Golden Rule Financial Corporation v. Shareholder Representative Services LLC
61, 2021
Del.Dec 3, 2021Background
- Golden Rule Financial Corporation agreed to buy USHEALTH Group, Inc.; purchase price included a post-closing "true-up" based on Tangible Net Worth with a $52 million target.
- The Agreement required closing-period calculations be prepared "in accordance with the Accounting Principles," which placed certain "Specific Policies" (including ASC 606) at the top of the hierarchy.
- SRS (the sellers' representative) provided pre-closing estimates using the Company’s historical (but incorrect) application of ASC 606; Golden Rule later discovered the Company had applied ASC 606 incorrectly.
- Golden Rule submitted a Final Adjustment Statement using the Company’s pre-closing (consistent but incorrect) treatment and also provided a reconciliation showing the amount if ASC 606 were applied correctly (a much higher Tangible Net Worth).
- SRS demanded the correct application of ASC 606, engaged KPMG under the agreement’s dispute-resolution process, and Golden Rule sued in Chancery asserting breach of contract, breach of the implied covenant, and quasi‑estoppel; Chancery dismissed under Rule 12(b)(6).
- The Delaware Supreme Court affirmed: the Agreement unambiguously required correct application of ASC 606; the equitable claims failed (no contractual gap; quasi‑estoppel not shown).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether "in accordance with the Accounting Principles, consistently applied" required continuing the Company’s pre‑closing (incorrect) ASC 606 treatment | "Consistently applied" obliges Golden Rule to use the same method the Company used pre‑closing; consistency is the clause’s purpose | Accounting Principles (top‑ranked Specific Policies) require the correct application of ASC 606; "consistently applied" prevents opportunistic switching, not perpetuating error | Court: Clause is unambiguous — parties intended ASC 606 to be applied correctly; consistency does not require carrying forward an incorrect application |
| Whether the implied covenant of good faith and fair dealing fills any contractual gap to require consistency as plaintiff urges | Covenant should prevent SRS from forcing a correct‑application outcome that departs from pre‑closing practice | No contractual gap exists; the Agreement specifies Accounting Principles and a hierarchy that mandates correct ASC 606 application | Court: Implied covenant inapplicable — contract is not silent and supplies the rule; no extraordinary remedy warranted |
| Whether quasi‑estoppel prevents SRS from asserting correct application of ASC 606 | SRS previously acquiesced to the Company’s treatment and should be estopped from taking a contrary position | SRS’s position is consistent with the contract’s express terms and not unconscionable; no inequitable conduct shown | Court: Quasi‑estoppel not met — no unconscionability; parties are sophisticated and contract governs |
Key Cases Cited
- Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC, 166 A.3d 912 (Del. 2017) (distinguished; involved a liability bar and different true‑up context)
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (explains narrow, extraordinary scope of implied covenant relief)
- Oxbow Carbon & Minerals Hldgs., Inc. v. Crestview‑Oxbow Acq., LLC, 202 A.3d 482 (Del. 2019) (addresses when contract silence permits implied covenant relief)
- RBC Capital Markets, LLC v. Jervis, 129 A.3d 816 (Del. 2015) (discusses quasi‑estoppel standards in commercial contracts)
- Clinton v. Enterprise Rent‑A‑Car Co., 977 A.2d 892 (Del. 2009) (standard of review for Rule 12(b)(6) dismissal)