United States District Court, D. Massachusetts
MEMORANDUM AND ORDER ON CROSS MOTIONS FOR PARTIAL JUDGMENT ON THE PLEADINGS
RICHARD G. STEARNS, District Judge.
This case involves a dispute over the interpretation of a tax indemnification clause in an Agreement and Plan of Merger (Merger Agreement or Agreement) through which plaintiff Mercury Systems, Inc. (Mercury) acquired KOR Electronics (KOR). Defendant Shareholder Representative Services LLC (SRS) is the agent and proxy for the KOR Securityholders from whom KOR was acquired. Both parties now move for partial judgment on the pleadings as to Counts I and IV of the First Amended Complaint, which are related to federal and state tax indemnification claims for the 2011 tax year.
On December 22, 2011, the Merger Agreement was executed, and KOR became a wholly-owned subsidiary of Mercury, while the Securityholders of KOR's outstanding shares and vested options exchanged their shares and options for payments from Mercury totaling $70 million. Pursuant to the Agreement, $10.65 million of the $70 million that Mercury paid for KOR was placed into an escrow account established at closing to indemnify Mercury. Merger Agreement §§ 1.01(a), 9.05. The Agreement contained a tax indemnification section wherein SRS agreed to indemnify Mercury for pre-closing tax period liabilities and any related losses.
On January 28, 2013, Mercury filed an indemnity claim for $1, 829, 112, comprised of $1, 473, 294 claimed as 2011 federal tax liabilities, and $355, 818 claimed as 2011 state tax liabilities. SRS maintains that it does not owe this amount because almost all of it has already been paid to Mercury through tax credits and refunds attributable to KOR's pre-closing tax payments and credits that were in excess of the eventual amounts owed for tax year 2011.
The Merger Agreement
Both parties agree that relevant language covering the disputed claims is found in Article X of the Merger Agreement, entitled "Tax Matters, " which begins on page 70 of the Agreement. Section 10.01, Tax Indemnification, requires the Securityholders (who are represented by SRS) to:
indemnify and hold harmless each Buyer Indemnified Person from, against and in respect of any and all Losses that constitute or that result from, arise out of or relate to, directly or indirectly (a) Taxes (or the non-payment thereof) of the Company and its Subsidiaries for all Pre-Closing Tax Periods, ... (c) any and all Taxes incurred by the Company directly related to the distribution of proceeds for the Contemplated Transactions....
Merger Agreement § 10.01. The section concludes with the statement that,
[a]ny indemnification made pursuant to this Section 10.01 shall be made in accordance with the provisions of Section 9.05. Notwithstanding any other provision of this Agreement, the determination of the Taxes with respect to this Section 10.01 will be calculated without taking into account any deductions described in Section 10.05 below.
Section 10.05, Allocation of Certain Expenses, dictates that "Company Transaction Expenses... shall be claimed as deductions for the Pre-Closing Tax Period ending on the Closing Date" and that "any income tax deductions attributable to payments due at Closing to holders of Vested Options shall be claimed as deductions for the Pre-Closing Tax Period ending on the Closing Date." Id. § 10.05.
Section 10.02, Tax Return Preparation, requires that a distribution be made to Mercury from the escrow account three days prior to the filing of tax returns relating to any pre-closing tax period and explains the calculation for this distribution as follows:
With respect to any such Tax Return filed after the Closing Date that relates to any Pre-Closing Tax Period and upon the request of the Securityholders' Representative, the Escrow Agent shall make a distribution from the Escrow Amount (sic) to the Parent three (3) days prior to the filing of such Tax Returns the amount of the aggregate Tax liabilities due, if any, with respect to such Pre-Closing Tax Periods; provided however, that for purposes of determining the Tax liability due with respect to such Tax Return for purposes of calculating the Securityholders' indemnification obligations, the determination of the Tax liability for any such Pre-Closing Tax Period will be calculated and determined excluding any deductions described in Section 10.05 below. ...