Chicago Bridge & Iron Company N v. v. Westinghouse Electric Company and WSW Acquisition Co.

IN THE SUPREME COURT OF THE STATE OF DELAWARE
CHICAGO BRIDGE & IRON §
COMPANY N.V., § No. 573, 2016
§
Plaintiff Below, § Court Below: Court of Chancery
Appellant, § of the State of Delaware
§
v. §
§ C.A. No. 12585
WESTINGHOUSE ELECTRIC §
COMPANY LLC and WSW §
ACQUISITION CO., LLC, §
§
Defendants Below, §
Appellees. §
Submitted: May 3, 2017
Decided: June 27, 2017
Revised: June 28, 2017
Before STRINE, Chief Justice; VALIHURA and SEITZ, Justices.
Upon appeal from the Court of Chancery. REVERSED.
David E. Ross, Esquire, Garrett B. Moritz, Esquire, Ross Aronstam & Moritz LLP,
Wilmington, Delaware; Theodore N. Mirvis, Esquire (argued), Jonathan M. Moses,
Esquire, Kevin S. Schwartz, Esquire, Andrew J.H. Cheung, Esquire, Cecilia A.
Glass, Esquire, Bita Assad, Esquire, Wachtell, Lipton, Rosen & Katz, New York,
New York, for Plaintiff Below, Appellant, Chicago Bridge & Iron Company N.V.
Kevin G. Abrams, Esquire, John M. Seaman, Esquire, Abrams & Bayliss LLP,
Wilmington, Delaware; Peter N. Wang, Esquire (argued), Susan J. Schwartz,
Esquire, Yonaton Aronoff, Esquire, Douglas S. Heffer, Esquire, for Defendants
Below, Appellees, Westinghouse Electric Company LLC and WSW Acquisition
Co., LLC.
STRINE, Chief Justice:
In giving sensible life to a real-world contract, courts must read the specific
provisions of the contract in light of the entire contract. That is true in all commercial
contexts, but especially so when the contract at issue involves a definitive acquisition
agreement addressing the sale of an entire business.
In this case, Chicago Bridge & Iron Company N.V. (“Chicago Bridge”) and
Westinghouse Electric Company (“Westinghouse”) had an extensive collaboration
and complicated commercial relationship involving the construction of nuclear
power plants by Chicago Bridge’s subsidiary, CB&I Stone & Webster, Inc.
(“Stone”), including two which would be the first new nuclear power plants in the
United States in thirty years. As delays and cost overruns mounted, this relationship
became contentious. To resolve their differences, Chicago Bridge agreed to sell
Stone to Westinghouse. The agreement to do so was unusual in a few key respects.
First, the purchase price to be paid at closing by Westinghouse was set in the contract
at zero,1 a figure in Yiddish that, perhaps appropriately given Chicago Bridge’s
Chicago connection, sounds like an iconic linebacker. The parties came to that
figure in part by considering Stone’s historical financial statements and management
projections and by basing it upon a target for Stone’s net working capital—its current
1
App. to Appellant’s Opening Br. at A64 (Verified Complaint, dated July 21, 2016 Ex. A,
Purchase Agreement by and Among Chicago Bridge & Iron Company N.V., as Seller Parent,
CB&I Stone & Webster, Inc., as the Company, WSW Acquisition Co., LLC, as Purchaser, and
Westinghouse Electric Company LLC, as Purchaser Parent § 1.2(a)(i)) [hereinafter Purchase
Agreement].
assets less current liabilities—of $1.174 billion. That target is referred to in the
Purchase Agreement as the “Target Net Working Capital Amount,” and we will refer
to it as “the Target” for short.2 The parties also agreed Chicago Bridge might receive
certain payments at closing if project milestones were met by that time or at a later
date through an earnout provision.3 Given the difficulties with the nuclear projects,
it was likely that no money would change hands at closing, or, that after closing, the
only money to change hands would be the amount constituting the difference
between Stone’s actual net working capital as of closing and the Target. In other
words, if the value of Stone’s working capital stayed at the Target as of the time of
closing, Chicago Bridge would receive zero. If the value of Stone’s working capital
was different from the Target, Chicago Bridge would owe the delta if the difference
was negative, and Westinghouse would owe the delta if the difference was positive.
We refer to the process the Purchase Agreement sets out for calculating these
payments as the “True Up” and the resulting price including the delta as the Final
Purchase Price.4 So, at closing, Westinghouse would get Stone and might have to
2
Id. at A130 (§ 11.1) (defining Target Net Working Capital Amount).
3
Id. at A65 (§ 1.3); id. at A149 (Sch. 1.3(c)).
4
The Purchase Agreement uses both “Final Purchase Price” and “Closing Date Purchase Price.”
It defines “Closing Date Purchase Price” as the zero dollar starting point adjusted by the True Up’s
delta and transaction expenses. Id. at A64 (Purchase Agreement § 1.2(a)(i)). And, the “Final
Purchase Price” is defined as the Closing Date Purchase Price “as finally determined pursuant” to
§ 1.4’s dispute resolution procedures. Id. at A67 (§ 1.4(d)). For most humans, the term Final
Purchase Price is clearer and we use it to refer to whatever the ultimate purchase price turned out
to be.
2
make a payment to Chicago Bridge, to account, for example, for the expectation that
Chicago Bridge would make substantial capital expenditures before closing so
Stone’s construction projects could continue. This was almost certain because the
Purchase Agreement contained a covenant requiring Chicago Bridge to continue to
run Stone, a construction firm, in the ordinary course of business until closing. But,
regardless, Chicago Bridge would not be walking away from the deal with a check
in hand constituting anything one could call sale profits in the colloquial sense of
that term.
Second, and important for understanding how this zero purchase price made
commercial sense, although Chicago Bridge was only selling a subsidiary and would
carry on business after the transaction concludes, Westinghouse agreed that its sole
remedy if Chicago Bridge breached its representations and warranties was to refuse
to close, and that Chicago Bridge would have no liability for monetary damages
post-closing (the “Liability Bar”). Furthermore, Westinghouse agreed to indemnify
Chicago Bridge for “all claims or demands against or Liabilities of [Stone].”5 The
agreement was also predicated on Chicago Bridge obtaining liability releases from
the power utilities that would ultimately own the nuclear plants being built in the
United States.6 Thus, this transaction gave Chicago Bridge a clean break from the
5
Id. at A112, A115 (§§ 10.4, 11.1).
6
Id. at A110 (§ 8.3(c)).
3
spiraling cost of the nuclear projects. That view of the overall transaction is
buttressed by the Westinghouse CEO’s apparent description of the transaction as a
“quitclaim.”7 In other words, although Chicago Bridge was to get no profit from the
sale at the time of closing and had little likelihood of any future upside through the
earnout, it also got to walk away and not worry about the projects.
The True Up also contained provisions to settle any disputes over the Final
Purchase Price by referring them to an independent auditor who was to act “as an
expert and not as an arbitrator,”8 had to issue its decision in the form of a “brief
written statement” in an expedited time frame of 30 days, and had to rely on the
parties’ written submissions as the sole basis for its decisions.9
In contesting Chicago Bridge’s calculation of the Final Purchase Price,
Westinghouse asserted that Chicago Bridge, which had been paid zero at closing and
had invested approximately $1 billion in the plants in the six months leading to the
December 31, 2015 closing, owed it nearly $2 billion! As Westinghouse admits, the
overwhelming percentage of its claims are based on the proposition that Chicago
Bridge’s historical financial statements—i.e., the very ones on which Westinghouse
could make no post-closing claim—were not based on a proper application of
generally accepted accounting principles (“GAAP”). By way of example, Chicago
7
Id. at A11 (Verified Compl., dated July 21, 2016 ¶ 2).
8
Id. at A67 (Purchase Agreement § 1.4(c)).
9
Id. at A66–67 (§1.4(c)).
4
Bridge had historically booked as an asset certain large claims it had against
Westinghouse for construction costs Chicago Bridge incurred on their joint nuclear
projects, claims that Westinghouse obviously knew about and that were among the
reasons principally motivating the transaction. Westinghouse now argues that those
claims were not accounted for in Stone’s financial statements in accordance with
GAAP. But, although Westinghouse says it believed that to be true before closing,
Westinghouse, which had the right to refuse to close if Chicago Bridge had breached
its representations and warranties, chose to close anyway. Westinghouse then raised
this and other claims that were dependent on proving that the accounting practices
that undergirded the financial statements on which no claims could be brought post-
closing were improper, but argued that it nonetheless could do so as part of the
contractual True Up resulting in the Final Purchase Price.
