Glidepath Limited v. Beumer Corporation ( 2019 )

EFiled: Feb 21 2019 08:00AM EST
Transaction ID 62987268
Case No. 12220-VCL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GLIDEPATH LIMITED and SIR KEN )
STEVENS, KNZM, )
)
Plaintiffs, )
)
v. ) C.A. No. 12220-VCL
)
BEUMER CORPORATION, GLIDEPATH )
LLC, THOMAS DALSTEIN, and FINN )
PEDERSEN, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: November 26, 2018
Date Decided: February 21, 2019
Francis G.X. Pileggi, Gary W. Lipkin, Alexandra D. Rogin, ECKERT SEAMANS
CHERIN & MELLOTT, LLC, Wilmington, Delaware; Attorneys for Plaintiffs.
Benjamin A. Smyth, McCARTER & ENGLISH, LLP, Wilmington, Delaware; William D.
Wallach, McCARTER & ENGLISH, LLP, Newark, New Jersey; Attorneys for Defendants.
LASTER, V.C.
Glidepath LLC (the “Company”) is a Delaware limited liability company. The
plaintiffs sold the Company to defendant Beumer Corporation (the “Buyer”) in a two-stage
transaction. In the first stage, the Buyer purchased a 60% member interest in the Company
from the plaintiffs and took over management of the Company’s operations. A period of
shared ownership followed. To complete the second stage, either party could exercise an
option under a reciprocal put-call mechanism. The Buyer exercised its call and acquired
the plaintiffs’ remaining 40% member interest.
The bulk of the purchase price took the form of contingent payments based on the
Company’s performance over a three-year period. When the Company’s performance did
not warrant any additional payment, the plaintiffs filed suit.
The plaintiffs claim that the Buyer and the two individual defendants breached
express provisions in the transaction documents and violated the implied covenant of good
faith and fair dealing, which the plaintiffs say should result in an award of damages equal
to the contingent consideration. This decision rejects those theories.
The plaintiffs also claim that the Buyer and its representatives breached their
fiduciary duties while managing the Company. The plaintiffs again seek damages equal to
the contingent consideration. This decision agrees that the Buyer and its representatives
owed fiduciary duties to the Company and its members, but holds that those duties did not
include any obligation to ensure that the plaintiffs received the contingent consideration.
Recognizing that the Buyer and its representatives faced a conflict of interest when
managing the Company because of the divergent incentives created by the Buyer’s
contractual obligations, this decision nevertheless holds that the Buyer and its
representatives properly sought to maximize the long-term value of the Company. The
defendants’ actions were entirely fair.
In a pre-trial ruling on a motion for summary judgment, the plaintiffs obtained an
order finding that the Buyer breached the transaction agreements in three respects. The
plaintiffs seek damages for those breaches. Two warrant only nominal awards. The third
warrants damages of $377,282.57, plus pre- and post-judgment interest at the legal rate.
The plaintiffs’ final claim is for breach of an exclusive territory provision. This
provision binds the plaintiffs; it does not apply to the defendants.
I. FACTUAL BACKGROUND
Trial took place over four days. The parties submitted 354 exhibits and lodged
eighteen depositions. Eight fact witnesses and two experts testified live at trial. The parties
proved the following facts by a preponderance of the evidence.1
A. The Players
The Company designs, installs, and maintains baggage-handling systems at airports
in the United States. Before the events giving rise to this litigation, the Company was a
wholly owned subsidiary of Glidepath Ltd. (“Seller Parent”), which designs, installs, and
maintains baggage-handling systems at airports around the world. Plaintiff Ken Stevens
controls Seller Parent. This decision refers to Stevens and Seller Parent jointly as the
1
Citations in the form “[Name] Tr.” refer to witness testimony from the trial
transcript. Citations in the form “[Name] Dep.” refer to witness testimony from a
deposition transcript. Citations in the form “JX __ at __” refer to trial exhibits using the
JX-based page numbers generated for trial.
2
“Sellers.”
The Buyer designs, installs, and maintains baggage-handling systems at airports in
the United States. The Buyer is a subsidiary of BEUMER Group GmbH & Co. KG (“Buyer
Parent”), which designs, installs, and maintains baggage-handling systems at airports
around the world. Dr. Christoph Beumer controls Buyer Parent.
At the risk of oversimplification, baggage-handling systems come in two types:
traditional systems and next-generation systems. Manufacturers build baggage-handling
systems using two measurement standards: the Imperial system and the metric system.
During the period relevant to the parties’ dispute, traditional systems using Imperial
measurements dominated the market for baggage-handling systems in the United States.
American airports were slow to embrace next-generation systems, which have a higher
upfront cost. Decision-makers at American airports also harbored skepticism about the
reliability of next-generation systems, recalling the problems at the Denver International
Airport when it attempted to implement one many years before.
Buyer Parent was a market leader in next-generation systems, but Buyer Parent had
enjoyed its principal success outside of the United States. The Buyer had limited
experience contracting in the United States and even less experience designing, supplying,
and maintaining traditional systems that used Imperial measurements. As a result, the
Buyer struggled to penetrate the American market.
The Company was skilled in designing, supplying, and maintaining traditional
systems that used Imperial measurements, and it had established itself as a significant
player in the US market. But the Company was struggling financially. To secure a job
3
installing or maintaining a baggage-handling system, a contractor typically must supply a
performance bond. The contractor’s financial strength determines the amount of bonding
capacity it can obtain. The Company lacked the financial strength necessary to support
significant bonding capacity, which limited the Company’s ability to win jobs.2
During the fiscal year that ended on March 31, 2012, the Company suffered a net
loss of approximately $4 million.3 Because of these poor results, Stevens wanted to sell the
Company.4
B. The Buyer Approaches The Company.
In summer 2012, the Buyer contacted Stevens about the Company. The Buyer saw
an acquisition as a means of expanding its American footprint.5 The Buyer also believed
that with its financial backing, the Company would be able to compete for larger jobs that
could incorporate next-generation components.6
2
See Stevens Tr. 14–15 (referring to bonding as “one of the big issues” and
lamenting that the Company historically had “[f]ailed to realize the importance of securing
the commensurate amount of bonding and the style of bonding that is unique to the U.S.”);
see also Bryan Tr. 606 (agreeing that prior to the transaction the Company “didn’t have a
lot of access to bonding”).
3
Hufnagel Tr. 768–69; see Barr Tr. 562–63.
4
Stevens Tr. 11–12; see JX 7 at 3 (“The company went through some difficult times
over the last three years, with heavy losses and a comprehensive restructuring program.”).
The Company faced other problems as well, such as going without a CEO from 2011 until
2013. See Stevens Tr. 129–31.
5
See Stevens Tr. 13, 64; Barr Tr. 563–67; see also JX 4 at 9; Pedersen Tr. 887–88.
6
See Dalstein Tr. 1096 (testifying that the “main reason” for the transaction was to
take on American projects combining next-generation and traditional components); JX 4
at 9 (anticipating “strengthening of competitive position vis-à-vis current leaders in the
4
Stevens understood why the Buyer was interested in the Company, and he played
up the Company’s ability to help the Buyer meet its goals.7 In a July 2012 presentation to
the Buyer, Stevens argued that a post-acquisition Company could sell both traditional and
next-generation systems.8 His presentation identified thirteen large prospects that could
involve next-generation systems, including a “Favored Project” at Denver International
Airport worth $30 million and bigger projects in Boston and Newark.9 Stevens argued that
pursuing these projects had advantages, because “[c]ompetition is less intense at [the large-
projects] level and correspondingly, margins are higher.”10
market for >$20M BHS projects, together with jump-start of imperial format conveyor
portfolio”); JX 6 at 2 (“Assume strategy in Airports is to win projects >$20m where we
can offer ‘new’ technologies together with conveyors and, initially, only take 100%
conveyor projects <$20M.”); JX 10 at 2.
