LSVC Holdings LLC v. Vestcom Parent Holdings Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

LSVC HOLDINGS, LLC, a Delaware )
limited liability company, )
)
Plaintiff/Counterclaim-Defendant, )
)
v. ) C.A. No. 8424-VCMR
)
VESTCOM PARENT HOLDINGS, INC., )
a Delaware corporation, )
)
Defendant/Counterclaim-Plaintiff, )
)
and )
)
VPH CLAIM HOLDING, LLC, a )
Delaware limited liability company, )
)
Counterclaim-Plaintiff. )

MEMORANDUM OPINION

Date Submitted: September 29, 2017
Date Decided: December 29, 2017

Lewis H. Lazarus, MORRIS JAMES LLP, Wilmington, Delaware; Stephen C.
Hackney and Timothy W. Knapp, KIRKLAND & ELLIS LLP, Chicago, Illinois;
Attorneys for Plaintiff and Counterclaim-Defendant.

William M. Lafferty and Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT
& TUNNELL LLP, Wilmington, Delaware; Jody C. Barillare, MORGAN, LEWIS
& BOCKIUS LLP, Wilmington, Delaware; Kevin O’Mara, Kenneth I. Schacter,
and Michael E. Tracht, MORGAN, LEWIS & BOCKIUS LLP, New York, New
York; Attorneys for Defendant and Counterclaim-Plaintiffs.

MONTGOMERY-REEVES, Vice Chancellor.
 This case involves the world of transaction tax deductions (“TTDs”). TTDs

are transactional expenses (such as professional fees and compensatory payments

for options cancellations or bonuses) incurred by an acquired company, that can be

claimed as tax deductions. TTDs may be realized in at least three ways: (1) as a

reduction in pre-closing taxable income; (2) as a post-closing refund for either pre-

closing tax overpayments or net operating losses (“NOLs”) carried back to earlier

periods; or (3) as a reduction in post-closing taxable income for either costs

deductible in post-closing periods or NOLs carried forward to post-closing periods.

I note here the importance of timing. To the extent not otherwise contractually

dictated, the first method to realize TTDs occurs pre-closing and benefits the target

company, while the latter two situations occur post-closing and benefit the

acquirer.

The TTDs in the instant case arise from the sale of a manufacturer of retail

shelving labels, Vestcom International, Inc. (“Vestcom” or the “Company”),

between sophisticated financial actors. The parties entered into a Stock Purchase

Agreement (the “Agreement”) governing the transaction. Between the signing of

the Agreement and closing of the transaction, Vestcom claimed the entirety of the

TTDs on its pre-closing taxes. The acquiring parties contend that the Agreement

bars Vestcom from realizing the full amount of the TTDs as a reduction in pre-

closing taxable income. Instead, the acquirers assert that the Agreement mandates

1
a 50/50 split of the value of the TTDs, regardless of how or when realized.

Vestcom’s former owner disagrees, arguing that the Agreement only requires a

50/50 split of any TTDs realized post-closing and does not prevent the Company

from claiming all available TTDs on its pre-closing tax filings.

After examining the terms of the Agreement and the evidence presented at

trial, I conclude that the Agreement allows Vestcom to claim the full amount of the

TTDs pre-closing.

I. BACKGROUND
The facts in this opinion are my findings based on the parties’ stipulations,

161 trial exhibits, including deposition transcripts, and the testimony of ten live

witnesses presented at a four-day trial before this Court that began on May 8, 2017.

I grant the evidence the weight and credibility that I find it deserves. 1 0F

A. Key Parties
Plaintiff and Counterclaim-Defendant LSVC Holdings, LLC (“LSVC”) is an

entity jointly owned by two private equity firms, Lake Capital Partners (“Lake

Capital”) and The Stephens Group, LLC (the “Stephens Group”). 2 Doug Rescho is
1F

1
Citations to testimony presented at trial are in the form “Tr. # (X)” with “X”
representing the name of the speaker. After being identified initially, individuals
are referenced herein by their surnames without regard to formal titles such as
“Dr.” No disrespect is intended. Exhibits are cited as “JX #.” Unless otherwise
indicated, citations to the parties’ briefs are to post-trial briefs, and citations to the
oral argument transcript refer to the post-trial oral argument.
2
Tr. 985 (Sorrells).

2
a principal at Lake Capital. 3 At the Stephens Group, Wesley Kent Sorrells is a
2F

managing director, 4 and Ronald Clark is the Chief Operating Officer and general
3F

counsel. 5
4F

Private equity firm Court Square Capital Partners (“Court Square”) owns

Defendant and Counterclaim-Plaintiff Vestcom Parent Holdings, Inc. (“VPH”). 6 5F

Counterclaim-Plaintiff VPH Claim Holding, LLC (“VCH”) is the “assignee of

VPH’s rights, title, and interest in the [Vestcom] Stock Purchase Agreement and

VPH’s claims against LSVC in connection with the Stock Purchase Agreement.” 7 6F

At Court Square, John P. Civantos is a managing partner, 8 and Kevin A. White is a
7F

principal. 9 8F

Shannon Palmer is the Chief Financial Officer (“CFO”) of Vestcom. 10
9F

3
Id. at 31-32 (Civantos).
4
Id. at 983 (Sorrells).
5
Id. at 1123 (Clark).
6
Id. at 8-9 (Civantos).
7
VPH/VCH Second Amended Verified Counterclaims ¶ 6.
8
Tr. 10 (Civantos).
9
Id. at 16 (Civantos).
10
Id. at 501 (Palmer).

3
 B. Pertinent Facts
I detail the facts necessary to allocate the value of the TTDs arising from the

Vestcom transaction in accordance with the parties’ agreement.

1. The parties negotiated the transaction
Lake Capital and the Stephens Group created LSVC to acquire Vestcom in

April 2007. 11 During the summer of 2012, LSVC put Vestcom up for sale. 12
10F 11F

Court Square created VPH to bid on and potentially acquire LSVC. 13 12F VPH

emerged as the winning bidder in LSVC’s sale process, and the parties began

negotiations. 14 13F

In connection with the potential transaction, LSVC hired Robert W. Baird &

Co. Incorporated (“Baird”) as advisor and exclusive agent for communications

regarding a potential transaction. 15 Andrew Snow was the lead banker from Baird
14F

on the deal. 16 LSVC also retained Kirkland & Ellis (LLP) (“Kirkland & Ellis”) as
15F

legal advisor. 17 From Kirkland & Ellis, Robert Wilson served as the lead deal
16F

11
Id. at 985 (Sorrells).
12
Id. at 986 (Sorrells).
13
Id. at 8-9 (Civantos).
14
Id. at 992 (Sorrells).
15
JX 6 at 3.
16
Tr. 994 (Sorrells).
17
Id. at 988 (Sorrells).

4
lawyer, 18 and Kevin Coenen was the lead tax attorney. 19 Court Square retained
17F 18F

Jones Day as legal advisor in connection with the transaction. 20 Kevin O’Mara
19F

served as the lead deal attorney from Jones Day. 21 Civantos and Snow conducted
20F

principal-to-principal negotiations between LSVC and VPH. 22 21F

In negotiating the sale, the parties focused on, inter alia, the TTDs. Each

side began with an attempt to seize the full value of the deductions. LSVC’s first

draft of the Agreement, sent in September 2012, proposed that VPH pay to LSVC

100% of the value of the TTDs as part of the purchase price. 23 Court Square 22F

responded by striking the language in the draft 24 so as not to bear the cost of the
23F

TTDs. 25
24F

As a compromise, LSVC decided to propose that the parties split the value

of the TTDs. On October 3, 2012, Snow and Civantos discussed the TTDs, and

18
Id. at 699 (Wilson).
19
Id. at 831 (Coenen).
20
Id. at 29 (Civantos).
21
Id. at 72 (Civantos).
22
Id. at 16-17 (Civantos).
23
JX 9 § 1.02.
24
JX 11 at 2.
25
Tr. 30 (Civantos).

