IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
VIASAT, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2024-0713-LWW
)
L3HARRIS TECHNOLOGIES, )
INC., )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: June 23, 2026
Date Decided: September 29, 2026
Ryan D. Stottmann & Jonathan H. Lloyd, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; Paul F. Rugani & Thomas Kidera,
ORRICK, HERRINGTON & SUTCLIFFE LLP, New York, New York; Jordan
Bock, GOODWIN PROCTER LLP, Boston, Massachusetts; Counsel for Plaintiff Viasat, Inc.
Raymond J. DiCamillo & Matthew D. Perri, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Thomas C. White, SULLIVAN & CROMWELL LLP, Washington, D.C.; Michael P. Devlin, SULLIVAN & CROMWELL LLP, New
York, New York; Counsel for Defendant L3Harris Technologies, Inc.
WILL, Vice Chancellor
In 2023, a defense contractor bought a tactical data links business from a
competitor for $2 billion. The purchase price was subject to a post-closing
adjustment process. The parties agreed that any working capital adjustment dispute
would be resolved by an independent accounting expert.
After closing, the parties disagreed on the final price and submitted several
issues to the accounting expert, three of which are raised here. The accounting
expert resolved the issues, in whole or in part, in the buyer’s favor. Now, the seller
sues the buyer challenging the accounting expert’s interpretation of the governing
asset purchase agreement. For each of the three issues, the seller asserts that the
accounting expert exceeded its contractual mandate.
The parties have cross-moved for summary judgment, with mixed results.
The seller prevails on the first issue because the expert overrode an express
contractual prohibition. The buyer prevails on the second and third issues because
the expert acted in accordance with the agreement.
I. FACTUAL BACKGROUND
The following background is drawn from the undisputed facts in the pleadings
and documentary exhibits the parties submitted.1
1
Citations to “Pl.’s Ex.” refer to exhibits to the Transmittal Affidavit of Jonathan H. Lloyd in Support of Plaintiff’s Opening Brief in Support of Plaintiff’s Motion for Summary Judgment (Dkt. 61). Citations to “Def.’s Ex.” refer to exhibits to the Transmittal Affidavit of Danielle I. Bell in Support of L3Harris Technologies, Inc.’s Motion for Summary Judgment (Dkt. 64). Pincites refer to the exhibits’ internal pagination.
1
A. L3Harris’s Purchase of Link-16
Plaintiff Viasat, Inc. is a publicly traded Delaware corporation that provides
high-speed satellite broadband services and secure networking systems for civilian
and government customers worldwide.2 Defendant L3Harris Technologies, Inc. is
also a publicly traded Delaware corporation and a defense contractor.3
Viasat manufactures battlefield radio systems through its Link-16 Tactical
Data Links business (the “Business”).4 In October 2022, the parties entered into an
Asset Purchase Agreement (“APA”) for L3Harris to acquire the Business from
Viasat for $1.958 billion.5 The transaction closed on January 3, 2023.6
B. The Post-Closing Adjustment Process
Under the APA, the final purchase price L3Harris paid for the Business
depended, in part, on a post-closing working capital adjustment.7 The parties set
“Target Working Capital” for the Business at $145 million.8 The APA defines
“Working Capital” as the difference between current assets and current liabilities as
2
Verified Compl. (Dkt. 1) (“Compl.”) ¶ 15; see Answer to Verified Compl. (Dkt. 29) (“Answer”) ¶ 15.
3
Compl. ¶ 16; Answer ¶ 16.
4
Compl. ¶ 1; Answer ¶ 1.
5
Compl. ¶¶ 21-22; Answer ¶¶ 21-22; Pl.’s Ex. 1 (“APA”) pmbl., § 2.01(b). 6
Compl. ¶ 22; Answer ¶ 22; see Pl.’s Ex. 11 (“Final Report”) 1 (“Purchaser and Seller entered into the Contract with a closing date of January 3, 2023.”). 7
APA §§ 2.01(b), 2.08(d).
8
Compl. ¶ 22; Answer ¶ 22; APA § 1.01(a) (defining “Target Working Capital”).
2
listed “on the Reference Statement of Working Capital, subject to the definitional
adjustments set forth therein.”9 The “Reference Statement of Working Capital” (or
“Reference Statement”) is the “statement setting forth Working Capital as of the
Measurement Date”—December 31, 2021.10 It is a two-page list of accounting
issues that the parties agreed to handle a specific way.11
The APA required Viasat to deliver an “Estimated Closing Statement” before
closing and to estimate “Closing Working Capital” in good faith.12 L3Harris based
its initial payment at closing on this estimate.13 The APA also required L3Harris to
prepare a “Closing Statement” after closing.14 Viasat could then object to the
Closing Statement, and the parties would negotiate over disputed items.15 If the
9
APA § 1.01(a) (defining “Working Capital”).
