252 A.3d 445
Del. Ch.2018Background
- Buyer (Informa) purchased the Company from Seller (Penton) under a Merger Agreement that allocated post- and pre-closing tax benefits differently, creating an economic incentive to classify deductions as pre- or post-closing.
- Sections 5.2(a)(i) (Pre-Closing) and 5.2(a)(ii) (Post-Closing) incorporate Section 2.8(b)(ii)’s dispute-resolution procedures for purchase-price/tax disputes.
- Section 2.8(b)(ii) designates an Accounting Firm (e.g., Ernst & Young) to decide disputes “acting as an accounting expert only and not as an arbitrator,” and states the Accounting Firm shall not take into account “usage, custom or other extrinsic factors” and prohibits discovery/hearings.
- Parties disagreed over whether the Accounting Firm could consider extrinsic evidence (term sheets, offering circular) in resolving a tax-allocation dispute; Buyer said no, Seller argued yes (or that the accountant could decide what to consider).
- Seller sued seeking (alternatively) a declaration that the accountant may decide what evidence to consider or that extrinsic evidence is admissible; Buyer counterclaimed for declarations and injunctive relief consistent with limiting the accountant to contract text.
Issues
| Issue | Plaintiff's Argument (Seller) | Defendant's Argument (Buyer) | Held |
|---|---|---|---|
| 1. Is the contract’s dispute procedure an arbitration or an expert determination? | The presence of a third-party decisionmaker means arbitral doctrines should apply. | The Merger Agreement explicitly says the Accounting Firm is "an accounting expert only and not an arbitrator," so this is an expert determination. | Expert determination; Delaware recognizes the distinction where parties clearly express it. |
| 2. If expert determination, who decides the scope of the Accounting Firm’s authority (including what it may consider)? | The Accounting Firm should decide procedural scope, including what evidence it may consider. | The court must interpret the contract and decide scope because the expert was given a narrow, technical role. | Court decides scope; expert cannot interpret the contract to expand its own jurisdiction absent an explicit grant. |
| 3. May the Accounting Firm consider extrinsic evidence (term sheets, offering circular)? | The contract’s incorporation of Section 2.8(b) ‘‘mutatis mutandis’’ for tax disputes permits extrinsic evidence for tax interpretation. | The plain language forbids importing ‘‘usage, custom or other extrinsic factors’’ and bars discovery/hearings; extrinsic evidence is excluded. | Held: extrinsic evidence is barred; Accounting Firm may not consider term sheets or offering circular. |
| 4. Did Seller unreasonably refuse to agree to an engagement letter or breach the agreement? | Seller acted reasonably in disputing the engagement terms and litigating the scope issue. | Buyer contends Seller breached by refusing reasonable engagement terms. | Seller did not act unreasonably; no breach declaration for refusing the engagement on Buyer’s terms. |
Key Cases Cited
- City of Omaha v. Omaha Water Co., 218 U.S. 180 (1910) (distinguishing expert appraisement from arbitration; experts may inform themselves ex parte).
- AIU Insurance Co. v. Lexes, 815 A.2d 312 (Del. 2003) (where contract calls for expert/appraisal, court—not appraisers—decides the scope of the submission in dispute).
- Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912 (Del. 2017) (contract language that the auditor act "as an expert and not as an arbitrator" narrows the auditor’s role to discrete technical issues).
- Viacom Int’l Inc. v. Winshall, 72 A.3d 78 (Del. 2013) (parties’ concession that FAA governed led court to treat the process as arbitration; courts should enforce parties’ chosen framework).
- Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199 (Del. 1993) (12(c) standard and that judgment on the pleadings enforces unambiguous contracts).