5
Snow tentatively offered to “split[] [the TTDs] down the middle.” 26 Following
25F

that discussion, Snow updated Sorrells, stating that Snow communicated the TTD

plan to Civantos but that Civantos’s “body language wasn’t very accommodative

on the material economic point (tax benefits) . . . we’ll see.” 27 Later that day,
26F

Snow and Civantos had a follow-up conversation, during which the parties

discussed various terms, including the TTDs. Snow and Civantos agreed that

“50% of trans[action] tax benefits [would] be paid to sellers [LSVC] as and when

realized,” as long as LSVC would accept “pre-closing tax indemnity being back to

dollar one.” 28 Snow testified that the TTD portion of the discussion lasted between
27F

“30 seconds and one minute” and did not include any of the “mechanics of how the

parties would share TTDs.” 29 During that conversation, Snow stated that the TTDs
28F

would be worth between $6-$7 million. 30 After Snow conveyed the outcome of
29F

the conversation to LSVC, Sorrells told him, “Good job on getting the split.” 31
30F

26
Id. at 1189 (Snow).
27
JX 13.
28
JX 14.
29
Tr. 1208 (Snow).
30
Id. at 38 (Civantos).
31
JX 16.

6
 On October 4, 2012, VPH sent an initial draft of the letter of intent (the

“Letter of Intent”) to LSVC that did not mention the TTDs. 32 LSVC returned an
31F

edited draft of the Letter of Intent into which it inserted the following provision

regarding the TTDs: “[VPH] would pay over to the seller [LSVC] 50% of the

benefit of any transaction tax deductions on an ‘as and when realized’ basis.” 3332F

The parties then signed the Letter of Intent. 34 Civantos and Snow each recognized
33F

that their respective attorneys would work out the details of the deal when they

took over drafting. 35
34F

Following the Letter of Intent, Kirkland & Ellis and Jones Day took over

drafting the Agreement. The attorneys exchanged ten drafts of the Agreement

before the final executed version. The key changes related to the TTDs occurred in

Sections 3.08 and 9.01 of the Agreement.

On October 21, 2012, Jones Day sent a redline to LSVC’s first draft of the

Agreement. 36 Jones Day rejected a provision which stated that Section 3.08 of the
35F

Agreement contained the only representations and warranties relating to taxes and

32
JX 18.
33
JX 23.
34
JX 21.
35
Tr. 1210-12 (Snow); Id. at 152 (Civantos).
36
JX 27.

7
represented that Vestcom “paid or properly accrued” all pre-closing taxes. 37 Jones
36F

Day added a provision whereby VPH would retain 50% of the value of the TTDs

“[t]o the extent that [VPH] actually receives a refund or realizes a reduction in its

Taxes as a direct result of any Transaction Tax Benefits.” 38 Finally, Jones Day
37F

sought to require Vestcom to file pre-closing tax forms “without regard to” the

TTDs and to “submit such Tax Return” to VPH in advance of filing. 39 38F

Kirkland & Ellis replied with a new draft of the Agreement on October 27,

2012. 40 Section 3.08 of this draft again contained the language struck by Jones
39F

Day in the October 21 draft that Section 3.08 contained the only representations

and warranties related to Vestcom’s pre-closing taxes. 41 Kirkland & Ellis altered
40F

the representation on pre-closing taxes to specify that LSVC would pay taxes “due

and payable.” 42 41F Kirkland & Ellis deleted Jones Day’s provisions requiring

Vestcom to file pre-closing taxes without regard to the TTDs and to show VPH the

37
Id. § 3.08.
38
Id. § 9.01(a).
39
Id.
40
JX 29.
41
Id. § 3.08(u).
42
Id. § 3.08(a).

8
tax returns prior to filing. 43 Kirkland & Ellis then deleted the term allowing VPH
42F

to retain 50% of the TTDs. 44 Kirkland & Ellis added two provisions, the first—
43F

entitled “Tax Refunds”—stipulating that VPH retain 50% of any post-closing tax

refunds 45 and the second—entitled “Post-Closing Tax Savings”—allowing VPH to
44F

retain 50% of the value of any post-closing tax savings. 46 Kirkland & Ellis also
45F

added a provision entitled “Transaction Tax Deductions,” stating that “[i]n

connection with the preparation of [post-closing] Tax returns . . . all Transaction

Tax Deductions shall be treated as properly allocable to the Pre-Closing Tax

Period ending on the Closing Date and such Tax Returns shall include all

Transaction Tax Deductions as Deductions.” 47 The provisions relating to splitting
46F

tax refunds and savings fell within Section 9.01 (within Article IX) of the

Agreement.

On November 3, 2012, Jones Day responded with a new draft. 48 Again,
47F

Jones Day deleted the term that Section 3.08 contained the only tax

43
Id. § 9.01(a).
44
Id.
45
Id. § 9.01(e).
46
Id. § 9.01(b).
47
Id. § 9.01(a).
48
JX 36.

9
representations 49 and reinserted the requirement that Vestcom send VPH its pre-
48F

closing tax forms before filing. 50 Jones Day did not strike LSVC’s proposal to
49F

share 50% of post-closing tax refunds and 50% of post-closing tax savings.

Instead, Jones Day specified that VPH “shall not be required to pay over 50% of

such refund or amount credited to the extent that such refund or credit does not

related to a [TTD].” 51 50F Jones Day also deleted Kirkland & Ellis’s language

requiring VPH to include the full amount of the TTDs on the post-closing tax

filing. 52
51F

On November 8, 2012, Kirkland & Ellis replied to Jones Day with the next

draft of the Agreement. 53 Kirkland & Ellis added back into Section 3.08 the
52F

provision that all pre-closing tax representations were contained in Section 3.08 54 53F

and removed the provision allowing VPH access to pre-closing tax returns prior to

filing. 55 Kirkland & Ellis then deleted the provision that entitled VPH to 100% of
54F

49
Id. § 3.08(p).
50
Id. § 9.01(a).
51
Id. § 9.01(e).
52
Id. § 9.01(j).
53
JX 44.
54
Id. § 3.08(p).
55
Id. § 9.01(a).

10
non-TTD related pre-closing tax refunds. 56 Finally, Kirkland & Ellis reinserted the
55F

term requiring VPH to reflect the full amount of the TTDs on post-closing tax

returns. 57
56F

On November 18, 2012, Jones Day sent an updated draft of the Agreement

to Kirkland & Ellis. 58 This draft did not contain changes relevant to the tax
57F

provisions. On November 20, 2012, Jones Day sent another draft of the

Agreement to Kirkland & Ellis. 59 In this draft, Jones Day altered the language in
58F

Section 3.08 to state that the Agreement contained Vestcom’s pre-closing tax

representations and warranties in “Section 3.04, Section 3.13, Section 3.15[,] . . .