7
See Stevens Tr. 141–46; JX 11 at 16, 22.
8
See JX 11 at 18 (touting the Company’s “plant and staff, complete product suite,
effective sales force, essential contract and business licenses and market positioning to
sustain a $40 million plus operation and extend Beumer’s competitive positioning at both
ends of the market”); id. at 22 (“The arrival of Beumer into the USA brings truly world-
class equipment to the market in the high technology arena.”); id. (“The ability to target
the wider market and bid for higher scale projects will provide a distinct, appealing and
valuable offering. It is in this area that synergies and benefits from consolidation can be
sustained and will be realized which will enable the larger more capable organization to
prosper.”); Stevens Tr. 140–42; JX 4 at 7.
9
See JX 11 at 24; see also id. at 26 (listing small and medium prospects).
10
Id. at 16; see id. at 22 (“[The Company], with its reputation for excellence in
completing small to medium sized projects, is capable of contributing strategic and
competitive advantages to a larger entity such as Beumer which primarily operates at the
higher end of the market where there are less players and the margins are better.”); see also
Pedersen Tr. 986–87.
5
But pursuing these projects would be a new frontier for the Company, which had a
policy of not attempting projects valued at over $12 million.11 Although the Company had
captured roughly one-third of the American market for mid-sized projects in the $5–$10
million range, it historically could not compete for larger projects valued at over $20
million and had only taken on three projects in the $25 million category in its entire
history.12
C. The Terms Of The Transaction
Stevens offered to sell the Company for $5.5 million in cash. The Buyer thought it
was worth much less. To bridge the valuation gap, the Buyer suggested an earn out.13
In January 2013, the parties reached an agreement in principle, memorialized in a
11
See JX 11 at 14 (“The board of [the Company] restricts it to medium sized airport
projects in the $1 million to $12 million price band.”); Stevens Tr. 148–49 (“Q. It would
have been difficult, if not impossible, to undertake more than one project greater than $12
million at the same time? A. Yes.”); see also Hufnagel Tr. 737.
12
JX 4 at 7–8; see JX 11 at 16.
13
See JX 7 at 6 (“[The Buyer] proposed an initial investment of $1 million for 60%
of the shares, via a three year earn out [Stevens] could receive another max. [$2.5 million]
out of the retained earnings, if the company makes a profit. After the three year period both
parties have a call/put option. Via this methodology the total purchase price after three
years is max. [$6 million] and Glidepath owner is participating in this risk.”); JX 6 at 2
(“What we know at this point $5.5m is much too high. $2.9m assets we also need to verify.
Goodwill almost zero due to the losses.”); Hufnagel Tr. 805 (“[The Buyer’s and the
Sellers’] evaluations and the expectations differed widely. This is why we came to the
conclusion of doing an earnout.”); see also JX 6 at 2 (considering whether the Buyer would
have to “fund[] losses in 2012/13 and 2013/14” and suggesting plan “to at least break even
next year after integration costs”); Barr Tr. 575 (discussing need for Sellers “to have some
skin in the game”).
6
term sheet, on a transaction that included a package of contingent consideration.14 They
hoped to close the transaction immediately after the Company’s 2013 fiscal year, which
ended in March.15 With that goal in mind, they moved quickly to negotiate binding
transaction documents.16
In a decision that would redound profoundly to their detriment, the Sellers did not
formally involve outside counsel and did not retain counsel in the United States.17 Stevens
consulted at times with a New Zealand solicitor, but the solicitor did not play a meaningful
role in the negotiations.18 In substance, Stevens and his colleague, Wayne Collins,
attempted to handle everything themselves, including both the business negotiations and
the legal documentation.
The Buyer took a different approach. The Buyer’s CEO, Dr. Thomas Dalstein, led
the business negotiations. Buyer Parent’s CFO, Norbert Hufnagel, assisted him. The
Buyer’s outside counsel took primary responsibility for drafting the deal documents.19
14
JX 12.
15
See id. at 3; Stevens Tr. 20; Barr Tr. 570.
16
See JX 14 at 2–3 (email exchanges negotiating provisions and memorializing the
Buyer’s intention “to have the first drafts of the various agreements to you [the Sellers]
around the 12th feb”).
17
See Stevens Tr. 119–20; Collins Tr. 221; Hufnagel Tr. 805.
18
See Stevens Tr. 119.
19
See JX 351 (draft agreements received from Buyer Parent’s German counsel).
7
By the end of March 2013, the transaction documents were substantially complete.20
The two principal documents were a Membership Interest Acquisition Agreement (the
“Acquisition Agreement”) and an Amended and Restated Operating Agreement (the
“Operating Agreement”). The Acquisition Agreement governed the first-stage transaction
in which the Buyer acquired a 60% member interest in the Company from Seller Parent.
The Operating Agreement governed the internal affairs of the Company during a period of
shared ownership, culminating in a second-stage transaction in which the Buyer completed
the acquisition. The mechanism for the Buyer to acquire Seller Parent’s remaining 40%
member interest was a reciprocal put-call mechanism (the “Put-Call Option”). As between
the parties, it was virtually inevitable that one side or the other would exercise the Put-Call
Option. If the option price undervalued the remaining 40% member interest in the
Company, then the Buyer would exercise its call. If the option price overvalued the
remaining 40% member interest in the Company, then Seller Parent would exercise its put.
The Acquisition Agreement specified that in exchange for its 60% member interest,
the Buyer would pay Seller Parent $1 million in cash at closing, plus two forms of
contingent consideration. The first was an earn-out payment of up to $1.56 million (the
“Earn Out”) based on the Company’s performance during “fiscal years 2014, 2015 and
2016” (the “Earn Out Period”).21 The second was a distribution equal to 40% of the
20
See JX 19 at 2; Stevens Tr. 125.
21
JX 61 §§ 3.1.1, 3.2.1, 3.2.2.
8
Company’s net profit during the Earn Out Period, up to a maximum of $1.04 million (the
“Profit Distribution”).22 In combination, the Earn Out and the Profit Distribution entitled
Seller Parent to an amount equal to the Net Profit during the Earn Out Period, capped at
$2.6 million, with 60% of the Net Profit paid by the Buyer under the Earn Out and 40%
paid by the Company through the Profit Distribution.
Through the Put-Call Option, the Operating Agreement provided for the balance of
the contingent consideration. Regardless of which side exercised the option, the
consideration consisted of a fixed payment of $400,000, plus a variable portion of up to $2
million tied to the Company’s performance during the Earn Out Period.23 In the aggregate,
the consideration received by Seller Parent from the $1 million at closing, the Earn Out,
the Profit Distribution, and the Put-Call Option could not exceed $6 million.24 The
Acquisition Agreement also provided that Seller Parent would receive payments pegged to
the size of the Company’s bank balance on two specified dates.25
This decision refers to the Earn Out, the Profit Distribution, and the Put-Call Option
as the “Contingent Consideration.” The parties typically referred to these components
colloquially as the “earn out.”
Id. § 3.4.1. The Acquisition Agreement defined the “Net Profit” as “the profit of
22
the Company remaining after taxes have been paid for the Company and its members.” Id.
at 6.
23
See JX 65 § 8.3.3.
24
JX 61 § 3.4.3.
25
Id. §§ 3.1.3, 3.1.4.
9
During the period of joint ownership, the Operating Agreement established a
manager-managed governance structure in which a single Manager would exercise “the
powers of the Company,” manage its “business and affairs,” and “make all decisions and
take all actions for the Company . . . .”26 The Buyer had the right to appoint the Manager.27
The Operating Agreement did not modify or eliminate the Manager’s fiduciary duties. It
did contain two internally inconsistent exculpatory provisions, one of which granted
exculpation for breaches of the duty of care, while the other retained liability for gross
negligence.28
Consistent with the manager-managed structure, the Operating Agreement provided
that no individual member would have the right, power, or authority to act for or on behalf
26
JX 65 § 5.1.3.
