This newsletter is our sixth annual review of significant state court decisions relevant for private company M&A transactions and related governance matters and disputes. The summarized decisions provide useful guidance regarding contract formation and drafting, rights and remedies, and appraisal rights.

Julius v. Accurus Aerospace Corp., No. CV 2017-0632-MTZ (Del. Ch. Oct. 31, 2019)

In focusing representations and warranties on changes to customer contracts since the balance sheet date, the buyer failed to allocate to sellers the risk of a key customer having taken action prior to the balance sheet date, which prevented the key customer contract from being renewed and resulted in a significant decrease in future revenue of the acquired business.

The Facts

Julius v. Accurus Aerospace Corp. involved a hearing on cross motions for summary judgment in a post-closing indemnity dispute relating to the July 2016 acquisition of Accurus Aerospace, an aerospace parts business. The dispute stemmed from the failure of Accurus' principal customer, The Boeing Company (Boeing), to allow Accurus to re-bid for the opportunity to supply Boeing a number of high-revenue parts (the Lost Parts), when the existing supply sub-contracts expired at the end of 2016.

The court noted that, as is common practice in the aviation parts industry, Accurus and Boeing were party to a Long Term Agreement (the LTA) and specific parts would be identified in sub-contracts to the LTA. When a sub-contract for specific parts was expiring, Accurus historically was afforded the opportunity to re-bid and, if it won the contract, would enter into a new sub-contract with Boeing.

Prior to and during due diligence and negotiation of the Asset Purchase Agreement relating to the sale of Accurus (the APA), Accurus was in contact with Boeing regarding the sub-contracts for parts that were expiring, and submitted re-bids for certain of those parts. The sellers (Sellers) shared with the buyers (Buyers) a projection spreadsheet (the Projection Spreadsheet) that included all parts and indicated whether Accurus would have an opportunity to re-bid on parts for which the applicable sub-contracts were expiring. The Lost Parts were among those for which it was indicated there would be an opportunity to re-bid.

After the closing under the APA, Boeing sent an award letter to Buyers that indicated that the Business had won contracts for certain parts, but not for others, including the Lost Parts. The Lost Parts represented about 10% of the total projected sales in subsequent years pursuant to the Projection Spreadsheet. During the discovery process of the litigation, it was determined that the contracts for the Lost Parts had been awarded by Boeing to other suppliers sometime in 2013 and 2014. Thus, at the time of the APA, and unbeknownst to Buyers or Sellers, the Business had already lost the opportunity to re-bid on those parts.

The parties provided for an indemnity escrow under the APA. Buyers submitted an indemnity claim for losses due to the lost opportunity, and demanded that the escrow funds remain in the escrow pending resolution of the claim. When the escrow period ended, Sellers initiated litigation for release of the escrow funds, and Buyers counterclaimed for breach of representations and warranties under the APA.

The Alleged Breached Provisions of the APA

Buyers alleged that Sellers breached the representations and warranties in Section 3.7(a), 3.25(a), 3.25(d) and 3.28 by failing to notify Buyers that Boeing had awarded the Lost Parts to other suppliers in 2013 and 2014, which resulted in the Business not having the ability to bid on the Lost Parts. Section 3.7(a) contained an absence of changes representation, which provided that since December 31, 2015 (the Balance Sheet Date), operations had been conducted in the ordinary and usual course of business, and there had not been any event, occurrence or development that had had, or could reasonably be expected to have had, a material adverse effect.

Section 3.25 set forth representations relating to customers and suppliers. Section 3.25(a) provided that since the Balance Sheet Date:

"no customer, distributor, or supplier of the Business has terminated or materially reduced or altered its business relationship with Seller or Seller Subsidiary or materially changed the terms on which it does business with either, or threatened that it intends to cancel, terminate, or otherwise materially reduce or alter its business relationship with either."

Section 3.25(d) provided that Sellers had disclosed to Buyers any "material disputes, complaints, or issues" with respect to any customers or suppliers, and the manner in which Sellers proposed to resolve them. Section 3.28 set forth an SEC Rule 10b-5-type representation, to the effect that there were no material misstatements or omissions in the representations and warranties under the APA or other transaction documents.

