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The allegations in [55 paragraphs of plaintiffs' complaint] purport to characterize the [Stock Purchase Agreement]. Defendants respectfully refer the Court to the [Stock Purchase Agreement] for its actual language and complete contents.
Redacted Answer & Counterclaims
The Chancery Daily recently discussed what has turned out to be the last post-trial Opinion that Vice Chancellor McCormick issued in that role -- see The Honorable Kathaleen S. McCormick is sworn in as Chancellor for the Delaware Court of Chancery (May 6, 2021) -- in Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, memo. op. (Del. Ch. Apr. 30, 2021). The decision is of interest for a number of reasons -- importantly, as the Court of Chancery's second post-trial decision addressing coronavirus-related grounds for seeking to terminate corporate mergers and acquisitions (following AB Stable VIII, LLC v. MAPS Hotels & Resorts One, LLC, et al., C.A. No. 2020-0310-JTL, memo. op. (Del. Ch. Nov. 30, 2020)), and also for its application of the "prevention doctrine," finding that a buyer could not rely on its failure to obtain debt financing as an unsatisfied condition precedent to closing -- preclusive of specific performance -- where buyer's own actions prevented satisfaction of that condition (in breach of an obligation to use reasonable best efforts to obtain debt financing).
A couple of aspects of the KCAKE decision's discussion of the "prevention doctrine" warrant mention. First, the Court indicates that it previously addressed the doctrine in a prior oral ruling on buyers' motion to dismiss -- Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, tr. ruling (Del. Ch. Oct. 16, 2020; filed Nov. 4, 2020). The April 30 decision itself touches only lightly on the substance of the prevention doctrine, citing the October 16, 2020 oral ruling, In re Anthem-Cigna Merger Litigation, C.A. No. 2017-0114-JTL (consol.), memo. op. (Del. Ch. Aug. 31, 2020), and WaveDivision Holdings, LLC, et al. v. Millennium Digital Media Systems, LLC, et al., C.A. No. 2993-VCS, memo. op. (Del. Ch. Sept. 17, 2010), for the proposition that non-occurrence of a contractual condition is excused if a contracting party's breach of the contract "contributed materially" to the non-occurrence, and finds the buyer was shown at trial to have "contributed materially" to its own failure to obtain debt financing. The decision goes on to refute buyer's arguments for why the prevention doctrine should not apply -- including one based on the Court's October 16, 2020 oral ruling, which the Court describes as a "lengthy ruling" and a "thorough discussion," that cited "several authorities when analyzing the prevention doctrine" -- which TCD read as suggesting a more thorough discussion of the prevention doctrine than that appearing in the April 30 decision. Second, the Court indicates -- disapprovingly -- that buyer supports its argument based on the October 16, 2020 oral ruling by "excis[ing] the single statement that comes closest to supporting [buyer's] theory," equating the term "scuttling" with "bad faith" requirement for application of the prevention doctrine.
A few months after TCD first began publication, our April 15, 2013 edition discussed two oral rulings issued by then-Chancellor Strine: In re Amylin Pharmaceuticals, Inc. Shareholders Litigation, C.A. No. 7673-CS (consol.) transcript (Del. Ch. Feb. 5, 2013) (approving a settlement and awarding attorneys' fees), and In re Transatlantic Holdings, Inc. Shareholders Litigation, C.A. No. 6574-CS (consol.), transcript (Del. Ch. Feb. 28, 2013) (declining to approve a proposed settlement). TCD noted that although those rulings were never committed to writing, both were cited by other members of the Court in subsequent rulings in other matters. The Court in In re Interclick, Inc. Shareholders Litigation, C.A. No. 7038-VCG, transcript (Del. Ch. Mar. 27, 2013), cited the bench ruling in Amylin, including the analogy Chancellor Strine used to describe the value of disclosures obtained: "to the extent [the disclosures] were material, they were of the variety that Chancellor Strine noted in the Amylin case allowing investors to sleep well following a tender. They were modest benefits to the stockholders, but I don't think more than a modest benefit to the stockholders." The Court in In re Gen-Probe, Inc. Shareholders Litigation, C.A. No. 7495-VCL (consol.), transcript (Del. Ch. Apr. 10, 2013), approved a proposed settlement and awarded attorneys' fees, but explained that it was awkward to approve a settlement where disclosures obtained were "terribly thin" following Chancellor Strine's ruling in Transatlantic. TCD also noted that the former Chancellor himself likened transcript rulings to jurisprudential birdcage lining -- though our formative experience demonstrated that members of the Court had knowledge of, and raised -- sua sponte -- other members' oral rulings, while only Chancellor Strine appeared to actively denigrate them.
Indoctrination is a powerful thing, and we acknowledge that formative experience may endure beyond its actual relevance. Just over one year ago, Nicholas Day v. Diligence, Inc., C.A. No. 2020-0076-SG, letter op. (Del. Ch. May 7, 2020), made the italic-girded point that "Transcript Rulings generally have no precedential value in this Court and they should ordinarily not be relied on as precedent." TCD (and others -- see Performing Equity: Why Court of Chancery Transcript Rulings Are Law (Friedlander)) has responded "but . . . but . . . but . . ." -- see, e.g., May 11, 2020; August 10 & 11, 2020 -- but a growing chorus of juridic voices now resounds, and we are not deaf to it. To be clear, TCD doesn't mean to suggest that this is good or bad -- our objective is to advise interested parties on the current state of corporate and commercial litigation in the Delaware Courts -- but it does persuade us to stop and think about what we are doing.
TCD approached the Court's oral ruling in Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, tr. ruling (Del. Ch. Oct. 16, 2020; filed Nov. 4, 2020), suspecting from contextual clues in the April 30 memorandum opinion that it provided useful discussion of the "prevention doctrine" -- a doctrine that we did not recognize as well-represented in Delaware case law. See, e.g., Neurvana Medical, LLC v. Balt USA, LLC, et al., C.A. No. 2019-0034-KSJM, memo. op. (Del. Ch. Feb. 27, 2020) (finding application of the "prevention doctrine" unsupported by conclusory allegations); Realogy Holdings Corp. v. SIRVA Worldwide, Inc, et al., C.A. No. 2020-0311-MTZ, letter op. (Del. Ch. Aug. 7, 2020) ("I did not 'reach the abstract or doctrinal boundaries of the prevention doctrine . . . .'"); Bobcat North America, LLC v. Inland Waste Holdings, LLC, et al., C.A. No. N17C-06-170-PRW-CCLD, memo. op. (Del. Super. Apr. 26, 2019) (rejecting seller's "prevention doctrine" defense that buyer's actions prevented the occurrence of a contractual condition);
AWH Orlando Member, LLC v. REJV5 AWH Orlando , LLC and AWH Orlando Holding, LLC, No. 78, 2018, order (Del. Mar. 26, 2018) (declining interlocutory review of a ruling that the "prevention doctrine" did not preclude exercise of a removal right); REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC and AWH Orlando Holding, LLC, C.A. No. 2017-0708-JRS, tr. ruling (Del. Ch. Feb. 1, 2018; filed Feb. 28, 2018) (rejecting defendant's "prevention doctrine" defense where express terms of an LLC Agreement permitted plaintiff to remove defendant as manager);
2009 Caiola Family Trust, et al. v. PWA, LLC and Dunes Point West Associates, LLC, C.A. No. 8028-VCP, memo. op. (Del. Ch. Oct. 14, 2015) ("Defendants . . . contend that the prevention doctrine precludes a finding that [individual defendant] failed to satisfy the Key Person-involvement requirement. Defendants fail to point to any evidence, however, that indicates Plaintiffs prevented [individual defendant] from being actively involved in the operation of [the] business."). In fact, the oral ruling's discussion of the doctrine was far more thorough than any of the references cited above -- including the April 30 memorandum opinion -- and the Court itself described the doctrine as an "underdeveloped area of our law." More specifically, the Court favorably cited In re Anthem-Cigna Merger Litigation, C.A. No. 2017-0114-JTL (consol.), memo. op. (Del. Ch. Aug. 31, 2020), as "provid[ing] a helpful explication of this previously underdeveloped area of our law." Notably, however, the Anthem-Cigna decision does not use the term "prevention doctrine," or the word "prevention" -- potentially frustrating identification using a text-based legal research aid. It instead discusses the concept of "causation," noting that
Delaware has adopted the framework set forth in the Restatement (Second) of Contracts. That framework recognizes that "[p]erformance of a duty subject to a condition cannot become due unless the condition occurs or its non-occurrence is excused." But the framework also recognizes that "[w]here a party's breach by non performance contributes materially to the non-occurrence of a condition of one of his duties, the nonoccurrence is excused."
