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Millard Highlights Implications of Chicago Bridge Decision

November 22, 2017, Pamela L. Millard

In "Bridging the GAAP: Contractual Interpretation Issues in 'Chicago Bridge & Iron'," an article published in Delaware Business Court Insider, partner Pam Millard outlined the implications of the Delaware Supreme Court’s opinion in Chicago Bridge & Iron Co. v. Westinghouse Electric Co. LLC, 2017 WL 2774563 (Del. June 28, 2017), reversing Vice Chancellor Laster’s 2016 opinion in Chicago Bridge & Iron Co. v. Westinghouse Electric Co. LLC, 2016 WL 7048031 (Del. Ch. Dec. 5, 2016).

On June 28, 2017, the Delaware Supreme Court reversed the Court of Chancery’s prior ruling in Chicago Bridge & Iron v. Westinghouse Electric, 2016 WL 7048031 (Del. Ch. Dec. 5, 2016), rev’d, 2017 WL 2774563 (Del. June 28), holding that an independent auditor appointed to resolve purchase price adjustment disputes relating to a sale transaction was not empowered to decide challenges to the seller’s compliance with GAAP in connection with a post-closing true up of net working capital.


In 2015, Chicago Bridge & Iron, entered into a purchase agreement with Westinghouse Electric Co., pursuant to which Westinghouse purchased a subsidiary of Chicago Bridge (Stone). The parties were engaged in the construction of two nuclear power facilities, and frequent cost overruns led Chicago Bridge to exit the project. The purchase agreement provided that Westinghouse would acquire Stone for $0 in consideration, subject to a true-up calculation adjusting the final purchase price based on work undertaken by Chicago Bridge between signing and closing  (the true up).  The initial net working capital amount was set at $1.174 billion (the target), with Westinghouse owing Chicago Bridge the difference if the final net working capital amount exceeded the target, and Chicago Bridge owing Westinghouse the deficiency if the final net working capital amount was less than the target.

The purchase agreement required Chicago Bridge to deliver a closing payment statement to Westinghouse prior to closing containing a good faith estimate of certain amounts, including the net working capital amount, and the purchase agreement specified that the closing payment statement was to be prepared in accordance with GAAP “applied on a consistent basis throughout the periods indicated and with the agreed principles.” The agreed principles further provided that working capital would be calculated 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” and “based on the past practices and accounting principles, methodologies and policies applied by [Stone] ….”  Following the delivery of seller’s closing payment statement, the parties closed the transaction.

The Dispute

Following the closing, Westinghouse delivered its own closing statement to Chicago Bridge in accordance with the terms of the purchase agreement. Claiming that Stone’s books and records were not GAAP-compliant, Westinghouse presented a net working capital amount of negative $967.5 million, more than $2 billion less than the estimated net working capital amount. The purchase agreement contemplated that, to the extent the parties were unable to resolve a dispute arising from the closing statements, either party could submit the dispute to an independent auditor, who was to function “solely as an expert and not as an arbitrator.”

After taking steps to utilize the Independent auditor, seller ultimately abandoned the auditor process and filed suit in the Court of Chancery. In considering Chicago Bridge’s claims for declaratory relief, the Court of Chancery analyzed several unusual provisions included in the purchase agreement, including a “liability bar,” pursuant to which the sole remedy available to Westinghouse if Chicago Bridge breached its representations and warranties was to refuse to close, and Chicago Bridge had no monetary liability to Westinghouse post-closing. In addition, Westinghouse agreed to indemnify Chicago Bridge for any and all claims relating to Stone, and the closing of the transaction was conditioned upon Chicago Bridge obtaining valid and enforceable releases from the owners of the nuclear power facilities being acquired in the transaction. The parties also agreed that their mutual representations and warranties would not survive the closing.

Procedural History

Chicago Bridge asserted in the Court of Chancery that Westinghouse’s calculation of the net working capital amount breached the express terms of the purchase agreement, and buyer’s claims regarding the net working capital amount were actually claims for breaches of representations made by Chicago Bridge, which were extinguished by the liability bar.  Westinghouse argued in the alternative that the true up was intended to resolve any disagreement over the final purchase price, and not just the calculation of the net working capital amount. The Court of Chancery held that the authority granted to the independent auditor was broad enough to permit the independent auditor to consider whether Chicago Bridge had complied with GAAP for purposes of calculating the final net working capital amount.

The Delaware Supreme Court reversed, finding that claims that Stone’s financial statements were not GAAP-compliant were not subject to resolution by the Independent auditor, and describing the true up as a “narrow, subordinate and cabined remedy” intended solely to reimburse Chicago Bridge for capital expenditures incurred between signing and closing.

Supreme Court Analysis

In reaching its decision, the Supreme Court noted that language contained in the true up, which included the phrases “applied on a consistent basis throughout the periods indicated” and “based on the past practices and accounting principles, methodologies and policies,” worked to “establish a requirement of consistency.” The agreed principles further “set the approach to GAAP as that already used by Chicago Bridge” in the preparation of Stone’s financial statements. Taken together, the Supreme Court determined that the true up and the agreed principles required Westinghouse and Chicago Bridge to continue the accounting practices that were in place prior to the transaction and up until the closing.

Although Westinghouse argued that it could receive non-GAAP compliant financial statements pre-closing and then wait until the post-closing true up to challenge Chicago Bridge’s historical accounting practices, the Supreme Court found this argument unavailing, noting that buyer’s view of the true up “renders the liability bar meaningless and eviscerates the basic bargain between these two sophisticated parties.”

Practical Guidance

Draft Precise Formulas—contractual formulas relating to net working capital should include specific components and defined terms, since the use of broad terms such as “current assets” and “current liabilities” could result in unintended ambiguities if a disputes arises.

Limit the Timeline—true up provisions should state that the calculation is only intended to capture changes to net working capital that occur between the initial estimate reflected in the purchase agreement and closing, blunting potential claims by a buyer challenging seller’s historical financial accounting practices.

Specify Accounting Procedures—provide in the contract that historical accounting practices utilized by seller to estimate net working capital apply to any subsequent closing statements, and specify which GAAP principles apply to the parties’ estimated net working capital calculations.

Cabin the Remedy—exclusive remedy provisions carving out the calculation of purchase price adjustments potentially open the door for buyers to make a post-closing accounting claim under the true up provision in addition to a claim that seller breached its representations and warranties for indemnification purposes.

Limit the Authority of an Independent Auditor—it is advisable for sellers to ensure that complex claims relating to a contract between sophisticated parties be brought in a court of law, rather than resolved through an abbreviated process through an independent auditor/accountant.

Consider the Contract as a Whole—the Supreme Court repeatedly emphasized in Chicago Bridge that Westinghouse’s contractual arguments contradicted the spirit of the parties’ business deal, which was premised on Chicago Bridge’s ability to avoid any future involvement in, or future liabilities associated with, the nuclear plant facilities.

Reprinted with permission from the November 22, 2017 edition of the Delaware Business Court Insider © 2017 ALM Media Properties, LLC. All rights reserved.

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