Be Fruitful and Multiply: Pursuing Diminution in Value Damages With Respect to RWI Policy Claims—Part I

When an insured is pursuing a representation and warranty insurance (“RWI”) claim, a critical consideration is whether diminution in value damages (“DIV Damages”) can be asserted as Loss covered by the RWI policy.^[1] This article, to be published in four parts, discusses Delaware mergers and acquisitions (“M&A”) damages law regarding DIV Damages and describes how an insured can pursue them as part of an RWI claim.

Part I addresses (i) the principal differences between DIV Damages calculated using a multiple of EBITDA methodology (“MOE Methodology”) and DIV Damages calculated using a discounted cash flow methodology (“DCF Methodology”), and (ii) the evolution of cases involving DIV Damages calculated using an MOE Methodology under Delaware M&A damages law. Part II will address the evolution of cases involving DIV Damages calculated using a DCF Methodology under Delaware M&A damages law. Part III will discuss the requirements for a DIV Damages award as part of an RWI claim. Part IV will discuss the limitations on, and other matters regarding, a DIV Damages award as part of an RWI claim.

Each part of this article contains practice tips for attorneys for insureds seeking recovery of DIV Damages as part of an RWI claim.

What Are DIV Damages?

DIV Damages are a form of expectation damages in which the amount of the damages is the difference between (i) the value of the target business as represented to the buyer (almost always the purchase price paid for the target business by the buyer) and (ii) the value of the target business after giving effect to the diminution in the target business resulting from a breach of the Acquisition Agreement representations and warranties (“R&W Breach”) or from fraudulent misrepresentation or deceit regarding the target business. DIV Damages are often the most significant portion of an RWI claim recovery sought by an insured.

Notwithstanding the terminology often inaccurately used, DIV Damages are not “multiplier losses” or based on “multiplied damages.” Instead, DIV Damages are M&A damages calculated by reference to either: (i) in the case of an MOE Methodology, (a) an actual or deemed shortfall in the EBITDA of the target business for a specified measurement period (“Measurement Period EBITDA”) caused by the R&W Breach or by the fraudulent misrepresentation or deceit, times (b) the multiple applied by the insured to the Measurement Period EBITDA in determining the purchase price to pay for the target business; or (ii) in the case of a DCF Methodology, the loss of future cash flows and terminal value over a specified period caused by the R&W Breach or by the fraudulent misrepresentation or deceit, discounted to present value by the application of a discount factor. By comparison, an example of “multiplied damages” would be treble damages awarded to a private plaintiff for an antitrust violation, in which damages are calculated and then statutorily multiplied by three to determine the aggregate amount to be paid by the offending person or entity to the private plaintiff for the specified antitrust violation.^[2]

The Principal Differences Between Using an MOE Methodology and Using a DCF Methodology to Calculate DIV Damages

An MOE Methodology and a DCF Methodology are both ways to value a target business. However, on the one hand, an MOE methodology is retrospective, focused on historical EBITDA for a specified Measurement Period prior to the Acquisition, typically a specified calendar year or a trailing twelve months (“TTM”) or latest or last twelve months (“LTM”) period before a specified month-end date. On the other hand, a DCF methodology is prospective, focused on projected cash flows during a specified period—say five years or seven years after the Acquisition—with a terminal value (i.e., an additional number of years of projected cash flows summed) added on, all subject to a discount rate. As such, DIV Damages calculated using a DCF methodology are often confused with, and even referred to as, “lost profits damages.”

In the case of an MOE Methodology, it is the multiple that accounts for the risks associated with the target business. In the case of a DCF Methodology, it is either the projected cash flows themselves or the discount rate (sometimes referred to as a “risk-adjusted discount rate”) that accounts for the risks associated with the target business. In the case of an MOE Methodology, it is the multiple that increases the size of the shortfall in EBITDA during the Measurement Period from 1x. In the case of a DCF Methodology, it is the multiple years of projected cash flows and the terminal value that increase the size of the loss of cash flows from 1x.

One other note about the two methodologies: While this is not true across the board, financial buyers such as private equity firms tend to use an MOE Methodology to determine the purchase price for the target business (subject to deal adjustments, as in the case of an auction), while strategic buyers tend to use a DCF Methodology to confirm the acceptability of, if not actually establish, the purchase price for the target business.

Evolution of Cases Involving DIV Damages Calculated Using an MOE Methodology Under Delaware M&A Damages Law

From the Beginning: Cobalt v. Crystal

The seminal case involving DIV Damages calculated using an MOE Methodology under Delaware M&A damages law is the 2007 Delaware Chancery Court case of Cobalt v. Crystal.^[3] Cobalt involved the sale of WRMF—a West Palm Beach, Florida, radio station—by James Crystal Enterprises, LLC (“Crystal”) to Cobalt Operating, LLC (“Cobalt”), for a purchase price of $70 million. The purchase price was based on measurement period Broadcast Cash Flow (“BCF”) (a “financial measure . . . roughly akin to [EBITDA]”^[4]) of the target of $5 million, times a multiple of 14.