This discussion begins on page 190; and the decision's total length -- 306 pages -- is not optimally conducive to casual recollection (or relocation) of topics addressed, even by one who read it in its entirety. The oral ruling also notes that WaveDivision Holdings, LLC, et al. v. Millennium Digital Media Systems, LLC, et al., C.A. No. 2993-VCS, memo. op. (Del. Ch. Sept. 17, 2010), is the most frequently cited Delaware decision applying the prevention doctrine -- though it pre-dated TCD, and is not represented for that purpose in the publication. We felt that the October 16 oral ruling provided useful discussion and compiled references that could facilitate further exploration of the doctrine. However, the Court itself presages its ruling as follows:
. . . I want to deliver a few disclaimers. First, I will quote from many portions of the governing agreements and various authorities, and in many instances those quotes will be excised or partial. Persons reading the transcript of this bench ruling should not rely on my quotes for a complete recitation of the contractual provisions or referenced authorities.
Second, and more substantively, I want to note for the record that the issues raised by the pending motion implicate complicated interplay between the efforts clause, the implied covenant, and the prevention doctrine, which in turn implicates a complicated framework of the Second Restatement of Contracts.
I've done my best to do justice to these contractual provisions and doctrines. But, again, it's complicated. And I think it's important to remind persons that I'm traversing that complicated framework in the context of a bench ruling which has no, or at least very limited, precedential value.
As to the first caveat, TCD notes that the nature of oral rulings is frequently such that contract provisions are characterized rather than recited verbatim, or recited in relevant part rather than in full. For this reason, TCD attempts to reproduce the actual language of contract terms as part of its reporting of transcript rulings -- but adds that in this instance, we were unable to find a copy of the Stock Purchase Agreement, redacted or otherwise, filed on the public docket -- notwithstanding the requirement under Ct. Ch. R. 5.1 that "All pleadings and other materials of any sort . . . that are filed with the Register in Chancery, provided to the Court, or otherwise part of the record in a civil action shall be available for public access," and notwithstanding that the buyer's redacted answer and counterclaims expressly asked the Court at least fifty-five times to refer to the "actual language" and "complete contents" of the Stock Purchase Agreement at issue ("attached hereto as Exhibit A"), TCD was forced to piece together its ostensible terms from fragmentary quotes and characterizations spread throughout the parties' pleadings and briefs. Accordingly, we can offer no greater certainty than the Court's oral ruling that our recitation of the contract provisions is complete, authoritative, or even accurate. Nor, unfortunately, can we suggest where the actual provisions might be found (a situation that is particularly galling given the admonition that "this court must construe the agreement as a whole, giving effect to all provisions herein. The meaning inferred from a particular provision cannot control the meaning of the entire agreement if such an inference conflicts with the agreement's overall scheme or plan.")
As to the second caveat, we note that notwithstanding the Court's reservations regarding the complicated nature of the issues addressed, as noted in the Court's April 30 memorandum opinion, buyer "chose to excise [a] the single statement" from the Court's oral ruling as suggesting something that the Court did not suggest. Citing a stray phrase from an obscure and possibly unstructured source, divorced from context, is a strategy that TCD has often observed -- and one might suspect that it is a reason why the Court increasingly insists that transcript rulings should not be cited as precedent. One might also suspect that excerpting a choice quote from a jurist's own prior ruling is particularly unlikely to succeed, but as TCD often concedes, it is not well-versed in the finer points of litigation strategy.
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Indemnification Adequately Secured Dissolved Corporation's Risk
Dissolved Corporation; Liability Reserve; 8 Del. C. § 280(c)(1); Legal Standard; Judgment Debt; Contractual Commitment; Entity dissolution; Indemnification Obligation; Insurance Policy; D&O Insurance; Entity Dissolution; Dissolved LLC; Distribution Recipient; Undertaking to Repay; Consent to Jurisdiction; Judgment Creditor; Pending Judgment; Indemnification Agreement; Transferred Liability; Indemnification; Joint and Several Liability; Liquid Assets; Indemnification Enforcement; Fraudulent Transfer; Unsupported Argument
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"Prevention Doctrine" May Treat Frustrated Closing Condition as Met
Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, tr. ruling (Del. Ch. Oct. 16, 2020; filed Nov. 4, 2020)
Contract Interpretation; Reasonable Best Efforts; Efforts Clause; Commercially Reasonable; Objective Standard; Refusal to Perform; Entire Agreement; Enforceable Contract; Renegotiation; Contractual Scheme; Surplusage; "acceptable to"; Implied Covenant; Duty to Cooperate; Breach of Contract; Contractual Gap; Frustrate Bargain; Independent Effect; Duplicative Claim; Express Term; Express Prohibition; Specific Performance; Prevention Doctrine; Restatement of Contracts; Liability for Nonperformance; Remedy for Nonperformance; Assumption of Risk; Condition Precedent; Allocate Risk; Liability Limitation; Contractual Damages; Termination Fee; Motion to Dismiss; Monetary Damages; Remedy
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Defendant Cannot Avoid Advancement Duty by Artful Pleading
Mark Rutenberg v. CDx Diagnostics, Inc., et al., C.A. No. 2021-0081-SG, tr. ruling (Del. Ch. May 7, 2021)
Advancement; By Reason Of; Property Misappropriation; Artful Pleading; Breach of Fiduciary Duty; Official Capacity
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[SEALED] Michael Lebner, et al. v. Clozex Medical, Inc., C.A. No. 2021-0272, compl. (Del. Ch. Mar. 31, 2021)
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Nature of Action: Books and Records
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Additional Plaintiff(s): Patricia Lebner
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Plaintiff's Counsel: POTTER ANDERSON & CORROON
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Entity Defendant(s): Clozek Medical, Inc.
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Nature of Action: Breach of Fiduciary Duty
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Plaintiff's Counsel: NURICK LAW GROUP
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Individual Defendant(s): Richard Eisenberg; Ira Schickman
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Entity Defendant(s): Stone & Paper Investors, LLC; DDK & Co., LLP
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Petitioner Altaba, a dissolved corporation formerly known as the web services provider Yahoo!, brought this action under 8 Del. C. § 280 and 8 Del. C. § 281 to obtain court supervision over setting liability reserves and making stockholder distributions.
Altaba sold its operating business, subsequently renamed Oath Holdings, to Verizon Communications in June 2017, retained one primary remaining asset (a stake in Alibaba Group), registered as a closed-end investment company, and later determined to dissolve and distribute its assets to stockholders pursuant to an April 2019 "Plan of Dissolution." Altaba made an initial distribution of $51.50 per share in June 2019, filed a certificate of dissolution, and notified known creditors of the deadline for submitting claims. The Court approved a previous interim distribution and holdback in
In re Altaba, Inc., C.A. No. 2020-0413-JTL, opinion (Del. Ch. Oct. 19, 2020).
Droplets, Inc. submitted a creditors' claim arising out of patent litigation it had filed against Yahoo! in 2011. Yahoo! asserted that it need not set aside a reserve for Droplets' claim because Oath Holdings was contractually bound to assume responsibility for infringement claims against the operating business and to indemnify Altaba for judgments arising out of such claims. According to the Court, the record demonstrated that Oath Holdings did not dispute its indemnification obligation and that it had resources sufficient to pay the largest judgment that might be entered in the patent litigation. Droplets nevertheless argued that the indemnification commitment was inadequate security because: Oath Holdings showed that its indemnification commitment was inadequate security by arguing in the patent litigation that it should not be held jointly and severally liable; Altaba might choose not to enforce its indemnification right; Oath Holdings lacked sufficient liquid assets on its balance sheet; and Oath Holdings might hide or fraudulently transfer assets to avoid meeting its obligations.
The Court rules in this post-trial Order that Altaba need not set aside reserves for the patent litigation because, based on the record, Droplets' arguments are unsupported and Oath Holdings' indemnification commitment constitutes adequate security. * * * * * * * *
The Court discussed legal standards applicable when determining adequate security in a proceeding filed by a dissolved corporation under 8 Del. C. § 280(c)(1), and observed that a contractual commitment can provide adequate security.
"Under 8 Del. C. § 280(c)(1), the court must 'determine the amount and form of security that will be reasonably likely to be sufficient to provide compensation for any claim against the corporation which is the subject of a pending action . . . to which the corporation is a party.' The court, however, is 'not required to guarantee that the full amount of any judgment [claimant] could achieve in its . . . lawsuits remains available.' Rather, the Court must 'make a probabilistic judgment as to how the [litigation] would turn out.'
A contractual commitment to compensate a claimant for a liability can serve as adequate security under [8 Del. C. § 280 and 8 Del. C. § 281]."
"In [
In re Delta Holdings, Inc., C.A. No. *18604-CC, memo. op. (Del. Ch. July 26, 2004)], the dissolved company provided security for indemnification obligations to its directors and officers in the form of an insurance policy. The dissolved company secured a policy that would provide coverage for six years. The court recognized that an insurance policy could provide adequate security, but concluded that a six-year policy was insufficient. The court instead directed the dissolving company to purchase an insurance policy that would provide coverage for a longer period. The court thus recognized that a contractual commitment could provide adequate security."
