New York Law Review

Tag: Mergers and Acquisitions

  • Cortland Street Recovery Corp. v. Bonderman, 31 N.Y.3d 30 (2018): Interpreting ‘Fundamental Change’ Clauses in Preferred Stock Agreements

    Cortland Street Recovery Corp. v. Bonderman, 31 N.Y.3d 30 (2018)

    When interpreting a contract, particularly one involving complex financial transactions, a motion to dismiss should be denied if the contract language is ambiguous and susceptible to multiple reasonable interpretations, requiring further factual development to ascertain the parties’ intent.

    Summary

    Cortland Street Recovery Corp., representing preferred shareholders of Superior Well Services, sued to compel Superior to repurchase their shares after a merger with Nabors Industries. The preferred stock agreement stipulated repurchase upon a “fundamental change,” defined as an entity acquiring over 50% of Superior’s common stock, unless the acquisition resulted from a merger where Superior was the “surviving entity.” Nabors acquired Superior through a subsidiary, Diamond Acquisition Corp., which merged into Superior. The plaintiffs argued that either the initial tender offer triggered the fundamental change provision or that Nabors’ continued existence meant Superior wasn’t the sole surviving entity. The Court of Appeals held that the contract was ambiguous, precluding dismissal and requiring further examination of the parties’ intent.

    Facts

    Plaintiffs owned preferred stock in Superior Well Services, Inc., which contained a provision requiring Superior to repurchase the stock at $1,000 per share upon a “fundamental change.”
    The agreement defined “fundamental change” as (1) an entity acquiring over 50% of Superior’s voting stock, unless resulting from a merger where Superior is the surviving entity, or (2) Superior merging with another entity, unless Superior is the surviving entity.
    In 2010, Superior agreed to be acquired by Nabors Industries through a tender offer via Nabors’ subsidiary, Diamond Acquisition Corp.
    Diamond acquired over 92% of Superior’s common stock and then merged into Superior, with Superior surviving the merger and Nabors becoming the sole owner of Superior.
    Plaintiffs demanded repurchase of their preferred stock, arguing a fundamental change occurred, but Superior refused.

    Procedural History

    Plaintiffs sued in Supreme Court, seeking a declaration that Superior must repurchase their shares.
    Supreme Court denied Superior’s motion to dismiss, finding the fundamental change provision open to interpretation.
    The Appellate Division reversed, dismissing the complaint, viewing the acquisition and merger as a single transaction with Superior as the surviving entity.
    The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the acquisition of over 50% of Superior’s common stock by Diamond Acquisition Corp. constituted a “fundamental change” under the preferred stock agreement, requiring Superior to repurchase the preferred shares.
    Whether, even if the entire series of transactions is considered a single event, Superior was “the surviving entity” of the merger, triggering the exception to the fundamental change provision.

    Holding

    No, because the agreement was ambiguous as to whether the initial tender offer by Diamond triggered the “fundamental change” provision independently of the subsequent merger, and also ambiguous as to whether Superior was “the surviving entity” given Nabors’ continued existence.