10
Id. § 3.04 (defining “Reference Statement of Working Capital” and “Measurement Date”).
11
APA sched. 1.01(h).
12
Compl. ¶ 22; Answer ¶ 22; APA § 2.02(b); see also id. § 1.01(a) (defining “Closing Working Capital” as “Working Capital as of 12:01 a.m. Pacific Time on the Closing Date”); id. (defining “Estimated Closing Statement” as “a written statement” including “Seller’s good faith estimates of Closing Working Capital . . . and Closing Indebtedness” and “Seller’s calculation of the Closing Date Payment” and “calculation of the Closing Date Reimbursement Amount”).
13
Compl. ¶ 22; Answer ¶ 22; APA § 2.03(a).
14
Compl. ¶ 25; Answer ¶ 25; APA § 2.08(a); see id. § 1.01(a) (defining “Closing Statement” as “the statement setting forth Closing Working Capital and the Closing Indebtedness, to be delivered pursuant to Section 2.08(a)”).
15
Compl. ¶¶ 26-27; Answer ¶¶ 26-27; APA § 2.08(b)-(c).
3
parties could not resolve an item, Section 2.08(c) required them to submit the dispute
to “Grant Thornton LLP,” defined as the “Arbiter.”16
Section 2.08(a) of the APA directs the parties to calculate Working Capital
“using and applying the Accounting Principles” and “taking into account the
definitional adjustments” set out in the Reference Statement.17 Section 1.01(a)
defines “Accounting Principles” in three clauses, which the parties refer to as tiers.18
The first tier is generally the policies, practices, and procedures specified in the
Reference Statement (“Tier 1”).19 The second tier is Generally Accepted Accounting
Principles, or GAAP (“Tier 2”).20 And the third tier requires the use of Viasat’s
historical accounting methods, policies, principles, practices, classifications,
judgments, and estimation methodology, “to the extent not inconsistent with the
Reference Statement of Working Capital or GAAP” (“Tier 3”).21 Crucially, the APA
sets a hierarchy among these tiers, confirming which tiers “take precedence” over
others.22
16
Compl. ¶ 28; Answer ¶ 28; APA § 2.08(c); id. §§ 1.01(a), 2.02(b), 2.03(a), 2.08(a)-(c). 17
Compl. ¶ 29; Answer ¶ 29; APA § 2.08(a).
18
Compl. ¶ 30; Answer ¶ 30; APA § 1.01(a) (defining “Accounting Principles”). 19
APA § 1.01(a) (defining “Accounting Principles”).
20
Id.
21
Id.
22
Id.; Compl. ¶ 31; Answer ¶ 31.
4
The Reference Statement contains specific accounting practices and
procedures for several categories of Working Capital, including Estimates at
Completion (EACs), Excess and Obsolescence (E&O) reserves, and Work in
Progress (WIP) reserves.23 For example, regarding EACs, the Reference Statement
directs that estimates to complete “shall not be adjusted unless otherwise done in the
Ordinary Course by the business’ program control analysts, project managers and
financial analysts, and consistent with [Viasat]’s past practice.”24 The APA defines
“Ordinary Course” as “the conduct of the Business, consistent in all material respects
with the normal day-to-day customs, practices, and procedures of the Business.”25
C. The Purchase Price Dispute
On December 28, 2022, Viasat delivered an estimate of Closing Working
Capital of $154,354,000.26 That amount exceeded Target Working Capital by
23
APA sched. 1.01(h); Compl. ¶ 33; Answer ¶ 33.
24
APA sched. 1.01(h); Compl. ¶ 24; Answer ¶ 24.
25
APA § 1.01(a) (defining “Ordinary Course”).
26
Compl. ¶ 22; Answer ¶ 22.
