Textron, Inc. Plaintiff,
Acument Global Technologies, Inc. Defendant.
Submitted: December 18, 2013
Denise S. Kraft, Esquire, Laura D. Hatcher, Esquire, Aleine Porterfield, Esquire, Brian A. Biggs, Esquire, DLA Piper LLP (US), John A. Tarantino, Esquire, (pro hac vice), (argued), Adler Pollock & Sheehan P.C., Attorneys for Plaintiff.
C. Barr Flinn, Esquire, (argued), Benjamin Z. Grossberg, Esquire, Tammy L. Mercer, Esquire, Young Conaway Stargatt & Taylor LLP, Rodney Square. Attorneys for Defendant.
DECISION AFTER TRIAL VERDICT FOR DEFENDANT
JAN R. JURDEN, JUDGE
This case stems from a 2006 purchase sale agreement, whereby Defendant Acument Global Technologies, Inc. ("Acument"), through its parent company, Platinum Equity, LLC ("PE"), purchased Plaintiff Textron, Inc.'s ("Textron") global fastening manufacturing business. The executed purchase sale agreement ("PSA") contained a "Tax Benefit Offset" provision, which is the genesis of the suit.
Textron asserts that based upon the term "assumed" within the "Tax Benefit" definition, a subsequent letter agreement, and various emails, the parties came to a mutual agreement that the Tax Benefit Offset provision applied a "hypothetical" tax break to Textron with each required pre-closing indemnification payment. Acument, however, claims that the Tax Benefit Offset only applied if Acument was entitled to receive a tax reduction based upon Textron's indemnification.
After carefully considering all the evidence introduced during the four-day bench trial, the parties' extensive and helpful briefing, and post-trial arguments, it seems that the parties were never on the same page. At times, it appears the parties had an "agreement, " but several emails later, any glimmer of mutuality is decimated by the other's misunderstanding or interchangeable use of two different concepts. In light of this, and because each party introduced substantial evidence in support of their respective positions, this case was difficult and close.Ultimately, Plaintiff has failed to prove by a preponderance of the evidence that the Tax Benefit Offset applies "hypothetically, " regardless of whether Acument receives or recognizes a tax "reduction." Thus, for the reasons explained below, the Court finds for Acument on all counts.
A. The Players
Textron is a Delaware corporation that employs approximately 32, 000 people in 25 countries, operating several "segment" businesses ranging from the manufacture and sale of various products to providing financial services. In December 2005, Textron's board of directors resolved to sell its fastening manufacturing segment, Textron Fastening Systems ("TFS"), in order to advance its portfolio strategy of divesting non-core manufacturing businesses.Headquartered in Michigan, TFS provides fastening systems to several industries around the globe. In 2005, TFS's revenue approximated $1.8 billion.
Textron had several people involved in the TFS transaction. At the top was Jack Curran ("Curran"), Esquire, vice president of mergers and acquisitions at Textron, who was "in charge of the [TFS] deal." David Stonestreet, senior tax attorney of the TFS segment, negotiated the tax provisions in the TFS sale contract and advised Textron as to the tax implications after TFS was sold. Andrew Spacone ("Spacone"), Esquire, Textron's senior associate general counsel, did not participate in TFS's sale, but was responsible for the post-sale indemnification payment process.
2. Platinum Equity
PE is a global firm "specializing in the merger, acquisition, and operation of companies that provide services and solutions to customers in a broad range of business markets[….]" Founded in 1995, PE is headquartered in Los Angeles, California and "has acquired more than 60 businesses with more than $13 billion in aggregate revenue." PE recognized TFS as the ideal acquisition to expand its own manufacturing portfolio with a highly respected brand.
PE's Johnny Lopez ("Lopez"), executive vice president of mergers and acquisitions, initiated negotiations with Textron and maintained a negotiating relationship with Curran. Dan Krasner ("Krasner"), Esquire, vice president and assistant general counsel at PE, negotiated the transaction's terms with Curran.Marc Yassinger, ("Yassinger"), Esquire, PE's director of mergers and acquisitions, was also involved in negotiating certain provisions.
B. The Negotiations
Curran's first step in divesting TFS was to hire J.P. Morgan Securities, Inc. ("J.P. Morgan") and Rothschild, Inc. ("Rothschild") to identify potential buyers, and the Skadden, Arps, Slate, Meagher & Flom, LLP ("Skadden") law firm to draft documents and assist in the sale process. With the help of several specialists, Skadden attorneys wrote a seller-friendly "bid draft" to be used as Textron's proposed purchase agreement, which was supplied within the data room for potential buyers to review and comment. Merger and acquisitions partners, Margaret Cohen, Esquire, and Lou Goodman, Esquire, led the process from drafting Textron's proposed agreement to closing the deal with a buyer.Textron's in-house counsel Stonestreet and Mike Cahn, Esquire, also participated in the negotiations.