The Court discussed Seema S. Boesky, et al. v. CX Partners, LP, C.A. No. *9739-CA, opinion (Del. Ch. Apr. 28, 1988), which enjoined a limited partnership's partial liquidating distribution on the ground of insufficient reserved security for creditors, but suggested in dicta that recipients of the distribution might provide adequate security by contractually binding themselves to return distributed funds to satisfy creditor claims and submitting to Court of Chancery jurisdiction for the purpose of litigating creditor claims.
"In [Seema S. Boesky, et al. v. CX Partners, LP, C.A. No. *9739-CA, opinion (Del. Ch. Apr. 28, 1988)], the court enjoined a partial liquidating distribution of a limited partnership because the partnership had not provided adequate security for its creditors. In dictum, Chancellor Allen posited that adequate security could be provided 'by an enforceable undertaking by those to whom early liquidating distributions are made,' under which the recipients of the distribution would 'submit to the jurisdiction of this court for the purpose of litigating any claim arising from the liquidation' and agree to 'return such part or all of any such distribution to the partnership to the extent necessary to permit the partnership to satisfy any judgment entered against it or to pay any settled claim.' Chancellor Allen thus recognized that an adequate contractual commitment could provide adequate security and indicated that if the undertakings were provided, then the distribution might be able to proceed."
The Court, in a proceeding initiated by a dissolved corporation to obtain Court approval of liability reserves and stockholder distributions, ruled post-trial that the corporation need not reserve funds as security for a potential judgment in a patent infringement action because, in connection with the corporation's sale of its operating entity, the operating entity had contractually assumed all liability - and agreed to indemnify the corporation - for the patent litigation, which agreement it did not dispute, and the operating entity had assets sufficient to pay the largest judgment that might be entered, such that the operating entity's indemnification agreement constituted adequate security.
". . . [A]dequate contractual security exists for the Patent Litigation.
Under a Reorganization Agreement dated July 23, 2016, [the dissolved corporation's former operating entity] assumed financial responsibility for the Patent Litigation. Under a Stock Purchase Agreement dated July 23, 2016, [dissolved corporation] sold all of the equity in [operating entity] . . . . On June 13, 2017, the transaction closed, and [the buyer] acquired all of the outstanding shares of [operating entity], which became a wholly owned subsidiary of [buyer].
Under the Reorganization Agreement, [operating entity] agreed to 'assume and . . . satisfy, pay, perform and discharge when due' all 'Assumed Liabilities,' including 'all Liabilities to the extent resulting from, related to, arising out of, imposed under or pursuant to the conduct of the Business or the Transferred Assets, whether arising from or related to any period prior to, on, or after the Closing, including Liabilities for infringement claims.' [Operating entity] also agreed to 'indemnify, defend and hold harmless[] the Seller Indemnitees [defined to include dissolved corporation] from and against all Losses of the Seller Indemnitees to the extent relating to, arising out of or resulting from . . . any Transferred Asset or Assumed Liability.'
Through these provisions, [operating entity] became financially responsible to [dissolved corporation] for any judgment rendered in the Patent Litigation.
The record evidence at trial established the following facts:
[Operating entity] does not dispute its obligation to indemnify [dissolved corporation] for the full amount of any judgment in the Patent Litigation.
[Operating entity] has the financial strength to pay the highest possible judgment that could be entered in the Patent Litigation.
. . . . [Operating entity's] indemnification constitutes security reasonably likely to compensate [patent litigation plaintiff] for its claim against [dissolved corporation] in the Patent Litigation. [Dissolved corporation] need not reserve any additional funds as security for [the patent] claim."
The Court, in a proceeding initiated by a dissolved corporation to obtain Court approval of liability reserves and stockholder distributions, ruled post-trial that the corporation need not reserve funds as security for a potential judgment in a patent infringement action because the corporation's transferred operating entity had contractually agreed to indemnify the corporation for the patent litigation. The Court rejected the patent litigation plaintiff's argument that the operating entity's opposition to being held jointly and severally liable in the patent litigation weighed against finding that its indemnification commitment provided adequate security.
"[Patent litigation plaintiff] asserts that the indemnification obligation does not provide adequate security because [the dissolved corporation's former operating entity] opposed [patent litigation plaintiff's] motion in the Patent Litigation to hold [operating entity] jointly and severally liable for the patent claim.
There is an obvious legal difference between joint and several liability and a contractual obligation to indemnify. [Operating entity] opposed being held jointly and severally liable. [Operating entity] has never repudiated its indemnification obligation."
The Court, in a proceeding initiated by a dissolved corporation to obtain Court approval of liability reserves and stockholder distributions, ruled post-trial that the corporation need not reserve funds as security for a potential judgment in a patent infringement action because the corporation's transferred operating entity had contractually agreed to indemnify the corporation for the patent litigation. The Court rejected the patent litigation plaintiff's arguments that the operating entity's indemnification commitment was inadequate security because the corporation might decide not to enforce the indemnification agreement and the operating entity did not have sufficient liquid assets on its balance sheet, explaining that the patent litigation plaintiff would have remedies available if the corporation decided against enforcement and that the record demonstrated the operating entity had assets sufficient to satisfy the largest judgment possible.
"[Patent litigation plaintiff] asserts that the indemnification provides inadequate security because [the dissolved corporation] may not enforce the indemnification obligation. [Patent litigation plaintiff] also argues that the indemnification is inadequate because [dissolved corporation's former operating entity] does not have liquid assets on its balance sheet sufficient to satisfy the maximum possible liability in the Patent Litigation.
[Dissolved corporation] has committed to enforce the indemnification obligation for [patent litigation plaintiff's] benefit. If necessary, [patent litigation plaintiff] could obtain a receiver to enforce the obligation.
The fact that [operating entity] does not have cash on its balance sheet does not mean that [operating entity] could not fulfill its indemnification obligation. . . . [T]he record evidence demonstrates that [operating entity] could satisfy the highest possible judgment in the Patent Litigation."
The Court, in a proceeding initiated by a dissolved corporation to obtain Court approval of liability reserves and stockholder distributions, ruled post-trial that the corporation need not reserve funds as security for a potential judgment in a patent infringement action because the corporation's transferred operating entity contractually agreed to indemnify the corporation for the patent litigation. The Court rejected the patent litigation plaintiff's unsupported argument that the operating entity might fraudulently transfer or hide assets to avoid payment and that its indemnification commitment was therefore inadequate security.
"[Patent litigation plaintiff] asserts that the indemnification is inadequate because [the dissolved corporation's former operating entity] might respond to a judgment in the Patent Litigation by fraudulently transferring or hiding assets. There is no evidence that [operating entity] would do that, and if it did, a variety of remedies would exist."
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Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, tr. ruling (Del. Ch. Oct. 16, 2020; filed Nov. 4, 2020)
Plaintiff Snow Phipps, seller of DecoPac -- which makes cake decorating supplies -- pursuant to a Stock Purchase Agreement, brought suit against defendant buyers, referred to collectively as Kohlberg (defendant KCAKE is Kohlberg's acquisition vehicle), asserting breach of contract and implied covenant claims, and seeking specific performance of Kohlberg's obligation to close in response to Kohlberg's assertion that it was entitled to terminate the transaction.
Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, am. compl. (Del. Ch. May 5, 2020; red. May 12, 2020). Kohlberg filed counterclaims for breach of the Stock Purchase Agreement and for declarations that Snow Phipps was not entitled to specific performance of the Stock Purchase Agreement or other agreements.
Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, answer (Del. Ch. June 18, 2020; red. June 25, 2020).
Kohlberg sent Snow Phipps an initial letter of intent to acquire DecoPac, which emphasized Kohlberg's ability to provide certainty of closing, commitment to work with DecoPac's incumbent lenders to arrange debt financing, and that closing would not be subject to a financing contingency. Snow Phipps rejected the initial offer and, on February 18, 2020, Kohlberg increased its bid to $600 million subject to confirming 2019 EBITDA. Snow Phipps had received other expressions of interest but accepted Kohlberg's bid based on Kohlberg's representation that it could conclude the transaction quickly and with certainty. Kohlberg engaged in further due diligence. By the end of February, the Center for Disease Control had warned that COVID-19 would spread in the US and urged adoption of preventive measures.
On March 4, Kohlberg demand a $50 million price reduction due to market volatility, lower than expected 2019 EBITDA, and reduced 2020 earnings expectations based on anticipated decline in consumer demand. Snow Phipps accepted the reduction, and requested that "pandemics" and "epidemics" be carved out from the draft Purchase Agreement's definition of Material Adverse Effect -- which at the time included carveouts related to "general economic conditions," "terrorism or similar calamities," and "government orders" -- but Kohlberg rejected that language. Also on March 4, California declared a state of emergency due to spread of COVID-19; several US school districts had announced school closings.
