           IN THE SUPREME COURT OF THE STATE OF DELAWARE


TEXTRON INC.,                           §
                                        §
                                        §     No. 204, 2014
      Plaintiff-Below,                  §
      Appellant,                        §
                                        §     Court Below: Superior Court
      v.                                §     of the State of Delaware
                                        §     in and for New Castle County
ACUMENT GLOBAL                          §     C.A. No. N10C-07-103 JRJ CCLD
TECHNOLOGIES, INC.,                     §
                                        §
      Defendant-Below,                  §
      Appellee.                         §

                          Submitted: January 14, 2015
                           Decided: January 23, 2015


Before STRINE, Chief Justice; HOLLAND and VAUGHN, Justices.

Upon appeal from the Superior Court. AFFIRMED.

Denise S. Kraft, Esquire, Laura D. Hatcher, Esquire, Brian A. Biggs, Esquire, DLA
Piper LLP, Wilmington, Delaware; Donald J. Wolfe, Jr., Esquire (argued), Arthur
L. Dent, Esquire, Potter Anderson & Corroon LLP, Wilmington Delaware; John A.
Tarantino, Esquire, Adler Pollock & Sheehan P.C., Providence, Rhode Island, for
Appellant.

C. Barr Flinn, Esquire (argued), Tammy L. Mercer, Esquire, Benjamin Z.
Grossberg, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington,
Delaware, for Appellee.



STRINE, Chief Justice:
                                 I.     INTRODUCTION

       Textron, Inc. appeals from a judgment by the Superior Court holding that the

company is not entitled to reimbursement from its former fastening manufacturing

business, now known as Acument Global Technologies, Inc. (“Acument”), for paying

certain pre-closing contingent liabilities in the United States.1 The Superior Court‟s

opinion centered on the meaning of a “tax benefit offset” provision in the parties‟

Purchase Agreement under which Acument was required to reimburse Textron if

Acument received a “tax benefit” related to the contingent liabilities. The Superior Court

rejected Textron‟s interpretation of the Agreement that Acument only needed to be

hypothetically able to take advantage of a tax benefit to trigger the offset, in the sense

that any step-up in Acument‟s tax basis constituted a benefit even if the overall effect of

the transaction was tax-neutral because of an off-setting step-down. Textron claims not

to appeal that aspect of the Superior Court‟s ruling, but argues that even if the tax benefit

has to be actual rather than merely hypothetical, the Superior Court erred by not finding

that Acument actually enjoys the right to tax benefits. Textron contends that its payment

of the pre-closing liabilities constitutes a tax benefit because the payments automatically

increase Acument‟s tax basis under U.S. tax law.

       But, as Acument points out, the increase in Acument‟s basis is fully offset by a

simultaneous decrease because Textron, not Acument, paid the liabilities per the parties‟

Agreement. In other words, the Agreement, taken as a whole as it must be, guaranteed


1
 Textron, Inc. v. Acument Global Technologies, Inc., 2014 WL 2903060 (Del. Sup. Mar. 25,
2014) [hereinafter Opinion].
                                              1
that Acument would not receive a net tax benefit simply because Textron made a required

indemnification payment. Accordingly, Textron‟s argument that Acument has received a

tax benefit triggering Textron‟s right to reimbursement is without merit, as the total effect

of Textron‟s payments is tax-neutral.

       Similarly, Textron‟s second and related claim that the Superior Court erred in

“redefining” the required tax benefit to mean only a “deduction” rather than any

“reduction” is meritless. The Superior Court made clear that it intentionally used the

term “deduction” in the opinion solely to reflect the language used by both parties to

describe what the Purchase Agreement required. The Superior Court also limited its

determination that the required tax benefit must be a deduction to the claims that are

specific to this case, and thus did not prejudice Textron‟s right to receive offsets for

unrelated non-deduction reductions. We therefore affirm the judgment below.

                                  II.     BACKGROUND2

                                          A. The Parties

       Textron is a $12 billion Delaware corporation that operates in a wide variety of

industries, including aircraft manufacturing, defense, and related financial services.3 In

2006, Textron sold its global fastening manufacturing business segment to a subsidiary of

a private equity firm, Platinum Equity, LLC,4 which renamed the business from Textron


2
  The uncontested facts are drawn from the decision of the Superior Court below, as well as the
record and the briefs submitted by the parties.
3
  Textron: Our Company, http://www.textron.com/about/company/index.php (last visited Dec.
23, 2014).
4
  Textron sold the business to TFS Acquisition Corp., which was wholly owned by Platinum
Equity. TFS Acquisition Corp. became Acument after the purchase.
                                                2
Fastening Systems to Acument.5 Platinum Equity was founded in 1995, and has since

acquired more than 150 companies across many industries.6 For sake of simplicity, we

refer to the parties involved as Textron and Acument, and only reference Platinum Equity

when the distinction between Platinum Equity and Acument is relevant.

                                       B. The Sale Process

       In 2005, Textron decided to sell its global fastening systems business segment

through a two-stage competitive auction. In the first stage, potential buyers who signed a

nondisclosure agreement were granted access to due diligence. In the second stage,

Textron selected a subset of potential buyers to participate in an auction. Platinum

Equity made an initial bid of $900 million in early March 2006.

