Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC: Dispute over Post-Closing Purchase Price Adjustment Referred for Resolution to Independent Auditor
May 25, 2017
In Chicago Bridge & Iron Company N.V. v. Westinghouse Electric Company LLC, 2016 WL 7048031 (Del. Ch. Dec. 5, 2016), the Court of Chancery held, pursuant to the language of a purchase agreement between Chicago Bridge & Iron Company N.V. (“Seller” or the “Company”) and Westinghouse Electric Company LLC (“Buyer”), that a dispute over the post-closing purchase price adjustment was to be submitted to and resolved by an independent auditor.
In 2015, an acquisition vehicle controlled by Buyer purchased a subsidiary of Seller. The purchase agreement between the parties provided for a purchase price of $0, subject to a purchase price adjustment at closing (the “Closing Date Adjustment”) and the potential for deferred future payments. The purchase price for the transaction was to be determined by a complex pricing mechanism tied to the difference between the contractually defined target net working capital amount of $1.174 billion and the net working capital amount as calculated by the parties post-closing. The purchase price thus had the potential to vary greatly depending upon the Closing Date Adjustment.
In advance of closing, Seller was required to prepare a closing payment statement containing a “good faith estimate” of the closing date purchase price. The closing payment statement was to be prepared in accordance with generally accepted accounting principles (“GAAP”). On December 28, 2015, Seller provided Buyer with a closing payment statement estimating net working capital as approximately $1.6 billion, exceeding the contractual target net working capital amount and suggesting that Seller was owed $428 million.
Following closing, Buyer was likewise required to submit a closing statement, prepared in accordance with GAAP, containing Buyer’s “good faith calculations” of the purchase price at closing. Buyer’s closing statement estimated the net working capital amount at closing as negative $976,500,000, which implied that Seller owed Buyer $2.15 billion. The difference stemmed from four changes that Buyer made to Seller’s closing payment statement: (i) reducing an outstanding receivable identified on the Company’s balance sheet as “claim cost” by 30% based on Buyer’s objection under GAAP to Seller’s estimate of “100 percent collectability” of this receivable; (ii) adjusting the claim cost receivable by establishing a claim cost reserve and deducting the amount of the reserve; (iii) increasing by 30% Seller’s estimate of the cost to complete the Company’s ongoing projects; and (iv) deducting a liability of $432 million relating to Seller’s acquisition of the Company that Buyer claimed was improperly omitted under GAAP.
While Seller initially used the dispute resolution mechanism found in the purchase agreement to resolve its objections to Buyer’s closing statement adjustments, Seller changed course and, on July 21, 2016, initiated litigation against Buyer. Buyer moved for judgment on the pleadings, arguing that the dispute resolution mechanism was the mandatory path for resolving the parties’ disagreements.
Claiming that Buyer breached the terms of the purchase agreement and the implied covenant of good faith and fair dealing in its calculation of the Closing Date Adjustment, Seller argued that the purchase agreement’s terms precluded Buyer from “making any adjustments to items that appeared on the Company’s balance sheet or adding liabilities with the avowed goal of complying with GAAP,” as Seller had represented that its financial statements complied with GAAP. Buyer argued that it did not give up its right to raise issues of GAAP compliance when calculating the Closing Date Adjustment, and that in any event, the purchase agreement required the parties to submit their dispute to an independent auditor.
The purchase agreement provided that if the parties were unable to resolve objections to the Closing Date Adjustment within thirty days, either party could submit the dispute to an independent auditor. Under the purchase agreement, the “determinations of the Independent Auditor were ‘final, conclusive, binding, non-appealable and incontestable by the parties . . . for any reason other than manifest error or fraud.’”
Relying on OSI Systems, Inc. v. Instrumentarium Corp., 892 A.2d 1086 (Del. Ch. 2006), Seller argued that the independent auditor’s role was “limited to ‘pure mathematics’ and should not extend to determinations of GAAP compliance.” To buttress this argument, Seller pointed to the size of the potential adjustment, noting that then-Vice Chancellor Strine had relied on the size of the dispute in OSI as one factor supporting his holding that the dispute should not be referred to the independent accountant. Buyer argued that the dispute resolution provision in OSI materially differed from the dispute resolution provision in the purchase agreement, and that the language interpreted in Alliant Techsystems, Inc. v. MidOcean Bushnell Holdings, L.P., 2015 WL 1897659 (Del. Ch. Apr. 24, 2015), was a more analogous precedent.
The Court, disregarding the potential size of the adjustment as a factor and holding that the language in the purchase agreement was unambiguous, agreed with Buyer. As in Alliant, the Court found that the independent auditor’s authority under the dispute resolution provision to determine “any and all matters that remain in dispute with respect to the [Closing Date Adjustment] and the calculations set forth therein” was sufficiently broad to include determinations about GAAP compliance. Because the independent auditor had exclusive authority to resolve the parties’ disputes over the Closing Date Adjustment under the plain language of the purchase agreement, the Court granted judgment on the pleadings in favor of Buyer.
The decision has been appealed to the Delaware Supreme Court.