ADR Procedure Was Probably Arbitration and not an Expert Determination, Giving Delaware Chancery Court Jurisdiction

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M&A Stories

December 04, 2020

Introduction

An acquisition often involves a post-closing purchase price adjustment reflecting the value of the net assets at closing. The parties often agree to submit any dispute over this calculation to an independent accounting firm.

The deal

This deal involved the 2018 stock acquisition of consumer finance company that provides loans to consumers with limited access to credit. The deal was priced at $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 target debt.

The parties agreed to submit any dispute over the post-closing calculation to an independent accounting firm for resolution. And any challenge to the independent accounting firm’s decision was to be decided by the Delaware Court of Chancery unless “such court does not have subject matter jurisdiction over such suit, action or proceeding.”

The lawsuit

After the closing the seller did not like the calculation approved by the independent accounting firm and tried to challenge it in a Delaware federal district court (which was the backup forum selected by the parties if the Delaware Court of Chancery did not have jurisdiction over the independent accounting firm’s decision).

The dispute came down to whether the dispute resolution by the independent accounting firm was an arbitration or an expert determination. The Delaware Chancery Court would have jurisdiction over an arbitration but not an expert determination.

The federal court held that the ultimate decision was up to the Delaware Court of Chancery, but in the meantime, it felt the dispute resolution procedure selected by the parties in the stock purchase agreement was probably an arbitration and not an expert determination. Thus, it dismissed the federal litigation to give the Delaware Court of Chancery an opportunity to decide whether it would take jurisdiction over the dispute.

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) 

Comment

The court here found it persuasive that the dispute resolution procedure selected by the buyer and seller was an arbitration because the SPA’s dispute resolution provision “lacks specific language disavowing arbitration.”

By John McCauley: I help people manage M&A risks involving privately held companies.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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