On March 6, the parties executed the Purchase Agreement, Kohlberg entered a Debt Commitment Letter with incumbent lenders, and Kohlberg and DecoPac entered an Equity Commitment Letter and a Limited Guarantee. Snow Phipps and DecoPac represented in the Purchase Agreement that there had been no change that had or "would reasonably be expected to have" a Material Adverse Effect, that none of DecoPac's top ten customers had "stopped or materially decreased its business," and that DecoPac would operate "in the Ordinary Course of Business." Kohlberg agreed to use "reasonable best efforts" to obtain Debt Financing. Kohlberg's obligation to close was contingent upon the accuracy of Snow Phipps' representations and warranties (the Bring Down condition) and Snow Phipps' compliance with all covenants, and allowed Kohlberg to terminate the transaction if Snow Phipps did not comply with those conditions. The Purchase Agreement had no expiration date and imposed an ongoing obligation to close. The transaction would close on May 5, 2020 (the Outside Termination Date), and a party who failed to fulfill obligations under the Agreement or prevented closing from occurring by that date would not be permitted to terminate the Agreement. The Purchase Agreement provided that Snow Phipps was entitled to specific performance if conditions including Kohlberg's receipt of debt financing were satisfied, and that a termination fee was "the sole and exclusive remedy" for any breach of any covenant in the Purchase Agreement or failure of the transaction to be consummated.
In late March, Kohlberg approached lenders under the Debt Commitment Letter with demands for an increased line of credit and add-backs of revenue lost due to COVID-19 that were inconsistent with the Debt Commitment terms. The lenders rejected Kohlberg's demands as an attempt to renegotiate the Debt Commitment, though each lender confirmed willingness to provide financing on the Debt Commitment's terms.
On April 1, Kohlberg informed Snow Phipps that debt financing was no longer available. In subsequent correspondence, Snow Phipps learned that the lenders were willing to provide financing under the terms of the Debt Commitment Letter but would not agree to Kohlberg's additional demands, unwilling to add additional EBITDA add-backs beyond those expressly listed in the letter. On April 5, Kohlberg informed Snow Phipps that it attempted, but failed, to obtain alternative financing. On April 8, Kohlberg informed Snow Phipps that it would not close because debt financing was unavailable and it did not believe Snow Phipps and DecoPac would meet their conditions to closing. On April 9, Snow Phipps informed Kohlberg that it would satisfy all closing conditions and was ready to close. On April 9, Kohlberg informed Snow Phipps that it would terminate the Purchase Agreement. Thereafter, several lenders informed Snow Phipps that they remained willing to provide debt financing on the Debt Commitment Letter's terms.
Snow Phipps asserted claims for breach of the Purchase Agreement by failure to use reasonable best efforts to obtain debt financing and alternative debt financing and failure to provide prompt notice of a dispute concerning the debt financing, and breach of the implied covenant of good faith and fair dealing precluding Kohlberg from acting to prevent debt financing from being available. Snow Phipps sought specific performance, or alternatively, damages not limited to the termination fee. Kohlberg moved to dismiss, arguing that it was entitled to renegotiate the terms of the Debt Commitment Letter, that it complied with notice requirements, that any claim for damages was limited to the amount of the termination fee, and that Snow Phipps was not entitled to specific performance.
The Court grants Kohlberg's motions in part and denies them in part in this oral ruling, finding Snow Phipps could not obtain damages exceeding the termination fee, that Kohlberg did not fail to provide prompt notice of disputes with lenders, and that Snow Phipps' claim for breach of an implied covenant to refrain from acting to prevent the availability of financing was duplicative of its claim for breach the express obligation to use reasonable best efforts to obtain financing. The Court found it reasonably conceivable that Kohlberg did not comply with its obligation to take reasonable best efforts to obtain debt financing, and that the reasonableness of its actions depended on facts that could not be resolved on at the pleading stage, and ruled that Snow Phipps could be found entitled to specific performance if Kohlberg was shown to have contributed to the unavailability of debt financing under the prevention doctrine. * * * * * * * *
Section 6.15(a) of the Stock Purchase Agreement states:
. . . [Buyer will] use its reasonable best efforts to arrange and obtain the Debt Financing on terms and conditions acceptable to Buyer, including commercially reasonable efforts to (i) maintain in effect the Debt Financing and the Debt Commitment Letter, (ii) satisfy all conditions applicable to the Buyer obtaining the Debt Financing, including the payment of any commitment, engagement, or placement fee required to be paid as a condition to the Debt Financing, (iii) enter into definitive agreements with respect to the Debt Financing that are on terms and conditions no less favorable to Buyer than those contained in the Debt Commitment Letter, so that such agreements are in effect as promptly as practicable but in any event no later than the Closing Date, (iv) consummate the Debt Financing at or prior to the date that the Closing is required to be effected in accordance with Section 2.1, and (v) comply with its obligations under the Debt Commitment Letter. . . . Buyer shall provide the Company prompt notice of the receipt of any written notice or other communication, in any case from any Debt Financing Source with respect to any material dispute or disagreement between or among any parties to the Debt Commitment Letter or any definitive letter related to Debt Financing.
Section 6.15(b) of the Stock Purchase Agreement states:
. . . [Buyer will] not to consent to (i) any amendment or modification to, or any waiver of any provision or remedy under, the Debt Commitment Letter . . . [that might] (v) reduce the aggregate amount of the Debt Financing below an amount sufficient . . . for Buyer to pay and satisfy in full Buyer's payment obligations pursuant to Article II at Closing, and to pay all related fees and expenses of Buyer . . . [or] impose new or additional conditions precedent or modify any existing conditions precedent set forth [in the Debt Commitment Letter] in a manner adverse to the interests of the Company, (x) materially delay the timing of the funding of the commitments thereunder or (y) materially adversely impact the ability of the Buyer to enforce its rights under the Debt Commitment Letter or to consummate the transactions contemplated by this Agreement or make funding of the commitments thereunder less likely to occur.
Section 6.15(d) of the Stock Purchase Agreement states:
If notwithstanding the use of reasonable best efforts by Buyer to satisfy their respective obligations under this Section 6.15, the Debt Financing or the Debt Commitment Letter (or any definitive financing agreement relating thereto) expire or are terminated or become unavailable prior to the Closing, in whole or in part, for any reason, Buyer shall . . . use its reasonable best efforts promptly to arrange for alternative financing from reputable financing sources (which, when added with the Equity Financing, shall be sufficient to pay the amounts required to be paid under this Agreement from other sources).
Section 8.1(c) of the Stock Purchase Agreement states:
. . . [T]he right to terminate . . . shall not be available to any party hereto whose failure to fulfill any of its obligations under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before the [May 5, 2020] Outside Termination Date.
Section 8.3(a) of the Stock Purchase Agreement states:
Notwithstanding anything to the contrary in this Agreement, (A) the Company's right to terminate this Agreement and to receive the Termination Fee when due and payable . . . shall be the sole and exclusive remedy . . . for any and all losses, costs, damages, claims, fines, penalties, expenses (including reasonable fees and expenses of outside attorneys), amounts paid in settlement, court costs, and other expenses of litigation suffered as a result of any breach of any covenant or agreement in this Agreement or the failure of the transactions contemplated hereby to be consummated[.]
Section 11.14(b) of the Stock Purchase Agreement states:
[T]the Company, Sellers and the Seller Representative shall be entitled to seek specific performance . . . of Buyer's obligations to consummate the transaction contemplated hereby if and only if . . . the full proceeds of the Debt Financing have been funded to Buyer on the terms set forth in the Debt Financing Commitment Letter to fund the payment of the Estimated Closing Payment at Closing (or would be funded at the Closing if the Equity Financing is substantially contemporaneously funded at the Closing) . . . .
* * * * * * * *
The Court denied defendant buyer's motion to dismiss plaintiff seller's claim for breach of buyer's obligation under a Purchase Agreement (Section 6.15(a)) to use reasonable best efforts to obtain debt financing for an acquisition under a Debt Commitment Letter, where buyer sought to renegotiate the terms of the Debt Commitment and took the position that financing was unavailable when lenders would not agree to buyer's new demands, rejecting buyer's argument that the best effort provision's obligation to seek financing on terms "acceptable to the Buyer" allowed it to renegotiate the Debt Commitment, and finding that the "acceptable to buyer" language did not permit buyer to walk away from the Debt Commitment if lenders did not accept its new demands and that buyer's interpretation would render the best efforts obligation meaningless.
". . . In relevant part, [the Purchase Agreement] obligates Buyer to, and I quote, 'Use its reasonable best efforts to arrange and obtain the Debt Financing on terms and conditions acceptable to the Buyer, including commercially reasonable efforts to (i) maintain in effect the Debt Financing and the Debt Commitment Letter, (ii) satisfy all conditions applicable to the Buyer obtaining the Debt Financing, (iii), enter into definitive agreements with respect to Debt Financing that are on terms and conditions no less favorable to Buyer than those contained in the Debt Commitment Letter, so that such agreements are in effect as promptly as practicable but in any event no later than the closing date, (iv) consummate the Debt Financing at or prior to the date that the closing is required to be effected and, (v), comply with its obligations under the Debt Commitment Letter.'
