Chicago Bridge & Iron Company N v. v. Westinghouse Electric Company and WSW Acquisition Co.
573, 2016
| Del. | Jun 28, 2017Background
- Chicago Bridge & Iron (Seller) agreed to sell its subsidiary CB&I Stone & Webster (Stone) to Westinghouse (Buyer) for a $0 nominal purchase price, subject to a post-closing working-capital adjustment (the "True Up") and potential earnouts.
- The parties negotiated and used Stone’s historical financial statements (June 30, 2015 and year-end 2014) as the baseline; Chicago Bridge represented those statements were prepared in accordance with GAAP.
- The Purchase Agreement included an unusually broad post-closing Liability Bar: most seller representations and warranties would not survive closing and seller would have no monetary liability after closing (except for fraud); Buyer agreed to indemnify Seller for Stone liabilities.
- The True Up required both parties to prepare closing working-capital statements "consistent with GAAP, consistently applied" and with the seller’s past accounting practices; disputes could be submitted to an Independent Auditor acting "as an expert and not as an arbitrator," whose decision would be final and expedited.
- After closing, Buyer’s Closing Statement altered historical accounting treatments (challenging seller’s GAAP application) and sought a roughly $2 billion payment from Seller; Seller sued for declaratory relief to prevent Buyer from using the True Up/auditor to litigate alleged pre-closing breaches barred by the Liability Bar.
- The Court of Chancery allowed Buyer to proceed to the Independent Auditor; the Delaware Supreme Court reversed, holding the True Up cannot be used to relitigate historical GAAP compliance that amounts to breaches of pre-closing representations barred by the Liability Bar.
Issues
| Issue | Plaintiff's Argument (Chicago Bridge) | Defendant's Argument (Westinghouse) | Held |
|---|---|---|---|
| Whether arguments that seller’s historical accounting violated GAAP may be resolved in the True Up/auditor process | These claims are effectively breaches of pre-closing representations and are barred by the Liability Bar; True Up is limited to changes between signing and closing using seller’s historical accounting methods | True Up resolves any dispute over Final Purchase Price; Buyer may challenge historical accounting via True Up even if it implicates pre-closing representations | True — Buyer may not use the True Up/auditor to relitigate alleged historical GAAP breaches that were extinguished at closing by the Liability Bar; True Up limited to post-signing-to-closing changes and consistent accounting methods |
| Proper scope of the Agreed Principles/GAAP requirement in the True Up | Agreed Principles require consistency with the accounting approach used in the financial statements; True Up’s GAAP consistency test is a consistency test, not a freestanding GAAP reexamination | The clause permits an independent GAAP compliance re-calculation to fix Final Purchase Price regardless of pre-closing representations | True — the contractual language requires use of seller’s past practices; the True Up enforces consistency, not a wholesale re‑writing of historical accounting for GAAP compliance |
| Whether the Independent Auditor’s narrow, expedited powers allow it to decide disputes that are effectively indemnity/representation claims | No — an expedited expert acting only on written submissions as an "expert, not arbitrator" is not the forum for complex representation/indemnity disputes that require full adjudicative protections | Yes — the parties agreed the auditor’s determinations would be final and binding on disputes within the True Up | True — the auditor’s role is narrow and confined to discrete True Up issues; it cannot decide barred pre-closing representation claims |
| Whether Section preserving True Up post-closing (Section 10.3) overrides the Liability Bar (Section 10.1) | Section 10.3 preserves only the True Up’s limited function; it does not resurrect extinguished representation claims | Section 10.3 shows parties intended True Up to remain available post-closing for any price disputes | True — Section 10.3 does not abrogate the Liability Bar; it preserves the limited True Up mechanism but does not permit relitigation of barred representation claims |
Key Cases Cited
- Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199 (Del. 1993) (contract interpretation: view pleadings in light most favorable to non-movant on a 12(c) motion)
- GMG Capital Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776 (Del. 2012) (a contract provision’s inferred meaning cannot control if it conflicts with the agreement’s overall scheme)
- OSI Sys., Inc. v. Instrumentarium Corp., 892 A.2d 1086 (Del. Ch. 2006) (working-capital adjustment may not be used to litigate alleged breaches of the seller’s historical accounting representations)
- Westmoreland Coal Co. v. Entech, Inc., 794 N.E.2d 667 (N.Y. 2003) (financial-statement comparability language enforces consistency; GAAP attacks on baseline statements are for courts under representations)
- Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393 (Del. 2010) (contracts are read as a whole and provisions given effect to avoid surplusage)