The Relevance of Commercial Realities in the Interpretation of the Charter and Bylaws

Delaware courts recognize that a company’s charter and bylaws reflect the contract between the company and its shareholders, directors, and officers, and use general principles of contract construction to govern these interpreting the document. Relatedly, under Delaware’s objective theory of contract, the goal of contract construction is to identify the parties’ intentions from the perspective of an objective, rational third party. Thus, where a literal interpretation would produce a result inconsistent with what the drafter reasonably intended (which itself derives from the commercial context evidenced in plain language throughout the document), the literal Meaning is supplanted by a more nuanced “objective” meaning. This article examines the application of this important precept in the interpretation of the Charter and Bylaws.

Chicago Bridge & Iron v. Westinghouse Electric, 166 A.3d 912 (Del. 2017) exemplifies this approach. So the Delaware Supreme Court interpreted an agreement to sell a subsidiary established to build a nuclear power plant. The initial purchase price was $0, but a post-closing adjustment was applied that required the buyer to make a post-closing payment if the subsidiary’s net working capital exceeded its target, or the seller if it fell short. rice field. Instead, Buyer’s sole remedy for any breach of Seller’s representations is to refuse to complete the transaction, and Buyer has agreed to indemnify Seller for its Subsidiary’s past liabilities. After closing, the buyer claimed to have owed nearly $2 billion from the seller under post-closing adjustments. This represents the difference between the seller’s working capital estimate, which allegedly did not comply with GAAP, and the buyer’s calculation, which allegedly complied with GAAP. In dismissing the buyer’s argument, the court explained that the contract must be construed in a way that respects the parties’ “fundamental business relationship” and gives “a sensible life to the real-world contract.” . at 913–14, 927. Having read the terms of the agreement in unison, the court held that the purpose of the transaction was to provide the seller with a risky and expensive investment in exchange for (potentially) $0, an upside opportunity, and security. concluded that it is to allow one to withdraw from the business. of minimal debt. Thus, the court concluded that the agreement, in effect, clearly forbade the use of post-closing adjustments to sue for breach of representation, entitles the buyer to a $2 billion “purchase price.” I rejected the counter-intuitive result.

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