Recovering Multiple-Based Damages on Your R&W Insurance Claim
Earlier this year, the Delaware Court of Chancery issued a post-trial opinion with profound implications for holders of buy-side representations and warranties (“R&W”) insurance.
In In re Dura Medic Holdings, Inc. Consol. Lit., 333 A.3d 227 (Del. Ch. Feb. 20, 2025) (Laster, V.C.), the court awarded damages to a buyer for the seller’s breach of a material customer representation by calculating the effect of the breach on the seller’s annual EBITDA and then applying a 6.7797 multiple that corresponded precisely (to the fourth decimal point) with the method the buyer had used to establish the purchase price. In doing so, the court significantly improved the legal landscape under Delaware law for breach claimants, particularly for insureds under buy-side R&W insurance policies seeking to recover multiple-based damages. Indeed, relying on Dura Medic, an Arbitration Panel in an R&W arbitration recently awarded Miller Friel’s client multiple-based expectation damages for the proven breach of a material customer representation in accordance with the policyholder’s valuation model for the deal.
Key Takeaways:
- In Dura Medic, the Chancery Court awarded multiple-based damages for the breach of a material customer representation, reasoning that dollar-for-dollar damages are not sufficient to remedy breaches that do not result in a one-time loss, but rather affect future cash flows. “Whether a misrepresentation diminishes the value of the business sufficiently to warrant utilizing a multiple turns on the extent to which the misrepresentation affects future earning periods.”
- To support a multiple-based damages award, a claimant need not demonstrate that “future earnings periods” will be affected into eternity. To the extent that a prior Chancery opinion (Zayo) declined to apply a multiple where the misrepresentation did not cause a “permanent diminution . . . into perpetuity,” the Dura Medic court made clear that Zayo does not align with Delaware law or “translate into a test for future cases” because “[n]othing lasts forever.”
- Pursuant to Dura Medic, where a buyer presents substantial evidence that it established its expectations based on a multiple of the target’s earnings, cash flow, or other valuation metric, an insurer, judge or arbitrator should use the same method to calculate multiple-based damages in the event of a breach.
The Court in Dura Medic Awards Multiple-Based Damages.
In Dura Medic, a private equity firm acquired a privately-held supplier of medical equipment. The buyer alleged that the seller breached a representation regarding material customers, among other representations. The court held that the seller breached the customer representation and that this breach caused a loss in annual earnings of $433,322.
The buyer sought damages calculated as these lost annual earnings multiplied by 6.7797, which was the multiplier the buyer had applied to TTM EBITDA to arrive at the merger price. On the other hand, seller opposed the application of a multiplier and argued that buyers should not recover more than $433,322, mainly because the business was not “permanently impaired” by the breach (i.e., the loss of the customers).
The Merger Agreement expressly contemplated a claim for damages “based on a multiple of earnings, revenue or other metric.” The Agreement, however, neither required a multiple-based calculation, nor specified when a multiple should be used. Given this silence, the court looked to Delaware common law, concluding that Delaware allows reasonable expectation damages “based on a multiple where the price was ‘established with a market approach of using a multiple.’” Dura Medic, 333 A.3d at 259 & n. 51, quoting NetApp, Inc. v. Cinelli, 2023 WL 4925910, at *18 (Del. Ch. Aug. 2, 2023).
In addition to NetApp, when assessing Delaware common law, the Dura Medic court relied on four other Chancery opinions that endorsed multiple-based damages calculated in accordance with the methodology that the buyer had used to value the deal, including:
- Swipe Acquisition Corp. v. Krauss, 2020 WL 5015863, at *7 & n.54 (Del. Ch. Aug. 25, 2020) (denying motion to dismiss because buyer adequately alleged damages based on a multiple);
- WaveDivision Holdings, LLC v. Millennium Digital Media Sys., LLC, 2010 WL 3706624, at *22-23 (Del. Ch. Sept. 17, 2010) (calculating expectation damages using EBITDA multiple because that was how buyer based its expectations);
- Cobalt Operating, LLC v. James Crystal Enterprises, LLC, 2007 WL 2142926, at *30 (Del. Ch. July 20, 2007) (awarding damages based on cash flow multiple where valuation was based on expectations of future cash flow), aff’d, 945 A.2d 594 (Del. 2008) (TABLE); and
- Tam v. Spitzer, 1995 WL 510043, at *10, *12 (Del. Ch. Aug. 17, 1995) (calculating damages using same DCF methodology buyer had used to value the transaction).