After finding that Crystal had breached and committed fraud with respect to certain Acquisition Agreement representations and warranties, then–Vice Chancellor Strine^[5] awarded Cobalt (i) DIV Damages of $11 million, based on (a) a measurement period BCF of $4.2 million adjusted to eliminate the effects of the R&W Breach, times (b) the multiple of 14 ($58.8 million, rounded up to $59 million, and then subtracted from the purchase price paid of $70 million); (ii) indemnification for out-of-pocket damages of $180,754 for credits extended by Cobalt to certain advertisers in respect of the R&W Breach; (iii) prejudgment interest; and (iv) reasonable attorney fees and costs.^[6]

In support of the award of DIV Damages to Cobalt, Vice Chancellor Strine made a number of factual and legal findings, including the following:

• “the traditional method of computing damages for a breach of contract claim is to determine the reasonable expectations of the parties”
• “[e]xpectation damages [in this case, the DIV Damages] are calculated as the amount of money that would put the non-breaching party in the same position that the party would have been in had the breach never occurred”
• Crystal “knew Cobalt was relying on a cash flow multiple in reaching the price it was willing to pay for WRMF”
• “Crystal did not present its own valuation evidence” to counter the valuation evidence presented by Cobalt^[7]

Cobalt continues to stand as the preeminent Delaware M&A damages law case involving an award of DIV Damages calculated using an MOE Methodology for an R&W Breach.

I Thought There Was a Rule Against Perpetuities? Zayo v. Latisys

The next significant Delaware M&A damages law case involving DIV Damages calculated using an MOE methodology is the 2018 Delaware Chancery Court case of Zayo v. Latisys.^[8] Zayo involved the sale of a group of IT infrastructure service providers ( “Latisys Companies”) by seller Latisys Holdings, LLC (“Latisys Holdings”) to buyer Zayo Group, LLC (“Zayo”) for a purchase price of $675 million. Zayo performed “extensive financial modeling of the Latisys business,” including “a synergies analysis[,] . . . an analysis of implied multiples of publicly known comparable transactions[,] . . . a 30-year [DCF] analysis, a net present value sensitivity analysis and an internal rate of return analysis.”^[9]

Vice Chancellor Slights first determined that the buyer Zayo had failed to prove a breach of the Acquisition Agreement representations and warranties, which by itself was dispositive of the case and did not require him to consider Zayo’s M&A contract damages claim. Nevertheless, “for the sake of completeness,”^[10] Vice Chancellor Slights also determined that Zayo was not entitled to a recovery of DIV Damages in respect of the asserted R&W Breach. In support of that determination, he made a number of factual and legal findings, including the following:

• Zayo’s valuation expert “lack[ed] . . . experience in valuing going concern businesses”
• Zayo’s valuation expert “base[d] her opinion solely on a multiple of EBITDA” analysis, even though “there [was] no evidence that Zayo actually based its purchase price on a multiple of EBITDA”
• to justify DIV Damages, “[t]he actual value the [buyer] received . . . must assume, and account for, a diminution of the [target’s] earnings into perpetuity”
• “[t]he ‘benefit of bargain’ methodology is appropriate for calculating damages only when the alleged breach of the representation or warranty has caused a permanent diminution in the value of the business (as a result of lost revenues into perpetuity) and the business has thereby been permanently impaired. This is where Zayo’s proof, and [its valuation expert’s] damages calculations, fell short.”^[11]

Although Vice Chancellor Slights’s damages dictum (that the loss and repricing of short-term customer contracts did not support Zayo’s claim for DIV Damages) was justified on the facts of the case, the extent and definitiveness of his findings that only a loss of revenues “into perpetuity” and thus a “permanent impairment” of earnings can support a claim for DIV Damages has been viewed by many M&A practitioners as legally unjustified.^[12] Nevertheless, for a period of time, RWI claimants seeking recovery of DIV Damages had a difficult precedent to contend with in Zayo, absent evidence of such a loss into perpetuity and permanent impairment.

