Topic: Contract Interpretation

CHANCERY COURT FINDS REQUEST FOR SPECIFIC ENFORCEMENT OF A PARTNERSHIP INTEREST CALL RIGHT IS PROVED BY CLEAR AND CONVINCING EVIDENCE

By Scott E. Waxman and Joseph Phelps

In Simon-Mills II, LLC v. Kan Am USA XVI Ltd. Partnership, No. 8520-VCG (Del. Ch. May 30, 2018), the plaintiffs, a number of entities organized under an umbrella real estate investment trust and referred to as “Simon,” sought specific performance of a call right applicable to partnership interests under a joint venture agreement (the “JVA”) with the defendant Kan Am, a group of Delaware limited partnerships.  In exchange for the called units, Simon proposed to issue to Kan Am units (the “Successor Units”) that it argued had “substantially the same” rights as the originally contemplated consideration units (the “Original Units”).  The Court of Chancery concluded that the Successor Units did indeed have “substantially the same” rights as the Original Units, within the meaning of the JVA, and that Simon proved by clear and convincing evidence that it was entitled to specific performance of the call right. Read More

Chancery Court Applies Contract Terms to Clarify Difference Between Void and Voidable Stock Issuances

By Jessica Pearlman and Jonathan Miner

Southpaw Credit Opportunity Master Fund, L.P. v. Roma Restaurant Holdings, Inc., C.A. No. 2017-0059-TMR (Del. Ch. Feb. 1, 2018) came before the Delaware Court of Chancery as a dispute over control of the board of directors of Roma Restaurant Holdings, Inc. (“Roma” or the “Company”). Plaintiffs were a stockholder group that had taken a majority position in Roma’s common stock. After learning of Plaintiffs’ majority position, the Roma board adopted a new equity compensation plan and issued sufficient shares of restricted stock to Roma employees to dilute Plaintiffs below a majority ownership position. Plaintiffs considered the dilutive restricted stock issuances as invalid for a number of reasons, including the Company’s failure to obtain contractually mandated stockholder agreement joinder documents from each recipient before issuance, and presented Roma with a written consent that removed two of Roma’s current directors (the “Defendant Directors”) and replaced them with Plaintiffs’ nominees. Roma contested the validity of Plaintiffs’ written consent and the case came before the Court under Section 225 of the Delaware General Corporation Law (DGCL) to determine the proper composition of Roma’s board of directors. Vice Chancellor Montgomery-Reeves found that the disputed restricted stock issuances were void and could not be counted toward a stockholder vote.

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Director’s Breach of Contract Lawsuit Found to Violate the Underlying Contract’s Confidentiality Clause

By: David Forney and Benjamin Kendall

In Cappella Holdings, LLC v. Anderson, C.A. No. 9809-VCS (Del. Ch. Nov. 29, 2017), the Chancery Court dismissed a director’s breach of contract claims against his former employer relating to alleged violations of an anti-dilution provision in his employment agreement.  The Court instead found that the director’s initial complaint, which included highly sensitive information about the company, violated the confidentiality provision of the underlying contract on which his claims were based.

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CHANCERY COURT DISMISSES BREACH OF CONTRACT AND FIDUCIARY DUTY CLAIMS BROUGHT UNDER AN UNENFORCEABLE CONTRACT

By Scott E. Waxman and Michael Bill

In Eagle Force Holdings, LLC v. Campbell, No. 10803-VCMR (Del. Ch. Ct. September 1, 2017), the Court of Chancery dismissed plaintiffs’ breach of contract and fiduciary duty claims against the defendant due to a lack of personal jurisdiction over the defendant. Plaintiffs argued the defendant consented to personal jurisdiction in Delaware by entering into the (1) Contribution and Assignment Agreement (the “Contribution Agreement) and (2) Amended and Restated Limited Liability Company Agreement (the “LLC Agreement,” and together with the Contribution Agreement, the “Transaction Documents”), but the Chancery Court found the Transaction Documents to be missing material terms and, thus, held them to be unenforceable.

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Court of Chancery Denies Motion to Dismiss Claim Alleging that General Partner Breached Contractual Duty of Good Faith

By: Scott Waxman and Zack Sager

In Morris vs. Spectra Energy Partners (DE) GP, LP, the Court of Chancery of the State of Delaware found that a limited partner adequately pled that the general partner of a master limited partnership breached its contractual duty to act in good faith in connection with a conflicted transaction between the master limited partnership and the indirect parent of the general partner.  The Court also dismissed claims for breach of the implied contractual covenant of good faith and fair dealing and tortious interference with a partnership agreement.

