Contract Interpretation – Page 5

Delaware Chancery Court Rules Seller is Entitled to Tax Savings by Applying Extrinsic Evidence of the Parties’ Negotiations and Interpretation of the Redemption and Stock Purchase Agreement in Question

Mar 18 2016

In Cyber Holding LLC v. CyberCore Holding, Inc. (C.A. No. 7369-VCN), the Delaware Court of Chancery (Noble, J.) ruled on a contract dispute over which party is entitled to tax savings in the amount of $1,557,171, resulting from deductions of various transaction expenses during the stub year. In its opinion, the Court reached its conclusion by applying the objective theory of contract construction combined with the consideration of extrinsic evidence in an effort “to ascertain the shared intentions of the parties.” After considering the limited extrinsic evidence available and conducting its analysis of the Agreement, the Court ruled in favor of the seller and held that the Buyer would have to remit the tax savings plus post-judgment interest. The Court rejected the seller’s request for prejudgment interest as the Agreement’s exclusive remedy provision controlled over the default of awarding prejudgment interest.

Chancery Court Grants in Part and Denies in Part Motion to Dismiss in Fraud Dispute

Dec 16 2015

By Eric Feldman and James Parks

On a motion to dismiss in Prairie Capital III, L.P. v. Double E Holding Corp., the Delaware Court of Chancery, granting in part and denying in part the defendant’s motion, re-enforced the importance of bargained-for contractual terms in the context of a dispute over a transaction consummated pursuant to a stock purchase agreement.

The case involves a transaction between two private equity firms, Prairie Capital Partners and Incline Equity Partners. Prairie Capital Partners, through its sponsored funds Prairie Capital III, L.P and Prairie Capital III QP, L.P. (collectively, “Prairie Capital”), owned Double E Parent LLC (the “Company”), a portfolio company, which it sold to Double E Holding Corp., which was an acquisition vehicle formed by Incline Equity Partners III, L.P., which was sponsored by Incline Equity Partners (collectively the “Buyer”). Prairie Capital III L.P. and Prairie Capital III QP, L.P. (the “Sellers”) were the principal sellers, and the Stock Purchase Agreement (the “SPA”) was signed and the transaction closed on April 4, 2012. The SPA established an escrow fund for a limited period of time for the parties’ respective indemnification obligations and included procedures to make a claim against such escrow fund.

Court of Chancery Reallocates Limited Liability Company Distributions According to Prior Agreements between the Parties

Nov 02 2015

By Andrew Skouvakis and Thomas Meyer

In Finger Lakes Capital Partners, LLC v. Honeoye Lake Acquisition, LLC, the Court of Chancery held that proceeds from a limited liability company’s liquidity event distributed to the members of the limited liability company should be reallocated in accordance with prior agreements between the members. The Court found that an integration clause in the limited liability company agreement did not supersede allocation provisions in the prior agreements.

In 2003, Zubin Mehta and Gregory Shalov formed Finger Lakes Capital Partners, LLC (“Finger Lakes”) to sponsor investments in portfolio companies. Lyrical Partners, L.P. (“Lyrical”) provided the majority of the capital for these investments. In 2004, Mehta, Shalov, and Lyrical executed a binding term sheet (the “Term Sheet”) addressing the ongoing business relationship between Finger Lakes and Lyrical. Under the Term Sheet, Lyrical received a 25% ownership interest in Finger Lakes and was entitled to a percentage of portfolio company management fees that would otherwise go to Finger Lakes.

Chancery Court Confirms Delaware’s Merger Statutes Inapplicable to Options

Aug 25 2015

By Lisa Stark and Eric Jay

In Kurt Fox v. CDX Holdings, Inc. (f/k/a Caris Life Sciences, Inc.), C.A. No. 8031-VCL (Del. Ch. July 28, 2015), the Delaware Court of Chancery confirmed that Delaware’s merger statutes do not effect a statutory conversion of options at the effective time of a merger. Rather, the treatment of stock options in a merger is governed by the underlying stock option plan, which must be amended in connection with a merger if the treatment of options in the merger differs from the treatment contemplated by the plan. The Court also confirmed that a standard qualification in stock option plans, requiring a corporation’s board of directors to determine the fair market value of the option for purposes of cashing out the options, could not be satisfied by informal board action or a delegation to management or a third party.

