July 28, 2014
July 25, 2014
Delaware Court of Chancery Analyzes Damages Claims in Failed Asset Sale
The Delaware Court of Chancery recently denied, with one exception, cross-motions for summary judgment in an action to determine damages arising from a failed asset purchase agreement.
Plaintiff Henkel Corporation (Henkel) entered into a December 2007 Asset Sale and Purchase Agreement (Agreement) to sell its consumer adhesive business (Business) to defendant Innovative Brands Holdings, LLC (IBH) for $127.5 million. After signing, IBH subsequently refused to complete the purchase.
Henkel commenced an action for specific performance. IBH filed counterclaims seeking a declaration that a material adverse event (MAE) had occurred and that it was not obligated to close, but that Henkel nonetheless remained bound by the no-shop clause. Later, during the litigation, IBH changed its position and waived all rights to purchase the Business or to enforce the no-shop. Henkel then sold the Business to Shurtape for $112 million, or $15.5 million less than the price agreed to by IBH.
The parties then proceeded to litigation regarding the amount of damages owed to Henkel by IBH for breach of the Agreement. Henkel sought three types of damages: (1) the $15.5 million difference between the purchase price in the Agreement and the amount it later agreed to with Shurtape (Sales Price Damages); (2) the costs Henkel incurred in conducting a second sale process (Transaction Damages); and (3) the attorneys’ fees and expenses Henkel incurred due to IBH’s breach (Legal Enforcement Damages).
IBH argued that the income generated by the Business during the period between the date IBH breached the Agreement and the eventual sale to the alternative buyer (Interim Period) should be offset against Henkel’s damages. The court determined that Henkel’s reasonable expectations were limited to revenues generated by the Business until the date it would have sold the Business to IBH under the Agreement. Allowing Henkel to receive both damages and the Interim Period income would result in a “windfall” to Henkel.
The court denied summary judgment, however, in large part because there were disputed issues of fact as to the date of IBH’s breach, which the court needed to determine in order to calculate the Interim Period income to be offset against Henkel’s damages.
Separately, the Agreement authorized Henkel to recover legal expenses and did not subject them to any offset by the Business’ profits, as it did with regard to actual damages. Henkel was therefore entitled to partial summary judgment awarding its reasonable attorneys’ fees and costs.
Henkel Corp. v. Innovative Brands Holdings LLC, No. 3663-VCN (Del. Ch. Jan. 31, 2013).
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