Article IX [(which contains the provisions concerning splitting 50% of any tax

refunds and savings), and] Section 3.08.” 60
59F

On November 24, 2012, Kirkland & Ellis returned a draft of the Agreement

to Jones Day. 61 In this draft, Kirkland & Ellis removed language stating that
60F

56
Id. § 9.01(e).
57
Id. § 9.01(j).
58
JX 52.
59
JX 55.
60
Id. § 3.08(p).
61
JX 58.

11
Article IX also contained representations and warranties related to pre-closing tax

matters. 62
61F

On November 26, 2012, Jones Day sent a draft of the Agreement. 63 This
62F

draft contained language allowing VPH to prepare the post-closing deduction

statement before LSVC would review it. 64 Jones Day also removed language in
63F

this draft that would have given LSVC 100% of the value of pre-closing tax

savings from net operating losses. 65
64F

Kirkland & Ellis replied that same day to Jones Day, accepting Jones Day’s

changes from its earlier November 26 draft. 66 Kirkland & Ellis sent a final draft of
65F

the Agreement on November 27, 2012, which did not contain any pertinent

changes to the tax treatment. 67
66F

62
Id. § 3.08(p).
63
JX 74.
64
Id. § 9.01(j).
65
Id. § 9.01(k).
66
JX 73.
67
JX 89.

12
 2. Vestcom, LSVC, and VPH executed the finalized
Agreement
Vestcom, LSVC, and VPH executed the Agreement on November 27,

2012. 68 The following provisions bear on the TTDs. Section 3 of the Agreement
67F

contains Vestcom’s representations and warranties. In Section 3.08, Vestcom

represented and warranted that “[a]ll Taxes due and payable . . . have been timely

paid or properly accrued on the Company’s books and records.” 69 As a condition
68F

to VPH’s obligations, Vestcom’s Section 3.08(a) tax representation must be true at

both the signing and closing dates. 70 69F

Article IX of the Agreement details the treatment of taxes—specifically

TTDs, tax refunds, and post-closing tax savings—in the transaction. Section

9.01(a) states that all tax returns filed by VPH “shall be prepared consistent with

the past practices of [Vestcom].” 71 Regarding the TTDs, Section 9.01(j) states:
70F

In connection with the preparation of Tax Returns . . .
[VPH and LSVC] agree that, except for any Transaction
Tax Deductions that are not “more likely than not”
deductible in the Pre-Closing Tax Period, all Transaction
Tax Deductions shall be treated as properly allocable to
the Pre-Closing Tax Period ending on the Closing Date

68
JX 75.
69
Id. § 3.08(a).
70
Id. § 2.01(a).
71
Id. § 9.01(a).

13
 and such Tax Returns shall include all Transaction Tax
Deductions. 72
71F

Section 9.01(e) of the Agreement—entitled “Tax Refunds”—states that “to

the extent [a] [t]ax refund or credit is attributable to Transaction Tax Deduction . . .

[VPH] shall have the right to retain 50% of the TTD Refund/Credit.” 73 Section 72F

9.01(k)—entitled “Post-Closing Tax Savings”—provides that “to the extent [a]

reduction in [t]ax payments is attributable to . . . Transaction Tax Deductions . . . ,

[VPH] shall have the right to retain 50% of the TTD Tax Payment Savings.” 74 73F

Also relevant to the TTDs is the purchase price adjustment contained in the

Agreement, which adjusts the deal consideration based on the difference between

Vestcom’s estimate pre-closing and VPH’s calculation post-closing of the

Company’s “Net Working Capital, Cash on Hand and Indebtedness.” 75 “If the Net
74F

Working Capital as . . . determined [by VPH post-closing] is less than the

Estimated Net Working Capital [calculated by Vestcom pre-closing], . . . [the

parties] shall promptly cause an amount equal to the amount of such shortfall to be

72
Id. § 9.01(j).
73
Id. § 9.01(e).
74
Id. § 9.01(k).
75
Id. § 1.06(b).
14
paid to [VPH] from the Working Capital Escrow Account.” 76 75F Under the

Agreement,

“Net Working Capital” means (as finally determined
under Section 1.06) (a) current assets excluding Cash on
Hand and deferred tax assets less (b) the sum of accounts
payable, accrued expenses and deferred revenue plus (c)
the sum of accrued and unpaid interest related to
Indebtedness, accrued restructuring charges[,] . . .
accrued severance and related benefits and accrued
litigation settlement payments. 77
76F

Section 1.06 requires that “Net Working Capital . . . be determined on a

consolidated basis in accordance with GAAP.” 78 77F The Net Working Capital

definition states that “Net Working Capital shall be calculated in accordance with

the Example Net Working Capital attached as Exhibit H.” 79 78F The example in

Exhibit H contains a line item for “Income Tax Payable” but not for income tax

receivable. 80
79F

Finally, Section 5.01 of the Agreement requires that Vestcom “use its

commercially reasonable efforts to conduct the Business in the ordinary course of

76
Id. § 1.06(c)(i).
77
Id. at Art. X.
78
Id. § 1.06(b).
79
Id. at Art. X.
80
Id. at Ex. H.

15
business consistence with past practice” between the signing of the Agreement and

the closing of the transaction. 81 80F

3. Vestcom utilized 100% of the TTDs pre-closing
On December 17, 2012, Vestcom completed its fourth quarter tax payment

of $1,070,000 to the IRS. 82 As CFO, Palmer used an outside tax advisor, BKD, to
81F

estimate Vestcom’s tax liability. 83 Palmer believed that the transaction would
82F

close before the end of 2012, 84 and thus, Palmer and BKD included the value of
83F

the TTDs in making the tax payment. 85 84F

The transaction closed on December 27, 2012. 86 85F

4. The parties bring the instant case
On a February 21, 2013 conference call regarding the final net working

capital adjustment, VPH learned from Palmer that there would not be a refund for

VPH from any TTDs because LSVC claimed them pre-closing. 87 On February 25,
86F

81
Id. § 5.01(d).
82
Tr. 592 (Palmer).
83
Id. at 559-60 (Palmer).
84
Id. at 561 (Palmer).
85
Id. at 563-64 (Palmer).
86
Id. at 443 (White).
87
Id. at 531-32 (Palmer).

16
2013, VPH delivered a letter to LSVC alleging breach of the Agreement. 88 87F

LSVC’s reply letter denied any breach of contract. 8988F

On March 19, 2013, LSVC filed this case against VPH for breach of the

Agreement for failure to release funds from escrow. 90 The Court dismissed the
89F

original claims pursuant to a stipulated settlement between the parties, 91 so that the
90F

only remaining claims are VPH counterclaims against LSVC for allegedly

claiming the TTDs improperly. Finding the language of the Agreement ambiguous

as to the mechanics for claiming the TTDs and the calculation of net working

capital, 92 the Court denied an LSVC motion to dismiss 93 and cross motions for
91F 92F

summary judgments 94 and held trial.
93F

II. ANALYSIS
“Delaware law adheres to the objective theory of contracts, i.e., a contract’s

construction should be that which would be understood by an objective, reasonable

88
JX 112.
89
JX 127.
90
LSVC Verified Complaint ¶ 1.
91
Pre-Trial Stipulation and Order 5-6.
92
Id. at 6.
93
Telephonic Rulings of the Ct. 6-8, 15 (Oct. 11, 2013).
94
Pre-Trial Stipulation and Order 18.

