By: Scott Waxman and Adam Heyd

In Braga Investment & Advisory, LLC v. Yenni Income Opportunities Fund I, L.P., C.A. No. 2017-0393-AGB (Del. Ch. June 8, 2020), Braga Investment & Advisory, LLC (“Braga”), a minority investor in Steven Feller, P.E., LLC (“Newco”) alleged that Yenni Income Opportunities Fund I, L.P. (the “Fund”), the majority investor in Newco, had breached a purchase agreement for interests in Newco when the Fund amended it without Braga’s consent. Braga also contended that the Fund breached its co-investment agreement with Braga when it revoked Braga’s right to receive board packages under that agreement. The Delaware Court of Chancery (the “Court”) concluded that the Fund’s amendment of the purchase agreement did not require Braga’s consent, and that the Fund did not breach Braga’s right to receive board packages based on the ordinary use of that term.

In 2015, the Fund entered into a purchase agreement (the “Purchase Agreement”) with Steven Feller and Louise Feller (the “Sellers”) and Steven Feller P.E., PL (“Oldco”). The Purchase Agreement contemplated a series of transactions that would transfer all of Oldco’s assets to Newco (excluding certain specified assets), and result in the Fund and Oldco holding 80% and 20% of Newco’s equity interests, respectively. The Purchase Agreement set target net working capital at $3.8 million, with a post-closing adjustment mechanism if final closing net working capital differed from the target. All of Oldco’s accounts receivable, including accounts receivable that had not been collected for 120 days or longer (“Aged AR”), were not mentioned in the list of excluded assets under the Purchase Agreement, and all such accounts were to be included in the calculation of net working capital.

In August 2016, the Fund’s managing partner, Musa Yenni (“Yenni”) approached Braga regarding a minority investment in Newco. The investment memo provided to Braga stated that Aged AR was not considered part of Oldco’s assets in calculating the $3.8 million target net working capital. In September 2016, Braga entered into an agreement to purchase a 23.3% interest in Newco (the “Co-Investment Agreement”). Under the Co-Investment Agreement, Braga was granted certain board observer rights, including receiving board packages. Braga and Yenni (critically not the Fund) also entered into a joinder agreement (the “Joinder Agreement”), which stated that Braga would be deemed a “Buyer” under the Purchase Agreement, entitled to the rights and subject to the obligations of the Purchase Agreement.

Shortly before closing, Oldco insisted that Aged AR should be treated as an asset of Oldco – which would result in a working capital adjustment in favor of Sellers and Oldco of more than $2 million. Following negotiations, Oldco, Sellers and the Fund agreed in a side letter executed at closing (the “Side Letter”) to treat Aged AR as part of the excluded assets that would be retained by Oldco, to exclude all of the Aged AR from post-closing working capital adjustments, and to cap the rights of Sellers and Oldco to seek reimbursement for professional fees (amounting to approximately $200,000). Braga participated in the closing call and post-closing discussions in which these matters were discussed, and did not raise objections.

Braga filed its complaint with the Court in May 2017, alleging that (1) the Fund had breached the Purchase Agreement (as amended by the Joinder Agreement) when it entered into the Side Letter without Braga’s express written consent; had (2) the Fund had breached the Co-Investment Agreement by not providing Braga with sufficient information to constitute full board packages.

The Court noted that to establish a breach of contract claim under Delaware law, a plaintiff has the burden of proving, by a preponderance of the evidence, (1) the existence of a valid and enforceable contract; (2) that the defendants breached the contract; and (3) that the plaintiff was damaged as a result of those breaches. Delaware courts must give unambiguous contract terms their plain meaning, without regard to extrinsic evidence, and give priority to the parties’ intentions as reflected in the “four corners of the agreement”, construing the agreement as a whole and giving effect to all of its provisions.

The Court first addressed the disputes relating to the Purchase Agreement and Side Letter. The Court noted that by its terms, the Purchase Agreement could only be amended with the written consent of Oldco, the Sellers and the “Buyer”. Braga contended that it had been made a “Buyer” pursuant to the terms of the Joinder Agreement it had entered into with Yenni. However the Court noted that the Joinder Agreement, which purported to modify the Purchase Agreement and make Braga a “Buyer”, was itself invalid because it had only been signed by Yenni and not by any of the actual parties to the Purchase Agreement. Braga also pointed to several pieces of outside evidence in support of its arguments, which the Court dismissed in turn. Braga argued that the Fund had conceded in its opening brief that Braga became a party to the Purchase Agreement when it entered into the Joinder Agreement, but the Court noted that the Fund was not precluded under any legal doctrine from taking a different position at trial. Braga also noted that Yenni testified that he believed the Joinder Agreement made Braga a Buyer under the Purchase Agreement, but the Court pointed out that the Purchase Agreement is unambiguous on this issue and outside testimony should not be considered. Finally Braga claimed that the Joinder Agreement was ratified through an email by all necessary parties before the Side Letter was executed. However the Court noted that there was no evidence any representative of Oldco and the Sellers ratified the Joinder Agreement.

The Court also pointed out that Braga had not suffered damages as a result of any breach. Braga claimed damages from the alleged Purchase Agreement breach of $488,725, which was based on its purported share in the amount of Aged AR that should have been transferred to Newco at closing had the Purchase Agreement not been amended. However the Court pointed out that if the Side Letter had never been executed, Newco’s benefit from receiving the Aged AR would have been offset by the working capital adjustment in favor of Oldco. Moreover, the Court noted that Braga’s reliance on the investment memo it received stating that Aged AR would be excluded from the working capital calculation did not override the plain language of the Purchase Agreement. The Court also noted that certain damages claimed by Braga that arose post-closing did not result from the alleged breach of the Purchase Agreement, and that even if Newco suffered damages from a breach, Braga did not have a contractual right to receive a pro rata share of such damages.

Finally the Court found that the Fund materially complied with its obligation to provide Braga with board packages. The Court rejected Braga’s sweeping interpretation of its rights set forth in the Co-Investment Agreement, which was based the extensive information the Fund initially provided to Braga immediately following the Newco closing. Instead, the Court opted for a plain language reading of the term “Board packages”, and found that the Fund had materially complied with this requirement by providing Braga with the same set of materials Newco had determined were necessary for its board members to perform their duties.

Braga Investment & Advisory, LLC v. Yenni Income Opportunities Fund I, L.P., C.A. No. 2017-0393-AGB (Del. Ch. June 8, 2020)

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