Court Reviews Validity of Escrow Claims
Gore, et al., v. Al Jazeera America Holdings I, Inc. emphasizes not only the necessity to carefully draft indemnification claim provisions in merger agreements but the need to carefully draft indemnification claims as well. Here plaintiffs were the sellers of the business and were contesting indemnification claims. The case was before the Delaware Court of Chancery on motions for reargument and judgement on the pleadings.
The merger agreement provided that indemnification claim certificates must state that that the claimant “will incur or pay damages.” The contested claim certificate stated “may incur or pay additional damages.” The Vice Chancellor found that use of the term “may”, instead of the required term “will”, was substantially different and was not in compliance with the contract. However, the Court allowed the matter to proceed to trial to hear evidence as to whether this was a material defect in the context of the claim presented. In so doing the Court rejected a theory that the claim certificate was valid because another provision of the merger agreement, namely one requiring notice of third party claims, used the word “may”. The Court noted that the third party claim notice provision had a different objective which was to determine who would control the contest of the third party claim.
Another issue surrounded a set of facts that can be briefly summarized as follows: A third party made a claim which indicated the sellers had breached a representation, because of this breach the buyer anticipated certain other named parties would also submit claims and provided an estimate of the amount, and the buyer further anticipated that other unnamed third parties would submit claims in unspecified amounts. As to the claim for damages by unnamed third parties, the Court noted the claim certificate was required to state the amount of damages, or if not yet incurred or paid, the amount reasonably believed to be the amount that will be incurred or paid. Here the Court granted the motion for judgement on the pleadings because the contract did not permit open ended claims and unequivocally required some statement of a concrete damages amount to be paid, incurred or projected.
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