Chancery Addresses Contract and Fraud Claims Relating to M&A Post-Closing Price Adjustments

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Roma Landmark Theaters, LLC v. Cohen Exhibition Co., LLC, C.A. No. 2019-0585-PAF (Del. Ch. Sept. 30, 2020)

In Roma Landmark Theaters, the parties’ purchase agreement contained a framework for post-closing price adjustments and set forth the pre-closing duties of the buyer (but not the sellers) relating to certain calculations and financial information. The agreement included a dispute mechanism, which provided for an independent accounting firm to make a binding determination as to the distribution of escrowed funds in connection with a dispute over post-closing price adjustments. The accounting firm decided the dispute largely in sellers’ favor. Sellers then filed suit in the Court of Chancery to confirm the accounting firm’s decision, and require buyer to release the escrowed funds. Buyer filed counterclaims, alleging that the sellers committed financial disclosure misrepresentations amounting to fraud and bad faith.

The Court dismissed buyer’s contract claims against sellers. In the purchase agreement only the company, not sellers, provided representations and warranties regarding the company’s financials. The Court reasoned that the buyer was not entitled to representations and warranty protections from sellers beyond those afforded under the plain terms of their purchase agreement. The Court also dismissed buyer’s implied covenant claim because the buyer had not alleged an implied obligation or contractual gap in the parties’ purchase agreement.

The Court, however, upheld a part of buyer’s fraud claims at the pleadings stage. The Court found that buyer had pled with sufficient particularity that sellers knowingly omitted certain liabilities from interim financial statements, but that buyer had inadequately pled seller’s knowledge of alleged misrepresentation of other payments and expenses. Finally, the Court rejected buyer’s fraud claim to the extent that it was based on an account omitted from a preliminary closing statement because buyer had disclaimed reliance on that statement and the purchase agreement had explicitly excluded that account from the relevant calculation.

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