The Line Between Speculation and Expectation in Damages: Delaware Court of Chancery Weighs in on Damages for Fraud in M&A Transaction

In a recent decision, Vice Chancellor Will refused to award expectation damages based on a buyer’s “speculative” synergistic cash flow resulting from a merger.  The opinion demonstrates the rigorous approach that the Delaware Court of Chancery takes to calculating damages related to M&A transactions even with strong evidence of fraud, and offers valuable insight to companies calculating damages from lost synergies in M&A transactions.

The Court Found Clear Fraud

In NetApp, Inc. v. Cinelli, the buyer (NetApp) brought suit against the sellers of a cloud software company (Cloud Jumper), alleging breach of contract and fraud based on misrepresentations made in the merger agreement about the accuracy of financial statements.  Following a three-day trial, the Court found in favor of NetApp on the issue of liability for both breach of contract and fraud.  The sellers, the Court held, overstated Cloud Jumper’s revenue by improperly recording internal software use as revenue in financial statements.  There was a clear wrongdoer here, as “[t]here were several overt misrepresentations in the Merger Agreement” and “[t]he fact of NetApp’s damages [was] not in doubt.”  The only real question was the amount.

Key Question Was How to Measure Expectation Damages Based on Expected Synergies

Under Delaware law, the standard remedy for either claim is the reasonable expectations of the party, measured by the amount of money that would put the plaintiff in the position it would have held if the defendant’s representations were true.  The parties agreed that expectation damages was the proper approach, but the “murkiest issue” before the Court was the quantification.

The sellers contended that the proper analysis should measure the difference between the “as-represented” value of Cloud Jumper (the $35 million purchase price) and the “actual” or fair market value of Cloud Jumper if its revenues were accurately reported.  The sellers’ expert determined a $30.4 million fair market value for Cloud Jumper using several methods, including an income approach and a market approach.  This, according to sellers, supported a maximum recovery of approximately $4.6 million.

The buyer disagreed, arguing that its expectation damages should “address the future cash flows it planned to generate from the acquisition, irrespective of the purchase price,” which included “projected cash flow plus synergistic cash flow.”  The synergies that NetApp hoped to attain were from increasing sales of Cloud Jumper’s software using NetApp’s larger sales force, and from leveraging Cloud Jumper’s product with complementary NetApp products.  Many buyers value a target using just such an analysis of synergies.

The buyer’s expert calculated lost synergies by first calculating NetApp’s expectations for Cloud Jumper as a unit of NetApp using a discounted cash flow model (determined to be $86.2 million).  The expert then subtracted the value of future cash flows that NetApp would actually receive, adjusted for the internal billings (determined to be $48.5 million).  According to the buyer, Cloud Jumper’s fraud and breaches of contract caused it to lose future cash flows worth $37.7 million on a present value basis.

The Court ultimately agreed with the sellers and awarded $4.6 million in expectation damages.  While Vice Chancellor Will acknowledged that the buyer’s “approach is facially appealing” because it “considers NetApp’s expectations for how Cloud Jumper would perform as a unit of NetApp, including revenue synergies,” she rejected that approach for two reasons.

Speculative Synergy Projections

First, the Court found that the buyer’s projected synergies were too speculative.  Vice Chancellor Will noted that “[p]rospective corporate synergies involve predictions about the unpredictable process of integrating a new business into an existing one,” and that “[t]hese unknowns may result in an overvaluation of synergies, which can take longer to capture than anticipate—if they are captured at all.”  But here, there was “no evidentiary basis” from which the Court could make a “responsible estimate” of lost synergistic cash flows:

To assess whether NetApp reasonably expected to realize the synergies it layered on top of the Standalone Projections would be a theoretical exercise.  NetApp’s predictions were aspirational.  Its financial due diligence report noted that NetApp’s revenue team did not evaluate NetApp’s valuation model, including whether “synergies made any sense.”  The report also remarked that Cloud Jumper would need “heavy support from [the] NetApp cloud sales team to drive growth and adoption in order to achieve the aggressive [s]ynergies modeled in the financial [discounted cash flow] valuation.”

Vice Chancellor Will also found that the buyer’s expert’s “analysis does little to ground NetApp’s estimate,” as the expert “did not test NetApp’s synergy calculations or opine on their reasonableness, but wholesale adopted NetApp’s assumptions.”

The Court refused to apply the “wrongdoer rule”—which provides that uncertainty in a damages estimate should be construed against the breaching party—to cure the “conjectural nature” of the buyer’s analysis.  This was because resolving uncertainty against the sellers “d[id] not relieve NetApp of its burden to present expectation damages that are not speculative.”  She also noted that any uncertainty in the combined projections did not result from the sellers’ misrepresentations, but from the buyer’s “optimistic predictions about the unknown.”

Recovery for Lost Value Unrelated to Misstatements Because NetApp Discontinued the Sale of the Product

Second, the Court found that adopting the buyer’s estimate would allow recovery for lost value unrelated to the sellers’ misstatements.  A key fact in the case was that NetApp decided to end sales of Cloud Jumper’s product just four months after closing, even though the product performed as expected and NetApp retained Cloud Jumper’s existing customers, intellectual property, and personnel.  Under these circumstances, “awarding NetApp damages in excess of the purchase price would amount to a windfall.”


  1. Even if faced with a clear wrongdoer, buyers may not get all they were expecting if their expectations are unrealistic or if they make post-closing decisions that undermine those pre-closing assumptions.
  2. Buyers’ analyses of synergies will be scrutinized by courts post-close for their reasonableness and realistic achievability.
  3. Post-closing decisions, such as shutting down purchased product lines or otherwise altering pre-closing assumptions, may impact the ability to recover full expectation damages.


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