Reed Smith Client Alerts

A recent M&A-related lawsuit in the Delaware Court of Chancery, Roma Landmark Theaters, LLC v. Cohen Exhibition Co., LLC, 2020 WL 5816759 (Del. Ch. Sept. 30, 2020), involved a dispute over a post-closing purchase price adjustment. The Court of Chancery upheld the buyer’s fraud claims on a motion to dismiss, but dismissed the remaining claims, holding that sellers of a company cannot be held liable for alleged breach of the company’s contractual duty to prepare financial statements in good faith, but sellers could be liable for fraud based on the company’s contractual representations.

Authors: Brian M. Rostocki Benjamin P. Chapple Alexandria P. Murphy

The litigation in Roma Landmark Theaters arose out of the sale of Landmark Acquisition Corporation (the company) by plaintiffs Roma Landmark Theaters, LLC and MCC Entertainment LLC (the sellers) to defendant Cohen Exhibition Company LLC (the Buyer). The parties disagreed over post-closing purchase price adjustments arising out of the sale of the sellers’ membership interests in the company.

The securities purchase agreement (SPA) required the company (but not the sellers) to provide a “preliminary closing statement” upon which the purchase price adjustment would be determined at closing, subject to a final closing statement to be provided post-closing. The SPA also included a dispute resolution mechanism, which required the parties to submit any dispute over post-closing price adjustments to an independent accounting firm for a binding resolution and a binding determination as to the distribution of escrowed funds.

The independent accounting firm ruled in the sellers’ favor, and the sellers then filed suit in the Court of Chancery, seeking confirmation of the decision and release of escrowed funds. The Buyer counterclaimed, arguing that the sellers breached an obligation under the SPA to deliver a “preliminary closing statement” prepared in good faith, on which the purchase price was partially based, and alleging that the Sellers fraudulently omitted information from financial statements.

The court dismissed the buyer’s contract claims against the sellers because, under the terms of the SPA, only the company, not the sellers, provided representations and warranties regarding the company’s financials. The court held that the buyer cannot state a claim for breach of contract because the obligation to provide the “preliminary closing statement” was the company’s (as opposed to the sellers’), and that the buyer was not entitled to representations and warranty protections from the sellers beyond those afforded under the plain terms of the SPA. The court also dismissed the buyer’s implied covenant claim because the buyer had not alleged an implied obligation or contractual gap in the parties’ SPA.

The court, however, held that the sellers could be held liable for fraud based on the company’s alleged contractual misrepresentations, although the SPA’s anti-reliance clause barred some of the buyer’s fraud claims. The court upheld a part of the buyer’s fraud claims at the pleadings stage because the buyer had pled with sufficient particularity (opposed to speculative conclusions unsupported by fact) that the sellers knowingly omitted management bonus and medical claim liabilities from interim financial statements. 

The court rejected the buyer’s other fraud claims and granted the sellers’ motion to dismiss as to those claims.