SHAREHOLDER REPRESENTATIVE SERVICES, LLC, ET AL.
AIRBUS AMERICAS, INC.
THE CIRCUIT COURT OF FAIRFAX COUNTY Jane Marum Roush, Judge
Present: Lemons, C.J., Goodwyn, McClanahan, Powell, Kelsey,
and McCullough, JJ., and Koontz, S.J.
LAWRENCE L. KOONTZ, JR., SENIOR JUSTICE.
case involves a contract dispute between the purchaser and
the seller of a corporation pursuant to a corporate merger
agreement. As pertinent here, the merger agreement provided
for three different liability limitations ("damage
caps") in the event of certain breaches by the seller.
There is no dispute now that the seller breached a number of
the requirements of the merger agreement. Those breaches all
involved the seller's failure to use certain generally
accepted accounting principles, as contemplated in the merger
agreement, to accurately establish the financial condition of
the seller's corporation and, accordingly, the
appropriate adjustment to the consideration to be paid by the
purchaser to the seller. In this regard, the amount of the
adjustment was controlled by the indemnity the purchaser was
entitled to receive under the applicable damage caps. The
primary focus of this appeal is whether the circuit court
properly construed the merger agreement as to which damage
cap was controlling under the demonstrated facts of the case.
Aviation, Inc. ("Metron Aviation"), which in 2010
was a wholly-owned subsidiary of Metron Holdings, Inc.
("Metron"), is the developer of Metron Traffic
Flow, a software program for air traffic control systems. On
April 29, 2010, Metron Aviation entered into a five-year
contract with Airservices Australia ("ASA"), a
corporation chartered by the Australian government, which is
the equivalent of the United States' Federal Aviation
Administration. The contract required Metron Aviation to
install and support Metron Traffic Flow at ASA facilities.
Under the terms of the contract and subsequent revisions,
Metron Aviation was obligated to provide additional
functionality and updates through 2015, with ASA having an
option to extend the contract.
25, 2011, Airbus Americas, Inc. ("Airbus"), a
Delaware corporation, which has its principal office in
Herndon, Virginia, entered into a merger agreement with
Metron. Shareholder Representative Services, LLC
("SRS") acted as agent for the stockholders of
amount to be paid by Airbus to Metron at closing was subject
to an adjustment of the $75, 000, 000 purchase price based on
Metron's financial condition at the time of the merger.
To determine this adjustment, three business days prior to
the closing date Metron was required to prepare a
"Consideration Spreadsheet, " as defined in Section
2.15 of the parties' Agreement and Plan of Merger, based
on its most recent financial statements and current operating
assets and liabilities. Metron warranted that its corporate
accounting practices adhered to generally accepted accounting
principles, or "GAAP, " as required by Section 3.7
of the merger agreement.
required in Section 3.10, Metron warranted that it had
"no liabilities, indebtedness, claims, deficiencies,
expenses, guarantees or other obligations of any nature
(matured or unmatured, accrued or unaccrued, fixed or
contingent) required to be reflected, reserved against or
otherwise disclosed in or on the Company Financial Statements
prepared in accordance with GAAP." Section 3.28(c)
further provided a warranty that neither Metron nor its
subsidiary was "a party to any Government Contract which
is reasonably expected to result in a loss" to Metron or
to the requirement of Section 9.1, at closing the parties
established an escrow fund, as defined in Section 2.6(a)(ii),
securing Airbus for indemnification of any inaccuracies or
breaches of Metron's representations and warranties up to
$5.8 million. Under Section 9.2(a), the escrow fund was to be
held for a period of sixteen months after the closing date,
at which time all representations and warranties made by
Metron, with certain exceptions not at issue here, would
expire. Section 9.2(b), in relevant part, provided that
Airbus would "be entitled to be indemnified for
Damages[ actually Incurred . . . as a
result of (i) any breach of, or inaccuracy in, any
representation or warranty by [Metron, and] . . . (iv) any
inaccuracy in the Consideration Spreadsheet."
for acts of fraud or willful misconduct, Section
9.2(c)(iii)(A) established Metron's maximum liability for
"breaches of all representations and warranties other
than Fundamental Representations and Special Representations
. . . in the aggregate, to payment from the [$5.8 million]
Indemnity Portion of the Escrow Fund" (the "escrow
cap"). Liability for breaches of "Fundamental
Representations and Special Representations" was capped
at $15 million by Section 9.2(c)(iii)(B) (the "special
representations cap"). For any other breach not subject
to either of these caps, under Section 9.2(c)(iii)(C) Metron
was required to indemnify Airbus up to "100% of the
total merger consideration" actually received by Metron
under the merger agreement, which was approximately $55
million (the "merger consideration cap").
closing of the merger was held on October 18, 2011. Airbus
then tendered the amount required as stated in the
Consideration Spreadsheet prepared by Metron.
the merger, Metron Aviation, then a subsidiary of Airbus,
continued to work on developing and upgrading Metron Traffic
Flow as required by the ASA contract. In 2012, Airbus became
concerned that Metron Aviation was not performing as
expected, and following an internal audit determined that the
estimated cost to complete the ASA contract would
significantly exceed its expected revenue.
also determined in its audit that Metron's pre-merger
financial reports and operating accounts were, in the
auditor's opinion, not in accord with GAAP. Essentially,
the auditor concluded that payments noted by Metron under the
ASA contract and cost for future upgrades and maintenance
required under the contract had not been properly
characterized as liabilities under a "loss making
contract." Consequently, Airbus maintained that it was