IN THE SUPREME COURT OF THE STATE OF DELAWARE
GOLDEN RULE FINANCIAL §
CORPORATION, § No. 61, 2021
§
Plaintiff Below, § Court Below: Court of Chancery
Appellant, § of the State of Delaware
§
v. §
§ C.A. No. 2020-0378-PAF
SHAREHOLDER §
REPRESENTATIVE SERVICES §
LLC, §
§
Defendant Below, §
Appellee. §
Submitted: September 22, 2021
Decided: December 3, 2021
Before SEITZ, Chief Justice; VALIHURA and VAUGHN, Justices.
ORDER
This 3rd day of December 2021, upon consideration of the parties’ briefs and
the record of the case, it appears that:
1. The plaintiff-appellant, Golden Rule Financial Corporation (“Golden
Rule”), appeals from a Court of Chancery judgment dismissing its complaint
pursuant to Chancery Rule 12(b)(6). Golden Rule is the buyer in an agreement (“the
Agreement”) for the sale of USHEALTH Group, Inc. (“the Company”). The
defendant-appellee, Shareholder Representative Services LLC (“SRS”), is the
representative of the former stockholders of the Company for purposes of this
transaction. The Agreement provides that Golden Rule would acquire the Company
for a base purchase price of $750 million. The base purchase price, however, was
subject to a post-closing purchase price adjustment.
2. The post-closing purchase price adjustment process resulted in a dispute
between the parties as to the final purchase price, and SRS initiated a dispute
resolution procedure contained in the Agreement. When disputes arose during that
process, Golden Rule initiated this proceeding. On appeal, Golden Rule claims that
the Court of Chancery erred by dismissing its complaint. We have concluded that
the Court of Chancery did not err and that its judgment should be affirmed.
3. Golden Rule is a health insurance company organized under the laws of
Delaware. The Company is a Delaware corporation that owns several insurance
companies and other entities. The Seller, SRS, is a Colorado-based LLC and is the
representative agent and attorney-in-fact of the stockholders of the Company for
purposes of the Agreement.
4. On June 2, 2019, Golden Rule and SRS entered into the Agreement
whereby Golden Rule would acquire the Company. The parties closed the
transaction on August 31, 2019. The Agreement includes a price adjustment
mechanism based on whether certain accounting metrics at closing exceeded or fell
short of targets established at signing. The purchase price was to be adjusted either
upward or downward, depending on whether any business changes increased or
2
decreased the value of the Company between signing and closing. Such a price
adjustment provision is common in transactions of this type and is referred to as a
“true-up process.”
5. The specific accounting metric that was to be utilized in the true-up process
is “Tangible Net Worth.”1 The Agreement provides that Tangible Net Worth means
“as of the [closing date], the total assets . . . minus the total Liabilities . . . minus the
total intangible assets . . . in each case determined in accordance with the
Accounting Principles.”2 The Agreement sets the target Tangible Net Worth at $52
million. If the Tangible Net Worth at closing exceeded $52 million under the true-
up process, Golden Rule would owe the excess amount. If the Tangible Net Worth
fell short of the $52 million target, the purchase price would be reduced accordingly.
6. The Agreement includes a several-step process to accurately determine the
purchase price adjustment at closing. First, § 3.1(a) provides that no later than five
days before closing, SRS was required to provide Golden Rule with Pre-Closing
Financials, which included good-faith estimates of the financial metrics relevant to
the true-up process and the Company’s estimated purchase price at closing. The
applicable provision reads, in relevant part, as follows:
No later than five (5) Business Days prior to the
anticipated Closing Date, the Company shall deliver to
[Golden Rule] a statement setting forth an estimated
1
App. to Appellant’s Op. Br. at A0025 (Compl. ¶ 25) [hereinafter A_].
2
A0064 (emphasis added).