This passage contains two different efforts clauses. I'll reread the first sentence to emphasize the point. Buyer must 'use its reasonable best efforts to arrange and obtain the Debt Financing on terms and conditions acceptable to the Buyer, including commercially reasonable efforts to . . . maintain in effect the Debt Financing and the Debt Commitment Letter.'
As the Delaware Supreme Court explained in [
The Williams Companies, Inc. v. Energy Transfer Equity, LP, et al., No. 330, 2016, opinion (Del. Mar. 23, 2017)], reasonable best efforts clauses and commercially reasonable efforts clauses like those found in [the Purchase Agreement] 'impose obligations to take all reasonable steps to solve problems and consummate the transaction.' These provisions also 'prohibit the parties from preventing the transaction.'
Reasonable best efforts analyses apply an objective standard. As Vice Chancellor Laster explained in [
Akorn, Inc. v. Fresenius Kabi, AG, et al., C.A. No. 2018-0300-JTL, memo. op. (Del. Ch. Oct. 1, 2018)], in assessing an alleged breach, this court looks to 'whether the subject to the clause, (i) had reasonable grounds to take the action it did and, (ii) sought to address problems with its counterparty.'
And as Vice Chancellor Glasscock observed in [
Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., C.A. No. 8980-VCG, letter op. (Del. Ch. Oct. 25, 2013)], what constitutes reasonable best efforts presents a quintessential issue of fact that is typically not something this court will resolve on a pleadings-stage motion.
Plaintiffs allege that Buyer breached its reasonable best efforts obligation to obtain debt financing by seeking to negotiate for additional EBITDA add-backs and then refusing to perform under of the Debt Commitment Letter once those negotiations were unsuccessful. These allegations are reasonably conceivable.
It is reasonably conceivable that Buyer in no way sought to address the debt financing problems with Seller, that Buyer unilaterally sought to renegotiate with Lenders and, when those renegotiations proved unsuccessful, that Buyer informed Seller that debt financing was no longer available.
These reasonably conceivable facts run contrary to Buyer's obligation to take all reasonable steps to solve problems and consummate the transaction. The reasonableness of Buyer's actions presents an issue of fact not amenable to resolution at the pleadings stage.
Defendants counter with a number of arguments. Their primary response is that Plaintiffs' claim fails because Buyer was contractually entitled to continue to negotiate for additional EBIDTA add-backs between signing and closing and contractually entitled to walk away from the Debt Commitment Letter in the event Lenders could not agree to terms acceptable to Buyer.
Defendants rely on two parts of the governing agreement for this argument. The first is the reasonable best efforts provision itself, which requires Buyer to use reasonable best efforts to obtain and maintain the debt financing 'on terms and conditions acceptable to the Buyer.' The second is a catch-all phrase in a summary term sheet attached to the Debt Commitment Letter that contemplates that Buyer and Lenders may negotiate 'other adjustments, exclusions and add-backs as shall be mutually agreed or as otherwise consistent with the First Lien Documentation Principles.'
There are a number of problems with Defendants' interpretation, in my view, including the fact that the provisions do not expressly grant Defendants the rights that they rely on. Nothing in the Purchase Agreement or Debt Commitment Letter expressly indicates that continued negotiations were to occur between signing and closing. And the fact that Buyer and Lenders could mutually agree to additional EBITDA add-backs does not necessarily permit Buyer to walk away from the Debt Commitment Letter if it failed to receive the terms it demanded.
Cases of this court, such as [
eBay Domestic Holdings, Inc. v. Craig Newmark, et al. and craigslist, Inc., C.A. No. 3705-CC, opinion (Del. Ch. Sept. 9, 2010)], stand for the proposition that a contract remains enforceable as written even after a party unsuccessfully tries to renegotiate it.
Defendants' interpretation of the acceptable-to and catch-all provisions is also inconsistent with other provisions in the governing agreement. To start . . . the Debt Commitment Letter states that the letter was a 'binding and enforceable agreement with respect to the subject matter contained herein,' a provision that seems to prohibit Buyer from unilaterally walking away from the Debt Commitment Letter.
Also . . . the Purchase Agreement restricted Buyer's ability to modify the Debt Commitment Letter if doing so would 'materially delay the timing of the funding of the commitments thereunder' or 'make funding of the commitments thereunder less likely to occur.' These provisions suggest that Buyer could not demand modification that would make funding with the commitments less likely to occur.
Together, these provisions make me wonder whether the transactional designers actually intended that Buyer would be permitted to negotiate additional EBITDA add-backs between signing and closing and, if so, to what degree and what end.
Perhaps the biggest strike against [buyers'] interpretation, however, is that it would render the efforts clause . . . meaningless.
As I understand [buyers'] argument, [buyers] view the acceptable-to and catch-all provisions as operating to expressly permit Buyer to unilaterally block the debt financing by demanding any terms subjectively acceptable to it.
But, according to Delaware law, the efforts clauses agreed to by Buyer require Buyer to use objectively reasonable measures to take steps necessary to obtain and maintain in effect the debt financing. The contractual scheme cannot provide both that Buyer, on the one hand, may unilaterally block the debt financing and, on the other hand, must use best efforts to obtain the debt financing. Framed in this way, the concepts seem mutually exclusive.
As our Supreme Court explained in [
GMG Capital Investments, LLC, et al. v. Athenian Venture Partners I, LP, et al., Nos. 514, 2010 & 614, 2010, opinion (Del. Jan. 3, 2012)], this court 'must construe the agreement as a whole, giving effect to all provisions herein. The meaning inferred from a particular provision cannot control the meaning of the entire agreement if such an inference conflicts with the agreement's overall scheme or plan.'
This principle of contract interpretation requires courts to give each provision of an agreement effect, so as to not render any part of the contract mere surplusage. Reading the acceptable-to and catch-all provisions to permit Buyer to unilaterally block the debt financing by demanding any terms subjectively acceptable to it would render the reasonable best efforts provision mere surplusage and run contrary to the contractual scheme.
There might be a way to harmonize a version of [buyers'] interpretation with the provisions of the contractual scheme that I view it as running contrary to. If the acceptable-to and catch-all provisions actually permitted Buyer to negotiate EBIDTA add-backs before signing and closing -- which is an issue that I do not and need not resolve at this stage -- then the efforts clauses would operate to check the Buyer's ability to negotiate the terms of those add-backs.
In this way, the reasonable best efforts provision would foreclose Buyer from demanding objectively unreasonable financing terms. But even under this harmonized reading, [buyer] would not be entitled to dismissal because the question of whether Buyer demanded objectively unreasonable financing terms is a factually rife issue and not one I should decide at the pleading stage.
For these reasons, the motion to dismiss this portion of [seller's claim for] breach of [buyers'] obligation to use reasonable best efforts and commercially reasonable efforts . . . is denied."
Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, tr. ruling at 13-21 (Del. Ch. Oct. 16, 2020; filed Nov. 4, 2020)
The Court granted defendant buyer's motion to dismiss plaintiff seller's claim that buyer breached the implied covenant of good faith and fair dealing in a Purchase Agreement by acting to disrupt the availability of debt financing needed to conclude an acquisition under the terms of an existing debt commitment with lenders, finding buyers' obligation to use reasonable best efforts to obtain financing expressly precluded buyer from acting to prevent the availability of financing, making the purported implied covenant duplicative of the Agreement's express terms.
". . . [Sellers] claim that Buyer breached the implied covenant of good faith and fair dealing.
[Sellers'] theory is that the Purchase Agreement includes an implied covenant prohibiting Buyer from subverting the debt financing, and Buyer breached that obligation by actively disrupting the availability of financing and undermining the terms of the Debt Commitment Letter.
As Chief Justice Seitz explained in [
Adrian Dieckman v. Regency GP, LP, et al., No. 208, 2016, opinion (Del. Jan. 20, 2017)]: 'The implied covenant is inherent in all contracts and is used to infer contract terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated. It applies when the party asserting the implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected.' The prohibition against frustrating the fruits of the bargain is sometimes referred to in the affirmative as a duty to cooperate.
Where, as here, implied covenant claims are asserted alongside claims for breach of contract, one practical way to discern whether the implied covenant strikes at a contractual gap or prevents one party from frustrating the fruits of the bargain is to ask whether the implied covenant claim would do any independent work. Put differently, are there circumstances arising from the well-pled allegations where the Court might hold that the defendants breached the implied covenant but not the express terms of the agreement? If not, it is fair to conclude that the express contractual scheme covers the ground and that there's no room for an implied term.
Some courts reaching this conclusion have dismissed implied covenant claims as 'duplicative,' and I'll use that term here. But the word 'duplicative' is just shorthand for the question presented, which is whether the implied covenant is necessary to fill contractual gaps or prevent one party from frustrating the fruits of the bargain.
