Document:  Impact Investments Colorado II, LLC and Baker Investment Trust v. Impact Holding, Inc., C.A. No. 4323-VCP (Del. Ch. Aug. 31, 2012)

The Delaware Court of Chancery held that the terms of a stock purchase agreement precluded the buyer of a candy manufacturing business from seeking indemnification for certain claims that had been the subject of post-closing negotiations between the parties and had resulted in a post-closing adjustment to the purchase price.

This action arose from the acquisition of all of the outstanding stock of Impact Confections, Inc. (“Impact”) by Brazos Private Equity Partners LLC (“Brazos” or “Buyer”).  In 2008, the holders of all of the outstanding capital stock of Impact (“Sellers”) entered into a stock purchase agreement (the “SPA”) with Brazos.  The SPA provided for a post-closing purchase price adjustment in the event that Impact’s target working capital on the closing date differed from its actual working capital as of such date.  In this connection, the SPA required Buyer to deliver to Seller a statement setting forth the actual working capital of Impact within sixty days of closing and provided a procedure for resolving post-closing purchase price disputes.  In addition, the SPA created an escrow account from which claims for indemnification for breach of representations and warranties concerning Impact would be paid within one year of closing.  Finally, Section 6(f) of the SPA (“Section 6(f)”) limited the Buyer’s ability to seek indemnification for claims taken into account in determining purchase price adjustments, stating that “Sellers shall not be obligated to indemnify Buyer against Adverse Consequences as a result of, or based upon or arising from, any claim or liability to the extent such claim or liability is taken into account in determining any adjustment to the Purchase Price.”

In this case, Buyer argued that Section 6(f) did not foreclose it from pursuing indemnification for expenses which resulted in a purchase price adjustment to the extent the amount sought to be indemnified differed from any post-closing adjustments to the purchase price.  The Sellers argued that Section 6(f) should not be interpreted in a manner that allowed Buyer to rehash disputes negotiated and settled through a purchase price adjustment.  The Court agreed with Sellers and granted summary judgment in favor of Sellers with respect to several disputed expenses that had resulted in purchase price adjustments.  However, the Court declined to grant Sellers’ motion for summary judgment on a number of Buyer’s remaining claims for indemnification relating to alleged errors in the calculation of the components of working capital which had not been actually disputed and negotiated during the purchase price adjustment process.  The Court believed that the resolution of these latter claims could only be resolved after trial.