27
Id. § 5.1.2.
28
Compare id. § 5.4 (“The Manager of the Company shall not be personally liable
to the Company or its Members for monetary damages for breach of the duty of care or
other duty as a Manager; provided, however, that to the extent required by applicable law,
this Section shall not eliminate or limit the liability or the Manager (i) for any appropriation
in violation of his or her duties, of any business opportunity of the Company, (ii) for acts
or omissions which involve intentional misconduct or a knowing violation of law, or (iii)
for any transaction from which the Manager derived a personal benefit in violation or
breach of any provision of any written agreement of the Company.”), with id. § 6 (“Neither
the Manager, nor any Member, nor any other officer of the Company shall have any
liability to the Company or to any Member for any loss suffered by the Company which
arises out of any action or inaction of any such Manager, Member or officer if such
Manager, Member or officer, in good faith, determined that such course of conduct was in
the best interest of the Company and such course of conduct did not constitute gross
negligence or willful misconduct of such Manager, Member or officer.”).
10
of the Company, or to take any action that would bind the Company. 29 Notwithstanding
the otherwise plenary grant of authority to the Manager, two sections of the Operating
Agreement specified lists of actions that the Manager could not take without member
approval. The first section identified major actions that the Manager could not take without
the affirmative vote of members holding a 75% member interest in the Company. These
actions included matters such as dissolving the Company, amending its certificate of
formation, changing the legal form of the company, and admitting new members.30
More importantly for the present case, a second section specified a list of operational
activities that the Manager could not take without the prior written consent of members
holding a majority interest.31 The list identified the following items:
(i) The appointment and/or removal of the next management level
29
Id. § 5.1.1 (“No individual Member has the right, power, or authority to act for or
on behalf of the Company, to do any act that would be binding on the Company, or to incur
any expenditures on behalf of the Company.”); id. § 5.1.3 (“No individual Member (other
than in the capacity of the Manager or an officer acting pursuant to this Section 5) shall
have the right, power, or authority to act for or on behalf of the Company, to do any act
that would be binding on the Company, or to incur any expenditures on behalf of the
Company.”).
30
Id. § 5.2.2.
31
Id. § 5.2.3. The provision states that these actions require “the prior, written
consent of the Members . . . .” Id. The Operating Agreement stated that unless another
section provided otherwise, “all decisions of the Members of the Company shall be decided
by a majority of the votes cast (or by such greater percentage as may be required by the
Act or other applicable laws).” Id. § 5.2.4; see 6 Del. C. § 18-402 (establishing default
standard for member action requiring approval from holders of a majority of the interests
in profits); Obeid v. Hogan, 2016 WL 3356851, at *18–20 (Del. Ch. June 10, 2016)
(rejecting argument that comparable language required unanimous approval by the
members).
11
below the Manager;
(ii) Any single capital expenditure or disposition above $10,000.00;
(iii) Any single contract above $3,000,000.00;
(iv) Entry into any project contract as to which the aggregate liability
of the Company is not capped at an amount of 50% or less of the
contract value;
(v) Any bid bond above $200,000.00 and any performance bond
above $2,000,000.00;
(vi) Any cash-negative project with an aggregate negative cash
position of $1,000,000.00 at any point in the contract;
(vii) Any project with a gross profit level below 10%;
(viii) Any material deviation from the Business Plan; and
(ix) Entering any agency or representative agreements.32
Notably, the Operating Agreement provided that for purposes of this list of actions, the
members had delegated their voting rights to Dalstein, who had “the power to act on their
behalf . . . and . . . shall take on their behalf any action otherwise required to be taken by
the Members . . . .”33 As a result, Dalstein had the ability to veto any of the identified
actions by blocking them at the member level. Equally important, Dalstein had the ability
to authorize the Manager to take any of these actions, because the Operating Agreement
provided that once the necessary member vote had been obtained, “then any such decision
or consent shall constitute a decision or action by the Manager . . . and shall be binding on
32
JX 65 § 5.2.3 (formatting added).
33
Id. § 5.2.5.
12
each Manager, Member, officer and employee of the Company . . . .”34 This decision refers
to the members’ ability to veto or authorize material operational activities, with Dalstein
controlling the outcome, as the “Member Authorization Provision.”
Dalstein’s ability to veto or authorize operational matters under the Member
Authorization Provision diminished the protection afforded to the Sellers by the only other
limitation in the Operating Agreement on the Manager’s authority: compliance with the
Company’s business plan (the “Business Plan”). The Operating Agreement provided that
[t]he Manager shall prepare an updated Business Plan for the Company on a
calendar year or fiscal year basis. Such Business Plan (the “Business Plan”)
shall set forth all material activities of the Company in reasonable detail,
provide a budget and specify strategic plans of the Company for the ensuing
year. The Manager shall at all times act within the Business Plan and within
the Manager’s limits of authority set forth therein.35
But by exercising his delegated authority under the Member Authorization Provision,
Dalstein could authorize a “material deviation from the Business Plan.”36
The Operating Agreement only called for the members to meet once per year,
although any member holding at least a 10% member interest (viz., either of them) could
call a special meeting on not less than 10 days’ nor more than 60 days’ notice. The
Operating Agreement specified that at any meeting of members, the Buyer would be
represented by Dalstein, Hufnagel, and Beumer. The Sellers would be represented by
34
Id. § 5.2.1.
35
Id. § 5.1.3.
36
Id. § 5.2.3(viii).
13
Stevens and Collins.37 The parties have referred to this group as the “Advisory Board.”
The Operating Agreement imposed only one affirmative obligation on the Buyer:
“[The Buyer] shall support the Company with the realization of the Business Plan by way
of its bonding line.”38 Otherwise, neither the Operating Agreement nor the Acquisition
Agreement identified any actions that the Buyer or Buyer Parent had to take to enhance the
likelihood that the Sellers would receive the Contingent Consideration.
D. The Buyer Postpones The Closing.
In spring 2013, the Buyer postponed the closing. Buyer Parent wanted the Buyer to
be able to fund the $1 million payment due at closing out of cash on hand, which the Buyer
was not yet able to do. Buyer Parent also wanted the Buyer to have an individual ready to
take over as Manager, but the Buyer had not yet identified a suitable candidate.39
Stevens recognized that the postponement could affect the Contingent
Consideration, particularly because the Company continued to struggle financially. 40 After
two years during which the Company’s CEO position had gone unfilled, Collins took over
37
Id. § 7.6.5.
38
Id. § 2.5.
39
Hufnagel Tr. 765–66; see also Hufnagel Dep. 105–09.
40
See JX 21 at 2 (Stevens writing in May 2013: “[C]racks are appearing in the
structure, staff are looking to us to make decisions and we need to increase our sales
effort.”); id. at 3 (“I am worried about time drifting on, staff in Dallas looking to me for
leadership. And I need to protect my earn out.”); see also JX 47 at 4 (Stevens discussing
delayed closing’s implications for purchase price); JX 50 at 5 (Stevens discussing “very
soft” 2013 sales performance).
14
as acting CEO in June 2013, but he had no prior experience running an American baggage-
handling company.41 On his watch, the Company experienced significant cost overruns.42
Ultimately, 2013 fell short of expectations.
E. The Transaction Closes.
By November 2013, the Buyer had accumulated the cash necessary to fund the
closing payment. The Buyer also had identified defendant Finn Pedersen, an individual
affiliated with Buyer Parent, as the Manager.43 With these requirements met, the parties
targeted a closing in January 2014.44
On January 10, Collins sent signature pages to Stevens to be signed and held in
escrow pending closing.45 When the Buyer’s counsel continued to make minor comments
on the agreements, Collins complained to Dalstein: “Enough is enough, we have our
commercial agreement based on the mutual trust between us, let’s get on with it.”46
On January 16, 2014, Collins released the signature pages from escrow, and the
41
Stevens Tr. 129–31.