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Chancery Court Denies Cross-Motions for Partial Summary Judgment Due to Ambiguities in Contract Language of LLC Agreement Governing Joint Venture

By Scott E. Waxman and Rachel Cheasty Sanders

In AM General Holdings LLC v. The Renco Group, Inc., C.A. No. 7639-VCS  and The Renco Group, Inc. v. MacAndrews AMG Holdings LLC, C.A. No. 7668-VCS (Del. Ch. May 17, 2017), the Delaware Court of Chancery denied cross-motions for partial summary judgment after reviewing the LLC Agreement of AM General Holdings LLC, which governs the joint venture relationship between Plaintiff, The Renco Group, Inc. (“Renco”), and Defendant, MacAndrews AMG Holdings LLC (“MacAndrews”), both members of AM General Holdings LLC (the “Company”).  Renco brought suit against MacAndrews alleging that MacAndrews, the managing member of the Company, caused the Company to distribute $72.8 million to MacAndrews in breach of the Company’s LLC Agreement.  Renco contended that, according to the LLC Agreement, the $72.8 million should have been distributed to Renco instead.  Both parties pointed to several provisions of the LLC Agreement governing the distribution at issue, and both parties contended that these provisions were clear and unambiguous.  After reviewing the provisions, however, the Court determined that the provisions were, in fact, ambiguous and thus, the case could not be disposed of through summary judgment proceedings.

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Chancery Court Rules Against Enforcement of a Call Right Due to Failure to Tender the Contractual Consideration

By: Jill B. Louis and Gilbert A. Perales

In Simon-Mills II, LLC, et al., v. KanAm USA XVI Limited Partnership, et al., C.A. No. 8520-VCG (Del. Ch. March 30, 2017), the Court of Chancery denied Plaintiffs’ request to enforce its call right and granted Defendants’ request for declaratory judgment when the contracted consideration for the call right could not be tendered.

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Chancery Court Interprets Contractual Provisions, the Elimination of Fiduciary Duties and Standard to be Applied for Self-Dealing Transactions under LLC Agreement

By Nicholas I. Froio and Rachel Cheasty Sanders

In CelestialRX Investments, LLC and Krittika Life Sciences, LLC v. Krivulka, et al., C.A. No. 11733-VCG (Del. Ch. Jan. 31, 2017), the Delaware Court of Chancery addressed two preliminary issues before it on motions for partial summary judgment filed by the various defendants.  The plaintiffs include CelestialRX Investments, LLC (“CelestialRX”), one of three members of the Delaware limited liability company Akrimax Pharmaceuticals, LLC (“Akrimax”).  The defendants include Leonard Mazur and Joseph J. Krivulka (“Krivulka”), the two other members of Akrimax, along with various entities Krivulka controls or in which he has invested.  These entities entered into a number of transactions with Akrimax, these transactions being at the heart of this dispute.  The Court first considered whether a release agreement dated July 1, 2013 (“Release Agreement”) barred CelestialRX from bringing causes of actions against the defendants which occurred prior to the release.  After applying rules of contract interpretation, the Court, in dismissing the motion for partial summary judgment, held that the plaintiff was not a “Releasing Party” as defined in the Release Agreement and thus had not released any claims existing as of July 1, 2013.  The Court next considered the extent to which the LLC Agreement of Akrimax and its July 1, 2013 amendment (“Amendment No. 7”) limited or modified fiduciary duties of the members, directors or managers of Akrimax, and what standard of care applied under the LLC Agreement in the context of conflicted transactions.

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DELAWARE CHANCERY COURT DISMISSES CLAIMS DUE TO A PRIOR BROAD SETTLEMENT RELEASE

By Scott Waxman and Thomas Meyer

In Geier v. Mozido, LLC, C.A. No. 10931-VCS (Del. Ch. Sept. 29, 2016) (Slights, V.C.), the Delaware Court of Chancery granted the motion of Mozido LLC (“LLC”) and Mozido, Inc., a subsidiary of LLC (“Inc.” and together with LLC, “Defendants”), to dismiss claims relating to incentive options promised, but not delivered, to a former director of LLC (“Plaintiff”).

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Chancery Court Enforces Good Faith Standard of Care in Limited Partnership Agreement

By Eric Feldman and Priya Chadha

In Brinckerhoff v. Enbridge Energy Co., Inc., et al., C.A. No. 11314-VCS (April 29, 2016), the Delaware Court of Chancery reiterated its adherence to the principle stated in the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) of giving “maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements” as well as to the ability under DRULPA of parties to a limited partnership agreement to define their respective standards of care and scope of duties and liabilities, including to eliminate default fiduciary duties, and dismissed the plaintiff’s claims.

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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

By: Cartwright Bibee and Trevor Belton

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.

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

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.

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