The TFS sale was a competitive auction involving two stages. In the first stage, potential buyers expressed interest and negotiated a nondisclosure agreement with Textron. Upon signing the nondisclosure agreement, the potential buyer was given access to the data room, which enabled the prospective buyer to diligently assess TFS's business and finances. After potential buyers completed due diligence, Textron selected the potential buyers which it "believe[d] offer[ed] a good value, and a good chance of closing a deal." Once Textron selected its potential buyers, the bid draft was placed into the data room and the second stage of the auction commenced. This process allowed Textron to evaluate and compare competing offers.
The parties' dispute here centers on one clause and its related definition that appeared in the original bid draft:
6.1(d) Limitation of Liability. The obligations and liabilities of [Textron] and Purchaser under Sections 6.1(b) and (c), respectively, shall be subject to the following additional limitations: [...] (iii) Each Loss […] shall be reduced by (A) the amount of insurance proceeds payable to the Indemnified Party, (B) any indemnification, contribution or other similar payment payable to the Indemnified Party by any third party with respect to such Loss and (C) any Tax Benefit of the Indemnified Party attributable to such Loss [the "Tax Benefit Offset" or "Offset"].
"Tax Benefit" shall mean the present value of any refund, credit or reduction in otherwise required Tax payments, including any interest payable thereon, which present value shall be computed as of the Closing Date or the first date on which the right to the refund, credit or other Tax reduction arises or otherwise becomes available to be utilized, whichever is later, (i) using the Tax rate applicable to the highest level of income with respect to such Tax, (ii) using the interest rate on such date imposed on corporate deficiencies paid within thirty (30) days of notice of proposed deficiency under the Code, and (iii) assuming that such refund, credit or reduction shall be recognized or received in the earliest possible taxable period (without regard to any other losses, deductions, refunds, credits, reductions or other Tax items available to such party).
PE entered the competitive auction on December 16, 2005, when Lopez sent a letter to J.P. Morgan and Rothschild expressing PE's desire to acquire TFS. On March 10, 2006, Textron placed the bid draft in the data room, at which time PE and other potential buyers simultaneously received the document. Around that same time, PE made initial bid of $900 million.
On March 19, 2006, PE submitted its comments to the bid draft. Textron rejected several of PE's edits, including a change to section 6.1(d)(iii), which eliminated subsection (C) in its entirety. PE believed that section 6.1(d)(iii)(C), the Tax Benefit Offset, was "very seller friendly" because it required a tax offset even when "no actual tax savings [that] year" would occur. PE attempted to edit the agreement to reflect "an actual tax savings provision, " meaning that if a deduction was available but could not be used in that tax period, the Tax Benefit Offset would not apply. At no time during the PSA negotiations did either party claim the Tax Benefit Offset was "automatic" or "hypothetical."
Undaunted by Textron's rejection of these edits, the parties continued negotiations. In a March 24, 2006 PE internal email, PE employees reviewed "financial sections" of the draft and listed eleven items at issue. Of those eleven items were price adjustment considerations, workers compensation liability, and environmental and litigation indemnity.
On April 2, 2006, Krasner, Cohen, and Goodman, among others, participated in a teleconference in which several issues were discussed. As to price negotiations, PE advised Textron that it would only consider a downward price adjustment, as its original bid was based on PE's belief it was purchasing a growing business. Textron addressed its concerns that PE's last draft shifted several liabilities onto Textron, including indemnification for litigation, environmental and employment-related matters. Intending to "flip" TFS after its acquisition, the parties discussed PE's request to allow assignment of the final purchase sale agreement.
Between the April 2, 2006 teleconference and PE's next draft of the purchase sale agreement, the parties independently documented important negotiating issues, including several that focused on the amount of liability each party was willing to sustain. As to PE, it sought the optimum deal – taking concessions for a lower purchase price; for instance, PE wanted to treat UK pension funding as debt. Consistent with seeking to limit its overall cost, PE continued to seek indemnification on environmental matters, pre-closing restructuring, pre-closing litigation, and certain employee liabilities. Textron believed PE's "one-way purchase price adjustment [was] unacceptable and inequitable, " and Textron did not agree with PE's pre-closing liability shifting or PE's attempt to define items as debt that were not typically viewed as such.