42
JX 29 at 2.
43
See JX 37 at 2; Hufnagel Tr. 810–12.
44
See JX 39 at 2.
45
JX 52 at 2.
46
JX 60 at 2.
15
transaction closed.47 Neither Stevens nor Collins reviewed the documents again.48 Stevens
was on vacation and relied on Collins.49
F. Early Indications Regarding The Buyer’s Strategy
Soon after the deal closed, the Sellers received indications that the Buyer intended
to reorient the Company towards larger projects that offered higher profit margins, the
ability to negotiate terms and conditions, and the potential inclusion of next-generation
components. That should have come as no surprise to the Sellers, because the Buyer had
made clear during the deal negotiations that it wanted to pursue these goals, and Stevens
had pitched the Company to the Buyer as a means of achieving them.
The first indication involved a project for a traditional baggage-handling system at
John Wayne Airport in Orange County, California.50 When the deal closed, the Company
was preparing its bid and needed a performance bond. The Buyer tried to obtain a bond
through the Company’s broker, but could not secure enough capacity without a guarantee
from Buyer Parent.51 Buyer Parent decided that “a parent-company guarantee should be
47
JX 62–63.
48
Stevens Tr. 28–29; Collins Tr. 221–23, 261.
49
Stevens Tr. 29–30.
50
Barr. Tr. 710.
51
JX 56 at 3–4; see JX 67.
16
avoided”52 and asked the Buyer to look at international options for bonding.53
After analyzing the terms of the John Wayne bid, the Buyer concluded that the
project was too risky. The terms and conditions were non-negotiable, and the key to success
was making the lowest bid, which squeezed the profit margin.54 Dalstein decided that the
Company would not bid on the project—which he had the power to do under the Member
Authorization Provision.55 Collins became upset, because historically the Company had
bid on projects like the John Wayne opportunity.56 Collins objected that if the Company
changed its strategy, then “it could have serious repercussions [for the] Earn Out.”57
On January 29, 2014, after meeting with the bid team, Dalstein reversed course.58
The Company obtained bonding from Buyer Parent and ultimately won the bid.59
The second indication involved Denver International Airport. When the deal closed,
52
JX 56 at 3; see JX 70.
See JX 56 at 4 (“In the future aim should be to keep the liability for US business
53
in USA.”); see also JX 77 at 4.
54
See JX 69; JX 75 at 2–3.
55
JX 75 at 2–3.
56
See id. at 2.
57
Id.
58
JX 78; JX 81; see Dalstein Tr. 1127–29.
59
JX 140 at 3; JX 299 at 27; see JX 348; see also Graviet Tr. 361 (“Q. This is an
instance where the buyer listened to the specific recommendation, deferred to the people
in Dallas [i.e., management], and the bid was successfully submitted; right? A. Yes.”).
17
Denver was preparing to solicit bids for the major baggage-handling project that Stevens
had identified as a “Favored Project” when pitching the Buyer on the Company.60 Collins
did not believe the Company should bid, and he omitted the Denver opportunity from a
spreadsheet that identified the Company’s pipeline and backlog.61 The Buyer proposed
adding Denver and a similar project at San Francisco International Airport, noting that each
would include both a next-generation component and a traditional component.62
G. Pedersen Takes Over.
In mid-February 2014, Pedersen took over from Collins and assumed the position
of Manager under the Operating Agreement.63 By early March, Stevens and Collins felt
left in the dark. They were accustomed to total control over the Company, but now
Pedersen was running the show.64
Pedersen encouraged Dalstein to meet with Collins and reach agreement on how the
Company would be operated. Dalstein pointed out that the Buyer owned 60% of the
member interests and had the authority to operate the business. He recognized that
“important decisions” would require “a common understanding” between the Sellers and
60
See JX 81 at 3.
61
JX 93; see also JX 97 (discussing which prospects required bid bonds).
62
JX 94.
63
Stevens Tr. 130–31.
64
See JX 101.
18
the Buyer, but stressed that it was the Buyer and Pedersen who managed the business.65
One of Pedersen’s first tasks was to update the Business Plan that was incorporated
by reference in the Acquisition Agreement (the “Acquisition Plan”). 66 The Buyer and the
Sellers had jointly developed the Acquisition Plan during their negotiations in early 2012,
before the closing was delayed. It consisted of a one-page spreadsheet, with columns for
each fiscal year from 2013 through 2016, and rows labeled order intake, secured sales,
revenue, contribution margin, indirect expense, gross margin, SG&A, and EBIT. 67 The
plan divided the projected sales figures into four categories: “BHS Large projects
(>$15M),” “BHS Small projects (<$15M),” “BHS Manufacturing,” and “CSS Service &
Support.” For FY 2014, the plan anticipated an order intake of $25 million from large
projects and $16 million from small projects. For FY 2015, the plan anticipated an order
intake of $35 million from large projects and $12 million from small projects. Four
explanatory bullet points appeared the bottom of the page:
 “Revenue figures are [Company] stand-alone and do not include revenue from tote,
DCV, or tilt tray systems” (i.e., next-generation systems);
 “Revenue growth driven by complementary applications with BEUMER Group
Logistics—Airports technologies and after-market (customer support/service) /
base load development”;
 “Margin quality improvement driven by prize realization (i.e., market selectivity),
cost-savings and process synergies, and mix development (i.e., after-market / base
65
JX 111.
66
See JX 61, Schedule 4.2(v).
67
JX 61 § 4.2(v); see id. at Schedule 4.2(v); id. § 1.2.5 (“The Schedules form an
integral part of this Agreement and are incorporated by reference.”).
19
load development)”; and
 “EBIT growth driven by margin quality improvement and BEP (break-even point)
development).”68
Dalstein wanted Pedersen to prepare a new plan that took into account the delayed
closing and observed that “[b]asically we can move all numbers by almost one year.”69
Pedersen worked on the new plan with Eddie Perez, the Company’s CFO, and Christopher
Bryan, the Buyer’s CFO. They initially developed a plan that called for growth in EBIT of
1.2% in 2014 with accelerated growth in 2015 and beyond,70 but they worried that Stevens
and Collins would object to the plan because the projected results would not generate the
maximum Contingent Consideration.71 Perez modified the plan to contemplate more
aggressive results in 2015, but the plan still would not achieve the near-term results
required to maximize the Contingent Consideration.72
Pedersen presented the new Business Plan at the first meeting of the Advisory
Board, which took place on March 25, 2014. The plan projected Net Profit of $290,096 in
2014, and $2,083,737 in 2015.73 Compared to the Acquisition Plan, the new Business Plan
68
Id. at Schedule 4.2(v).
69
JX 113 at 2.
70
JX 116 at 5.
71
Id. at 4.
72
See id. at 2–3.
73
JX 117 at 26.
20
emphasized the Company’s long-term prospects.74 Stevens and Collins expressed concerns
about the plan, including the inclusion of integration costs. They objected that the Buyer
was treating the Company as if it was “suddenly 100% BEUMER.”75
The Advisory Board held another meeting on May 22–23, 2014. The year-to-date
financial results were poor.76 Stevens and Collins felt that the Company was turning down
jobs that it historically would have pursued. The Buyer felt the Company was making
sound business decisions by emphasizing larger projects with the potential for higher
margins and negotiable terms and conditions.77
H. The Chicago Project
An opportunity at O’Hare International Airport in Chicago suited the Company’s
new strategy: It was valued at $20–30 million, offered higher margins, and the terms and
74
See id. at 11, 13, 17, 31, 33.
75
JX 125 at 4; see also JX 101 (Collins complaining that “the integration has all the
feel of the integration of a 100% owned Beumer subsidiary when of course it is a 50/50
joint venture for the next three years.”); Stevens Tr. 175 (testifying that the Company was
“intended to be all along for the full three years of the earn-out a 50-50 . . . joint venture,
maybe not financially but 50-50 in control”). Collins and Stevens misunderstood the deal
they had agreed to in the Operating Agreement. The Company was a 60/40 joint venture
in which the Buyer had control, both by virtue of its right to appoint the Manager and
through the Member Authorization Provision.
