The Relevance of Commercial Reality in Interpreting Charters and Bylaws

Recognizing that corporate charters and bylaws reflect a contract between the corporation and its stockholders, directors, and officers, Delaware courts interpret these governing documents using general principles of contract interpretation, one of which directs the court to read the instrument as a whole. Relatedly, under Delaware’s objective theory of contracts, the goal of contract construction is to discern the parties’ intent from the perspective of an objective, reasonable third party. Thus, where a literal reading yields a result at odds with what the drafters would have reasonably intended (which itself derives from the commercial context evidenced in plain terms throughout the instrument), literal meaning gives way to a more nuanced “objective” meaning. This article explores the application of this key precept in the interpretation of charters and bylaws.

Chicago Bridge & Iron v. Westinghouse Electric, 166 A.3d 912 (Del. 2017), exemplifies this approach. There, the Delaware Supreme Court interpreted an agreement to sell a subsidiary formed to build nuclear power plants. The initial purchase price was $0, subject to a post-closing adjustment obligating buyer to make a post-closing payment if the subsidiary’s net working capital exceeded a target and seller to make a payment in the event of a shortfall. In exchange, buyer’s sole remedy for seller’s breach of its representations was to refuse to close and buyer agreed to indemnify seller for the subsidiary’s historical liabilities. After closing, buyer claimed that it was owed nearly $2 billion from seller under the post-closing adjustment, which amounted to the difference between seller’s working capital estimates (which were allegedly not GAAP compliant) and buyer’s calculation (which was allegedly GAAP compliant). In rejecting buyer’s claim, the court explained that contracts must be construed in a manner that honors the parties’ “basic business relationship” and gives “sensible life to a real-world contract.” Id. at 913–14, 927. Reading the agreement’s provisions in concert, the court concluded that the deal’s thesis was to allow seller to rid itself of a risky and expensive venture in exchange for (potentially) $0, a chance for upside, and a guarantee of minimal liabilities. Accordingly, the court concluded that the agreement unambiguously forbade using the post-closing adjustment to effectively sue for breach of a representation and rejected the counter-intuitive result of entitling the buyer to seek a $2 billion “purchase price.”