It is difficult to find a gap or need for the implied covenant in this case on the particular issue for which [sellers] invoke it, where the parties have covered the ground by agreeing to efforts clauses. On this point, the court's decision in [
Narrowstep, Inc. v. Onstream Media Corp., C.A. No. 5114-VCP, memo. op. (Del. Ch. Dec. 22, 2010),] is instructive. There, the plaintiffs alleged that the buyer failed to use its reasonable best efforts to take all necessary actions required to consummate the proposed merger, which was expressly required by the merger agreement.
The plaintiffs argued that the buyer breached the merger agreement by, in bad faith, delaying and extending the closing of the merger.
Although the merger agreement did not contain a provision specifically addressing the party's attempt to delay closing in bad faith, the court nonetheless found that the reasonable best efforts provision 'expressly proscribed that behavior.'
The Court, therefore, held that the plaintiffs' implied covenant claim was duplicative of the breach of contract claim and dismissed the implied covenant claim.
In this case, as in Narrowstep, [sellers'] implied covenant claim effectively duplicates the breach of contract claim. The requirement that Buyer use reasonable best efforts to arrange, obtain, maintain in effect, and replace the debt financing effectively proscribes intentional scuttling of the debt financing. Put differently, I cannot conceive of circumstances arising from the well-pled allegations where I might hold that Buyer breached the implied covenant but not the efforts clauses. The implied covenant claim is, therefore, dismissed."
Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, tr. ruling at 25-28 (Del. Ch. Oct. 16, 2020; filed Nov. 4, 2020)
The Court denied defendant buyer's motion to dismiss plaintiff seller's claim seeking specific performance of a Purchase Agreement that buyer refused to conclude based on the unavailability of debt financing needed to fund an acquisition, where obtaining debt financing was a condition to closing, finding that the "prevention doctrine" precluded seller from relying on the non-occurrence of the financing condition where seller's failure to comply with an obligation to use reasonable best efforts to obtain debt financing materially contributed to the condition's non-occurrence, and rejecting buyer's arguments that the prevention doctrine addresses only liability, not remedies, for contract non-performance and that seller assumed the risk that buyer could not obtain debt financing.
". . . [Buyers] argue that even if [sellers] prevail in showing that all of the closing conditions had been met, [sellers'] request for specific performance is foreclosed by the express terms . . . of the Purchase Agreement, which permits [sellers] to seek specific performance 'if and only if the full proceeds of the Debt Financing have been funded to Buyer on the terms set forth in the Debt Financing Commitment Letter to fund the payment of the Estimated Closing Payment at Closing.'
It is undisputed that the debt financing has not been funded. [Buyers] say that this fact, standing alone, operates to prevent [sellers'] claim for specific performance under the Purchase Agreement.
As their primary response to this argument, [sellers] invoke what is called the 'prevention doctrine,' contending that Buyer meaningfully contributed to the failure to fund the debt financing and that Buyer is, therefore, barred, by operation of the prevention doctrine from relying on that failure to avoid specific performance.
According to the Second Restatement of Contracts, the prevention doctrine is an established principle of contract law that states 'where a party's breach by nonperformance contributes materially to the nonoccurrence of a condition of one of his duties, the nonoccurrence is excused.'
As observed by this court in [
WaveDivision Holdings, LLC, et al. v. Millennium Digital Media Systems, LLC, et al., C.A. No. 2993-VCS, memo. op. (Del. Ch. Sept. 17, 2010)], a party 'cannot rely on the failure of a condition to excuse its performance when its own conduct materially caused the condition's failure.'
Most authorities addressing the doctrine provide that when it applies, the prevention doctrine treats a condition that has been thwarted as if it has been met.
I note that Vice Chancellor Laster recently expounded on the prevention doctrine in his decision in [
In re Anthem-Cigna Merger Litigation, C.A. No. 2017-0114-JTL (consol.), memo. op. (Del. Ch. Aug. 31, 2020)]. And although I do not rely on that decision in this ruling, because that decision was issued after the parties briefed the motions before me, I believe it provides a helpful explication of this previously underdeveloped area of our law.
In any event, many sources posit a broad purpose of the prevention doctrine. The language I just read from the Restatement, for example, refers to a party's duties generally. Again, the Restatement provides that 'where a party's breach by nonperformance contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused.'
Treatises describe the prevention doctrine as serving a broad purpose as well. For example, Williston on Contracts describes: 'Under the doctrine of prevention, when a party to a contract causes the failure of the performance of the obligation due, it cannot in any way take advantage of that failure. The principle of prevention is based on the implied agreement of the parties to contract to proceed in good faith and cooperate in performing a contract in accordance with its expressed intent and, therefore, to refrain from committing any intentional act or omission that would interfere with the other party or prevent or make it impossible for the other party to perform.'
Farnsworth similarly describes: 'A party may be required to do more than refrain from action that will prevent the occurrence of the condition. A party is often expected to take affirmative steps to see that the condition occurs.'
This court's prevention doctrine precedent is in accord with the description of the doctrine that I just quoted from the treatises.
WaveDivision is the most frequently cited case of this court applying the prevention doctrine. There, the acquirer entered into purchase agreements with the seller to acquire certain cable systems located in Michigan, Oregon, and Washington. The sellers' closing obligations were expressly conditioned on, among other things, having obtained the consent of the Lenders. The sellers caused the failure of that condition by enticing certain lenders to pursue alternative restructuring, despite the purchase agreement expressly preventing the seller from soliciting alternative proposals.
After signing the alternative proposal, the sellers attempted to rely on the failure to obtain lender consent to justify termination of the purchase agreement and disclaim liability. Applying the prevention doctrine, the court held that the seller could not rely on the failure to obtain lender consent to justify termination because the seller's conduct materially caused the condition's failure. The court awarded damages, which was the only relief that the plaintiff sought in that case.
In this case, as in WaveDivision, [sellers] argue that Buyer cannot rely on the failure to obtain debt financing when seeking to avoid specific performance because Buyer's conduct materially contributed to the condition's failure. The factual premise for [sellers'] argument is largely the same as the factual premise of their claims for breach of the efforts provisions.
[Sellers] allege that Buyer sought to negotiate additional EBITDA add-backs without offering Lenders anything in return, knowing that Lenders would not accept such unilateral concessions and that doing so would threaten the availability of debt financing.
Moreover, [sellers] allege that Buyer put forth minimal effort to obtain alternative financing by searching for only two business or four calendar days, despite the intended closing date being over a month away. The allegations are well-pled, and it is reasonably conceivable that these actions materially contributed to the debt funding condition's failure, such that the provision doctrine applies.
[Buyers] counter with two arguments. [Buyers] first argue that the prevention doctrine speaks only to a party's potential liability for nonperformance and not the appropriate remedy for nonperformance. [Buyers] next argue that the prevention doctrine does not apply because [sellers] contractually assumed the risk that the debt financing would not be funded. I refer to these arguments as the liability-not-remedy and assumption-of-risk arguments, respectively.
At a high level, I must say that I view [buyers'] liability-not-remedy argument as counterintuitive. After all, the underlying purpose behind the prevention doctrine is to prevent any party materially contributing to a failed condition from taking advantage of that failure 'in any way.' That purpose is equally served where the party invoking the doctrine seeks specific performance.
This generalization plays out in Delaware cases applying the doctrine, which do not differentiate between liability and remedy when applying the doctrine. Indeed, the prevention doctrine has been broadly applied in the context of claims of specific performance by Delaware courts, other courts applying Delaware law, and courts across the country, as [sellers] appropriately observed in briefing and my independent research has confirmed.
I will not attempt to read a long string cite for the purposes of this bench ruling, but I direct the parties to pages 22 through 26 of [
Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, ans. br. (Del. Ch. July 15, 2020; red. July 22, 2020),] for those authorities. I'll also say that [buyers] don't really dispute these observations.
Perhaps in recognition of the counterintuitive aspect of the liability-not-remedies argument, [sellers] develop a more nuanced version of the point. In [
Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, reply br. (Del. Ch. July 28, 2020; red. Aug 4, 2020),] at page 15, they argue that it would be illogical to conclude that 'where parties predetermine and expressly limit the remedies available if there is a breach, a breach somehow negates that limitation.'
In essence, [buyers] argue that invoking the prevention doctrine to a condition found within a contractual remedies provision would render the remedies limitation meaningless. This argument, in my view, misconstrues the contractual scheme and the prevention doctrine, by confusing the mere failure to satisfy a condition with the intentional obstruction of that condition.
Consider the fact that the funding condition . . . of the Purchase Agreement, which, again, requires that 'the full proceeds of the Debt Financing have been funded to Buyer' could be thwarted in multiple ways. On the one hand, Buyer could actively scuttle the debt financing, as Plaintiffs allege happened. On the other hand, third parties or market forces could impede fulfillment of the funding condition, as Defendants contend occurred.