76
JX 147 at 7; JX 148 at 5.
77
See JX 153.
21
conditions were negotiable.78 But in June 2014, after Pedersen and the Company had been
working on the Chicago bid for a month, problems emerged.79 The work needed to be
completed on a faster schedule, and to meet it, the Company would have to preorder parts
before the bid was awarded. The pre-award purchases would set up the Company for a loss
if its bid failed.80
After these problems emerged, Pedersen decided not to bid on the project. 81 Collins
objected and asserted that declining to bid the job required Advisory Board consent.82 That
was not correct. The Advisory Board had no authority over whether or not to decline a bid.
Instead, because of the size of the project, the Member Authorization Provision gave
Dalstein authority to either veto or authorize the bid. Pedersen correctly informed Collins
that he only had to report to Dalstein on these matters.83
I. Disagreements Over Strategy
In July 2014, the Company’s Vice President of Sales, Michael Baggett, complained
privately to Collins that the Company “had been forced to decline to bid over $100 million
See id. (Dalstein: “With Chicago we have the chance to kill many birds with one
78
stone: low risk, high margins, T & C negotiable, relaxed schedule, a subcontractor . . .
doctors the union at the airport and we can create volume, utilization and reputation.”).
79
See JX 142; JX 143; JX 146; see also JX 158.
80
JX 160; JX 166; see Pedersen Tr. 951.
81
JX 166.
82
See JX 165 at 3–4; see also JX 136 at 4.
83
See JX 165 at 2; see also JX 136 at 3.
22
in business over the past 30 days because [Buyer Parent] didn’t want to waste their bonding
capacity on us.”84 But as the Sellers’ witnesses conceded at trial, the Company could not
bid on all of its prospects.85 The Company had to select the most promising opportunities,
and Pedersen and Dalstein preferred different types of opportunities than what the
Company traditionally had pursued.86
In August 2014, Baggett griped to members of management that the Company was
not working hard enough to pursue an opportunity involving traditional systems at Palm
Beach International Airport.87 The Company pursued and won the project, which became
the largest pure-play traditional project in the Company’s history.88
Internally, some members of the Buyer’s team empathized with the Sellers
regarding the changes in the Company’s management and direction.89 But they also
described the serious problems with the Company’s historical approach, including a lack
84
JX 190 at 2.
85
Stevens Tr. 149; Graviet Tr. 288.
86
JX 136 at 2–3.
87
See JX 205 at 2.
88
See JX 205 at 2. But see JX 169 at 4 (Stevens identifying three older projects
valued at roughly $25 million “in today’s value”).
89
See JX 210 at 4; JX 216.
23
of meaningful financial oversight.90
On September 10, 2014, the Advisory Board held its third meeting. Pedersen
reported on the Company’s activities, projecting a worst-case scenario for the year of $24
million in sales with a best-case scenario of $80 million.91 One lowlight of the year was
that the Company had been forced to decline several bidding opportunities due to its efforts
to win the Denver project.92 The Company invested heavily in the Denver opportunity,
both because Pedersen understood from meetings with stakeholders that it was “ours to
lose,”93 and because the Denver project would involve a traditional component valued at
$60–70 million and a next-generation component valued at $30–40 million.94 Stevens
understood the significance of the Denver project and was excited about the opportunity.95
J. The Sellers Learn That An Earn Out Payment Is Unlikely.
By November 2014, the Buyer and Pedersen had determined that the Company was
unlikely to produce enough Net Profit for the Sellers to receive any Contingent
See JX 204 at 2 (observing that the Company had not “ever had a strong financial
90
manager that demanded a significant presence in the business”); JX 194 at 3 (noting
problem of “pay[ing] too much for the value we receive for labor or materials or both”).
91
JX 212 at 31.
92
See JX 219 at 7–8.
93
JX 119; see Pedersen Tr. 1003–05.
94
JX 157 at 3; see JX 130 at 3; JX 137; JX 138; JX 150.
95
See JX 227.
24
Consideration.96 They decided that they needed to inform the Sellers.
The next meeting of the Advisory Board meeting was scheduled for November 19,
2014. Pedersen prepared a presentation that explained “the earn out, the situation and the
different scenarios.”97 The presentation showed that the Company had incurred a net
operating loss of $1.56 million for the fiscal year that ended on March 31, 2014. 98 It
forecasted continuing losses for the fiscal year ending March 31, 2015. The presentation
forecasted modest gains in 2016, but projected they would be inadequate to generate a
cumulative Net Profit since the closing of the acquisition.99 Anticipating that the
presentation would not be well received, the Buyer had counsel review the deck.100
During the November 2014 meeting, the Sellers learned for the first time that they
were unlikely to receive any Contingent Consideration. Stevens was “shocked,”101 and his
demeanor was “icy.”102 He did not raise any objections to the analysis.103
Four months later, in March 2015, Stevens asked to meet with Beumer. In his email,
96
See Hufnagel Tr. 830–31, 839–40.
97
JX 226 at 2.
98
JX 239 at 33.
99
Id.
100
See JX 238 at 2; JX 241 at 2.
101
Hufnagel Tr. 845–46.
102
Id. at 833.
103
Id. at 833–41.
25
Stevens emphasized that he needed to “achieve the earn out” and had “relied heavily on
the strength and reputation of Beumer Corporation.”104 Beumer responded that
in all fairness, [the Company] was definitely not in the shape [Collins] always
communicated and made us [] believe. The earn out based on the 2014
numbers will not be achievable anymore as planned. . . . I definitely want to
find a fair solution but we both also have to acknowledge that the numbers
turned out to be different at the end as we all wanted them to be.105
Beumer’s answer infuriated Stevens, and he sent back an angry email filled with criticisms
of the Buyer.106
After exchanging several heated emails, Beumer and Stevens agreed it was best to
meet in person.107 They met in Dallas on April 29, 2015.108 The meeting was short and
unsuccessful.
K. This Litigation
On September 18, 2015, the Sellers commenced an arbitration against the Buyer.
On April 1, 2016, while the arbitration remained pending, the Buyer exercised its call
option. On April 15, the Sellers filed their complaint in this action and a motion seeking to
104
JX 268 at 3.
105
JX 280 at 9.
106
See id. at 8 (“In any case . . . you are running an international company having
acquired several companies, you had [the Company] under scrutiny for 16 months while
due diligence went on.”).
107
Id. at 2.
108
Dalstein Tr. 1120.
26
enjoin the exercise of the call. On April 22, I denied the motion.109
The parties agreed to forego the arbitration and litigate in this court.110 The Sellers
filed an amended complaint that asserted claims against the Buyer for breach of the
Acquisition Agreement, breach of the Operating Agreement, and breach of the implied
covenant of good faith and fair dealing. It asserted claims for breach of fiduciary duty and
civil conspiracy. The complaint also sought reformation of the dates governing the Earn
Out Period.
In November 2017, the Sellers moved for partial summary judgment. By order dated
January 5, 2018, I granted the motion as to specific claims for breach of contract (the
“Summary Judgment Order”).111
After trial, I directed the parties to present the reformation issue first, because the
outcome of that issue determined the relevant time periods for the other contractual claims.
In a memorandum opinion dated June 4, 2018, I rejected the Sellers’ claim for
reformation.112 That decision directed the parties to brief the remaining post-trial issues,
including the quantum of damages for the claims addressed on summary judgment.
While this litigation was pending, the Company achieved success in Denver and
San Francisco. If either project had come through earlier, it singlehandedly could have
109
See Dkt. 18 at 43–54.
110
See Dkt. 2 at 2 n.2.
