C.A. No. 3598-VCL (Del. Ch. Dec. 24, 2009)
In this decision, the Court of Chancery held defendant Roberto Bengoa (“Bengoa”), a shareholder representative, in contempt for his “contumacious refusal” to pursue arbitration of certain accounting-related disputes arising out of an Agreement and Plan of Merger and Stock Purchase (the “Purchase Agreement”), as required under the Purchase Agreement and previously ordered by the Court. Plaintiff Aveta, Inc. (“Aveta”), acquired defendant Preferred Medicare Choice, Inc. (“PMC”), by, essentially, purchasing 51% of the issued and outstanding stock of PMC from its three principal shareholders, including Bengoa, who were party to the Purchase Agreement, and subsequently merging the two companies. After the closing, a dispute arose over the calculation of (i) the earn out payments to be made by Aveta to all of PMC’s shareholders as part of the overall consideration; (ii) the Post-Closing Adjustment Payment; and (iii) the adjustment for actual claims compared to those estimated at the time of closing. The Purchase Agreement contained a mechanism for resolving these accounting disputes: Bengoa, as the representative for all of the shareholders, would negotiate with Aveta, and if agreement could not be reached within 20 days, the dispute would be referred to Ernst & Young, or another mutually acceptable accounting firm, to make a final determination.
In this case, Bengoa and Aveta negotiated unsuccessfully and agreed to have Ernst & Young serve as the arbitrator. Thereafter, however, Bengoa refused to proceed with the arbitration on the basis that, among other things, he had not been provided with necessary materials to participate productively. For nearly a year, Aveta tried to satisfy those requests, but was unsuccessful. Eventually Aveta filed an action in the Court of Chancery seeking an order, which it obtained, compelling Bengoa to arbitrate. For ten months following that ruling, Aveta attempted to proceed with arbitration, but Bengoa responded with “a mix of open defiance, evasion, and obstruction,” resulting in Aveta filing the instant motion to enforce the Court’s prior ruling. The Court, ruling on that motion through this memorandum opinion, held Bengoa in contempt and found that it was Bengoa’s “contumacious conduct” that prevented the parties from moving forward with arbitration as the Court ordered. For example, (i) in an email from his counsel to Aveta, Bengoa “openly flouted his obligation to arbitrate the dispute over the Earn Out Payments,” even reserving the right to litigate; (ii) Bengoa evaded and obstructed Aveta’s efforts to arbitrate by claiming that he needed an advisor, but did nothing to engage one; and (iii) when Aveta filed its motion to enforce, Bengoa sought and was granted an extension to file a response, during which time his father and other shareholders filed an action in Puerto Rico in a coordinated effort to disrupt these proceedings. To remedy these acts of contempt, the Court imposed sanctions, including fining Bengoa $20,000 per day until the arbitration commences (if arbitration does not commence within 30 days of the decision); ordering Bengoa to bear all of the expenses, including attorneys’ fees, that Aveta has incurred due to Bengoa’s contempt (including expenses incurred in this proceeding and in connection with Aveta’s efforts to pursue the arbitration); ordering Bengoa to pay Aveta’s fees and expenses in the proceeding initiated in Puerto Rico, because, had Bengoa arbitrated the disputes as required, these other shareholders would not have been able to bring those claims; ordering Bengoa to incur 100% of the cost of Ernst & Young serving as the arbitrator; and holding that Bengoa can no longer dispute the earn out payments as calculated by Aveta.
The full opinion is available here.