Shearman & Sterling LLP | M&A and Corporate Governance Litigation Blog | Delaware Court Of Chancery, Relying On Plain Language Of Purchase Agreement, Rejects Seller’s Attempt To Claw Back Cash Mistakenly Left In Target’s Bank Account<br >  
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  • Delaware Court Of Chancery, Relying On Plain Language Of Purchase Agreement, Rejects Seller’s Attempt To Claw Back Cash Mistakenly Left In Target’s Bank Account
     
    04/06/2021
    On March 29, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery granted defendants’ motion for judgment on the pleadings in a breach of contract action brought by plaintiff Deluxe Entertainment Services, Inc. in connection with its sale of a wholly-owned subsidiary, Deluxe Media Inc. (“Target”), to defendant, an affiliate of a private equity firm, DLX Acquisition Corporation.  Deluxe Ent. Servs. Inc. v. DLX Acquisition Corp., No. CV 2020-0618-MTZ (Del. Ch. Mar. 29, 2021).  The dispute arose from a transaction in which plaintiff sold defendant all outstanding shares of Target for approximately $175 million, but failed to sweep nearly $10 million in cash from Target’s bank accounts, as it was allegedly entitled to do in advance of closing.  When defendant refused to return the forgotten funds after closing, plaintiff filed suit and asserted claims for breach of the purchase agreement and the implied covenant of good faith and fair dealing, as well as for reformation of the agreement based on mistake.  Although the Court noted that defendant “does not dispute [that plaintiff] had the right to sweep those funds before closing” and that plaintiff’s failure to do so was “an operations or accounting mistake,” the Court rejected the claims, finding that the “heavily negotiated” agreement did not require defendant to return the disputed cash.

    The Court explained that the purchase agreement included so-called “wrong pocket” provisions expressly giving plaintiff the right to claw back certain excluded assets if they were inadvertently transferred, but the funds left in Target’s bank accounts were not among those specifically enumerated excluded assets.  The Court also rejected plaintiff’s argument that certain provisions in the agreement that excluded cash from the definition of net working capital for purposes of adjustments to the purchase price indicated the parties’ intent that the transaction be “cash-free, debt-free.”  The Court explained that “[t]he purchase price adjustments are just that:  adjustments to how much [defendant] paid, not to what assets [defendant] purchased.”  Moreover, the Court declined to consider plaintiff’s “proffered extrinsic evidence” about the negotiation history to assess the “intent” because the Court found the purchase agreement unambiguous.

    The Court also rejected plaintiff’s claim for breach of the implied covenant of good faith and fair dealing because it found there was no “gap” in the purchase agreement sufficient to suggest an implied obligation had not been met.  To the contrary, according to the Court, the parties explicitly included the “wrong pocket” provisions for certain inadvertently transferred assets, but the disputed funds were not among those. 

    As to plaintiff’s claim for reformation, the Court found that the mistake was “not the sort . . . that supports reformation” because it was “not a mistake in the expression of the Purchase Agreement,” such as a scrivener’s error, “but rather an operational mistake by [plaintiff] in preparing to perform.”  The Court thus held that defendant “bears the risk of that mistake” and granted judgment on the pleadings to defendant.   
    CATEGORY: Deal Disputes

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