The APA contained a standard integration clause, which provided that the transaction documents constituted the entire agreement and understanding of the parties, and superseded all prior agreements, undertakings, negotiations and communications. The APA did not contain any express representations or warranties relating to the projections. Buyers initially argued that the Projection Spreadsheet was a part of the APA, but later conceded that it was not, and thus Sellers were not liable for inaccuracies in the projections.

Court's Finding that Sellers Did Not Breach the APA

Section 3.25(d)

The court noted that whether this Section was breached turned on whether the lost opportunity to bid constituted a material "issue" with Boeing. In considering the definitions of "issue" in two dictionaries, the court held that there needed to have been an actual dispute or question raised by Accurus or Boeing that Accurus or Boeing intended to resolve. The court noted that when the Accurus had been about to lose the opportunity to bid on other parts in 2015, Accurus had engaged with Boeing to try to secure the opportunity to re-bid. The court noted that this created an "issue" between Accurus and Boeing.

The court contrasted that situation with the facts surrounding the Lost Parts. The court held that no "issue" arose in connection with the Lost Parts because neither Boeing nor Accurus raised any problem or made any inquiry about the Lost Parts when they were awarded to third parties in 2013 and 2014; Accurus was not even aware that this had happened. Rather, Accurus and Boeing continued their relationship without any dispute, until concerns were raised after the APA closing. Therefore, there was no "issue" that resulted in a breach of the APA.

Sections 3.7(a) and 3.25(a)

The court held that there was no breach of these Sections because they only applied to events occurring after the Balance Sheet Date. The loss of the opportunity to re-bid on the Lost Parts occurred in 2013 and 2014. Accordingly, the court held that the lost opportunity could not give rise to a breach of Sections 3.7(a) and 3.25(a).

Section 3.28

The court held that there was no breach of Section 3.28 because Sellers made the other representations and warranties truthfully at the time the APA was entered into. The court noted that none of the representations and warranties relied on by Buyers required Sellers to notify Buyers that Boeing had awarded the Lost Parts to other suppliers, or guaranteed that Accurus would have the opportunity to re-bid on the Lost Parts.

Accordingly, the court held that Buyers were not entitled to indemnification because Sellers had not breached the APA. The court also held that Buyers must release the escrow funds, although their prior refusal to do so did not constitute a breach of the APA or the escrow agreement because Buyers acted in good faith in bringing an indemnity claim.


Representations and warranties allocate risk, and Buyers here had failed to allocate the risk of the lost opportunity to Sellers. The crux of Buyers' problem was the way the representations and warranties were drafted: while changes under customer contracts arising between the Balance Sheet Date and closing may have been adequately covered, those arising before the Balance Sheet Date were not. This was particularly problematic where Accurus was heavily dependent on one customer, Boeing, and the business with Boeing was periodically coming up for renewal.

The court's decision suggests that Buyers could have addressed the problem by including in the APA provisions such as the following:

- a representation and warranty by Sellers that all parts for which Accurus had lost the opportunity to re-bid were as set forth on a schedule to the APA; and/or

- an indemnification provision relating to any parts for which Accurus had lost the opportunity to re-bid.

The decision is therefore a reminder that when diligencing target companies, buyers should consider carefully what are the material risks of the target's business, and then draft the representations, warranties and indemnities with granularity to address those risks. In Julius, there was a gap in the drafting that turned into a material issue after closing.

It is worth noting that a knowledge-based representation, which is often a compromise solution to address risk allocation in representations and warranties, would not have produced a different result. A representation calling for disclosure of parts for which, to the knowledge of Sellers, the opportunity to re-bid had been lost would not have been breached because Sellers were unaware that the opportunity had been lost. Instead, the Buyers in this case could have insisted that Sellers retained the risk of any re-bidding opportunity having been lost, whether or not they had made the necessary inquiries and knew about them.