       As Textron continued discussions with other potential buyers in the spring of

2006,7 Textron and Platinum Equity negotiated price and various provisions of the

proposed Purchase Agreement. The Purchase Agreement was based on a bid draft

crafted by Textron before it identified specific potential buyers. In the draft, Textron

5
  After this litigation began, Platinum Equity sold Acument to Fontana Gruppo. See Platinum
Equity Sells Acument to Fontana Gruppo, June 23, 2014,
http://www.platinumequity.com/news/907/platinum-equity-sells-acument-to-fontana-gruppo.
Textron filed a motion on July 24 requesting that we take judicial notice of the sale. This Court
denied the motion on July 28, but granted Textron leave to address the issue in its reply brief,
and entitled Acument to file a sur-reply brief in response. Because there is no dispute that
Platinum Equity always intended to “flip” Acument, and the substantive arguments presented do
not hinge on when a taxable benefit would accrue to Acument, only if there is such a benefit, it
does not matter whether or not we take judicial notice of the sale. Further, according to
Acument, only the equity of Acument‟s parent company was sold, so any change in Acument‟s
basis since the sale from Textron is still unrealized. Sur-Reply Br. at 3.
6
  The Firm: About Platinum Equity, http://www.platinumequity.com/company (last visited Dec.
21, 2014).
7
  Indeed, negotiations between Textron and Platinum Equity were suspended for a short period
of time in early May because Textron entered into an exclusivity contract with another bidder.
Opinion at *5.
                                                3
agreed to indemnify the buyer for certain pre-closing liabilities (“Losses”), including

those related to tax in § 4.6(h)(ii), specified breaches by Textron in § 6.1(b)(i-ii),

environmental issues in § 6.1(b)(iii), and retained litigation in § 6.1(b)(iv). But under

§ 6.1(d), the buyer was required to “reduce[]” any loss to Textron by reimbursing it for

insurance proceeds, payments by third parties, or – most relevant to this litigation –

“(iii)(C) any Tax Benefit of the [buyer] attributable to such Loss.”8 “Tax Benefit” is later

defined in the Agreement as:

       the present value of any refund, credit or reduction in otherwise required
       Tax payments, including interest payable thereon, which present value shall
       be computed as of the Closing Date or the first date on which the right to
       the refund, credit or other Tax reduction arises or otherwise becomes
       available to be utilized . . . assuming that such refund, credit or reduction
       shall be recognized or received in the earliest possible taxable period
       (without regard to any other losses, deductions, refunds, credits, reductions
       or other Tax items available to such party).9

       Asserting that § 6.1(d)(iii)(C) was “very seller friendly” and risked requiring an

offset even when it had not accrued “actual tax savings [that] year,” Platinum Equity first

proposed eliminating the provision.10 Textron rejected that change. Platinum Equity then

proposed changing the definition of “Tax Benefit” to “actual tax savings . . . in the first

taxable year in which an item is properly includible in a tax return.” Textron again

rejected the suggestion. But these proposed revisions were among many made by

Platinum Equity during the negotiations process, and the Superior Court determined that




8
  App. to Opening Br. at 123 (Purchase Agreement § 6.1(d)(iii)(C)).
9
  App. to Opening Br. at 142 (Purchase Agreement § 8.1) (emphasis added).
10
   Opinion at *4.
                                               4
that neither party considered the scope of the tax benefit offset to be a material issue.11

The relevant provisions in the final contract thus remained materially unaltered from the

bid draft.12 After extensive negotiations about a number of issues, including

responsibility for outstanding contingent liabilities, the parties agreed on a final purchase

price of $630 million and executed the Purchase Agreement on August 11, 2006.13

                                            C. Tax Issues

       To transfer Textron‟s entities based in the U.S., the parties structured the

transactions as “deemed asset sales.”14 Under § 338(h)(10) of the Internal Revenue

Code,15 parties in certain transactions can jointly elect to have a stock sale treated as an

asset sale for tax purposes. The tax benefits of that election can be material, depending

on the difference between the seller‟s asset basis and its stock basis. In a typical stock

sale, the buyer obtains assets with a carryover basis, i.e., the seller‟s former asset basis.

For its part, the seller is unable to use any of its net operating losses attributable to the

entity, as those remain with the entity and thus go to the buyer. By contrast, in a typical

asset sale, the buyer gets an increased or stepped-up basis equal to the purchase price, but



11
   Opinion at *23.
12
   Opinion at *6.
13
   The reason for the price drop from Platinum Equity‟s initial offer of $900 to $630 million was
disputed by the parties at trial. Textron argued that the decrease represented Platinum Equity‟s
agreement to share the pre-closing liabilities; Acument countered that the first offer represented
an outsider‟s view of the value of the entity, but once Platinum Equity had access to internal
documents, it was clear the business was worth less than $900 million. The Superior Court
found that “[t]here were several variables involved in the ultimate sale price, and the Court is not
persuaded that a partial indemnification agreement was one of those variables.” Opinion at *24.
14
   The sale involved entities in approximately 25 countries; the non-U.S. entities were sold
through stock sales. Opinion at *7.
15
   26 U.S.C. § 338(h)(10).
                                                 5
the seller is faced with an immediate tax bill for any increase in its basis. Just as in a

stock sale, the net operating losses remain with the entity.

       By structuring the deal as a deemed asset sale, both the buyer and seller benefited:

Acument got a stepped-up basis equal to the fair market value of the stock (that is, its

basis equals the purchase price), and Textron was not taxed on the stock sale.16 Textron

was still liable for any increase in its asset basis as if the transaction was an asset sale, but

any gains could be offset by losses, including those attributable to the subsidiary. And

because the deemed asset sale operates like a liquidation of the entity being sold, the

proceeds from the “liquidation” were tax-free to Textron, meaning that its stockholders

faced only one level of tax.17 Typically the buyer in a deemed asset sale assumes all tax

liabilities for the acquired entity, but here Textron agreed to indemnify Acument for

certain contingent tax liabilities.18

       One consequence of structuring the transaction as a deemed asset sale is that any

liabilities that were contingent at the time of the sale were not accounted for in the

purchase price, and thus were not accounted for in Acument‟s basis.19 Going forward,


