Greenstar IH Rep, LLC v. Tutor Perini Corp., C.A. 12885-VCS (Del. Ch. Dec. 4, 2019) (Slights, V.C.)

In this post-trial memorandum opinion, the Court of Chancery resolved a post-acquisition dispute related to a holdback payment in a merger agreement between two construction companies and held that the collection milestone necessary to trigger its payment had been met.

In 2011, Tutor Perini Corporation (“Tutor Perini”) acquired Greenstar Services Corporation (“Greenstar”). Stockholders of Greenstar (the “Sellers”) were provided consideration consisting of a combination of a cash payment at closing, an earn-out payment, and certain holdback payments, in particular and as relevant to this decision, an $8 million “Special Holdback.” In an attempt to resolve their disputes regarding the holdback payments, the parties signed an agreement modifying the merger agreement’s holdback provisions (the “Holdback Agreement”), but no resolution was reached, and this litigation ensued.

The Holdback Agreement contained two lists of Greenstar projects with uncollected claims (“Exhibits B and C”). If at least $60.529 million (the “Cash Collection Amount”) was collected from these claims, the full $8 million Special Holdback would be owed to the Sellers. The value of the sum of the Exhibit B claims (if fully collected) equaled the Cash Collection Amount, and any amount not collected from these claims created a “Shortfall” which Tutor Perini could use as an offset against the Special Holdback. However, claims collected from projects listed on Exhibit C could be added by the Sellers toward the Cash Collection Amount (and thereby offset any Shortfall from the failure to collect Exhibit B claims) if they “result[ed] in additional net profit,” although conversely, any counterclaims against Greenstar on the projects listed on Exhibit C would increase the Shortfall. In summary, the Sellers would be credited for collections on Exhibit B claims plus collections on Exhibit C claims minus counterclaims listed on Exhibit C.

The parties’ principal disagreement related to the meaning of “additional net profit.” The Sellers argued that any collection from Exhibit C should count toward the Cash Collection Amount unless it overlapped with a collection from Exhibit B. In contrast, Tutor Perini argued that the additional net profit requirement meant that a collection from Exhibit C only counted toward the Cash Collection Amount if the Exhibit C project generated a net profit, a calculation which would require a separate analysis of each project.

Relying on the fundamental principles of contract interpretation that a contract must be read as a whole and that general terms of a contract must yield to more specific terms, the Court held that the Holdback Agreement was unambiguous and that the Sellers’ interpretation of it was the only reasonable one. In its analysis, the Court held that the Sellers’ interpretation was consistent with the Holdback Agreement’s overall focus on cash collections and further supported by both the hypothetical example calculations provided with the Holdback Agreement and the commentary to Exhibits B and C. Furthermore, the Court held that that the Sellers’ interpretation was consistent with the ordinary meaning of net profit because, all things equal, the collection of unbooked claims increases net profit. In contrast, the Court held that the net profit formula which Tutor Perini advocated for was not contained in the Holdback Agreement, was contradicted by the Holdback Agreement’s example calculations, and further conflicted with the overall commercial scheme to incentivize collections and provide a predictable method to compute net profits. Having concluded that the Sellers’ interpretation was the only reasonable one, the Court went on to find that the collections from Exhibit B and C claims amounted to more than the Cash Collection Amount and therefore held that the Sellers were entitled to payment of the full $8 million Special Holdback.

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