111
Dkt. 147.
112
Glidepath Ltd. v. Beumer Corp., 2018 WL 2670724 (Del. Ch. June 4, 2018).
27
resulted in full payment of the Contingent Consideration. Instead, due to events beyond the
parties’ control, both arrived after the Earn Out Period.
II. LEGAL ANALYSIS
The Sellers raise a series of claims. They first contend that the defendants operated
the Company in a manner that deprived the Sellers of the Contingent Consideration. The
Sellers assert that the Buyer and its representatives operated the Company in a manner that
(i) breached the express terms of the Operating Agreement, (ii) violated the implied
covenant of good faith and fair dealing, and (iii) constituted a breach of fiduciary duty. As
damages, the Sellers seek the full value of the Contingent Consideration. This decision
rejects those theories.
The Sellers also seek remedies for three breaches of contract that they established
through a motion for summary judgment. Two of the breaches warrant awards of only
nominal damages. The third warrants damages of $377,282.57, plus pre- and post-
judgment interest at the legal rate.
Finally, the Sellers claim that the Buyer breached an exclusive territory provision.
This claim fails because the provision binds the Sellers, not the Buyer.
A. Breach of Contract
In their first theory, the Sellers contend that the Buyer and its representatives
operated the Company in a manner that deprived the Sellers of the Contingent
Consideration. The Sellers assert that the defendants’ business decisions constituted a
breach of the express terms of the Operating Agreement and the implied covenant of good
faith and fair dealing.
28
1. The Express Terms Of The Operating Agreement
“Delaware adheres to the objective theory of contracts, i.e., a contract’s
construction should be that which would be understood by an objective, reasonable third
party.”113 When interpreting a contract, the court “will give priority to the parties’
intentions as reflected in the four corners of the agreement,” construing the agreement as a
whole and giving effect to all its provisions.114 “Contract terms themselves will be
controlling when they establish the parties’ common meaning so that a reasonable person
in the position of either party would have no expectations inconsistent with the contract
language.”115 “The meaning inferred from a particular provision cannot control the
meaning of the entire agreement if such an inference conflicts with the agreement’s overall
scheme or plan.”116
The Sellers contend that the Buyer breached the express terms of the Operating
Agreement in three ways. First, the Sellers claim that the Buyer failed to support the
113
Salamone v. Gorman, 106 A.3d 354, 367–68 (Del. 2014).
GMG Capital Invs., LLC v. Athenian Venture P’rs I, 36 A.3d 776, 779 (Del.
114
2012); see Elliot Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del. 1998) (“It is well
established that a court interpreting any contractual provision . . . must give effect to all
terms of the instrument, must read the instrument as a whole, and, if possible, reconcile all
the provisions of the instrument.”); City Inv. Co. Liquid. Tr. v. Cont’l Cas. Co., 624 A.2d
1191, 1198 (Del. 1993) (“If a writing is plain and clear on its face, i.e., its language conveys
an unmistakable meaning, the writing itself is the sole source for gaining an understanding
of intent.”).
115
Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del.
1997).
116
GMG Capital, 36 A.3d at 779.
29
Company with its bonding line. Second, the Sellers claim that the Buyer breached a recital
that required the Buyer to contribute its “skills, expertise, collateral and interests” to the
Company. Third, the Sellers contend that Pedersen breached the Operating Agreement by
failing to manage the Company in conformity with the Acquisition Plan.
a. Bonding
Section 2.5 of the Operating Agreement states: “[The Buyer] shall support the
Company with the realization of the Business Plan by way of its bonding line.”117 The
Sellers contend that the Buyer breached this provision by failing to provide sufficient
bonding capacity for the Company to win jobs. The Sellers maintain that with more
bonding capacity, the Company could have won more jobs and generated financial results
that would have supported a full payment of the Contingent Consideration.
The Buyer did not have its own bonding line until well into the Earn Out Period.118
Until it secured its own line, the Buyer obtained bonds through Buyer Parent.119 The Sellers
117
JX 65 § 2.5.
118
See Bryan Tr. 635–36 (testifying that the Buyer acquired a bonding line in 2015);
Dalstein Tr. 1117–18 (explaining that the Buyer obtained a $30 million bonding line in
2016).
119
See JX 91 (February 2014 email discussing ACE and other Buyer Parent bonding
lines for the Buyer to use); JX 133 at 2 (Baggett in April 2014: “[The Company] currently
[has] a 5/20 bonding line with Capitol Indemnity ($5M single project/$20M aggregate),
but aside from that we rely on the BEUMER line to pursue future works.”); JX 189 (Bryan
in July 2014: “[The bond producer] strongly feels [the Buyer] will not get an offer for a
bonding program without the parent indemnity.”); see also JX 208 at 3 (September 2014
letter denying the Buyer prequalification to bid on Denver contracts because of the Buyer’s
inadequate financial capacity); JX 225.
30
contend that Buyer Parent refused to provide bonding for traditional projects because it
wanted to save its bonding capacity for next-generation projects. The Sellers also argue
that the Buyer should have done more to obtain guarantees from Buyer Parent.
The Sellers’ argument about bonding capacity fails because the Operating
Agreement did not impose an obligation on Buyer Parent. It only imposed an obligation on
the Buyer. The obligation that the Buyer undertook did not include any commitment to
cause Buyer Parent to take affirmative actions to provide bonding. Because of the structure
of the Operating Agreement, Buyer Parent’s refusals to provide bonding for particular jobs
could not give rise to breach.120 The plaintiffs proved that Buyer Parent was risk averse
when making bonding decisions.121 But the Operating Agreement did not obligate Buyer
Parent to provide bonding, nor did it obligate the Buyer to cause Buyer Parent to provide
120
See Alliance Data Sys. Corp. v. Blackstone Capital P’rs V, 963 A.2d 746, 765–
69 (Del. Ch.) (Strine, V.C.), aff’d, 976 A.2d 170 (Del. 2009) (TABLE).
121
See Graviet Tr. 297–315; see also Baggett Dep. 24–29 (identifying disputed no-
bid decisions); Collins Tr. 225 (“You can overbid a job simply by overestimating the risk.
And I don’t think Beumer had a good grasp particularly of consequential damages. They
hated them.”); Graviet Tr. 307–08 (explaining attempts to explain to the Buyer that terms
and conditions regarding “consequential damages, liquidated damages for delay” are
“common,” “you don’t have to worry about it,” and “if you have a good relationship with
the [project] owner, they’ll generally work with you if things happen”); JX 179 at 2
(Graviet in June 2014: “[R]egarding the T&C’s that are not negotiable, I will write down
my thoughts about how likely (how risky) those T&Cs really are.”). Compare JX 169 at 2
(Stevens explaining to Pedersen that “most contractual disagreements don’t get to court
and are generally settled amicably by [the Company’s] own staff and the owner/general
contractor on the other side. Foreigners don’t understand this and appear scared of it.”),
with JX 174 at 3 (Pedersen opining that Stevens is “a ‘bigger risk taker’ than BEUMER
and probably also bigger than me”).
31
bonding. The Buyer only had to support the Company with its own line.
The Sellers’ argument also depends on the premise that Section 2.5 of the Operating
Agreement obligated the Buyer to support the Acquisition Plan and achieve the results it
projected. Section 2.5 in fact refers to the “Business Plan,” which the Manager was
obligated to update every year. Through that process, the Company shifted its strategy
away from its historical focus on smaller-sized jobs involving exclusively traditional
technology in which the lowest-cost provider won the bid and towards larger jobs involving
both traditional and next-generation components that offered higher profit margins.
The Operating Agreement allowed that shift. Indeed, Stevens convinced the Buyer
to buy the Company by arguing that the Company could help the Buyer secure larger, more
complex jobs. Even the Acquisition Plan had contemplated that the Company would pursue
projects that combined next-generation and traditional technology.122 There was no
mandate to pursue projects involving exclusively traditional systems.