16
   Some of the former Textron entities in the U.S. were sold as single-member LLCs, treated as
disregarded entities for tax purposes, also through deemed asset sales. See Opinion at *7. The
tax treatment is therefore identical to that described above. See also App. to Opening Br. at 192
(Trial Tr. at 181-82, Apr. 25, 2013, testimony of Textron‟s tax expert, Stephen Gertzman)
(“When you‟re dealing with a [disregarded entity], you get the exact same tax consequences,
although you don‟t have explicit regulations as you do under [§ 338(h)(10)], but you do have the
same tax conclusions and I believed [Acument‟s tax expert] Mr. Wellen and I agree on that.”).
17
   See Reg. 1.338(h)(10)-1(d).
18
   See App. to Opening Br. at 121 (Purchase Agreement § 6.1(b)).
19
   Acument‟s tax expert presented an alternate theory at trial, that Acument never assumed
responsibility for the contingent liabilities because Textron had agreed to indemnify it. Under
that analysis, Acument‟s basis would not step up or step down when Textron paid the liabilities
because they were not latently part of the purchase price. But as the expert testified, the end
                                                6
though, when any of the contingent liabilities are paid,20 Acument‟s tax basis will be

retroactively increased as if the purchase price had been for the higher amount.21 As a

simplified example, if Textron pays a $5 million pre-closing liability, Acument‟s basis

will automatically increase from the purchase price of $630 million to $635 million. Of

critical importance to this litigation, though, Acument‟s basis will simultaneously

decrease by $5 million – i.e., go back down to $630 – because Textron made the payment

on Acument‟s behalf.22 As Textron‟s tax expert acknowledged at trial, the step up and

the step down in basis are considered analytically distinct by the IRS, but the net effect is

no change in basis.23 So long as the payment of the liability occurs simultaneously with

the indemnification by Textron, Acument is not entitled to deduct any amount from its

taxes.24 By contrast, Textron can deduct any payments it makes on the contingent


result is the same: so long as the indemnification is for the full amount of the liabilities, there is
no net increase in Acument‟s basis. In Acument‟s post-trial briefing, it acknowledged the
“confusion” that might result from the competing analyses, and noted that “the Court does not
need to rule which analysis is correct under federal tax law as both analyses yield the exact same
result.” App. to Opening Br. at 292 (Acument‟s Post Trial Br. at 22).
20
   To use the technical terminology, payment of a contingent liability “fixes” the amount under
the IRS‟ “all-events” test. According to IRS regulations, “a liability . . . is incurred, and
generally is taken into account for Federal income tax purposes, in the taxable year in which all
the events have occurred that establish the fact of the liability, the amount of the liability can be
determined with reasonable accuracy, and economic performance has occurred with respect to
the liability.” 26 C.F.R. 1.461-1(a)(2)(i).
21
   IRS regulations refer to the “adjusted grossed-up basis,” or “the amount for which new target
[i.e., Acument] is deemed to have purchased all of its assets in the deemed purchase.” 26 C.F.R.
1.338-5(a). The adjusted grossed-up basis (“AGUB,” in tax parlance) is determined at the time
of the acquisition, but then re-determined going forward if certain events occur, including if
contingent “liabilities not originally taken into account in determining AGUB are subsequently
taken into account.” Id. at (b)(2)(ii).
22
   See generally id.
23
   App. to Opening Br. at 201 (Trial Tr. at 218, Apr. 25, 2013, testimony of Textron‟s tax expert,
Stephen Gertzman, at 218).
24
   Cf. IRS Field Service Advice Memorandum No. 200048006 (App. to Answering Br., Ex. A).
There could be a different result if Textron only partially indemnified Acument because the
                                                  7
liabilities from its own taxes as if it had never transferred the subsidiary, and the record is

clear that it has done so.25

                                     D. Post-Closing Problems

       Notwithstanding the high level of sophistication of everyone involved in the

deal,26 the Superior Court found that there “was a general misunderstanding between the

parties as to the meaning and operation of the Tax Benefit Offset,” starting “not long after

the parties signed” the Purchase Agreement.27

       As the Superior Court discussed, within a year of the sale, Textron became

concerned about the mounting cost of pre-closing liabilities, especially in Brazil. By

December 2006, Textron had paid approximately $500,000 in indemnity payments

directly to the beneficiaries without requesting an offset from Acument. But on

December 26, a Textron tax attorney circulated an email internally, wondering if Textron

could request reimbursement for a “hypothetical tax benefit” from Acument under the

Purchase Agreement.28 Acument did not agree that it owed Textron any reimbursement

payments: because the Brazilian entity which was accumulating liabilities carried

amount of the increase in basis from the liability being paid would not be identically offset by a
decrease in basis from the indemnification. But there is no dispute that Textron is liable for the
full amount of the contingent liabilities, so the liabilities and indemnifications always offset each
other. See App. to Opening Br. at 121 (Purchase Agreement § 6.1(b) Indemnification by
[Textron]); Opinion at 21-22. Textron seems to dispute that the two payments will always “net
out,” but does not explain why on the facts of this case. The only examples it cites in support of
a mismatch are those involving partial indemnification. See Reply Br. at 12. At oral argument,
Textron conceded that it was not appealing the Superior Court‟s judgment that Acument was
entitled to full indemnification.
25
   App. to Opening Br. at 65-66 (Acument‟s Pre-Trial Br. at 1-2).
26
   See, e.g., Opinion at *8 (“Both Textron and [Platinum Equity] have vast in-house mergers and
acquisitions knowledge and experience, evidenced by the parties‟ own in-house groups.”).
27
   Opinion at *9.
28
   Id.
                                                  8
substantial net operating losses, Acument could not receive any deductions until those

losses were used up.29 And if it could not use the deductions from indemnified loss

payments, Acument did not want to pay Textron for them too.

