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Acushnet Co. v. Beam, Inc.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

June 21, 2016

Acushnet Company
Beam, Inc. fka Fortune Brands, Inc. No. 134300


          Kenneth W. Salinger, Justice

         In 2011 Fortune Brands, Inc. sold all stock in the Acushnet Company for $1.225 billion, subject to post-closing adjustments. Although Fortune subsequently changed its name to Beam, Inc., the Court will refer to Defendant as " Fortune" because this lawsuit concerns events that occurred before the name change.

         After the closing Acushnet asked Fortune to pay $19.29 million for pre-closing taxes pursuant to the allocation of tax liability agreed to by the buyers of Acushnet and Fortune, as seller, in their Stock Purchase Agreement (the " SPA"). Fortune took the position that it was entitled to deduct and setoff $16.62 million in Acushnet customer account receivables for value added taxes, because those VAT Receivables constitute " amounts credited against or with respect to Taxes" within the meaning of § 8.01(b) of the SPA. Fortune therefore made payment of the $2.67 million difference.

         Acushnet claims that Fortune breached the parties' contract by setting off the $16.62 million. Both sides moved for summary judgment, but the court (Sanders, J.) ruled that the contract is ambiguous and thus that the issue could only be decided after both sides had the opportunity at trial to present parol or extrinsic evidence regarding the meaning of the phrase quoted above. That trial was recently completed.

         The Court now finds and concludes that Fortune has a contractual right to set off all receivables actually owed by customers to Acushnet at the time of the closing with respect to value added taxes on prior purchases from Acushnet, that the proper setoff amount was $15.65 million, and that Acushnet is therefore entitled to judgment in its favor in the amount of $972, 288 plus prejudgment interest.

         1. Findings of Fact

         The Court conducted a jury-waived trial over six days from May 31 to June 8, 2016. The Court heard closing arguments on June 17, 2016. The Court makes the following findings of fact based on the credible evidence presented at trial, the undisputed facts to which the parties stipulated before trial, and reasonable inferences drawn from the evidence.

         1.1 Overview of the Deal

         In 2010, Fortune Brands, Inc. was a multi-billion-dollar holding company that owned Acushnet Company (a golf products manufacturer that sells the Titleist and Footjoy lines of products, among other things), Fortune Brands Home & Security, and Beam Global Spirits & Wine. Fortune decided that it wanted to sell its wholly-owned subsidiary Acushnet and to spin-off the Home & Security business.

         Fortune decided that it would sell all shares of Acushnet through an auction. Fortune began the bidding process by having its investment banker send an offering memorandum, a draft stock purchase agreement or " SPA, " and related documents to prospective bidders in early April 2011. The winning bid was submitted by investors led by FILA Korea, Ltd. and Mirae Assets (collectively the " FILA Group").

         The FILA Group first offered to buy Acushnet for $1.05 billion. Fortune's investment banker told the FILA Group's investment banker that this was a low bid. The FILA Group then increased their offer to $1.118 billion. Their final offer, which Fortune accepted, as $1.225 billion.

         Fortune and its attorneys prepared the first draft of the SPA. Fortune provided this first draft to the FILA Group on April 7, 2011. In response, the FILA Group proposed various revisions to the SPA. Fortune accepted some but not all of the FILA Group's proposed revisions. Over the next month the two sides negotiated and finalized various changes and revisions to the SPA.

         Fortune and the FILA Group executed the final version of the SPA on May 9, 2011. The transaction closed on July 29, 2011. In accord with the final SPA, the FILA Group, acting through a holding company, bought all outstanding shares of Acushnet for $1.225 billion, subject to certain post-closing adjustments.

         The final contract provides that " [t]he parties have participated jointly in the negotiation and drafting of this Agreement and this Agreement will not be construed for or against any party by reason of the authorship or alleged authorship of any provision hereof or by reason of the status of the respective parties."

         The final SPA also provides that it " shall be governed by and construed in accordance with" New York law. A separate provision states that no party to the SPA shall be liable " for any consequential, incidental, indirect, special or punitive damages . . . relating to the breach or alleged breach" of the SPA.

         1.2. Disclosure of VAT Receivables

         Fortune put the FILA Group on notice from the start of the bidding process that Acushnet did business and sold goods in countries that impose value added taxes (VATs).

         A value added tax system works as follows. A VAT is a kind of sales tax imposed at each stage of the distribution chain. The entire amount of the VAT is supposed to be paid by the final customer. Companies in the distribution chain must charge, collect, and remit VATs to the taxing authority, but ultimately are not supposed to incur any portion of the VAT themselves. In nations that impose a VAT, a company like Acushnet must pay a so-called input VAT as part of the price it pays for inputs it buys from suppliers, and must charge a so-called output VAT as part of the price it charges to and collects from its customers. Acushnet must file a VAT return at the end of each taxable period in each VAT jurisdiction, stating the total output VAT it charged to its customers and the total input VAT that Acushnet had paid to its suppliers, which Acushnet is allowed to subtract as a credit. Acushnet must pay the difference between the total output VAT that it charged to its customers and the total input VAT it paid to its suppliers over to the tax authority. At this point, as to any particular sale to one of its customers Acushnet has paid out an amount equal to the VAT that it charged to that customer: it first paid the input VAT to its supplier, and then paid the difference between the output VAT and the input VAT to the tax authority. Under a VAT system, Acushnet is supposed to be made whole when its customer pays Acushnet an amount that covers the purchase price for the goods sold plus an additional amount equal to the entire output VAT. If some portion of output VAT owed by customers proves to be uncollectible, a seller like Acushnet is entitled to subtract the uncollectible output VAT as a credit or other allowance on a future VAT tax return, and thereby recoup that amount. This mechanism is designed to ensure that companies like Acushnet are able to collect or otherwise recover the full amount of VAT that they pay either as an input VAT charge or as a net amount paid to the taxing authority. The Court credits the unrebutted testimony to that effect by Joseph Floyd, who was called by Acushnet to testify on its behalf as an expert witness.

         The FILA Group understood that this is how a VAT system works, in part because FILA Korea itself does business in countries that impose a VAT and therefore is subject to VATs in the same manner as Acushnet.

         Fortune disclosed to the FILA Group that Acushnet does business in countries with VATs and that, as a result, at the time of the auction Acushnet was owed money by customers associated with repayment of VATs. This disclosure was made in the first draft of the SPA that Fortune provided to the FILA Group in April 2011. This draft SPA included draft Disclosure Schedules containing italicized notes that told potential buyers that all customer receivables related to VAT have been removed from Acushnet's gross accounts receiveable and reclassified to other current assets. In its ...

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