After Westinghouse made these claims, Chicago Bridge and Westinghouse
unsuccessfully attempted to resolve their differences. But, once it was clear that
Westinghouse would seek to have the Independent Auditor require Chicago Bridge
to pay over $2 billion to it based on contentions that Chicago Bridge’s historical
accounting practices were not GAAP compliant, Chicago Bridge filed this action
seeking a declaration that Westinghouse’s changes based on assertions that Stone’s
financial statements and accounting methodologies were not GAAP compliant are
not appropriate disputes for the Independent Auditor to resolve when those changes
5
are, in essence, claims that Chicago Bridge breached the Purchase Agreement’s
representations and warranties and therefore are foreclosed by the Liability Bar.
Westinghouse moved for judgment on the pleadings, arguing that the Purchase
Agreement established a mandatory process for resolving the parties’ disagreements.
The Court of Chancery held for Westinghouse, reading the True Up as providing
Westinghouse with a wide-ranging, uncabined right to challenge any accounting
principle used by Chicago Bridge, however consistent that principle was with the
ones used in the financial statements represented to be GAAP compliant, and
empowering the expert to resolve that dispute in a truncated, rapid proceeding. We
conclude that the Court of Chancery erred in interpreting the Purchase Agreement
this way.
When viewed in proper context, the True Up is an important, but narrow,
subordinate, and cabined remedy available to address any developments affecting
Stone’s working capital that occurred in the period between signing and closing. By
way of example, the True Up emphasizes that net working capital should be
determined using the same accounting principles that were used in preparing the
financial statements represented by Chicago Bridge to be GAAP compliant. It does
so by stating that working capital was “to be determined in a manner consistent with
GAAP, consistently applied by [Chicago Bridge] in preparation of the financial
6
statements of the Business, as in effect on the Closing Date.”10 This language is in
line with other pertinent language, which requires consistency with “past practices”
and with the basic idea that the True Up is used to set a Final Purchase Price based
on developments after the initial price of zero was set. 11 Thus, the True Up was
tailored to address issues that might come up if Chicago Bridge tried to change
accounting practices midway through the transaction or if it stopped work on the
projects, rather than continue to invest as expected.
By reading the True Up as unlimited in scope and as allowing Westinghouse
to challenge the historical accounting practices used in the represented financials,
the Court of Chancery rendered meaningless the Purchase Agreement’s Liability
Bar. The Court of Chancery also slighted the requirement in the text of the Purchase
Agreement that Westinghouse indemnify Chicago Bridge for a broad set of claims
related to Stone. Not only that, it then subjected Chicago Bridge to unlimited post-
closing liability by way of an expedited proceeding before an accounting expert who
was charged with delivering a rapid decision based solely on written submissions of
the parties.12 By so interpreting the contract, the Court of Chancery failed to give
adequate weight to the structure of the Purchase Agreement and the subordinate and
confined purpose of the True Up. And, it failed to consider that the reason parties
10
Id. at A164 (Sch. 11.1(a)).
11
Id.
12
Id. at A67 (§ 1.4(c)).
7
can hazard having an expert decide disputes in this blinkered, rapid manner is
because when considering claims under the True Up, the expert is addressing a
confined period of time between signing and closing using the same accounting
principles that were the subject of due diligence and contractual representations and
warranties, and thus formed the foundation for the parties’ agreement to sign up and
close the transaction.
We therefore reverse and require the entry of a judgment on the pleadings for
Chicago Bridge. The Court of Chancery should declare that, under the Purchase
Agreement, Westinghouse’s arguments based on assertions that Chicago Bridge’s
historical financial statements and practices did not comply with GAAP may not be
heard in proceedings before the Independent Auditor and should enjoin
Westinghouse from submitting to the Independent Auditor or continuing to pursue
already-submitted claims not based on changes in facts and circumstances between
signing and closing.
I.
A.13
Chicago Bridge built nuclear power plants through its subsidiary Stone. Stone
is an engineering and construction firm, with substantial experience in power
13
The facts are taken from the pleadings and Purchase Agreement. “In determining a motion
under Court of Chancery Rule 12(c) for judgment on the pleadings, a trial court is required to view
the facts pleaded and the inferences to be drawn from such facts in a light most favorable to the
8
generation projects, which Chicago Bridge purchased in 2013. Westinghouse
designs nuclear power plants. In 2008, Westinghouse and Stone were hired as part
of a consortium to build two nuclear power plants. One was to be built in Georgia
and the other was to be built in South Carolina. Both plants would be cutting-edge
AP1000 models designed by Westinghouse.14 These would have been the first new
nuclear power plants built in the U.S. in over thirty years and the first to be built
under a new regulatory regime. Indeed, the relevant regulator did not approve
construction of the reactors until 2012. The construction suffered from delays and
material cost overruns, driven by various factors including regulator-driven design
changes. This resulted in disagreements between Westinghouse and Chicago
Bridge. To resolve those differences, they agreed that Westinghouse would acquire
Stone from Chicago Bridge in exchange for, among other things, Chicago Bridge
ceasing to have responsibility for the nuclear projects.
B.
Before they signed the Purchase Agreement, Chicago Bridge and
Westinghouse held extensive negotiations. Chicago Bridge gave Westinghouse
Stone’s financials, including the June 30, 2015 balance sheet, “[n]ear the start of
non-moving party.” Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624
A.2d 1199, 1205 (Del. 1993).
14
Stone and Westinghouse also collaborated on AP1000 plants in China, but those projects,
although part of the transaction, do not appear to have been material drivers of the present dispute.
App. to Appellant’s Opening Br. at A24 (Verified Compl., dated July 21, 2016 ¶ 27).
9
negotiations” in July 2015.15 During negotiations leading to signing, Chicago Bridge
and Westinghouse also agreed to a net working capital target of $1.174 billion—
what we’ve been calling the Target—and that was referred to in documents like the
August 13, 2015 “Aligned Positions” term sheet.16 Through the True Up process,
Chicago Bridge and Westinghouse would compare Stone’s actual working capital to
the Target and pay one or the other party to the extent the actual working capital
differed from the Target. The result of the True Up would be added together with
any earnout payments due at closing to comprise the Final Purchase Price. Thus, the
Target was a basic building block of the exchange Chicago Bridge and
Westinghouse were contemplating along with its zero value starting price.
As part of the documents prepared for signing, the parties prepared an
example of the calculations they would exchange as part of the True Up: Schedule
1.4(f) of the Purchase Agreement. The Purchase Agreement defined the actual net
working capital at closing (the “Net Working Capital Amount”) as Stone’s current
assets less current liabilities “solely to the extent such assets and liabilities are
described and set forth on Schedule 1.4([f]).”17 The calculation for the Target
15
Id. at A25–26 (¶ 29).
16
Id. at A28 (¶ 32).
17
Id. at A126 (Purchase Agreement § 11.1) (emphasis added) (defining Net Working Capital
Amount). The actual text of the definition refers to a Schedule 1.4(b), but that appears to be a
typographical error. For one thing, the Purchase Agreement’s table of contents does not list a
Schedule 1.4(b), only a Schedule 1.4(f). Id. at A62 (Table of Contents). For another, Section
1.4(b) describes the procedure for Westinghouse to deliver its Closing Statement; in contrast,
Section 1.4(f) covers the form of both the Closing Statement and Closing Payment Statement,
10
included accounts encompassing accounts receivable, the net Construction in
Progress asset account which was comprised of completed but unbilled work and the
“claim cost” asset, and accounts payable for the two nuclear projects. That Schedule
uses the June 30, 2015 balance sheet Chicago Bridge represented was GAAP
compliant.18 The Schedule is fairly simple:
which are the full set of places where the Net Working Capital Amount is relevant. So, it is
reasonable to conclude that the Purchase Agreement definition of Net Working Capital was meant
to refer to Schedule 1.4(f) and the fact that it refers to a nonexistent Schedule should be treated
similarly to a scrivener’s error. Deutsche Bank Nat’l Trust Co. v. Roslewicz, 2014 WL 4559101,
at *3 (Del. Ch. Sept. 2, 2014) (“Like a mutual mistake, a scrivener’s error fails to reflect the
intentions of the parties in the written instrument. An example of a scrivener’s error is a ‘minor
typographical mistake, such as an incorrect address.’” (quoting Envo, Inc., v. Walters, 2009 WL
5173807, at *5 (Del. Ch. Dec. 30, 2009))).
18
App. to Appellant’s Opening Br. at A71 (Purchase Agreement § 2.6(a)).
11
19
Another way of putting it is this. Assume the parties decided to close retroactively
to the June 30 financials or closed at a date when Stone’s net working capital was
exactly the same as on Schedule 1.4(f). If that was the case, Chicago Bridge would
have owed Westinghouse around $147.5 million because Stone’s working capital in
the June 30 financials was that amount below the Target. So, the Target was
19
Id. at A167 (Sch. 1.4(f)).
