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Penton Business Media Holdings, LLC v. Informa PLC

Court of Chancery of Delaware

July 9, 2018

PENTON BUSINESS MEDIA HOLDINGS, LLC, Plaintiff,
v.
INFORMA PLC and INFORMA USA, INC., Defendants. INFORMA PLC and INFORMA USA, INC., Counterclaim-Plaintiffs,
v.
PENTON BUSINESS MEDIA HOLDINGS, LLC, Counterclaim-Defendant.

          Submitted Date: May 11, 2018

          William M. Lafferty, John P. DiTomo, Coleen Hill, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Craig S. Primis, Erin C. Johnston, Matthew S. Brooker, KIRKLAND & ELLIS LLP, Washington, District of Columbia; Attorneys for Plaintiff/Counterclaim-Defendant.

          Kevin R. Shannon, Christopher N. Kelly, Jaclyn C. Levy, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Anthony M. Candido, Robert C. Myers, Benjamin A. Berringer, CLIFFORD CHANCE U.S. LLP, New York, New York; Attorneys for Defendants/Counterclaim-Plaintiffs.

          MEMORANDUM OPINION

          LASTER, V.C.

         Informa PLC and Informa USA, Inc. (jointly, the "Buyer") purchased Penton Business Media Holdings, Inc. (the "Company") from Penton Business Media Holdings, LLC (the "Seller"). The transaction was governed by an Agreement and Plan of Merger dated September 15, 2016 (the "Merger Agreement").

         The Merger Agreement contained complex provisions addressing how the value of transaction-related tax benefits would be allocated between the Buyer and the Seller. Those provisions incorporated a dispute resolution mechanism that called for the parties to submit disputes to an independent accounting firm. The Merger Agreement stated that the accountant "shall be acting as an accounting expert only and not as an arbitrator."

         Disputes arose, but the parties could not agree on procedures for submitting the disputes to the accountant. The Seller wanted to provide the accountant with term sheets and other extrinsic evidence to support its position. The Buyer contended that the accountant could not consider extrinsic evidence.

         The Seller filed this lawsuit. Invoking the doctrine of procedural arbitrability, the Seller seeks a declaration that the accountant has authority to determine what information it can consider. Alternatively, the Seller seeks a declaration that the accountant can consider extrinsic evidence. The Buyer filed a counterclaim. The Buyer contends that because the accountant is an expert and not an arbitrator, arbitral doctrines are irrelevant, and the court must decide the issue as a matter of contract interpretation. The Buyer seeks a declaration that the accountant cannot consider extrinsic evidence, along with other equitable relief.

         The parties filed cross motions for judgment on the pleadings. This decision holds that the Merger Agreement calls for an expert determination, which is a third-party dispute resolution mechanism distinct from arbitration. Although some jurisdictions do not recognize the distinction, Delaware does. When parties have opted for an expert determination, doctrines like substantive and procedural arbitrability do not apply. Although parties could give an expert the authority to interpret a contract, here they did not. Instead, the court must interpret the contract to determine what the accountant can consider. In this case, the plain terms of the Merger Agreement bar the accountant from considering extrinsic evidence.

         I. FACTUAL BACKGROUND

         On a motion for judgment on the pleadings, the facts are drawn from the operative pleadings and the documents they incorporate by reference. When evaluating cross motions for judgment on the pleadings, the facts for purposes of each motion must be viewed in the light most favorable to the non-movant. In this case, the relevant facts are undisputed.

         A. The Term Sheets

         In summer 2016, the parties began discussing a potential transaction. On July 6, the Buyer sent the Seller a term sheet that included a section addressing tax matters. The Seller contends that the term sheet supports its position in the underlying dispute.

         After further negotiations, the parties circulated a revised term sheet on July 19, 2016. It too contained a section on tax matters. The Seller believes that it too supports its position in the underlying dispute.

         B. The Merger Agreement

         The parties entered into the Merger Agreement and announced it on September 15, 2016. It called for the Company to merge with a wholly owned subsidiary of the Buyer, with the Company as the surviving entity (the "Merger"). The purchase price comprised $1.46 billion in cash and $100 million in Buyer equity.

         On the same day that the parties announced the Merger, the Buyer announced a rights offering to finance the transaction. The offering circular contained information that the Seller contends supports its position in the underlying dispute.