5
$9,354,000.27 L3Harris paid $1,972,592,177 when the transaction closed on January
3, 2023.28
On May 2, 2023, L3Harris delivered its Closing Statement, which calculated
a Final Purchase Price of $1,914,808,682.29 L3Harris sought a repayment of
$57,783,495 and proposed adjustments to 32 working capital items.30
Viasat responded with an objection notice on June 12, 2023.31 Viasat accepted
$494,040 of L3Harris’s proposed adjustments and disputed the rest.32 The parties
negotiated and narrowed their disagreements to ten items totaling $30,989,803.33
The ten disputed items were submitted to Grant Thornton for resolution in
accordance with Section 2.08(c) of the APA.34
On December 12, 2023, the parties engaged Grant Thornton LLP.35 Charles
Blank, who led Grant Thornton’s mergers and acquisitions dispute practice, oversaw
27
Compl. ¶ 22; Answer ¶ 22.
28
See Def.’s Ex. D at 6; Pl.’s Ex. 3 at 6.
29
Compl. ¶ 25; Answer ¶ 25; see also Def.’s Ex. D at 2, 7.
30
Compl. ¶ 3; Def.’s Ex. D at 2, 7.
31
Compl. ¶ 26; Answer ¶ 26; see also Def.’s Ex. D at 2, 7.
32
See Def.’s Ex. D at 7.
33
Compl. ¶ 27; Answer ¶ 27; see Def.’s Ex. D at 8; see also Pl.’s Ex. 3 at 2, 7-8; Final Report 2-3.
34
Compl. ¶ 34; Answer ¶ 34; APA § 2.08(c).
35
Def.’s Ex. B at 1.
6
the engagement.36 The engagement letter directed him to “interpret[] and appl[y]
the terms of the [APA]” using his “judgment” and “expertise as an accountant and
business advisor.”37
Grant Thornton issued its written determination (the “Final Report”) on May
1, 2024.38 It resolved eight of the ten disputed items in L3Harris’s favor and the
remaining two items largely in Viasat’s favor.39
D. This Litigation
Viasat filed this action on July 2, 2024, challenging Grant Thornton’s
treatment of five disputed items.40 In Count I, Viasat sought a declaration that Grant
Thornton’s approach to the disputed items violated the tiered structure of the
Accounting Principles in the APA, exceeded its authority, and amounted to manifest
error.41 Counts II and III asserted alternative claims to modify or vacate an
arbitration award under the Federal Arbitration Act and the Delaware Uniform
Arbitration Act.42
36
See Pl.’s Ex. 12 at 10, 21-25.
37
Def.’s Ex. B at 1-2.
38
Compl. ¶ 44; Answer ¶ 44; Def.’s Ex. F at 1.
39
See Final Report 77.
40
Compl. ¶¶ 68-84.
41
Id.
42
Id. ¶¶ 85-98; see 9 U.S.C. §§ 10-11; 10 Del. C. §§ 5714-15.
7
On January 28, 2025, I granted in part and denied in part L3Harris’s motion
to dismiss the Complaint.43 I concluded that the APA authorized Grant Thornton to
act as an expert rather than an arbitrator because its mandate was limited to applying
specialized accounting knowledge to resolve factual issues.44 Because Counts II and
III assumed Grant Thornton was acting as an arbitrator, they were dismissed.45
I denied the motion to dismiss as to Count I. Although Grant Thornton had
the authority to resolve accounting disputes subject to a manifest error standard of
review, interpreting the APA is a purely legal issue. Because contract interpretation
falls outside an accounting expert’s purview and Viasat adequately pleaded that
Grant Thornton misapplied the Accounting Principles, Count I stated a reasonably
conceivable claim.46
43
See Tr. of Jan. 28, 2025 Rulings on Def.’s Mot. to Dismiss (Dkt. 28) (“Mot. to Dismiss Tr.”).
44
Id. at 18.
45
Id. Because Counts II and III sought to modify or vacate an arbitration award, Viasat properly invoked this court’s statutory jurisdiction at the outset of this litigation. See 10 Del. C. § 5702. Although those statutory claims were dismissed, the court retains subject matter jurisdiction over the remaining declaratory judgment claim under the clean-up doctrine. See, e.g., Kraft v. WisdomTree Invs., Inc., 145 A.3d 969, 974 (Del. Ch. 2016); NEC Fund VI HE Lender, LLC v. Hecate Hldgs. LLC, 2026 WL 527007, at *9 (Del. Ch. Feb. 25, 2026).
46
Mot. to Dismiss Tr. 20-21.
8
Limited fact and expert discovery ensued. Viasat later withdrew its challenges
to two disputed items.47 The parties then cross-moved for summary judgment on the
three remaining items, which I refer to as “Disputed Items 1, 2, and 3.”48
II. ANALYSIS
The parties have cross-moved for summary judgment on the three remaining
disputed items. Disputed Item 1 concerns adjustments to Estimates at Completion.