3
balance sheet of the Company as of the [closing date]
prepared in accordance with the Accounting Principles
(the “Estimated Balance Sheet”) and a schedule . . . (the
“Estimated Schedule”) showing, in reasonable detail, a
good faith estimate of the Company’s calculations of the
Tangible Net Worth (the “Estimated Tangible Net
Worth”) . . . .3
Thus, the Agreement required that estimates be prepared in accordance with
the “Accounting Principles,”4 which are defined in Annex A of the Agreement. The
Agreement further provided at § 3.4(b) that Golden Rule was to respond to SRS’s
calculations within ninety days after the closing date with its own calculation of
Tangible Net Worth. Sec 3.4(b) provides in relevant part, as follows:
No later than 90 days after the Closing Date, [Golden
Rule] shall deliver to [SRS] a statement (the “Final
Adjustment Statement”) setting forth (i) the balance sheet
of the Company as of the [closing date] prepared in
accordance with the Accounting Principles, consistently
applied (the “Subject Balance Sheet”), and (ii) [Golden
Rule’s] good faith calculation of (A) the Tangible Net
Worth. . . .5
7. Essential to SRS’s and Golden Rule’s calculations of the Tangible Net
Worth are the Accounting Principles. The Accounting Principles first require that
the Tangible Net Worth be prepared and calculated in accordance with the following
hierarchy:
3
A0073.
4
A0145.
5
A0077.
4
(a) The accounting principles and policies specifically set
out below (the “Specific Policies”);
(b) To the extent not addressed in paragraph (a) and not
inconsistent with GAAP, as applicable, the accounting
policies, principles, procedures, rules, practices,
methodologies, categorizations, and definitions used to
prepare the audited GAAP annual consolidated balance
sheet as at December 31, 2018 . . .;
(c) To the extent not addressed in paragraphs (a) and (b),
GAAP, as applicable.6
8. Therefore, the parties were required to begin their calculations in
accordance with the “Specific Policies.”7 The Specific Policies refer to a special
accounting standard known as “ASC 606.” ASC 606 is the accounting procedure at
issue in this case. ASC 606 was adopted by the Financial Accounting Standards
Board (“FASB”)—an organization that establishes financial accounting standards
for companies that follow the Generally Accepted Accounting Principles (“GAAP”).
ASC 606 is a relatively new accounting standard. Private companies, such as the
Company, were not required to adopt it until the annual reporting period ending
December 31, 2019. Consequently, it was not mandatory for the Company to
implement ASC 606 during negotiations or prior to closing. The parties, through
their negotiations, however, chose to include ASC 606 in the Accounting Principles.
9. Prior to closing, SRS provided Golden Rule with its Estimated Tangible
6
A0145.
7
Id.
5
Net Worth. SRS estimated the Tangible Net Worth at closing to be approximately
$40.75 million, which would reduce Golden Rule’s purchase price by $11.25
million. When Golden Rule began to calculate its final adjustment after closing, it
realized that the Company had consistently but incorrectly applied ASC 606.
Applying the incorrect approach used by the Company prior to closing, Golden Rule
calculated the final Tangible Net Worth to be approximately $35 million, $5.75
million below SRS’s estimations. However, when Golden Rule applied ASC 606
correctly, the final Tangible Net Worth increased to $73.7 million.
10. Believing that the parties had agreed to “consistently apply” the
Accounting Principles post-closing in the same manner as they had been applied
when determining the Tangible Net Worth target set forth in the agreement and
SRS’s calculation just prior to settlement, Golden Rule’s Final Adjustment
Statement relied on the incorrect, yet consistent, ASC 606 approach taken by the
Company and SRS. Under this approach, Golden Rule determined Tangible Net
Worth at the aforementioned $35 million. Golden Rule, however, also provided the
Company and SRS with a Reconciliation Statement that showed the estimate of
$73.7 million had the ASC 606 been applied correctly rather than “consistently.”
11. SRS took the position that ASC 606 should be correctly applied, and that
the Final Adjustment Amount should be based on the Tangible Net Worth of $73.7
million calculated by Golden Rule. It began the Agreement’s dispute resolution
6
process and in that proceeding engaged an independent accounting firm known as
KPMG to determine the Final Adjustment Amount and resolve the dispute over the
application of ASC 606.
12. Golden Rule then filed its complaint in the Court of Chancery. It set forth
three counts: breach of contract, breach of the implied covenant of good faith and
fair dealing, and quasi-estoppel. The relief requested in all three was a declaration
that the Agreement requires the same, consistent application of ASC 606 as had been
applied by the Company and SRS, and an injunction prohibiting SRS from asking
KPMG to determine the Financial Application Amount using an application of ASC
606 that is inconsistent with the Company’s own application. SRS responded with
its motion to dismiss the complaint for failure to state a claim upon which relief
could be granted under Rule 12(b)(6).