    Court’s Reasoning

    The Court of Appeals emphasized that on a motion to dismiss, the court must accept the plaintiff’s allegations as true and draw all reasonable inferences in their favor. Dismissal is only appropriate if documentary evidence utterly refutes the plaintiff’s factual allegations and conclusively establishes a defense as a matter of law.
    The Court found the preferred stock agreement ambiguous. The term “transaction” within the agreement was not defined, making it unclear whether it referred only to the tender offer, or to the entire series of steps culminating in Nabors’ ownership.
    If the “transaction” was only the tender offer, then the acquisition of over 50% of Superior’s stock would constitute a fundamental change under subdivision (i), irrespective of the merger exception in subdivision (iii).
    Even if the entire series of steps were considered a single transaction, the court found ambiguity in the phrase “the surviving entity.” The use of “the” suggested that only one entity could survive, yet Nabors also survived. Superior failed to establish as a matter of law that only the tender offer and the merger of Diamond into Superior constituted the relevant “transaction.”
    Because there was a reasonable basis to believe the fundamental change clause was activated, dismissal was inappropriate. The Court quoted Sokoloff v. Harriman Estates Dev. Corp., 96 NY2d 409, 414 (2001), stating that a court must “accept as true the facts as alleged in the complaint and submissions in opposition to the motion, accord plaintiffs the benefit of every possible favorable inference and determine only whether the facts as alleged fit within any cognizable legal theory.” The Court also cited Goshen v Mutual Life Ins. Co. of N.Y., 98 NY2d 314, 326 (2002), noting that a motion may be granted if “documentary evidence utterly refutes [the] plaintiffs factual allegations,” thereby “conclusively establishing a defense as a matter of law.”
    The Court reversed the Appellate Division’s order and reinstated the complaint, allowing the case to proceed to further factual development to determine the parties’ intent regarding the ambiguous contract language.

  • Innophos, Inc. v. Rhodia S.A., 10 N.Y.3d 26 (2007): Interpreting Broad Contractual Tax Definitions

    10 N.Y.3d 26 (2007)

    When interpreting contracts, especially those involving sophisticated parties and broad definitions, courts must give effect to the plain meaning of the language used, and extrinsic evidence should only be considered if the agreement is ambiguous.

    Summary

    Innophos, Inc. sued Rhodia S.A. for breach of contract, seeking indemnification for water usage fees assessed by the Mexican government (CNA) after Innophos acquired Rhodia’s Mexican subsidiary. The purchase agreement contained indemnification clauses for “Taxes” and “Losses,” with different limitations. The central issue was whether the CNA fees constituted “Taxes,” which were fully indemnifiable, or “Losses,” subject to a deductible and a cap. The New York Court of Appeals held that the CNA fees were “Taxes” based on the agreement’s broad definition and the nature of the fees as a governmental charge for exploiting a natural resource. The court emphasized the importance of adhering to the contract’s plain language when the parties are sophisticated and the language is sweeping.

    Facts

    In early 2004, the CNA audited Rhodia Fosfatados de Mexico, S.A. de C.V., a Mexican subsidiary of Rhodia S.A., for water usage. In June 2004, Innophos acquired Rhodia Fosfatados. The purchase agreement included indemnification clauses for “Taxes” and “Losses.” The definition of “Taxes” was very broad, including various governmental charges. After the acquisition, the CNA assessed Rhodia Fosfatados for pre-closing unpaid water usage fees. Innophos sought indemnification from Rhodia under the “Taxes” clause.

    Procedural History

    Innophos sued Rhodia for breach of contract in New York State court. Innophos moved for partial summary judgment, seeking a declaration that the CNA fees were “Taxes” under the purchase agreement. The Supreme Court granted Innophos’s motion. The Appellate Division affirmed, finding the definition of “Taxes” broad enough to cover the fees. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the water usage fees assessed by the CNA constitute “Taxes” as defined in the purchase and sale agreement between Innophos and Rhodia, thereby requiring Rhodia to indemnify Innophos fully for such fees, or whether they constitute “Losses,” subject to the agreement’s deductible and cap provisions.

    Holding

    Yes, the CNA water usage fees are “Taxes” as defined in the agreement, because the fees are a “similar governmental charge” to a severance tax, assessed by the Mexican government in its sovereign capacity for the exploitation of a natural resource.

