Buyer and Seller executed a merger agreement on April 13, 2018. Pursuant to the merger agreement, Buyer acquired Target from its selling security holders, including Seller, a New York investment management company. Buyer paid a base price of $125 million, $23.1 million of which was placed in escrow at closing. Release of the escrowed funds depended on Target Subsidiary entering post-closing into a qualifying contract with the Chicago Public Schools. The section of the merger agreement governing the release of the escrowed funds delegated certain matters to the independent accountant for resolution. Buyer and Seller disputed whether their disagreement concerning a qualifying contract with the Chicago Public Schools must be referred to the independent accountant.
This dispute ended up in the Delaware Court of Chancery. Buyer asked the court to order Seller to resolve this dispute by an independent accountant. The court refused.
The court noted that the merger agreement designated the independent accountant “an expert, not an arbitrator.” Under settled Delaware case law, the court said that such language called for an expert determination, not an arbitration. In the court’s view, expert determination provisions were fundamentally different from arbitration provisions. Expert determination limited the scope of the accountant’s authority to factual disputes within the accountant’s expertise. Arbitrations typically conferred upon the arbitrator broad authority similar to that of judicial officers. By invoking language calling for an expert determination, the merger agreement narrowed the accountant’s scope of authority to factual disputes within an independent accountant’s expertise.
The court found that Buyer and Seller’s escrow dispute did not fit within the independent accountant’s narrow authority. To determine who is entitled to the escrow funds, one must determine whether the Chicago Public Schools and Target Subsidiary entered into a qualifying contract. This issue raised the primarily legal question of whether a certain contract met the definition of a qualifying contract. The court concluded that the question was not within the scope of the independent accountant’s expertise. Accordingly, Buyer was not contractually entitled to require Seller to submit this dispute to the independent accountant.
This case is referred to Ray Beyond Corp. v. Trimaran Fund Management, LLC, C.A. No. 2018-0497-KSJM, Court of Chancery of Delaware, (Decided: January 29, 2019).
Comment. Buyers and sellers need to be careful when submitting M&A agreements to alternative dispute resolution. Submitting a dispute to expert determination can result in a different outcome than submitting a dispute to arbitration.
With 20/20 hindsight if Buyer wanted to submit a dispute over whether a contract was qualified or not to alternative dispute resolution, then Buyer should have specified in the merger agreement’s dispute resolution provision that the dispute must be submitted to arbitration.
By John McCauley: I help people start, grow, buy and sell their businesses.
Telephone: 714 273-6291
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