A second point worth noting is the court's summary rejection of Plaintiff's claim that the APA's 10b-5 representation had been breached. The court held that it was not because none of the other representations had been breached. To the extent the court suggested that a breach of another representation was required in order to find a breach of the 10b-5 representation, that requirement would eviscerate any independent protection provided by the 10b-5 representation. In this regard, practitioners should take note that a 10b-5 representation may not give them the type of extra protection that it is often thought to bestow.

Kotler v. Shipman Assocs., LLC, No. CV 2017-0457-JRS (Del. Ch. Aug. 27, 2019)

Failure to ensure that parties execute and deliver the same version of an agreement can lead to a finding that a binding contract has not been formed.

In Kotler v. Shipman Associates, LLC, the Delaware Court of Chancery held that a contract was unenforceable because the "fully executed" agreement with "wet signatures" that was in the possession of plaintiff Stacey Kotler did not express defendant Shipman Associates' consent to the material terms. Instead, the court held that the evidence supported defendant's argument that, notwithstanding the fact that a signature of an authorized company representative was attached to the agreement plaintiff offered, defendant believed that the parties had agreed to different terms. Accordingly, the court found that no binding contract was formed.

The Facts

The Company engaged Kotler as a salesperson to sell cosmetics. Several years after Kotler was first promised an equity award, Kotler and the Company commenced negotiation of a warrant to purchase five percent of the equity of the Company. Due to poor record-keeping practices of the parties, the majority of records regarding the negotiations, including email correspondence between the parties, was lost. The evidence provided to the court of the terms of the warrant consisted of drafts retained by the parties, including a purported "fully executed" agreement provided by Kotler, and the parties' testimony. The court noted that none of the parties had a clear memory of what happened in connection with the negotiation and execution of the warrant.

The parties negotiated heavily over non-compete and non-solicitation provisions; the Company proposed a perpetual noncompete and non-solicit, which Kotler sought to either exclude or significantly cut back. The parties exchanged drafts over nine months, but, for example, a draft prepared by the Company did not contain any reference to the draft previously proposed by Kotler and contained the same misspelling of her name as the prior draft prepared by the Company.

The court found that: (i) the Company sent a draft that it presumed was the execution version of the warrant to Kotler; (ii) Kotler revised this draft, including correcting the spelling of her name and limiting the scope of the non-compete and nonsolicit provisions; (iii) Kotler executed the version with her revisions and sent a hard copy to the Company's president, who had been negotiating on behalf of the Company, without advising him that she had made significant revisions; (iv) Kotler sent either a blank counterpart signature page or a hard copy of the unexecuted version with her revisions to the Company's CEO for execution; (v) the Company's CEO spoke to the Company's President, who confirmed that the CEO should execute and return the counterpart signature page to Kotler; (vi) the CEO signed and returned a counterpart signature page to Kotler; and (vii) Kotler attached the counterpart signature page executed by the Company's CEO to the version with Kotler's revisions.

The parties believed they had executed a final agreement, but each party believed its version controlled. About a week later, Kotler and the Company's President agreed that the warrant should represent five percent of the outstanding equity of the Company instead of the five percent of the fully diluted capitalization. The Company's counsel prepared a revised draft of its version of the warrant that attempted to include all new changes, but notably it did not contain all of the revisions to the non-compete and non-solicitation provisions that Kotler included in Kotler's version of the warrant.

The court determined that Kotler revised this latest version of the warrant, including to limit the non-compete provision. Kotler then attached the executed counterpart signature pages that she had in her possession but did not circulate any final copy to the Company.

The Court's Decision

The court invoked well-settled contract principles that "to form an enforceable contract, the parties must have a meeting of the minds on all essential terms", and noted that manifestation of intent to be bound is based on objective evidence. The court held that even though Kotler produced a purported fully executed version of the warrant, evidence showed that the parties were operating off different versions of the agreement, and accordingly Kotler failed to satisfy her burden of proving the existence of a valid agreement.


Parties should incorporate into the signing process the clear sign-off by other parties to a mutually agreed final version of the contract. In addition, taking the basic step of circulating a complete executed version to all parties would significantly help to avoid disputes such as those arising in Kotler.

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