C.A. No. 5110-VCG (Del. Ch. Nov. 4, 2011) (Glasscock, V.C.)
In this memorandum opinion, the Court of Chancery granted summary judgment in favor of the defendant in connection with an action brought by a stockholder representative claiming that, pursuant to the terms of a merger agreement, certain contingent payments to be made to the former stockholders of a target corporation upon the achievement of specified revenue and product development milestones of the acquired business should be accelerated as a result of a change of control of the acquired business. In reaching its decision, the Court applied the step transaction doctrine and found that a change of control of the acquired business had occurred under the terms of the merger agreement. The Court nevertheless concluded that the contingent payments should not be accelerated because certain obligations under the merger agreement associated with the acquired business were assumed by the purchaser of that business in accordance with the terms of the merger agreement.
At issue in the decision was the acquisition of GloNav, Inc. (“GloNav”) by NXP b.v. (“NXP”). The merger agreement provided for certain contingent payments to be made to former GloNav stockholders upon the achievement of certain specified revenue and product development milestones by the acquired business. The merger agreement also provided certain protections for the former GloNav stockholders by obligating NXP to develop an operating plan for the GloNav business that was aligned with the achievement of the milestones and to provide GloNav with the necessary tools and other resources to achieve those milestones. Additionally, the merger agreement provided that, in the event of certain transactions resulting in a change of control of NXP or the GloNav business, the person acquiring NXP or the GloNav business would be required either to accelerate the contingent payments or assume all the obligations associated with the contingent payments.
Around the same time that GloNav and NXP were negotiating the merger agreement, NXP also was engaged in discussions with STMicroelectronics (“ST”) with respect to the formation of a joint venture (the “ST Joint Venture”). Following the time that GloNav and NXP entered into the merger agreement, NXP and ST executed a joint venture agreement whereby NXP agreed to transfer the GloNav business to the joint venture in a two-step transaction. The first step of the transaction involved the formation of two wholly-owned subsidiaries by NXP and the contribution of the GloNav business to one of those subsidiaries. The second step involved the transfer by NXP of all of the shares of those subsidiaries to the ST Joint Venture in return for 20% of the shares of the ST Joint Venture and a sum of cash. Although NXP retained its payment obligations to GloNav, the joint venture agreement assigned NXP’s performance obligations under the GloNav merger agreement to the ST Joint Venture. NXP continued to make the contingent payments to GloNav as agreed.
Plaintiff argued that the transfer of the GloNav business to the ST Joint Venture constituted a change of control under the terms of the merger agreement and that the contingent payments must be accelerated because the ST Joint Venture did not assume any of the obligations under the merger agreement. Defendants responded that neither of the two steps standing alone constituted a change of control triggering the acceleration provisions under the merger agreement provisions and that, even if they did, the ST Joint Venture assumed the obligations under the merger agreement.
In determining whether the joint venture transaction triggered the acceleration provisions, the Court applied the step transaction doctrine to determine whether the two steps of the transaction should be viewed as part of the same transaction. The step transaction doctrine treats the “steps” in a series of separate but related transactions involving the transfer of property as one transaction if all of the steps are substantially linked. Courts use three different tests in applying the step transaction doctrine: (1) the end result test, which deems a series of transactions as a step transaction if the separate transactions were parts of a single transaction and all of the transactions had the same end goal; (2) the interdependence test, which analyzes whether the steps are independently significant or whether they only have meaning as part of a greater transaction; and (3) the binding commitment test, which deems a series of transactions as one transaction if, when the first step was entered into, there was a binding commitment to undertake the subsequent steps. The Court determined that, under all three tests, the two-step transaction by which NXP transferred the GloNav business to the ST Joint Venture was in fact a single-step transaction for purposes of the acceleration provisions of the merger agreement. The Court stated that the controlling principle in applying the step transaction doctrine in the construction of a contract was the effectuation of “the parties’ intentions as expressed in, or reasonably inferred from, their agreement.” The Court noted that to read the acceleration provisions as permitting NXP to circumvent the protections therein by using a subsidiary to transfer those assets to the ST Joint Venture would render those protections meaningless and illusory. The Court went on to state that, even if the step transaction doctrine did not apply, the Court should consider the two transactions at issue together as a matter of equity.
Upon ruling that the joint venture transaction triggered the acceleration provisions of the merger agreement, the Court confronted the question whether the contingent payments should be accelerated or whether the acquirer had assumed the obligations under the terms of the merger agreement. The Court recognized that the ST Joint Venture had assumed the performance obligations, but not the related payment obligations. While the Court acknowledged that the word “all” in the relevant provision of the merger agreement could be read in isolation to require that the ST Joint Venture assume both the performance and payment obligations, the Court determined that it must read the contract as a whole to derive the meaning therefrom and effectuate the parties’ intent. The intent of the parties was to avoid acceleration if the acquiring company took on NXP’s responsibility of continued support of GloNav, with the aim of reaching the milestones which resulted in the contingent payments. Noting that there was an independent contractual obligation for NXP to make the contingent payments, the Court found that it was irrelevant which entity ultimately made the contingent payments to GloNav, as long as the former GloNav stockholders continued to receive those payments in accordance with the merger agreement. Consistent therewith, the Court denied the plaintiff’s motion for summary judgment and granted the defendant’s motion for summary judgment.
The full opinion is available here.