The Sellers contend that the Company’s lack of bonding capacity forced it to turn
down opportunities. There is some evidence that supports their position.123 But the
122
See JX 61, Schedule 4.2(v).
123
See, e.g., JX 270 (Bryan remarks on Cleveland opportunity in 2015: “WHAT???
IS??? GOING??? ON??? How can we not get a bid bond?”); JX 285 at 2 (Pedersen
discussing problems arising from lack of American bonding line); see also JX 223 at 2
(Baggett opining that the Company failed to bid multiple projects in 2014 because of
“limited bonding capacity,” “schedule conflicts, lack of engineering resources, [and]
overall risk assessment from [the Buyer]”); JX 174 at 2 (Buyer officer posing “a basic
question: do we have sufficient resources/staffing to go after profitable projects for the
[Company’s] ‘core business’ (i.e., Acquisition Business Plan projects) and to support
projects that complement/support development of the BEUMER group portfolio (e.g.,
32
evidence does not show that the Buyer failed to support the Company with its bonding
capacity, such as it was. The Buyer sought in good faith to obtain greater bonding capacity
from Buyer Parent,124 and Buyer Parent did provide bonding on multiple occasions,
including for strictly traditional projects. Examples include the traditional projects at John
Wayne and Palm Beach, which collectively had a value of $35 million.125
The Buyer did not breach its contractual obligation to support the Company with its
bonding capacity. The Buyer did not support every bid that some at the Company wanted
to make, but the Buyer had legitimate reasons for doing so.
b. The Efforts Claim Against The Buyer
The recitals to the Operating Agreement contain language in which the parties
described their intent to made the Company a success. Preamble E states:
It is the intention of the Members that, through the Company, the Members
will apply their joint skills, expertise, collateral and interests in building a
single baggage handling systems operation in the territories of the United
States, Mexico and the Bahamas, with the joint aim of becoming a dominant
force in baggage handling systems in such territories.126
The Sellers argue that the Buyer failed to contribute its “skills, expertise, collateral and
Denver, SFO, Seattle, …)? Both are critically important.”; Pedersen responding that “[t]he
answer to resources is NO”); Pedersen Tr. 1022–23 (explaining that the Company lacked
the resources to pursue Palm Beach and Chicago simultaneously).
124
JX 274 (Bryan requesting “a larger, more substantial bonding facility in the US”);
JX 56 at 4; see JX 70; JX 133 at 2; see also JX 91; JX 106 (“Now with the [Company’s]
bonding capacity increased we are [pursuing] a large amount of work again.”).
125
See JX 348.
126
JX 65 at 2.
33
interests” to the Company. The Sellers effectively seek to convert the recital into an efforts
clause that required the Buyer to strive to achieve the results necessary to trigger the
Contingent Consideration. The Sellers claim that the Buyer breached this obligation by
focusing on projects involving next-generation components, where the Company could not
take a leading role.
“Generally, recitals are not a necessary part of a contract and can only be used to
explain some apparent doubt with respect to the intended meaning of the operative or
granting part of the instrument. If the recitals are inconsistent with the operative or granting
part, the latter controls.”127 Preamble E is a recital. It does not establish a substantive
obligation.
Regardless, the Buyer would not have breached an obligation to devote its “skills,
expertise, collateral and interests” by focusing on large next-generation projects. These
projects had large traditional components. The traditional component in the Denver project,
for example, was larger than any project in the Company’s history. The traditional
component in the San Francisco project more than twice the size of Denver’s. If the
Company had landed either project, then the resulting business could have been sufficient
to trigger all of the Contingent Consideration.128
127
New Castle Cty. v. Crescenzo, 1985 WL 21130, at *3 (Del. Ch. Feb. 11, 1985)
(citation omitted); accord Creel v. Ecolab, Inc., 2018 WL 5778130, at *4 (Del. Ch. Oct.
31, 2018); UtiliSave, LLC v. Miele, 2015 WL 5458960, at *7 (Del. Ch. Sept. 17, 2015).
128
See Dalstein Tr. 1080–82 (discussing San Francisco project’s $66 million
conventional aspect, with a “gross margin . . . by far higher than all the planned gross
margin the acquisition business plan”); Pedersen Tr. 1013 (discussing allocation of $30
34
The Buyer properly devoted its “skills, expertise, collateral and interests” to the
Company by focusing on these projects. The Company eventually achieved success in
Denver and San Francisco, but only after the Earn Out Period. If the timing had worked
out better, the decision to focus on those projects would not have caused a dispute. It is
only with the benefit of hindsight that the Sellers can now attempt to challenge the business
decisions that the Company made. But the fact that those decisions did not pan out does
not mean that the Buyer failed to devote its “skills, expertise, collateral and interests” to
the Company. The evidence shows that it did.
c. Failure To Comply With The Business Plan
Section 5.1.3 of the Operating Agreement provides that “[t]he Manager shall at all
times act within the Business Plan and within the Manager’s limits of authority set forth
[in the Operating Agreement].”129 The Sellers claim that Pedersen failed to cause the
Company to adhere to the Acquisition Plan, resulting in a breach of this provision that led
to the failure to generate the financial results necessary to yield the Contingent
Consideration.
As noted, Section 5.1.3 does not require compliance with the Acquisition Plan. It
million of Denver project’s value to the Buyer); JX 207 (September 2014 memorandum
anticipating Q2 2015 start to Denver work with monthly progress payments and an 18%
gross margin); see also Collins Tr. 255 (“If the first year had been like the second and third
year, we wouldn’t be sitting here right now, I don’t think.”); Dalstein Tr. 1123; Pedersen
Tr. 1005–1012 (describing protracted Denver bidding process and the Buyer’s eventual
success after it made a joint bid with an electrical company); JX 341 at 24; JX 322.
129
JX 65 § 5.1.3.
35
requires compliance with the Business Plan, which Pedersen updated. The Sellers have not
challenged Pedersen’s compliance with the updated Business Plan. Moreover, under the
Member Authorization Provision, Dalstein had sole authority to authorize departures from
the Business Plan.130 Pedersen consistently sought Dalstein’s consent before he did
anything that even resembled a deviation from the Business Plan. 131 The Sellers have not
pointed to action that Pedersen took that failed to comply with the Business Plan and which
Dalstein failed to authorize.
2. The Implied Covenant
In addition to their arguments that invoke the express language of the Operating
Agreement, the Sellers contend that the Buyer violated the implied covenant of good faith
and fair dealing by failing “to use best efforts to reach an earn out provision.”132 According
to the Sellers, the Buyer breached the implied covenant by instead taking action designed
to frustrate the Sellers’ ability to receive the Contingent Consideration.
Invoking the implied covenant “is a ‘cautious enterprise’ that ‘is best understood as
a way of implying terms in the agreement, whether employed to analyze unanticipated
developments or to fill gaps in the contract’s provisions.’”133 “Delaware’s implied duty of
130
See JX 65 §§ 5.2.3(viii), 5.2.5.
131
See JX 104 at 3; JX 132; JX 146 at 2; JX 314 at 2; see also JX 164.
132
Dkt. 197 at 52.
133
Oxbow Carbon & Minerals Hldgs. v. Crestview-Oxbow Acq., LLC, --- A.3d ---,
2019 WL 237360, at *19 (Del. Jan. 17, 2019) (footnote omitted).
36
good faith and fair dealing is not an equitable remedy for rebalancing economic interests
after events that could have been anticipated, but were not, that later adversely affected one
party to a contract.”134
“[B]ecause the implied covenant is, by definition, implied, and because it protects
the spirit of the agreement rather than the form, it cannot be invoked where the contract
itself expressly covers the subject at issue.”135 “Even where the contract is silent, ‘[a]n
interpreting court cannot use an implied covenant to re-write the agreement between the
parties, and should be most chary about implying a contractual protection when the contract
could easily have been drafted to expressly provide for it.’”136 “Parties have a right to enter
into good and bad contracts, the law enforces both.”137
The Sellers have not identified a gap in the governing documents. The Operating
Agreement grants the Buyer expansive rights over the Company. The Buyer appoints the
Manager, who oversees the business and affairs of the Company and makes the operational
decisions relating to its business.138 Although the members held some consent rights over
operational matters, the Member Authorization Provision gave Dalstein the ability to veto
134
Nemec v. Shrader, 991 A.2d 1120, 1128 (Del. 2010).
