Chancery Construes Sellers’ APA Contractual Representations Concerning Customer Relationships and Changes in the Business, Finds No Breach
This case serves as a cautionary tale when sellers’ representations in a purchase agreement fail to fully protect against the business risks in question. According to the Court, this approach encourages contracting parties to allocate risks and draft agreements with precision. This principle also aligns with Delaware’s pro-contractarian policy to enforce strictly the terms of parties’ agreements, especially when sophisticated parties at arm’s-length negotiate those agreements.
This post-closing dispute arose from an acquisition in the airline parts industry. The sellers manufactured airplane parts for Boeing pursuant to a master agreement. Many of the sub-contracts in the master agreement were set to expire at the end of 2016. The buyers purchased the sellers’ assets pursuant to an asset purchase agreement (the “APA”) in the middle of 2016 fully expecting that Boeing would allow the sellers to re-bid on the sub-contracts. Instead, both the selling and buying parties later learned that Boeing already had awarded the contracts for many of the parts produced by the sellers to other companies in 2013 and 2014. It was undisputed that, at the time of contracting, neither the buyers nor the sellers were aware that the sellers had lost the opportunity to bid on these sub-contracts.
The buyers argued that the sellers’ representations in the APA protected the buyers from the risk that the buyers would be unable to bid on the subcontracts expiring at the end of 2016. The buyers alleged that the sellers breached the APA because certain of their representations were false, namely that: (i) sellers had disclosed all material “issues” with customers to the buyer before closing, (ii) there had been no material change in the seller’s relationship with its customers after 2015, and (iii) there had been no material adverse effect to the sellers’ operations after 2015.
Finding the APA unambiguous, the Court granted summary judgment against the buyers. Vice Chancellor Zurn first found that the lost opportunity to bid was not a “material dispute, claim or issue with respect to any customer” that required disclosure under the APA. The Court looked to dictionary definitions of “issue,” which indicate it is a matter in dispute, a concern or a problem. Here, the sellers were unaware of Boeing’s previous award in 2013 and 2014 of a number of the parts sub-contracts, and accordingly had not raised a “dispute,” “complaint” or “issue” with Boeing over the lost opportunities. In addition, having previously lost the opportunities in 2013 and 2014, the sellers’ representations about no “material changes” or “material adverse effect” to its business operations since 2015 were not false. The Court recognized and acknowledged that representations and warranties serve an important risk allocation function, but concluded that the buyers had failed to negotiate for contractual protections sufficient to protect them from the risk of the lost bidding opportunities in this case.Share