This December, the Delaware Supreme Court penned two decisions that shined the spotlight on purchase agreement provisions that are often afterthoughts in negotiations.  In Golden Rule Financial Corporation v. Shareholder Representative Services, No. 61, 2021, 2021 WL 5754866 (Del. Dec. 3, 2021) (ORDER), the Court reviewed the post-closing “true up” language and determined that “consistently applied” accounting principles in the post-closing true up does not necessarily mean “in the same manner as had been applied prior to closing.”  And in AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, –A.3d–, 2021 WL 5832875 (Del. Dec. 8, 2021), the Court confirmed what it means to operate a business in the ordinary course between signing and closing during a pandemic.  The Golden Rule and AB Stable decisions provide an insightful frame of reference for practitioners to rethink what these provisions mean and how they may want to recraft them to allocate risk as intended.

Golden Rule Financial Corporation v. Shareholder Representative Services

This case involved the purchase of another company.  Under the purchase agreement, the base purchase price was subject to a post-closing purchase price adjustment.  The post-closing adjustment followed the typical format—first, Sellers provide prior to closing an estimated balance sheet and a schedule showing an estimate its Tangible Net Worth.  Post-closing, Buyer provides Sellers a final statement prepared “in accordance with the Accounting Principles, consistently applied.”  The purchase agreement also provided that “Tangible Net Worth” be determined in accordance with the Accounting Principles.  The Accounting Principles, in turn, follow a hierarchy:

(a) The accounting principles and policies specifically set out below (the “Specific Policies”);

(b) To the extent not addressed in paragraph (a) and not inconsistent with GAAP, as applicable, the accounting policies, principles, procedures, rules, practices, methodologies, categorizations, and definitions used to prepare the audited GAAP annual consolidated balance sheet as at December 31, 2018 . . . ;

(c) To the extent not addressed in paragraphs (a) and (b), GAAP, as applicable.

If the final Tangible Net Worth exceeded the target peg of $52 million, Buyer would true up the Sellers the excess of the peg.  Likewise, if the Tangible Net Worth fell below the peg, the Sellers would true up Buyer.

In preparing its estimated balance statement and schedule, Sellers incorporated the recent accounting standard update ASC 606, even though the target company was not obligated to comply with ASC 606 under the accounting standards until after closing.  ASC 606 was also added as one of the “Specific Policies” under the Accounting Principles hierarchy.  Sellers provided an estimated balance sheet and schedule showing a Tangible Net Worth of $40.75 million, or $11.25 million below the peg.

When Buyer completed its post-closing statements, it discovered Sellers had incorrectly applied ASC 606.  If applied consistently with Sellers’ methodology, the final Tangible Net Worth would have been $35 million, $17 million below the peg.  If applied correctly, that number would be $73.7 million, well above the peg.  Buyer informed Sellers of the error and provided a final statement that incorporated Sellers’ incorrect but “consistently applied” ASC 606 application.  Sellers disputed the final statement and the parties commenced final determination with a third party auditor.  Before final determination, Buyer filed suit in the Court of Chancery for a declaration that the purchase agreement “requires the same, consistent application of ASC 606 as had been applied” by Sellers.  The Court of Chancery dismissed the action, holding that the final Tangible Net Worth figure must incorporate ASC 606 as correctly applied.

The Delaware Supreme Court affirmed the dismissal.  It ruled, essentially, that because the specific policy of ASC 606 was at the top of the Accounting Principles hierarchy, an incorrect application would effectively result in ASC 606 being left unapplied.  It disagreed with Buyer’s interpretation because “consistently applied” here is more reasonably interpreted as preventing either party from opportunistically picking and choosing different treatments under GAAP rather than applying the agreed upon GAAP provisions.


  • “Consistently applied” does not mean applied in the same incorrect manner prior to closing. Seek additional protection with language in the true up provisions that account  for incorrect application.
  • Pre-empt any financial statement and closing statement irregularities by conducting thorough financial due diligence.
  • Make sure you are protected from incorrect application of accounting rules with adequate financial statement representations. Consider also the indemnification rights and survival period with respect to financial statement representations to preserve recourse for the breach.

AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC

In this case, Seller entered into purchase agreement to sell a line of indirectly owned luxury hotels.  The purchase agreement was executed on September 10, 2019, with closing to happen at a later date.  The purchase agreement contained a “no material adverse effect” (or “No MAE”) condition and the following “ordinary course” covenant:

Except as otherwise contemplated by this Agreement . . . between the date of this Agreement and the Closing Date, unless the buyer shall otherwise provide its prior written consent (which consent shall not be unreasonably withheld, conditioned or delayed), the business of the company and its subsidiaries shall be conducted only in the ordinary course of business consistent with past practice in all material respects. . . . (emphasis added).

Closing was delayed for a variety of reasons, including issues with title on the hotel properties (someone had filed fraudulent deeds against the subject luxury hotel properties and Seller’s counsel downplayed and concealed information about it).  The issues pushed closing into the COVID pandemic.  Seller closed operations at two of its hotels, and the other hotels operated in a “closed but open” fashion, reducing staffing and pausing all non-essential capital spending.  Two weeks later, Seller informed Buyer of its change in operations while insisting that it did not need consent from Buyer to change its operations, nor could consent be reasonably withheld because of the pandemic.  Buyer said it was not prepared to give consent without more information.  Seller did not respond to a request for more information.  On the scheduled closing date, Seller gave notice of default on based on, among other things, Seller’s failure to operate in the ordinary course of business.  Seller then filed suit in the Court of Chancery seeking specific performance to close the transaction.  In Seller’s view, to give effect to both the No MAE provision and the ordinary course covenant, Seller must have freedom to take reasonable industry standard responses to systemic risks allocated to Buyer by the No MAE provision.  The Court of Chancery sided with Buyer, however, concluding that Seller breached the ordinary course covenant by making “extraordinary changes to is business that departed radically from the normal and routine operation of the Hotels and were wholly inconsistent with past practice.”

The Delaware Supreme Court affirmed the court’s decision, holding that compliance of the ordinary course covenant is measured by its operational history, and not that of the industry in which it operates.  It also found that the No MAE provision served a different purpose—the No MAE provision allocates the risk of changes in the target company’s valuation, whereas the ordinary course covenant is included to reassure the buyer that the target company has not materially changed its business during the pendency of the transaction.  Thus, the fact that Seller was taking justifiable, reasonable, industry-consistent steps to preserve the business in response to the pandemic did not excuse it from seeking prior consent to comply with the ordinary course covenant.


  • Ordinary course covenants as typically drafted do not allow for target companies to change their business practices outside of past practice, even if such changes are a commercially reasonable reaction to outside forces.
  • Delaware courts interpret material adverse effect clauses to allocate risk of changes to the target company’s valuation. Ordinary course covenants, on the other hand, are intended to protect against changes in business or business practices between signing and closing.
  • If a target company needs the flexibility to react to events such as the COVID pandemic between signing and closing, consider qualifying the ordinary course covenant with a “commercially reasonable efforts” clause. The Court specifically identified that changing business practices in accordance with industry practices was more akin to acting with “commercially reasonable efforts” than only the ordinary course.
  • Alternatively, seek consent when acting outside of the ordinary course covenant. The Court concluded by reiterating that prior notice and consent provisions are not to be taken lightly, and a 2 week delay between changing business practices and giving notice/consent was not immaterial.  Moreover, here, consent could not be unreasonably withheld, conditioned or delayed, thus providing possible recourse to Seller if Buyer did not consent to acting within industry practices during the pandemic.