American Capital Acquisition Partners, LLC, et al. v. LPL Holdings, Inc., et al. No. 8490-VCG (February 3, 2014) (Glasscock, V.C.)

By David Bernstein

In 2011, LPL Holdings, Inc. (“LPL”) acquired Concord Capital Partners, Inc. (“Concord”) from American Capital Acquisition Partners, LLC (“American Capital”) under a purchase agreement (the “Purchase Agreement”) that provided for a contingent addition to the purchase price that could be as much as $15 million based upon the 2013 gross margin of Concord (which was renamed “Concord-LPL”). Conford-LPL also entered into employment contracts with senior executives of Concord, which provided for bonuses based upon Concord-LPL’s reaching specified revenue targets in 2011, 2012 and 2013. At the time of the acquisition, LPL discussed with American Capital and Concord’s senior executives the synergies that could be achieved by using LPL’s computerized custody system to provide custody services for Concord-LPL trust accounts. In fact, the LPL computer system could not process those accounts, and LPL did not modify the system to enable it to process them. As a result, Concord-LPL did not generate gross margins sufficient to entitle American Capital to the contingent additional payments and did not generate sufficient revenues to reach the specified targets in the employment contracts. American Capital and the former Concord senior executives sued LPL, alleging that LPL had committed fraud in stating that LPL could, or would become able to, process Concord-LPL’s trust accounts, and had breached the implied covenant of good faith and fair dealing in (a) not doing what was necessary to enable the LPL computer system to be used to process those accounts and (b) diverting business away from Concord-LPL to another company to avoid having to make additional payments to American Capital under the Purchase Agreement and provide bonuses to Concord’s senior executives under the employment contracts.

On the issues relating to the implied covenant of good faith and fair dealing, Vice Chancellor Glassrock noted that the covenant is not available to change agreed upon contract terms. It only served as a gap-filler with regard to unanticipated situations that the contract terms did not cover but would have been contracted for had the parties anticipated such situations. He said that because the parties had discussed use of the LPL systems with regard to Concord-LPL’s trust accounts prior to signing the Purchase Agreement, he assumed that the parties consciously decided not to include a provision requiring LPL to take necessary actions to enable the LPL computer system to be used to process Concord-LPL’s trust accounts, which the implied covenant of good faith and fair dealing could not vary. However, the Vice Chancellor said there was no indication that the parties consciously decided not to prohibit LPL from diverting business from Concord-LPL to another company, and therefore LPL’s doing that violated the implied covenant of good faith and fair dealing.

With regard to the fraud claims, the Vice Chancellor noted that the Purchase Agreement, in addition to containing an integration clause, contained an anti-reliance clause that expressly stated that except for the representations and warranties in the Purchase Agreement, neither American Capital nor LPL was relying on any representation or warranty, express or implied, of any kind.

He said that an integration clause alone would not have precluded a fraud claim, but an express disclaimer of reliance on extra contractual representations “necessarily prevent[ed]” American Capital from pleading reasonable reliance.

Accordingly, Vice Chancellor Glassrock dismissed all the counts except those asserting that the alleged diversion of business away from Concord-LPL violated the implied covenant of good faith and fair dealing.

American Capital v. LPL Holdings

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