In Schillinger Genetics, Inc. v. Benson Hill Seeds, Inc., the Delaware Court of Chancery held that plaintiff sellers were entitled to summary judgment on their claim that the buyer breached the parties' purchase agreement by failing to timely provide a closing statement following the closing of the sale. In so doing, the court ruled that the plaintiffs were entitled to the escrow funds that secured the sellers' obligation to fund any negative post-closing adjustments to the purchase price and that, as a result of its breach, the buyer had waived its right to assert any such negative adjustments. The court's decision is a reminder to buyers and their counsel to ensure that their post-closing true-up calculations are delivered within the temporal parameters specified by the governing purchase agreement following the closing of a transaction.

Background

On February 7, 2019, Schillinger Genetics, Inc. (Company) and John Schillinger, the Company's founder (collectively, Sellers), entered into an asset purchase agreement under which Benson Hill Seeds, Inc. (Buyer) acquired certain assets and liabilities of the Company for $14 million. Under the purchase agreement, Sellers were obligated to provide estimates of the Company's accounts payable at closing, and, within 90 days thereafter, Buyer was obligated to provide its own calculation of the actual accounts payable at closing. The parties deposited $250,000 into an escrow account to cover Sellers' obligations in the event that Buyer's calculation of the accounts payable resulted in a negative adjustment to the purchase price. The transaction closed on February 9. Buyer subsequently failed to deliver its calculations by the deadline established by the purchase agreement. On June 24, following repeated outreach to Buyer, Sellers' counsel sent Buyer's counsel a letter, informing Buyer that it was in breach of the purchase agreement. On July 3, Buyer emailed Sellers a purported closing statement containing its calculation, which revealed a negative adjustment to the purchase price of approximately $80,000. Sellers disputed Buyer's calculations through the dispute mechanisms established by the purchase agreement, but Buyer ultimately refused to resolve the disagreement or execute a joint written consent releasing the escrow funds. Sellers filed an action in the Delaware Court of Chancery, claiming that Buyer had breached the purchase agreement by failing to timely provide the closing statement, seeking an order of specific performance for release of the escrow funds.

Court's Analysis

The court granted summary judgment in Sellers' favor, holding that Buyer had breached the purchase agreement and waived its right to any post-closing adjustment. In its analysis, the court noted that it was undisputed that Buyer had failed to timely deliver its closing statement in accordance with the purchase agreement. It was unavailing to the court that, according to Buyer, Sellers were not prejudiced by the delay because the parties had expressly bargained for the 90-day deadline of the closing statement. According to the court, by failing to provide the closing statement by the deadline, Buyer had frustrated the determination of the post-closing adjustment, entitling Sellers to all of the escrow funds. However, the court stopped short of entering an order of specific performance that would have directed Buyer to release the escrow funds to Sellers. Rather, in the interests of "judicial economy" and to avoid "a series of potential and disruptive appeals," the court deferred the release of the escrow funds pending final judgment on the other remaining issues in the case, reasoning that Sellers were not likely to suffer any harm from having the funds remain in the escrow and that Sellers would be compensated for the delay through the interest accruing on the escrow funds in the account, in addition to any court-awarded interest.

Takeaways

Schillinger demonstrates the importance of ensuring that buyers in M&A transactions strictly comply with bargained-for deadlines covering closing statements in their purchase agreements. In this respect, practical steps to avoid any unnecessary pitfalls might involve sending digital calendar reminders of the closing statement deadline and other important post-closing deadlines to the deal team on the day of (or shortly after) closing. The court's decision in Schillinger also serves to reinforce the familiar principle that an order of specific performance is always at the court's discretion. Parties to a purchase agreement can always signal their agreement that specific performance is necessary to the court in case of a breach (as the parties did in Schillinger), but the court, will ultimately decide when, and in what circumstances, to grant such a remedy.