This class action arose from a 2011 spin-off/merger transaction pursuant to which Miraca Holdings, Inc. (“Miraca”) acquired CDX Holdings, Inc. (formerly known as Caris Life Sciences, Inc.) (“Caris”) for $725 million (the “Merger”). Immediately prior to the Merger, Caris spun off two of its three subsidiaries to its stockholders (the “Spin-Off”). In the Merger, each share of Caris stock was converted into the right to receive $4.46 in cash. Each option was terminated with the right to receive the difference between $5.07 per share and the exercise price of the option, minus 8% of the total option proceeds, which were held back to fund an escrow account from which Miraca could satisfy indemnification claims brought post-closing.

Fight Between Two Chemical Giants Continues: Akzo Nobel’s Claim of IP Misappropriation against Dow Chemical Survives Motion to Dismiss

Jun 17 2015

By Holly Vance and Stephanie S. Liu

In Akzo Nobel Coatings, Inc. v. The Dow Chemical Company, the Delaware Court of Chancery decided a dispute between two chemical companies that were parties to a joint development agreement. Akzo Nobel Coatings Inc. (“Akzo”) alleged, among other things, that The Dow Chemical Company, doing business as Dow Advanced Materials (“Dow”), wrongfully misappropriated intellectual property that belonged in part or in whole to Akzo and breached their joint development agreement. Dow moved to dismiss pursuant to Court of Chancery Rule 12(b)(6). The Court granted the motion in part and denied in part. Specifically, Akzo’s claims for declaratory judgment and breach of contract survived, but its alternative claims for breach of the implied covenant of good faith and fair dealing, conversion, and unjust enrichment were dismissed.

Akzo specializes in the design, manufacture, and sale of various chemical coatings, including protective coatings for food and beverage packaging and containers. Dow develops, manufactures, and sells polymeric materials, products, and technologies, including those suitable for use in coatings for food and beverage containers. In January of 2010, the parties executed a Joint Development Agreement (“JDA”) to combine the parties’ respective areas of expertise in pursuit of the development of new protective coatings for metal food and beverage packaging containers. Depending on the resulting invention, any given project under the JDA could either be wholly owned by one of the two parties or jointly owned. Dow terminated the JDA in October of 2011, and then communicated to Akzo in May of 2012 that it intended to file two patent applications relating to potential JDA inventions. In June of 2013, Akzo filed its complaint, asserting claims for: (1) a declaratory judgment regarding Akzo’s ownership rights under the JDA; (2) breach of contract and a permanent and mandatory injunction against Dow; (3) breach of the implied covenant of good faith and fair dealing; (4) conversion; and (5) unjust enrichment. The Court reviewed the complaint under the reasonable “conceivability” standard, the governing pleading standard in Delaware to survive a motion to dismiss, which asks whether there is a “possibility” of recovery.

Chancery Court Interprets Redemption Option Provisions in LLC Agreement in Connection with Judicial Dissolution

May 05 2015

By Andrew Skouvakis and Peter C. Seel

In Hampton v. Turner, Vice Chancellor Noble denied a motion for summary judgment in a dispute about whether a limited liability company had properly exercised a redemption option under its operating agreement and tendered the correct purchase price for three members’ limited liability company interests, after such members sought judicial dissolution of the company. In denying summary judgment, Vice Chancellor Noble found that the operating agreement was unambiguous with respect to the application of the redemption option provisions and how those should be interpreted to determine a purchase price.

Chancery Court Resolves Dispute over Competing Exclusive Remedy Clauses in a SPA

May 04 2015

By Lisa Stark and Andrew Lloyd

In Alliant Techsystems, Inc. v. MidOcean Bushnell Holdings, L.P., C.A. No.9813-CB (Del. Ch. Apr. 24, 2015, rev. Apr. 27, 2015), the Delaware Court of Chancery held that an exclusive remedy clause in a stock purchase agreement did not require the parties to submit their dispute over the accounting methodology used to calculate the net working capital of the seller at closing to a court for resolution under the indemnification provisions in the SPA. Rather, the Court held that an accounting firm must resolve the parties’ dispute under a separate exclusive remedy provision. The Court’s decision meant that the buyer had recourse to a larger pool of funds from which it could potentially satisfy its purchase price adjustment claim following closing.

Supreme Court Partially Reverses Chancery Decision Interpreting Common Voting Agreement Provisions

Dec 12 2014

By Holly Vance and Porter Sesnon

In Salamone, Dura, and Halder v. Gorman, IV, the Supreme Court of Delaware (the “Court”) partially affirmed and partially reversed a Chancery Court decision determining the composition of the board of directors (the “Board”) of Westech Capital Corporation (“Westech”). The dispute centered on the interpretation of a Voting Agreement entered into by Westech and the purchasers of Westech’s Series A Preferred Stock in 2011.

