Yesterday’s decision by Vice Chancellor Slights in Greenstar IH Rep, LLC and Gary Segal v. Tutor Perini Corporation et al. (Del Ch., C.A. No. 12885-VCS) highlights the recurring (for M&A counsel) question of whether the acquisition agreement should include examples of how a particular calculation should be done.
In this decision, the court faced a dispute between sellers and buyer over whether a condition to the release of a holdback had been met. The agreement allowed certain amounts to be credited towards satisfaction of that condition if they resulted in “additional net profit.” The buyer argued that such amounts could only be credited if the transactions to which they related were profitable; the sellers stated that the “additional net profit” language was merely intended to avoid double-counting of amounts, and pointed to sample calculations included as an exhibit.
The court agreed with the sellers, relying substantially on the calculation examples shown on the exhibit to the agreement in explaining its reasoning. While the buyer tried to persuade the court that this exhibit merely presented two discrete examples of possible results, Vice Chancellor Slights dismissed this argument by noting that the exhibit was integrated into the agreement and had as much weight as any other term. Indeed, in a footnote, the court suggests that the exhibit with its examples has greater weight than the loose reference to “additional net profit” in the text of the agreement proper: “Thus, the general, undefined term “net profit” must be construed in light of the specific clarification provided in [the calculation examples in] Exhibit D. [Sunline Commercial Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 846 (Del. 2019)] (holding that “general terms of the contract must yield to more specific terms.”).”
As a young attorney, my mentors often warned against including examples of calculations in agreements, precisely out of concern for unintended consequences should the agreements be litigated. Nonetheless, many times one or both parties will insist on their inclusion. I do not think it a cardinal sin to do so – what is a mortal sin, however, is for the attorney to draft words that require such an example in order to be understood.
The transactional attorney must strive to draft contract language for calculations in words that, to the maximum extent possible, can be directly translated into formulas in an Excel spreadsheet. That did not happen here. Sellers argued, and the court agreed, that the aim of the disputed words was to avoid double-counting of amounts for contractual claims listed on two different tables. In the agreement, this was stated without direct reference to the first of the two exhibits, and instead implied through the words in dispute here – amounts relating to claims on the second table would only be included “to the extent such [claim] results in additional net profit.” To translate this into an Excel formula, we need to know, at the very least, (a) what constitutes “net profit” (revenues minus all expenses? some? just related counterclaims?) and (b) to what that “net profit” is “additional.” In the given case, I suspect I would have proposed something along the lines of “for Claims listed on both Exhibit B and Exhibit C, a C Claim Collection shall be included in the amount of the excess, if any, of (x) aggregate Collections in respect of such Claim over (y) the amount for such Claim set forth on Exhibit B.” Which is easily plugged into a spreadsheet (IF(AggColl-BAmt>0,AggColl-BAmt,0)).