Sage Software, Inc. v. CA, Inc., C.A. No. 4912-VCS (Del. Ch. Dec. 14, 2010) (Strine, V.C.)

In this opinion, the Court of Chancery held that defendant corporation CA, Inc. (“CA”) was entitled to declaratory judgment on two counts pertaining to a merger agreement under which CA was obligated to indemnify plaintiffs Sage Software, Inc. and Sage Software Canada LTD (collectively, “Sage”) for tax losses allocable to the period preceding the closing of the merger (the “Pre-Closing Period”).

Pursuant to an Agreement and Plan of Merger dated December 23, 2003 (the “Merger Agreement”), Sage acquired ACCPAC International, Inc. (“ACCPAC”), a wholly owned subsidiary of CA that conducted the majority of its business in Canada but also maintained operations in the United States. Article VIII of the Merger Agreement included provisions delineating the parties’ rights and obligations with regard to “Tax Matters” relevant to the Pre-Closing Period, and Article X outlined CA’s indemnification obligations and the timing of any required indemnification payments.

In 2006, Sage learned that the Canada Revenue Agency (the “CRA”) had concluded an audit of ACCPAC and proposed a tax assessment related to underpaid Canadian taxes implicating the Pre-Closing Period. ACCPAC subsequently requested a Competent Authority proceeding, under which the CRA and the United States Internal Revenue Service would determine the proper allocation of taxes between the two taxing authorities; a process that both plaintiffs and defendant acknowledged could take years to complete. In 2008, while the Competent Authority proceeding was ongoing, the CRA exercised its statutory right to collect 50% of the proposed $8 to $10 million tax assessment from ACCPAC (the “Required Payment”), and Sage made such payment in order to avoid having certain assets of ACCPAC seized. Following numerous communications between CA and Sage regarding CA’s obligation to indemnify Sage for the cost of the Required Payment, Sage filed suit in the Court of Chancery seeking a declaratory judgment that either: (i) the Merger Agreement requires CA to reimburse Sage “promptly” for payments made to the CRA pending the outcome of the Competent Authority Proceeding; or (ii) the Merger Agreement permits Sage to terminate the Competent Authority process, causing the CRA’s proposed assessment to become final, and triggering CA’s indemnification obligations under the Merger Agreement.

In analyzing Sage’s contention that Article X of the Merger Agreement required CA to reimburse “promptly” any amounts paid by Sage to the CRA, the Court focused on language contained in Section 10.10 of the Merger Agreement stating that “any amounts owed” by CA to Sage under Article X of the Merger Agreement “shall be paid within ten (10) business days notice from [Sage] following the final resolution (which is final in the sense that it is no longer subject to appeal or other review) of any dispute related to such amounts; provided that in the case of indemnity payments for a Tax Loss, [CA] shall not be required to make the portion of such payment, if any, that is not yet due and payable to a Tax Authority until ten (10) days before it is so due and payable.” (emphasis in original). Sage argued that Section 10.10 contains two independent payment provisions, the first addressing CA’s indemnity obligations other than payments for Tax Losses, which are contingent upon the final resolution of any dispute, and the second which is limited to Tax Losses, and is not subject to the final resolution of any dispute. The Court, however, disagreed with Sage’s analysis, and adopted CA’s view that the requirement that any dispute reach final resolution applied to all of CA’s indemnification obligations, including indemnification pertaining to Tax Losses. Citing the broad language contained in Section 10.10 governing “any amounts owed” under Article X of the Merger Agreement, the general practice of the Delaware courts to read the phrase “provided that” as creating a condition rather than an exception, and the fact that the second clause of the Section 10.10 language cited by the Court is written in the negative rather than in the affirmative, the Court determined that the language at issue was intended to provide additional protection to CA in the event of an indemnification obligation pertaining to Tax Losses.

The Court then examined Sage’s argument that the company’s payment to the CRA was both “final” and “due and payable” since the Required Payment was non-appealable and the CRA retained the authority to seize certain assets of ACCPAC, citing language contained in Section 10.10 of the Merger Agreement defining the term “final resolution” as “final in the sense that it is no longer subject to appeal or other review.” Noting that under standard rules of contract interpretation, the term “review” must have a meaning separate and apart from the term “appeal” or such terms would have no meaning in the Merger Agreement, the Court determined that even if Sage was unable to appeal the Required Payment, such payment remained subject to further review under the Competent Authority process and was therefore not final. The Court likewise concluded that while Sage may have been obligated to make the Required Payment in order to avoid the seizure of certain assets of ACCPAC, a dispute nonetheless remained regarding the final tax payment due to the CRA. Finding that CA’s analysis reflected the most reasonable reading of Section 10.10 of the Merger Agreement, the Court granted summary judgment to CA on count one.

Turning to count two, the Court similarly determined that the plain language of Section 8.2 of the Merger Agreement, which states that neither Sage nor ACCPAC is permitted to “settle, compromise, and/or concede any Tax Claim for which [CA] may be liable without the prior written consent of [CA],” precluded Sage from terminating unilaterally the Competent Authority process without CA’s written consent. While Section 8.2 provides that such consent may not be unreasonably delayed or withheld by CA, the Court noted that, to date, Sage had failed to present any resolution to the Competent Authority process to which CA had been provided an opportunity to consent. Concluding that the Court would not “permit Sage to bypass this contractual process through premature judicial involvement,” the Court also granted summary judgment to CA on count two.

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