                                                        EFiled: Jul 09 2015 03:46PM EDT
                                                        Transaction ID 57527989
                                                        Case No. 7369-VCN
                              COURT OF CHANCERY
                                    OF THE
                              STATE OF DELAWARE

                                                              417 SOUTH STATE STREET
 JOHN W. NOBLE                                                DOVER, DELAWARE 19901
VICE CHANCELLOR                                              TELEPHONE: (302) 739-4397
                                                             FACSIMILE: (302) 739-6179

                                     July 9, 2015


R. Judson Scaggs, Jr., Esquire                  Kevin M. Gallagher, Esquire
Morris, Nichols, Arsht & Tunnell LLP            Richards, Layton & Finger, P.A.
1201 North Market Street                        920 North King Street
Wilmington, DE 19801                            Wilmington, DE 19801

        Re:    Cyber Holding LLC v. CyberCore Holding, Inc.
               C.A. No. 7369-VCN
               Date Submitted: April 28, 2015

Dear Counsel:

        Plaintiff Cyber Holding LLC (“Seller”)1 brings claims seeking tax-related

payments under the agreement governing the sale of CyberCore Corporation (the

“Company”) to Defendant CyberCore Holding, Inc. (“Buyer”) which has moved

for summary judgment.

                                        *****

        Buyer and Seller executed the Redemption and Stock Purchase Agreement

By and Among CyberCore Corporation, CyberCore Holding, Inc. and the




1
    There were other sellers, but Cyber Holding LLC is the named plaintiff.
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
Page 2


Stockholders of CyberCore Corporation (the “Agreement”) on June 8, 2011.2 The

Company claimed deductions for transaction-related expenses (the “Transaction

Deductions”) for the tax year from January 1, 2011, to July 8, 2011 (the “Stub

Year”). Because of the deductions, the Company reported a net operating loss for

the Stub Year, escaped over $1 million in 2011 income tax liability, received a

$214,166 refund for prepaid estimated 2011 taxes, and obtained over $3 million in

income tax refunds for 2009 and 2010 by carrying back the net operating loss.3

Buyer has remitted to Seller refunds for the estimated prepaid taxes and the 2009

and 2010 taxes. Seller brings this action to recover $1,557,171 (the “Avoided

Tax”) pursuant to Section 6.5(f)(z) of the Agreement.4 On this motion, the parties

have framed a dispute over contract interpretation.




2
  Verified Compl. Ex. A (“SPA”). The sale of the Company closed in July 2011.
3
  There is no active dispute over these basic facts. See Def.’s Opening Br. in Supp.
of Its Mot. for Summ. J. (Def.’s Opening Br.”) 5, 7-8; Pl.’s Opp’n to Def.
CyberCore Holding, Inc.’s Mot. for Summ. J. (“Pl.’s Opp’n Br.”) 11-12.
4
  The Avoided Tax represents “the amount by which the Transaction Deductions
reduced the Company’s 2011 taxes beyond the amount of the 2011 refund.” Pl.’s
Opp’n Br. 2. The amount of the Avoided Tax has been revised in pre-trial
discussions.
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
Page 3


                                       *****

      Summary judgment on an issue of contract interpretation is appropriate only

where the moving party can show that its interpretation “is the only reasonable

interpretation.”5   When interpreting a contract, the Court first looks for the

objective meaning of the parties’ agreement, “giving effect to all provisions

therein.”6 However, “an ambiguity exists when the provisions in controversy are

fairly susceptible of different interpretations or may have two or more different

meanings.”7

                                       *****

      The key inquiry on this motion is whether the parties’ negotiated agreement

is ambiguous. The parties direct the Court’s attention to a few key provisions.

First and foremost, Section 6.5(f), and subsection 6.5(f)(z) in particular, is the

source for the claimed right to taxes avoided in the Stub Year:



5
  United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007).
The Court will not examine arguments on subjects beyond the ambiguity of the
text of the Agreement.
6
  GMG Capital Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del.
2012) (internal quotation marks omitted).
7
  Id. at 780 (alteration and internal quotation marks omitted).
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
Page 4


