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Shareholder Representative Services LLC v. Airbus Americas, Inc.

Supreme Court of Virginia

October 27, 2016

SHAREHOLDER REPRESENTATIVE SERVICES, LLC, ET AL.
v.
AIRBUS AMERICAS, INC.

          FROM 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.

          OPINION

          LAWRENCE L. KOONTZ, JR., SENIOR JUSTICE.

         This 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.

         BACKGROUND

         Metron 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.

         On July 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 Metron.[1]

         The 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.[2]

         As 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 its subsidiary.

         Pursuant 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[[3] 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."

         Except 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").

         The 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.

         After 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.

         Airbus 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 entitled ...


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