The prevention doctrine would only nullify the funding condition in the former scenario, leaving the funding condition functional in the latter scenario. Thus, reading the funding condition as applying only where Buyer did not intentionally scuttle debt financing is not 'unprecedented, illogical, or unwarranted' as [buyers] say. Rather, it's true to the purpose of the prevention doctrine and it's a sensible reading of the contractual scheme.
For that reason, I agree with [sellers'] argument that the prevention doctrine potentially forecloses [buyers'] from avoiding specific performance due to the lack of debt financing.
I now turn to the assumption of risk argument. It is true that multiple courts have held that the prevention doctrine does not apply if the risk of such a lack of cooperation was assumed by the other party or the lack of cooperation is justifiable.
I direct the parties to this court's decisions in [
Mobile Communications Corp. of America v. MCI Communications Corp., C.A. No. *8108-VCB, letter op. (Del. Ch. Aug. 27, 1985),] and the federal authorities relied on in that decision, including [ Richard W. Shear v. National Rifle Association of America, et al., No. 78-1108, opinion (D.C. Cir. Aug. 15; rev. Aug. 22, 1979)]. As noted by multiple authorities, including the Delaware Superior Court in [
Bobcat North America, LLC v. Inland Waste Holdings, LLC, et al., C.A. No. N17C-06-170-PRW-CCLD, memo. op. (Del. Super. Apr. 26, 2019)], the risks must be 'clearly assumed' for the assumption of risk exception to apply.
The assumption of risk analysis is logically tethered to the rationale underlying the prevention doctrine. After all, when the contractual scheme authorizes prevention, then the act is not wrongful. As the federal court described in Shear, prevention can be viewed in some ways as a breach of contract, so prevention has not occurred if the contract permits the conduct at issue.
To argue that [sellers] assumed the risk that debt would not be funded, [buyers] repeat their arguments for dismissal of the claim for breach of the efforts provisions. As discussed earlier, these arguments are unavailing.
In an effort to augment these points, [buyers] rely on [a term] of the Purchase Agreement, which stipulates that Buyer cannot terminate if its 'failure to fulfill any of the obligations under this Agreement have been the cause of, or resulted in, the failure of the Closing.'
[Buyers] argue that inclusion of this language . . . indicates that Seller knew how to contract for such protection and, therefore, I should not read it into [the funding condition]. But generally, a blanket assumption of risk, or an implied ability to negotiate for a blanket assumption of risk, will not serve to disarm the prevention doctrine because courts require that the parties clearly allocate the specific risk at issue in order to avoid application of the prevention doctrine.
Based on a reading of the plain language of [the funding condition], I cannot conclude that Seller assumed the specific risk at issue. At a high level, it's difficult for me to conclude that [sellers] assumed the risk that [buyers] would intentionally scuttle the debt financing when [sellers] contracted for the right to require [buyers] to use their reasonable best efforts to obtain or, in the alternative, maintain it.
Moreover, in the few Delaware cases addressing the issue, no court found that either party had assumed the risk of intentional prevention of a condition. To do so in this case -- one in which [sellers] allege Buyer intentionally scuttled the debt financing -- would be antithetical to Delaware law and the underlying purpose of the prevention doctrine.
For those reasons, I find that [sellers] did not assume the risk of the Buyer intentionally preventing the debt financing from being funded.
Moreover, I cannot, at this stage, determine whether Buyer's alleged lack of cooperation was justifiable, which would be the second way in which an assumption of risk exception would be viable here. Such a determination is inherently factual and more appropriately addressed at a later stage of these proceedings."
Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, tr. ruling at 28-40 (Del. Ch. Oct. 16, 2020; filed Nov. 4, 2020)
The Court granted defendant buyer's motion to dismiss plaintiff seller's claim for breach of a Stock Purchase Agreement to the extent that it sought damages in excess of a specified termination fee, finding the terms of the Purchase Agreement and related Agreements unambiguous and rejecting seller's argument that motions to dismiss for failure to state a claim properly address only claims, not remedies.
". . . [Buyers] contend that [sellers'] request for damages, which is, 'in an amount to be determined at trial,' fails to the extent that [sellers] seek damages in excess of the termination fee. . . .
. . . The termination fee provision of [the Stock Purchase Agreement] provides: 'In the event that the Seller Representative terminates this Agreement pursuant to Section 8.1(e) or Section 8.5(f), then Buyer shall pay the Company a termination fee of $33,000,000, it being understood that in no event shall Buyer be required to pay the Termination Fee on more than one occasion. Nothing in this Section 8.3(a) shall limit the right of any Company Party (y) to bring or maintain any Legal Proceeding for specific performance to the extent provided in Section [11.14], or (z) enforce the Limited Guarantee.
Under no circumstances will any Company Party be entitled to receive both a grant of specific performance and the payment of the Termination Fee or to receive monetary damages other than the Termination Fee when due and payable.'
. . . [T]his court has held that enforceability of liability limitations should not be decided on the pleadings. As this court explained in [
William Chaffin v. GNI Group, Inc., et al., C.A. No. *16211-VCJ, memo. op. (Del. Ch. Sept. 3, 1999),] generally 'on a motion to dismiss all that need be decided is whether a claim is stated upon which any relief could be granted. The nature of that relief is not relevant and need not be addressed.'
Yet, Delaware courts have only applied this standard where further development of the factual record is necessary to determine the applicability of the liability limitation provision. Otherwise, the court may dismiss certain relief where, assuming all the facts as alleged in the amended complaint to be true, and assuming plaintiff were to prevail on each of its claims, plaintiffs would not be entitled to the relief sought.
In the present case, no further development of the factual record is necessary to determine the applicability of [the termination fee provision]. The terms . . . are unambiguous with respect to the applicability of the termination fee: 'Under no circumstances will any Company Party be entitled to receive monetary damages other than the Termination Fee when due and payable.'
. . . [T]he termination fee provision is not subject to any conditions.
The Limited Guaranty and Equity Commitment Letter contain similarly unambiguous language.
Paragraph 1 of the Limited Guaranty provides: 'In no event shall any Guarantor's liability under this Limited Guarantee exceed the Termination Fee.'
And the Equity Commitment Letter likewise provides: 'The Company's remedies against [buyer's guarantors] under the Limited Guarantee shall, and are intended to, be the Company's sole and exclusive direct or indirect remedies available to the Company and its Affiliate for any loss, damage or recovery of any kind arising under or in connection with any breach of the Agreement, Limited Guarantee or this letter agreement, except for the Company's right to specific performance under . . . the Agreement.'
Considering the unambiguous language and lack of preconditions in each of these provisions, no factual development of the record is required for me to address this issue.
. . . [Sellers] argue that motions to dismiss are properly addressed to claims and not remedies, to avoid dismissing damages in excess of the termination fee. But, as a descriptive matter, this argument fails. It's simply not always true that this court will limit motions to dismiss to claims and not remedies.
This court has dismissed remedies on motions to dismiss without dismissing the underlying claim in cases such as [
Shocking Technologies, Inc. v. Simon J. Michael, et al., C.A. No. 7164-VCN, letter op. (Del. Ch. Apr. 10, 2012),] and [
RGC International Investors, LDC v. Greka Energy Corp., et al., C.A. No. *17675-VCS, memo. op. (Del. Ch. Nov. 6, 2000)]. In the former case, this court granted a motion to dismiss to the extent that relief sought entailed the defendant's removal from the board. And, in the latter case, this court granted a motion to dismiss the alternative remedy of rescission.
Therefore, to the extent that [sellers'] breach of contract claim seeks damages in excess of the termination fee, [sellers] have failed to state a claim upon which relief can be granted and any relief or any request for that relief is dismissed."
Snow Phipps Group, LLC, et al. v. KCAKE Acquisition, Inc., et al., C.A. No. 2020-0282-KSJM, tr. ruling at 28, 42-47 (Del. Ch. Oct. 16, 2020; filed Nov. 4, 2020)
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Mark Rutenberg v. CDx Diagnostics, Inc., et al., C.A. No. 2021-0081-SG, tr. ruling (Del. Ch. May 7, 2021)
Plaintiff Mark Rutenberg, a director and former CEO of defendant CDx Diagnostics ("Diagnostics"), brought this action against Diagnostics and related entities, pursuant to 8 Del. C. § 145 and various provisions of defendants' bylaws and certificates of incorporation, to enforce his alleged right to advancement of expenses incurred in an underlying New York action that Diagnostics brought against him.
In its initial New York complaint, Diagnostics claimed that plaintiff breached contractual and fiduciary duties by misappropriating Diagnostics intellectual property and that it was entitled to a declaration that it owned patented technology under the parties' contract. Plaintiff then filed this action for advancement and later moved for summary judgment.
