Delaware Court of Chancery Holds That Sale of a Buyer’s Indirect Parent Was Not a Change of Control Triggering a Contingent Payment

Key Points

• The Delaware Court of Chancery held in Castle Tire that a private equity firm’s acquisition of a buyer’s indirect parent was not a Change of Control under an asset purchase agreement, and it entered judgment on the pleadings for the buyer.
• Corporate separateness led the Delaware Court of Chancery in Castle Tire to decline to extend the acquisition prong of the Change of Control definition to an upstream parent, because the agreement defined Buyer solely as the buyer entity.
• The asset-sale prong of the Change of Control definition failed in Castle Tire because the seller pleaded no facts showing that any of the buyer’s assets were transferred, and the Delaware Court of Chancery explained that the sale of a parent’s stock is not a transfer of its downstream subsidiary’s assets.
• Even if a qualifying merger had occurred, “equityholders of record” in the Castle Tire asset purchase agreement unambiguously refers to the record owners of the buyer’s membership interests, not the enterprise’s ultimate beneficial owner, the Delaware Court of Chancery held.
• Sellers who want sponsor exits to trigger a contingent payment should define the trigger to reach acquisitions of the buyer’s parent entities and affiliates and use beneficial ownership or ultimate control language, because Castle Tire enforced a narrowly drafted trigger as written.

In Castle Tire Disposal, LLC v. Liberty Tire Services of Ohio, LLC, the Delaware Court of Chancery held that a private equity firm’s acquisition of a buyer’s indirect parent was not a Change of Control under an asset purchase agreement. The court entered judgment on the pleadings for the buyer. The decision confirms that Delaware courts will enforce a narrowly drafted change of control trigger as written and will respect corporate separateness. As a result, an upstream sponsor exit may not accelerate a seller’s contingent payment unless the agreement expressly reaches it.

Background

Castle Tire Disposal, LLC (the seller) sold substantially all of its assets to Liberty Tire Services of Ohio, LLC (the buyer) under an asset purchase agreement (the APA). The buyer is an indirect, wholly owned subsidiary of Liberty Recycling Parent Inc. (the parent), which in turn is indirectly owned by private equity firm Energy Capital Partners (ECP).

In addition to $40 million paid at closing, the APA provides for a contingent value payment. The payment is triggered by the earlier of two events: 40 months after closing, or a Change of Control. The APA defines a Change of Control as either (i) “an acquisition of Buyer (or its successor) by another entity by means of any transaction or series of related transactions” or (ii) “a sale of all or substantially all of the Assets” (collectively, a Merger). In either case, the definition applies only if “Buyer’s equityholders of record as of immediately following the Closing will, immediately after such Merger, hold less than fifty percent (50%) of the voting power of the surviving or acquiring entity.”

In a transaction that closed in December 2025, I Squared Capital acquired the parent from ECP. The buyer made no contingent value payment. The seller sued for a declaratory judgment and specific performance, and the buyer moved for judgment on the pleadings.

Holding

The court held that the APA is unambiguous and that the seller failed to plead facts satisfying either element of a Change of Control.

First, there was no qualifying Merger. The APA defines Buyer solely as the buyer entity. Relying on corporate separateness and citing the canon expressio unius est exclusio alterius (naming one subject implies the exclusion of others), the court declined to “disregard that distinction” and extend the provision to an upstream parent. The court also pointed out that the parties referred to affiliates expressly elsewhere in the APA. The asset-sale prong also failed. The APA defines “Assets” as the business, properties, assets, and rights the seller sold to the buyer. The seller pleaded no facts showing that any of the buyer’s assets were transferred, and the court explained that the sale of a parent’s stock “is not a transfer of its downstream subsidiary’s assets.”

Second, even if a qualifying Merger had occurred, “equityholders of record” unambiguously refers to the record owners of the buyer’s membership interests, not to the enterprise’s ultimate beneficial owner. The seller had argued that the term means the persons with ultimate control of the buyer, making ECP the relevant holder. The court rejected that reading because it conflated beneficial and record ownership. It also observed that the APA used “beneficially or of record” when the parties intended to capture beneficial ownership.

The Court Rejected Three Further Arguments

The court held that I Squared could not be the “acquiring entity,” because it did not acquire the buyer or all or substantially all of its Assets. The seller also argued that the court’s reading would produce absurd results, such as treating a minor restructuring of the buyer’s direct parent as a Change of Control. The court rejected that argument and held the sophisticated parties to their bargain, without deciding how any such restructuring would be treated. Finally, the court held that discovery of the I Squared transaction agreement was unnecessary. Under either characterization of the deal, the pleadings did not establish a Change of Control.

Takeaways for Sellers and Buyers

• Name every entity whose sale should trigger payment. Sellers should define the trigger to reach direct and indirect acquisitions of the buyer, its parent entities, and its affiliates.
• Choose the ownership test deliberately. A test keyed to “equityholders of record” measures direct record ownership only. Sellers who want sponsor exits covered should use beneficial ownership or ultimate control language.
• Buyers can rely on precise drafting. A trigger limited to the named buyer and its record holders arguably preserves flexibility for upstream transactions without accelerating contingent payments.

For questions about change of control triggers, contingent value payments, or disputes over acquisition agreement terms, contact Troutman Pepper Locke’s Mergers + Acquisitions and Delaware Court of Chancery Litigation practice groups.