        (f) To the extent (x) any Transaction Deductions are not properly
        deductible in the Tax year that ends on or includes the Closing Date
        and are properly deductible in a Tax year beginning after the Closing
        Date . . . by the Buyer . . . , (y) after the application of Sections 6.5(d)
        and (e) the Company or any Company Subsidiaries has a net operating
        loss carryforward that is attributable to the Transaction
        Deductions . . . , or (z) Transaction Deductions claimed in the Tax
        year ending on or including the Closing Date result in a reduction of
        Taxes for that Tax year in excess of the amount paid to Sellers
        pursuant to Sections 6.5(d) and (e), then Buyer . . . shall pay to the
        Sellers’ Representative . . . an amount equal to the amount by which
        (i) the amount of Taxes that the Buyer, the Company and its
        Subsidiaries . . . would have been required to pay in the Tax year in
        question but for the deduction or the Carryforward of the Transaction
        Deductions . . . exceeds (ii) the amount of Taxes actually payable by
        the Buyer, the Company and its Subsidiaries . . . with respect to such
        Tax years (and in the case of payments pursuant to clause (z) above,
        solely to the extent such amount is in excess of the amount paid to
        Sellers pursuant to Sections 6.5(d) and (e)).8

        The dispute boils down to whether the references to an amount “in excess of

the amount paid to Sellers pursuant to Sections 6.5(d) and (e)” mean in excess of

(1) the total amount paid pursuant to those sections (including the remittances for

2009 and 2010) or (2) the amount paid pursuant to those sections with respect to

the Stub Year alone. If the first interpretation is correct, as Buyer posits, Buyer has

already paid Seller over $3 million, which exceeds the amount of the Avoided Tax


8
    SPA § 6.5(f) (emphases omitted).
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
Page 5


(approximately $1.56 million). If the second, or Seller’s, interpretation is correct,

Buyer owes Seller the amount of the Avoided Tax.

         Sections 6.5(d) and 6.5(e), to which the parties also ascribe different

meanings,9 state (in relevant part):

         (d) To the extent that the Company has paid estimated income Taxes
         for the Tax year ending on or including the Closing Date and the
         amount of the estimated income Taxes which were paid prior to the
         Closing Date exceeds the amount of the income Tax liability with
         respect to such Tax year (taking into account the Transaction
         Deductions, to the extent permitted by law, for which such estimated
         income Taxes were paid, Buyer shall . . . prepare . . . [state and federal
         forms for refunds of overpayment of estimated taxes] with respect to
         such Tax year. . . . Within five Business Days of the receipt . . . of a
         refund . . . , Buyer shall pay an amount equal to such refund . . . to the
         Sellers’ Representative . . . .10

         (e) To the extent that the Company would have a net operating loss
         for the Tax year ending on or including the Closing Date, Buyer shall
         prepare . . . any claim for refund of Taxes . . . with respect to such Tax
         year, including a claim for refund or amended Tax Return to effect a
         carryback to a prior year of any loss generated or otherwise
         attributable to the Tax year ending on or including the Closing
         Date . . . to the fullest extent permitted by Law. . . . Within five
         Business Days of the receipt . . . of a refund as a result of such a
         refund claim, Buyer shall pay to the Sellers’ Representative . . . an
         amount equal to (i) the amount by which (A) the amount of the refund
         actually received exceeds (B) the amount of the refund that would

9
    See, e.g., Oral Arg. Def.’s Mot. for Summ. J. Tr. (“Oral Arg. Tr.”) 23, 40-41.
10
     SPA § 6.5(d).
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
Page 6


      have been received had the refund been determined without taking
      into account any Deductible Expense Carrybacks; minus (ii) the
      income Taxes actually payable by the Company as a result of the
      receipt of such refunds for the year of receipt.11

      Buyer argues that Seller’s year-by-year interpretation is not supported by the

text and cannot be correct because the net operating loss taken in the Stub Year

cannot be “carried back” to the same year—essentially nullifying the reference

to 6.5(e).12 Seller counters that Section 6.5(f)(z)’s references to the “Tax Year

ending on or including the Closing Date”;13 references to an “amount paid” rather

than amounts paid;14 logic;15 and the totality of Sections 6.5(d), (e), and (f)

(ensuring it benefits from the Transaction Deductions for the periods preceding,

during, and after the Stub Year)16 support its reading.      Seller further alleges

(although not purely a contractual argument) that the Transaction Deductions were