         C. The Tax Provisions

         Section 5.2 of the Merger Agreement contains a complex mechanism for apportioning tax deductions and other tax benefits that the Company could claim as a result of the Merger. The parties grouped the benefits into three categories: (i) benefits applied to pre-Merger periods, (ii) benefits applied to post-Merger periods, and (iii) benefits that remained unapplied as of a set date. The first two categories are pertinent to this case.

         Section 5.2(a)(i) governed the allocation of tax benefits for periods ending on or before the closing date of the Merger (the "Pre-Closing Periods"). This decision therefore calls it the "Pre-Closing Section." It directed the Buyer to pay the Seller an amount equal to any refund that the Company received because of tax benefits that the Company applied to a Pre-Closing Period. Critically for the underlying dispute, the Seller only would receive a payment equal to the refund. The Seller would not be entitled to receive a portion of the value of the tax benefits that were utilized to reduce the Company's tax liability except to the extent they resulted in a refund.

         Section 5.2(a)(ii) governed the allocation of tax benefits for periods that ended after closing, with the final post-closing period ending on December 31, 2017 (the "Post-Closing Periods"). This decision therefore calls it the "Post-Closing Section." It deployed the defined term "Transaction Tax Benefits," which included "any reduction in the [Company's] Tax liability" for any Post-Closing Period.[1] It directed the Buyer to pay the Seller an amount equal to 40% of any Transaction Tax Benefits that the Company realized during a Post-Closing Period. Unlike the Pre-Closing Section, the Post-Closing Section did not require a refund. The Post-Closing Section required a payment equal to the reduction in the Company's tax liability even if the Company did not receive a refund.

         The different formulas for calculating the payment to the Seller meant that if the Buyer could allocate benefits to Pre-Closing Periods rather than Post-Closing Periods, then the Buyer could pay less to the Seller. A particular tax benefit might generate the same dollar-value reduction in potential tax liability for either a Pre-Closing or a Post-Closing Period, but the Buyer would only pay for the benefit in a Pre-Closing Period to the extent it resulted in a refund; for a Post-Closing Period, the Buyer would always make a payment to the Seller equal to 40% of the benefit.

         D. The Dispute Resolution Mechanism

         The Pre-Closing and Post-Closing Sections piggybacked on a dispute resolution mechanism that Section 2.8 of the Merger Agreement established for disputes over purchase-price adjustments, such as disagreements over the closing-date balance sheet (the "Dispute Resolution Provision"). If a dispute over a purchase-price adjustment arose, then the Dispute Resolution Provision called for the parties to engage in commercially reasonable efforts to resolve it for a period of thirty days. If those efforts failed, the Dispute Resolution Provision stated that "unless otherwise agreed by the [Seller] and [the Buyer], the remaining items in dispute shall be submitted promptly to Ernst & Young."[2] The Dispute Resolution Provision incorporated methods for selecting an alternative accountant if Ernst & Young could not serve, and it therefore defined the holder of the adjudicative role generically as the "Accounting Firm."[3]

         Section 2.8(b)(ii) of the Merger Agreement called for the Accounting Firm to make "a determination of each disputed item within forty-five (45) days after referral of the matter to such Accounting Firm, which determination must be in writing and must set forth, in reasonable detail, the basis therefor."[4] It further specified that "[a]ny such determination must be based solely on" three categories of information:

(i) the definitions and other applicable provisions of this Agreement,
(ii) a single presentation (which presentations shall be limited to the remaining items in dispute set forth in the Proposed Closing Date Calculations and Purchase Price Dispute Notice) submitted by each of [the Buyer] and the [Seller] to the Accounting Firm within fifteen (15) days after the engagement thereof (each of which the Accounting Firm shall forward simultaneously to [the Buyer] or the [Seller], as applicable, once both such presentations are received) and
(iii) one written response submitted to the Accounting Firm within ten (10) Business Days after receipt of each such other party's presentation (each of which the Accounting Firm shall forward simultaneously to [the Buyer] or the [Seller], as applicable, once both such presentations are received), and not on an independent review.[5]

         Having specified what the Accounting Firm could consider, and having included an aside about what the Accounting Firm could not do ("an independent review"), the Dispute Resolution Provision went on to specify other sources of information that the Accounting Firm could not consider:

The parties agree that no ex parte conferences, oral examinations, testimony, depositions, discovery or other form of evidence gathering or hearings shall be conducted or allowed by the Accounting Firm; provided, however, that at the Accounting Firm's request, or as mutually agreed by [the Buyer] and the [Seller], [the Buyer] and the [Seller] may meet with the Accounting Firm so long as Agents of both parties are present.[6]

         The parties further agreed that "[i]n resolving the items in dispute, . . . the Accounting Firm shall be acting as an accounting expert only and not as an arbitrator and shall not import or take into account usage, custom or other extrinsic factors."[7]

         The Dispute Resolution Provision also contained language requiring that the parties agree on the terms of engagement for the Accounting Firm. This language appeared in a sentence primarily devoted to allocating fees and expenses:

The terms of appointment and engagement of the Accounting Firm shall be as reasonably agreed upon between the [Seller] and [the Buyer], and any associated engagement fees shall be borne by [the Buyer] and the [Seller] . . . in the same proportion as the aggregate amount of the disputed items that is unsuccessfully disputed by each such party (as determined by the Accounting Firm) bears to the total amount of the disputed items submitted to the Accounting Firm.[8]

         All of these details appeared in one lengthy block paragraph in Section 2.8(b)(ii). To reiterate, that was the portion of the Merger Agreement devoted to purchase-price adjustments.

         Both the Pre-Closing and Post-Closing Sections incorporated the Dispute Resolution Provision by reference, albeit tersely. The Pre-Closing Section directed the Company to prepare tax forms for the Pre-Closing Periods and provide them to the Seller for review. It then stated: "Dispute resolution provisions corresponding to those in Section 2.8(b) shall apply in case the parties cannot agree on the substance contained in these forms provided to the [Seller] for its review and comment."[9] That was it.

         The Post-Closing Section was marginally less laconic. Like the Pre-Closing Section, the Post-Closing Section required that the Buyer give the Seller a copy of its schedules and calculations for the Seller's "review, comment, and consent."[10] It provided that if the Seller disputed any item, then the parties would "cooperate in good faith to resolve the dispute" for a period of thirty days. It then stated that if the dispute persisted, then "the determination of the disputed item or items shall be made by the Accounting Firm following the general procedures set forth in Section 2.8(b)(ii), mutatis mutandis, whose decision shall be final and whose fees shall be shared equally by [the Buyer], on the one hand, and the [Seller] on the other hand."[11]

         The Merger Agreement included a forum selection clause for all disputes not covered by the Dispute Resolution Provision. Section 9.17 stated that "[e]xcept as provided by Section 2.8(b) and Section 5.2," the parties submitted to the jurisdiction of the Delaware courts "in any action arising out of or relating to this Agreement."[12] The parties further agreed "that all claims in respect of such action may be heard and determined in any such court and . . . not to bring any action arising out of or relating to this Agreement in any other court."[13]

         E. The Tax Dispute

         The Merger closed on November 2, 2016. On December 21, the Buyer sent the Seller a proposed tax form that showed the Company offsetting its liability for Pre-Closing Periods with $40 million of transaction-related tax deductions. The Company anticipated a resulting tax refund of approximately $600, 000, which the Buyer would owe to the Seller. The real economic consequence of this allocation was to remove the $40 million of transaction-related tax deductions from the amounts that the Company could apply to Post-Closing Periods. If the Company had used those deductions for Post-Closing Periods, then the Post-Closing Section would have required the Buyer to pay 40% of the value of those deductions to the Seller, or roughly $16 million.

         The Buyer's allocation did not please the Seller. By letter dated January 24, 2017, the Seller disputed whether the Buyer could allocate the transaction-related tax deductions in this manner.[14] In a subsequent letter, the Seller supported its position by referring to extrinsic evidence, including the term sheets and the rights offering circular.[15]

         F. The Disagreement Over Ernst & Young's Role

         When the parties failed to resolve the dispute, the Seller invoked "the dispute resolution procedures set forth in Section 5.2(a)(ii) and Section 2.8(b) of the Merger Agreement."[16] The parties turned to negotiating the terms of Ernst & Young's engagement.

