Chicago Bridge & Iron Company N v. v. Westinghouse Electric Company and WSW Acquisition Co.
573, 2016
| Del. | Jun 28, 2017Background
- Chicago Bridge agreed to sell its construction subsidiary CB&I Stone & Webster (Stone) to Westinghouse for a nominal $0 at closing, with post-closing adjustments (the “True Up”) based on Stone’s net working capital relative to a $1.174 billion Target and possible contingent/earnout payments.
- The Purchase Agreement unusually barred seller monetary liability after closing (the “Liability Bar”), required Westinghouse to indemnify Chicago Bridge for Stone-related claims, and made closing contingent on third‑party releases from the plant owners.
- The True Up required pre‑ and post‑closing statements prepared from Stone’s books “in accordance with GAAP” and “consistent with the past practices” used in the financial statements on which Westinghouse had performed due diligence.
- Chicago Bridge’s Closing Payment Statement (Dec. 28, 2015) reported Net Working Capital of ~$1.6B; Westinghouse’s Closing Statement (Apr. 28, 2016) recalculated Net Working Capital at about –$976.5M, seeking ~ $2B from Chicago Bridge by challenging historical accounting treatments.
- Chicago Bridge sued for a declaratory judgment that Westinghouse cannot use the True Up/Independent Auditor to litigate claims that, in essence, challenge pre‑closing financial statements and would have been breaches of representations barred by the Liability Bar; the Court of Chancery rejected that claim and the Delaware Supreme Court reversed.
Issues
| Issue | Chicago Bridge’s Argument | Westinghouse’s Argument | Held |
|---|---|---|---|
| Whether the True Up / Independent Auditor may adjudicate challenges to Chicago Bridge’s historical GAAP accounting (the pre‑closing financials). | True Up is limited to post‑signing to pre‑closing changes and must use historical accounting methods; challenges to historical GAAP are breaches of representations barred after closing. | True Up resolves any dispute over Final Purchase Price; Westinghouse may contest historical accounting in the post‑closing True Up. | True — True Up is cabined to changes between signing and closing using the historical accounting approach; it cannot be used to relitigate alleged pre‑closing GAAP breaches. |
| Whether allowing such GAAP challenges in the True Up would nullify the Liability Bar. | Permitting that would eviscerate the Liability Bar and rewrite the parties’ exchange (seller gets clean break for $0). | Liability Bar does not preclude price disputes resolved by the True Up; parties bargained to accept financials pre‑closing but reserve price adjustment rights. | True — permitting those claims would render the Liability Bar meaningless; therefore they are barred from Independent Auditor proceedings. |
| Scope and role of the Independent Auditor (expert, not arbitrator). | Auditor’s role is narrow: expert determination confined to specified calculation disputes, based on written submissions and consistent accounting, for changes occurring between signing and closing. | Auditor is the mandatory forum for resolving all disputes about the Closing/Closing Payment Statements and calculations. | True — Auditor’s authority is limited and cannot be used to decide matters that are actually representation/warranty breach claims. |
| Proper remedy / relief when a party submits barred claims to the Independent Auditor. | Court should enjoin Westinghouse from submitting or continuing to pursue claims before the Auditor that are effectively barred representation/warranty claims. | Westinghouse sought to proceed through contractual True Up process. | Court ordered reversal of Chancery Court and directed declaratory relief enjoining Westinghouse from pursuing such claims before the Independent Auditor; remanded for entry of judgment for Chicago Bridge. |
Key Cases Cited
- Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199 (Del. 1993) (standard for reviewing Rule 12(c) and interpreting contracts as a whole)
- GMG Capital Investments, LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776 (Del. 2012) (contract interpretation must give effect to the entire agreement)
- OSI Systems, Inc. v. Instrumentarium Corp., 892 A.2d 1086 (Del. Ch. 2006) (working‑capital true‑up cannot be used to relitigate alleged breaches of representations about historical financial statements)
- Westmoreland Coal Co. v. Entech, Inc., 794 N.E.2d 667 (N.Y. 2003) (consistency requirement focuses true‑up on changes between reference date and closing, not on historical GAAP compliance)