IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
LDC PARENT, LLC,
Plaintiff,
v.
ESSENTIAL UTILITIES, INC. f/k/a Aqua America, Inc.,
Defendant.
ESSENTIAL UTILITIES, INC. f/k/a Aqua America, Inc.,
Counterclaim Plaintiff,
v.
LDC PARENT, LLC,
Counterclaim Defendant. ) ) ) ) ) C.A. No. N20C-08-127 MMJ CCLD ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
Submitted: February 3, 2021 Decided: April 28, 2021
DENIED
-Motion for Judgment on the Pleadings GRANTED IN PART
OPINION Christopher N. Kelly, Esq., Kevin R. Shannon, Esq., Potter Anderson & Corroon LLP, Wilmington, Delaware, John E. Schreiber, Esq. (Argued), James P. Smith III, Esq., Winston & Strawn LLP, New York, New York, Attorneys for LDC Parent, LLC.
A. Thompson Bayliss, Esq. (Argued), Adam K. Schulman, Esq., Abrams & Bayliss LLP, Wilmington, Delaware, Attorneys for Essential Utilities, Inc. f/k/a Aqua America, Inc.
JOHNSTON, J. FACTUAL AND PROCEDURAL CONTEXT
Parties
This case arises from a dispute over the calculation of a post-closing
purchase price adjustment. Plaintiff/Counterclaim Defendant LDC Parent, LLC
place of business in Wilmington, Delaware. 1 Defendant/Counterclaim Plaintiff
Essential Utilities,
its principal place of business in Bryn Mawr, Pennsylvania. 2 LDC and Essential
contractually agreed that Delaware would have personal jurisdiction over them for
disputes arising out of the Purchase Agreement. 3
The Parties Execute the Purchase Agreement
On October 22, 2018, the parties executed a Purchase Agreement whereby
Essential agreed to purchase from LDC all of the issued and outstanding
membership interests of LDC Funding, LLC, a Delaware limited liability company
4 The parties agreed to a base purchase price of
$4,275,000,000.00. 5 However, this price could be adjusted after closing. Section
2.1(c)(i)(B) states that the Base Price shall be:
1 Compl. ¶ 14. 2 Id. ¶ 15. 3 Id. Ex. A § 11.10(a). 4 Compl. ¶ 1. 5 Id. Ex. A § 2.1(b)(i). increased, dollar for dollar, by the total amount that actual aggregate Capital Expenditures, excluding any Commercial Growth Capex, by the Regulated Utility Subsidiaries from November 1, 2018 through the Measurement Time exceed the Budgeted Capital Expenditure Amount, or decreased, dollar for dollar, by the total amount that actual aggregate Capital Expenditures, excluding any Commercial Growth Capex, by the Regulated Utility Subsidiaries from November 1, 2018 through the Measurement Time are less than the Budgeted Capital Expenditure . 6
In other words, the Base Price will be adjusted upwards in favor of LDC if
the actual Capital Expenditures exceeded the Budgeted Capital Expenditure
Amount. Conversely, it will be adjusted downwards in favor of Essential if the
actual Capital Expenditures were less than the budgeted amount.
