Seller Beware? Chancery Court Confirms Award Requiring Seller to Pay Buyer to Acquire Business

The Delaware Court of Chancery on March 17, 2024, entered judgment in favor of SM Buyer LLC (Buyer),¹ "reluctantly" confirming an arbitrator's determination that RMP Seller Holdings LLC (Seller) owed Buyer $87,427,170.51 – twice what Buyer paid for the company – in a post-closing purchase price adjustment.² The surprising result hinged on a literal reading of the equity purchase agreement's (Agreement) terms, notwithstanding the "spirit" of the deal, and reflects Delaware courts' highly contractarian bent. It is currently on appeal to the Delaware Supreme Court.

The Save Mart Acquisition

Seller owned 100 percent of the equity in Save Mart Super Markets LLC (Save Mart), a grocery store chain with operations throughout California and northern Nevada. Save Mart also owned a one-third property interest in a joint venture (GP Interest) relating to another grocery business, Superstore Industries (SSI), which Save Mart listed on its books as an equity investment, without separately listing any debt of SSI.

The deal was structured to be "debt-free, cash-free," meaning Seller would hang on to the cash on the business's balance sheet, while also eliminating any associated debt. In 2022, Buyer agreed to wholly acquire Save Mart via the Agreement.

The Post-Closing Purchase Price Adjustment

As is customary in mergers and acquisitions (M&A) transactions, the Agreement contemplated a post-closing purchase price adjustment. This process typically contemplates minor adjustments to account for any changes to the company's balance sheet that may have occurred between the deal signing and closing. The parties exchange proposed closing statements and endeavor to agree on a final adjusted purchase price taking into account the condition of the balance sheet as of closing. Notably, in the context of this deal, the amount of Save Mart's "indebtedness" stood to reduce the final purchase price.

In March 2022, Buyer had presented to Seller a pre-closing statement reflecting an aggregate purchase price of $39,598,051. Buyer's statement treated the GP Interest as an equity investment and did not include any debt separately owned by SSI. Buyer did not object at that time to Seller's accounting methodology, and the parties continued to closing, with Seller expecting an approximately $40 million payment for its interests in the business. In June 2022, however, Buyer delivered to Seller its proposed final closing statement, which included $109 million in indebtedness of SSI. The result was to flip the purchase price to negative, resulting in Seller paying Buyer almost $90 million to acquire the business.

The Arbitration Award

The conflicting calculations stemmed from the parties' differing interpretations of the Agreement's definition of "Closing Date Indebtedness," an accounting issue beyond the scope of this review. Unable to resolve their differences, the parties submitted their dispute to an accounting referee and then to arbitration, pursuant to the Agreement's dispute resolution provisions. The arbitrator, former Vice Chancellor Joseph Slights of the Delaware Court of Chancery, now in private practice, applied a strict interpretation of the Closing Date Indebtedness definition to uphold Buyer's purchase price calculation, despite the unorthodox result and what seemed to be a clear deviation from the economic realities of the transaction.

Confirmation of the Award

Buyer then filed in Delaware Chancery Court to have the arbitration award confirmed. In that court, Vice Chancellor J. Travis Laster acknowledged that the arbitral result was "economically divorced from the intended transaction"³ and that he would have reached a different result if presented the question directly. Review of an arbitration award, however, is "one of the narrowest standards of judicial review"⁴ and requires affirming the award unless a showing is made that the arbitrator acted in "manifest disregard of the law," which requires "that the arbitrator (1) knew of [a] relevant legal principle, (2) appreciated that this principle controlled the outcome of the disputed issue, and (3) nonetheless willfully flouted the governing law by refusing to apply it."⁵ In other words, the award will be affirmed if the arbitrator "is even arguably construing or applying the contract and acting within the scope of his authority[.]"⁶ Finding that Seller could not demonstrate that Arbitrator Slights exhibited manifest disregard for the law, Vice Chancellor Laster reluctantly confirmed the award, which Seller has now appealed to the Delaware Supreme Court.

The Save Mart decision emphasizes two important points for M&A practitioners: 1) Delaware courts' famously rigid application of contract terms, even where seemingly inequitable results may obtain, and 2) the extremely narrow grounds available to a party seeking to challenge an arbitration award. As Arbitrator Slights related in the Save Mart opinion: "Delaware law is more contractarian than most, and Delaware courts will enforce the letter of the parties' contract without regard for whether they have struck a good or bad deal[.]"⁷ The decision underscores the importance to transaction parties of carefully working through defined terms and ensuring, to the extent possible, that the fundamental economic terms of a deal are explicitly addressed in transaction documents.

While the case is currently on appeal to the Delaware Supreme Court, given the exceedingly high burden required to reverse an arbitration award, it appears likely that the negative purchase price ruling will hold.

Holland & Knight routinely assists purchasers and sellers in post-closing M&A disputes and claims relating to earnouts and purchase price adjustments, as well as for breaches of representations and warranties and indemnity in jurisdictions around the country. Our firm's deep bench of practitioners continuously monitors developments in the law that affect transaction participants.

Notes

¹ SM Buyer LLC v. RMP Seller Holdings, LLC, No. 2023-0957, 2024 WL 1181315 (Del. Ch. Mar. 17, 2024).

² SM Buyer LLC v. RMP Seller Holdings, LLC, No. 2023-0957, 2024 WL 865918 (Del. Ch. Feb. 28, 2024).

³ Id. at *4.

⁴ Id. at *3.

⁵ Id. (quoting SPX Corp. v. Garda USA, Inc., 94 A.3d 745,750–51 (Del. 2014)).

⁶ Id. (quoting SPX Corp., 94 A.3d at 751).

⁷ Final Arbitration Award at 2, 8, SM Buyer LLC v. RMP Seller Holdings, LLC, 2024 WL 865918 (Del. Ch. Feb. 28, 2024) (No. 2023-0957).