Diagnostics purportedly amended its New York complaint, leaving only the declaratory judgment claim against plaintiff, and cross-moved for summary judgment in Delaware on the ground that the New York action did not name plaintiff in his official capacity and that he was therefore not entitled to indemnification. Plaintiff argued in opposition that the New York amendment was procedurally infirm and that the allegations against him continued to turn on actions he allegedly took as a director and officer.
The Court largely grants plaintiff's motion in this oral ruling, through reserving decision on plaintiff's entitlement to indemnification from defendants other than Diagnostics, and denies defendants' motion, finding it more likely than not that, even under the amended complaint, the New York litigation will continue to involve litigation of allegations and defenses causally related to plaintiff's position as a director and officer. * * * * * * * *
The Court granted plaintiff director and former officer's motion for summary judgment on his claim for advancement of expenses incurred defending against claims that defendant corporation brought against him in New York, rejecting defendant's argument that - after it amended its New York complaint to remove a fiduciary duty claim and allegations that plaintiff used his official position to assist in misappropriating defendant's intellectual property, and to instead seek only a declaration of the parties' rights to intellectual property under a contract - the New York action was longer maintained "by reason of" plaintiff's service as a fiduciary (as the governing charter provision required) recognizing that corporations often try to artfully plead around advancement rights when suing directors and officers, analogizing to hypothetical claims challenging misappropriation of tangible property, and finding it more likely than not that, even as recast, the New York complaint will still require litigation of allegations and defenses related to plaintiff's official capacity.
"It's crystal clear to me that the original complaint was such that plaintiff's advancement right was triggered. It is true that if there are completely unrelated claims in a complaint, unrelated to service as an officer or director, and that all other claims are excised, that our case law says that if it's no longer by reason of service as an officer or director, there is no longer an advancement right.
But we have to be very careful, in doing that, not to allow corporations which have enticed individuals to serve by offering advancement rights to artfully plead around those rights. Because the incentive is always there, and it's an incentive not just in money -- although that's very important -- but it also always occurs in the scenario we have here, in which a fiduciary is covered by advancement rights; in the corporation's view, he proves to be faithless. They're understandably upset and angry that a fiduciary has proved faithless. They sue the fiduciary, and then the corporate counsel tells them, "By the way, you have to pay for both sides of this litigation."
That is something that elicits a lot of dissatisfaction on boards. And so, over and over again, we have seen litigation about attempts to plead around advancement rights in artful ways. And for the most part, those are ineffective.
In looking at this case, I have to determine whether what is left of this matter still invokes the 'by reason of' provision of the mandatory advancement right. That requires a causal nexus. I've looked at the underlying complaint, and as I say, it clearly invokes that 'by reason of' for the purloining of property rights that the corporation maintains belong to it by reason of a contract. And the allegations were that, among other things, the plaintiff used his position as an officer or director to put himself in a position to purloin this technology, which is now still the subject of the litigation going forward.
Those allegations have been excised, but it seems more likely than not to me that whatever litigation goes forward will necessarily involve the plaintiff having to defend what he did as an officer or director of the company. That seems inescapable, when I look at both complaints.
It's true that the factual allegations have been taken out. But let me give you a rather crude analogy, in my mind. A complaint that an officer and director, upon his employment, was given the key to the executive washroom; that that's one of the great perks of being an officer or director of the corporation. And the complaint says he used his officer and director access to the executive washroom -- which would have been denied him unless he held a fiduciary capacity -- to convert toilet paper during the early part of the pandemic, when toilet paper was a precious commodity, and that complaint triggers an advancement right.
Then the complaint is dropped so that it says nothing about the key to the washroom, the rights of the officer or director; it just says he was an employee and he stole company property. Would that amendment vitiate the advancement right? I mean, pretty clearly, it would not.
And I think that analogy is similar the case here. It may be that nothing in the trial will touch on the duties of the plaintiff as an officer or director, but given the allegations of the complaint, I find that unlikely. And so since the defense will inevitably touch on that, and since the allegations in the original complaint made it clear that the plaintiff used his high corporate position, in the defendants' point of view, in gaining access to and being able to convert this property, it is clear to me that the amended complaint still triggers advancement rights, because it is causally related to, has a causal nexus to, his position as an officer or director and, therefore, satisfies the 'by reason of' standard of the . . . charter. "
Mark Rutenberg v. CDx Diagnostics, Inc., et al., C.A. No. 2021-0081-SG, tr. ruling at 4-7 (Del. Ch. May 7, 2021)
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SUMMARIES OF NEW COMPLAINTS
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[SEALED] Michael Lebner, et al. v. Clozex Medical, Inc., C.A. No. 2021-0272, compl. (Del. Ch. Mar. 31, 2021)
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Plaintiff(s): Michael Lebner; Patricia Lebner
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Plaintiff's Counsel: POTTER ANDERSON & CORROON - Christopher N. Kelly (#5717); Abraham C. Schneider (#6696)
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Entity Defendant(s): Clozek Medical, Inc.
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Nature of Claim(s): Plaintiffs, a director and a stockholder of defendant, brought suit under 8 Del. C. § 220 seeking inspection of corporate books and records.
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Field of Law: Corporation Law
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Basis for Jurisdiction: 8 Del. C. § 220 - inspection of corporate books and records
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Preliminary Motions: Motion for expedited proceedings
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Plaintiff(s): Clovis Holdings, LLC
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Plaintiff's Counsel: NURICK LAW GROUP - Catherine Damavandi (#3823)
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Individual Defendant(s): Richard Eisenberg; Ira Schickman
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Entity Defendant(s): Stone & Paper Investors, LLC; DDK & Co., LLP
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Nature of Claim(s): Plaintiff brought suit against defendants asserting claims for breach of fiduciary duties and tortious interference.
Count 1: Tortious Interference with Business Relations
Count 2 & 4: Civil Conspiracy
Count 3: Breach of Fiduciary Duty
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Field of Law: Commercial Law
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Basis for Jurisdiction: 10 Del. C. § 341 - jurisdiction over matters and causes in equity
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PAF - C.A. No. 2021-0272, Michael Lebner, et al. v. Clozex Medical, Inc.
PAF - C.A. No. 2021-0273, Clovis Holdings, LLC v. Stone & Paper Investors, LLC, et al.
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WEEKLY HEARING & TRIAL SCHEDULE - May 17 - May 21, 2021
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(T) = Telephone; (Z) = Zoom; (C) = CourtScribes
Monday, May 17, 2021
01:30 (Z) - Yatra Online, Inc. v. Ebix, Inc., et al., C.A. No. 2020-0444-JRS
01:30 (Z) - Sanovas, Inc. v. Lawrence J. Gerrans, et al., C.A. No. 2020-0993-PAF
01:30 (Z) - Stephen Cervieri v. Curadel Surgical Innovations, Inc., C.A. No. 2020-0926-KSJM
Tuesday, May 18, 2021
09:15 (Z) - Suzanne Flannery v. Genomic Health, Inc., et al., C.A. No. 2020-0492-JRS
11:00 (T) - In re Jersey Lynne Farms, Inc., C.A. No. 2018-0942-PAF
01:30 (Z) - Mariner Royal Holdings, LLC, et al. v. FNB Corp., C.A. No. 2019-0781-PAF
Wednesday, May 19, 2021
10:30 (Z) - In re Saint Gervais, LLC, C.A. No. 2021-0347-SG
01:30 (Z) - Supernus Pharmaceuticals, Inc. v. Reich Consulting Group, C.A. No. 2020-0217-MTZ
01:30 (Z) - Teamsters Local 237 Additional Security Benefit Fund, et al. v. Dan Caruso, C.A. No. 2020-0620-PAF
03:15 (Z) - DuPont Teijin Films U.S., LP v. Robert Cowley, et al., C.A. No. 2021-0080-JTL
03:30 (T) - Budor Ventures, LLC v. Petzey Technology, Inc., C.A. No. 2021-0397-PAF
Thursday, May 20, 2021
09:30 (Z) - Paul Morris v. Spectra Energy Partners (DE) GP, LP, C.A. No. 2019-0097-SG
11:00 (T) - Arkansas Teacher Retirement System v. Alon USA Energy, Inc., et al., C.A. No. 2017-0453-KSJM
11:00 (T) - Chromalloy Gas Turbine, LLC v. Siemens Energy, Inc. and Advanced Airfoil Components, LLC, C.A. No. 2021-0403-PAF
01:30 (T) - Terry Friddle, et al. v. Christopher Moehle, et al. [Robotics Hub], C.A. Ho. 2021-0306-SG
Friday, May 21, 2021
11:00 (Z) - Definition Services, Inc. v. GVA Capital, Ltd., C.A. No. 2021-0357-KSJM
11:00 (T) - Alice Goh v. London Impact Ventures, LLC, C.A. No. 2021-0292-PAF
01:30 (T) - State of Delaware, Department of Finance v. Univar, Inc., C.A. No. 2018-0884-JRS
01:30 (Z) - Joseph Lawrence Ligos v. Isramco, Inc., et al., C.A. No. 2020-0435-SG |
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