Do Post-Closing Merger Price Adjustments Comport With DGCL?

Delaware courts have routinely upheld post-closing merger price adjustments that comply with the requirements of Section 251 of the Delaware General Corporation Law. To allow stockholders to make an informed decision as to whether to accept the merger consideration, or seek appraisal, Section 251 requires that the value of the “cash, property, rights or securities … which the holders … are to receive” as consideration in the merger be determinable or ascertainable by the stockholders at or about the time of the merger. Section 251(b) permits, however, the value of the merger consideration to be determined or ascertained from “facts” outside of the merger agreement, including the “occurrence of any event … a determination or action by any person or body, including the corporation.” For example, upward, post-closing price adjustments for earnouts based on the performance of the seller over a definite period of time after the closing are common in private-company mergers, and have been upheld by the Court of Chancery under DGCL Section 251(b), as in Aveta v. Cavallieri, 23 A.3d 157, 178 (Del. Ch. 2010). Similarly, escrow provisions, in which a portion of the merger consideration is held back and remains subject to claims of the buyer for a certain period of time after the closing, are also common in private-company mergers, and widely accepted as permissible post-closing price adjustments under DGCL Section 251(b). (See, e.g., In re OPENLANE Shareholders Litigation, C.A. No. 6849-VCN (Del. Ch. Sept. 30, 2011).)

Under Section 251, stockholders surrender their shares for cancellation in return for the benefit of the merger consideration. In an earnout approach, stockholders receive the benefit of a portion of the merger consideration up front, and have the possibility of receiving additional merger consideration or future benefits based on the performance of the seller over a period of time after the closing. In an escrow approach, the stockholders also receive the benefit of a portion of the merger consideration up front, and have the possibility of receiving additional merger consideration or the future benefit of the amount of the merger consideration held back in escrow depending on whether the buyer successfully asserts a claim against the escrowed funds. In contrast to a benefit for their canceled shares, an indemnification or clawback approach leaves the stockholders with a potential liability or obligation to return the merger consideration at some later time if the buyer successfully asserts a claim under the indemnification obligation in a merger agreement. But, as the Court of Chancery noted in its recent decision in Cigna Health and Life Insurance v. Audax Health Solutions, C.A. No. 9405-VCP (Del. Ch. Nov. 26, 2014), query whether the indemnification or clawback approach comports with the two-way exchange concept in Section 251, in which the stockholders surrender their shares in exchange for the benefit, not liability for further obligations, of the corresponding merger consideration. The court noted that very few Delaware cases have, however, addressed the propriety of post-closing price adjustments for indemnification or clawbacks.