       On January 25, 2007, Textron‟s senior associate general counsel sent Acument‟s

general counsel a letter “for settlement purposes only,” requesting that Acument make

payments to Textron to reimburse it for its payments on the contingent liabilities based on

the tax benefit offset. The letter reflected Textron‟s position that “Acument is not

required to actually save taxes for the reduction to kick in.”30 Textron‟s counsel sent a

similar letter to Acument France. Acument initially maintained that it did not owe

Textron any reimbursement, but apparently later accepted that it owed Textron offset

payments. The Superior Court found that it was not clear from the record what and how

much, exactly, Acument agreed to reimburse.31 But it does not appear from the record

that the primary concern was with U.S.-related liabilities at that point; the parties were

focused mainly on the liabilities in Brazil.32

       On October 24, 2007, Textron and Acument executed a Letter Agreement, which

the Superior Court determined was designed to clarify the parties‟ respective

responsibilities for the contingent liabilities under the original Purchase Agreement. The

Letter Agreement referred to another document, entitled “Andrew‟s Open Issues



29
   Opinion at *9.
30
   Opinion at *10.
31
   Opinion at *10.
32
   Opinion at *11. The Superior Court, however, rejected Acument‟s argument that the Letter
Agreement was only related to Brazil. Opinion at *20 n.241.
                                                 9
Summary, dated October 9, 2007,” as the “base line” for discussions.33 The “Andrew”

referred to was Andrew Spacone, Textron‟s senior associate general counsel. As the

Superior Court noted, Spacone drafted both the Letter Agreement and the original Open

Issues Summary.34 In the Letter Agreement, Acument “agreed to reimburse Textron for

the hypothetical tax benefits associated with the past Loss Payments to Date.”35 The first

paragraph of the Letter Agreement refers to hypothetical tax rates in Brazil and France,

but does not otherwise specify which country or countries are covered.36 Some U.S.-

related liabilities were included in the $720,658 Acument agreed to pay to offset

Textron‟s previous indemnification payments.37

       After signing the Letter Agreement, Acument began to make reimbursement

payments to Textron as claims arose, including three payments on U.S. liabilities.38 But

in April 2008, Acument‟s tax director apparently realized for the first time that Acument

could not deduct the indemnity payments in the U.S.39 He concluded that because

Acument could not realize any actual net tax benefit in the U.S., the tax benefit offset

provision of the Purchase Agreement was not triggered. Accordingly, in June 2008,


33
   App. to Reply Br. at 1 (Letter Agreement at 1).
34
   Opinion at *13.
35
   Id.
36
   Id.
37
   App. to Opening Br. at 73 (Acument‟s Pre-Trial Br. at 9). Acument did not seek
reimbursement for these earlier payments before the Superior Court, characterizing them as
“spilt milk.” App. to Opening Br. at 74 (Acument‟s Pre-Trial Br. at 10 n.4).
38
   App. to Opening Br. at 95-96 (Pretrial Stipulation and Order at 5-6).
39
   Opinion at *15. According to Textron, “Acument has never seriously disputed that, outside of
the U.S., Textron‟s indemnity is subject to the Tax Benefit Reduction.” Opening Br. at 11.
Acument concurred in its briefing to the Superior Court. See App. to Opening Br. at 85
(Acument Pre-Trial Br. at 21) (“Acument has been consistently providing Tax Benefit offsets in
relevant foreign jurisdictions when requested and applicable.”).
                                              10
Acument refused to continue offsetting Textron‟s payments on U.S.-related claims,

asserting in a letter to Textron‟s senior tax attorney that because Acument was not

eligible for a tax benefit, the offset did not apply, and any previous U.S.-related offset

payments had been made in error.40 Acument sought reimbursement from Textron for

those payments in the amount of $251,937. Textron insisted that no net tax benefit was

required to trigger reimbursement, in the U.S. or elsewhere.

       In January 2010, Textron‟s senior associate general counsel sent Acument‟s

general counsel a letter demanding that Acument offset Textron‟s payments on the U.S.

liabilities.41 Textron reiterated its view that the Purchase Agreement

       does not require that Acument actually realize any net tax benefit for the
       reduction of indemnity payments to apply. Instead, the fact that Acument
       at some time in the future (or in the past) may be entitled (for whatever
       reason) to a tax deduction attributable to the United States claims that are
       indemnified by Textron . . . is enough to trigger the reduction in Textron‟s
       indemnity payments under the Purchase [and Sale] Agreement.42

Acument again refused to pay.43

                                          E. Litigation

       Textron filed this suit in the Superior Court on July 13, 2010, seeking to enforce

its alleged right to a reduction of its indemnity obligations in the amount of $2,048,414.44

Textron argued that under § 6.1(d)(iii)(C) of the Purchase Agreement and the terms of the

40
   App. to Opening Br. at 103 (letter from Don Modrycki to David Stonestreet, dated June 2,
2008).
41
   Textron‟s letter also demanded reimbursement for “hypothetical tax benefits” in Germany and
France, for a total of $2.6 million. Opinion at *15.
42
   App. to Acument Pre-Trial Opening Br. at 129 (letter from Andrew Spacone to John Clark,
dated Jan. 26, 2010).
43
   Opinion at *16.
44
   App. to Answering Br. at 11 (Complaint at 5).
                                              11
later Letter Agreement, it was entitled to reimbursement by Acument for any payments it

made on pre-closing contingent liabilities in the amount of any tax benefit Acument has a

right to receive, regardless of whether Acument actually received that benefit in net tax

savings. Textron further argued that Acument enjoys the right to a tax benefit within the

meaning of § 6.1(d)(iii)(C) of the Purchase Agreement solely because of the increase in

its basis resulting from payment of the liabilities. Acument asserted counterclaims that

were essentially the reverse of Textron‟s claims, including a demand for reimbursement

of its earlier erroneous payments.

       Textron initially moved for judgment on the pleadings, claiming that the language

in the Purchase Agreement was unambiguous. Acument agreed that the Agreement was

unambiguous, but disagreed on the proper interpretation of the “unambiguous” provision.