12
important because it was the benchmark value that the parties were to use in coming
to the purchase price, which would have to account for, among other things, the
reality that Chicago Bridge had to continue to spend around $1 billion on the nuclear
projects before closing.
C.
On October 27, 2015, Chicago Bridge and Westinghouse signed the Purchase
Agreement, which provided for a purchase price of $0 at closing,20 subject to the
post-closing adjustment True Up and with the potential for deferred consideration
and earnout payments based on project milestones in the future:
(a) The aggregate consideration for the purchase of the
Transferred Equity Interests shall be an amount in cash equal to:
(i) (A) $0, less (B) the Closing Indebtedness Amount, (C) (x) if
the amount of the Target Net Working Capital Amount exceeds the Net
Working Capital Amount, less the amount by which the Target Net
Working Capital Amount exceeds the Net Working Capital Amount
and (y) if the Net Working Capital Amount exceeds the Target Net
Working Capital Amount, plus the amount by which the Net Working
Capital Amount exceeds the Target Net Working Capital Amount, less
(D) the Company Transaction Expenses (the amount resulting from the
calculation in this Section 1.2(a)(i), the “Closing Date Purchase Price”);
plus
(ii) any Deferred Purchase Price that becomes due and payable
to Seller Parent or any of its Affiliates in accordance with this
Agreement; plus
(iii) any Net Proceeds Earnout Amounts that become due and
payable to Seller Parent or any of its Affiliates in accordance with this
Agreement; plus
(iv) any Milestone Payments that become due and payable to
Seller Parent or any of its Affiliates in accordance with this Agreement
20
Id. at A64, A65 (§§ 1.2, 1.3).
13
(together with the Closing Date Purchase Price, Deferred Purchase
Price and Net Proceeds Earnout Amounts, the “Aggregate Purchase
Price”).21
In exchange, Chicago Bridge would be released from all future liabilities related to
Stone, and especially the two still-incomplete nuclear power plants. That release
took the form of the Liability Bar,22 indemnification by Westinghouse of Chicago
Bridge,23 and a condition to closing that the power utilities that would operate the
plants sign agreements releasing Chicago Bridge from claims related to the
construction of those plants.24
i.
Chicago Bridge made representations as part of the Purchase Agreement,
including that Stone’s financial statements for the year ending December 31, 2014
and as of June 30, 2015, had “been prepared in accordance with GAAP”25 and that
Stone had no undisclosed liabilities.26 But, as has been discussed, Section 10.1 of
the Purchase Agreement, what we have called the Liability Bar, stated that those
representations, along with virtually all the other representations and warranties
made by Chicago Bridge, would not survive closing27 and Chicago Bridge would
21
Id. at A64 (§ 1.2(a)).
22
Id. at A111 (§ 10.1).
23
Id. at A112 (§ 10.4).
24
Id. at A110 (§ 8.3(c)).
25
Id. at A71 (§ 2.6(a)).
26
Id. at A71–72 (§§ 2.6(a), (e)); id. at A162 (Sch. 2.6(a)).
27
The Seller Fundamental Representations and the Purchaser Fundamental Representations
survive. Id. at A111 (§ 10.1); id. at A120 (§ 11.1) (defining “Fundamental Representations”).
14
have “no liability for monetary damages after the Closing” absent actual fraud.28
Provisions like the Liability Bar are unusual. The American Bar Association
Business Law Section M&A Market Trends Subcommittee’s survey of private
transactions completed in 2014 suggests virtually all private deals provided for some
post-closing survival of representations and warranties.29 Indeed, “[b]y far the most
common matter with respect to which indemnities are given is a Seller’s breach of
the representations and warranties . . . rendered in the acquisition agreement in favor
of the Buyer.”30 Section 10.3, however, carved out the True Up:
This Article X shall not (i) operate to interfere with or impede the
operation of the provisions of Section 1.4(c) providing for the
resolution of certain disputes relating to the Final Purchase Price
between the parties and/or by an Independent Auditor . . . .31
ii.
In contrast to the lack of indemnification of Westinghouse as buyer for post-
closing breaches of the seller’s representations and warranties, the Purchase
Those representations largely dealt with the authority of Chicago Bridge and Westinghouse to
enter into the transaction. Id. at A128 (§ 11.1) (defining “Purchaser Fundamental Representations”
and “Seller Fundamental Representations”); id. at A69, A70, A72, A84, A85, A86–87 (§§ 2.2, 2.3,
2.7, 2.23, 3.2, 3.5, 3.6, 4.2, 4.6).
28
Id. at A111 (§ 10.1).
29
Compendium of Selected Authorities Cited in Appellant’s Opening Br. ex. 4 (2015 Private
Target Mergers & Acquisitions Deal Points Study, M&A Market Trends Subcommittee, Mergers
& Acquisitions Committee, American Bar Association Business Law Section 70 (2015)). The
Subcommittee assessed survival based on what happened to “most” representations and warranties
in an agreement: “certain representations and warranties may be carved out from these periods in
order to survive for other specified periods.” Id.
30
LOU R. KLING & EILEEN T. NUGENT, NEGOTIATED ACQUISITIONS OF COMPANIES, SUBSIDIARIES
AND DIVISIONS 15.02[1] (2016) (citations omitted).
31
App. to Appellant’s Opening Br. at A112 (Purchase Agreement § 10.3).
15
Agreement required Westinghouse to indemnify Chicago Bridge. This
indemnification for claims related to Stone was broad: “regardless of where or when
or against whom such claims, demands or other Liabilities are asserted or determined
or whether asserted or determined prior to, on or after [signing or closing].” 32 This
too is an unusual provision. In purchase agreements, “there is invariably an article
dealing with indemnification of the purchaser by the seller or seller’s stockholders.
Never the other way around . . . .”33 As another commentator noted, although
“indemnification can inure to the benefit of a Seller,” it is “generally considered in
the context of a Buyer’s right to collect from the Seller.”34 Indeed, even where those
commentators allow that it is conceivable that a seller might be indemnified, they
appear to be focused strictly on indemnification for breaches of representations and
warranties, not the broad indemnification for all liability found here.35
The Purchase Agreement also contained an additional, material limitation on
Chicago Bridge’s liability related to Stone’s construction projects. One condition
precedent to closing—one of only three that was a condition to both Chicago
Bridge’s and Westinghouse’s obligation to close—stated that neither party was
32
Id. at A112 (§ 10.4); id. at A115 (§ 11.1) (defining Assumed Liabilities).
33
JAMES C. FREUND, ANATOMY OF A MERGER 365 (1975).
34
KLING & NUGENT, supra note 30, at § 15.01.
35
Id.; see also id. at § 15.02[1][b] (“Except in transactions where the purchase price is paid
completely or partially in securities where Buyer indemnification (and representations) tends to be
coextensive with that granted by the Seller to the Buyer, it is less typical for the Buyer to indemnify
the Seller with respect to breaches of its representations or other matters.”).
16
obligated to close if liability releases Chicago Bridge anticipated receiving from the
power plant owners were not “valid and binding and in full force and effect” as of
the Closing Date.36
iii.
It is worth summarizing where things stood when Westinghouse signed the
Purchase Agreement on October 27. Westinghouse had copies of Stone’s financial
statements that Chicago Bridge represented complied with GAAP. Westinghouse
also had, in the form of Schedule 1.4(f), an indication that, at least based on those
financials for the first half of 2015, Stone’s net working capital would have been
slightly below the Target and so Chicago Bridge could have been expected to make
a payment to Westinghouse if they had closed the deal on those financials. But,
Westinghouse also knew that the Purchase Agreement obligated Chicago Bridge to
continue to operate Stone in the ordinary course of business,37 which, given that its
business was construction, would involve continuing to invest in the nuclear
projects. Thus, Westinghouse would have expected that, as happened throughout
the projects, Chicago Bridge’s continued funding of Stone’s work would result in an
increase in net working capital. Furthermore, Westinghouse knew that the Purchase
Agreement the parties were signing would rid Chicago Bridge at closing of current
36
App. to Appellant’s Opening Br. at A110 (Purchase Agreement § 8.3(c)).
37
Id. at A89–90 (§ 5.3(a)).
17
and future liability for the spiraling costs associated with Stone’s projects, and
covering those liabilities would be the responsibility of Westinghouse and the
projects’ ultimate owners. In exchange, Chicago Bridge would give Stone to
Westinghouse for a price set presumptively at zero.
D.
i.
After signing, Chicago Bridge continued Stone’s construction of the two
nuclear plants, spending around $1 billion on their construction between June 30 and
closing alone.38 Westinghouse and the ultimate plant owners didn’t pay nearly that
amount to Chicago Bridge,39 so, as commonly occurs when a business does the thing
that it is in business to do and doesn’t get paid immediately, Stone’s short-term assets
like accounts receivable increased.
