M&A statutes of limitations: Delaware moves to vanquish a legal relic

by DLA Piper
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In a world of continuous innovation, it is an understatement that to varying degrees the law lags behind the times.  But even measured by the glacial pace of judicial and statutory change, the notion of a corporate “seal” – the physical symbol of a corporate “person,” evoking images of dripping wax and flickering candles in a bygone colonial setting – is dated.

The importance of the corporate seal has been the rage recently with Delaware decisions, among them the November 2013 holding in ENI Holdings, LLC v. KBR Group Holdings, LLC, that have decreed Delaware’s normal statute of limitation was… an actual statute of limitations. 

The Delaware statute of limitations for contract type claims is either three years (general contracts) or four years (UCC claims).  Yet the statute of limitations for the IRS to assert tax recovery claims on things such as payroll taxes or ERISA claims well exceeds these Delaware periods.  Accordingly, a buyer could be left in the position of being liable to the IRS for successor tax liability from the purchase of a target, say five years post-closing, but be unable to recover in turn from a seller since the statute of limitations would have expired.

Practitioners and clients thus may have assumed that Delaware, the US corporate mecca for flexibility and respect for individual contract rights, would have without hesitation allowed for parties to knowingly and consensually execute contracts that extend post-closing indemnification claim periods beyond the state-level statute of limitations period.  In fact, the increasingly ubiquitous “fundamental claim” concept has led to many contracts purporting that for items such as capitalization issues, including title to shares, share capitalization and absence of liens on shares, the post-closing recovery period is indefinite. 

It is not so.  Absent special “seal” language, Delaware general contract claim recovery continues to expire at three years.  In contrast, California allows parties to mutually extend its four-year period, while New York does not allow extension of its six-year period.

Delaware statute currently allows for signing contracts under corporate “seal” which automatically extends the statute of limitations to 20 years.  However, unlike in Asia, where corporate “chops” or seals are commonly accepted,  the notion of a corporate seal in the US is viewed as arcane.  Most companies do not even have physical seals, and those that do generally store them in a dusty pouch in some dark corner of a safe somewhere.  Delaware quite pragmatically has pointed out that the actual seal is not necessary – the parties need only indicate in the contract that they were intentionally executing the contract under “seal” (using words to that effect) and then have the word “seal” printed by a respective signatory next to the executory signature, and voilà.  The number of contracts containing such language is small, however, and the point is outdated and often overlooked.

Hence, for 2014, as part of the routine annual review of Delaware statute, the Delaware State Bar Association has begun examining a proposal to amend Section 8106 of the Delaware General Corporations Law (DGCL) to dispense with the need for a corporate seal.  Parties would remain able to use one if they have a burning desire to do so. Thus, the seal is not technically being vanquished just yet.  The change would allow parties to contracts with more than $100,000 at stake to simply do what has been routinely done for years:  opt to extend the statute of limitations on claims – at least for up to 20 years.  Balance would be restored to the natural corporate universe, in that Delaware would then become as flexible as California. 

Please note: while such amendments routinely are adopted through the Delaware process, until they are likely to become effective on August 1, buyers and sellers alike would be well advised to continue inserting the “seal” language in M&A contracts.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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