17
third party.” 95 “When interpreting a contract, this Court ‘will give priority to the
94F

parties’ intentions as reflected in the four corners of the agreement,’ construing the

agreement as a whole and giving effect to all its provisions.” 96 The terms of the
95F

contract control “when they establish the parties’ common meaning so that a

reasonable person in the position of either party would have no expectations

inconsistent with the contract language.” 97 96F Standard rules of contract

interpretation state that “a court must determine the intent of the parties from the

language of the contract.” 98
97F

“In giving sensible life to a real-world contract, courts must read the specific

provisions of the contract in light of the entire contract. This is true in all

commercial contexts, but especially so when the contract at issue involves . . . [the]

sale of an entire business.” 99 “When a contract’s plain meaning, in the context of
98F

the overall structure of the contract, is susceptible to more than one reasonable

95
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010).
96
Salamone v. Gorman, 106 A.3d 354, 367-68 (Del. 2014) (quoting GMG Capital
Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012)).
97
Id. at 368 (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d
1228, 1232 (Del. 1997)).
98
Id. (quoting Twin City Fire Ins. Co. v. Del. Racing Ass’n, 840 A.2d 624, 628 (Del.
2003)).
99
Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912,
913-14 (Del. 2017).

18
interpretation, courts may consider extrinsic evidence to resolve the ambiguity.” 10099F

Such extrinsic evidence may include “the history of negotiations, earlier drafts of

the contract, trade custom, or course of performance.” 101 “After examining the
100F

relevant extrinsic evidence, a court may conclude that, given the extrinsic

evidence, only one meaning is objectively reasonable in the circumstances of [the]

negotiation.” 102
101F

At the motion to dismiss and summary judgment stages in the instant case,

the Court found the Agreement ambiguous in its treatment of the TTDs. After

reviewing the evidence presented at trial, I conclude that the Agreement allows

only one objectively reasonable meaning, namely that Vestcom was free to claim

100% of the TTDs to reduce pre-closing taxable income, but VPH would have to

remit 50% of the value of any post-closing refunds or reductions in taxable income

to LSVC.

A. VPH and LSVC Each Offer Reasonable Interpretations of the
Agreement
This dispute centers on Sections 3.08, 5.01, and 9.01 of the Agreement.

Both VPH and LSVC offer reasonable readings of these terms of the Agreement.

100
Salamone, 106 A.3d at 374 (citing In re IBP, Inc. S’holder Litig., 789 A.2d 14, 55
(Del. Ch. 2001)).
101
In re Westech Capital Corp., 2014 WL 2211612, at *9 (Del. Ch. May 29, 2014).
102
Salamone, 106 A.3d at 374-75 (alteration in original) (quoting In re Mobilactive
Media, LLC, 2013 WL 297950, at *15 (Del. Ch. Jan. 25, 2013)).

19
 VPH, who bears the burden as Counterclaim-Plaintiff, argues that the

analysis must begin with Section 9.01. VPH asserts that Section 9.01(j) of the

Agreement gives VPH “control of the calculation and distribution of all TTDs.” 103 102F

VPH avers that, because it “shall include all Transaction Tax Deductions” on the

post-closing tax returns, this necessarily implies that the Agreement bars LSVC

from claiming any TTDs pre-closing, and the only remaining methods to realize

the TTDs occurred post-closing, after VPH took control of the Company. 104 VPH 103F

contends that to hold otherwise would make this portion of the contract “mere

surplusage.” 105
104F

VPH adds that LSVC’s decision to claim the TTDs pre-closing was outside

of the ordinary course of business in violation of Section 5.01 because (1) there

was no guarantee the transaction would close before December 31, in which case

the TTDs would not apply to the 2012 tax year, and (2) “a major transaction that

would significantly impact Vestcom’s tax liability, such as [the challenged]

103
VPH/VCH Opening Br. 18.
104
Id. at 48. Section 9.01(j) states that “[i]n connection with the preparation of [post-
closing] Tax Returns . . . [VPH and LSVC] agree that, except for any Transaction
Tax Deductions that are not ‘more likely than not’ deductible in the Pre-Closing
Tax Period, all Transaction Tax Deductions shall be treated as properly allocable
to the Pre-Closing Tax Period ending on the Closing Date and such Tax Returns
shall include all Transaction Tax Deductions.” JX 75 § 9.01(j).
105
VPH/VCH Opening Br. 49 (quoting Summers v. Walnut Ridge Cmty. Ass’n, Inc.,
2015 WL 6694093, at *3 (Del. Ch. Nov. 3, 2015)).

20
acquisition, was entirely out of the ordinary for the [C]ompany.” 106 Further, VPH
105F

argues that Section 3.08 “had nothing to do with the parties’ agreement to split

TTDs,” and thus, the Court may look to Section 9.01 for guidance on the treatment

of the TTDs pre-closing. 107
106F

LSVC responds that the analysis should begin and end with Section 3.

Under Section 3.08, all representations and warranties related to pre-closing taxes

are contained in identified provisions in Section 3 of the Agreement. 108 LSVC 107F

maintains that, without a compelling explanation from VPH, the Court should not

even look outside of Section 3 to determine the treatment of pre-closing tax filings.

LSVC adds that, in light of the actual closing date of the transaction, the

provisions requiring the Company to operate in the ordinary course of business

obligated Vestcom to claim the TTDs pre-closing. Sections 3.08(a) and 5.01 of the

Agreement require that Vestcom pay “[a]ll Taxes due and payable” 109 in a manner
108F

106
VPH/VCH Reply Br. 20.
107
Id. at 17. “This is because the ring fence language in Section 3.08 is a
representation and warranty pertaining to something that happened in the past,
while the TTD provisions in the Tax Matters section in Article IX—the provisions
on which the Court sought extrinsic evidence—were prospective covenants
governing conduct in the future.” Id.
108
JX 75 § 9.01(p).
109
Id. § 3.08(a). Section 3.08(a) itself is a pre-closing representation, and Section
2.01(a) of the Agreement “brings down” the representation at closing, making the
term also a representation that Vestcom paid all taxes due and payable at closing.

21
“consistent with past practice [of] the Company.” 110 LSVC contends that Vestcom
109F

generated its pre-closing tax returns using the “same tax estimating process” as in

prior quarters, under which the Company projected its full-year tax liabilities,

including expenses that are “more likely than not,” and paid its taxes

accordingly. 111 LSVC also proffers that under VPH’s reasoning, all of Vestcom’s
110F

actions surrounding the transaction would be out of the ordinary course because

acquisition is not an ordinary event, and this would be an absurd result.

LSVC states that even if the Court looks outside of Section 3.08 to

determine the treatment of the TTDs pre-closing, Section 9.01 of the Agreement

only provides for a payment from VPH to LSVC of post-closing benefits. 112 111F

LSVC points out that notably absent from the Agreement is a term requiring LSVC

to make a payment or retain only a certain portion of a refund or reduction realized

pre-closing. LSVC argues that this framework for a payment only from VPH to

LSVC is consistent with the executed Letter of Intent, which states: “[VPH] would

110
JX 75 § 5.01.
111
Tr. 559-61 (Palmer).
112
To the extent VPH were to receive a refund post-closing as a result of a TTD,
Section 9.01(e) states that “[VPH] shall have the right to retain 50%” of said
refund. JX 75 § 9.01(e). And to the extent that the TTDs reduce VPH’s post-
closing tax burden, Section 9.01(k) states that “[VPH] shall have the right to retain
50% of the . . . [s]avings.” Id. § 9.01(k). These clauses only concern post-closing
benefits, and compliance with each requires a one-way transfer from VPH to
LSVC.