The Voting Agreement provisions at issue were Sections 1.2(b) and 1.2(c), each of which set forth the process for designating certain individuals to serve on the Board. Section 1.2(b) provides for one director to be designated “by the majority of the holders of the Series A Preferred Stock . . . .” Section 1.2(c) provides two individuals to be designated “by the Key Holders . . . .” The dispute revolved around the removal by John J. Gorman, IV (“Gorman”), Westech’s majority stockholder, of a current director nominated pursuant to Section 1.2(c) and the election of two new directors, one pursuant to Section 1.2(b) and another pursuant to Section 1.2(c).

Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., et al., C.A. No. 8980-VCG (October 31, 2014) (Glasscock, V.C.)

Nov 05 2014

By David Bernstein and Marisa DiLemme

This decision involves a merger agreement (the “Agreement”) between Apollo (Mauritius) Holdings Pvt. Ltd. and Cooper Tire & Rubber Company (“Cooper”), a principal purpose of which was for Apollo to acquire Cooper’s 65% interest in Chengshan Cooper Tires (“CCT”), a Chinese tire manufacturer. After the merger was announced, the minority owner of CCT apparently caused CCT’s union workers to go on strike by telling them that if they did not protest, they would be fired. The minority partner also prevented Cooper from getting access to CCT’s financial records, which made it impossible for Cooper to prepare and deliver financial statements for the third quarter of 2013 as required by the Agreement. Apollo refused to consummate the merger and sought a judicial declaration that its refusal was not a breach of the Agreement because Cooper had not satisfied several conditions to closing.

Vice Chancellor Glasscock agreed that Apollo was not required to carry out the merger because Cooper had not satisfied some of the conditions to closing. Among other things, he found that the strike at CCT violated a Cooper covenant to cause each of its subsidiaries to “conduct its business in the ordinary course of business consistent with past practice.” Cooper argued that an exception to the definition of “Material Adverse Effect” for a negative reaction to the Agreement by Cooper’s labor unions or joint venture partners also applied to the covenant to cause all subsidiaries to conduct their businesses in the ordinary course, but Vice Chancellor Glasscock rejected this argument, pointing out that even within the definition of Material Adverse Effect, there were some things (events that would prevent Cooper from fulfilling its obligations under the Agreement or from consummating the merger) that were not subject to the exception.

Another argument that Cooper made is that by attempting to negotiate terms on which the minority owner of CCT would withdraw its opposition to the transaction, Apollo acquiesced in proceeding with the merger despite what the minority owner was doing. Vice Chancellor Glasscock rejected this argument, saying that Apollo was negotiating with the minority owner in an effort to make it possible for the merger to proceed.

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JD Holdings, L.L.C., et. al. v. The Revocable Trust of John Q. Hammons, et. al., C.A. 7480-VCL (Laster, V.C.)

Oct 05 2014

By Masha Trainor and Ryan Drzemiecki

This case involves a dispute over interpretation of a right of first refusal clause. In 2005, John Q. Hammons, a hotel entrepreneur, entered into a complex transaction (the “2005 Transaction”), structured as a triangular merger, in which Hammons’ publicly traded company, John Q. Hammons Hotels, Inc., emerged as indirect wholly-owned subsidiary of JD Holdings, LLC, which is controlled by Jonathan Eilian. As part of the 2005 Transaction, Hammons granted Eilian a right of first refusal (the “ROFR”) to purchase any interest in a hotel or other real property described therein (each a “JQH Subject Hotel”).

The plaintiffs, entities affiliated with Eilian (“Plaintiff”), originally filed suit to obtain a declaration regarding the meaning of certain provisions of the ROFR Agreement. Subsequently, Hammons died. The parties agreed that, pursuant to the ROFR Agreement, Hammons’ death triggered a 90-day period during which Eilian would negotiate exclusively with JQH Trust and Hammons’ estate (“Defendant”) to determine whether Eilian would buy the JQH Subject Hotels. However, they disagreed about the JQH Trust’s obligations following the expiration of the exclusivity period. Plaintiff argued that the ROFR clause required the JQH Trust to liquidate all of the JQH Subject Hotels for cash within a certain period after Hammons’ death even if the parties did not agree on a transaction during the exclusivity period, and the ROFR would apply to any such sale. In the answer and counterclaim to the amended complaint, Defendant rejected this interpretation of the ROFR, contending, among other things, that the ROFR failed to create any affirmative obligation to sell and, even if it did, would be void under the rule against perpetuities. The parties have cross-moved for judgment on the pleadings on this and other claims and counterclaims.

Catagory:Contract Interpretation