Impact Invs. Colorado II, LLC v. Impact Holding, Inc., C.A. No. 4323-VCP (Del. Ch. Aug. 31, 2012) (Parsons, V.C.)
In this memorandum opinion, the Delaware Court of Chancery denied in part and granted in part Impact Investments Colorado II, LLC (“ICII”) and Baker Investment Trust’s (“Baker Trust,” and together with ICII, the “Sellers”) motion for summary judgment, finding there were genuine issues of material fact as to whether Impact Holding, Inc. (the “Buyer”) complied with certain claim notice provisions of the stock purchase agreement (the “SPA”) and related escrow agreement (the “EA”). However, because there was no genuine issue of material fact as to a subset of Buyer’s claims regarding the SPA’s purchase price adjustment process, the Court granted Sellers’ motion for summary judgment with respect to those claims.
Sellers were the majority shareholders of Impact Confections, Inc. (the “Company”), a Colorado-based candy manufacturer famous for its Warheads brand of candy. On January 15, 2008, pursuant to the SPA, Buyer purchased the stock of the Company for a preliminary purchase price of $38 million less certain sums, including $2 million held in an escrow account (the “Escrow”) governed by the EA. All indemnification claims arising out of the SPA’s representations and warranties concerning the Company were to be pursued against the Escrow, which terminated on January 15, 2009. The SPA also included a working capital purchase adjustment mechanism (the “Purchase Price Adjustment”).
To seek indemnification against the Escrow, the SPA requires that Buyer provide Sellers with written notice (a “Claim Notice”) that describes “the claim with reasonable particularity and containing a reference to the provisions of this Agreement.” The EA contains similar language providing for notice to the non-claiming party. The Claim Notice sections of the SPA and EA contain provisos such that failure to follow the Claim Notice procedures in the SPA or EA does not relieve the other party of its indemnity obligations unless such non-compliance causes material prejudice.
On March 14, 2008, Buyer initiated the Purchase Price Adjustment process. The parties negotiated certain disputed items in good faith, including (1) the disallowance of unamortized trade show expenses; (2) disallowance of sugar credits; and (3) inclusion of an accrual for insurance policies and premiums. Ultimately, Sellers acknowledged and agreed to a revised calculation and, on May 19, 2008, Buyer caused a “Working Capital Overage” to be wired to Sellers. On January 14, 2009, one day before termination of the claim period under the SPA and the EA, Buyer provided Sellers with a Claim Notice for indemnification in the amount of the full $2,000,000 held in Escrow. The Claim Notice included claims for breaches of a number of representations, warranties and covenants, including claims relating to the calculation of working capital.
On January 19, 2009, Sellers provided Buyer with a Notice of Dispute of Buyer’s Claim Notice (the “Notice of Dispute”) asserting that the Claim Notice failed to provide an adequate description or amount of the claim and that such inadequate description materially prejudiced Sellers’ ability to determine whether to accept or reject the claims.
On January 30, 2009, Sellers filed a petition in the Court of Chancery seeking: (1) a declaratory judgment that Buyer had failed to provide legally sufficient notice of its claim; (2) a judgment in favor of Sellers for damages for breach of contract; (3) an order compelling Buyer to release the Escrow; and (4) attorneys’ fees.
Buyer filed a counterclaim. seeking: (1) a declaratory judgment that Sellers had breached their representations and warranties and that Buyer’s claims are meritorious; (2) an injunction compelling the release of the full Escrow amount to the Buyer; and (3) damages arising out of the Sellers’ alleged breach of the SPA. The parties cross-moved for summary judgment.
The Court acknowledged the parties essentially agreed that the Claim Notice was filed within the one-year deadline provided for in the EA and SPA, but disagreed as to its sufficiency. Accordingly, the Court stated it will be deemed established at trial pursuant to Chancery Court Rule 56(d) that Buyer timely filed the Claim Notice. The Court ultimately denied summary judgment on the sufficiency issue because the Court found the operative phrase, “with reasonable particularity,” susceptible of two reasonable interpretations.
The Court next considered whether, even if Buyer’s Claim Notice was insufficient at the time of the Escrow deadline, Buyer’s claims were still preserved because Sellers were not materially and adversely prejudiced by any delay in supplying adequate notice. Buyer argued that a failure to provide a timely and sufficiently detailed Claim Notice only bars an indemnification claim to the extent that Sellers suffered material prejudice as a result of those deficiencies. Sellers responded that the time limits the SPA and EA established contain no exception for material prejudice, and therefore superseded the material prejudice provisos. The Court agreed with Sellers and recognized that allowing Buyer to submit a Claim Notice after the deadline would read the provisions establishing such deadline out of the EA and SPA in contravention of well-established cannons of contract interpretation.
Sellers next argued that the procedure for resolving Final Working Capital and the Purchase Price Adjustment foreclosed Buyer from seeking damages for breach of related representations and warranties. Section 6(f) of the SPA limits the Buyer’s ability to seek indemnification for claims “taken into account in determining any adjustment of the Purchase Price.” Sellers construed the phrase to include all components of Final Working Capital. Buyer put forth a narrower interpretation including only those items of Final Working Capital that were actually asserted and adjusted in connection with the Purchase Price Adjustment.
The Court found that the parties expressly negotiated over the unamortized trade show expenses and trade credits and thus held that Buyer’s claims regarding the same were previously “taken into account” in the Purchase Price Adjustment and, therefore, are barred. Further, the Court held that Buyer’s personal property tax claims, being unrelated to calculations of working capital, were not “taken into account” during the Purchase Price Adjustment and, as a result, Buyer remains free to pursue such claims.
The Court then considered Buyer’s remaining claims relating to the Purchase Price Adjustment and Sellers’ alleged breaches of the representations and warranties in the SPA, ultimately denying summary judgment after finding the record unclear.