22
pay over to the seller [LSVC] 50% of the benefit of any transaction tax deductions

on an ‘as and when realized’ basis.” 113
112F

LSVC also offers a coherent response to the “mere surplusage” argument. A

requirement to list the total amount of the TTDs on post-closing tax returns does

not on its face prevent Vestcom from claiming the TTDs on pre-closing tax

returns. Instead, the actual text to which LSVC agreed simply requires VPH to list

the total amount of the TTDs on post-closing returns. Under LSVC’s

interpretation, even if LSVC used the TTDs to prepare pre-closing estimates, VPH

must still list the TTDs on post-closing tax returns to prevent VPH from creating

an artificial tax indemnity for which LSVC would be liable. 114 113F While this

alternative purpose for Section 9.01(j) prevents the term from being mere

surplusage, the parties’ arguments reveal a tension in the Agreement, particularly

between the one-way payment mechanism and the language in Section 9.01(j)

requiring VPH to list the TTDs on post-closing tax returns. This tension

necessitates examination of extrinsic evidence.

113
JX 23.
114
LSVC indemnified VPH for any losses related to tax payments pre-closing. JX 75
§ 7.02(a)(v).

23
 B. The Extrinsic Evidence Presented at Trial Confirms LSVC’s
Interpretation of the Agreement
At trial, VPH and LSVC presented extrinsic evidence regarding the history

of the negotiations and the actions of the parties. VPH contends that the extrinsic

evidence demonstrates that, despite the lack of a provision requiring a payment

from LSVC to VPH related to pre-closing TTDs, and despite an express

prohibition on LSVC from claiming the TTDs pre-closing, the agreement between

LSVC and VPH was a “horse trade” to split the TTDs 50/50 in all circumstances,

no matter the mechanics. 115 LSVC responds that the terms of the Agreement itself
114F

only specify a payment from VPH to LSVC for post-closing refunds or savings and

that the extrinsic evidence supports this interpretation. 116 I find that the extrinsic
115F

evidence supports LSVC’s interpretation of the Agreement.

1. History of the negotiations leading to the Letter of Intent
The parties presented evidence of their respective understandings of the

negotiations. At the outset, each party wanted to claim the entirety of the TTDs.

LSVC’s first draft of the Agreement proposed that VPH pay 100% of the value of

115
VPH/VCH Opening Br. 27.
116
LSVC Answering Br. 47-48.

24
the TTDs as part of the purchase price. 117 VPH rejected that provision in an
116F

attempt to retain the full value of the TTDs. 118 117F

In order to bridge the gap between the parties, LSVC proposed that VPH pay

LSVC 50% of any TTD value “as and when realized.” 119 Snow communicated
118F

this proposal to Civantos on October 3, 2012 and, in exchange, offered that LSVC

would provide pre-closing tax indemnity “back to dollar one.” 120 119F While this

conversation created an overarching structure for the transaction, Snow stated that

the parties did not reach a “comprehensive agreement;” they expected the lawyers

to work out the details in the Agreement. 121
120F

The parties formalized this proposal in the Letter of Intent, which provided

that “[VPH] would pay over to the seller [LSVC] 50% of the benefit of any

transaction tax deductions on an ‘as and when realized’ basis.” 122 Civantos’s121F

testimony at trial centered on the “as and when realized” language, contending that

117
JX 9 § 1.02.
118
Tr. 24-30 (Civantos).
119
JX 14.
120
Id.
121
Tr. 1210-12 (Snow).
122
JX 23. VPH’s first draft of the Letter of Intent did not contain any provision
related to the TTDs. JX 18. But LSVC’s reply draft contained the aforementioned
TTD language. JX 23. VPH signed the Letter of Intent without making any edits.
Tr. 754 (Wilson).

25
this provision implied that “whatever shape, form, or manner of transaction

benefits were realized, they would be shared 50/50.” 123 This, however, does not
122F

address why the Letter of Intent discussed only a payment from VPH to LSVC.

When asked whether the language of the Letter of Intent accurately captured his

understanding of the parties’ intent, Civantos admitted, “I guess it depends on how

you read it.” 124 But, like Snow, Civantos expected the lawyers to work out “[t]he
123F

actual language . . . once we negotiate the contract.” 125
124F

2. Negotiations between the Letter of Intent and the
Agreement
The parties presented an in-depth review of the drafting history of the

Agreement that followed the execution of the Letter of Intent. At the outset, VPH

contends that the Court should overlook the drafting history because the true deal

was struck by LSVC and VPH, not their respective attorneys. 126 Unfortunately,
125F

VPH fails to identify any piece of evidence that explicitly states that the parties

would split pre-closing tax benefits 50/50 under all circumstances. Moreover, the

actions of the attorneys (as agents) and the terms of the Agreement bind VPH, as

well as LSVC.

123
Tr. 44 (Civantos).
124
Id. at 159 (Civantos).
125
Id. at 152 (Civantos).
126
VPH/VCH Opening Br. 40.
26
 The drafting history demonstrates that LSVC rejected the proposed

provisions that would have produced the outcome VPH now desires. 127 126F For

instance, VPH inserted a term into a draft of the Agreement that would have

required Vestcom to file pre-closing tax returns “without regard to [the TTDs].” 128 127F

Undoubtedly, such a provision would bar LSVC from filing pre-closing tax returns

utilizing the benefits of the TTDs; the Company clearly could not claim the TTDs

on pre-closing tax returns “without regard to [the TTDs].” 129 LSVC, however,
128F

rejected that term in the following draft on October 27, 2012. 130 LSVC replaced
129F

this language with provisions governing post-closing “[t]ax refunds” 131 and the 130F

other “[p]ost-[c]losing [t]ax] [s]avings.” 132 As with the finalized Agreement, these
131F

provisions called for a payment from VPH to LSVC of 50% of any post-closing

tax refunds or savings. Moreover, LSVC added Section 9.01(j) which requires

VPH to list the total amount of the TTDs on post-closing tax returns and prevents

127
Contrary to VPH’s assertion, this does not turn the “principle of contra
proferentem [under which the Court would construe an ambiguous term against
the party that supplied the language] on its head.” VPH/VCH Opening Br. 44.
Instead, I simply recognize that VPH proposed the term it now seeks to enforce.
LSVC outright rejected that term, and VPH still agreed to the Agreement.
128
JX 27 § 9.01(a).
129
Id.
130
JX 29 § 9.01(a).
131
Id. § 9.01(e).
132
Id. § 9.01(b) (provision later properly labeled § 9.01(k)).

27
VPH from creating an artificial tax indemnity—for which LSVC would be on the

hook—by claiming less than the total value of the TTDs post-closing. 133 Notably
132F

absent from LSVC’s proposed alterations to the Agreement is a provision requiring

a payment from LSVC to VPH related to pre-closing tax savings.

And VPH understood the effects of this language. Two days after LSVC

deleted that language, Civantos complained that this rejection created “new points .

. . that are atypical and were NOT in the original [Kirkland & Ellis] draft.” 134 133F

Snow responded that “most of the ‘new’ language [was] the plumbing required to

flush out areas such as [the] tax matters section.” 135 VPH argues that Snow misled
134F

Civantos into thinking that the underlying business deal was unchanged. 136 I 135F

disagree. LSVC’s rejections are consistent with its interpretation of the Letter of

Intent, which dictated a split of the TTDs but not the scope or functionality of that

split.

