The Court of Chancery examined a closing condition that there be “no pending or threatened legal or administrative action” related to an Equity Purchase Agreement pursuant to which the buyer agreed to purchase the seller. Immediately before closing, the Pension Benefit Guaranty Corporation (the “PBGC”) wrote a letter to the seller noting its concern regarding the seller’s transfer to the buyer of certain pension plan obligations. After the transaction closed, the PBGC sent another letter advising the seller that it was “extremely disappointed” that is had closed the transaction and that, while it did “not plan to initiate legal action against [the seller], [it had] not yet decided whether [it would] pursue [the] matter through the IRS and/or professional actuarial organizations.” The Court found that this language was not a “threatened legal or administrative action,” but rather “merely an identification or a reservation of options . . . .”
Bottom Line: “Potential Litigation” is not the equivalent of Threatened Litigation.” When potential litigation exists pre-closing, buyers should condition closing on receipt of a no-action letter from each potential claimant.