The Superior Court found that the provision was “reasonably and fairly susceptible to

different interpretations” and denied Textron‟s motion.45

       At trial, Textron argued that the tax benefit reduction required only a hypothetical

tax benefit, with or without net tax savings. Second or alternatively, Textron argued that

Acument actually had the right to a benefit because Textron‟s payments on the pre-

closing contingent liabilities provided a step-up in Acument‟s basis. In its view, the

Purchase Agreement and Letter Agreement established that the parties intended to share

liabilities, so Textron only had a partial responsibility to indemnify Acument. Textron

further argued that Acument‟s reimbursement payments were “probative of the parties‟


45
   Textron, Inc. v. Acument Global Technologies, Inc., 2011 WL 1326842, at *6 (Del. Sup. Apr.
6, 2011).
                                              12
intent.”46 Acument countered that it was entitled to full indemnification by Textron, and

only owed reimbursement to Textron if it actually received a net tax benefit. It also

contended that the Letter Agreement was not meant to apply to the U.S. liabilities, and its

mistaken payments did not constitute a waiver of its arguments related to those liabilities.

                               F. The Superior Court’s Decision

       After two years of discovery, including with the aid of a Special Discovery

Master, and a four-day bench trial, the Superior Court issued a 65-page opinion on March

25, 2014. The bulk of the opinion sets forth the facts, particularly the parties‟ negotiating

history and post-closing conduct. After reviewing that evidence, the Superior Court held

that Textron had failed to prove its case by a preponderance of the evidence, and ruled in

favor of Acument on all claims, including its counterclaims for return of its mistaken

payments.

       First, the Superior Court agreed with Acument that its mistaken payments to

Textron did not constitute a waiver.47 The Superior Court next determined that the Letter

Agreement was not intended to modify the Purchase Agreement, as Textron had argued.

The court thus focused on interpreting the Purchase Agreement, using the Letter

Agreement as parol evidence to “clarify” the Purchase Agreement‟s meaning. The court

found that the language of the Purchase Agreement “does not explicitly support either

side‟s interpretation,” but “still offers guidance as to the parties‟ intent.”48 In particular,

the court noted that “[e]ven though the parties were aware that [Platinum Equity]

46
   Opinion at *17.
47
   Opinion at *19.
48
   Opinion at *21.
                                               13
intended to „flip‟ [Acument], there is no express language within the [Purchase

Agreement] to support Textron‟s position that an increase in basis is what the . . . drafters

intended to satisfy the Tax Benefit Offset.”49 Reading the contract as a whole, the

Superior Court determined that the language of the Purchase Agreement did not support

Textron‟s interpretation that a hypothetical tax benefit was sufficient or that the parties

had agreed to share responsibility for the pre-closing liabilities.

       But because the Superior Court held that the Purchase Agreement was ambiguous,

it proceeded to look at other extrinsic evidence. The court found that the parties‟ conduct

during and after signing the contract “also belie[d] Textron‟s position that the [Purchase

Agreement] encompasses only partial indemnification based upon a „hypothetical‟ Tax

Benefit Offset.”50 The court found that the contemporaneous understanding of the

Purchase Agreement, as evidenced by internal Textron communications, suggested that

the parties understood the offset to apply only if Acument was able to take advantage of

tax deductions on a net basis.51

       The court also weighed the credibility of the witnesses presented by the parties,

and determined that Textron‟s key witness, senior associate general counsel Andrew

Spacone, was not credible in his depiction of the parties‟ negotiating history.52 The court

did not make any findings as to the credibility of the parties‟ tax experts, presumably

because neither expert disputed that Acument cannot deduct payments made by Textron


49
   Opinion at *21.
50
   Opinion at *22.
51
   Opinion at *25-26.
52
   See, e.g., Opinion at *12 n. 139, *25.
                                              14
on the contingent liabilities in the U.S.,53 and that as long as the indemnification

payments are for the full amount of the liabilities, there is no net change in Acument‟s

basis.54 As a result, the Superior Court held that:

       (1) Textron has failed to prove by a preponderance of the evidence that the
       Tax Benefit Offset, as defined by the Tax Benefit definition of the
       [Purchase Agreement], is “hypothetical”; (2) The Tax Benefit Offset
       applies only when Acument is entitled to a Tax deduction based on
       Textron‟s indemnification payments; (3) Acument has not breached the
       [Purchase Agreement] by withholding the Tax Benefit Offset because it is
       not entitled to a tax deduction in the United States; (4) Textron has
       breached the [Purchase Agreement] by wrongfully withholding the Tax
       Benefit Offset on indemnity payments for which Acument does not receive
       a tax benefit; and (5) Textron owes Acument $251,937 for Tax Benefit
       Offset reimbursement.55

                                      G. Textron’s Appeal

       On appeal, Textron argues that the Superior Court erred in not addressing whether

Acument‟s increase in basis constitutes a “tax benefit” for purposes of the Purchase

Agreement. Textron also alleges that the Superior Court erred in construing “reduction”

to mean “deduction,” thereby narrowing the circumstances under which the “Tax Benefit

Reduction” provision is triggered. Textron claims not to appeal the Superior Court‟s

holding that the tax benefit reduction required an actual net tax benefit to Acument, rather

than a hypothetical one.56

       Acument contends in response that it has not received a tax benefit because its

increase in basis from payment of the contingent liabilities is offset by an equal decrease


53
   Opinion at *7 n. 85, *18.
54
   Opinion at *18.
55
   Opinion at *27.
56
   Opening Br. at 12, n. 4.
                                              15
in basis from the indemnification. In other words, Acument argues that to determine

whether a benefit occurred, all the effects of the transaction (positive and negative) must

be taken into account. It urges us to reject Textron‟s contention that only one effect (the

positive tax effect) is relevant, and we should ignore the corresponding (negative) effect,

in order to produce a “benefit.” Because the net effect is in fact neutral, Acument argues

that Textron is not entitled to be reimbursed for fulfilling its indemnity obligations under

the Purchase Agreement. Acument points out that, contrary to Textron‟s argument on

appeal, the Superior Court did consider Textron‟s argument below that Acument‟s

increase in basis constituted a tax benefit, but rejected it. Acument also contends that the

Superior Court correctly held that the benefit can be either a deduction or a reduction, but

the distinction is irrelevant because the only benefit at issue is a deduction.

