In Leaf Invenergy Company v. Invenergy Renewables LLC (May 3, 2019), the Delaware Supreme Court reversed the Court of Chancery’s award of nominal damages ($1) to an LLC member for the company’s breach of the LLC agreement and instead awarded damages of $126.1 million. The decision underscores the ambiguity that can arise with respect to provisions that require consent of an LLC member (or, in the context of other entities, a partner or stockholder) for the company to take certain action unless the company pays the party a specified amount. The decision serves as a reminder of the need for clarity in the drafting of these provisions.
- The Supreme Court held that the amount of damages from breach of a provision that requires payment of a specified amount is equal to the unpaid amount (not the “actual harm” to the non-breaching party). The opinion suggests that this should always be the result where (a) an agreement unambiguously provides for payment of a specified amount upon the occurrence of a specified action without consent and (b) the action is later taken without consent and the payment is not made. (We note that, in the context of a provision that does not provide for payment of a specified amount, the Court of Chancery’s approach--that is, basing damages on the actual harm to the nonbreaching party--should be applicable.)
- The decision highlights that drafters of agreements should seek to ensure clarity in provisions that require consent unless a specified payment is made. Care should be taken to clearly reflect the parties’ intentions with respect to both the consent requirement and the measure of damages in the event of a breach.
Background. Leaf Invenergy Company (“Leaf”), an investment fund vehicle, invested $30 million in a Series B investment round of Invenergy Wind LLC (“Invenergy”), a wind energy developer. The Series B notes provided for a preferred rate of return. The notes were later converted to equity and, as part of the conversion, the parties became subject to an LLC Agreement. The LLC Agreement prohibited Invenergy from effecting a “Material Partial Sale” (a defined type of sale of assets) of the LLC without Leaf’s consent unless when the sale closed Leaf’s LLC interest was redeemed for the “Target Multiple” (a defined premium rate of return on Leaf’s investment in the LLC). Invenergy later effected a $1.8 billion Material Partial Sale without obtaining Leaf’s consent or paying Leaf the Target Multiple. Leaf alleged breach by Invenergy, brought suit before the Court of Chancery, and sought redemption of its LLC interest for the Target Multiple. At the pleading stage of that litigation, the Court of Chancery held that Invenergy had breached the LLC Agreement by effecting the Material Partial Sale without Leaf’s consent. After trial to determine the damages, Vice Chancellor Laster awarded Leaf only nominal damages ($1) on the basis that Leaf had not suffered any “actual harm” because the asset sale had been at an “attractive price” that increased the value of its LLC units--thus, the Court of Chancery stated, Leaf was no worse off (in fact was better off) after the sale than it had been before it. Leaf appealed and the Delaware Supreme Court, in an opinion written by Justice Traynor, has reversed and awarded damages equal to the Target Multiple ($126.1 million).
The LLC Agreement. The relevant provision of the Invenergy LLC Agreement reads as follows:
- Section 8.4. … Without the prior written consent of [Leaf], [Invenergy] shall not: … participate in or permit a Material Partial Sale, unless the transaction giving rise to the Material Partial Sale yields cash proceeds equal to or greater than the amount that would provide [Leaf], as of the closing of such Material Partial Sale, with cash proceeds equal to or more than [the] Target Multiple with such Target Multiple to be paid upon such closing of the Material Partial Sale.
The Supreme Court disagreed with the Court of Chancery’s interpretation of the consent provision. In the litigation before the Court of Chancery, both parties acknowledged that (i) Invenergy had effected a Material Partial Sale without Leaf’s consent and (ii) their mutual expectation had been that, if Invenergy ever effected a Material Partial Sale without Leaf’s consent, Invenergy would pay Leaf the Target Multiple. The Court of Chancery awarded only nominal damages on the basis that, notwithstanding the parties’ “subjective expectations” that the Target Multiple would be paid in these circumstances, the LLC Agreement did not so provide. Under the Court of Chancery’s interpretation (as it was understood by the Supreme Court), the “unless” clause of Section 8.4 provided an “exception” to the prohibition on a sale without Leaf’s consent--thus, if Leaf’s consent were not obtained, Invenergy could (but was not required to) “invoke the exception” by paying the Target Multiple, and, if the Target Multiple were paid, there would not be a breach of the provision. Alternatively, however, in the Court of Chancery’s view, Invenergy could decide to “ignore” or “bypass” the consent requirement (that is, could decide to not obtain consent and not pay the Target Multiple) and then pay damages for breaching the provision based on the harm to Leaf. Invenergy’s choosing this alternative path constituted a permissible “efficient breach”--that is a decision that the economic benefits to it of breaching outweighed the cost of damages that it would have to pay.
The Supreme Court disagreed and interpreted Section 8.4 as “unambiguously” requiring payment of the Target Multiple if Invenergy effected a sale without Leaf’s consent. The Supreme Court viewed the provision as encompassing two obligations--one, not to effect a Material Partial Sale without Leaf’s consent, and two, to pay the Target Multiple if there were a sale without Leaf’s consent. The Supreme Court reasoned that the Court of Chancery’s analysis provided a remedy only for breach of the first obligation (i.e., not obtaining consent) and not for breach of the second obligation (i.e., not making payment). The Supreme Court rejected the Court of Chancery’s “efficient breach” concept. There is “no support in our case law” for using the concept of efficient breach to “circumvent a contractual obligation to pay a specified amount,” the Supreme Court wrote.