The multi-step True Up process began just before closing. First, at least three
business days before closing, Chicago Bridge had to deliver a statement to
Westinghouse of its good faith estimate of certain amounts (the “Closing Payment
Statement”), including the Net Working Capital Amount. The Closing Payment
Statement had to be “prepared and determined from the books and records of the
Company and its Subsidiaries and in accordance with United States generally
38
Id. at A40 (Verified Compl., dated July 21, 2016 ¶ 54).
39
Id.
18
accepted accounting principles (“GAAP”) applied on a consistent basis throughout
the periods indicated and with the Agreed Principles.”40 The Agreed Principles
provided:
Working Capital . . . will be determined in a manner consistent with
GAAP, consistently applied by [Stone] in preparation of the financial
statements of the Business, as in effect on the Closing Date. To the
extent not inconsistent with the foregoing, Working Capital . . . shall be
based on the past practices and accounting principles, methodologies
and policies applied by [Stone] and its subsidiaries and the Business (a)
in the Ordinary Course of Business and (b) in the preparation of: (i) the
balance sheet of the [Stone] and its Subsidiaries for the year ended
December 31, 2014 (adjusted to reflect the Business); and (ii) the
Sample Calculation set forth on Schedule 1.4(f).41
So, on December 28, 2015, three days before closing, Chicago Bridge
presented Westinghouse with its Closing Payment Statement, which included an
estimated Net Working Capital Amount of $1.6 billion, approximately $428 million
more than the Target. The increase was largely a result of the substantial
construction costs Chicago Bridge incurred during the second half of 2015. Thus,
absent other changes, Westinghouse would have been on the hook for that $428
million in bills Westinghouse and the utilities hadn’t paid to Stone, a contribution
that was expected given the ongoing nature of the construction on the projects.
Westinghouse received this Closing Payment Statement, which it concedes was
identical in form to what the Purchase Agreement required in Section 1.4(f) and
40
Id. at A68 (Purchase Agreement § 1.4(f)) (emphasis added).
41
Id. at A164 (Sch. 11.1(a)) (emphasis added).
19
Schedule 1.4(f). And, with that Statement in hand, on December 31, 2015,
Westinghouse chose to close.
ii.
In the second step of the True Up, Westinghouse had to deliver to Chicago
Bridge no later than ninety days after closing its calculations of certain amounts (the
“Closing Statement”), including the Net Working Capital Amount and its estimate
of the Final Purchase Price, which, like the Closing Payment Statement, was to be
“prepared and determined from the books and records of the Company and its
Subsidiaries and in accordance with United States generally accepted accounting
principles (‘GAAP’) applied on a consistent basis throughout the periods indicated
and with the Agreed Principles.”42 Westinghouse asked for an extension of the
ninety-day deadline, which it received.
Then, on April 28, 2016, Westinghouse presented the Closing Statement to
Chicago Bridge in which it calculated that the Net Working Capital Amount was
negative $976.5 million, more than $2 billion less than the Target. Based on this
calculation, and absent other changes, Chicago Bridge owed Westinghouse over $2
billion. As Westinghouse concedes, “the majority” of its claims do not arise from
changes in Stone’s business between signing on October 27 and closing December
42
Id. at A68 (§ 1.4(f)).
20
31.43 Similarly, Chicago Bridge admits that, of the roughly $2 billion at issue, about
$70 million are issues that involve a change in fact or circumstance that arose
between signing and closing and are properly before the Independent Auditor.44
The large discrepancy between Chicago Bridge’s estimate and
Westinghouse’s calculation was mostly the result of three changes that
Westinghouse made in its calculation. None of these large changes were based on
events between signing and closing. First, Westinghouse recalculated the $1.16
billion “claim cost” asset on Stone’s balance sheet. The “claim cost” asset
represented “the costs incurred and paid for by [Stone] for items that would be
presented for recovery from either the project owners or Westinghouse as a matter
of contractual entitlement or as claims for overruns for which [Stone] was not
responsible.”45 In other words, these represent some of the very cost overruns that
triggered Chicago Bridge’s desire to walk away from Stone and its projects.
Chicago Bridge had historically estimated 100% collectability of the “claim
cost” asset, including in calculating the Target and example calculation found in
Schedule 1.4(f) because they were based on the GAAP-warranted June 2015
financials. Westinghouse now asserted that historical approach violated GAAP.
43
Oral Argument at 30:06, Chicago Bridge & Iron v. Westinghouse Electric, No. 573, 2016 (Del.
May 3, 2017).
44
Id. at 3:49.
45
App. to Appellant’s Opening Br. at A25–26 (Verified Compl., dated July 21, 2016 ¶ 29).
21
Instead, Westinghouse argued that the “claim cost” asset should be reduced by
30%—to reflect that 30% of these costs would likely not be recoverable—and also
that Chicago Bridge should have recorded a reserve liability of hundreds of millions
of dollars for related losses Stone would have taken as a result of design changes
going forward. In essence, Westinghouse argued that it would not have honored all
of its obligations under the consortium agreements and would have avoided liability
for some of Stone’s claims for recovery. Thus, Westinghouse’s argument could be
summarized as “although our initial deal was you get a release from the spiraling
costs of these projects going forward and we get the bulk of the potential upside,
now we want to stick you with close to $1 billion more of those costs that you
thought you were getting rid of when you gave us Stone.” These changes resulted
in a $903.9 million decrease in the Net Working Capital Amount.46
Second, Westinghouse asserted that the projects would cost approximately
$3.2 billion more to complete than Chicago Bridge had originally predicted and,
therefore, that Chicago Bridge should have recorded an additional liability of $956.6
million, again based on Westinghouse’s assertion that 30% of the additional costs
would not be recoverable from Westinghouse or the project owners. Much like the
first item, Chicago Bridge had accounted for these costs in a consistent way in the
past and the increase represented the precise reason Chicago Bridge was willing to
46
Id. at A43 (¶ 60) (citing Westinghouse’s calculation).
22
hand Stone over for zero dollars in the first place. And, Westinghouse did not point
to changes after signing that are driving the increased costs.
Third, Westinghouse asserted that Chicago Bridge omitted a margin fair value
liability of $432 million from Stone’s balance sheet that Chicago Bridge had
recorded in connection with its acquisition of Stone in 2013.47 The margin fair value
liability is a non-cash account established by a purchaser to reflect a reduction of the
net purchase price driven by the purchaser’s assumption of an unfavorable
contract.48 This liability was included in Chicago Bridge’s financial statements, but
it had never been included in Stone’s financial statements or the Target.49
* * *
The sum total of the logic of Westinghouse’s claims is worth stating. Based
on challenges to large items included in the financials that Chicago Bridge
represented were GAAP compliant, which Westinghouse knew about before closing,
and which it did not use as a basis not to close, Westinghouse now says that it should
keep Stone, which it got for zero dollars, and be paid by Chicago Bridge over $2
billion for taking it!
47
Id. at A16 (¶ 10).
48
Opening Br. at 19.
49
App. to Appellant’s Opening Br. at A25–26 (Verified Compl., dated July 21, 2016 ¶ 67); id. at
A167 (Purchase Agreement Sch. 1.4(f)).
23
iii.
In the True Up’s third stage, Chicago Bridge had sixty days to review the
Closing Statement and dispute elements of the Closing Statement in writing (the
“Objections Statement”). If Chicago Bridge delivered an Objections Statement,
Westinghouse and Chicago Bridge had to negotiate in good faith for thirty days to
resolve its contents. Unsurprisingly, Chicago Bridge raised several objections to
Westinghouse’s calculations, which the parties attempted to resolve through
negotiation.
When, as was the case, Chicago Bridge and Westinghouse could not reach an
agreement by the end of this thirty-day period, either party was permitted to submit
the dispute to the Independent Auditor, identified in the Purchase Agreement as
KPMG. The Independent Auditor was to function “solely as an expert and not an
arbitrator” and was not permitted to assign a value to any item greater than the
highest value for the item claimed by Chicago Bridge or Westinghouse or less than
the lowest value claimed for the item by Chicago Bridge or Westinghouse.50 The
Independent Auditor was limited in several other ways. The Independent Auditor
was to base its conclusions solely on written submissions from Chicago Bridge and
Westinghouse, had thirty days to make its conclusion, and that conclusion was to
50
Id. at A66–67 (Purchase Agreement § 1.4(c)).
24
come in the form of “a brief written statement.”51 Any determination made by the
Independent Auditor was to be “final, conclusive, binding, non-appealable and
incontestable by the parties.”52
iv.
