Penton Bus. Media Holdings, LLC v. Informa PLC

• Decision Date: 09 July 2018
• Docket Number: C.A. No. 2017-0847-JTL
• Citation: 252 A.3d 445
• Parties: PENTON BUSINESS MEDIA HOLDINGS, LLC, Plaintiff, v. INFORMA PLC and Informa USA, Inc., Defendants. Informa PLC and Informa USA, Inc., Counterclaim-Plaintiffs, v. Penton Business Media Holdings, LLC, Counterclaim-Defendant.
• Court: Court of Chancery of Delaware

252 A.3d 445

PENTON BUSINESS MEDIA HOLDINGS, LLC, Plaintiff,

v.INFORMA PLC and Informa USA, Inc., Defendants.

Informa PLC and Informa USA, Inc., Counterclaim-Plaintiffs,

v.Penton Business Media Holdings, LLC, Counterclaim-Defendant.

C.A. No. 2017-0847-JTL

Court of Chancery of Delaware.

Date Submitted: May 11, 2018

Date Decided: July 9, 2018

William M. Lafferty, John P. DiTomo, Coleen Hill, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Craig S. Primis, Erin C. Johnston, Matthew S. Brooker, KIRKLAND & ELLIS LLP, Washington, District of Columbia; Attorneys for Plaintiff/Counterclaim-Defendant.

Kevin R. Shannon, Christopher N. Kelly, Jaclyn C. Levy, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Anthony M. Candido, Robert C. Myers, Benjamin A. Berringer, CLIFFORD CHANCE US LLP, New York, New York; Attorneys for Defendants/Counterclaim-Plaintiffs.

LASTER, V.C.

Informa PLC and Informa USA, Inc. (jointly, the "Buyer") purchased Penton Business Media Holdings, Inc. (the "Company") from Penton Business Media Holdings, LLC (the "Seller"). The transaction was governed by an Agreement and Plan of Merger dated September 15, 2016 (the "Merger Agreement").

The Merger Agreement contained complex provisions addressing how the value of transaction-related tax benefits would be allocated between the Buyer and the Seller. Those provisions incorporated a dispute resolution mechanism that called for the parties to submit disputes to an independent accounting firm. The Merger Agreement stated that the accountant "shall be acting as an accounting expert only and not as an arbitrator."

Disputes arose, but the parties could not agree on procedures for submitting the disputes to the accountant. The Seller wanted to provide the accountant with term sheets and other extrinsic evidence to support its position. The Buyer contended that the accountant could not consider extrinsic evidence.

The Seller filed this lawsuit. Invoking the doctrine of procedural arbitrability, the Seller seeks a declaration that the accountant has authority to determine what information it can consider. Alternatively, the Seller seeks a declaration that the accountant can consider extrinsic evidence. The Buyer filed a counterclaim. The Buyer contends that because the accountant is an expert and not an arbitrator, arbitral doctrines are irrelevant, and the court must decide the issue as a matter of contract interpretation. The Buyer seeks a declaration that the accountant cannot consider extrinsic evidence, along with other equitable relief.

The parties filed cross motions for judgment on the pleadings. This decision holds that the Merger Agreement calls for an expert determination, which is a third-party dispute resolution mechanism distinct from arbitration. Some jurisdictions do not recognize the distinction, but Delaware does. When parties have opted for an expert determination, doctrines like substantive and procedural arbitrability do not apply. Although parties could give an expert the authority to interpret a contract, here they did not. Instead, the court must interpret the contract to determine what the accountant can consider. In this case, the plain terms of the Merger Agreement bar the accountant from considering extrinsic evidence.

I. FACTUAL BACKGROUND

On a motion for judgment on the pleadings, the facts are drawn from the operative pleadings and the documents they incorporate by reference. When evaluating cross motions for judgment on the pleadings, the facts for purposes of each motion must be viewed in the light most favorable to the non-movant. In this case, the relevant facts are undisputed.

A. The Term Sheets

In summer 2016, the parties began discussing a potential transaction. On July 6, the Buyer sent the Seller a term sheet that included a section addressing tax matters. The Seller contends that the term sheet supports its position in the underlying dispute.

After further negotiations, the parties circulated a revised term sheet on July 19, 2016. It too contained a section on tax matters. The Seller believes that it too supports its position in the underlying dispute.

B. The Merger Agreement

The parties entered into the Merger Agreement and announced it on September 15, 2016. It called for the Company to merge with a wholly owned subsidiary of the Buyer, with the Company as the surviving entity (the "Merger"). The purchase price comprised $1.46 billion in cash and $100 million in Buyer equity.

