Submitted: February 3, 2015
William M. Lafferty, Kevin M. Coen, and D. McKinley Measley of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Thomas G. Rafferty and Antony L. Ryan of CRAVATH, SWAINE & MOORE LLP, New York, New York; Attorneys for Plaintiff.
David E. Ross of ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Matthew Solum and David S. Flugman of KIRKLAND & ELLIS LLP, New York, New York; Attorneys for Defendant.
This action requires the Court to interpret the terms of a stock purchase agreement to determine whether a dispute over accounting methodology relating to the calculation of net working capital must be resolved by an accountant under a purchase price adjustment procedure or by a court as a claim for breach of a representation and warranty.
In 2013, Alliant Techsystems Inc. ("ATK") agreed to purchase Bushnell Group Holdings, Inc. ("Bushnell") from MidOcean Bushnell Holdings, L.P. ("MidOcean") for $985 million, subject to post-closing adjustments to be made in accordance with the terms of a stock purchase agreement (the "Agreement"). The Agreement contains two "sole and exclusive" remedy provisions. One provision requires the parties to use an independent accounting firm of national reputation to resolve disputes concerning adjustments to the estimated purchase price, including disputes concerning the calculation of net working capital. It contains a specified cap. The other provision governs claims for indemnification. It imposes a lower cap on either party's ability to recover from the other for any claims concerning the transaction, including any claim for breach of a representation or warranty, except in certain defined circumstances. One exception is for matters falling within the purchase price adjustment procedure.
After the transaction closed, ATK challenged a number of items underlying MidOcean's estimate of net working capital on the ground that the accounting treatment for such items did not comply with United States generally accepted accounting principles ("GAAP"). MidOcean objected, asserting that disputes over accounting methodology cannot be raised as part of the purchase price adjustment procedure. The filing of this lawsuit followed. ATK seeks an order of specific performance requiring MidOcean to submit the current dispute to an accounting firm under the purchase price adjustment procedure. MidOcean seeks a declaration that claims asserting purported violations of GAAP must be resolved by a court in accordance with the provisions governing claims for indemnification. The net amount of the parties' dispute stands at approximately $22 million, or a little over two percent of the estimated purchase price.
This Court and courts in other jurisdictions have reached different results in determining whether a dispute over accounting methodology may be resolved as part of a purchase price adjustment process. This is not surprising. Claims of this nature are creatures of contract and counterparties to a transaction are free to contractually order their affairs as they wish. The critical issue for the Court to decide here is what the shared intentions of the contracting parties were when they entered the Agreement.
For the reasons discussed below, I conclude based on the plain terms of the Agreement that the present dispute over the calculation of net working capital fairly may be raised under the purchase price adjustment procedure even though that dispute implicates issues of accounting methodology that also could form the basis of an indemnification claim for breach of a representation and warranty. I further conclude that where a dispute could be brought either as part of the purchase price adjustment procedure or as an indemnification claim, the Agreement specifically provides that the exclusive remedy provision in the purchase price adjustment procedure trumps the exclusive remedy provision for indemnification claims. Accordingly, judgment is entered in ATK's favor granting its request for specific performance and denying MidOcean's motion for summary judgment.
A. The Parties
Plaintiff Alliant Techsystems Inc. is a Delaware corporation with its principal place of business in Arlington, Virginia. ATK is a developer and manufacturer of aerospace, defense, and sporting products.
Non-party Bushnell Group Holdings, Inc. is a Delaware corporation that sells branded sports optics, outdoor accessories, and performance eyewear. Together with its subsidiaries, Bushnell is referred to at times as the "Company."
Defendant MidOcean Bushnell Holdings, L.P. is a Delaware limited partnership.
B. The Purchase Agreement
On September 4, 2013, ATK agreed to acquire Bushnell for $985 million (including debt), subject to certain post-closing adjustments. The final Purchase Price was to be determined through a process (the "Purchase Price Adjustment Procedure") that would take into account, among other things, whether any adjustment should be made for changes in Net Working Capital between the date of the Agreement and the Closing of the transaction.
Net Working Capital is defined as the sum of all current assets minus the sum of all current liabilities "calculated in accordance with GAAP and otherwise in a manner consistent with the practice and methodologies used in the preparation of" certain financial statements of the Company. The assumed amount of Net Working Capital in the Agreement is $188.1 million. The Net Working Capital Adjustment is the amount by which Net Working Capital at Closing is greater or less than $188.1 million.
1. Section 2.4 of the Agreement
As is common in stock purchase agreements, the Agreement contains a multi-step process to determine the final Purchase Price. That process is spelled out in Section 2.4.
First, no later than three business days before the Closing, MidOcean was required to deliver to ATK a statement setting forth reasonably detailed calculations of certain amounts from which an estimated Purchase Price would be computed. Relevant here, MidOcean was required to provide its good faith estimate as of the Closing of the Net Working Capital of the Company and the related Net Working Capital Adjustment from the $188.1 million of Net Working Capital assumed in the Agreement.
Second, no later than 60 days after the Closing, ATK (as the buyer now in possession of the business) was required to deliver to MidOcean reasonably detailed calculations of certain amounts (the "Proposed Closing Date Calculations"), including the Net Working Capital of the Company as of the Closing and the related Net Working
Third, after receiving the Proposed Closing Date Calculations from ATK, MidOcean had 45 days to review them and to deliver to ATK a written notice of dispute (the "Purchase Price Dispute Notice") specifying "in reasonable detail those items or amounts in [ATK's] calculation of the Proposed Closing Date Calculations as to which [MidOcean] disagrees (the 'Disputed Items') and the basis for such disagreement."
If MidOcean delivered to ATK a Purchase Price Dispute Notice, the parties were then required to "use their respective commercially reasonable efforts to reach agreement on the Disputed Items set forth in the Purchase Price Dispute Notice in good faith during the 30-day period commencing on the date Buyer receives the applicable Purchase Price Dispute Notice from the Seller." If ATK and MidOcean were unable to agree upon a final resolution of the Disputed Items, they were required to submit the remaining Disputed Items immediately "to an independent accounting firm of national reputation mutually acceptable" to them (the "Accounting Firm").
Under the Agreement, the Accounting Firm must act "as an expert, and not as an arbitrator" and may only issue determinations with respect to Disputed Items based "on the definitions and other applicable provisions of [the] Agreement." The Agreement limits the recovery for a Purchase Price adjustment to the amounts held in two escrow accounts that were established at the Closing: the Adjustment Escrow Account ($5 million) and the Indemnity Escrow Account ($7, 387, 500).
The Agreement expressly states that the Purchase Price Adjustment Procedure is the sole and exclusive method for resolving the Disputed Items: "[T]he procedures set forth in this Section 2.4 for resolving disputes with respect to the Proposed Closing Date Calculations shall ...