The End of Perpetuity? In re Dura Medic

And then came the 2025 Delaware Chancery Court case of In re Dura Medic.^[13] Dura Medic involved the sale of a durable medical equipment supply company (“Dura Medic”) by its stockholders (“DM Stockholders”) to Comvest Partners, a private equity firm (“Comvest”), for a purchase price of $30 million. The buyer Comvest based the purchase price on the Company’s LTM^[14] April 2018 EBITDA, times a multiple of 6.7797.^[15]

After determining that certain Acquisition Agreement representations and warranties had been breached, Vice Chancellor Laster awarded Comvest: (i) DIV Damages of $2,847,890, based on (a) a deemed shortfall in Measurement Period EBITDA of $433,322 resulting from lost profits from two customers at the heart of one of the two R&W Breaches, times (b) the multiple of 6.7797, minus (c) $89,903 in actual post-Acquisition collections from such customers; and (ii) $100,000 of out-of-pocket damages for fees paid to a healthcare regulatory consulting firm with respect to the other of the two R&W Breaches.^[16]

In connection with awarding DIV Damages to Comvest, Vice Chancellor Laster made a number of factual and legal findings, including the following:

• Where the Acquisition Agreement is silent on the appropriate measure of damages, “the court must look to the common law [, under which] a party can recover reasonable expectation damages based on a multiple where the [purchase] price was established with a market approach using a multiple.”^[17]
• With respect to the DM Stockholders’ asserting Zayo as a precedent that only permitted the application of a multiple of a shortfall in EBITDA to losses permanently affecting the target business:
  • the buyer Zayo had provided no evidence in that case that it had based the purchase price for the target Latisys Companies on a multiple of EBITDA
  • the customer contracts at issue in that case all expired in one year or less after the Acquisition
  • the case’s “reference to a ‘permanent diminution . . . into perpetuity’ . . . [did] not translate into a test for future cases”
  • the Zayo court had offered no legal authority for the “permanent diminution” requirement for the application of a multiple^[18]
• Revenue from new customers added after the Acquisition would have been additive if Dura Medic could also have retained the lost customers at the heart of the applicable R&W Breach.^[19]
• Fraud is not required to apply a multiple in calculating expectation damages.^[20]

To summarize the foregoing, Dura Medic not only distinguished the damages findings in Zayo but also concluded that a recurring diminution in EBITDA after the Acquisition, not a “permanent diminution . . . into perpetuity” of EBITDA, was sufficient to support the award of DIV Damages based on a multiple.

But is Zayo actually dead? Cobalt, Zayo, and Dura Medic were all Delaware Chancery Court cases, decided by three different Vice Chancellors over an eighteen-year period. While the Delaware Supreme Court did affirm Vice Chancellor Strine’s decision in Cobalt, the Delaware Supreme Court has not directly or indirectly overruled Vice Chancellor Slights’s damages decision in Zayo. All that said, the strength and logic of the DIV Damages findings in Dura Medic, particularly those directly contradicting the findings in Zayo, taken together with the dicta status of the DIV Damages findings in Zayo, do appear to toll a death knell for the Zayo requirement of a “permanent diminution . . . into perpetuity.”

Practice Tips for Attorneys for Insureds

In the Acquisition Agreement drafting and negotiation phase, consider the following:

• If the definition of Damages or Losses in the Acquisition Agreement is incorporated into the definition of Loss in the policy, ensure that the definition in the Acquisition Agreement does not exclude “diminution in value,” “multiple of EBITDA,” “multiplier damages,” “lost profits,” or the like, and preferably try to have the definition explicitly include the first or second of those terms.
• If one-half (or some other portion) of the policy retention can be borne by the seller through an indemnification escrow provided for in the Acquisition Agreement, try to ensure that no type of Damages or Losses are disclaimed or waived in the Acquisition Agreement that are covered by the policy.

This article is the first in the RWI Practice Insights series by John T. Capetta.

1. This article focuses on buyer-side RWI policies and U.S. law (principally Delaware case law). Although there may be other methodologies to calculate DIV Damages, this article focuses on those calculated using either an MOE Methodology or a DCF Methodology as defined in the second paragraph. The period of time for which the historical EBITDA is measured in an MOE Methodology, or for which the projections used in a DCF Methodology are included, is referred to in this article as the “Measurement Period.”

   • As used in this article:
     • the term Loss has the definition set forth in the RWI policy;
     • the term Acquisition Agreement includes stock purchase agreements, merger agreements, asset purchase agreements, and other types of business combination agreements by which a buyer acquires a target business from a seller;
     • the term Acquisition refers to the business combination contemplated by the Acquisition Agreement;
     • the term the buyer and the term the insured are often used interchangeably;
     • the term target and the term target business are used interchangeably;
     • the term R&W Breach also includes a claim under an RWI policy with respect to a tax indemnification provision in the Acquisition Agreement; and
     • the phrase without required disclosure by the seller refers to a failure by the seller to make a disclosure to the buyer even though required to do so by a representation and warranty in the Acquisition Agreement.