Disputed Items 2 and 3 concern inventory reserves.49
Under Court of Chancery Rule 56, summary judgment is granted only if
“there is no genuine dispute as to any material fact” and “the movant is entitled to a
judgment as a matter of law.”50 When parties cross-move for summary judgment,
“the court must examine each motion separately.”51 “The facts must be viewed in
47
Answering Br. in Opp’n to Def.’s Mot. for Summ. J. (Dkt. 72) (“Pl.’s Answering Br.”) 36-37.
48
See id.; see also Opening Br. in Supp. of Pl.’s Mot. for Summ. J. (Dkt. 61) (“Pl.’s Opening Br.”); Answering Br. of L3Harris Technologies, Inc. in Opp’n to Viasat’s Mot. for Summ. J. (Dkt. 73) (“Def.’s Answering Br.”); Reply Br. of L3Harris Technologies, Inc. in Further Supp. of Mot. for Summ. J. (Dkt. 80) (“Def.’s Reply Br.”); Opening Br. of L3Harris Technologies, Inc. in Supp. of Its Mot. for Summ. J. (Dkt. 63) (“Def.’s Opening Br.”); Reply Br. in Supp. of Pl.’s Mot. for Summ. J. (Dkt. 79) (“Pl.’s Reply Br.”); see also Tr. of June 23, 2026 Oral Arg. on Cross-Mots. for Summ. J. (Dkt. 88).
49
Pl.’s Answering Br. 36-37; Pl.’s Opening Br. 35, 42, 44; Def.’s Opening Br. 33, 38-39; see also Final Report 10, 18, 25.
50
Ct. Ch. R. 56(a).
51
Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160, 167 (Del. Ch. 2003).
9
the light most favorable to the nonmoving party and the moving party has the burden
of demonstrating that there is no material question of fact.”52
Both motions turn on the interpretation of the APA, which is governed by
Delaware law.53 Matters of contract interpretation are “readily amenable to
summary judgment” because “proper interpretation of language in a contract . . . is
treated as a question of law.”54 The court may grant summary judgment in a contract
dispute in two scenarios: “(1) when the contract is unambiguous, or (2) when the
extrinsic evidence fails to create a triable issue of material fact.”55 Where a contract
is unambiguous, the court gives effect to the “plain meaning of the contract’s terms
and provisions.”56 It must assess the contract “as a whole and . . . give each provision
and term effect, so as not to render any part of the contract mere surplusage.”57
52
Senior Tour Players 207 Mgmt. Co. v. Golftown 207 Hldgs. Co., 853 A.2d 124, 126 (Del. Ch. 2004).
53
See APA § 10.06.
54
Tetragon Fin. Gp. Ltd. v. Ripple Labs Inc., 2021 WL 1053835, at *3 (Del. Ch. Mar. 19, 2021) (first quoting Barton v. Club Ventures Invs. LLC, 2013 WL 6072249, at *5 (Del. Ch. Nov. 19, 2013); and then quoting Pellaton v. Bank of N.Y., 592 A.2d 473, 478 (Del. 1991)). 55
Julius v. Accurus Aerospace Corp., 2019 WL 5681610, at *7 (Del. Ch. Oct. 31, 2019), aff’d, 241 A.3d 220 (Del. 2020).
56
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010); see also RhonePoulenc Basic Chems. Co. v. Am. Motorists Ins., 616 A.2d 1192, 1195 (Del. 1992) (“Clear and unambiguous language . . . should be given its ordinary and usual meaning.”). 57
Osborn, 991 A.2d at 1159 (quoting Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396-97 (Del. 2010)).
10
As explained below, each motion is granted in part and denied in part. Viasat
is entitled to summary judgment on Disputed Item 1. L3Harris is entitled to
summary judgment on Disputed Items 2 and 3.58
A. Standard of Review and Framing Principles
The parties agreed that Grant Thornton would serve as an expert rather than
as an arbitrator.59 In Terrell v. Kiromic Biopharma, Inc., the Delaware Supreme
Court addressed the distinction between judicial review of an expert determination
and an arbitration award.60 Interpreting language like that of APA Section 2.08(c),
Terrell explained that an expert’s “authority is limited to its mandate to use its
specialized knowledge to resolve a specified issue of fact.”61 On such matters, the
“expert’s determination of the disputed factual issue will be final and binding.”62
But when an expert’s assessment hinges on resolving legal issues, that assessment is
not entitled to deference.63
58
See infra Sections II.B-C.