out-of-pocket
expenditures actually paid or payable (and, if payable, reflected as a current
liability in Working Capital) by the Regulated Utility Subsidiaries that are properly
capitalized in accordance with U.S. GAAP 7
Under the terms of the Purchase Agreement, Essential has 45 days after
closing to prepare, and deliver to LDC, a Preliminary Closing Adjustment
Schedule reflecting its calculation of the value of any adjustments to the Base
Price. 8 LDC then has 45 days
6 Id. § 2.1(c)(i)(B). 7 Id. § 1.1. 8 Id. § 2.1(c)(ii). specified amounts. 9 LDC is required to notify Essential in writing of any
objections to items on the Preliminary Closing Adjustment Schedule. 10
In the event that LDC has any objections, the parties have 30 days to attempt
to resolve the dispute. 11 If shall,
within ten (10) days thereafter, cause the Independent Accounting Firm to
promptly review [the] Agreement and the remaining Disputed Items for purposes
of resolving the Disputed Items in accordance with [the] Agreement and
calculating the Final Closing Adjustment Amount 12
shall be final and binding upon the parties. 13
The Parties Disagree on the Post-Closing Price Adjustment
On April 29, 2020, Essential delivered to LDC a Preliminary Closing
Adjustment Schedule. 14 In the schedule, Essential deducted $19,990,666 (the
Item Capital Expenditures. 15
deduction. 16 Two weeks later, on May 20, 2020, LDC wrote to Essential a second
9 Id. § 2.1(c)(iii). 10 Id. 11 Id. § 2.1(c)(iv). 12 Id. 13 Id. 14 Compl. ¶ 4. 15 Id. 16 Id. ¶ 26. time to again inquire about reasons for deducting the Disputed Item. 17
[t]he adjustment of $19,990,666
represents the payable and accrued capital expenditures as of October 31, 2018
subsequently paid in November 2018 that were reflected as a current liability in
18 On May 27, 2020, LDC informed Essential in writing that
LDC believed the deduction was incorrect because the Disputed Item was actually
paid after November 1, 2018. 19 LDC also provided its revised Capital Expenditure
calculations. 20
calculations. 21 The parties spoke via telephone on June 4, 2020, but were unable to
resolve the dispute. 22 On June 11, 2020, LDC provided Essential with a formal
notice of objection to, among other things, the $19,990,666 deduction. 23 The
parties again attempted to resolve the dispute but were unsuccessful. 24
The Parties Attempt to Engage the Independent Accounting Firm
Pursuant to the terms of the Purchase Agreement, Essential invoked the
17 Id. ¶ 27. 18 Id. ¶ 28. 19 Id. ¶ 29. 20 Id. ¶ 30. 21 Id. ¶ 33. 22 Id. 23 Id. ¶ 34. 24 Id. ¶ 36. Independent Accounting Firm dispute resolution process on July 20, 2020. 25 On
July 27, 2020, the parties agreed that BDO USA, LLP would be a
suitable Independent Accounting Firm. 26 The parties reached out to BDO on the
same day. 27 BDO sent a draft engagement letter to the parties on August 6, 2020. 28
The parties have not formally engaged BDO because there are disputes over
before this Court addresses the issues in this case. 29
Procedural Context
LDC filed suit in this Court on August 17, 2020. LDC seeks a declaratory
constitutes a Capital Expenditure under
the Purchase Agreement for purposes of calculating the Capital Expenditure
Adjustment 30
Essential filed its Answer and Counterclaim on October 5, 2020. Essential
requests a declaratory judgement that the parties must submit the question of
whether the Disputed Item is or is not a Capital Expenditure to the Independent
Accounting Firm. Essential additionally asserts that LDC breached the contract by
seeking Superior Court declaratory relief.
25 Id. ¶ 37. 26 Counterclaim ¶ 50. 27 Id. ¶ 51. 28 Id. ¶ 52. 29 Id. ¶¶ 53-57. 30 Compl. ¶ 44. LDC filed a Motion for Judgment on the Pleadings on November 9, 2020.
LDC seeks (1) declaratory judgment and (2) dismissal of ounterclaim.
Essential filed a Cross-Motion for Judgment on the Pleadings on December 1,
STANDARD OF REVIEW
In a Rule 12(c) Motion for Judgment on the Pleadings, the Court must
consider whether the movant is entitled to judgment as a matter of law. 31 Such a
determination by the Court can only be made where there are no material issues of
fact. 32 The Court must view the facts in the light most favorable to the non-moving
party. 33 The Court also must accept as true all of the well-pleaded factual
allegations. 34 Finally, exhibits attached to the pleadings or incorporated by
reference may be considered. 35
ANALYSIS
LDC argues that whether the Disputed Item Capital Expenditure
is a purely legal issue. LDC asserts that the relevant question is when the amount
31 Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1205 (Del. 1993) (internal citations omitted). 32 Id. 33 Id. 34 OSI Sys., Inc. v. Instrumentarium Corp., 892 A.2d 1086, 1090 (Del. Ch. 2006). 35 Id. Cypress Associates, LLC v. Sunnyside Cogeneration Associates Project 36 for the
proposition that the use of non-
capital
of money. As the interpretation of a contractual term is a legal issue not involving
accounting principles or expertise, LDC maintains that there is no need to engage
in the Section 2.1(c)(iv) dispute resolution process. However, even if the parties
engage in that process, LDC argues that the Independent Accounting Firm should
act as an expert because the Purchase Agreement only grants it a limited amount of
authority to review technical accounting questions.