Eventually, PE submitted an April 20, 2006 draft, which revived the original bid draft's Tax Benefit Offset clause, but deleted and replaced Textron's proposed "Tax Benefit" definition with:
"Tax Benefit" shall mean the actual tax savings derived by a party from the relevant item in the first taxable year in which an item is properly includible in a tax return. The amount of any such benefit shall be computed by preparing the relevant tax return with and without the relevant item and comparing the tax due in each instance. In the event that the inclusion of the relevant item in first taxable year in which an item is included in a tax return does not result in a reduction in the tax liability of the relevant party, no Tax Benefit shall be deemed to exist even if such item produces a tax savings in a later taxable year.
According to PE, the purpose of rewriting the Tax Benefit definition was to give an actual tax savings and to allow the loss and tax benefit offset to occur in the same year. In addition to drafting the new language, PE drafted section 6.1(b), pre-closing liabilities, requiring Textron to shoulder pre-closing environmental and litigation losses.
On April 25, 2006, Curran emailed Lopez a proposal which Curran believed brought "certainty and clarity" to the agreement. Notably, Curran's proposal listed a net asset value of approximately $674 million dollars. Among the remaining eleven items, Curran noted that Textron felt it was "very important" that PE not have a financing contingency,  and agreed that Textron would retain pre-closing environmental and litigation matters. Lopez forwarded the email to PE's CEO, but shortly thereafter, negotiations between Textron and PE ceased and Textron sought its opportunity with another buyer under an exclusivity contract.
In early May 2006, Lopez and Curran again discussed the TFS deal. By May 2, 2006, the purchase price had dropped to $770 million with PE paying £90 million towards UK pensions, but reducing the cost by "debt-like items" and the net asset adjustment. Curran advised PE that he continued to want "clarity and certainty" as to the materiality in the audit, the UK pension liability,  PE's financing contingency,  TFS's reserves, debt-like item liability, and indemnity for litigation and environmental matters.
On May 4, 2006, Lopez emailed Curran a comprehensive proposal, offering $630 million for TFS, while making several concessions on PE's behalf. Lopez admitted that PE's proposal "shifted considerable risk to [PE], " but believed the proposal brought the "full clarity and certainty" that Curran wanted. Among the proposed items, PE agreed to Textron's "definition of traditional 'indebtedness'" and assumed debt-like liabilities,  accepted the UK pension liability up to £52.2 million,  removed the financing contingency,  and addressed several "Net Asset Adjustment" items. Around May 18, 2006, Textron's negotiations with the other potential buyer ended. Textron then supplied PE with a new purchase agreement (the "May 18 draft") and gave PE a short time to conclude the transaction.
Some time before May 24, 2006, PE informed Textron that it accepted the May 18 draft without edits. Importantly, the May 18 draft contained substantially similar Tax Benefit Offset language and the exact same Tax Benefit definition as the original bid draft. Krasner testified that he discussed the Tax Benefit definition with Cohen, and Cohen remarked that if PE were to receive a tax benefit, then it would be unfair for Textron to pay full indemnity. Krasner conceded the point because he believed the provision was "fair."
Notably, Curran testified that the Tax Benefit Offset acted as a "sharing" mechanism between the parties. In an inarticulate fashion, Curran related the Tax Benefit Offset to his desire to avoid reviewing PE's tax returns and to avoid arguing with PE on pertinent tax law. Curran claimed that the Tax Benefit definition functioned "to bring clarity and certainty to this whole concept of tax benefit." Based on the Tax Benefit definition's language, "assuming that such refund, credit, or reduction shall be recognized or received in the earliest possible taxable period, " Curran testified that he believed and intended the Tax Benefit Offset acted as a "sharing provision [that] brought to us  that clarity and certainty that we required."
The May 18 draft was the final version that the parties executed on May 31, 2006. The named purchaser was TFS Acquisition Corporation, wholly owned by PE affiliates. After the sale closed, TFS Acquisition Corporation changed its name to Acument Global Technologies, Inc.
The TFS sale involved entities in approximately 25 countries. All non-U.S. entities were acquired through stock purchases. As part of the deal, Textron reorganized TFS's U.S. subsidiaries by transferring assets into limited liability companies, which then sold membership interests to TFS Acquisition/PE. The U.S. entities were then purchased as single member LLCs treated as disregarded entities or entities with section 338(h)(10) elections,  both of which are considered a "deemed asset sale."