Moreover, LSVC’s November 8 draft contained provisions detailing post-

closing tax refunds and post-closing tax savings and requiring Vestcom to list all

133
Tr. 864-65 (Coenen).
134
JX 34.
135
Id.
136
VPH/VCH Opening Br. 14-15.

28
TTDs on post-closing tax returns, 137 consistent with the executed version of the
136F

Agreement. In response, on November 14, 2012, VPH sent a “major issues” list to

LSVC identifying areas in the November 8 draft that VPH was still

“review[ing].” 138 The “major issues” list characterized the language in Section
137F

9.01 as “relating to how the parties will split refunds (if any) attributable to a pre-

Closing period (including those arising from any Transaction Tax Deductions,

etc.).” 139
138F This description of the Section 9.01 language suggests that VPH

understood LSVC’s changes as affecting tax refunds received post-closing, rather

than guaranteeing a 50/50 split of the TTDs no matter when or how realized.

VPH also argues that the changes to Section 9.01 should not be interpreted

in LSVC’s favor because they would have reflected a material change to economic

terms of the deal and any changes with economic consequences would not be made

through redline drafts, but rather through principal-to-principal discussions. 140 139F

This is not true. VPH’s attorneys actually negotiated for a meaningful economic

term by striking a provision in a November 26, 2012 draft that would have given

LSVC 100% of the value of any TTD-related NOLs, transferring the benefit

137
JX 44 § 9.01.
138
JX 49.
139
Id.
140
VPH/VCH Opening Br. 14-15.

29
instead to VPH. 141 Further, LSVC did not view the language as a new term but
140F

rather a reflection of the original agreement.

Similarly, on multiple occasions, VPH proposed, and LSVC rejected,

versions of a provision allowing for Vestcom representations of pre-closing tax

matters to fall outside of Section 3 of the Agreement. VPH’s drafts from October

21, November 3, and November 20, 2012 each allowed the Agreement to contain

pre-closing tax representations in sections other than Section 3. 142 Such a term
141F

might have implied that Section 9.01 contains pre-closing tax representations. But

LSVC rejected these provisions in succession on October 27, November 8, and

November 24, 2012. 143 142F VPH agreed by signing the final version of the

Agreement, which states that “the only representations and warranties being made

by the Company” with respect to pre-closing taxes fall within specified sections of

Section 3. 144 LSVC contends that this prevents VPH from looking to the language
143F

in Section 9.01 to infer pre-closing action (or inaction) on the part of Vestcom with

respect to pre-closing taxes. I find this explanation to be persuasive evidence of

141
JX 74 § 9.01(k).
142
JX 27 § 3.08; JX 36 § 3.08(p); JX 55 § 3.08(p).
143
JX 29 § 3.08(u); JX 44 § 3.08(p); JX 58 § 3.08(p).
144
JX 75 § 3.08(p).

30
how to read the Agreement; one should look to Section 3 for matters related to pre-

closing taxes and Section 9.01 for matters related to post-closing taxes.

Regardless, VPH now contends that the business principals agreed to a

50/50 split of all TTD benefits no matter when or how realized and that the

exchange of redlines between the attorneys simply documented the deal but did not

change the basic meaning. 145 144F As support, VPH correctly points out that no

witnesses testified that the fundamental agreement changed between the Letter of

Intent and the Agreement. 146 The challenge with VPH’s stance, however, is that
145F

LSVC’s interpretation of the agreement does not reflect a change to the basic

agreement outlined in the Letter of Intent. The Letter of Intent simply stated an

intent to split the TTDs; it did not detail the full range of circumstances under

which that would be done or the mechanisms by which it would be carried out. 147 146F

145
VPH/VCH Opening Br. 42.
146
Tr. 55 (Civantos); Id. at 1196-97 (Snow); Id. at 1005 (Sorrells); Id. at 726
(Wilson); Id. at 920-24 (Coenen).
147
VPH also points to an email in which Palmers states that LSVC and VPH “decided
to divvy up the tax benefit” in an attempt to show the parties agreed to a 50/50
split in all circumstances. JX 32. On October 30, 2012, Palmer sent Sorrells a
request from VPH’s tax advisors at PriceWaterhouseCoopers (“PWC”) for
information regarding Vestcom’s tax position. Palmer stated that PWC asked for
the information because “you guys decided to divvy up the tax benefits.” JX 32.
Palmer’s email and Sorrells’ response—“Will do”—did not explicitly say that the
terms restricted benefits to refunds. Tr. 510 (Palmer). Then, in the twenty-four
hours before execution of the Agreement, White asked Snow for details on the
TTD estimates. JX 65. Snow responded to White that he had “pinged K&E
[Kirkland & Ellis] to check [the] status,” id., after which Snow forwarded K&E’s
31
The lawyers then fleshed out the functioning of the TTD split through the drafts of

the Agreement, as Snow and Civantos knew would happen. 148 The Letter of
147F

Intent, the redlined drafts of the Agreement, and the final Agreement all detail a

possible payment from VPH to LSVC related to post-closing TTDs. 149 148F And

consistent with both the Letter of Intent and the Agreement, if the Company

underpaid its taxes pre-closing, LSVC would pay VPH 100% of the shortfall,

while if the Company overpaid its pre-closing taxes or produced other post-closing

benefits, VPH would retain 50% of the value of the refund or other savings and

remit the remaining 50% to LSVC. 150149F

response later that night. JX 70. White protested, asking for a more detailed
schedule. JX 71. Snow replied that he estimated the TTDs for Civantos in
October at roughly $6-$7 million. JX 69. But Civantos insisted on a more
detailed schedule “so we all understand and agree on what is expected and there
are no surprises.” Id. Palmer created a schedule, JX 78, and after receiving
permission from Sorrells to share, Snow sent VPH the TTD schedule. JX 77.
This activity, along with VPH’s testimony at trial, establishes that VPH cared
strongly about the TTDs. See, e.g., Tr. 441-42 (White). What it does not establish
is the nature of the TTD split.
148
Tr. 1210-12 (Snow); Id. at 152 (Civantos).
149
LSVC Answering Br. 44-46.
150
Tr. 728-29 (Wilson). VPH tries to advance the “forthright negotiator principle” to
say that LSVC cannot enforce some secret understanding of an agreement that it
did not communicate to the counterparty. VPH/VCH Opening Br. 24-25 (citing
United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 835-36 (Del. Ch. 2007)).
But this argument fails. To the extent that either party has some undisclosed
understanding of the Agreement, it is VPH in its argument that the true meaning of
the agreement was a 50/50 split of the TTDs in all circumstances, regardless of the
terms written into the Agreement. Indeed, as discussed supra, VPH tries to
advance its theory of a 50/50 split in all cases despite the fact that LSVC struck
32
 VPH now asks the Court to enforce against LSVC terms that LSVC

explicitly struck from the Agreement but provides no compelling grounds on

which to do so. Accordingly, I decline. 151150F

3. Actions after execution of the Agreement
VPH contends that the post-execution actions of the parties show that the

Agreement entitled VPH to the full value of the TTDs. VPH points to LSVC’s

behavior after VPH learned that Vestcom had claimed the TTDs pre-closing. After

Palmer told White about the Company’s pre-closing tax returns, White was upset,

believing “[t]hese guys pulled a fast one on us.” 152 Palmer apologized to White on
151F

