Buyers and sellers and their counsel allocate risk in stock purchase or merger agreements. A buyer, for example, may not be willing to close if there is threatened regulatory action affecting an asset or liability it is acquiring. The parties then negotiate how to address this risk, often including the buyer's right to withdraw from the transaction unless the threat disappears. When a buyer seeks to avoid closing on the basis of threatened legal action as negotiated with the seller, the seller may have a different view as to whether the negotiated "threat" actually exists. Such was the circumstance in Rexam v. Berry Plastics, C.A. No. 10596-VCN (Dec. 3, 2015), and its holding in favor of the seller provides important guidance regarding what constitutes "threatened action" that might permit a buyer to be relieved of its obligation to close.
Seller Rexam Inc. and certain affiliates (the seller) agreed to sell certain assets in its health care containers and closure business to Berry Plastics Corp. (the buyer) pursuant to an equity purchase agreement. Prior to closing, the Pension Benefit Guaranty Corp. (PBGC) wrote a letter to the seller inquiring of the adequacy of funding of certain pension obligations to be transferred to the buyer and of the buyer's ability to fund the pension obligations. The parties then negotiated a side letter prior to closing in which they agreed that the buyer would only be obligated to accept the pension obligations if after 180 days post-closing there were "no pending or threatened legal or administrative action with respect to the PBGC inquiry." If that condition were not satisfied then the buyer would have no obligation to accept the pension obligation. The parties closed the transaction on June 2, 2014, with the PBGC inquiry open.
On June 9, 2014, the PBGC advised the seller that it was disappointed that the seller had closed the transaction. It expressed concern that the seller had underfunded its pension obligations and had transferred the obligation to the buyer who lacked resources to support the pension obligations. It told the seller that, "While PBGC does not plan to initiate legal action against [the seller] at this time, we have not yet decided whether we will pursue this matter through the IRS and/or other professional actuarial organizations." This was the last communication from the PBGC prior to the specified date when the buyer had the right to withdraw from any duty to complete the pension transfer. On that date the buyer wrote to the seller and stated that it would not accept the transfer of the pension obligation because the June 9 letter was "evidence of a pending or threatened legal or administrative action by the PBGC." The seller sued and sought a declaration that the buyer's performance in accepting the pension transfer was not excused under the terms of the parties' equity purchase agreement and side letter. The matter was before the Delaware Court of Chancery on the parties' cross-motions for judgment on the pleadings.
Court Finds Letter Did Not Constitute Threatened Action
The parties agreed that the issue before the court was whether under Delaware's objective theory of contract interpretation a threatened action existed that excused the buyer of its duty to acquire the pension obligations. The court read the June 9 letter as reflecting the PBGC's unhappiness with the pension transfer and its frustration that the transaction had closed. It also agreed that the PBGC had reserved its options. Nonetheless, it found that factual predicate was insufficient to constitute "threatened action." In so holding the court relied upon I/MX Information Management Solutions v. MultiPlan (Del. Ch. Mar. 27, 2014), where the court held that to constitute a threat, the party allegedly threatening an action must have "expressed that it was going to do something ... in such a way that a reasonable person would understand that [it] was intending to press the issue through a proceeding before a third party." Here the court noted that the last communication from the PBGC indicated that it did not intend to pursue action and that it had not decided whether it someday would. The court found that this degree of uncertainty fell short of the risk of threatened action that would entitle the buyer to avoid its duty to accept the pension transfer.
Parties have it within their control to allocate risk in stock purchase or merger agreements. Where one party attempts to avoid an obligation based on a negotiated contract right and another party disputes its right to do so, a Delaware court will apply an objective standard to determine the parties' intent. In Rexam, if the buyer had wanted to be relieved of its obligation to close unless the PBGC had issued a "no action" letter, it could have bargained for such certainty. But having failed to do so, the court found that the buyer ran the risk that it would have to assume the pension obligation with a degree of uncertainty. The lesson learned is that a Delaware court may not relieve a party of an obligation to perform based on a bargained-for right to walk away upon threatened legal or regulatory action if the only "threat" is a possibility of future action unaccompanied by the actual filing of an action or communication of an intent to so proceed. While the court acknowledged that this was a close case and the time for appeal has not yet expired, for present purposes the court's holding provides noteworthy guidance to transaction planners.