    Court’s Reasoning

    The Court of Appeals emphasized that contract interpretation begins with the plain language of the agreement. “The fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent[, and that t]he best evidence of what parties to a written agreement intend is what they say in their writing.” The court found the definition of “Taxes” in the purchase agreement to be broad and sweeping. The court rejected Rhodia’s argument that the CNA fees were merely a “water bill” for the purchase of a commodity. The court reasoned that the fees were more akin to a severance tax, which is a tax imposed on the value of natural resources extracted from the earth. Since the Mexican Constitution vests ownership of natural resources in the Mexican State, the CNA fees were assessed by the government in its sovereign capacity for the exploitation of a natural resource, water. The court stated, “[W]ater is an asset of the public domain of the Nation . . . [and i]f a private person desires to use or exploit such . . . resources, it must secure a concession . . . [, the fees for which are] calculated in accordance with the volume of water used.” Because no ambiguity existed in the contract, resorting to extrinsic evidence was unnecessary. The court affirmed the lower courts’ decisions granting summary judgment to Innophos.

  • Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 351 (2003): Exclusive Remedy Provisions in M&A Agreements

    100 N.Y.2d 351 (2003)

    When a stock purchase agreement contains both purchase price adjustment and indemnification provisions, objections to asset values based on failures to comply with GAAP existing at the time of the agreement are claims for breach of warranty, subject to the exclusive remedies specified in the indemnification provisions.

    Summary

    Westmoreland Coal Co. acquired Entech’s coal mining subsidiaries via a stock purchase agreement containing both price adjustment and indemnification clauses. Westmoreland objected to Entech’s closing date certificate, claiming GAAP violations in asset valuations. Entech refused to submit to alternative dispute resolution (ADR) under the price adjustment clause, arguing that the indemnification clause provided the exclusive remedy for breaches of representation or warranty. Westmoreland sued to compel ADR. The New York Court of Appeals held that Westmoreland’s objections were claims for breach of warranty, governed by the indemnification provisions, and thus not subject to ADR.

    Facts

    Entech and Westmoreland entered into a stock purchase agreement where Westmoreland would acquire Entech’s coal mining subsidiaries. The agreement included interim financial statements warranted by Entech as compliant with GAAP. The purchase price was subject to adjustment based on the closing date net asset value. After closing, Westmoreland objected to the closing date certificate, alleging the asset values didn’t comply with GAAP and sought a significant price adjustment. Entech argued that these objections were warranty breaches subject to the agreement’s indemnification clause, which dictated litigation as the exclusive remedy.

    Procedural History

    Westmoreland petitioned to compel ADR per the purchase price adjustment provisions. The Supreme Court granted the petition. The Appellate Division affirmed, holding any material objection to the closing date certificate must be submitted to an independent accountant for arbitration. Entech appealed to the New York Court of Appeals.

    Issue(s)

    Whether Westmoreland’s objections to the closing date certificate, based on alleged failures to comply with GAAP, fall under the stock purchase agreement’s purchase price adjustment provisions requiring ADR, or the indemnification provisions providing for exclusive litigation in court for breaches of representation and warranty?

    Holding

    No, because Westmoreland’s objections related to accounting conventions and asset values already present in the interim financial statements, which Entech warranted as GAAP-compliant. These objections are claims for breach of warranty and are subject to the exclusive remedies detailed in the indemnification provisions, namely litigation.

    Court’s Reasoning

    The court emphasized interpreting the contract as a whole, stating, “A written contract ‘will be read as a whole, and every part will be interpreted with reference to the whole; and if possible it will be so interpreted as to give effect to its general purpose.’” The court reasoned that the purchase price adjustment clause required the closing date certificate to be prepared consistently with the interim financial statements. Entech warranted that the interim financial statements complied with GAAP. Westmoreland’s objections essentially alleged a breach of this warranty. The indemnification clause provided the exclusive remedy for warranty breaches, specifying litigation. Allowing ADR would circumvent the indemnification clause’s limitations and the $1.75 million threshold for indemnification. The court also noted Westmoreland’s due diligence obligations and experience in the coal business. It stated, “These sophisticated commercial parties surely could not have intended to consign a significant portion of the purchase price to ADR.” The court emphasized that warranty claims require the protections of discovery, evidence rules, and appellate review, which are absent in ADR. The court found that “Westmoreland’s objections related to noncompliance with GAAP are, in fact, claims for breach of a representation or warranty. These claims may only be pursued in a court of law”.