         The parties agreed to ask Ernst & Young the following question: "What amount of the Transaction Tax Deductions shown on the attached schedule is to be treated as 'Aggregate Post-Closing Tax Deductions' (as such term is defined in the Merger Agreement)?"[17] The parties also agreed on the list of transaction-related tax deductions that Ernst & Young needed to address. They even agreed on which individuals to use at Ernst & Young.[18]

         But the parties could not agree on what information Ernst & Young could consider. The Buyer posited that the language of Ernst & Young's engagement letter should track the Dispute Resolution Provision and specify that Ernst & Young "shall not take into account any usage, custom or other extrinsic factors."[19] The Seller disagreed, arguing that

this issue is quite different from a working capital dispute, where the accounting principles are defined and the exercise is basically a straightforward numerical/accounting exercise. For this reason, Section 5.2 of the Merger Agreement does not state that a dispute over tax matters is to be resolved using procedures "identical" to those in Section 2.8(b) or that such process is to follow "all" of the procedures set forth in Section 2.8(b). Rather, Section 5.2 states that the process is to be one "corresponding" with the process in 2.8(b), which is wording intended to signal that the process is to be similar or analogous to the one in Section 2.8(b), but not necessarily identical.[20]

         The Seller wanted to provide Ernst & Young with extrinsic evidence, including the term sheets and offering circular, to support its position.

         The Buyer viewed the Seller's proposal as inconsistent with the language in the Dispute Resolution Provision which specified that Ernst & Young would be acting as an expert and not as an arbitrator:

A key principle in Section 2.8(b)(ii), which has equal application to accounting and tax disputes, is that the Accounting Firm is being engaged to act as an expert and not as an arbitrator. Accordingly, the Accounting Firm may not review and weigh extrinsic evidence. Instead, the Accounting Firm is expected to bring its technical expertise in accounting (or tax matters in this case) to bear on questions submitted by the parties, and to determine the answers to those questions based solely on the definitions and other applicable provisions set forth in the Merger Agreement. Consistent with this key principle, Section 2.8(b)(ii) rightly rules out, among other things, oral examinations, testimony, discovery and depositions. These are all fundamentally important, specifically-negotiated, customary and basic elements of what the parties agreed in Section 2.8(b), are designed to limit the scope of Ernst & Young's authority to its particular expertise, and in order to be "corresponding," the dispute resolution procedures we agree [to] with Ernst & Young must reflect these basic elements.[21]

         The Seller was not convinced.

         The Seller next proposed that the parties present their disagreement to Ernst & Young and let the accountants decide what they would consider.[22] The Buyer did not like that option, contending that the engagement letter needed to spell out Ernst & Young's duties.[23] This was necessary, the Buyer said, because Ernst & Young "is not bound by the provisions of the merger agreement, but is bound by the terms of its engagement letter."[24] Further exchanges ensued, but they did not add meaningfully to the dispute.

         G. This Litigation

         On November 26, 2017, the Seller filed suit. Its complaint seeks alternative declaratory judgments. The Seller prefers a declaration that Ernst & Young has the authority to determine what evidence it can consider when addressing an issue pursuant to the Dispute Resolution Provision. Alternatively, the Seller would like a declaration that Ernst & Young can consider extrinsic evidence.

         The Buyer answered and filed a counterclaim, which it later amended. The operative counterclaim contains four counts. Count I seeks declarations that (i) Ernst & Young's engagement is subject to the limitations in the Dispute Resolution Provision and (ii) the Seller's refusal to engage Ernst & Young to date breaches the Dispute Resolution Provision. Count II seeks a mandatory injunction compelling the parties to engage Ernst & Young and complete the dispute resolution process on terms consistent with the declaration sought by Count I. Count III seeks a declaration that this court, rather than Ernst & Young, must consider the Seller's proposed interpretation and that it is incorrect. Count IV seeks an injunction prohibiting the Seller from advancing its contract interpretation arguments before Ernst & Young.

