Chicago Bridge & Iron Company N v. v. Westinghouse Electric Company and WSW Acquisition Co.
166 A.3d 912
| Del. | 2017Background
- Chicago Bridge & Iron (Seller) agreed to sell its construction subsidiary CB&I Stone & Webster (Stone) to Westinghouse (Buyer) for a $0 initial purchase price, subject to a post-closing net working capital adjustment (the “True Up”) and potential earnouts.
- The Purchase Agreement set a Target Net Working Capital Amount and required Closing Payment and Closing Statements prepared from Stone’s books “in accordance with GAAP” but “consistent with” Stone’s past accounting practices (the “Agreed Principles”).
- The Agreement contained an unusual Liability Bar: most seller representations and warranties (including that the referenced financial statements were GAAP-compliant) did not survive closing, and Seller would have no post-closing monetary liability except for fraud. Buyer, however, agreed to indemnify Seller for Stone-related liabilities.
- Chicago Bridge continued operating Stone and spent about $1 billion between the reference date and closing; its pre-closing Closing Payment Statement estimated Net Working Capital above the Target. Westinghouse closed anyway.
- Post-closing, Westinghouse’s Closing Statement asserted large GAAP-based adjustments to historic accounting (claim cost, completion cost, and margin fair value items) that were largely tied to pre-signing accounting practices and sought over $2 billion from Chicago Bridge via the True Up.
- Chicago Bridge sued for a declaratory judgment that Westinghouse could not use the True Up/Independent Auditor to relitigate alleged breaches of pre-closing representations barred by the Liability Bar; the Court of Chancery granted judgment on the pleadings for Westinghouse. The Supreme Court reversed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the True Up/Independent Auditor may resolve disputes that effectively assert breaches of Seller’s pre-closing GAAP representations | Chicago Bridge: most of Westinghouse’s adjustments attack Stone’s historical accounting and therefore are breach-of-representation claims barred after closing by the Liability Bar; such matters are not within the limited True Up scope | Westinghouse: the True Up is the contract’s exclusive post-closing path to resolve any disagreement about the Final Purchase Price, so GAAP challenges to the historic statements can be asserted there | Held for Chicago Bridge: True Up limited to changes between signing and closing and to consistent application of past accounting practices; it may not be used to resurrect barred representations/warranty claims |
| Whether the Independent Auditor has authority to decide GAAP-compliance of historical accounting (and issue binding rapid rulings) | Chicago Bridge: the Independent Auditor was appointed as an expert to resolve narrow post-signing/closing accounting disputes, not to adjudicate pre-closing representation breaches | Westinghouse: the auditor’s broad mandate and finality clause permit resolution of any dispute over Closing/Closing Payment statements, including GAAP issues | Held for Chicago Bridge: auditor’s role is cabined ("expert, not arbitrator"), limited to written submissions about True Up items reflecting post-signing changes; arbitrability of barred claims is for courts |
| Whether reading the True Up broadly would render the Liability Bar meaningless | Chicago Bridge: a broad True Up would eviscerate the Liability Bar and rewrite the parties’ bargain (seller gave up liabilities in exchange for $0 upfront) | Westinghouse: it bargained to accept pre-closing financials for now but reserved the right to a special-purpose GAAP-based price determination post-closing | Held for Chicago Bridge: context and contract language show parties intended the Liability Bar to cut off post-closing claims over historical accounting; True Up cannot be used to circumvent that result |
| Proper interpretation standard for ambiguous contract provisions and interplay of sections (True Up, Agreed Principles, Liability Bar) | Chicago Bridge: read contract as whole and in commercial context; consistency language requires sticking with historic accounting methods for True Up | Westinghouse: specific True Up language requires GAAP compliance and a post-closing mechanism that can reach broad disputes about Net Working Capital | Held for Chicago Bridge: contract unambiguously read in full supports limiting True Up to consistency with past practices and to post-signing factual changes; the Court reverses the Chancery decision |
Key Cases Cited
- Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199 (Del. 1993) (contract interpretation—read the document as a whole)
- GMG Capital Investments, LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776 (Del. 2012) (a provision’s meaning cannot conflict with the contract’s overall scheme)
- OSI Systems, Inc. v. Instrumentarium Corp., 892 A.2d 1086 (Del. Ch. 2006) (working-capital true-up cannot be used to re-litigate alleged breaches of representations about historical financials)
- Westmoreland Coal Co. v. Entech, Inc., 794 N.E.2d 667 (N.Y. 2003) ("consistent with past practices" language limits true-up to measuring change between reference and closing dates)