Opinion ID: 2773129
Heading Depth: 2
Heading Rank: 1

Heading: 2d 873, 880 (Del. Ch. 1986)).

Text: 17 supported by the record or unless the inferences drawn from those findings are not the product of an orderly or logical deductive process.”59 2. Acument is Not Entitled to a Tax Benefit As Defined by the Purchase Agreement As noted, the Purchase Agreement defines “Tax Benefit” as “the present value of any refund, credit or reduction in otherwise required Tax payments.”60 The Agreement then specifies how such a benefit is calculated, including in which year “such refund, credit or reduction shall be recognized.”61 The Superior Court determined that the Purchase Agreement was ambiguous because “the provisions in controversy are reasonably or fairly susceptible of different interpretations.”62 Namely, the Superior Court found that the plain language of the contract could support either Textron‟s interpretation entitling it to a refund for merely hypothetical benefits or Acument‟s interpretation requiring it to receive actual net tax benefits. The court thus denied Textron‟s motion for judgment of the pleadings, and considered the extrinsic evidence at trial. Based on that extrinsic evidence, including internal emails, communications between the parties, and testimony from deposition and trial witnesses, the Superior Court determined that Acument‟s obligation to reimburse Textron was not triggered under the Purchase Agreement unless Acument received an actual net tax benefit. 59 Honeywell Intern. Inc. v. Air Products & Chemicals, Inc., 872 A.2d 944, 950 (Dec. 2005). 60 App. to Opening Br. at 142 (Purchase Agreement § 8.1). 61 Id. 62 Textron, Inc. v. Acument Global Technologies, Inc., 2011 WL 1326842, at  (Del. Sup. Apr. 6, 2011). 18 Textron asserts that it is not contesting the Superior Court‟s interpretation of the contract as requiring actual net tax benefits, but it argues that the Superior Court erred in not considering whether Acument had received a tax benefit because of the increase in its basis. As an initial matter, Textron‟s claim that the Superior Court ignored this issue is incorrect; although the Superior Court could have detailed its findings related to the parties‟ tax arguments more clearly, the opinion does note that the language of the Purchase Agreement does not support Textron‟s argument “that the parties intended for an increase in basis to satisfy the Offset,” and in fact “belies” that contention.63 It is also difficult to distinguish between Textron‟s argument below that the offset would be triggered by a hypothetical benefit and its argument on appeal that Acument is entitled to an actual benefit, because Textron does not contend that Acument will see any net tax reduction from the stepped-up basis. Instead, Textron seems to want to parse the meaning of “actual” tax benefits. Textron alleges that because U.S. tax law perceives the step-up and step-down in basis as analytically distinct, Acument is entitled to an actual benefit from the step-up that is separate from the (simultaneous and equal) step-down.64 But “analyzed separately” does not mean that the decrease in basis is not considered relevant by the IRS. Textron‟s claim only makes sense if the parties had intended for Textron to partially indemnify Acument for the pre-closing liabilities, contrary to the Superior Court‟s findings. Given the structure of the sale of the U.S. 63 Opinion at . 64 Opening Br. at 23 (“Any corresponding decrease in tax basis (in step 2) as a result of Textron‟s indemnity payment is irrelevant, as that decrease is a distinct and independent event under the tax law, the effect of which is analyzed separately.”). 19 entities as deemed asset sales and Textron‟s agreement to indemnify Acument fully, any time Textron pays one of the contingent liabilities, Acument‟s basis will increase automatically by the amount of the payment – and decrease simultaneously and automatically by the same amount, resulting in no net change. If Acument was required to reimburse Textron for the amount of the increase by itself, every indemnification payment on U.S. liabilities would trigger reimbursement, thus requiring Acument to share responsibility for the pre-closing liabilities. The Superior Court rejected that interpretation of the Purchase Agreement as not supported by the plain terms of the Agreement or the extrinsic evidence, and Textron does not purport to challenge those findings on appeal.65 We agree with the Superior Court that the plain language of the Purchase Agreement does not support Textron‟s interpretation. For example, the relevant provisions in the Purchase Agreement call for Textron to indemnify Acument for “any and all Losses incurred . . . to the extent relating to or arising out of” pre-closing liabilities.66 The Purchase Agreement does provide for some liabilities to be shared (those related to certain breaches of Textron‟s representations or warranties), and sets a deductible, minimum and maximum for the shared portion.67 It was thus reasonable for the Superior Court to assume that the lack of a similar provision related to the other 65 Opinion at . 66 See Purchase Agreement § 4.6(h)(ii), § 6.1(b). 67 See Purchase Agreement § 6.1(d)(i). 20 liabilities suggests that the parties did not intend for those liabilities to be shared.68 Further, the tax benefit provision in § 6.1(d)(iii) comes after similar offsets in (i) and (ii), which trigger reimbursement if Acument receives insurance proceeds or third-party contributions, respectively. As the Superior Court determined, “[n]one of the clauses contain language indicating the reduction is „automatic.