Sparton Claims It Was Misled in Hunter Deal Nixed by Del. Court

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By Yin Wilczek

Sparton Corp.'s claims that it was misled in its $55 million acquisition of Hunter Technology Corp. were dismissed by the Delaware Chancery Court.

The court Aug. 9 granted a motion to dismiss by former holders of Hunter shares and options. It held that the merger agreement barred Sparton’s breach of contract claims and the company failed to state a viable fraud claim ( Sparton Corp. v. O’Neil , 2017 BL 277532, Del. Ch., No. 12403-VCMR, 8/9/17 ).

One claim left out of the dismissal request—that Hunter didn’t pay certain invoices—remains pending.

Sparton, a medical equipment maker based in Schaumburg, Ill., acquired Hunter in an all-cash transaction in April 2015. Hunter was a defense and aerospace manufacturing services provider with operations in Milpitas, Calif., and Lawrenceville, Ga.

Anti-Reliance Provision

The agreement to acquire Hunter was executed between Sparton, Hunter, and Joseph O’Neil, who represented Hunter’s option- and stockholders. The agreement included a provision stating that the parties didn’t rely on anything outside of the representations and warranties contained in the agreement.

Among other claims, Sparton said the agreement was fraudulently induced because, during the merger negotiations, O’Neil created and presented false financial statements with the help of the other defendants. Sparton also said that Hunter breached the merger agreement because its financial statements didn’t accurately reflect its working capital, and O’Neil failed to use commercially reasonable efforts to resolve certain liabilities that Hunter incurred before the deal.

Sparton asked the court for almost $2 million in damages, and for unspecified fees and costs to resolve Hunter’s alleged unresolved liabilities.

Vice Chancellor Tamika Montgomery-Reeves found that Sparton failed to make out viable breach of contract claims. “The conclusory allegations that O’Neil did not use commercially reasonable efforts to resolve” Hunter’s liabilities simply because the matters remain unresolved is not enough to state a claim under Delaware law, the judge wrote.

Montgomery-Reeves also found that Sparton didn’t have a viable fraud claim. Based on the agreement’s anti-reliance provision, the company couldn’t rely on statements made by O’Neil or anyone else before the deal, she said.

“Further, Sparton does not plead any particularized facts about Defendants’ roles in the Company or any of Defendants’ relationships with management, other than that they are Stockholders and Optionholders and that O’Neil is the Representative of the Stockholders and Optionholders,” the judge wrote. “And Sparton fails to allege any other facts to show that any of the Defendants had the authority to prepare either the invoices or the financial statements or that they would be in a position to know that these documents were falsely prepared.”

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

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