                                     III.   ANALYSIS

A. The Superior Court Did Not Err in Finding that Acument Has Not Received the Right
            to a Tax Benefit Under the Terms of the Purchase Agreement

                                   1. Standard of Review

       Textron first argues on appeal that the increase in Acument‟s basis from the

payment of the contingent liabilities constitutes an actual (non-hypothetical) tax benefit,

but the Superior Court erred in failing to “address[] this potentially dispositive issue.”

Textron contends that because the error is a matter of law, de novo review is appropriate.

Acument responds that because “Textron‟s appeal does not actually challenge the Court‟s

determination of tax law,” but instead only contests the Superior Court‟s interpretation of




                                              16
the parties‟ contract, we should give deference to the factual findings underlying the

Superior Court‟s interpretation in our review.57

       Acument is correct; Textron is not challenging the Superior Court‟s analysis of the

relevant tax law, but is instead challenging the Superior Court‟s interpretation of what the

parties‟ Purchase Agreement required as a result of the relevant tax law. The question

before us, as it was before the Superior Court, is not how “benefit” is defined by tax law,

but how this contract defined that term. To quote Corbin on Contracts: “If the purpose of

contract law is to enforce the reasonable expectations of parties induced by promises,

then at some point it becomes necessary for courts to look to the substance rather than to

the form of the agreement, and to hold that substance controls over form.”58 The parties

do not dispute that under IRS regulations, payment of pre-closing contingent liabilities

automatically increases Acument‟s basis. What they dispute is whether their “reasonable

expectations” in signing the Purchase Agreement entailed categorizing the increase in

Acument‟s basis as a “tax benefit,” particularly when that increase is automatically offset

by a decrease in basis from Textron‟s indemnification.

       Thus, our standard of review must reflect the fact that this case presents issues of

contract law, not tax law. We consider issues involving the language of the contract de

novo, but to the extent that the Superior Court‟s interpretation of the contract is based on

extrinsic evidence, its findings are entitled to deference “unless the findings are not



57
  Answering Br. at 19.
58
  CORBIN ON CONTRACTS (Kaufman Supp. 1984) § 570 (quoted in Katz v. Oak Industries, 508
A.2d 873, 880 (Del. Ch. 1986)).
                                             17
supported by the record or unless the inferences drawn from those findings are not the

product of an orderly or logical deductive process.”59

              2. Acument is Not Entitled to a Tax Benefit As Defined by the
                                 Purchase Agreement

       As noted, the Purchase Agreement defines “Tax Benefit” as “the present value of

any refund, credit or reduction in otherwise required Tax payments.”60 The Agreement

then specifies how such a benefit is calculated, including in which year “such refund,

credit or reduction shall be recognized.”61 The Superior Court determined that the

Purchase Agreement was ambiguous because “the provisions in controversy are

reasonably or fairly susceptible of different interpretations.”62 Namely, the Superior

Court found that the plain language of the contract could support either Textron‟s

interpretation entitling it to a refund for merely hypothetical benefits or Acument‟s

interpretation requiring it to receive actual net tax benefits. The court thus denied

Textron‟s motion for judgment of the pleadings, and considered the extrinsic evidence at

trial. Based on that extrinsic evidence, including internal emails, communications

between the parties, and testimony from deposition and trial witnesses, the Superior

Court determined that Acument‟s obligation to reimburse Textron was not triggered

under the Purchase Agreement unless Acument received an actual net tax benefit.




59
   Honeywell Intern. Inc. v. Air Products & Chemicals, Inc., 872 A.2d 944, 950 (Dec. 2005).
60
   App. to Opening Br. at 142 (Purchase Agreement § 8.1).
61
   Id.
62
   Textron, Inc. v. Acument Global Technologies, Inc., 2011 WL 1326842, at *6 (Del. Sup. Apr.
6, 2011).
                                              18
       Textron asserts that it is not contesting the Superior Court‟s interpretation of the

contract as requiring actual net tax benefits, but it argues that the Superior Court erred in

not considering whether Acument had received a tax benefit because of the increase in its

basis. As an initial matter, Textron‟s claim that the Superior Court ignored this issue is

incorrect; although the Superior Court could have detailed its findings related to the

parties‟ tax arguments more clearly, the opinion does note that the language of the

Purchase Agreement does not support Textron‟s argument “that the parties intended for

an increase in basis to satisfy the Offset,” and in fact “belies” that contention.63

       It is also difficult to distinguish between Textron‟s argument below that the offset

would be triggered by a hypothetical benefit and its argument on appeal that Acument is

entitled to an actual benefit, because Textron does not contend that Acument will see any

net tax reduction from the stepped-up basis. Instead, Textron seems to want to parse the

meaning of “actual” tax benefits. Textron alleges that because U.S. tax law perceives the

step-up and step-down in basis as analytically distinct, Acument is entitled to an actual

benefit from the step-up that is separate from the (simultaneous and equal) step-down.64

       But “analyzed separately” does not mean that the decrease in basis is not

considered relevant by the IRS. Textron‟s claim only makes sense if the parties had

intended for Textron to partially indemnify Acument for the pre-closing liabilities,

contrary to the Superior Court‟s findings. Given the structure of the sale of the U.S.