‟ And none of the clauses have language indicating a „sharing‟ or partial indemnification. Considering the entire 6.1(d)(iii) clause, it reads as possible reductions to the amount of Loss Textron is required to indemnify.”69 Moreover, because the Superior Court‟s fact findings were supported by the record, they are entitled to deference on appeal. The Superior Court was persuaded by witness testimony from those involved in drafting and negotiating the Purchase Agreement that the parties intended § 6.1(d)(iii) to prevent a “windfall” to Acument from being both compensated and indemnified for the same underlying liabilities, but the provision was not intended to create a sharing mechanism to relieve Textron of its indemnity obligations.70 Although the Superior Court did not highlight it, it is also worth noting that the imbalance generated by requiring Acument to reimburse Textron would be acute because 68 See, e.g., Opinion at  (“The Court‟s finding that the Offset was not meant to be automatic is reinforced by the absence of the words „hypothetical‟ or „automatic‟ within the [Purchase Agreement]. Again, the parties are well seasoned in mergers and acquisitions – they knew what they were doing. If Textron and [Platinum Equity] agreed to partial indemnification, the indemnification clause could have easily been written to limit Textron‟s liability either through explicit „partial indemnification‟ language or drafting 6.1(d)(iii) to read as „each Loss is partially indemnified subject to‟ instead of „each Loss shall be reduced by[. . . .]‟”). 69 Opinion at  (internal citations omitted). 70 Opinion at . 21 Textron – not Acument – receives an actual tax savings from its payment of the contingent liabilities. As Textron‟s tax expert discussed in his expert report, when the liability is paid, “the seller [i.e., Textron] will be entitled to a tax deduction for satisfaction of its liability to the claimant.”71 But because the indemnification by Textron automatically adjusts the purchase price down, in an amount equal to the increase from the payment of the liability, Acument will not see any change in basis, and thus cannot deduct any amount from its U.S. taxes.72 If we were to conclude that the parties had silently agreed to share responsibility for pre-closing liabilities, Textron would be doubly-reimbursed (by the IRS and by Acument), while Acument would suffer a net loss. As well, it is not clear under the Purchase Agreement how Acument could even calculate the amount owed in reimbursement if Textron is correct that the step-up in basis constitutes an actual benefit. Textron highlights the last sentence of the definition of “Tax Benefit” in the Purchase Agreement, but ignores the first. “Tax Benefit” is defined in § 8.1 of the Agreement as: “the present value of any refund, credit or reduction in otherwise required Tax payments. . . .”73 It is not clear what the “present value” of a net zero change in basis is, other than zero. One potentially confusing factor that the Superior Court did address is that Acument does not contend that the benefit provision is triggered only if there is a reduction in its tax bill in a given year. Rather, because the Purchase Agreement states in (iii) of the Tax Benefit definition quoted above that the “refund, credit or reduction shall 71 App. to Opening Br. at 174 (Gertzman Expert Report at 6). 72 See App. to Opening Br. at 178 (Gertzman Expert Report at 10). 73 App. to Opening Br. at 142 (Purchase Agreement § 8.1) (emphasis added). 22 be recognized or received in the earliest possible taxable period (without regard to any other losses, deductions, refunds, credits, reductions or other Tax items available to such party),” Acument concedes that “it need not actually save taxes for a Tax Benefit Offset to apply.”74 But contrary to Textron‟s argument, and as the Superior Court discussed, the relevant provision refers to timing considerations for calculating the benefit, not whether the offset is triggered in the first instance.75 That is, if Acument receives a net tax benefit, (iii) of the Tax Benefit definition requires that it calculate the amount owed in reimbursement to Textron based on the “earliest possible taxable period,” regardless of whether it could save more if it deferred the payment. For example, if Acument was able to take advantage of a tax deduction under Brazilian tax law because of Textron‟s indemnification payments, the fact that Acument could not receive any additional tax savings from doing so because it already had outstanding net operating losses to use in a particular year would not factor into the calculation of which taxable period applied. By the terms of the Purchase Agreement, the savings to Acument would be deemed to have been caused by the deduction resulting from Textron‟s indemnification regardless of whether Acument used that deduction. The Superior Court found that the contract was structured in this way to promote “certainty and clarity” and avoid Textron having to review Acument‟s tax returns in every jurisdiction in which it was required to file.76 The Purchase Agreement‟s “without regard” language thus does not support Textron‟s 74 Answering Br. at 31 (emphasis added). 75 See, e.g., Opinion at . 76 Opinion at  n.292. 