Chicago Bridge filed this action against Westinghouse and alleged that
Westinghouse’s calculation of the closing date adjustment breached the express
terms of the Purchase Agreement and the implied covenant of good faith and fair
dealing. At that time, Westinghouse had not invoked the Independent Auditor, but,
it seemed certain Westinghouse intended to do so.53 Chicago Bridge, therefore,
sought an order declaring that Westinghouse’s claims over the Net Working Capital
Amount were actually claims for breaches of the representations, which had been
extinguished under the Liability Bar, and further declaring that Westinghouse could
not circumvent the Liability Bar by submitting its claims to the Independent Auditor
under the True Up. Westinghouse moved for judgment on the pleadings, arguing
that the True Up establishes a mandatory process for resolving the parties’
disagreements. The Court of Chancery granted Westinghouse’s motion, finding that
51
Id. at A67 (§ 1.4(c)).
52
Id.
53
As part of the Stipulation and Scheduling Order in the Court of Chancery, Chicago Bridge and
Westinghouse agreed not to submit any claims to the Independent Auditor until the case was
resolved, but they would identify and engage the Independent Auditor. Id. at A170 (Granted
Stipulation and Scheduling Order Concerning Case Schedule, dated August 4, 2016). And, after
the Court of Chancery’s decision, Chicago Bridge and Westinghouse have pressed their claims
before the Independent Auditor. Appellees’ Answering Br. at 3.
25
the unambiguous language of the Purchase Agreement required the Closing Payment
Statement and Closing Statement to be GAAP compliant, and that the Independent
Auditor’s authority extends to all disputes related to the Objections Statement and
Closing Statement. This appeal followed.
II.
This Court reviews de novo the Court of Chancery’s grant of a motion for
judgment on the pleadings.54 A motion for judgment on the pleadings may be
granted only when no material issue of fact exists and the movant is entitled to
judgment as a matter of law.55 “[J]udgment on the pleadings . . . is a proper
framework for enforcing unambiguous contracts because there is no need to resolve
material disputes of fact.”56
A.
Chicago Bridge argues that the bulk of Westinghouse’s changes to the Net
Working Capital Amount fall outside the scope of matters that the Independent
Auditor may resolve under the True Up because they implicate Stone’s historical
accounting practices. According to Chicago Bridge, the vast majority of
Westinghouse’s claims—or around $1.93 billion57—really constitute alleged
54
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1204
(Del. 1993).
55
Id. at 1205.
56
NBC Universal v. Paxson Commc’ns Corp., 2005 WL 1038997, at *5 (Del. Ch. Apr. 29, 2005).
57
See supra note 44.
26
breaches of the Purchase Agreement’s representations. The calculations of the Net
Working Capital Amount included in Chicago Bridge’s Closing Statement were
based on Stone’s earlier financial statements, which Chicago Bridge represented
were GAAP compliant.58 And, under the Purchase Agreement’s Liability Bar,
Westinghouse gave up its post-closing rights to challenge the representations and
warranties. Thus, Chicago Bridge argues that Westinghouse is trying to get around
the Liability Bar through the True Up. Unlike Westinghouse, Chicago Bridge
conceives of the True Up as a limited procedure for Chicago Bridge and
Westinghouse to account for changes in Stone’s business during the period from
signing to closing and maintain the benefit of the deal they struck.
In contrast, Westinghouse argues that the True Up is a process for resolving
any disagreement over the calculation of the final purchase price, not limited to the
calculation of the Net Working Capital Amount, which the parties are required to
follow. And, therefore, the fact that Westinghouse’s objections to Chicago Bridge’s
calculation of the Net Working Capital Amount could have also been claims for a
breach of Chicago Bridge’s GAAP representation because they relate to Chicago
Bridge’s historical accounting practices for Stone is irrelevant. Indeed, in its
answering brief, Westinghouse argues:
In other words, for pre-closing purposes, [Westinghouse] agreed to
accept the Article II Financials with their GAAP variations without
58
App. to Appellant’s Opening Br. at A71 (Purchase Agreement § 2.6(a)).
27
recourse, but only because for purposes of setting a price,
[Westinghouse] bargained for a more objective standard. Under the
Agreement, then, [Westinghouse] reasonably could proceed to closing
regardless of whether [Chicago Bridge’s] representations about its
financial state were fully GAAP-compliant, precisely because it had
assurances that the price ultimately fixed would be rooted not in those
representations, but in different, special-purpose, GAAP-compliant
calculations.59
Put bluntly, Westinghouse alleges that it gave up nothing in the Liability Bar
because, through the True Up, it could seek monetary payments by alleging that
Chicago Bridge’s historical accounting treatment wasn’t GAAP compliant.
B.
As is often true in cases involving disputes over complex agreements, Chicago
Bridge and Westinghouse assert that each of their views of the True Up are supported
by the unambiguous terms of the Purchase Agreement.60 We agree with both
Chicago Bridge and Westinghouse that the Purchase Agreement is unambiguous
when read in full and situated in the commercial context between the parties.61 When
59
Answering Br. at 29 (emphasis added).
60
Cf. Rhone-Poulenc Basic Chemicals Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.
1992) (“A contract is not rendered ambiguous simply because the parties do not agree upon its
proper construction. Rather, a contract is ambiguous only when the provisions in controversy are
reasonably or fairly susceptible of different interpretations or may have two or more different
meanings.”); Nw. Nat. Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del. 1996) (“Although the parties
disagree as to the proper interpretation of the contract, their disagreement does not create an
ambiguity.”).
61
“[Delaware] courts interpreting a contract ‘will give priority to the parties’ intentions as reflected
in the four corners of the agreement, construing the agreement as a whole and giving effect to all
its provisions.’” In re Viking Pump, Inc., 148 A.3d 633, 648 (Del. 2016) (quoting Salamone v.
Gorman, 106 A.3d 354, 368 (Del. 2014)); see also Kuhn Const., Inc. v. Diamond State Port Corp.,
990 A.2d 393, 396–97 (Del. 2010) (“We will read a contract as a whole and we will give each
provision and term effect, so as not to render any part of the contract mere surplusage.”); Eugene
28
we do so, we conclude that Chicago Bridge’s reading of the contract is the proper
one and that Westinghouse’s interpretation of the True Up, which the Court of
Chancery adopted, cannot be reconciled with Purchase Agreement when interpreted
consistently in its entirety.62
C.
The basic business relationship between parties must be understood to give
sensible life to any contract. As explained earlier, Chicago Bridge and
Westinghouse had a complicated commercial relationship building nuclear power
plants, which led to disputes. To resolve these disputes, Westinghouse and Chicago
Bridge agreed to enter into the Purchase Agreement through which Westinghouse
would acquire Stone. The Purchase Agreement set a purchase price of zero dollars,
which is then adjusted through the True Up, and, unusually for a transaction selling
A. Delle Donne & Son, L.P. v. Applied Card Sys., Inc., 821 A.2d 885, 887 (Del. 2003) (“In
construing a contract, the document must be considered as a whole . . . .”); Nw. Nat. Ins. Co., 672
A.2d at 43; RESTATEMENT (SECOND) OF CONTRACTS § 202 (1981) (“A writing is interpreted as a
whole, and all writings that are part of the same transaction are interpreted together.”); 11
WILLISTON ON CONTRACTS § 32:5 (4th ed.) (“[A] contract will be read as a whole and every part
will be read with reference to the whole.”).
62
GMG Capital Investments, LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 779 (Del.
2012) (“The meaning inferred from a particular provision cannot control the meaning of the entire
agreement if such an inference conflicts with the agreement’s overall scheme or plan.”).
29
a subsidiary, contained the Liability Bar, as well as a broad indemnification for the
seller, Chicago Bridge.
Crucially, in exchange for receiving zero upfront consideration, Chicago
Bridge would be released from all liability related to the projects. This reflected the
essence of the deal: Chicago Bridge would deliver Stone to Westinghouse for zero
dollars in up front consideration and, in return, would be released from any further
liabilities connected with the projects. Not only would Westinghouse indemnify
Chicago Bridge against future liabilities, but closing was contingent on Chicago
Bridge receiving releases from the utility companies that would operate the plants
when they were completed. The True Up works in this context to ensure Chicago
Bridge was appropriately compensated for the work it expected to continue to do
and Westinghouse was protected if Chicago Bridge suddenly stopped work or if
Westinghouse and the power utilities started paying their bills owed to Stone
unexpectedly quickly, such that Stone’s accounts receivable went down more than
expected and thus net working capital fell. Thus, the crux of this deal was that
Chicago Bridge was done with the nuclear projects. It would get no profit for selling
Stone—as of closing—but the Liability Bar, indemnity, and releases meant Chicago
Bridge would at least be rid of liability for the still-spiraling costs of the projects, a
privilege that was valuable in that context. Now, Westinghouse says Chicago Bridge
30
should pay it an extra $2 billion for that privilege.63 As the key provisions of the
Purchase Agreement show and the business context they highlight demonstrates,
Westinghouse’s view that the Purchase Agreement gave it a free license to re-trade
the core common basis of the exchange is beyond strained; it involves a rewriting of
the contract embodying that exchange.
