166 A.3d 912 (Del. 2017), 573, 2016, Chicago Bridge & Iron Company N.V. v. Westinghouse Electric Co., LLC

Docket Nº573, 2016
Citation166 A.3d 912
Opinion JudgeSTRINE, Chief Justice.
Party NameCHICAGO BRIDGE & IRON COMPANY N.V., Plaintiff Below, Appellant, v. WESTINGHOUSE ELECTRIC COMPANY LLC and WSW ACQUISITION CO., LLC, Defendants Below, Appellees
AttorneyDavid E. Ross, Esquire, Garrett B. Moritz, Esquire, Ross Aronstam & Moritz LLP, Wilmington, Delaware; Theodore N. Mirvis, Esquire (argued), Jonathan M. Moses, Esquire, Kevin S. Schwartz, Esquire, Andrew J.H. Cheung, Esquire, Cecilia A. Glass, Esquire, Bita Assad, Esquire, Wachtell, Lipton, Rosen ...
Judge PanelBefore STRINE, Chief Justice; VALIHURA and SEITZ, Justices.
Case DateJune 27, 2017
CourtSupreme Court of Delaware

Page 912

166 A.3d 912 (Del. 2017)

CHICAGO BRIDGE & IRON COMPANY N.V., Plaintiff Below, Appellant,

v.

WESTINGHOUSE ELECTRIC COMPANY LLC and WSW ACQUISITION CO., LLC, Defendants Below, Appellees

No. 573, 2016

Supreme Court of Delaware

June 27, 2017

Submitted May 3, 2017

As Corrected June 28, 2017.

Court Below: Court of Chancery of the State of Delaware. C.A. No. 12585. Upon appeal from the Court of Chancery.

Chi. Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, (Del. Ch., Dec. 5, 2016)

David E. Ross, Esquire, Garrett B. Moritz, Esquire, Ross Aronstam & Moritz LLP, Wilmington, Delaware; Theodore N. Mirvis, Esquire (argued), Jonathan M. Moses, Esquire, Kevin S. Schwartz, Esquire, Andrew J.H. Cheung, Esquire, Cecilia A. Glass, Esquire, Bita Assad, Esquire, Wachtell, Lipton, Rosen & Katz, New York, New York, for Plaintiff Below, Appellant, Chicago Bridge & Iron Company N.V.

Kevin G. Abrams, Esquire, John M. Seaman, Esquire, Abrams & Bayliss LLP, Wilmington, Delaware; Peter N. Wang, Esquire (argued), Susan J. Schwartz, Esquire, Yonaton Aronoff, Esquire, Douglas S. Heffer, Esquire, for Defendants Below, Appellees, Westinghouse Electric Company LLC and WSW Acquisition Co., LLC.

Before STRINE, Chief Justice; VALIHURA and SEITZ, Justices.

OPINION

Page 913

STRINE, Chief Justice.

In giving sensible life to a real-world contract, courts must read the specific provisions of the contract in light of the entire

Page 914

contract. That is true in all commercial contexts, but especially so when the contract at issue involves a definitive acquisition agreement addressing the sale of an entire business.

In this case, Chicago Bridge & Iron Company N.V. (" Chicago Bridge" ) and Westinghouse Electric Company (" Westinghouse" ) had an extensive collaboration and complicated commercial relationship involving the construction of nuclear power plants by Chicago Bridge's subsidiary, CB& I Stone & Webster, Inc. (" Stone" ), including two which would be the first new nuclear power plants in the United States in thirty years. As delays and cost overruns mounted, this relationship became contentious. To resolve their differences, Chicago Bridge agreed to sell Stone to Westinghouse. The agreement to do so was unusual in a few key respects. First, the purchase price to be paid at closing by Westinghouse was set in the contract at zero,1 a figure in Yiddish that, perhaps appropriately given Chicago Bridge's Chicago connection, sounds like an iconic linebacker. The parties came to that figure in part by considering Stone's historical financial statements and management projections and by basing it upon a target for Stone's net working capital--its current assets less current liabilities--of $1.174 billion. That target is referred to in the Purchase Agreement as the " Target Net Working Capital Amount," and we will refer to it as " the Target" for short.2 The parties also agreed Chicago Bridge might receive certain payments at closing if project milestones were met by that time or at a later date through an earnout provision.3 Given the difficulties with the nuclear projects, it was likely that no money would change hands at closing, or, that after closing, the only money to change hands would be the amount constituting the difference between Stone's actual net working capital as of closing and the Target. In other words, if the value of Stone's working capital stayed at the Target as of the time of closing, Chicago Bridge would receive zero. If the value of Stone's working capital was different from the Target, Chicago Bridge would owe the delta if the difference was negative, and Westinghouse would owe the delta if the difference was positive. We refer to the process the Purchase Agreement sets out for calculating these payments as the " True Up" and the resulting price including the delta as the Final Purchase Price.4 So, at closing, Westinghouse would get Stone and might have to make a payment to Chicago Bridge, to account, for example, for the expectation that Chicago Bridge would make substantial capital expenditures before closing so Stone's construction projects could continue. This was almost certain because the Purchase Agreement contained a covenant requiring Chicago Bridge to continue to run Stone,

Page 915

a construction firm, in the ordinary course of business until closing. But, regardless, Chicago Bridge would not be walking away from the deal with a check in hand constituting anything one could call sale profits in the colloquial sense of that term.