         II. LEGAL ANALYSIS

         The parties have cross-moved for judgment on the pleadings. "In determining a motion under Court of Chancery Rule 12(c) for judgment on the pleadings, a trial court is required to view the facts pleaded and the inferences to be drawn from such facts in a light most favorable to the non-moving party."[25] "A motion for judgment on the pleadings may be granted only when no material issue of fact exists and the movant is entitled to judgment as a matter of law."[26] [J]judgment on the pleadings . . . is a proper framework for enforcing unambiguous contracts because there is no need to resolve material disputes of fact."[27]

         A. Who Decides What Ernst & Young Can Consider?

         The parties dispute whether Ernst & Young has authority to decide what types of materials it can consider. The first step in the analysis requires determining whether the Dispute Resolution Provision calls for an arbitration or an expert determination.[28]

         If the Dispute Resolution Provision calls for an arbitration, then the familiar doctrines of substantive and procedural arbitrability will govern:

Substantive arbitrability issues are gateway questions about the scope of an arbitration and its applicability to a given dispute. The court presumes that parties intended courts to decide issues of substantive arbitrability. The opposite presumption applies to procedural arbitrability issues, such as waiver, or satisfaction of conditions precedent to arbitration.[29]

         If this framework applies, then Ernst & Young can decide the issue, because "[t]he Delaware Supreme Court has made clear that procedural arbitrability also includes questions about what evidence the arbitrator should consider in deciding the dispute."[30]

         If the Dispute Resolution Provision calls for an expert determination, then different rules apply.[31] Most notably for the current case, the body of law governing arbitrations, including the distinction between substantive and procedural arbitrability, is irrelevant.[32] Instead, the court must interpret and apply the contract.[33]

         1. Does Delaware Recognize A Distinction Between An Arbitration And An Expert Determination?

         The buyer posits that arbitral principles, including the doctrines of substantive and procedural arbitrability, always apply whenever parties have selected a private third-party to decide a dispute. They rely on cases which hold that "[i]f the parties have agreed to submit a dispute for a decision by a third party, they have agreed to arbitration."[34] In my view, those cases speak too broadly. Most importantly for present purposes, Delaware decisions distinguish between expert determinations and arbitrations.

         Until the passage of the Federal Arbitration Act (the "FAA"), the distinction between arbitrations and expert determinations was widely recognized. It was a feature of English commercial and legal practice at the time of the separation of the colonies, and English courts have a well-developed jurisprudence in this area.[35] After the separation, state courts recognized the distinction throughout the nineteenth century.[36]

         In 1910, the United States Supreme Court addressed the distinction in a case involving the valuation of a waterworks plant that a city had agreed to purchase.[37] The panel of appraisers who valued the plant heard evidence without a city representative present, which the city claimed violated the rights to which it was entitled in an arbitration. The Supreme Court disagreed, explaining that the proceeding had not been an arbitration:

If this was a technical arbitration of a matter of dispute or difference between the parties, to be heard and decided upon evidence submitted, the examination of the company's books without the consent of the city or the presence of its representatives would be such misconduct as would vitiate the award. In such a matter, the rules relating to judicial inquiry would apply. But in an appraisement, such as that here involved, the strict rules relating to arbitration and awards do not apply, and the appraisers were not rigidly required to confine themselves either to matters within their own knowledge, or those submitted to them formally in the presence of the parties; but might reject, if they saw fit, evidence so submitted, and inform themselves from any other source, as experts who were at last to act upon their own judgment.[38]

         The Supreme Court observed that the panel was "made up of such engineers, selected because they [are] experts," who were expected "to examine and estimate the value and acquaint themselves with the condition and extent of the property in question in their own way, and not according to the procedure required in a judicial proceeding."[39] The Supreme Court held that "[i]n the absence of any evidence of actual bad faith" the determination would stand.[40]

         Unfortunately, subsequent developments blurred once-clear doctrine. The passage of the FAA in 1925, the articulation of a strong federal policy in favor of arbitration, and the adoption of comparable arbitration acts and policies at the state level led to rules that favored arbitration. As litigants sought to escape from court into an arbitral forum, and judges sought subconsciously to lighten heavy dockets, arbitral principles seeped into and, in some jurisdictions, swamped the law governing expert determinations. One national survey posits that only twenty-four states continue to recognize a distinction between experts and arbitrators.[41] In twenty-two states, the distinction has been lost, and in four the matter has either been resolved ambiguously or not at all.[42] At the federal level, the United States Courts of Appeals have split on whether an expert determination constitutes an arbitration under the FAA.[43]