D.
i.
The True Up has an important role to play, but that role is limited and
informed by its function in the overall Purchase Agreement. Generally speaking,
purchase price adjustments in merger agreements account for changes in a target’s
business between the signing and closing of the merger.64 This is especially so when
the purchase price is based on the target’s value at closing.65 As experienced
commentators have observed, when a purchase price involves a fixed amount plus
or minus net working capital changes, there are two main interpretations of the
variable amount. The most common is that “the business being sold is run for the
seller’s benefit (for better or worse) from the date on which working capital was that
fixed dollar amount until closing. If the business sells a lot of widgets during that
63
See OSI Systems, Inc. v. Instrumentarium Corp, 892 A.2d 1086, 1093–94 (Del. Ch. 2006).
64
ABA, ABA MODEL STOCK PURCHASE AGREEMENT WITH COMMENTARY 64 (2d ed. 2010).
65
KLING & NUGENT, supra note 30, at § 17.01[2] (2016). “In this situation, the parties have agreed
that the price the buyer should pay is related to the target’s financial position on the closing date
as compared to its financial position as of a reference date.” Id.
31
period, and working capital increases as a result, the seller [gets] paid more.”66 This
illustrates the fundamental nature of net working capital adjustments as existing to
account for changes in a target business from signing until closing. Buyers want
protection against value depletion before they take over the business, and, at the
same time, sellers want to ensure that they will be compensated for effectively
running the business.67 Thus, purchase price adjustments account for the normal
variation in business from signing until closing to assure the buyer and seller that the
purchase price accurately reflects the target’s financial condition at the time of
closing.68
ii.
The True Up provision of the Purchase Agreement is consistent with the
general role net working capital adjustments play. The plain terms of the definition
of Net Working Capital, read in conjunction with the rest of Purchase Agreement,
require the use of Stone’s past accounting practices, rather than a new assessment of
66
Id. at § 17.02. Alternatively, the “generally less relevant interpretation is that the Buyer is
guaranteed an amount of working capital equal to such fixed amount.” Id.
67
Id. (“The seller and its personnel are viewed as ‘lame duck’ management and the buyer will be
concerned that the business will languish under their direction.”); ERNST & YOUNG, SHARE
PURCHASE AGREEMENTS: PURCHASE PRICE MECHANISMS AND CURRENT TRENDS IN PRACTICE (2d ed.
2012) (“Purchase price adjustments aim to protect the buyer against value erosion and value
leakage at the target company until the closing date. At the same time, they should reward the
seller for managing the business well between the reference date and closing.”); Mark Thierfelder,
et al., Working Capital Adjustment: At the Crossroads of Law and Accounting, N.Y.L.J. Oct. 26,
2015 (“Buyers typically want to protect against the depletion of working capital after signing and
ensure that an acquired business has an appropriate amount of working capital.”).
68
ABA, supra note 64, 64–65.
32
those historical practices’ compliance with GAAP. The Purchase Agreement states
that the Closing Payment Statement and Closing Statement, of which the Net
Working Capital estimates and Westinghouse’s disputed items are a part, must be
“prepared and determined from the books and records of [Stone] and its Subsidiaries
and in accordance with United States generally accepted accounting principles
(‘GAAP’) applied on a consistent basis throughout the periods indicated and with
the Agreed Principles.”69 And, the Agreed Principles require that Working Capital
calculations be “determined in a manner consistent with GAAP, consistently applied
by Seller Parent in preparation of the financial statements of the Business, as in
effect on the Closing Date” and “based on the past practices and accounting
principles, methodologies and policies” used by Stone.70 Thus, the Closing Payment
Statement and Closing Statement have to comply with two conditions: i) they must
be prepared from Stone’s books and records; and ii) they must use the same
accounting approach as had been used in the past.
The phrases “applied on a consistent basis throughout the periods indicated”
and “based on the past practices and accounting principles, methodologies and
policies” both require consistent accounting treatment. They recognize that GAAP
allows for a variety of treatments and different accountants may come to differing
69
App. to Appellant’s Opening Br. at A68 (Purchase Agreement § 1.4(f)) (emphasis added).
70
Id. at A164 (Sch. 11.1(a)) (emphasis added).
33
views on what constitutes acceptable GAAP treatment, but for the purpose of these
calculations, both Westinghouse and Chicago Bridge must hold the accounting
approach constant. Thus, the True Up and the Agreed Principles work together to
establish a requirement of consistency. The Agreed Principles also do something
else: they set the approach to GAAP as that already used by Chicago Bridge “in
preparation of the financial statements of the Business.”71 Thus, when read together,
these parts of the Purchase Agreement require Westinghouse and Chicago Bridge to
continue using the accounting approach Chicago Bridge had been using in the
normal course of business before the transaction for the calculations up to and
through closing. This makes sense when considering the whole point of these
statements. They are not to aid Westinghouse’s investigation of the business or to
otherwise provide a historical picture of Stone’s operations. Rather, they account
for changes in Stone’s business from the time when the Purchase Agreement was
agreed on until closing. Thus, keeping all other variables constant in terms of
accounting is crucial.
Paying close attention to how the representations and warranties fit together
with the True Up reinforces this point. Chicago Bridge represented that it provided
“the financial statements of [Stone] . . . (collectively, the ‘Financial Statements’)”
and that those Financial Statements had “been prepared in accordance with
71
Id.
34
GAAP.”72 Working Capital is defined as being determined on the basis of GAAP
“consistently applied by Seller Parent in preparation of the financial statements of
[Stone].”73 Thus, it would be unreasonable to interpret the definition of Working
Capital as allowing for a different accounting approach from that used for the
Financial Statements.74 Instead, the consistency language of the Working Capital
definition emphasizes that there is one approach to GAAP and one set of statements
that are appropriate for use throughout the transaction. This is, of course, common
sense, when keeping the broader context in mind: it would be awfully difficult for
the True Up to fulfill one of its main roles, i.e., account for changes in Stone’s
business between signing and closing, if one accounting approach was used to
complete the Financial Statements for signing and another one was used to complete
the True Up calculations.
This interpretation of the True Up gives the language of Section 1.4 an
important role to play in the transaction, but not as wide-ranging as Westinghouse’s
preferred interpretation. As is traditionally the case with provisions like this one,
the True Up’s effect is that Chicago Bridge could continue operating Stone as though
72
Id. at A71 (§ 2.6(a)).
73
Id. at A164 (Sch. 11.1(a)).
74
See OSI, 892 A.2d at 1093 (rejecting a similar argument that a reference statement of working
capital was not specifically represented to be GAAP compliant and so the figures of that statement
could be reassessed for GAAP compliance outside of a representation and warranty breach
adjudication, because those reference statements were based on the financial statements that were
represented to be GAAP compliant).
35
it was still its own business, but without worrying that pursuing normal construction
operations would benefit Westinghouse to its own detriment. Westinghouse was
also protected to the extent Chicago Bridge or Stone tried to suddenly shift course
in how it chose to treat Stone from an accounting perspective, even though Chicago
Bridge’s representations, and therefore liability under an indemnity or breach of
contract theory, about Stone’s GAAP compliance lapsed at closing. Or, if Chicago
Bridge didn’t follow through with the construction program or if Westinghouse and
the utilities paid a bunch of their bills, Westinghouse wouldn’t end up worse off than
it was at signing thanks to the True Up. Thus, this interpretation of the True Up
maintains the underlying economics of the parties’ bargain.
iii.
Additionally, to understand the role the True Up plays in the Purchase
Agreement, it is important to recognize the limited role of the adjudicator, here an
auditor (called the Independent Auditor in the Purchase Agreement), that Chicago
Bridge and Westinghouse selected. The Independent Auditor does not have a
mandate to address any dispute that might come from the Purchase Agreement.75
Instead, Chicago Bridge and Westinghouse identified a set of specific disputes that
75
Indeed, even in a situation where the Court of Chancery addressed an adjudicator in a somewhat
similar role to the Independent Auditor, but with arguably broader powers, it observed that issues
related to potential misrepresentations made by a seller “are not generally viewed as the kind of
disputes that would be resolved by the person charged with ‘truing up’ the books.” Matria
Healthcare, Inc. v. Coral SR LLC, 2007 WL 763303, at *6 (Del. Ch. Mar. 1, 2007).