59
See APA § 2.08(c); see also Mot. to Dismiss Tr. 18 (explaining that the APA contemplated an expert determination, not arbitration).
60
Terrell v. Kiromic Biopharma, Inc., 297 A.3d 610, 617-18 (Del. 2023). 61
Id. at 618.
62
Id.
63
See id. at 623.
11
The APA establishes an unambiguous, three-tier hierarchy of Accounting
Principles for the calculations necessary to determine any adjustments to Working
Capital. The three tiers are:
(i) the policies, practices and procedures specified in the
Reference Statement of Working Capital [Tier 1]; (ii) GAAP
[Tier 2]; and (iii) to the extent not inconsistent with the Reference
Statement of Working Capital or GAAP, the same accounting
methods, policies, principles, practices and procedures, with
consistent classifications, judgments and estimation
methodology . . . as were applied [by Viasat] in preparation of
the Financial Statements [Tier 3].64
The APA clarifies that “clause (i) shall take precedence over clauses (ii) and (iii),
and clause (ii) shall take preceden[ce] over clause (iii).”65 Thus, Tier 1—the
“policies, practices, and procedures” in the Reference Statement—takes precedence
over Tiers 2 and 3.66
Viasat contends that Grant Thornton impermissibly interpreted the legal
scope of the “shall take precedence” clause by proceeding to consider GAAP (Tier
2) after concluding that Viasat complied with the Reference Statement (Tier 1) as to
the three disputed items.67 After doing so, Grant Thornton rejected Viasat’s
64
APA § 1.01(a).
65
Id.
66
Id.; see also APA sched. 1.01(h) (Reference Statement).
67
Pl.’s Opening Br. 26-29, 35-39.
12
calculations for non-compliance with GAAP, flipping the outcome to L3Harris.68
L3Harris counters that because the Reference Statement and GAAP are in different
tiers, Grant Thornton properly sought to satisfy both requirements when possible.69
L3Harris also contends that Grant Thornton’s interpretation of certain APA terms is
subject to manifest error deference.70
To start, L3Harris’s argument that the court should defer to Grant Thornton’s
interpretation of the “shall take precedence” clause lacks merit. To be clear, the court
defers to the expert’s accounting determinations—such as whether an item
constitutes a “loss” or an “account receivable.”71 But Grant Thornton approached
the Accounting Principles as a checklist and evaluated whether Viasat’s calculations
complied with the Reference Statement and also with GAAP.72 Whether that
approach is consistent with the text of the APA presents a pure “question of contract
interpretation, and therefore, of law” that requires no specialized expertise.73 Grant
68
Id.
69
Def.’s Answering Br. 22-24; Def.’s Reply Br. 3-4.
70
Def.’s Answering Br. 44-47.
71
See ArchKey Intermediate Hldgs. Inc. v. Mona, 302 A.3d 975, 998 (Del. Ch. 2023) (“The more closely related the term or provision is to the expert’s area of expertise, the more likely it is that an expert can interpret the term without judicial assistance.”). 72
Pl.’s Ex. 12 (“Blank Dep.”) 132-34; see also Final Report 16, 22, 33. 73
Thompson St. Cap. P’rs IV, L.P. v. Sonova United States Hearing Instruments, LLC, 340 A.3d 1151, 1165 (Del. 2025); see also Terrell, 297 A.3d at 617-18.
13
Thornton’s interpretation of the “shall take precedence” clause is afforded no
deference.74
L3Harris’s reading of the “shall take precedence” clause—like Grant
Thornton’s interpretation—conflicts with the plain terms of the APA. Black’s Law
Dictionary defines “precedence” as “[g]enerally, the quality, state, or condition of
going before something else according to some system of priorities.”75 Applied here,
it means that if the Reference Statement resolves an issue, the inquiry ends. If the
Reference Statement and GAAP produce conflicting outcomes, the Reference
Statement is prioritized and controls.76
L3Harris argues otherwise by relying on ArchKey Intermediate Holdings Inc.
v. Mona.77 That reliance is misplaced. In ArchKey, the operative agreement required
that a closing statement be “both GAAP-compliant and as consistent as possible with
the Company’s past practices.”78 Unlike the APA here, the agreement addressed in
74
See Thompson St., 340 A.3d at 1165 (explaining that a “question of contract interpretation” is a question “of law”).
75
Precedence, Black’s Law Dictionary (12th ed. 2024); see also Def.’s Opening Br. 23 (citing a similar definition).