         Delaware decisions have maintained the distinction between an arbitration and an expert determination.[44] In 2003, the Delaware Supreme Court considered a dispute under an insurance policy which provided that a panel of appraisers would determine the amount of a loss and stated that the panel's determination would "be binding."[45] The panel's determination included costs that the policy expressly excluded, and the determination exceeded coverage limits in certain respects. When the insurer sued for a declaratory judgment that the determination violated the terms of the policy, the Delaware Superior Court applied an arbitral standard of review and dismissed. The Superior Court held that the panel's determination would stand "absent fraud or a completely irrational result."[46]The Delaware Supreme Court reversed, explaining that those types of issues were not waived "by an appraisal clause."[47] The Delaware Supreme Court held that when a contract calls for an expert determination by an appraiser, "it is for the court, not the appraiser, to decide the scope of the submission where that question is in dispute."[48]

         Delaware authorities have applied the distinction between expert determinations and arbitration when interpreting dispute resolution provisions in transaction agreements. In ASQR India Private, Ltd. v. Bureau Veritas Holdings, Inc., [49] the parties to an asset purchase agreement anticipated that disputes might arise over which customer contracts the buyer was acquiring. The parties agreed to a "Referee Procedure" under which a representative from a relevant industrial board would decide which customer contracts fell within the scope of the agreement. The agreement specified that "in performing such review, the Referee shall be functioning as an expert and not as an arbitrator."[50] The parties later locked horns over "a number of procedural and factual determinations about how to implement the Referee Procedure."[51] One side asked the court to resolve these issues; the other side argued that the expert should resolve them. Chief Justice Strine, writing as a Vice Chancellor, declined to apply arbitral doctrines, holding that the authority to resolve the disputes lay with the court, "and not with the Referee, whose scope of authority is limited to specific, technical questions."[52] He reasoned that the Referee Procedure was "a narrow dispute resolution mechanism" that was "designed to take advantage of the technical expertise, rather than the arbitration skills, of the Referee, and is only triggered when the parties teed up a narrow, technical question in the course of the Review Process."[53]

         More recently, in EMSI Acquisition, Inc. v. Contrarian Funds, LLC, [54] the parties to a stock purchase agreement agreed to have disputes over purchase-price adjustments referred to a "Settlement Auditor."[55] The agreement "explicitly provide[d] that the Settlement Auditor [would] resolve disputes over the calculation [of] Net Working Capital 'acting as an expert and not an arbitrator.'"[56] After the Settlement Auditor made its determination, the seller sued to confirm the results as if the determination had been an arbitral award. The buyers moved to dismiss, arguing that the procedure was not an arbitration and that an order confirming it would conflict with the bargained-for language of the agreement.[57] Vice Chancellor Slights dismissed the case, giving controlling weight to the parties' contractual stipulation that the Settlement Auditor had acted as an expert and not an arbitrator.[58]

         The Delaware Supreme Court also recently considered the distinction between an expert determination and an arbitration in Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC.[59] The parties to a purchase agreement agreed to a complex set of purchase-price adjustment provisions that called for disputes to be submitted to an independent auditor. The auditor "was to act 'as an expert and not as an arbitrator,' had to issue its decision in the form of a 'brief written statement' in an expedited time frame of 30 days, and had to rely on the parties' written submissions as the sole basis for its decision."[60] Disputes arose about whether the seller's historical treatment of certain items complied with GAAP, with the buyer arguing that it could modify the seller's historical treatment because it did not comply with GAAP. The buyer sought to have the independent auditor decide this issue. The Supreme Court agreed with the seller that the independent auditor lacked authority to make that decision. The high court noted that the agreement "states in multiple places that the auditor was acting 'as an expert and not as an arbitrator.'"[61] The high court further explained that "the Independent Auditor did not have a wide-ranging brief to adjudicate all disputes" arising under the agreement "but rather one confined to a discrete set of narrow disputes."[62]

         To my mind, these cases demonstrate that Delaware has not elided the distinction between expert determinations and arbitrations, nor have our courts applied arbitral principles to all contractual dispute resolution mechanisms. This outcome comports with Delaware's position as "a freedom of contract state, with a policy of enforcing the voluntary agreements of sophisticated parties in commerce."[63] As Chief Justice Strine recognized while writing as Chancellor on this court, "Delaware is a state that respects the freedom of contract. Thus, when two parties have a contract on which payment must be made, they are free to determine the basis for that payment."[64] "When a contract plainly says that a contractual input (the value of a certain property) will be determined by an appraiser selected in accordance with the contract's terms, that is what it plainly means."[65]An expert determination-whether by an appraiser, an auditor, or a different type of expert-is not an arbitration unless the parties specifically "designate that expert as an arbitrator for that purpose," thereby invoking the body of law governing arbitrators.[66] The court interprets and enforces the contract provisions governing the expert determination; the court does not apply arbitral principles.[67]