63
  Opinion at *21.
64
  Opening Br. at 23 (“Any corresponding decrease in tax basis (in step 2) as a result of
Textron‟s indemnity payment is irrelevant, as that decrease is a distinct and independent event
under the tax law, the effect of which is analyzed separately.”).
                                               19
entities as deemed asset sales and Textron‟s agreement to indemnify Acument fully, any

time Textron pays one of the contingent liabilities, Acument‟s basis will increase

automatically by the amount of the payment – and decrease simultaneously and

automatically by the same amount, resulting in no net change. If Acument was required

to reimburse Textron for the amount of the increase by itself, every indemnification

payment on U.S. liabilities would trigger reimbursement, thus requiring Acument to share

responsibility for the pre-closing liabilities. The Superior Court rejected that

interpretation of the Purchase Agreement as not supported by the plain terms of the

Agreement or the extrinsic evidence, and Textron does not purport to challenge those

findings on appeal.65

       We agree with the Superior Court that the plain language of the Purchase

Agreement does not support Textron‟s interpretation. For example, the relevant

provisions in the Purchase Agreement call for Textron to indemnify Acument for “any

and all Losses incurred . . . to the extent relating to or arising out of” pre-closing

liabilities.66 The Purchase Agreement does provide for some liabilities to be shared

(those related to certain breaches of Textron‟s representations or warranties), and sets a

deductible, minimum and maximum for the shared portion.67 It was thus reasonable for

the Superior Court to assume that the lack of a similar provision related to the other




65
   Opinion at *21.
66
   See Purchase Agreement § 4.6(h)(ii), § 6.1(b).
67
   See Purchase Agreement § 6.1(d)(i).
                                               20
liabilities suggests that the parties did not intend for those liabilities to be shared.68

Further, the tax benefit provision in § 6.1(d)(iii) comes after similar offsets in (i) and (ii),

which trigger reimbursement if Acument receives insurance proceeds or third-party

contributions, respectively. As the Superior Court determined, “[n]one of the clauses

contain language indicating the reduction is „automatic.‟ And none of the clauses have

language indicating a „sharing‟ or partial indemnification. Considering the entire

6.1(d)(iii) clause, it reads as possible reductions to the amount of Loss Textron is required

to indemnify.”69

       Moreover, because the Superior Court‟s fact findings were supported by the

record, they are entitled to deference on appeal. The Superior Court was persuaded by

witness testimony from those involved in drafting and negotiating the Purchase

Agreement that the parties intended § 6.1(d)(iii) to prevent a “windfall” to Acument from

being both compensated and indemnified for the same underlying liabilities, but the

provision was not intended to create a sharing mechanism to relieve Textron of its

indemnity obligations.70

       Although the Superior Court did not highlight it, it is also worth noting that the

imbalance generated by requiring Acument to reimburse Textron would be acute because


68
   See, e.g., Opinion at *22 (“The Court‟s finding that the Offset was not meant to be automatic
is reinforced by the absence of the words „hypothetical‟ or „automatic‟ within the [Purchase
Agreement]. Again, the parties are well seasoned in mergers and acquisitions – they knew what
they were doing. If Textron and [Platinum Equity] agreed to partial indemnification, the
indemnification clause could have easily been written to limit Textron‟s liability either through
explicit „partial indemnification‟ language or drafting 6.1(d)(iii) to read as „each Loss is partially
indemnified subject to‟ instead of „each Loss shall be reduced by[. . . .]‟”).
69
   Opinion at *21 (internal citations omitted).
70
   Opinion at *22.
                                                  21
Textron – not Acument – receives an actual tax savings from its payment of the

contingent liabilities. As Textron‟s tax expert discussed in his expert report, when the

liability is paid, “the seller [i.e., Textron] will be entitled to a tax deduction for

satisfaction of its liability to the claimant.”71 But because the indemnification by Textron

automatically adjusts the purchase price down, in an amount equal to the increase from

the payment of the liability, Acument will not see any change in basis, and thus cannot

deduct any amount from its U.S. taxes.72 If we were to conclude that the parties had

silently agreed to share responsibility for pre-closing liabilities, Textron would be

doubly-reimbursed (by the IRS and by Acument), while Acument would suffer a net loss.

       As well, it is not clear under the Purchase Agreement how Acument could even

calculate the amount owed in reimbursement if Textron is correct that the step-up in basis

constitutes an actual benefit. Textron highlights the last sentence of the definition of

“Tax Benefit” in the Purchase Agreement, but ignores the first. “Tax Benefit” is defined

in § 8.1 of the Agreement as: “the present value of any refund, credit or reduction in

otherwise required Tax payments. . . .”73 It is not clear what the “present value” of a net

zero change in basis is, other than zero.

       One potentially confusing factor that the Superior Court did address is that

Acument does not contend that the benefit provision is triggered only if there is a

reduction in its tax bill in a given year. Rather, because the Purchase Agreement states in

(iii) of the Tax Benefit definition quoted above that the “refund, credit or reduction shall

71
   App. to Opening Br. at 174 (Gertzman Expert Report at 6).
72
   See App. to Opening Br. at 178 (Gertzman Expert Report at 10).
73
   App. to Opening Br. at 142 (Purchase Agreement § 8.1) (emphasis added).
                                               22
be recognized or received in the earliest possible taxable period (without regard to any

other losses, deductions, refunds, credits, reductions or other Tax items available to such

party),” Acument concedes that “it need not actually save taxes for a Tax Benefit Offset

to apply.”74 But contrary to Textron‟s argument, and as the Superior Court discussed, the

relevant provision refers to timing considerations for calculating the benefit, not whether

the offset is triggered in the first instance.75 That is, if Acument receives a net tax benefit,

(iii) of the Tax Benefit definition requires that it calculate the amount owed in

reimbursement to Textron based on the “earliest possible taxable period,” regardless of

whether it could save more if it deferred the payment. For example, if Acument was able

to take advantage of a tax deduction under Brazilian tax law because of Textron‟s

indemnification payments, the fact that Acument could not receive any additional tax

savings from doing so because it already had outstanding net operating losses to use in a

particular year would not factor into the calculation of which taxable period applied. By

the terms of the Purchase Agreement, the savings to Acument would be deemed to have

been caused by the deduction resulting from Textron‟s indemnification regardless of

whether Acument used that deduction. The Superior Court found that the contract was

structured in this way to promote “certainty and clarity” and avoid Textron having to

review Acument‟s tax returns in every jurisdiction in which it was required to file.76 The

Purchase Agreement‟s “without regard” language thus does not support Textron‟s



74
   Answering Br. at 31 (emphasis added).
75
   See, e.g., Opinion at *21.
76
   Opinion at *25 n.292.
                                              23
argument that the offset is triggered despite the decrease in liability from the

indemnification.

