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Delaware Chancery Court allows termination of USD230 million telecom deal for breach of Capitalization Representations

Decision underscores primacy of negotiated contract language.

Following a three-day trial that laid out a complex set of facts, the Delaware Chancery Court recently ruled1 that prospective buyers could not be forced to complete a planned merger due to the sellers’ breach of the merger agreement’s capitalization representations. Setting aside the buyers’ potential motives for termination, Chancellor Kathaleen St. J. McCormick relied on the negotiated language of the merger agreement to find that the buyers had validly terminated the merger agreement – “Buyers negotiated for the ability to terminate if the capitalization representations were not accurate in all respects, and this decision enforces that right” – even though the “financial value of [the breach was] minor relative to the deal value.”2

Key facts

A group of privately-held Florida broadband companies (the “Sellers”) held a competitive bidding process for the sale of the group (the “Company Group”) and ultimately entered into a merger agreement (the “Merger Agreement”) with private equity firm Antin Infrastructure Partners S.A.S. and its affiliate OTI Parent LLC (the “Buyers”), for a purchase price of USD230 million, plus USD30 million in potential earn-out payments.3 The Merger Agreement included a “flat bring-down” of its capitalization representations (the “Capitalization Representations”), meaning at closing, the representations regarding the capitalization of the Company Group had to be “true in all respects”.4 Buyers had noted concerns about the target’s capitalization during due diligence, which Sellers addressed by agreeing to: (i) change the transaction structure to a merger (rather than a share purchase – in order to minimize the risk of potential post-closing claims from unknown holders of equity securities in the Company Group); (ii) an uncapped indemnity for any costs or damages related to a breach of the Capitalization Representations; and (iii) a closing condition that the fundamental representations, including the Capitalization Representations, were to be true and correct in all respects at closing.5

After the Merger Agreement was signed, however, Rafael Marquez, a former employee of the Company Group, came “out of the woodwork” claiming ownership in certain Company Group entities based on a 2004 Software Development Agreement. Marquez “demand[ed] settlement amounts far beyond what [the Company Group CEO] viewed as reasonable,” contacted Buyers’ executives and attorneys, threatened to make the Company Group software “available to a network of developers in Venezuela,” and refused Sellers’ repeated offers to settle his claims.6 Buyers’ and Sellers’ relationship deteriorated as they “were unable to reach an agreement on how to address the Marquez risks;” ultimately, Buyers delivered a notice of breach of the Capitalization Representations on February 6, 2023.7 Sellers attempted to insulate Buyers from the issue via an internal restructuring, which Buyers viewed as a further breach of the Merger Agreement; during this period, it also came to light that the Company Group had another previously-undisclosed potential optionholder. Buyers notified Sellers that due to Sellers’ failure to cure these breaches of the Merger Agreement, Buyers would terminate the Merger Agreement, effective March 8, 2023. Sellers then filed suit, claiming specific performance under the Merger Agreement and that Buyers had breached certain covenants and therefore could not terminate the Merger Agreement.

Ultimately, Chancellor McCormick was not convinced by Sellers’ claims, nor by the mitigating factors Sellers put in place to address the Capitalization Representations pre-signing (the structuring and special indemnity) or pre-closing (the restructuring), nor by the potentially small dollar value of the Marquez issue. Instead, she looked to the language of the Merger Agreement, writing, “the parties’ dispute over Buyers’ motives are largely beside the point. The real issue [. . .] is whether they had a legal basis to notice a breach and terminate the Merger Agreement.”8

Key takeaways

While most representations and warranties in a merger agreement are subject to materiality or “material adverse effect” qualifiers, certain fundamental representations (including representations and warranties relating to: the organization and authority of the target company; no conflicts with organizational documents of the target company; equity securities of the target company; and monetary obligations (such as debt or broker’s fees)) may need to be true and correct in all respects on and as of the signing of the merger agreement, as well as the closing date. If such representations and warranties are required to be “true and correct in all respects,” a buyer may have the right to walk away in the event any of these fundamental representations are inaccurate.

In an uncertain economy, it becomes especially important for parties to carefully consider the wording of its representations and warranties, and related bring down and closing conditions – this language is not simple “boilerplate” when it can result in the failure of a transaction.


1. HControl Holdings LLC v. Antin Infrastructure Partners S.A.S. C.A. No. 2023-0283-KSJM, memo. op. (Del. Ch. May 29, 2023).
2. Id at 4.
3. Id at 9.
4. Id at 12.
5. Id at 15.
6. Id at 1, 17, 22-30.
7. Id at 35.
8. Id at 37.