May 24, 2020
Many business acquisitions have post-closing purchase price adjustments based upon the financial position of the target company at closing. The parties usually provide for a dispute resolution procedure for resolving disagreements over the final numbers, and the amount in dispute can be a big number.
This deal involved a stock acquisition of a consumer finance company. The buyer agreed to pay $7.3 million plus the amount of the “Estimated Closing Net Assets” of the target, subject to post-closing adjustments, as well as pay off certain debt of the target.
The stock purchase agreement provided a dispute resolution mechanism, under which disagreements between the parties about the post-closing calculations must be submitted to an independent accounting firm for resolution. The accounting firm’s decision “shall be final and binding upon the Parties.”
Not surprisingly, the buyer and seller did not agree upon the post-closing calculation and the matter was resolved by the accounting firm. The seller challenged the accounting firm’s decision in a federal Delaware District Court. The buyer countered by filing its own action in the Delaware Court of Chancery seeking to confirm the independent accounting firm’s determination as an arbitration award.
The federal court held that the Delaware Court of Chancery probably has jurisdiction because the SPA provided for a Delaware Court of Chancery forum selection clause if that court had jurisdiction over the dispute. The federal court held that Delaware’s Court of Chancery probably had jurisdiction over the dispute because of its power to review arbitrations. However, the seller could come back to federal court if the Delaware Court of Chancery declines to exercise jurisdiction.
This case is referred to as FNB Corporation v. Mariner Royal Holdings, LLC, C.A. Nos. 19-1643-LPS-JLH, 19-1859-LPS-JLH, United States District Court, D. Delaware, (March 26, 2020).
The federal court concluded that the Delaware Court of Chancery had jurisdiction because under Delaware law, that court had jurisdiction to review arbitration decisions. The seller unsuccessfully argued that the accounting firm acted not in the capacity of an arbitrator but as an accounting expert.
The federal court rejected this argument: “… (The seller) … argues that the Court of Chancery lacks jurisdiction … because the SPA’s dispute resolution procedure is an ‘expert determination, not an arbitration. In support of its position, Seller cites to a different line of cases from the Court of Chancery. Those case are distinguishable because the contract language demonstrated the parties’ intent to engage in an expert determination. … Although the law in Delaware does appear to be evolving …, I am persuaded that the SPA at issue here, which lacks specific language disavowing arbitration, and which permits the accounting firm reasonable access to information, more closely resembles … (an) arbitration … (provision)…, than … (an) expert determination … (provision) …. Because … (the seller’s) … action seeks to void the independent accounting firm’s decision and … (the buyer’s) … action seeks to confirm it, I conclude that, if appropriate for this Court to make such a determination, the Court of Chancery has subject matter jurisdiction over these disputes …”
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