Essential argues in response that this issue cannot be properly resolved by
the Court. Essential contends that the timing of capitalization of the Disputed Item
is vital to a final determination. Because the Disputed Item was capitalized before
November 1, 2018, it does not fall under
for purposes of determining the post-closing price adjustment amount. Essential
maintains that because the issue of whether the Disputed Item is a capital
expenditure or not relies on the application of GAAP principles, the dispute must
be resolved by the Independent Accounting Firm. Finally, Essential argues that the
Independent Accounting Firm should function as an arbitrator because the parties
36 2007 WL 148754, at *11 n. 15 (Del. Ch.). agreed to submit all disputes surrounding the Capital Expenditure Adjustment to
the Independent Accounting Firm for a final and binding decision.
Capital Expenditures
It is undisputed that the $19,990,666 amount was payable as of October 31,
2018 and actually paid after November 1, 2018. Essential focuses on when the
LDC focuses
on when it The
question before this Court is whether the a purely legal
question that can be resolved by the Court or an accounting question that must be
referred to the Independent Accounting Firm.
Chancery Case Law
The parties relied heavily on two similar cases. First, in Ray Beyond
Corporation v. Trimaran Fund Management, L.L.C., 37 the Court of Chancery
looked at a dispute arising from a merger agreement. When Ray Beyond acquired
a company named ChanceLight, Inc. from Trimaran, $23.1 million was placed in
escrow. 38 Release of the escrow funds depended on a ChanceLight subsidiary
company entering into a post-closing contract with the Chicago Public Schools. 39
The merger agreement between Ray Beyond and Trimaran delegated certain
37 2019 WL 366614, at *1 (Del. Ch.). 38 Id. 39 Id. matters related to the release of the escrow funds to an independent accounting
firm. 40 When a dispute arose over whether the ChanceLight subsidiary had entered
into a qualifying post-closing contract, Ray Beyond and Trimaran disagreed over
how it should be resolved. 41
To decide whether or not the matter was required to be submitted to the
independent accounting firm, the Court of Chancery focused on the language in the
42
The Court typical expert determination provision limits the decision
maker's authority to deciding a specific factual dispute within the decision maker's
expertise 43 Therefore, the language in the merger agreement that explicitly stated
that the independent accounting firm was to act as
parties intended for the non-lawyer neutral to only decide accounting, not legal,
issues. 44 The Court found that the legal question of whether the ChanceLight
subsidiary had entered into a qualifying contract would not be submitted to the
independent accounting firm. 45
40 Id. 41 Id. 42 Id. 43 Id. at *6. 44 Id. 45 Id. at *9. In Stone v. Nationstar Mortgage, LLC, 46 Nationstar purchased all of the
equity interest in a company. 47 Under the terms of the purchase agreement,
Nationstar was to pay the sellers a Closing Payment Amount and potential post-
closing earn-out payments. 48 The Closing Payment Amount was to be calculated
exhibit to the purchase agreement. 49
Within 60 days after closing, Nationstar was
setting forth the Company s balance
sheet as of immediately prior to the Closing, Nationstar's own calculations of the
Closing Payment Amount, and its supporting calculations 50 Any unresolved
disputes over the items set forth in the Adjustment Statement were to be submitted
to a third-party decision maker. 51
After closing, the parties disagreed over the calculations made by Nationstar
in its Adjustment Statement. 52 The Court of Chancery was asked to determine
whether various issues related to the calculation of the Adjustment Statement
should be resolved by the Court or the Independent Accounting Firm. In Count I
that the Sellers prepared and submitted to
46 2020 WL 4037337, at *1 (Del. Ch.). 47 Id. 48 Id. 49 Id. (alteration in original). 50 Id. at *2 (internal quotation marks and citation omitted). 51 Id. 52 Id. at *3. Nationstar an Estimated Closing Payment Amount in which Sellers refused to
apply the objective formula specified in ... the Accounting Principles for
calculating the value of the Company s mortgage servicing rights 53 In Count II,
that the Sellers used the wrong closing date in calculating the
Closing Date Members Equity 54 that the
Sellers improperly increased the Closing Date Members Equity by purporting to
include certain transaction costs in that amount that should have been excluded. 55
Nationstar argued that that the Court could resolve Counts I, II, and III
56 After considering the arguments, the Court of
Chancery stated:
Although all of the premises of Nationstar s argument are true, the result Nationstar seeks does not follow. At bottom, Nationstar s argument elevates form over substance. In substance, Counterclaims I, II, and III raise issues necessary to determine the amount of any Disputed Items, an issue contractually delegated to the Independent Accountant for resolution. They all involve accounting methodology issues that fall squarely within an accounting firm s expertise. That Nationstar and the Sellers disagreed concerning the application of contractually called-for accounting principles in the first instance does not strip the Independent Accountant of the authority to resolve their disputes. Nationstar s attempts to plead around this reality [are] unsuccessful. Delaware courts have rejected contractual parties efforts to plead around the scope of a third-party decision-maker s authority
53 Id. at *5 (omission in original) (internal quotation marks omitted). 54 Id. 55 Id. T 56 Id. at *7. by couching delegable disputes in questions of law. So too does the Court here. 57
Referral is Required under the Purchase Agreement
The Court finds Nationstar controlling on the issue of referral. argument that whether or not the Disputed Item falls under the definition of
question of contract interpretation couching delegable disputes in questions of
law 58
Capital E the
application of GAAP principles. at the plain language of
the Capital Expenditures definition considers whether expenditures are or
payable. The Disputed Item was clearly payable before November 1, 2018.
Therefore, under Section 1.1, there must be a determination of whether the
The Court finds that the timing of capitalization is an issue that, pursuant to
Section 1.1., must be resolved in consideration of and in accordance with GAAP.
This is not a question of law, but rather a question that requires accounting
57 Id. at *8. 58 See id. expertise. Therefore, the Section 2.1(c)(iv) dispute resolution process is
implicated, and the dispute must be referred to the Independent Accounting Firm.
Independent Accounting
The parties argued in-depth about whether referral of this dispute to the
Independent Accounting Firm would result in the firm functioning as an expert or
as an arbitrator. On this issue, the Court of Chancery in Nationstar stated:
It is true that, under Delaware law, an expert s scope of authority is factual dispute concerning a matter within the special expertise of the decision maker, usually concerning
It is also true that the Independent Accountant is an expert and not an arbitrator, although the language of the Purchase Agreement does not expressly state this. The Dispute Resolution Provisions do not bear the hallmarks of an arbitration provision; they do not include procedural rules mimicking the judicial process, broadly encompass all legal disputes, or speak to issues typically resolved by legal professionals. Thus, it is safe to conclude that a contractually-designated accountant is intended to serve as an expert, not an arbitrator. 59
The Court finds that t ill fall under the Independent
notwithstanding whether the firm has broad authority
to handle all disputes, or limited authority to only handle accounting disputes.
Regardless of the scope of authority, referral of the Disputed Item makes the
accountant a finder of fact applying accounting principles. No legal question will
be referred. Nevertheless, the Purchase Agreement requires that the accountant,
59 Id. at *7-8 (internal citations omitted). when reviewing the agreement, construe the terms in accordance with the laws of
Delaware. 60 The terms of the Purchase Agreement additionally provide that the
will 61 In light of the parameters
agreed upon by the parties, the Court finds that the precise issue of whether the
as an
be resolved at this time.
CONCLUSION
Whether something counts
accounting principles. Therefore, the issue of whether the disputed $19,990,666
amount is subject to the the
Independent Accounting Firm pursuant to the narrow dispute resolution procedure
in Section 2.1(c)(iv).
The Court declines to decide, at this time, whether the Independent
Accounting Firm will act as an expert or an arbitrator. For now, the Court finds it
60 Compl. Ex. A §§ 2.1(c)(iv), 11.10(a). 61 Id. § 2.1(c)(iv). sufficient that the accountant is a third-party decision maker bound by the
decision-making parameters set forth in the Purchase Agreement.
THEREFORE,
DENIED. -Motion for Judgment on the Pleadings is hereby
GRANTED as to participation in the price adjustment dispute resolution process.
The parties have 30 days from the date of this order to meet and confer regarding
further proceedings .
IT IS SO ORDERED.
/s/ The Honorable Mary M. Johnston The Honorable Mary M. Johnston