13. In its ruling on SRS’s motion to dismiss, the court first found, as to Count
I, the breach of contract claim, that the agreement unambiguously requires the
correct application of ASC 606 to the Closing Balances Sheets and the Tangible Net
Worth estimates. It reasoned that although the Agreement does not use the qualifiers
“accurate” or “correct,” they are inherent in the ordinary and usual meaning of the
provisions involved. The court rejected Golden Rule’s argument that “consistently
applied” in § 3.4(b)(i) required that the Company’s incorrect application of ASC 606
be carried on to the conclusion of the process.
7
14. Regarding Counts II and III, the court found that there was no gap to be
filled by the covenant of good faith and fair dealing, and that Golden Rule did not
meet the high standard required for invoking quasi-estoppel.
15. This Court reviews a decision to grant a motion to dismiss under Rule
12(b)(6) de novo “to determine whether the trial judge erred as a matter of law in
formulating or applying legal precepts.”8 The Court must accept all well-pleaded
allegations as true and draw reasonable inferences in favor of the plaintiff.9
“Nevertheless, conclusory allegations need not be treated as true, nor should
inferences be drawn unless they truly are reasonable.”10 “Dismissal is appropriate
only if it appears with reasonable certainty that, under any set of facts that could be
proven to support the claims asserted, the plaintiff would not be entitled to relief.”11
16. Golden Rule contends that the contractual language that the final true-up
process figures be prepared “in accordance with the Accounting Principles,
consistently applied” means that Golden Rule was entitled (and obligated) to prepare
the true-up process figures in the same manner the Company did before closing; that
the purpose of the true-up process required application of the Accounting Principles
in the same manner both before and after closing; and that inconsistent application
8
Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009) (internal quotation marks
omitted).
9
Feldman v. Cutaia, 951 A.2d 727, 731 (Del. 2008).
10
Id.
11
Clinton, 977 A.2d at 895 (internal quotation marks omitted).
8
of the Accounting Principles would produce an unfair windfall for SRS. It contends
that the Court of Chancery’s interpretation of the Agreement causes it to read as if
the clause in question, § 3.4(b), said simply “in accordance with the Accounting
Principles[,]” and essentially reads the phrase “consistently applied” out of the
Agreement.
17. As mentioned, Tangible Net Worth is defined as being prepared “in
accordance with the Accounting Principles.”12 The Accounting Principles, in turn,
require that the calculations be prepared in agreement with the outlined hierarchy,
which unambiguously requires that the Tangible Net Worth “reflect the impact of
the requirements of [ASC 606].”13 Golden Rule contends that it did apply ASC 606
because an incorrect application of the rule is still an application of the rule. We
believe, however, that Golden Rule’s contentions are antithetical to the plain
language that the Tangible Net Worth “reflect the impact of the requirements of
[ASC 606].”14
18. The structure of the Agreement illustrates that the intention of the parties
was to implement the correct approach to ASC 606. The “Specific Policies,” which
include ASC 606, are at the top of the Accounting Principles hierarchy, followed by
“the accounting policies [and] principles . . . used to prepare the [Company’s]
12
A0073.
13
A0145.
14
Id.
9
audited GAAP annual consolidated balance sheet as at December 31, 2018.”15 This
hierarchy shows that the parties prioritized the application of ASC 606. An incorrect
application of ASC 606 would effectively result in ASC 606 being left unapplied,
despite the parties’ express agreement to apply ASC 606.
19. Golden Rule’s argument that the Court of Chancery’s interpretation
effectively erases “consistently applied” from the Agreement, violating the principle
that courts give effect to all provisions in a contract, is unpersuasive. Because GAAP
“allows for a variety of treatments,”16 “consistently applied” can reasonably be
interpreted as preventing either party from opportunistically picking and choosing
different treatments under GAAP rather than applying the agreed upon GAAP
provisions. The plain language of the Agreement supports an application of the
correct application of ASC 606. Golden Rule’s position would, in substance, read
ASC 606 out of the agreement.
20. Golden Rule relies, in part, upon this Court’s opinion in Chicago Bridge
& Iron Co. N.V. v. Westinghouse Electric Co. LLC.17 In that case, Chicago Bridge
agreed to sell its subsidiary, Stone, to Westinghouse.18 Chicago Bridge and
Westinghouse had an “extensive collaboration and complicated commercial
15
Id.
16
Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC, 166 A.3d 912, 929 (Del.
2017).
17
166 A.3d 912 (Del. 2017).
18
Id. at 917.