23 argument that the offset is triggered despite the decrease in liability from the indemnification. Because the Superior Court interpreted the language of the Purchase Agreement in a reasonable manner that is supported by substantial extrinsic evidence and commercial logic, its determination that the parties did not intend for Acument‟s automatic basis increase to constitute a tax benefit within the meaning of the Purchase Agreement must be affirmed. B. Textron Has Not Shown That the Superior Court’s Use of the Term “Deduction” Was in Error Textron‟s second claim on appeal is that the Superior Court erred in narrowing Textron‟s right to reimbursement from any “reduction” to only a “deduction,” “thereby materially altering the contract and the parties‟ rights thereunder.”77 Textron alleges that because the terms are not interchangeable, “the Superior Court caused real and quantifiable harm to Textron.”78 To wit, Textron argues that construing the tax benefit as a deduction forecloses the possibility that Textron could be entitled to reimbursement when Acument‟s basis increases in other circumstances or for any other refund, credit, or reduction that is not a deduction in the future. As noted, the Purchase Agreement entitles Textron to an offset whenever Acument is entitled to a tax benefit, which is defined in the Agreement as “the present value of any refund, credit or reduction in otherwise required Tax payments.”79 Contrary to Textron‟s 77 Opening Br. at 29. 78 Reply Br. at 16. 79 App. to Opening Br. at 142 (Purchase Agreement § 8.1) (emphasis added). 24 argument, the Superior Court did not ignore this language or misconstrue the rights the Agreement provides to the parties. Rather, the Superior Court concluded, “after carefully considering all the documentary evidence, the parties‟ positions during negotiations, and the parties‟ conduct after executing the [Purchase Agreement] and Letter Agreement, . . . that the Tax Benefit Offset applies only if Acument is entitled to a „deduction‟ upon the making of an indemnification payment.”80 The court added in a footnote that its holding “does not limit or otherwise effect the [Purchase Agreement‟s] own language regarding a credit and/or refund.”81 The Superior Court then clarified that it “intentionally use[d] the term „deduction,‟ as did the parties throughout their negotiations and up to the filing of this lawsuit,”82 noting that, Despite Textron‟s argument that the [Purchase Agreement] utilizes the broader term of „reduction,‟ as will be discussed, the parties tacitly agreed reduction meant deduction as exhibited in their pre-litigation conduct. Because the Court previously ruled the [Purchase Agreement] and Letter Agreement are ambiguous, it is not limited to determining their meaning by a third party standard.83 Although this last phrase is somewhat cryptic, it appears from the Superior Court‟s citations that its use of the word “deduction” is meant to reflect the parties‟ shared meaning in accordance with standard principles of contractual interpretation: “Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is 80 Opinion at . 81 Opinion at  n.248. 82 Opinion at . 83 Opinion at  n.249. 25 interpreted in accordance with that meaning.”84 Because the Superior Court carefully reviewed the extrinsic evidence to interpret the meaning of “tax benefit” in the Purchase Agreement in accordance with the parties‟ intent, its finding that the parties intended to require a deduction related to the indemnification payment to trigger the offset contested in this case is entitled to deference on appeal. The record before the Superior Court was replete with references to “deductions” by both parties,85 including in “Andrew‟s Open Issues Summary” drafted by Textron‟s senior associate general counsel Andrew Spacone, and the later Letter Agreement.86 Spacone‟s January 26, 2010, demand letter also asserted that “the fact that Acument . . . may be entitled . . . to a tax deduction attributable to the United States claims that are indemnified by Textron . . . is enough to trigger the reduction in Textron‟s indemnity payments under the Purchase Agreement.”87 In other words, the Superior Court made a well-grounded factual finding that in the context relevant to the dispute before it, the parties understood the term “reduction” to mean a “deduction” in the sense of a net tax benefit. These findings led to the Superior Court‟s ultimate holding that the tax benefit offset was not triggered by a hypothetical right to a tax benefit, and that Acument had not actually received a tax benefit under the terms of the Purchase Agreement because it was 84 The Superior Court cited Wilmington Firefighters Ass’n, Local 1590 v. City of Wilmington, 2002 WL 418032, at , n.33 (Del. Ch. Mar. 12, 2002) (citing RESTATEMENT (SECOND) OF CONTRACTS § 201(1)). 85 See Opinion at -26. 86 Opinion at ,  (“First, the Open Issues Summary declares that the Tax Benefit Offset applies where „tax liability payments Textron is required to make, [ ] are deductible to Acument.‟ That is an important concession on Textron‟s part because it implicates deductibility as the trigger for the Offset.”). 87 App. to Acument Pre-Trial Opening Br. at 129 (letter from Andrew Spacone to John Clark, dated Jan. 26, 2010) (emphasis added). 26 not entitled to a deduction from its change in basis. But Textron also independently challenges the Superior Court‟s use of the term “deduction,” particularly for claims that are outside the scope of this particular litigation (i.e., tax benefits in the form of tax credits or other non-deduction reductions). As to those claims, though, the Superior Court made it clear that its use of the word “deduction” is not meant to limit other possible reductions in other contexts.88 In fact, the Superior Court did use the term “reduction” when speaking more broadly about the parties‟ Agreement: “based upon the parties‟ conduct and correspondence, a Tax Benefit Offset only applies if Acument is entitled to a Tax deduction or reduction.”89 Because the Superior Court had a reasonable basis to find that the parties themselves understood the relevant tax benefit at issue in this case to be a deduction, there is no merit to Textron‟s claim that the Superior Court‟s considered use of the word “deduction” was in error. Accordingly, we affirm the judgment of the Superior Court. 88 Opinion at  n. 248. 89 Opinion at  (emphasis added). 27