   ↑

2. See Section 4 of the Clayton Antitrust Act of 1914 with respect to certain violations of the U.S. antitrust statutes. 15 U.S.C. § 15. ↑

3. Cobalt Operating, LLC v. James Crystal Enters., LLC, No. 714, 2007 WL 2142926 (Del. Ch. July 20, 2007), aff’d, 945 A.2d 594 (Del. 2008) (unpublished table decision). ↑

4. Id. at *1 n.1. ↑

5. Vice Chancellor Strine later became the Chief Justice of the Delaware Supreme Court. Vice Chancellor Strine issued some of the most significant M&A opinions ever, and certainly some of the most entertaining. See, e.g., his description and the depiction of the “Rose Mary Stretch” in Cobalt, 2007 WL 2142926, at *2. ↑

6. Cobalt, 2007 WL 2142926, at *4, *29–31. ↑

7. Id. at *29 (footnotes omitted). For want of a better place in this article to discuss it, the 2013 Delaware Chancery Court case of Universal Enterprise Group, L.P. v. Duncan Petroleum Corp., No. 4948, 2013 WL 3353743, at *19 (Del. Ch. July 1, 2013), aff’d, 99 A.3d 228 (Del. 2014) (unpublished table decision), contains potentially confusing language that describes diminution in value as an “alternative to expectation damages in particular contexts,” rather than as a type of expectation damages. However, in Universal, expectation damages would arguably have been the costs to restore certain parcels of real property (which made up the target business) to their expected condition as represented by the seller in the Acquisition Agreement, with diminution in value damages being an alternative method to compensate the buyer for the injury suffered as a result of the R&W Breaches in question. The Chancery Court rejected diminution in value damages in part because they would have produced a damages award “an order of magnitude greater than an award based on expectation damages” and thus would have been “disproportionate, constitute economic waste, and bestow a windfall.” Id. at *20. In the end, the Chancery Court awarded neither expectation damages nor diminution in value damages but instead only “actual damages” (to make matters even more confusing) in the form of the costs and expenses incurred by the buyer in remediating the parcels of real property after the Acquisition. ↑

8. Zayo Group, LLC v. Latisys Holdings, LLC, No. 12874, 2018 WL 6177174 (Del. Ch. Nov. 26, 2018). Then–Vice Chancellor Strine did issue another opinion after Cobalt and prior to Zayo that involved a multiple of EBITDA methodology: WaveDivision Holdings, LLC v. Millennium Digital Media Systems, L.L.C., No. 2993, 2010 WL 3706624 (Del. Ch. Sep. 17, 2010). However, WaveDivision arose from certain covenant breaches by the seller, which led to the seller’s not selling the target businesses to the buyer, rather than R&W Breaches. Moreover, WaveDivision involved a comparison of (i) the purchase price for the target businesses that the buyer would have paid had the Acquisition been consummated, to (ii) the value of the target businesses as they would have been operated by the buyer in the future, rather than their value ex ante (which arguably would have been equal to the proposed purchase price and thus have left the buyer without a real remedy). As a result, while there are aspects of WaveDivision that are instructive, such as with respect to mitigation, it does not fit into the line of Delaware M&A damages law cases regarding DIV Damages calculated using an MOE Methodology that began with Cobalt. ↑

9. Zayo, 2018 WL 6177174, at *6. ↑

10. Id. at *15. ↑

11. Id. at *15–17 (footnotes omitted). Vice Chancellor Slights had noted that the buyer Zayo’s “initial indication of interest [IOI] . . . ‘propose[d] a total value in the range of $625M–$655M in cash (approximately 11–11.5x Q4 2014E LQA [presumably “Last Quarter Annualized”] Adjusted EBITDA of $56.8M),’” id. at *4 (citing and quoting the IOI), but he inexplicably seemed to disregard that IOI in determining that “there is no evidence that Zayo actually based its purchase price on a multiple of EBITDA.” Id. at *17. ↑

12. See, e.g., E. Hutchinson Robbins, Jr., M&A Representation and Warranty Damages: The Myth of Lost Revenues into Perpetuity, Bus. L. Today (Aug. 19, 2021). ↑

13. In re Dura Medic Holdings, Inc. Consolidated Litigation, 333 A.3d 227 (Del. Ch. 2025). ↑

14. In Dura Medic, “LTM” stands for “Last Twelve Months.” Id. at 243. ↑

15. Id. at 259. ↑

16. Id. at 261–3. ↑

17. Id. at 259 (footnotes and internal quotation marks omitted). ↑

18. Id. at 259–60 (footnotes omitted), 260 n.55. In Zayo, Vice Chancellor Slights gave significant weight to the American Institute of Certified Public Accountants Mergers and Acquisitions Dispute Practice Aid’s pronouncements regarding the need for a permanent impairment in value in support of his determination that a multiple of EBITDA was not an appropriate methodology to calculate damages absent such a permanent impairment, but he did not cite any cases or other basis in the law for that determination, although he did distinguish a number of cases, including Cobalt, in reaching that determination. Zayo, 2018 WL 6177174, at *17 n.215. ↑

19. Dura Medic, 333 A.3d at 260. ↑

20. Id. ↑