On the same day that the parties announced the Merger, the Buyer announced a rights offering to finance the transaction. The offering circular contained information that the Seller contends supports its position in the underlying dispute.

C. The Tax Provisions

Section 5.2 of the Merger Agreement contains a complex mechanism for apportioning tax deductions and other tax benefits that the Company could claim as a result of the Merger. The parties grouped the benefits into three categories: (i) benefits applied to pre-Merger periods, (ii) benefits applied to post-Merger periods, and (iii) benefits that remained unapplied as of a set date. The first two categories are pertinent to this case.

Section 5.2(a)(i) governed the allocation of tax benefits for periods ending on or before the closing date of the Merger (the "Pre-Closing Periods"). This decision therefore calls it the "Pre-Closing Section." It directed the Buyer to pay the Seller an amount equal to any refund that the Company received because of tax benefits that the Company applied to a Pre-Closing Period. Critically for the underlying dispute, the Seller only would receive a payment equal to the refund . The Seller would not be entitled to receive a portion of the value of the tax benefits that were utilized to reduce the Company's tax liability except to the extent they resulted in a refund.

Section 5.2(a)(ii) governed the allocation of tax benefits for periods that ended after closing, with the final post-closing period ending on December 31, 2017 (the "Post-Closing Periods"). This decision therefore calls it the "Post-Closing Section." It deployed the defined term "Transaction Tax Benefits," which included "any reduction in the [Company's] Tax liability" for any Post-Closing Period.¹ It directed the Buyer to pay the Seller an amount equal to 40% of any Transaction Tax Benefits that the Company realized during a Post-Closing Period. Unlike the Pre-Closing Section, the Post-Closing Section did not require a refund. The Post-Closing Section required a payment equal to the reduction in the Company's tax liability even if the Company did not receive a refund.

The different formulas for calculating the payment to the Seller meant that if the Buyer could allocate benefits to Pre-Closing Periods rather than Post-Closing Periods, then the Buyer could pay less to the Seller. A particular tax benefit might generate the same dollar-value reduction in potential tax liability for either a Pre-Closing or a Post-Closing Period, but the Buyer would only pay for the benefit in a Pre-Closing Period to the extent it resulted in a refund; for a Post-Closing Period, the Buyer would always make a payment to the Seller equal to 40% of the benefit.

D. The Dispute Resolution Mechanism

The Pre-Closing and Post-Closing Sections piggybacked on a dispute resolution mechanism that Section 2.8 of the Merger Agreement established for disputes over purchase-price adjustments, such as disagreements over the closing-date balance sheet (the "Dispute Resolution Provision"). If a dispute over a purchase-price adjustment arose, then the Dispute Resolution Provision called for the parties to engage in commercially reasonable efforts to resolve it for a period of thirty days. If those efforts failed, the Dispute Resolution Provision stated that "unless otherwise agreed by the [Seller] and [the Buyer], the remaining items in dispute shall be submitted promptly to Ernst & Young."² The Dispute Resolution Provision incorporated methods for selecting an alternative accountant if Ernst & Young could not serve, and it therefore defined the holder of the adjudicative role generically as the "Accounting Firm."³

Section 2.8(b)(ii) of the Merger Agreement called for the Accounting Firm to make "a determination of each disputed item within forty-five (45) days after referral of the matter to such Accounting Firm, which determination must be in writing and must set forth, in reasonable detail, the basis therefor."⁴ It further specified that "[a]ny such determination must be based solely on" three categories of information:

(i) the definitions and other applicable provisions of this Agreement,

(ii) a single presentation (which presentations shall be limited to the remaining items in dispute set forth in the Proposed Closing Date Calculations and Purchase Price Dispute Notice) submitted by each of [the Buyer] and the [Seller] to the Accounting Firm within fifteen (15) days after the engagement thereof (each of which the Accounting Firm shall forward simultaneously to [the Buyer] or the [Seller], as applicable, once both such presentations are received) and

(iii) one written response submitted to the Accounting Firm within ten (10) Business Days after receipt of each such other party's presentation (each of which the Accounting Firm shall forward simultaneously to [the Buyer] or the [Seller], as applicable, once both such presentations are received), and not on an independent review.⁵

Having specified what the Accounting Firm could consider, and having included an aside about what the Accounting Firm could not do ("an independent review"), the Dispute Resolution Provision went on to specify other sources of information that the Accounting Firm could not consider:

The parties agree that no ex parte conferences, oral examinations, testimony, depositions, discovery or other form of evidence gathering or hearings shall be conducted or allowed by the Accounting Firm; provided, however, that at the Accounting Firm's request, or as mutually agreed by [the Buyer]

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