Has There Been a Threat?

Corporate Attorney Josh FrenchBy: Joshua French

In a recent Delaware opinion, the Court of Chancery was faced with a question as to what constitutes a “threat” of an “Action” when determining whether a claim is indemnifiable under the terms of a stock purchase agreement.

Multiplan, Inc. acquired several subsidiaries of i/mx Information Management Solutions pursuant to a Stock Purchase Agreement, dated April 29, 2011.  As in many purchase agreements or merger agreements, the parties agreed to a set of rules governing how the buyer (Multiplan) could make claims against the Seller (i/mx) post-closing for breaches of representations and warranties.  In this case, the parties agreed that “if any Action is commenced or threatened that may give rise to a claim for indemnification by any Indemnified Party, then such Indemnified Party will promptly give notice to the Indemnifying Party.”  An “Action” is defined as “any claim, action, or suit, or any proceeding or investigation, by or before any Governmental Authority or any arbitration or mediation before any third party”.

Here, Multiplan received a letter from a third party notifying Multiplan that it had become aware that a certain customer of Multiplan was impermissibly accessing discounted rates.  Notably, the letter did not make any demands on Multiplan, other than to ask for Multiplan’s attention to the matter.  Multiplan then informed i/mx that it was demanding indemnification against this third-party claim.

The Court’s decision turned on the interpretation of the term “threatened” in the indemnification section, as it quickly determined that no “Action” had been commenced by the third party in its letter, as no attempt was made to seek third-party adjudication of a dispute.  The Court looked to the plain, dictionary meaning of “threatened”, as the parties had not defined the term in the agreement.  Using this interpretation, the Court determined that the third-party had not in its correspondence with Multiplan “gave signs or warnings” that it was going to file a lawsuit or otherwise announce that it intended to, or that it was possible that it would, commence an Action.  As such, the Court ruled that i/mx was entitled to summary judgment that Multiplan did not have an indemnification claim on this matter.

If the names of the parties look familiar, there was a prior ruling in the litigation relating to this purchase agreement in December 2013, which Mary Beth Kerrigan discussed in her “Baskets and Materiality” post on the M&A Today blog.  Similar to her discussion of the issue of baskets and the definition of “materiality”, here the language contained in the indemnification section and the determination of whether an Action had been threatened was subject to judicial interpretation because of loosely defined terms.  If Multiplan intended to be able to make a claim for indemnification upon any notice of any potential issue with a third party, it should have been more explicit as to what constitutes a threat.  Parties should carefully consider how an uninformed observer would read the language in definitive agreements, particularly when drafting indemnification provisions which, by their very nature, are going to be read and re-read long after the closing and likely by parties who had no involvement in the drafting.

For more information on this topic, please feel free to contact Josh.

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