76
L3Harris acknowledges that if the Reference Statement dictates “[n]o Cash shall be included in Working Capital,” the directive governs even if GAAP would classify cash differently. Def.’s Answering Br. 23 n.3 (citing APA sched. 1.01(h)). 77
302 A.3d 975, 1000 (Del. Ch. 2023); see also Def.’s Answering Br. 23-24. 78
ArchKey, 302 A.3d at 1000 (emphasis added).
14
ArchKey did not subordinate GAAP to past practices and lacked a tie-breaking
hierarchy.
This dispute instead resembles Golden Rule Financial Corp. v. Shareholder
Representative Services, where the court held that a precedence clause subordinated
lower tiers in the event of a conflict.79 Golden Rule involved an agreement that an
accounting determination would be conducted according to a three-tier hierarchy.80
The court explained that, in such cases, compliance with the second tier could not
“justify” an “incorrect application” of the first, priority tier.81
As in Golden Rule, each tier of the Accounting Principles follows a bargainedfor hierarchy. If a policy in the Reference Statement (Tier 1) departs from GAAP,
then it supersedes the general GAAP default (Tier 2).82 But if the Reference
Statement does not resolve the disputed item, then the Accounting Principles dictate
that GAAP controls.83
Finally, L3Harris insists that this reading of the “shall take precedence” clause
is absurd because no reasonable buyer would agree to an approach contrary to
79
2021 WL 305741, at *6-7 (Del. Ch. Jan. 29, 2021), aff’d, 267 A.3d 382 (Del. 2021). 80
Id. at *3 (Del. Ch. Jan. 29, 2021).
81
Id. at *12.
82
See APA § 1.01(a); supra note 64 and accompanying text.
83
See Roma Landmark Theaters, LLC v. Cohen Exhibition Co. LLC, 2020 WL 5816759, at *15 n.72 (Del. Ch. Sept. 30, 2020) (enforcing an accounting hierarchy where specific policies in a higher tier superseded policies in lower tiers).
15
GAAP.84 “An unreasonable interpretation produces an absurd result or one that no
reasonable person would have accepted when entering the contract.”85 It is not
absurd, however, for sophisticated parties to negotiate bespoke accounting metrics
that depart from GAAP to allocate risk in a post-closing true-up. That L3Harris now
wishes it had negotiated differently is of no consequence. “Parties have a right to
enter into good and bad contracts, the law enforces both.”86
B. Disputed Item 1
Disputed Item 1 concerns Estimates at Completion (EACs) for two projects
in the Business’s joint tactical radio system portfolio.87 L3Harris proposed
adjustments to these EACs that would reduce Closing Working Capital by
approximately $10.6 million.88
The Reference Statement directs that “[e]stimates to complete shall not be
adjusted unless otherwise done in the Ordinary Course by the business’ program
control analysts, project managers and financial analysts, and consistent with Seller's
84
Def.’s Opening Br. 3, 30-32.
85
Osborn, 991 A.2d at 1160.
86
Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010).
87
See Compl. ¶ 45; Answer ¶ 45.
88
Final Report 10, 15-17.
16
past practice.”89 This is a definitive, substantive restriction.90 Grant Thornton found
that Viasat performed the requisite review and made no non-ordinary course
adjustments to the EACs in compliance with Tier 1.91 But Grant Thornton reached
down to Tier 2 of the Accounting Principles and applied a GAAP adjustment to the
underlying labor hours in the EACs that flipped the contract into a loss position.92
Grant Thornton then applied the Reference Statement’s “loss contracts”
provision to justify its adjustment.93 This provision states that “[l]oss contracts, if
any, are recorded in accordance with GAAP in the period where an expected loss
becomes evident.”94 L3Harris argues that GAAP must be applied to determine
whether a loss contract exists.95 But whether a loss is evident is a function of the
EACs.96 The “loss contracts” provision dictates how the contract is recorded once
89
APA sched. 1.01(h).
90
See id. (using mandatory language: “shall not be adjusted”); see Pl.’s Opening Br. 38-40.
91
Final Report 15-16.
92
Id. at 16-17.
93
See Blank Dep. 97-98.
94
APA sched. 1.01(h).
95
Def.’s Opening Br. 37-38.
96
See Pl.’s Ex. 6 (FitzGerald Dep.) 76 (testifying that the EAC and ETC indicate whether there is a loss contract).
