Shearman & Sterling LLP | M&A Litigation Blog | Delaware Court Of Chancery Holds Alleged Breaches Of Representations Do Not Excuse Buyers’ Noncompliance With Post-Closing Obligations Where Buyers Seek To Enforce Claims For Indemnification<br >  
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  • Delaware Court Of Chancery Holds Alleged Breaches Of Representations Do Not Excuse Buyers’ Noncompliance With Post-Closing Obligations Where Buyers Seek To Enforce Claims For Indemnification
     
    11/06/2018
    On October 29, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery entered final judgment on counterclaims seeking to enforce covenants in a stock purchase agreement requiring the buyers to remit certain tax refunds and insurance proceeds. Post Holdings, Inc. and Michael Foods of Delaware, Inc. v. NPE Seller Rep LLC, C.A. No. 2017-0772 AGB (Del. Ch. Oct. 29, 2018). National Pasteurized Eggs, Inc. (“NPE”) was sold pursuant to a stock purchase agreement. Thereafter, the buyers initiated an action asserting claims for fraud and breaches of representations and warranties, seeking indemnification under the agreement. The sellers filed counterclaims to enforce covenants in the agreement requiring the buyers to remit certain tax refunds and insurance proceeds. The buyers argued that their obligation to remit such proceeds “should be excused” because of the sellers’ alleged prior material breach. Granting judgment on the pleadings to the buyers, the Court held that “buyers cannot continue to accept the benefits of the contract—as they seek to do in this action through their claim for indemnification—while disclaiming their contractual obligation to remit the tax refunds and insurance proceeds to the sellers promptly after they were received.”

    In October 2016, a food company and its parent acquired NPE in a $93.5 million transaction effectuated by way of a stock purchase agreement with the prior stockholders of NPE. The agreement provided that the sellers would indemnify the buyers for losses arising from any breach of the representations made in the agreement. The agreement separately obligated the buyers to remit to the sellers certain tax refunds and insurance proceeds relating to the pre-closing period within 15 days of receipt, subject to the qualification that tax refunds would be required to be paid only net of the amount of any “indemnification payment owed” by sellers. The buyers received approximately $974,000 in such tax refunds and insurance proceeds. After the buyers filed suit seeking indemnification pursuant to the agreement and alleging breaches of various representations, the sellers counterclaimed to enforce the remittance obligations. In response, the buyers argued (i) that the sellers’ alleged “material breach” excused the remittance obligation, and (ii) that the netting provision permitted them to refuse to remit the tax refunds because the amount of their indemnification claim exceeded the amount of those refunds.

    Finding the contract unambiguous and concluding there was no dispute on dispositive facts, the Court granted judgment on the counterclaims to the sellers on the pleadings. Specifically, the Court held that the buyers could not characterize the agreement as “valid, binding and legally enforceable,” retain the benefits of the agreement, and pursue contractual indemnification claims, while simultaneously refusing to perform. The Court also found that the netting provision allowed offsets for tax refunds only to the extent that indemnification payments are “owed” (i.e., liquidated claims that are due and payable), and not for unliquidated claims. The Court noted that the requirement that tax refunds be remitted within 15 days would be “rendered meaningless” if the buyers could use unliquidated indemnification claims as an offset, thereby holding the tax refunds for an “indeterminate and potentially prolonged period of time to resolve [the] indemnification dispute.”
    CATEGORY: Deal Disputes

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