10
relationship”19 in the nuclear power plant business. The relationship became
contentious, and to resolve their differences, the parties agreed that Chicago Bridge
would sell Stone to Westinghouse, which would allow Chicago Bridge to make a
“clean break from the spiraling cost of the nuclear projects.”20 Reflecting the fact
that a purpose of the transaction was essentially to enable Chicago Bridge to get out
of the nuclear power plant business, the contract had several unique provisions.21
One was that the purchase price of the deal was set at zero.22 Chicago Bridge agreed
to this purchase price because of another uncommon provision: a Liability Bar.23
The Liability Bar eliminated Chicago Bridge’s liability to Westinghouse for any
post-closing claims for breaches of representations and warranties.24
21. The agreement had a true-up provision, which required that final
calculations be “prepared and determined from the books and records of the
Company and its Subsidiaries and in accordance with [GAAP] applied on a
consistent basis throughout the periods indicated and with the Agreed Principles.”25
Chicago Bridge was likely to receive compensation only if the true-up process led
19
Id. at 914.
20
Id. at 915.
21
See id. at 920.
22
Id.
23
See id.
24
Id.
25
Id. at 922.
11
to that result. The true-up target in that transaction was Net Working Capital.26
22. Shortly before closing, Chicago Bridge delivered to Westinghouse its
calculation that the Net Working Capital was approximately $428 million above the
target.27 After settlement, Westinghouse informed Chicago Bridge that it calculated
the Net Working Capital at over $2 billion below the target and that Chicago Bridge
owed it that amount.28 Westinghouse admitted that almost all of the $2 billion arose
from the proposition that Chicago Bridge’s historical financial statements were
based on an incorrect application of GAAP in Stone’s financial statements.29
Chicago Bridge argued in response that the Westinghouse’s claims constituted
alleged breaches of the Agreement’s representations and warranties, which were
barred by the Liability Bar, and that Westinghouse was, in essence, trying to make
an end-run around the Liability Bar.30 This Court agreed with Chicago Bridge that
Westinghouse’s claim was barred by the Liability Bar and that the true-up process
could resolve only changes in Stone’s business between signing and closing.31
23. This case is different from Chicago Bridge in significant respects. In this
case, there is no Liability Bar to contend with and the implementation of ASC 606
26
Id. at 914.
27
Id. at 923.
28
Id.
29
Id.
30
Id. at 925.
31
Id. at 934.
12
was a specifically bargained-for term. Because of these and other factual differences
between the cases, Chicago Bridge has no persuasive precedential value in this case.
24. We also find no error in the Court of Chancery’s dismissal of Golden
Rule’s equitable claims of breach of the covenant of good faith and fair dealing and
quasi-estoppel. The implied covenant of good faith and fair dealing is a “limited and
extraordinary legal remedy[,]”32 which applies only “when the contract is truly silent
concerning the matter at hand. ”33 No such gap exists here. “Under Delaware law,
the doctrine of quasi-estoppel applies ‘when it would be unconscionable to allow a
person to maintain a position inconsistent with one to which he acquiesced, or from
which he accepted a benefit. To constitute this sort of estoppel the act of the party
against whom the estoppel is sought must have gained some advantage for himself
or produced some disadvantage to another.’”34 “[C]ourts are particularly reluctant
to find unconscionability in contracts between sophisticated corporations.”35 We see
no error in the Court of Chancery’s conclusion that SRS’s effort to have ASC 606
applied correctly, which we agree is consistent with the express terms of the contract,
32
Nemec v. Shrader, 991 A.2d 1120, 1128 (Del. 2010).
33
Oxbow Carbon & Minerals Hldgs., Inc. v. Crestview-Oxbow Acq., LLC, 202 A.3d 482, 507
(Del. 2019) (quoting Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1033 (Del.
Ch. 2006)).
34
RBC Capital Markets, LLC v. Jervis, 129 A.3d 816, 872-73 (Del. 2015) (quoting Bank of N.Y
Mellon v. Commerzbank Capital Funding Trust II, 2011 WL 3360024, at *8 n.21 (Del. Ch. Aug.
4, 2011).
35
Reserves Mgmt., LLC v. Am. Acq. Prop. I, LLC, 86 A.3d 1119, 2014 WL 823407, at *9 (Del.
2014).
13
is not unconscionable.
NOW, THEREFORE, IT IS THE ORDER of the Court that the judgment of
the Court of Chancery is AFFIRMED.
BY THE COURT:
/s/ James T. Vaughn, Jr.
Justice
14