17
an expected loss “becomes evident.”97 It did not grant Grant Thornton the authority
to ignore the EAC calculation methodology to look for losses under GAAP.98
Grant Thornton contravened the APA by applying a GAAP adjustment to the
labor hours first. Doing so was inconsistent with the Reference Statement.99 Grant
Thornton essentially found a “loss contract” by ignoring the Tier 1 statement that
EACs “shall not be adjusted,” and then used the resulting loss to justify disregarding
Tier 1.100 Given the hierarchy in the Accounting Principles, Grant Thornton could
not use a GAAP adjustment to create a loss that triggered the recording mechanism
in the “loss contract” provision.101
Accordingly, Viasat’s motion for summary judgment on Disputed Item 1 is
granted; L3Harris’s cross-motion on Disputed Item 1 is denied. The first tier of the
Accounting Principles hierarchy—the Reference Statement—controlled the
generation of the EACs.102 Grant Thornton confirmed that Viasat complied with Tier
1.103 Because the Reference Statement supplied a definitive substantive constraint
97
APA sched. 1.01(h).
98
See Pl.’s Opening Br. 41-42.
99
See APA sched. 1.01(h) (stating unequivocally that “[e]stimates to complete shall not be adjusted”).
100
See Final Report 14, 16-17; Blank Dep. 97-98 (“It tells me that if you have a loss contract, you apply GAAP to recognize—to recognize and measure the expected loss.”). 101
See Final Report 14.
102
APA sched. 1.01(h).
103
Final Report 16.
18
that Viasat met, Grant Thornton lacked the contractual authority to then proceed to
Tier 2 of the Accounting Principles.104
C. Disputed Items 2 and 3
Disputed Items 2 and 3 present a different situation. For each, the Reference
Statement supplies a procedural mechanism for evaluating an adjustment but, unlike
Disputed Item 1, lacks a definitive substantive constraint. For both Disputed Items
2 and 3, the Reference Statement does not fully resolve the disputed issue.105 Tier 1
is therefore not determinative, meaning that Tier 2—GAAP—applies under the
Accounting Principles’ hierarchy.106
Disputed Item 2 concerns Excess and Obsolescence (E&O) reserves—that is,
reserves on Viasat’s balance sheet for unused or outdated inventory.107 A higher
reserve reduces current assets (lowering Working Capital); a lower reserve keeps
inventory asset values higher (increasing Working Capital).108 By reducing the
104
See Terrell, 297 A.3d at 618.
105
See Final Report 22, 32-33.
106
See APA § 1.01(a); supra note 64 and accompanying text; see also Golden Rule, 2021 WL 305741, at *12.
107
See Compl. ¶ 50; Answer ¶ 50.
108
See APA § 1.01 & sched. 1.01(h) (defining Working Capital as “Current Assets” minus “Current Liabilities” and classifying “Inventories” within “Current Assets”); Final Report 20 (confirming that inventory reserves reduce the “Inventories” line item under “Current Assets”).
19
reserve, Viasat increased its Closing Working Capital, effectively increasing the
post-closing purchase price L3Harris was required to pay.
Viasat managed its inventory using Oracle software, which automatically
calculated a baseline “system-recommended reserve” for each item.109 The
Reference Statement permitted Viasat’s corporate accounting team to adjust that
reserve “where the corporate accounting team has determined that the system does
not capture all relevant inventory demand.”110 The Reference Statement outlined
evidence that could show demand.111 It then directed Viasat to evaluate and
determine what reserve amount, “if any, is appropriate based on actual demand.”112
Viasat reduced the Oracle-generated reserve by $10,148,762.113 Applying
Tier 1, Grant Thornton found that Viasat had sufficient support to manually override
Oracle’s recommended reserve if documented demand existed.114 Tier 1 does not,
however, address the calculation of the E&O reserve.115 The Reference Statement
outlines who makes the adjustment and when an adjustment is authorized, without
109
See Final Report 18-19.
110
Id. at 22 (summarizing APA sched. 1.01(h)).
111
APA sched. 1.01(h).
112
Id.
113
Final Report 19.
114
Id. at 18, 22-23.
115
See id. at 22.