In Dura Medic, the Delaware Chancery Court also cited with approval a recent New York case, Taylor Precision Prods., Inc. v. Larimer Group, Inc., 2023 WL 678582, at *5 (S.D.N.Y. Oct. 13, 2023). See Dura Medic, 333 A.3d at 259 n.51. In Taylor Precision, the court calculated damages by isolating the effect of the breach on the target’s TTM adjusted EBITDA and then applying to that effect a multiple (7.55x) derived from the original purchase price. In support of this methodology, the New York court reasoned that “[t]his calculation is directly tied to the information concealed by [sellers] and speaks to the valuation of the business on the day of closing.” Taylor Precision, 2023 WL 678582, at *5. The New York court emphasized that inquiry into the target’s performance and market conditions after closing is not relevant, because “events subsequent to the breach ‘may neither offset nor enhance [buyer’s] general damages.’” Id. at *7 (citations omitted).
Importantly, Dura Medic is not only consistent with the overwhelming weight of Delaware and New York authority on damages but also conforms to relevant damages guidance which directs valuation experts to “use the model that supports the value the buyer assigned to the transaction and adjust it for the misstatements to quantify the impact on that value.” Business Valuation Resources, The Comprehensive Guide to Economic Damages (7th ed.) Vol. 2 at § 5.2.1; see also Association of International Certified Professional Accountants, Forensic & Valuation Services Practice Aid: Mergers & Acquisitions Disputes 58 (2020) (updated Jan. 1, 2020) (“Claims that result in dollar-for-dollar damages are typically those that have a one-time effect on the target and that do not impact the target financial condition in future periods (in other words, will not affect future cash flows).”), cited in Dura Medic, 333 A.3d at 260 n. 56.
The buyer in Dura Medic proved, using investment committee documents, that it derived the merger price by applying a multiple of 6.7797 to the seller’s EBITDA. Dura Medic, 333 A.3d at 259 & n. 52. The court calculated damages using this exact multiple. Notably, while the seller pointed to evidence indicating that the buyer’s investment committee also used metrics other than an EBITDA multiple to value transactions as a general matter, the court did not give any weight to such evidence because those other metrics did not correspond to the merger price. Id.
Zayo Is Not a Test for Future Cases Under Delaware Law.
The sellers in Dura Medic rested their defense to the buyer’s damages claim entirely on Zayo Group, LLC v. Latisys Holdings, LLC, 2018 WL 6177174 (Del. Ch. Nov. 26, 2018). In Zayo, the court declined to apply a multiple because the material contracts at issue expired less than a year after closing and there was no evidence that the buyer had based its purchase price on a multiple of EBITDA. Therefore, according to the court, the related misrepresentation did not “cause a permanent diminution in the value of the business (as a result of lost revenues in perpetuity).” Zayo Group, 2018 WL 6177174, at *17.
Zayo has attained talismanic significance to R&W insurers who purposefully remain silent on the issue of multiple-based damages when issuing policies but then seek to hide behind Zayo to deny or aggressively limit coverage in responding to claims. Specifically, where the underlying merger agreement is silent with respect to multiplied damages, these insurers will remove any exclusions or limitations for multiple-based damages, trading “silence for silence.” Because these insurers understand that the buyer has based the purchase price on the target’s stream of future earnings, they knowingly assume the risk that breaches of insured representations could cause “enhanced damages”—i.e., covered “Loss”—well beyond straight dollar-for-dollar damages. In accepting “silence for silence,” insurers have “settled on an uneasy state where [diminution-in-value]/multiplied damages are implicitly covered.” Sean J. Griffith, Deal Insurance: Representation and Warranty Insurance in Mergers and Acquisitions, 104 Minn. L. Rev. 1839, at 1870 (2020) (emphasis original).
Dura Medic should put an end to insurers’ unwarranted reliance on Zayo. In no uncertain terms, the Dura Medic court made clear that it would be both legally and practically unsound to rely on Zayo’s reference to a “permanent diminution” into “perpetuity”. First, Zayo “cited no authority” in support of its perpetuity comment. Dura Medic, 333 A.3d at 260 & n. 55. Second, “[n]othing lasts forever.” Id. at 260. Thus, Zayo’s dicta regarding “perpetuity” “does not translate into a test for future cases.” Id. Rather, the standard under Delaware law going forward is this: “Whether a misrepresentation diminishes the value of the business sufficiently to warrant utilizing a multiple turns on the extent to which the misrepresentation affects future earning periods.” Id. Dollar-for-dollar damages are not sufficient to remedy breaches that do not result in a one-time loss but instead affect future cash flows.
Under Dura Medic, the many Delaware rulings on which it relies, and applicable accounting guidance, once a buyer proves that it established the purchase price using a multiple, damages must be calculated “using the corresponding method to account for any diminution in value attributable to the misrepresentation.” NetApp, Inc., 2023 WL 4925910, at *18 and n. 235 (emphasis supplied), citing WaveDivision Holdings, LLC, 2010 WL 3706624, at *22-23. This Delaware authority makes clear that where a buyer presents substantial evidence that it established its expectations based on a multiple of the target’s earnings, cash flow, or other valuation metric, an insurer, judge or arbitrator must use the same method to calculate multiple-based damages in the event of a breach and is not free to disregard it.