The Delaware Court of Chancery recently issued an opinion that offers useful guidance for parties wishing to include a binding third-party valuation feature in an agreement. In PECO Logistics v. Walnut Investment Partners, C.A. No. 9978-CB (Del. Ch. Dec. 30, 2015), the court refused to review an independent valuation firm’s valuation of a business where the agreement provided that such determination would be binding. The decision reaffirms the court’s general deference to the contractual choices of sophisticated parties and offers a road map for practitioners to reduce potential disputes over third-party valuations in a variety of contexts, including purchase price adjustments in merger and acquisition agreements.
The dispute in PECO Logistics arose when Walnut Investment Partners L.P. and Walnut Private Equity Fund L.P. (together, the Walnut investors) exercised a voluntary right (the put right) to sell their preferred units in PECO Logistics LLC to the company pursuant to the company’s LLC agreement.
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