Internal billings trigger M&A damages; GPCM prevails

BVWireIssue #252-2
September 20, 2023

damages, breach of contract, cash flow, fraud, merger, projections, generally accepted accounting principles (GAAP), purchase price, guideline public company method (GPCM)

A case in Delaware Chancery Court shows that the court will not award damages from an M&A transaction gone bad when the calculations are based on speculative lost synergies.

GAAP gap: NetApp Inc. sued the sellers of the company it acquired, Cloud Jumper, a private software firm, for breach of contract and fraud in connection with the sale. The court held that the defendant breached multiple representations in the merger agreement, including that the financial statements were GAAP-compliant and represented bona fide transactions. But the seller included internal billings in company revenue and projections that it did not disclose to the buyer, who relied on those numbers when valuing the firm for purchase.

The court awarded expectation damages but did not accept the plaintiff buyer’s calculation, which used a DCF and projected as well as synergistic cash flows. The court accepted the seller’s estimate of damages, which was the purchase price minus the valuation using the guideline public company method (GPCM).

There are much more details in the case, which is NetApp, Inc. v. Cinelli, 2023 Del. Ch. LEXIS 220; 2023 WL 4925910, and a case analysis and full court opinion are on the BVLaw platform.

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