11
   SPA § 6.5(e) (emphasis omitted).
12
   Def.’s Opening Br. 14-16. Seller responds that Section 6.5(e) also applies “to
refunds of prepaid estimated taxes for the 2011 tax year.” Pl.’s Opp’n Br. 20-21.
13
   Pl.’s Opp’n Br. 15-16 (internal quotation marks omitted).
14
   Id. at 20 n. 3.
15
   Id. at 19-20.
16
   Id. at 17. On the other hand, Buyer claims that “Section 6.5(f)(z) operated to
provide Sellers with a minimum benefit from the Transaction Deductions . . . .”
Def.’s Opening Br. 13.
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
Page 7


known to be so large that Section 6.5(f)(z) would never be triggered under Buyer’s

interpretation.17

      The parties also cite Sections 6.5(a) and 10.1(a)(iii). Section 10.1(a), in the

article outlining indemnification rights and obligations, generally explains that

      the Company Equity Holders shall . . . indemnify and hold
      harmless . . . each of the Buyer Indemnified Parties from, against and
      in respect of any and all Losses arising out of:
       ...
      (iii) any Taxes assessed or imposed upon the Company or any
      Company Subsidiary that are allocable or attributable to taxable years
      or periods ending on or prior to the Closing Date or to the portion of
      any Straddle Period through and including the Closing Date . . . .18

Section 6.5(a), within the article outlining covenants, specifies that

      Buyer shall, at its own expense, prepare . . . and timely file . . . all Tax
      Returns of the Company and the Company Subsidiaries for all periods
      beginning on or after January 1, 2010 that have not yet been filed and
      are required to be filed after the Closing Date. . . . Buyer shall cause
      any amounts shown to be due on such Tax Returns (other than

17
   Pl.’s Opp’n Br. 16-17. In other words, the payments pursuant to Sections 6.5(d)
and (e) would necessarily cancel out the Section 6.5(f)(z) obligation.
   Of course, Buyer disagrees with Seller’s interpretation, citing mixed references
to time periods, emphasis on Sections 6.5(d) and (e), and the possibility that
Section 6.5(f)(z) could result in payments under fact patterns not present here—
among other reasons to adopt its interpretation. See, e.g., Def.’s Reply Br. in
Further Supp. of Its Mot. for Summ. J. 9-10. Buyer also asks the Court to apply
contra proferentem. Id. at 10.
18
   SPA § 10.1(a).
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
Page 8


       estimated tax payments due prior to the Closing Date) to be timely
       remitted to the applicable Governmental Entity no later than the date
       on which such Taxes are due (including extensions).19

Buyer claims that Section 10.1(a)(iii) already gives Seller the benefit of the

Avoided     Tax       through   indemnification   and   that   a double   benefit   by

Section 6.5(f)(z) does not make sense.20 Buyer views Section 6.5(a) as simply

governing “logistical” matters.21 Seller, on the other hand, explains that Section

10.1(a)(iii) indemnifies Buyer for “after-the-fact” assessments (such as after an

audit), while Section 6.5(a) is a covenant governing the broader division of

responsibilities.22

       A review of the plain language of the Agreement does not lend a clear

answer. Seller argues (more generally) that the Agreement’s tax provisions were

designed to “ensure that Sellers receive the full benefit of the Transaction

Deductions.”23 Buyer argues that “[t]he sellers [we]re obligated to pay the pre-


19
   SPA § 6.5(a).
20
   Def.’s Opening Br. 16-17.
21
   Oral Arg. Tr. 14-15, 58.
22
   Pl.’s Opp’n Br. 21-22 & n.4. Seller adds that Buyer’s interpretation would mean
that any payment under Section 6.5(f)(z) would result in a double payment. Id.
at 23.
23
   Id. at 17.
Cyber Holding LLC v. CyberCore Holding, Inc.
C.A. No. 7369-VCN
July 9, 2015
Page 9


closing [taxes], and the buyers [we]re only obligated to pay the post-closing

[taxes].”24 The Agreement is reasonably susceptible to more than one reading at

this point and, thus, is ambiguous. Additionally, communication between counsel

for Buyer and Seller might prove informative. However skeptical the Court may

be that trial will unearth any new evidence, it cannot choose between two

interpretations that appear reasonable at this stage.

                                        *****

         For the reasons above, the motion for summary judgment is denied.

         IT IS SO ORDERED.

                                                Very truly yours,

                                                /s/ John W. Noble

JWN/cap
cc: Register in Chancery-K




24
     Oral Arg. Tr. 57-58.
