In Coughlan v. NXP B.V., C. A. No. 5110-VCG (Del.
Ch. Nov. 4, 2011), the Delaware Court of Chancery applied the step transaction
doctrine and the equitable principle that elevates substance over form, in order
to grant summary judgment in a contract interpretation case. Read this 35-page
Issue Addressed: Whether a challenged transaction
triggered an acceleration provision in a merger agreement?
Short answer: No.
Basis of Jurisdiction and Procedural Setting:
The Court explained that: "This matter is before me
pursuant to 8 Del. C. Section 111(a)(6), which confers jurisdiction on
the Court of Chancery over any civil action to interpret the provisions of
merger agreements. Slip op. at 16. The procedural posture was pending cross
motions for summary judgment based on Court of Chancery Rule 56(h) which is
deemed to be a submission by the parties for a decision on the record submitted
with the motions.
Very Brief Background:
This decision interpreted provisions in a merger
agreement that included contingent payments due in certain circumstances. The
Court found the provisions unambiguous and also found that the obligations
under the agreement were assumed by an acquiring company, thus avoiding
acceleration provisions. The opinion provides extensive details about the
Overview of Key Legal Principles:
This opinion recognizes that summary judgment is
appropriate for contract issues because "the proper construction of any
contract ... is purely a question of law." Also reiterated was the following
truism that cannot be repeated too often: "... a contract is not rendered
ambiguous simply because the parties do not agree upon its proper
The step transaction doctrine was explained as treating a
series of "formally separate but related transactions involving the transfer of
property as a single transaction if all the steps are substantially linked."
The Court recited three different analyses used in applying the step
transaction doctrine: "the end result test, the interdependence test, and the
binding commitment test." See footnotes 73 to 76 for prior Chancery
cases where this doctrine has been applied.
Importantly, for purposes of its broad applicability to
other cases, the Court emphasized that even if the step transaction were not
applied, a similar result would be reached based on the hoary equitable
principle which provides that: "equity regards substance rather than form."
Slip op. at 25 and 26.
Highlights of the Court's reasoning include the settled
principle that each provision of a contract must be given effect, if possible,
and reconciled with all provisions as a whole. Likewise, the Court underscored
its position that it would not allow a "hyper-technical reading of an isolated
portion" of the agreement in order to "circumvent a meaning that is clear by
the language of the Agreement read as a whole." Id. at 29. The Court
observed that even though the acceleration provision was not triggered, the
contingency payments continued to be paid by the acquiring entity just as
contemplated by the applicable agreement.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Eckert Seamans.
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