The Supreme Court disagreed with the Court of Chancery’s determination of damages. First, the Court of Chancery had determined that Leaf suffered no “actual harm” from Invenergy’s effecting the Material Partial Sale because the sale was at an “attractive price” that increased the value of Leaf’s LLC membership interest. According to the Court of Chancery, Leaf was no worse off--indeed (as a Leaf executive testified at the trial) was better off--after the Material Partial Sale was effected. The Supreme Court disagreed and stated that the “harm” done to Leaf was not an appropriate “frame of reference” for determining damages for breach of a contractually required payment amount--and therefore the increase in the value of its LLC interest was not relevant. Rather, the Supreme Court, noting that there were two obligations (one, not to sell without consent, and the other, to pay the Target Multiple if there were an unconsented sale), held that Leaf was entitled to the payment it had specifically bargained for in the event of an unconsented sale. “When considering the breach as a whole [(i.e., breach of both the consent obligation and the payment obligation)], what would most aptly repair that breach is Invenergy’s payment…of the amount it agreed it would pay for the right to engage in a Material Partial Sale without Leaf’s consent,” the Supreme Court wrote.
Second, the Court of Chancery had viewed the parties’ acknowledged mutual intention (that if Invenergy effected a Material Partial Sale without Leaf’s consent then Invenergy would pay Leaf the Target Multiple) as not relevant. The Court of Chancery had written: “The parties’ subjective beliefs about a remedy are not controlling unless they are implemented in a remedial provision in an agreement, such as a liquidated damages clause,” and, in this case, “the parties did not memorialize their subjective beliefs about the expected remedy in a contractual provision.” The Supreme Court disagreed and stated that damages clauses “are not the only ways for a contract to specify the damages flowing from a breach.” In this case, the Supreme Court stated, a liquidated damages clause would have been “superfluous given Invenergy’s contractual obligation to pay the Target Multiple.” The Supreme Court analogized Invenergy’s nonpayment to nonpayment by a purchaser of a company of part of the stated purchase price. In that case, the Supreme Court stated, the remedy would not be determined by what harm resulted to the seller (based on whether there had been an increase or decrease in value of the company as compared to the agreed purchase price). Rather, the purchaser would have to pay the full purchase price (without the need for a liquidated damages clause stating so).
The Supreme Court distinguished the GoodCents precedent cited by Invenergy. The 2017 GoodCents case involved a similar agreement provision but in a different context. In GoodCents, the company (seemingly to the surprise of the common shareholders, who owned 20% of the company) was sold for less than the liquidation preference of the preferred shareholders (who owned 80% of the company). Under the company’s charter, the preferred shareholders ordinarily could not receive a larger per-share payout than the common shareholders on an as-converted basis--however, some exceptions were provided. The case turned on interpretation of the charter provision that stated that the company could not effect a merger “without the affirmative vote of the holders of a majority of the Preferred Stock…unless the [merger agreement] provides that the consideration payable to the stockholders shall be distributed to the holders of capital stock of the corporation in accordance with [the preference clauses]” (which gave preferred shareholders a liquidation preference and other additional rights over the common shareholders). According to the preferred shareholders, they were entitled to senior claims equal to the liquidation preference on the merger consideration because, while they had voted in favor of the merger, they had not waived the preference clauses. The Court of Chancery disagreed with the preferred shareholders’ interpretation and held that the provision granted the preferred shareholders a class vote but not a right to the Liquidation Preference on a merger. The court ordered that the merger consideration be distributed pro rata to all of the shareholders.
In the discussion of GoodCents in the Invenergy opinion, the Supreme Court stated that the Court of Chancery had reached the right result in GoodCents in determining that the preferred shareholders were not entitled to the liquidation preference. This was the correct result, the Supreme Court stated, because the preferred shareholders had provided the affirmative vote in favor of the merger. If they had not approved the merger (i.e., if they had been in the same position as Leaf in not having provided consent), then they would have been entitled to the liquidation preference (just as Leaf was entitled to payment of the Target Multiple). The Supreme Court indicated that the Court of Chancery’s reasoning for the result it reached in awarding the liquidation preference in GoodCents was not clear and stated: “To the extent that GoodCents turns on an interpretation [of the GoodCents charter provision that it] cannot yield damages in the amount of the liquidation preference even in the absence of consent, we reject it.”
- Drafters should be clear in an agreement as to what the parties’ obligations are and what the consequences of breach are. In the case of an agreement provision where a party is prohibited from taking a specified action without the other party’s consent unless a specified payment is made, the parties should seek to ensure clarity as to whether, if the action is taken without the consent obtained, the breaching party is required to make the specified payment or not. If the parties intend that the payment will be made if the consent is not obtained, then, the clarity of the agreement will be enhanced if the parties specifically provide as much (either in the same provision or in a liquidated damages clause).
- Drafters should consider providing for reimbursement of legal fees in the event that contractually required amounts are not paid. Providing for recoupment of legal fees expended to enforce payment would help to disincentive a party’s decision to effect an “efficient breach” (i.e., not to pay on the theory that the worst that can happen is that a court will order payment).