         In arguing the contrary position, the Seller relies on three Delaware cases: Avnet, Inc. v. H.I.G. Source, Inc.;[68] SRG Global, Inc. v. Robert Family Holdings, Inc.;[69] and Viacom International Inc. v. Winshall.[70] Each applied arbitral principles to an expert determination. Upon closer analysis, however, the decisions did so because the parties joined issue over those arbitral doctrines.

         The Avnet decision involved a purchase-price adjustment provision that called for disputes to be submitted to an accountant.[71] The agreement empowered the accountant to resolve "all matters (but only such matters) that remain in dispute relating to the Closing Balance Sheet, Merger Consideration Components and Aggregate Merger Consideration."[72] The parties disagreed about aspects of the purchase-price adjustments, and the buyer filed suit. The seller moved to dismiss the complaint and framed its arguments using the doctrines of substantive and procedural arbitrability. Neither party posited that the agreement contemplated an expert determination. The decision framed the issue to be decided using the arbitral concepts that the parties advanced: "The parties agree that the sole question to be resolved on the pending motion is whether this Court or the arbitrator should decide HIG Source's challenge to the arbitration."[73] Presented with those arguments, the court held that the buyer's objections raised issues of substantive arbitrability.

         Months later, matters unfolded similarly in SRG Global. An agreement governing the sale of real estate provided that if any disputes arose over reimbursement for the cost of environmental remediation, then an environmental expert would "resolve such issues," and the expert's decision would be "final and binding on the parties."[74] The parties disagreed over an assortment of issues, and the buyer filed suit. The seller moved to dismiss, arguing that the issues presented questions of procedural arbitrability that the expert should decide. Unlike in Avnet, the buyer argued that the expert procedure was not an arbitration, then argued in the alternative that the disputes were matters of substantive arbitrability for the court to decide. The seller countered that the parties' agreement was broad enough to refer the issue of substantive arbitrability to the arbitrator (as the parties labeled the expert). With the parties' briefing steeped in the language of arbitration, this court concluded that the disputes presented "questions of procedural arbitrability that the arbitrator should decide" and dismissed the lawsuit on that basis.[75] The court briefly addressed the seller's argument that the expert determination was not an arbitration, observing that the buyer's "earlier filings" had "classif[ied] the dispute resolution process here as arbitration"[76] and relying on one side of the federal circuit split to support treating the expert as an arbitrator.[77]

         The final case is Viacom, which concerned a dispute over an earn-out. The merger agreement called for the parties to submit any disputes over the calculation of the earn-out to the "Resolution Accountants." The agreement provided that "[t]he scope of the Resolution Accountants['] engagement . . . shall be limited to the resolution of the Earn-Out Disagreements, and the recalculation of the [Earn-Out] . . . in light of such resolution, and [the Resolution Accountants] shall be deemed to be acting as experts and not as arbitrators."[78] The agreement also provided that "[t]he resolution of the dispute by the Resolution Accountants will be a final, binding and conclusive resolution of the parties' dispute, shall be non-appealable, and shall not be subject to further review."[79] Seemingly in tension with that language, the agreement used arbitration-style language when framing the scope of possible review, stating not only that the determination "shall be final and binding on all parties," but also that "no such party shall have the right to bring any claim disputing such final determination, in the absence of fraud or manifest error."[80]

         After the Resolution Accountants made a determination, the purchaser filed suit to set it aside, and the seller countersued to confirm the determination as an arbitral award under the FAA. In its complaint, the purchaser alleged that the resolution process was not an arbitration. Nevertheless, during briefing at the trial level, the purchaser conceded that "for purposes of the pending motions, . . . the Resolution Accountants' Determination may be reviewed under [FAA] standards."[81] Then-Chancellor Strine treated the concession as binding, deemed the parties to have agreed to resolve the dispute under the FAA, and confirmed the determination on that basis.[82] While discussing the reasonableness of the purchaser's concession, however, he ...


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