A recent Delaware Court of Chancery decision,
Deluxe Entertainment Services Inc. v. DLX Acquisition Corporation, 2021 WL 1169905 (Del Ch. Mar. 29, 2021), provides a stark reminder of the need to carefully provide, in your stock purchase agreement, mechanics for the transfer by the target to the selling shareholders of any assets that remain in the target at closing that were intended to be excluded from the sale of the target and retained by the selling stockholders. In
Deluxe Entertainment, the buyer was entitled to keep all cash held in target bank accounts after closing, even though cash had been excluded from the net working capital adjustment (i.e., the seller received no credit for the amount of cash left in the target’s bank accounts), and the seller could have swept the cash from the target immediately prior to closing, but failed to do so.
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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.