language producing that result from the Agreement. JX 29 § 9.01(a). VPH did
not convey this understanding to LSVC (except in language that was struck by
LSVC in the drafts of the Agreement), while LSVC expressed its understanding of
the agreement by negotiating for deal terms that produced LSVC’s desired real-
world effects. In fact, VPH may even have communicated that it understood
LSVC’s understanding of the agreement through the “major issues” list, discussed
supra.
151
See GRT, Inc. v. Marathon GTF Tech., Ltd., 2012 WL 2356489, at *8 (Del. Ch.
June 21, 2012) (“Under basic principles of Delaware contract law, and consistent
with Delaware’s pro-contractarian policy, a party may not come to court to
enforce a contractual right that it did not obtain for itself at the negotiating table.
This principle applies with particular force when the supposedly aggrieved party
in fact sought the specific contractual right at issue in negotiations but failed to get
it. This is because a court’s role in interpreting contracts is ‘to effectuate the
parties’ intent.’ For a court to read into an agreement a contract term that was
expressly considered and rejected by the parties in the course of negotiations
would be to ‘create new contract rights, liabilities and duties to which the parties
had not assented’ in contravention of that settled role.” (citations omitted)).
152
Tr. 451-52 (White).

33
a follow-up call, saying that he did not intend to breach the Agreement. 153 Palmer
152F

then informed Sorrells that Civantos and White were upset regarding the lack of a

TTD refund post-closing. 154 Palmer and Sorrells looked to the Agreement to see if
153F

the agreement allowed for the escrow account to make whole any alleged shortfall

in value. 155 Further, Civantos reached out to Sorrells regarding the alleged TTD
154F

issue on February 25, 2013, proposing that the parties “find a less cumbersome

solution” to “save ourselves excessive brain damage.” 156 In response, Sorrells
155F

stated that Palmer “mentioned to me the TTD issue” and that he would “take a look

and then let’s chat.” 157
156F

VPH contends that, because LSVC did not immediately respond that there

was no breach of the Agreement, LSVC must have known that it was in breach. I

am not persuaded by this argument. Sophisticated private equity firms own LSVC

and VPH. Upon learning that a transactional counterparty was upset over a deal,

LSVC examined the underlying agreement and told VPH that it would “take a look

153
Id. at 452 (White).
154
Id. at 533 (Palmer).
155
Id. at 536 (Palmer).
156
JX 113.
157
JX 114.

34
and then let’s chat.” 158 I cannot infer from LSVC’s measured response that a lack
157F

of indignant outrage upon an accusation of violating a deal term demonstrates

knowledge that the term was indeed breached.

* * *

The extrinsic evidence regarding the understanding of the negotiations and

the actions of the parties establishes that the parties agreed to split the TTDs. 159
158F

But the question for the Court is the scope of that split. At best, VPH’s arguments

show a disconnect between Court Square principals and their own lawyers. What

they do not demonstrate is that, as of the signing of the Agreement, either LSVC or

VPH agreed that LSVC would pay 50% of any TTDs claimed on pre-closing tax

returns or that LSVC was aware of the disconnect.

C. LSVC’s Interpretation Prevents an Unusual Overpayment of
Taxes
LSVC’s view benefits from the basic fact that it does not require an unusual

overpayment to the IRS. VPH’s interpretation of the Agreement would have

required Palmer to send an additional $6 million dollars to the IRS for Vestcom’s

fourth quarter tax payment, despite expenses that the Company was more likely

than not to incur during that fiscal year. Palmer testified that doing so “would be

158
Id.
159
See, e.g., JX 16 (Sorrells and Rescho congratulated Snow on “getting the split”
after Civantos agreed to share the TTDs 50/50.).

35
very unnatural,” 160 and even VPH’s expert witness agreed that “the idea is to pay
159F

the minimum to the IRS.” 161 VPH responds that an additional payment of $6
160F

million to the IRS would not constitute overpayment, but rather it would be a

decision to not “risk underpay[ment] [on] its taxes by gambling that the TTDs

would be available in the 2012 tax year.” 162 I am not persuaded by this argument.
161F

D. LSVC’s Interpretation Is Consistent with the Ordinary Course of
Business
VPH contends that Vestcom acted outside the ordinary course of business, in

violation of Section 5.01, when it claimed the TTDs pre-closing. 163 VPH argues
162F

that it is not ordinary for a company to claim TTDs because the transactions giving

rise to such deductions do not occur in the ordinary course of business. 164 But this
163F

argument implies that LSVC would breach the Agreement regardless of whether

Vestcom claimed the TTDs pre-closing because claiming TTDs and not claiming

TTDs are both events outside of the ordinary course of business. Further, the

evidence presented at trial demonstrates that Palmer acted within the ordinary

160
Tr. 557-58 (Palmer).
161
Id. at 634 (Katz).
162
VPH/VCH Opening Br. 50.
163
Id. at 49.
164
Id. at 50.

36
course of business, which VPH fails to refute. 165 Section 3.08(a) of the Agreement
164F

requires Vestcom to have fully paid all taxes “due and payable” 166 as of closing. 167
165F 166F

Any such payments “in the ordinary course of business [must be made] consistent

with past practice.” 168 Palmer testified that his calculation of Vestcom’s fourth
167F

quarter tax liability complied with the Company’s past practices. 169 Moreover,
168F

VPH admits that the finance professionals at Lake Capital or the Stephens Group

did not coach Palmer into this interpretation. 170 Instead, Palmer, who knew about
169F

the tax provisions of the Agreement, 171 estimated the Company’s tax payment in
170F

line with his understanding of Vestcom’s normal course of business. VPH offers

165
VPH also argues that LSVC’s actions violate another term in Section 3.06, which
bars Vestcom from “materially accelerat[ing] the collection of accounts receivable
. . . for the purpose of increasing Cash on Hand.” JX 75 § 3.06. Properly
estimating one’s tax liability is not the same as accelerating the collection of
accounts receivable in order to increase cash.
166
JX 75 § 3.08(a).
167
Id. § 2.01(a).
168
Id. § 5.01.
169
Tr. 567 (Palmer). Palmer explained that “Vestcom’s objective in calculating its
estimated taxes was to accurately calculate its tax liability and then pay that
amount,” id. at 563-64 (Palmer), and that is precisely what he did with the tax
payment challenged in this case. Id. at 567 (Palmer).
170
VPH/VCH Opening Br. 37 (citing Tr. 528-29 (Palmer)). Sorrells also stated that
he “never talked with [Palmer] about the mechanics of the [Agreement] at all.”
Tr. 1070-71 (Sorrells).
171
Tr. 568-69 (Palmer).