Second, and important for understanding how this zero purchase price made commercial sense, although Chicago Bridge was only selling a subsidiary and would carry on business after the transaction concludes, Westinghouse agreed that its sole remedy if Chicago Bridge breached its representations and warranties was to refuse to close, and that Chicago Bridge would have no liability for monetary damages post-closing (the " Liability Bar" ). Furthermore, Westinghouse agreed to indemnify Chicago Bridge for " all claims or demands against or Liabilities of [Stone]." 5 The agreement was also predicated on Chicago Bridge obtaining liability releases from the power utilities that would ultimately own the nuclear plants being built in the United States.6 Thus, this transaction gave Chicago Bridge a clean break from the spiraling cost of the nuclear projects. That view of the overall transaction is buttressed by the Westinghouse CEO's apparent description of the transaction as a " quitclaim." 7 In other words, although Chicago Bridge was to get no profit from the sale at the time of closing and had little likelihood of any future upside through the earnout, it also got to walk away and not worry about the projects.

The True Up also contained provisions to settle any disputes over the Final Purchase Price by referring them to an independent auditor who was to act " as an expert and not as an arbitrator," 8 had to issue its decision in the form of a " brief written statement" in an expedited time frame of 30 days, and had to rely on the parties' written submissions as the sole basis for its decisions.9

In contesting Chicago Bridge's calculation of the Final Purchase Price, Westinghouse asserted that Chicago Bridge, which had been paid zero at closing and had invested approximately $1 billion in the plants in the six months leading to the December 31, 2015 closing, owed it nearly $2 billion! As Westinghouse admits, the overwhelming percentage of its claims are based on the proposition that Chicago Bridge's historical financial statements--i.e., the very ones on which Westinghouse could make no post-closing claim--were not based on a proper application of generally accepted accounting principles (" GAAP" ). By way of example, Chicago Bridge had historically booked as an asset certain large claims it had against Westinghouse for construction costs Chicago Bridge incurred on their joint nuclear projects, claims that Westinghouse obviously knew about and that were among the reasons principally motivating the transaction. Westinghouse now argues that those claims were not accounted for in Stone's financial statements in accordance with GAAP. But, although Westinghouse says it believed that to be true before closing, Westinghouse, which had the right to refuse to close if Chicago Bridge had breached its representations and warranties, chose to close anyway. Westinghouse then raised this and other claims that were dependent on proving that the accounting practices that undergirded the financial statements on which no claims could be brought post-closing were improper, but

Page 916

argued that it nonetheless could do so as part of the contractual True Up resulting in the Final Purchase Price.

After Westinghouse made these claims, Chicago Bridge and Westinghouse unsuccessfully attempted to resolve their differences. But, once it was clear that Westinghouse would seek to have the Independent Auditor require Chicago Bridge to pay over $2 billion to it based on contentions that Chicago Bridge's historical accounting practices were not GAAP compliant, Chicago Bridge filed this action seeking a declaration that Westinghouse's changes based on assertions that Stone's financial statements and accounting methodologies were not GAAP compliant are not appropriate disputes for the Independent Auditor to resolve when those changes are, in essence, claims that Chicago Bridge breached the Purchase Agreement's representations and warranties and therefore are foreclosed by the Liability Bar. Westinghouse moved for judgment on the pleadings, arguing that the Purchase Agreement established a mandatory process for resolving the parties' disagreements. The Court of Chancery held for Westinghouse, reading the True Up as providing Westinghouse with a wide-ranging, uncabined right to challenge any accounting principle used by Chicago Bridge, however consistent that principle was with the ones used in the financial statements represented to be GAAP compliant, and empowering the expert to resolve that dispute in a truncated, rapid proceeding. We conclude that the Court of Chancery erred in interpreting the Purchase Agreement this way.

When viewed in proper context, the True Up is an important, but narrow, subordinate, and cabined remedy available to address any developments affecting Stone's working capital that occurred in the period between signing and closing. By way of example, the True Up emphasizes that net working capital should be determined using the same accounting principles that were used in preparing the financial statements represented by Chicago Bridge to be GAAP compliant. It does so by stating that working capital was " to be determined in a manner consistent with GAAP,...

