Golden Rule Financial Corporation v. Shareholder Representative Services LLC

Citation: Not availableDocket: 61, 2021

Court: Supreme Court of Delaware; December 2, 2021; Delaware; State Supreme Court

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Golden Rule Financial Corporation (Golden Rule) appeals a Court of Chancery judgment that dismissed its complaint against Shareholder Representative Services LLC (SRS), the representative for former stockholders of USHEALTH Group, Inc., in a transaction where Golden Rule agreed to acquire the Company for a base price of $750 million, subject to post-closing adjustments. Disputes arose regarding the final purchase price adjustment based on the Company’s Tangible Net Worth, which is defined as total assets minus total liabilities and intangible assets, with a target set at $52 million. The Agreement included a price adjustment mechanism, requiring SRS to provide Golden Rule with Pre-Closing Financials, including an Estimated Balance Sheet and Estimated Tangible Net Worth, five days before closing. The Court of Chancery found no error in dismissing Golden Rule's complaint, affirming the judgment on December 3, 2021.

The Agreement mandates that estimates align with 'Accounting Principles' defined in Annex A. Golden Rule must respond to SRS's calculations within ninety days post-closing with its own Tangible Net Worth calculation. Specifically, within this timeframe, Golden Rule is required to provide a Final Adjustment Statement, including a balance sheet and its good faith calculation of Tangible Net Worth. The calculations rely on a hierarchy of Accounting Principles, starting with 'Specific Policies,' which reference ASC 606, an accounting standard adopted by the FASB, applicable to private companies from the annual reporting period ending December 31, 2019. Although not mandatory during negotiations, ASC 606 was included in the Agreement.

SRS initially estimated Golden Rule's Tangible Net Worth at approximately $40.75 million, reducing the purchase price by $11.25 million. However, after closing, Golden Rule discovered the Company had incorrectly applied ASC 606. Using the incorrect method, Golden Rule calculated Tangible Net Worth at about $35 million, significantly lower than SRS's estimate. When applying ASC 606 correctly, the Tangible Net Worth would rise to $73.7 million.

Golden Rule's Final Adjustment Statement relied on the consistent but incorrect ASC 606 application previously used, resulting in a Tangible Net Worth of $35 million. Nonetheless, it also submitted a Reconciliation Statement indicating the correct application would yield $73.7 million. SRS contended that ASC 606 should be applied correctly, advocating for the Final Adjustment Amount based on the $73.7 million figure. This disagreement prompted SRS to initiate the Agreement's dispute resolution process and engage KPMG to determine the Final Adjustment Amount and address the ASC 606 application dispute.

Golden Rule filed a complaint in the Court of Chancery, alleging three counts: breach of contract, breach of the implied covenant of good faith and fair dealing, and quasi-estoppel. The complaint sought a declaration that the Agreement mandates consistent application of ASC 606, as previously applied by the Company and SRS, and an injunction against SRS from using an inconsistent application of ASC 606 to determine the Financial Application Amount. SRS moved to dismiss the complaint under Rule 12(b)(6), claiming it failed to state a valid claim.

The court ruled on the motion to dismiss, concluding that the breach of contract claim (Count I) was valid, as the agreement clearly requires the correct application of ASC 606 to the Closing Balance Sheets and Tangible Net Worth estimates. The court noted that while the Agreement did not explicitly use terms like "accurate" or "correct," these notions were inherently understood in the context. It dismissed Golden Rule’s argument that "consistently applied" necessitated perpetuating the Company's prior incorrect application of ASC 606.

For Counts II and III, the court determined there was no gap to fill with the covenant of good faith and fair dealing, and Golden Rule did not meet the stringent criteria for quasi-estoppel. 

The court reviews Rule 12(b)(6) dismissals de novo, accepting well-pleaded allegations as true while rejecting conclusory claims. Dismissal is warranted only if it is clear that no facts could support the claims for relief.

Golden Rule argued that the phrase "in accordance with the Accounting Principles, consistently applied" entitled it to prepare true-up process figures identically to the Company's pre-closing practices. It contended that inconsistent application of these principles would unfairly benefit SRS and criticized the court's interpretation as effectively disregarding "consistently applied."

Tangible Net Worth must be prepared "in accordance with the Accounting Principles," which require adherence to a hierarchy that emphasizes ASC 606's application. Golden Rule claimed it applied ASC 606, but the court found its arguments contradicted the explicit requirement that Tangible Net Worth reflect the impact of ASC 606. The Agreement's structure indicated the parties intended to implement ASC 606 correctly, with its principles prioritized above other accounting policies, implying that any incorrect application would negate its intended effect.

Golden Rule's argument that the Court of Chancery's interpretation nullifies the 'consistently applied' clause in the Agreement, contravening contract law principles, is deemed unconvincing. The term 'consistently applied' is interpreted to prevent either party from arbitrarily selecting different GAAP treatments, emphasizing adherence to the agreed GAAP provisions. The Agreement's language supports proper application of ASC 606, and Golden Rule's stance would effectively eliminate ASC 606 from the Agreement.

Golden Rule cites the case Chicago Bridge, Iron Co. N.V. v. Westinghouse Electric Co. LLC, where Chicago Bridge sold its subsidiary Stone to Westinghouse amid a contentious relationship, with unique contractual provisions including a zero purchase price and a Liability Bar that exempted Chicago Bridge from post-closing claims for breaches of representations and warranties. The contract included a true-up provision requiring final calculations based on GAAP applied consistently, with Chicago Bridge initially reporting Net Working Capital significantly above target, while Westinghouse later claimed a shortfall of over $2 billion, attributing it to incorrect GAAP application.

Chicago Bridge argued that Westinghouse's claims were barred by the Liability Bar, which the Court upheld, noting the true-up process could only address changes post-signing. However, this case differs significantly as there is no Liability Bar involved, and ASC 606's implementation was a specifically negotiated term, rendering Chicago Bridge's case not persuasive as precedent in this matter.

The Court of Chancery's dismissal of Golden Rule's claims for breach of the covenant of good faith and fair dealing, as well as quasi-estoppel, was upheld. The implied covenant of good faith and fair dealing is recognized as a limited remedy applicable only when a contract is silent on specific matters, which was not the case here. Under Delaware law, quasi-estoppel applies when it would be unconscionable for a party to maintain a position inconsistent with one they previously accepted, provided that such inconsistency resulted in an advantage to them or a disadvantage to another party. Courts are hesitant to deem contracts between sophisticated corporations as unconscionable. The Court agreed that SRS's application of ASC 606 aligns with the contract's express terms and is not unconscionable. Consequently, the judgment of the Court of Chancery is affirmed.