36
the Independent Auditor could resolve. Chicago Bridge could call on the
Independent Auditor to determine if Westinghouse had provided adequate access to
its books and records to assist Chicago Bridge in assessing Westinghouse’s
calculation of the Closing Statement.76 If Westinghouse wanted to change the
purchase price allocation and Chicago Bridge disputed the change, the Independent
Auditor could be called on to resolve that dispute.77 Similarly, if Chicago Bridge
and Westinghouse disagreed about the calculation of earnout amounts, the
Independent Auditor could resolve those disputes.78 And, of course, the Independent
Auditor was charged with resolving disputes between Chicago Bridge and
Westinghouse over the Closing Payment Statement and Closing Statement.79
But, the Purchase Agreement further limited the scope of the Independent
Auditor’s review even in the limited situations where it was empowered to review
anything. For one thing, the Purchase Agreement states in multiple places that the
auditor was acting “as an expert and not as an arbitrator.”80 That language by itself
has been read to narrow the scope of the expert’s domain.81 The Independent
76
App. to Appellant’s Opening Br. at A66 (Purchase Agreement § 1.4(b)).
77
Id. at A69 (§ 1.6).
78
Id. at A157–58 (Sch. 1.3(d)).
79
Id. at A66–67 (§ 1.4(c)).
80
Id. at A66 (§ 1.4(b)); A157–58 (Sch. 1.3(d)).
81
See, e.g., AQSR India Private, Ltd. v. Bureau Veritas Holdings, Inc., 2009 WL 1707910, at *2
(Del. Ch. June 16, 2009). New York law has also recognized the distinction between arbitrators
and experts; one report on the state of New York’s law on the topic notes “[w]here the parties have
selected an expert to decide factual issues within the scope of that decision maker’s expertise, the
parties have chosen expert determination as the dispute resolution mechanism, not arbitration,”
37
Auditor was to base its conclusions solely on written submissions from Chicago
Bridge and Westinghouse, had thirty days to make its conclusion, and that
conclusion was to come in the form of “a brief written statement.”82 Thus, the
Independent Auditor did not have a wide-ranging brief to adjudicate all disputes
between Chicago Bridge and Westinghouse under the Purchase Agreement, but
rather one confined to a discrete set of narrow disputes.83 Notably, those duties never
Compendium of Selected Authorities Cited in Appellant’s Opening Br. ex 5 (Purchase Price
Adjustment Clauses and Expert Determinations: Legal Issues, Practical Problems and Suggested
Improvements 24 (June 2013)), and that incorrectly treating an expert as an arbitrator can lead to
experts “being granted broader and deeper authority than that reasonably expected by the parties,”
id. at 49.
82
App. to Appellant’s Opening Br. at A67 (Purchase Agreement § 1.4(c)).
83
Indeed, the Independent Auditor’s role as to the True Up is far different from broad arbitration
provisions that empower an arbitrator to decide any disputes arising under or related in any way
to a claim under a contract. E.g., Riley v. Brocade Commc’ns Sys., Inc., 2014 WL 1813285, at *2
(Del. Ch. May 6, 2014) (“[T]he parties agree that any and all claims, disputes or controversies of
any nature whatsoever arising out of, or relating to, this Agreement, the COC [Change of Control]
Plan and/or the Participation Agreement, or their interpretation, enforcement, breach, performance
or execution, Employee’s employment with the Company, or the termination of such employment,
shall be resolved, to the fullest extent permitted by law by final, binding and confidential
arbitration” (quoting agreement at issue in the case)). The Purchase Agreement’s specific
delineation of areas the Independent Auditor may review stands in sharp contrast to broad
arbitration provisions. Even where the Purchase Agreement’s language seems broad, stating that
Westinghouse and Chicago Bridge may submit “any and all matters that remain in dispute with
respect to the Objections Statement, the Closing Statement and the calculations set forth therein,”
the remainder of the sentence “with respect to the Objections Statement, the Closing Statement
and the calculations set forth therein” qualifies the universe of disputes to those embodied in those
statements and calculations and thus only disputes properly part of the True Up. App. to
Appellant’s Opening Br. at A67 (Purchase Agreement § 1.4(c)).
Such broad arbitration provisions can even be used to empower the arbitrator to determine
disputes like this about arbitrability itself. E.g., Pryor v. IAC/InterActiveCorp, 2012 WL 2046827,
at *5–*6 (Del. Ch. June 7, 2012) (applying a stockholder’s agreement that stated “[a]ny
controversy concerning whether a matter is an arbitrable matter . . . shall be determined by the
[a]rbitrator,” and concluding that the determination of what claims could be heard by the arbitrator
was the arbitrator’s decision to make (quoting the stockholder’s agreement at issue in the case));
see also James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 80 (Del. 2006) (determining
that arbitrators are empowered to decide arbitrability in circumstance where the “arbitration clause
38
included assessing if Chicago Bridge breached the representations and warranties it
offered in the Purchase Agreement.84
iv.
That the Purchase Agreement’s plain meaning does not allow claims that
could have been brought as breaches of representations and warranties to be brought
as part of the True Up is also apparent because to allow such claims would largely
render the Liability Bar meaningless. That section cuts off both parties’ liability for
breaches of representations and warranties at closing. The majority of the issues
Westinghouse disputes with respect to the Net Working Capital Amount reflect its
position that Chicago Bridge’s historical accounting treatment of Stone was not
GAAP compliant. Westinghouse argues that under the Purchase Agreement, it could
accept non-GAAP compliant financial statements pre-closing and wait until the post-
closing adjustment process to dispute Chicago Bridge’s historical accounting
generally provides for arbitration of all disputes and also incorporates a set of arbitration rules that
empower arbitrators to decide arbitrability”). By contrast, the agreement to arbitrate disputes from
the True Up embodied in the Purchase Agreement addresses a narrow set of disputes, disclaims
that the expert is an arbitrator, and thus the parties both agreed that any dispute over what claims
may be asserted in the True Up proceeding and what claims are barred by the Liability Bar must
be addressed by a court.
84
See OSI, 892 A.2d at 1091 (“[The relevant purchase agreement’s provisions] appears on its face
to simply contemplate the use of an Independent Accounting Firm if there are differences of
opinion about the amount of Modified Working Capital . . . . OSI’s current position involves the
Independent Accounting Firm in an entirely different and more ambitious role: that of determining
that the Transaction Accounting Principles used in the Reference Statement were not compliant
with U.S. GAAP.”).
39
methodology, despite the Liability Bar’s elimination of liability. Indeed,
Westinghouse’s Answering Brief states:
In other words, for pre-closing purposes, [Westinghouse] agreed to
accept the Article II Financials with their GAAP variations without
recourse, but only because for purposes of setting a price,
[Westinghouse] bargained for a more objective standard. Under the
Agreement, then, [Westinghouse] reasonably could proceed to closing
regardless of whether [Chicago Bridge’s] representations about its
financial state were fully GAAP-compliant, precisely because it had
assurances that the price ultimately fixed would be rooted not in those
representations, but in different, special-purpose, GAAP-compliant
calculations.85
But, Westinghouse’s view that such changes can be addressed through the
True Up renders the Liability Bar meaningless and eviscerates the basic bargain
between these two sophisticated parties.86 The financial statement representation is
the most important representation in a typical purchase agreement. 87 So,
Westinghouse’s argument would mean that the Liability Bar doesn’t mean what
plain English would suggest it means for the most important item that section
ostensibly encompasses, because, under Westinghouse’s interpretation, the end of
liability on the financial statements representation has no effect as to any item
conceivably subject to change as part of the True Up because any qualm
85
Answering Br. at 29 (emphasis added).
86
See OSI, 892 A.2d at 1093 (observing that accepting a seller’s argument that allowing certain
claims to be heard in the purchase price adjustment adjudication would “undermine the limitations
on liability and the core dispute resolution mechanism” agreed to by the parties).
87
FREUND, supra note 33, at 254 (observing that if a purchaser could have only one representation,
it would be “the financial statements, of course”).
40
Westinghouse had about Stone’s historic accounting treatment could be brought
before the Independent Auditor. As the Court of Chancery has observed, “where the
contract expressly provides that the representations and warranties terminate upon
closing . . . the parties have made clear their intent that they can provide no basis for
a post-closing suit seeking a remedy for an alleged misrepresentation. That is, when
the representations and warranties terminate, so does any right to sue on them.” 88 To
accept Westinghouse’s interpretation of the True Up would require reading into this
unambiguous agreement an unwritten, material exception to the Liability Bar, which
this Court declines to do. Under the plain terms of the Purchase Agreement, if
Westinghouse disagreed with the accounting methodology that Chicago Bridge
historically used, it could refuse to close or sue for damages.89 After closing,
Westinghouse could only use the True Up to resolve disputes arising from changes
in facts or circumstances of Stone’s business between signing and closing.
