Delaware Court of Chancery Applies Step Transaction Doctrine to Favor Substance Over Form

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 opinion here.

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 factual context.

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 construction."

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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