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34 practice notes
  • Penton Business Media Holdings, LLC v. Informa PLC, 070918 DECH, 2017-0847-JTL
    • United States
    • Delaware Court of Chancery of Delaware
    • July 9, 2018
    ...*2. [52] Id. [53] Id. [54] 2017 WL 1732369 (Del. Ch. May 3, 2017). [55] Id. at *3. [56] Id. at *16. [57] Id. [58] Id. at *16-17. [59] 166 A.3d 912 (Del. 2017). [60] Id. at 915 (footnotes omitted). [61] Id. at 931. [62] Id. [63] Pers. Decisions, Inc. v. Bus. Planning Sys., Inc......
  • Wellin v. Wellin, 122619 SCDC, 2:13-cv-01831-DCN
    • United States
    • Federal Cases United States District Courts 4th Circuit District of South Carolina
    • December 26, 2019
    ...provisions of the contract in light of the entire contract." Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co., 166 A.3d 912, 913-14 (Del. a. Interpretation of Transferee and the undefined term "person" In 2007, in purported compliance......
  • Arch Insurance Co. v. Murdock, 030118 DESUP, N16C-01-104 EMD CCLD
    • United States
    • Delaware Superior Court of Delaware
    • March 1, 2018
    ...Northern Ins., 785 A.2d 281, 287 (Del. 2001). See also Chicago Bridge & Iron Co. N. U, v. Westinghouse Elec. Co., 166 A.3d 912, 912 (Del. 2017). [142] O'Brien, 785 A.2d at 287. [143] Id. (quoting from Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 117......
  • Arch Insurance Co. v. Murdock, 030118 DESUP, N16C-01-104 EMD CCLD
    • United States
    • Delaware Superior Court of Delaware
    • March 1, 2018
    ...Northern Ins., 785 A.2d 281, 287 (Del. 2001). See also Chicago Bridge & Iron Co. N. U, v. Westinghouse Elec. Co., 166 A.3d 912, 912 (Del. 2017). [142] O'Brien, 785 A.2d at 287. [143] Id. (quoting from Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 117......
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32 cases
  • Penton Business Media Holdings, LLC v. Informa PLC, 070918 DECH, 2017-0847-JTL
    • United States
    • Delaware Court of Chancery of Delaware
    • July 9, 2018
    ...*2. [52] Id. [53] Id. [54] 2017 WL 1732369 (Del. Ch. May 3, 2017). [55] Id. at *3. [56] Id. at *16. [57] Id. [58] Id. at *16-17. [59] 166 A.3d 912 (Del. 2017). [60] Id. at 915 (footnotes omitted). [61] Id. at 931. [62] Id. [63] Pers. Decisions, Inc. v. Bus. Planning Sys., Inc......
  • Wellin v. Wellin, 122619 SCDC, 2:13-cv-01831-DCN
    • United States
    • Federal Cases United States District Courts 4th Circuit District of South Carolina
    • December 26, 2019
    ...provisions of the contract in light of the entire contract." Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co., 166 A.3d 912, 913-14 (Del. a. Interpretation of Transferee and the undefined term "person" In 2007, in purported compliance......
  • Arch Insurance Co. v. Murdock, 030118 DESUP, N16C-01-104 EMD CCLD
    • United States
    • Delaware Superior Court of Delaware
    • March 1, 2018
    ...Northern Ins., 785 A.2d 281, 287 (Del. 2001). See also Chicago Bridge & Iron Co. N. U, v. Westinghouse Elec. Co., 166 A.3d 912, 912 (Del. 2017). [142] O'Brien, 785 A.2d at 287. [143] Id. (quoting from Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 117......
  • Arch Insurance Co. v. Murdock, 030118 DESUP, N16C-01-104 EMD CCLD
    • United States
    • Delaware Superior Court of Delaware
    • March 1, 2018
    ...Northern Ins., 785 A.2d 281, 287 (Del. 2001). See also Chicago Bridge & Iron Co. N. U, v. Westinghouse Elec. Co., 166 A.3d 912, 912 (Del. 2017). [142] O'Brien, 785 A.2d at 287. [143] Id. (quoting from Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 117......
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2 firm's commentaries
  • Chancery Court Confirms Limited Scope of Authority of Expert-Not-Arbitrator Dispute Resolution Provisions
    • United States
    • JD Supra United States
    • March 12, 2019
    ...legal question of whether a qualifying contract had been executed. The Court relied on Chicago Bridge & Iron v. Westinghouse Electric, 166 A.3d 912 (Del. 2017); Penton Business Media Holdings v. Informa, (Del. Ch. July 9, 2018); and AQSR India Private v. Bureau Veritas Holdings, (Del. C......
  • Delaware Contract Interpretation Principles
    • United States
    • LexBlog United States
    • April 3, 2018
    ...provisions of the contract in light of the entire contract.” (citing Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co., 166 A.3d 912, 913-14 (Del. 2017)). Another recent Delaware Supreme Court decision also supports the view that the current approach that Delaware courts are taki......