Westinghouse also urges that when Section 10.3 explicitly preserves the True
Up after closing, that can only mean Westinghouse is allowed to bring any claims it
chooses post-closing despite the Liability Bar in Section 10.1. Section 10.3 provides
that the Liability Bar “shall not . . . operate to interfere with or impede the operation
88
GRT, Inc. v. Marathon GTF Technology, Ltd., 2011 WL 2682898, at *13 (Del. Ch. July 11,
2011).
89
App. to Appellant’s Opening Br. at A108 (Purchase Agreement § 8.1(a)).
41
of the provisions” addressing the True Up.90 But, accepting that Westinghouse
cannot close and then object, for the first time, to Chicago Bridge’s consistent
accounting treatment in the True Up is consistent with the language of Section 10.3.
Given the Liability Bar’s broad language cutting off liability for money damages
after closing, Section 10.3 simply makes clear that the True Up has teeth for
addressing changes in Stone’s business between signing and closing and that those
changes very well might result in money changing hands between Chicago Bridge
and Westinghouse, either for expected reasons, such as Chicago Bridge’s obligation
to inject substantial capital into Stone, or less innocuous ones, such as Chicago
Bridge or Westinghouse fiddling with the accounting used in the True Up’s
statements to swing the balance in that party’s favor. Under this reading, Section
10.3 plays its meaningful and expected, but confined, role in the Purchase
Agreement. By contrast, Westinghouse’s strained argument that Section 10.3 is a
broad license for Westinghouse to resuscitate claims covered by the Liability Bar in
the True Up process is not reasonably supported by its language or its role within
the overall context of the Purchase Agreement.
90
Id. at A112 (§ 10.3(a)).
42
v.
Although Westinghouse argues91 that the True Up was structured after the
analogous provision at issue in Alliant Techsystems, Inc. v. MidOcean Bushnell
Holdings, L.P,92 the True Up differs in a material fashion. Indeed, the True Up here
is more similar to that at issue in OSI Systems, Inc. v. Instrumentarium Corp.93 and
in a New York case, Westmoreland Coal Co. v. Entech, Inc.94 In OSI, the Court of
Chancery addressed a merger agreement containing one form of dispute resolution
for disputes about the amount of working capital, without a cap on the amount of the
dispute, and another form of dispute resolution for claims for breaches of
representations and warranties, with a capped potential liability amount.95 There,
the initial exchange of estimates was essentially the same as what was required here:
the seller created one before closing and the buyer did the same after closing. But,
the buyer’s calculation had to be “prepared in accordance with the Transaction
Accounting Principles applied consistently with their application in connection with
the preparation of the Reference Statement of Working Capital and the Statement of
91
Oral Argument at 34:25, Chicago Bridge & Iron v. Westinghouse Electric, No. 573, 2016 (Del.
May 3, 2017) (“[T]he architecture of what the parties did, exactly as they did in Alliant . . . .”); id.
at 35:27 (“[W]e tracked [10.3] word for word from the Alliant agreement . . . .”); see also
Appellees’ Answering Br. at 4 (calling Alliant “remarkably analogous”).
92
2015 WL 1897659 (Del. Ch. Apr. 24, 2015).
93
892 A.2d 1086 (Del. Ch. 2006).
94
794 N.E.2d 667 (N.Y. 2003).
95
892 A.2d at 1094.
43
Estimated Closing Modified Working Capital . . . .”96 The term “Transaction
Accounting Principles” meant “U.S. GAAP; provided, however, that: (i) with respect
to any matter as to which there is more than one principle of U.S. GAAP, Transaction
Accounting Principles means the principles of U.S. GAAP applied in the preparation
of the Financial Statements . . . .”97
In OSI, the buyer’s statement altered many of the accounting methods that the
seller used in preparing the Reference Statement and Statement of Estimated Closing
Modified Working Capital because the buyer alleged that those statements did not
comply with GAAP. As a result, the buyer’s calculation differed substantially from
the seller’s. The parties disputed whether the question of GAAP compliance should
be resolved by an independent auditor under the purchase price adjustment
provision, or if it needed to be resolved by a court under the agreement’s
indemnification provision.
OSI’s merger agreement required the working capital adjustments to be
prepared “in accordance with the Transaction Accounting Principles applied
consistently with their application in connection with the preparation of the
Reference Statement of Working Capital and the Statement of Estimated Closing
Modified Working Capital.”98 The Transaction Accounting Principles definition
96
Id. at 1091.
97
Id.98
Id.44
included a requirement that they comply with GAAP, but as in this case, the party
seeking the dramatic change as part of the working capital adjustment conceded that
its grievances were not the result of changes between signing and closing, but rather
existed before signing.99 Thus, in OSI, like this case, there were historic financials
that carried with them an approach to GAAP and a representation that the approach
complied with GAAP. The language for the working capital adjustment similarly
did not establish a separate GAAP compliance test, but instead a consistency test:
the adjustment was to be “in accordance with the Transaction Accounting Principles
applied consistently with their application in connection with the preparation of the
[statements based on historical financials].”100
The seller’s financial statements as of signing were also subject to a
representation that they complied with GAAP and so the Court of Chancery
concluded that the assertion that the Reference Statement of Working Capital did
not comply with GAAP necessarily asserted a claim for a breach of that
representation.101 Like the True Up provisions here, “[t]he process set forth in [the
OSI purchase agreement] was not intended to be used to resolve [contentions that
the seller’s historical accounting was materially inaccurate], it was designed to
handle disputes about the extent of change in [target’s] Modified Working Capital
99
Id.100
Id.101
Id. at 1092.
45
between . . . the ‘as of’ date of the Reference Statement[] and . . . the Closing Date[]
when measured under the same accounting principles used in preparing the
Reference Statement.”102 Because the Court of Chancery read the purchase
agreement to bar the buyer from “bypass[ing] the contractual Indemnification
process, [and] ignor[ing] the contractual requirement to prepare its Initial Modified
Working Capital Statement using accounting principles consistent with those used
in the Reference Statement,”103 and found that “the buyer’s claims rest
fundamentally on its assertion that the seller premised its financial statements and
estimates of working capital on accounting judgments that violated generally
accepted accounting principles,” it determined that those claims involved claims for
breaches of representations and warranties and could only be properly presented in
the contractual indemnification process.104
New York State’s highest court confronted a similar dispute in Westmoreland
where the merger agreement required comparable closing date financial statements
to be prepared “in accordance with GAAP applied on a consistent basis with past
practices.”105 Westmoreland treated that language as establishing a test for
consistency. Indeed, Westmoreland observed that “[w]hat is most important is that,
102
Id. at 1095.
103
Id.104
Id. at 1087.
105
794 N.E.2d at 670.
46
when preparing financial statements intended to be used for comparative purposes,
the methodology be consistent applied . . . . [The Agreement’s] emphasis on
consistent treatment can only reflect a purpose to flag changes in value between . . .
the date of acquisition pricing[] and the closing date.”106 Westmoreland determined
that the buyer’s attacks on GAAP compliance implicated the initial financial
statements, and such claims constituted only a breach of the representation that those
initial statements were GAAP compliant.107 Those claims could “only be pursued
in a court of law, with its attendant protections of discovery, rules of evidence,
burdens of proof, and full appellate review.”108
In contrast, in Alliant the definition of Net Working Capital was that it was a
relevant set of assets less liabilities on a consolidated basis “and calculated in
accordance with GAAP and otherwise in a manner consistent with the practices and
methodologies used in the preparation of the [benchmark financial
statements] . . . .”109 The Chancellor found that the use of two separate “and”s
created two separate tests.110 The first test was if the calculation complied with
GAAP. The second test was if the calculations were “otherwise” consistent with
how the seller had prepared its financial statements. That is rather different from the
106
Id. at 671.
107
Id. at 671–72.
108
Id.
109
2015 WL 1897659, at *7 (emphasis added).
110
Id. at *8.
47
language present in OSI, Westmoreland, and here where the Closing Payment
Statement and Closing Statement are simply required to use the same approach to
GAAP as Chicago Bridge and Stone had employed historically; the Purchase
Agreement’s plain terms do not establish two separate tests.
III.
For the reasons described, any argument by Westinghouse that the Closing
Date Purchase Price should be adjusted due to assertions that Chicago Bridge’s
historical financial statements and accounting practices did not comply with GAAP
may not be heard in a proceeding before the Independent Auditor. The Court of
Chancery should enjoin Westinghouse from submitting claims to the Independent
Auditor or continuing to pursue already-submitted claims based on arguments that
also would have constituted arguments that Chicago Bridge breached the Purchase
Agreement’s representations and warranties. This leaves Westinghouse free to make
any argument to the Independent Auditor that addresses a change in facts or
circumstances that occurred between signing and closing relevant to the Closing
Date Purchase Price. Thus, the judgment of the Court of Chancery dated December
5, 2016 is reversed. We remand this matter to the Court of Chancery and direct it to
grant Chicago Bridge’s requested declaratory relief.
48