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addressing the method for measuring the adjustment.116 As Grant Thornton’s Blank
testified, the Reference Statement “did not answer th[is] question,” and “[a]pplying
GAAP would answer” it.117
As such, Grant Thornton properly proceeded to Tier 2 and applied GAAP,
which requires inventory to be measured at the lower of its cost or net realizable
value.118 For $9,354,210 of the reduction Viasat made to the system-generated
reserve, Grant Thornton determined that Viasat had met these standards.119 For the
remaining $794,552, Grant Thornton concluded that Viasat “did not provide
commentary or provided minimal detail.”120 Grant Thornton could not tell whether
Viasat had appropriately considered certain pertinent factors.121 Consequently,
Grant Thornton ruled for L3Harris in that amount.122
For Disputed Item 3, the same general analysis applies. This item concerns a
$3,790,793 adjustment to the Work in Progress (WIP) inventory the parties call the
“bone pile.”123 The Reference Statement describes a two-step process for calculating
116
See APA sched. 1.01(h); see also Def.’s Opening Br. 38-39.
117
Blank Dep. 104-05.
118
Final Report 22.
119
Id. at 22-23.
120
Id. at 23.
121
Id. at 23 n.52.
122
Id. at 24.
123
Id. at 25; see Compl. ¶ 55; Answer ¶ 55.
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these WIP reserves. Viasat must first calculate a “system recommended reserve”
equal to the value of WIP aged more than 24 months and then evaluate and adjust
that figure “considering additional factors (e.g., known issues in WIP projects less
than 24 months aged).”124
Grant Thornton determined that Viasat followed this process and considered
known issues.125 The parties disagreed on how those issues affected the recovery
rate.126 Viasat allegedly assigned this defective inventory a recovery rate
approaching 100 cents on the dollar.127 Because the Reference Statement only
directed Viasat to engage in “evaluation and adjustment” to the reserve without
providing a valuation metric, Tier 1 of the Accounting Principles was insufficient to
resolve the dispute.128 Grant Thornton then looked to Tier 2 and found that Viasat’s
calculation was “not determined in accordance with GAAP.”129
Viasat contends that because its calculations for Disputed Items 2 and 3
complied with the Reference Statement, Tier 1 of the Accounting Principles is
satisfied.130 It insists that the inquiry ends, even though the Reference Statement
124
APA sched. 1.01(h).
125
Final Report 32-33.
126
Id. at 32.
127
See Def.’s Ex. D at 28-29.
128
See APA sched. 1.01(h); APA § 1.01(a).
129
Final Report 32-33; Blank Dep. 109-10.
130
Pl.’s Opening Br. 44-45 & n.10; Pl.’s Answering Br. 35-36.
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does not provide an accounting methodology for Disputed Items 2 and 3, because
Target Working Capital was set from Viasat’s pre-closing application of the same
policies.131 The APA lacks any such requirement.
If Viasat’s reading were adopted, a subjective adjustment by management
would avoid analysis under GAAP, despite the lack of substantive limit in the
Reference Statement. Viasat’s accounting team could, for example, value “bone
pile” inventory at 100 cents on the dollar, and L3Harris would have no recourse.132
Under that approach, Tier 2 would be meaningless as applied to inventory
reserves.133
Grant Thornton properly applied the Reference Statement first and looked to
GAAP because the Reference Statement gave no substantive answer for Disputed
Items 2 and 3. This approach was consistent with Grant Thornton’s contractual
mandate.134 Accordingly, Viasat’s claim that Grant Thornton deviated from the APA
fails concerning Disputed Items 2 and 3. L3Harris’s motion for summary judgment
is granted on those items; Viasat’s cross-motion is denied.
131
Pl.’s Opening Br. 44-45 & n.10; Pl.’s Answering Br. 35-36.
132
See Def.’s Opening Br. 21, 31.
133
Osborn, 991 A.2d at 1159 (explaining that Delaware courts will not “read a contract to render a provision or term ‘meaningless or illusory’” (quoting Sonitrol Hldg. Co. v. Marceau Investissements, 607 A.2d 1177, 1183 (Del. 1992))).
134
See APA §§ 1.01(a), 2.08(a); supra note 64 and accompanying text.
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III. CONCLUSION
Viasat’s summary judgment motion on Count I is granted as to Disputed Item
1; L3Harris’s cross-motion on that item is denied. Viasat is entitled to a declaration
that Grant Thornton exceeded its authority by evaluating Disputed Item 1 under
GAAP, which contravened the prohibitions in the Reference Statement.
L3Harris’s motion for summary judgment on Count I is granted as to Disputed
Items 2 and 3; Viasat’s cross-motion on those items is denied. Grant Thornton did
not exceed its authority in resolving Disputed Items 2 and 3.
The parties are directed to confer and submit a proposed form of judgment
implementing these rulings within 14 days.
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