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Deluxe Entertainment Services Inc. v. DLX Acquisition Corporation involved a stock purchase agreement where Plaintiff Deluxe Entertainment sold all of its stock (the “Transaction”) in its wholly owned subsidiary, Deluxe Media Inc. (“Target”), to defendant DLX Acquisition Corporation (“Buyer,” and together with Target, “Defendants”), an affiliate of the private equity firm Platinum Equity. All of Target’s assets, except for those excluded by the parties’ purchase agreement (the “Purchase Agreement”), were transferred in the Transaction.

At closing, several million dollars in cash remained in Target’s bank accounts (the “Disputed Cash”). Seller alleges it failed to sweep those funds from Target before closing “for various practical and technical reasons,” and Buyer did not dispute Seller had the right to sweep those funds before closing.

Buyer refused to return the Disputed Cash upon request from the Seller, indicating the Purchase Agreement did not require it to do so.  Seller then commenced an action in the Court of Chancery alleging three causes of action for return of the Disputed Cash:

  • Buyer’s failure to return the Disputed Cash amounted to a breach of the Purchase Agreement.
  • Failure to return the cash was a breach of the implied covenant of good faith and fair dealing.
  • A request to reform the Purchase Agreement to address the issue.

Seller argued the parties never intended to transfer the Disputed Cash to Buyer as evidenced by:

  • The Purchase Agreement’s definition of net working capital for purposes of calculating the purchase price, and
  • Extrinsic evidence about the parties’ negotiations leading up to the Purchase Agreement, which Seller contends reflects the parties’ otherwise undocumented agreement that the Transaction would be “cash-free, debt-free.”

Breach of Purchase Agreement

The Court noted it is a general principle of corporate law that all assets and liabilities are transferred in the sale of a company effected by a sale of stock.  When Seller agreed to sell Buyer all the Target Shares, it agreed to sell all the Target’s assets.

As a result, the parties did not enumerate the assets transferred but instead listed certain excluded assets on a schedule.  The schedule did not address the Disputed Cash.

Seller argued the Purchase Agreement did not transfer Target’s cash to Buyer based on the Purchase Agreement’s calculation of the purchase price, which directs a calculation of net working capital that excluded cash.  Seller further argued that the Purchase Agreement’s exclusion of cash from Net Working Capital, and thus from the Closing Date Purchase Price, indicated the parties’ clear intent that the Transaction would be “cash-free, debt-free.”  The Court rejected these arguments, noting that the purchase price adjustments are just that: adjustments to how much Buyer was to pay, not to what assets the Buyer purchased. Nothing in the purchase price provisions indicated the parties’ intention to exclude cash according to the Court.

Seller contended that “at worst,” the Purchase Agreement is ambiguous in its treatment of cash, so the Court may reach its proffered extrinsic evidence and conclude the parties intended the Transaction to exclude cash. But the Court noted the Purchase Agreement was not ambiguous on this point, so it did not reach Seller’s arguments about the parties’ negotiation history. According to the Court a party cannot use negotiation history itself to create ambiguity, as extrinsic, parol evidence cannot be used to manufacture an ambiguity in a contract that facially has only one reasonable meaning.

Good Faith and Fair Dealing

Seller argued that the implied covenant of good faith and fair dealing required Buyer to return the Disputed Cash. Since Seller failed to identify a gap in transaction terms in which the implied covenant could operate, the Seller’s claim failed.

Other provisions of the Purchase Agreement contemplated the possibility that an asset could be inadvertently transferred at closing, but those provisions did not address the Disputed Cash. Here an unintended asset transfer was not an “unanticipated development,” but rather was “expressly covered by the contract.”  The Court stated to use the implied covenant to add the Disputed Cash to the list of excluded assets would be “to create a free-floating duty unattached to the underlying legal documents.”


Seller contended that if the Purchase Agreement’s plain language does not evidence the parties’ agreement that the Disputed Cash was to be excluded from the Transaction, then the absence of such language was the result of a scrivener’s error. Seller therefore urged the Court to reform the Purchase Agreement.

The Court declined to reform the Purchase Agreement.  The Court noted Seller’s allegations about the parties’ negotiation history failed to plead the terms of a definite agreement that was materially different from the Purchase Agreement the terms of which the parties intended to incorporate into the Purchase Agreement. The alleged mistake that led to the perhaps unintended transfer of the Disputed Cash is not the sort of mistake that supports reformation; it is not a mistake in the expression of the Purchase Agreement, but rather an operational mistake by Seller in preparing to perform.

More fundamentally, Seller offered no evidence of a scrivener’s error in the Purchase Agreement. Seller did not identify what error was made when reducing the Purchase Agreement to writing nor any mistake as to the contents or effect of a writing that expresses the agreement. Nor did Seller identify an erroneous belief relating to the facts as they existed at the time of the making of the contract.

The Court stated the “mistake” at issue was Seller’s failure to sweep the Disputed Cash from Target’s bank account, separate and apart from the terms of the Purchase Agreement. Seller’s failure to sweep Target’s cash was an operations or accounting mistake, which is crucially distinguishable from a scrivener’s error in the underlying agreement itself that can be remedied by reformation.  The Court held it will not change the terms of the parties’ bargain to accommodate Seller’s error in preparing to perform under the agreement that reflects that bargain.

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