Explore a pivotal M&A case where Delaware Chancery Court’s jurisdiction hinged on ADR nature. Learn how dispute resolution processes impact court access in acquisitions.
M&A Stories
December 04, 2020
Introduction:
In acquisitions, settling the purchase price often involves adjusting the value of net assets after closing. To resolve disputes over these calculations, parties typically opt for an external accounting firm to make decisions independently.
The Deal:
In a specific case from 2018, a consumer finance company was acquired through a stock purchase worth $7.3 million, with the final amount based on the “Estimated Closing Net Assets” of the target. Any discrepancies in these calculations, as well as the payment of certain target debt, were to be addressed by an independent accounting firm.
The Agreement:
Both parties agreed that if there were disagreements over the accounting firm’s decision, the matter would be taken to the Delaware Court of Chancery. However, this only applied if the court had jurisdiction over such disputes, as explicitly stated in the agreement.
The Legal Dispute:
After the acquisition was completed, the seller contested the accounting firm’s decision and sought resolution in a Delaware federal district court. This court was the backup forum in case the Delaware Court of Chancery lacked jurisdiction over the accounting firm’s ruling.
Central Issue:
The crux of the matter revolved around determining whether the dispute resolution process, as outlined by the accounting firm, constituted arbitration or expert determination. The jurisdiction of the Delaware Chancery Court extended to arbitration but not to expert determination.
Court’s Decision:
The federal court ruled that the final say on this matter rested with the Delaware Court of Chancery. In the meantime, the federal court leaned towards considering the dispute resolution procedure outlined in the stock purchase agreement as arbitration rather than expert determination. Consequently, it dismissed the federal litigation to allow the Delaware Court of Chancery the chance to confirm its 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’s decision was influenced by the fact that the arbitration-like language was present in the buyer-seller agreement’s dispute resolution provision, without any explicit indication against arbitration.
This case demonstrates that how you characterize your alternative dispute resolution or ADR process can matter. The Delaware Court of Chancery is highly respected as an expert on mergers and acquisitions. Calling your ADR an arbitration probably assures you access to that court, as opposed to an ADR which is an expert determination.
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
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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