37
no evidence that the Company’s actions conflicted with the ordinary course of

business or the past practices of Vestcom. Rather, VPH’s tax expert explained

that, absent some other agreement, “there is nothing improper” in LSVC claiming

the full value of the TTDs pre-closing. 172
171F

E. LSVC’s Interpretation Prevents an Absurd Result Under the Net
Working Capital Adjustment
The Net Working Capital calculation also supports LSVC’s—but not

VPH’s—view of the agreement. The parties agreed to adjust the purchase price

based on any differences between the estimated net working capital at signing and

the actual net working capital after VPH took control of the Company. 173 If VPH
172F

found the net working capital accounts lower than the estimates, then VPH would

172
Id. at 637-38 (Katz). VPH also contends that LSVC violated the covenant of good
faith and fair dealing by claiming the TTDs pre-closing. VPH/VCH Opening Br.
51-52. The covenant protects “the spirit of an agreement when, without violating
the express term of the agreement, one side uses oppressive or underhanded tactics
to deny the other side the fruits of the parties’ bargain.” Chamison v. HealthTrust,
Inc., 735 A.2d 912, 920 (Del. Ch. 1999). As discussed, however, LSVC did not
use oppressive or underhanded tactics to undercut the spirit of the agreement;
rather, LSVC complied with the terms of the bargain, which provided for a
payment from VPH to LSVC related to the value of any TTDs realized post-
closing. Moreover, VPH asks the Court to apply the covenant of good faith and
fair dealing to add a rejected term to the Agreement barring Vestcom from
claiming any TTDs pre-closing. But the “covenant should not be used to fill the
gap [in a contract] with a rejected term because doing so would grant a contractual
protection that the party ‘failed to secure . . . at the bargaining table.’” NAMA
Hldgs., LLC v. Related WMC LLC, 2014 WL 6436647, at *16 (Del. Ch. Nov. 17,
2014) (quoting Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697,
707 (Del. Ch. 2004), aff’d, 861 A.2d 1251 (Del. 2004)).
173
JX 75 § 1.06(b).

38
receive the difference from an escrow account. 174 But if the actual net working
173F

capital account was greater than the estimate at signing, then VPH would owe

LSVC the difference.

Net working capital increases (decreases) as accounts payable decreases

(increases) and increases (decreases) as accounts receivable increase (decrease). 175
174F

Income tax payables and receivables factor into net working capital under GAAP.

LSVC argues that the structure of the net working capital adjustment implies that

“any expected tax refund that would have resulted had Vestcom not used the TTDs

to decrease its fourth quarter estimated taxes would have been paid for by VPH as

an adjustment” to net working capital. 176 The idea is as follows: if LSVC overpaid
175F

its taxes in the fourth quarter of 2012, then VPH would receive a refund in 2013. 177
176F

Expected tax refunds increase income tax receivables, which in turn increase net

working capital and trigger a purchase price adjustment payment from VPH to

LSVC.

174
Id. § 1.06(c)(i).
175
Id. at Art. X.
176
VPH/VCH Opening Br. 55.
177
The Agreement explicitly excludes cash on hand from the net working capital
calculation. JX 75 Art. X. Thus, a change to the Company’s cash holdings
resulting from tax payments does not by itself affect the purchase price
adjustment.

39
 The issue is whether the Agreement provides for the inclusion of income tax

receivables in the net working capital adjustment. Under GAAP, income tax

receivables are listed as a current asset for the purpose of net working capital. 178 177F

Section 1.06 of the Agreement stipulates that “Net Working Capital . . . be

determined on a consolidated basis in accordance with GAAP,” 179 while the Net
178F

Working Capital definition states that “Net Working Capital shall be calculated in

accordance with the Example Net Working Capital attached as Exhibit H.” 180 179F

Exhibit H does not include a line item for income tax receivable, 181 explicitly
180F

excludes income tax payables from the net working capital adjustment, 182 and does
181F

not comply with GAAP. 183 There is then a seeming ambiguity between whether
182F

GAAP or the accounting methodology from Exhibit H controls the accounting

treatment of income tax receivables. I find that either accounting methodology

dictates the same result.

178
Id.; LSVC Answering Br. 64.
179
JX 75 § 1.06(b).
180
Id. at Art. X.
181
Id. at Ex. H.
182
Id.
183
LSVC Answering Br. 64.

40
 If GAAP controls, then an expected tax return from overpayment would

reside as an income tax receivable in the net working capital calculation. This

would increase net working capital, triggering a payment from VPH to LSVC.

If Exhibit H controls, then the question is whether net working capital as

contemplated by the Agreement and Exhibit H includes income tax receivables.

VPH points out that the Company’s general ledger netted any income tax

receivables against income tax payables in the payables line on the balance sheet. 184
183F

But Palmer clarified that the Company’s practice was to “adjust [the general ledger]

at year-end with [the Company’s tax advisor]” in order to satisfy GAAP. 185 I find
184F

Palmer’s testimony highly credible. Palmer has been the CFO of Vestcom for six

years, working at the Company before and after the sale under both LSVC and VPH

ownership. 186
185F He was involved in the net working capital negotiations and

preparation of the estimated closing balance sheet, providing him a valuable

understanding of these terms. 187 Palmer also displayed a noteworthy degree of
186F

candor to the Court, for which the Court is greatly appreciative.

184
Tr. 544 (Palmer).
185
Id. at 601 (Palmer).
186
Id. at 501 (Palmer).
187
Id. at 598, 601 (Palmer).

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 VPH replies that because Exhibit H excludes income tax payables from the

defined net working capital adjustment, the Agreement also excludes income tax

receivables from that calculation. But VPH ignores the remainder of Palmer’s

explanation. Palmer testified that he did not believe the Agreement excluded

income tax receivables from the net working capital adjustment. 188 He noted that
187F

the Agreement explicitly removes cash, deferred tax assets, accounts payable,

accrued expenses, deferred revenue, certain restructuring charges, accrued

severance and related benefits, and accrued litigation settlement payments from the

definition of net working capital. 189 This highly negotiated list of exclusions does
188F

not include receivables. And Exhibit H lacks a line item for income tax receivables

only because Vestcom was not expecting a tax receivable as of October 2012. 190 189F

Palmer stated that, in the event of an expected $6 million refund, he would have

“read [the Agreement] at the time and understood it just as it’s written” 191 and then
190F

ordered the Company “controller . . . [to] break [income tax receivables] out as a

current asset.” 192 Palmer further noted that such a “significant, several million
191F

188
Id. at 602 (Palmer).
189
Id. at 605 (Palmer). See JX 75 Art. X.
190
Tr. 603 (Palmer).
191
Id. at 602 (Palmer).
192
Id. at 604 (Palmer).

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dollar[]” expected refund would warrant an accounts receivable line item because

“[i]t would have looked very strange to have a $6 million debit balance in current

liabilities.” 193 Thus, the result under the Agreement of a tax overpayment is the
192F

creation of a receivable, which increases net working capital and obligates a

payment from VPH to LSVC under the purchase price adjustment.

VPH points out that this creates an illogical result if the Agreement also

requires that Vestcom overpay its taxes by $6 million before closing. 194 If LSVC
193F

paid an extra $6 million in pre-closing taxes, then VPH would owe both the cost of

the net working capital adjustment increase as a result of the new receivable (the

expected tax refund) and half the value of that later-realized tax refund, meaning

that VPH would effectively pay 150% for the value of the TTDs. VPH is correct

that this would be an unusual provision. 195 But such an absurd outcome directly
194F

results from VPH’s argument that the Agreement requires a $6 million

overpayment. Instead, LSVC provides a functional understanding of the

Agreement that does not obligate VPH to make such unusual payments.

193
Id.
194
VPH/VCH Opening Br. 54-55.
195
And VPH states that such an arrangement was not the deal. Tr. 70 (Civantos).

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III. CONCLUSION
For the foregoing reasons, I find in favor of LSVC and conclude that the

Agreement permitted Vestcom to claim the TTDs pre-closing.

IT IS SO ORDERED.

44