The deal closed on August 11, 2006. In the end, the parties agreed to several indemnifications, including:
4.6(h) Indemnification by [Seller] [Seller] shall indemnify Purchaser from and against and in respect of any and all Losses incurred by Purchaser, which may be imposed on, sustained, incurred or suffered by or assessed against Purchaser, directly or indirectly, to the extend relating to or arising out of: (i) any liability for Taxes imposed on any of the FS subsidiaries as members of the "affiliated group" […]; (ii) any liability for Taxes imposed on any of the FS Subsidiaries for any taxable year or period that ends on or before the Closing Date […]; (iii) any liability, or increase in a liability, for Taxes imposed on Purchaser or any of its Affiliates as a result of any failure by Parent to perform or comply with its obligations under this Section 4.6 [Tax Matters].
6.1(b) Indemnification by [Seller] […] from and after the Closing Date, [Seller] shall indemnify Purchaser […] from and against and in respect of any and all Losses incurred by Purchaser […], which may be imposed on, sustained, incurred or suffered by or assessed against Purchaser … directly or indirectly, to the extent relating to or arising out of: (i) any breach of any of the representations or warranties of [Seller…] pursuant to Section 5.2(c) […]; (ii) any failure by [Seller] to perform or comply with its covenants and agreements contained in this Agreement […]; (iii) any Losses of the FS Business or any of the FS Subsidiaries related to any Remedial Work for pre-Closing Releases of any Hazardous Substance ("Environmental Losses") […]; (iv) any Litigation proceeding pending as of the date hereof […] ("Retained Litigation"); […].
6.1(d) Limitation of Liability The obligations and liabilities of [Seller] and Purchaser under Sections 6.1(b) and (c), respectively, shall be subject to the following additional limitations: […] (iii) Each Loss (including Losses for which indemnification is required pursuant to Section 4.6) shall be reduced by (A) the amount of any insurance proceeds received by the Indemnified Party, (B) any indemnification, contribution or other similar payment paid to the Indemnified Party by any third party with respect to such Loss and (C) any Tax Benefit of the Indemnified Party or any of its Affiliates attributable to such Loss.
There is no doubt that this transaction was even-handed. Both Textron and PE have vast in-house mergers and acquisitions knowledge and experience, evidenced by the parties' own in-house groups. Moreover, Textron's Curran and PE's Krasner and Yassinger all have extensive experience in mergers in acquisitions. It is clear that the parties wanted to close the deal. While some issues were deal breakers (i.e., financing contingencies, price adjustments, and certain liabilities), other terms were not "material" enough to warrant scrutiny during the negotiation period. Like several deals of this magnitude, language that "seem[s] so esoteric and irrelevant" can cause problems down the road.
C. Post-closing Problems
By December 2006, pre-closing liabilities started adding up, especially in Brazil. At this point, the individuals involved slightly shifted, and there were now three entities involved: Textron, PE, and Acument. PE was still behind the scenes with Krasner and Yassinger. Curran and Stonestreet continued to work on TFS problems, with Spacone, Textron's senior associate general counsel, now entering the picture. John Clark ("Clark"), Esquire, transitioned from executive vice president and general counsel of TFS to the same title for Acument. Dan Modrycki ("Modrycki"), CPA, joined Acument in May 2007 as tax director.
From this point on, the evidence at trial makes clear there was a general misunderstanding between the parties as to the meaning and operation of the Tax Benefit Offset. Correspondence between the parties fails to clearly support either party's instant position on this point, and the evidence establishes that each side suffered from a lack of "clarity, " using "hypothetical tax rate" and "hypothetical tax benefit" interchangeably, although each term has a very different meaning.
The confusion set in not long after the parties signed the PSA. Textron "mistakenly" paid approximately $500, 000 in indemnity payments, directly to the beneficiary, without the Tax Benefit Offset. Clearly noticing an issue, on December 26, 2006, Stonestreet emailed Spacone and advised, "[w]e should consider whether any part of each Loss suffered by TFS do [sic] Brazil could result in a tax deduction or credit." That same day, Stonestreet sent another email to Spacone, discussing for the first time, a "hypothetical tax benefit." It is important to note that the first use of "hypothetical" came from Textron's Stonestreet, because he was the key player in defining the Tax Benefit Offset's function.
On January 4, 2007, Textron employee Brian Swiszcz ("Swiszcz") sent an internal email to Stonestreet and Stonestreet's boss, Norm Richter, among other employees. Addressing several issues relating to a TFS Mexican subsidiary, Swiszcz wrote:
David Stonestreet, who was the Textron tax attorney and primary tax contact on the [TFS] deal, has advised that Textron is responsible for the subject bond fee as a cost related to the tax Liability. We have communicated to TFS/[PE] that we believe we are only required to indemnify them net of tax benefit ...