Explore the Delaware Court’s landmark decision on an escrow dispute in an M&A agreement, highlighting the importance of the difference between alternative dispute resolution procedures of expert determination and arbitration, and its impact on M&A disputes.
M&A Stories
February 5, 2019
In an M&A deal executed on April 13, 2018, the buyer acquired the target, including the seller, a New York investment management company. The base price was $125 million, with $23.1 million held in escrow, pending the execution of a qualifying contract with the Chicago Public Schools. Disputes over this escrow release clause led to a legal battle.
The dispute went to the Delaware Court of Chancery, where the buyer requested an independent accountant to resolve it. However, the court refused, emphasizing that the accountant was designated as an “expert,” not an arbitrator. This distinction is crucial under Delaware law.
Expert determination limits the accountant’s role to factual disputes within their expertise, while arbitration provides broader authority. The issue in this case, determining whether a contract qualified, was primarily a legal question and fell outside the accountant’s expertise. Consequently, the court ruled that the buyer couldn’t compel the seller to refer the dispute to the accountant.
In retrospect, parties in M&A agreements should be cautious when choosing alternative dispute resolution mechanisms. Selecting expert determination can yield different results than arbitration, as demonstrated in this case.
Case Reference:
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).
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