C.A. No. 5074-VCL (Del. Ch. Sept. 20, 2010) (Vice Chancellor Laster)
In this opinion, the Court of Chancery granted plaintiff’s motion for summary judgment and denied defendant shareholders’ cross-motion for summary judgment, finding that the contractual process for calculating post-closing adjustments to plaintiff’s acquisition price for Preferred Medicare Choice Inc. (“PMC”) was binding on all former PMC shareholders. Aveta Inc. (“Aveta”), a Delaware corporation, acquired PMC, a Puerto Rico corporation in 2006. Part of the consideration to that transaction was subject to post-closing adjustments and potential earn-out payments. The transaction agreement, signed by the former controlling shareholders of PMC (the “Principal Shareholder Defendants”), included a procedure for calculating the post-closing adjustments whereby Aveta would initially determine the adjustment amount from PMC’s books and records and then submit its figure for review to former controlling shareholder Roberto L. Bengoa, the Principal Shareholder Defendants’ appointed “Shareholders’ Representative.” The transaction agreement also specified that any dispute over the post-closing adjustments would be settled through binding arbitration and that such arbitration would be handled by Ernst & Young LLP (“E&Y”).
The present dispute arose when 110 former PMC shareholders, consisting of the three Principal Shareholder Defendants and a large group of noncontrolling shareholders (the “Class B Defendants”), purported to revoke Bengoa’s representation. The Class B Defendants neither signed the transaction agreement, nor were required to vote in its favor. Instead, the agreement was approved using the voting power of the Class A shares owned by the Principal Shareholder Defendants. Each group of defendants also sought to avoid the contractual process for calculating the postclosing adjustments and earn-out outlined in the transaction agreement by relying on a term sheet (“the Total Proposal”) executed by Aveta and Bengoa during the post-closing dispute. The Total Proposal was a three-page, informal agreement outlining a potential framework for resolving disputes. The defendants believed the Total Proposal novated the transaction agreement. When Aveta sought to enforce a previous judgment by the Court of Chancery compelling Bengoa to arbitrate the post-closing adjustments dispute, the defendants filed an action in Puerto Rico advancing the above claims. Aveta then filed the present action in response and the Puerto Rico litigation was stayed pending the outcome here.
Turning first to the defendants’ ability to revoke Bengoa’s authority to serve as Shareholders’ Representative, the Court held that the Class A Principal Shareholder Defendants were “bound by Bengoa’s actions because they irrevocably appointed Bengoa as their agent pursuant to Section 13.2 of the Purchase Agreement, which each of the [Principal Shareholder Defendants] signed.” That delegation was “clear and unambiguous,” and it implicated the interests of Aveta, which bargained for the right to negotiate with Bengoa during the post-closing adjustments. Regarding the Class B Defendants, who did not sign the agreement, the Court held that corporate law, rather than agency law, dictated the same result. Because part of the transaction in 2006 involved the merger of two Puerto Rico corporations, the domestic law of that territory governed the corporate mechanics of the merger. Section 3051 of the Puerto Rico General Corporation Law, which at the time of the merger paralleled Section 251 of the Delaware General Corporation Law, stated: “Any of the terms of the agreement of merger or consolidation may depend upon facts ascertainable outside of such agreement; provided that the manner in which such facts shall affect the terms of the agreement, is clearly and expressly set forth in the agreement of merger or consolidation.” While this provision was subsequently revised in 2006, under either version the Court found that the post-closing adjustments and earn-off “easily qualify as provisions dependent on ‘facts ascertainable outside of the merger agreement,’” such as financial figures from PMC’s books and records, and that the “methods for deriving those amounts are ‘clearly and expressly set forth in the agreement of merger or consolidation.’” Thus, it was inconsequential whether Bengoa received authority under the transaction agreement to represent the Class B Defendants as a matter of agency law because Section 3051 authorized the agreement to appoint Bengoa to follow the procedures outlined in the agreement.
In deciding whether the Total Proposal novated or amended the transaction agreement such that the defendants would not be bound by the postclosing adjustments, the Court referenced its December 24, 2009 decision holding Bengoa in contempt for refusing to arbitrate. In that decision, the Court held that the Total Proposal was nothing more than “an unenforceable agreement to agree” and could be read sensibly only in conjunction with the transaction agreement. Finding that the Principal Shareholder Defendants were in privity with Bengoa, the Court applied the doctrine of res judicata to prevent them from raising the same claim. As for the Class B Defendants, the Court stated that res judicata may also apply, but the argument was more appropriately dismissed under stare decisis. While Aveta advanced additional reasons why the Total Proposal was not a binding agreement, the “Class B Defendants have not suggested how their claims ‘are distinguishable from those adjudicated [in the Contempt Decision].’”
After holding that the defendants are bound by the post-closing adjustments, the Court then rejected the defendants’ argument that they should be permitted to intervene in the potential E&Y arbitration. In addition to harming Aveta’s reliance interest in the provisions agreed upon, the Court also found that allowing such participation “would rewrite the Purchase Agreement to craft a different set of procedures for determining how certain ‘facts ascertainable outside of such agreement . . . shall affect the terms of the agreement.’” The provisions would then fail to be “clearly and expressly set forth” as Section 3051 requires.
Finally, the Court held that the defendants breached the forum selection provision in the transaction agreement when they filed suit in Puerto Rico. The Principal Shareholder Defendants signed the agreement and were thus bound directly, while the “Class B Defendants bound themselves by their conduct.” According to the Court, the Class B Defendants could not sue to recover the earn-out payments under the Total Proposal without invoking the terms of the transaction agreement that the Total Proposal allegedly modified. Having done so, the Class B Defendants were obligated under the forum selection provision, which required that all claims be brought in Delaware. By attempting to “have it both ways,” the defendants forced Aveta into “duplicative and unnecessary litigation in Puerto Rico,” and the Court therefore held the defendants jointly and severally liable for the expenses Aveta incurred in the Puerto Rico action, as well as the litigation presently before the Court.
The full opinion is available here.