       Because the Superior Court interpreted the language of the Purchase Agreement in

a reasonable manner that is supported by substantial extrinsic evidence and commercial

logic, its determination that the parties did not intend for Acument‟s automatic basis

increase to constitute a tax benefit within the meaning of the Purchase Agreement must

be affirmed.

          B. Textron Has Not Shown That the Superior Court’s Use of the Term
                              “Deduction” Was in Error

       Textron‟s second claim on appeal is that the Superior Court erred in narrowing

Textron‟s right to reimbursement from any “reduction” to only a “deduction,” “thereby

materially altering the contract and the parties‟ rights thereunder.”77 Textron alleges that

because the terms are not interchangeable, “the Superior Court caused real and

quantifiable harm to Textron.”78 To wit, Textron argues that construing the tax benefit as

a deduction forecloses the possibility that Textron could be entitled to reimbursement

when Acument‟s basis increases in other circumstances or for any other refund, credit, or

reduction that is not a deduction in the future.

       As noted, the Purchase Agreement entitles Textron to an offset whenever Acument

is entitled to a tax benefit, which is defined in the Agreement as “the present value of any

refund, credit or reduction in otherwise required Tax payments.”79 Contrary to Textron‟s


77
   Opening Br. at 29.
78
   Reply Br. at 16.
79
   App. to Opening Br. at 142 (Purchase Agreement § 8.1) (emphasis added).
                                              24
argument, the Superior Court did not ignore this language or misconstrue the rights the

Agreement provides to the parties. Rather, the Superior Court concluded, “after carefully

considering all the documentary evidence, the parties‟ positions during negotiations, and

the parties‟ conduct after executing the [Purchase Agreement] and Letter Agreement, . . .

that the Tax Benefit Offset applies only if Acument is entitled to a „deduction‟ upon the

making of an indemnification payment.”80 The court added in a footnote that its holding

“does not limit or otherwise effect the [Purchase Agreement‟s] own language regarding a

credit and/or refund.”81 The Superior Court then clarified that it “intentionally use[d] the

term „deduction,‟ as did the parties throughout their negotiations and up to the filing of

this lawsuit,”82 noting that,

       Despite Textron‟s argument that the [Purchase Agreement] utilizes the
       broader term of „reduction,‟ as will be discussed, the parties tacitly agreed
       reduction meant deduction as exhibited in their pre-litigation conduct.
       Because the Court previously ruled the [Purchase Agreement] and Letter
       Agreement are ambiguous, it is not limited to determining their meaning by
       a third party standard.83

       Although this last phrase is somewhat cryptic, it appears from the Superior Court‟s

citations that its use of the word “deduction” is meant to reflect the parties‟ shared

meaning in accordance with standard principles of contractual interpretation: “Where the

parties have attached the same meaning to a promise or agreement or a term thereof, it is




80
   Opinion at *20.
81
   Opinion at *20 n.248.
82
   Opinion at *20.
83
   Opinion at *20 n.249.
                                             25
interpreted in accordance with that meaning.”84 Because the Superior Court carefully

reviewed the extrinsic evidence to interpret the meaning of “tax benefit” in the Purchase

Agreement in accordance with the parties‟ intent, its finding that the parties intended to

require a deduction related to the indemnification payment to trigger the offset contested

in this case is entitled to deference on appeal. The record before the Superior Court was

replete with references to “deductions” by both parties,85 including in “Andrew‟s Open

Issues Summary” drafted by Textron‟s senior associate general counsel Andrew Spacone,

and the later Letter Agreement.86 Spacone‟s January 26, 2010, demand letter also

asserted that “the fact that Acument . . . may be entitled . . . to a tax deduction attributable

to the United States claims that are indemnified by Textron . . . is enough to trigger the

reduction in Textron‟s indemnity payments under the Purchase Agreement.”87 In other

words, the Superior Court made a well-grounded factual finding that in the context

relevant to the dispute before it, the parties understood the term “reduction” to mean a

“deduction” in the sense of a net tax benefit.

       These findings led to the Superior Court‟s ultimate holding that the tax benefit

offset was not triggered by a hypothetical right to a tax benefit, and that Acument had not

actually received a tax benefit under the terms of the Purchase Agreement because it was
84
   The Superior Court cited Wilmington Firefighters Ass’n, Local 1590 v. City of Wilmington,
2002 WL 418032, at *6, n.33 (Del. Ch. Mar. 12, 2002) (citing RESTATEMENT (SECOND) OF
CONTRACTS § 201(1)).
85
   See Opinion at *24-26.
86
   Opinion at *13, *19 (“First, the Open Issues Summary declares that the Tax Benefit Offset
applies where „tax liability payments Textron is required to make, [ ] are deductible to Acument.‟
That is an important concession on Textron‟s part because it implicates deductibility as the
trigger for the Offset.”).
87
   App. to Acument Pre-Trial Opening Br. at 129 (letter from Andrew Spacone to John Clark,
dated Jan. 26, 2010) (emphasis added).
                                               26
not entitled to a deduction from its change in basis. But Textron also independently

challenges the Superior Court‟s use of the term “deduction,” particularly for claims that

are outside the scope of this particular litigation (i.e., tax benefits in the form of tax

credits or other non-deduction reductions). As to those claims, though, the Superior

Court made it clear that its use of the word “deduction” is not meant to limit other

possible reductions in other contexts.88 In fact, the Superior Court did use the term

“reduction” when speaking more broadly about the parties‟ Agreement: “based upon the

parties‟ conduct and correspondence, a Tax Benefit Offset only applies if Acument is

entitled to a Tax deduction or reduction.”89

         Because the Superior Court had a reasonable basis to find that the parties

themselves understood the relevant tax benefit at issue in this case to be a deduction,

there is no merit to Textron‟s claim that the Superior Court‟s considered use of the word

“deduction” was in error. Accordingly, we affirm the judgment of the Superior Court.




88
     Opinion at *20 n. 248.
89
     Opinion at *22 (emphasis added).
                                               27
