Chancery Orders Trial to Determine Meaning of Ambiguous Post-Closing Covenants in a Stock Purchase Agreement
Schneider Nat’l Carriers, Inc. v. Kuntz, C.A. No. 2017-0711-PAF (Del. Ch. July 16, 2020)
If parties to a contract offer reasonable but conflicting interpretations of ambiguous contractual language, the Court of Chancery may deny summary judgment and order trial for purposes of weighing conflicting extrinsic evidence and witness testimony to interpret the meaning of the contractual language.
Schneider National Carriers, Inc. acquired Watkins & Shepard and its subsidiaries (collectively, “W&S”) in a 2016 transaction. In the stock purchase agreement (“SPA”), Schneider agreed to operating covenants in connection with the post-closing operation of the business (including an annual requirement to acquire at least sixty tractors), that it would work to achieve synergies, and that during the three-year earn out period it would not materially change W&S’s business.
After closing, Schneider acquired more than sixty tractors each year, but also disposed of more than that each year, and thus, on balance, decreased the size of the tractor fleet. Each year, W&S missed its financial targets. Schneider shut down the business. The parties disagreed as to whether the SPA’s sixty-tractor purchase requirement involved gross purchases or net increases in the number of tractors. The parties cross-moved for summary judgment on the issue of whether Schneider had breached the SPA covenants requiring tractor purchases, working to achieve synergies and materially changing the business.
In prior motion practice, the Court had ruled that the requirement to acquire tractors was ambiguous, as it could be interpreted either on a gross basis or net basis. Because the extrinsic evidence adduced in discovery did not clearly resolve the ambiguity in either party’s favor, the Court denied both motions for summary judgment. The Court reasoned that the negotiation history of the SPA reflected rejection of a net-increase requirement to purchase tractors under the covenant, but in contrast, projections underlying the negotiation assumed net increases of tractors under the covenant. In addition, the affidavits submitted by the parties’ witnesses were in conflict regarding the negotiation history and contractual intent of the tractor-purchase requirement. Accordingly, the Court concluded that a trial was necessary to assess witness credibility and determine the meaning of the contractual language in the covenant. The Court similarly pointed to factual disputes in denying summary judgment on claims for breach of the other post-closing covenants.