135
Fisk Ventures, LLC v. Segal, 2008 WL 1961156, at *10 (Del. Ch. May 7, 2008),
aff’d, 984 A.2d 124 (Del. 2009) (TABLE).
136
Oxbow, 2019 WL 237360, at *19 (alteration in original).
137
Nemec, 991 A.2d at 1126.
138
See JX 65 §§ 5.1.2, 5.1.3.
37
or authorize those actions.139 In Section 5.2.2 of the Operating Agreement, the Sellers
retained their ability to vote on extraordinary matters, but the Sellers have not alleged a
violation of that provision.
Given these provisions, there is no gap for the implied covenant to fill. The Manager
had authority under the Operating Agreement to implement the strategy that he considered
best for the Company’s overall success.140 Likewise, Dalstein had authority to authorize or
veto specific operating decisions that he favored or disfavored. “A party does not act in
bad faith by relying on contract provisions for which that party bargained where doing so
simply limits advantages to another party.”141
B. Breach Of Fiduciary Duty
Separate from their contractual theory, the Sellers argue that the defendants
breached their fiduciary duties by engaging in a “bad-faith scheme to raise costs, lower
profitability, divert opportunities, and to employ Company resources to pursue [next-
generation] projects for the primary benefit of the Buyer (and to the detriment of the
Company).”142
139
Id. §§ 5.2.3, 5.2.5.
140
During negotiations, Collins wondered what might happen if the Buyer failed to
provide bonding. He suggested that if the failure to bond caused the Company to lose a
project, the Sellers should be made whole by an adjustment to the Net Profit calculation.
JX 19 at 2. The final transaction documents did not implement Collins’s suggestion.
141
Nemec, 991 A.2d at 1128.
142
Dkt. 197 at 42.
38
The Company was a manager-managed LLC. The Operating Agreement did not
eliminate or modify the principles of equity that impose fiduciary duties on whose who
control an enterprise. Consequently, Pedersen owed fiduciary duties in his capacity as
Manager.143 The Buyer owed fiduciary duties as a controlling member.144 Because Dalstein
had the power to cause the Buyer to act and personally wielded the powers granted by the
Member Authorization Provision, he owed fiduciary duties as well.145
143
See 6 Del C. § 18-1104 (“In any case not provided for in this chapter, the rules
of law and equity, including the rules of law and equity relating to fiduciary duties and the
law merchant, shall govern.”); CSH Theatres, LLC v. Nederlander of San Francisco
Assocs., 2018 WL 3646817, at *21 (Del. Ch. July 31, 2018); Wenske v. Blue Bell
Creameries, Inc., 2018 WL 3337531, at *1 n.3 (Del. Ch. July 6, 2018); Ross Hldg. & Mgmt.
Co. v. Advance Realty Gp., LLC, 2014 WL 4374261, at *12 (Del. Ch. Sept. 4, 2014); Feeley
v. NHAOCG, LLC, 62 A.3d 649, 660–63 (Del. Ch. 2012). See generally CSH Theatres,
LLC v. Nederlander of San Francisco Assocs., 2015 WL 1839684, at *11 & n.54 (Del. Ch.
Apr. 21, 2015).
144
See CMS Inv. Hldgs. v. Castle, 2015 WL 3894021, at *18 (Del. Ch. June 23,
2015); Feeley, 62 A.3d at 662 (“Managers and managing members owe default fiduciary
duties; passive members do not.”); Kelly v. Blum, 2010 WL 629850, at *1 (Del. Ch. Feb.
24, 2010) (“[E]ven though contracting parties to an LLC agreement have the freedom to
expand, restrict, or eliminate fiduciary duties owed by managers to the LLC and its
members and by members to each other, in the absence of a provision explicitly altering
such duties, an LLC’s managers and controlling members in a manager-managed LLC owe
the traditional fiduciary duties that directors and controlling shareholders in a corporation
would.”); see also 2009 Caiola Family Tr. v. PWA, LLC, 2015 WL 6007596, at *26 (Del.
Ch. Oct. 14, 2015).
145
See Renco Gp., Inc. v. MacAndrews AMG Hldgs., 2015 WL 394011, at *7 (Del.
Ch. Jan. 29, 2015); Feeley, 62 A.3d at 670–72 (explaining that the “human controllers of
an entity fiduciary” owe at least a duty of loyalty to a managed entity with respect to
transactions involving its property); In re USACafes, L.P. Litig., 600 A.2d 43, 48 (Del. Ch.
1991) (Allen, C.) (“[O]ne who controls property of another may not, without implied or
express agreement, intentionally use that property in a way that benefits the holder of the
39
When determining whether a fiduciary has breached its duties, Delaware law
distinguishes between the standard of conduct and the standard of review.146 The standard
of conduct describes what the fiduciary is expected to do and is defined by the content of
the duties of loyalty and care. The standard of review is the test that a court applies when
evaluating whether a fiduciary has met the standard of conduct.147
In terms of the standard of conduct, the duty of loyalty requires that fiduciaries act
in the best interests of their beneficiaries.148 To satisfy the standard of conduct, fiduciaries
must act in good faith, meaning they must subjectively believe that they are advancing the
control to the detriment of the property or its beneficial owner.”); see also 2009 Caiola
Family Tr. v. PWA, LLC, 2014 WL 7232276, at *9 n.57 (Del. Ch. Dec. 18, 2014).
146
See Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014); William T.
Allen, Jack B. Jacobs & Leo E. Strine, Jr., Realigning the Standard of Review of Director
Due Care with Delaware Public Policy: A Critique of Van Gorkom and Its Progeny as a
Standard of Review Problem, 96 Nw. U.L. Rev. 449, 451–52 (2002); William T. Allen,
Jack B. Jacobs & Leo E. Strine, Jr., Function Over Form: A Reassessment of the Standards
of Review in Delaware Corporation Law, 56 Bus. Law. 1287, 1295–99 (2001); see also E.
Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate
Law and Governance from 1992–2004? A Retrospective on Some Key Developments, 153
U. Pa. L. Rev. 1399, 1416–25 (2005) (distinguishing between the standards of fiduciary
conduct and standards of review). See generally Julian Velasco, The Role of Aspiration in
Corporate Fiduciary Duties, 54 Wm. & Mary L. Rev. 519, 553–58 (2012); Melvin Aron
Eisenberg, The Divergence of Standards of Conduct and Standards of Review in Corporate
Law, 62 Fordham L. Rev. 437, 461–67 (1993).
147
In re Trados Inc. S’holder Litig., 73 A.3d 17, 35–36 (Del. Ch. 2013).
148
See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (“[T]he duty
of loyalty mandates that the best interest of the corporation and its shareholders takes
precedence over any interest possessed by a director, officer or controlling shareholder and
not shared by the stockholders generally.”).
40
interests of their beneficiaries.149 And fiduciaries must in fact pursue the interests of their
beneficiaries, rather than succumbing to conflicting or divergent interests. Fiduciaries who
make decisions based on their private interests violate the standard of conduct.150
Fiduciaries also must make decisions prudently and carefully, in compliance with the duty
of care.
By default, a Delaware LLC exists perpetually—from formation until
cancellation.151 Consequently, unless their fiduciary duties are eliminated or modified, the
fiduciaries who control a Delaware LLC must strive to maximize the value of the LLC over
a long-term horizon, as warranted for an entity with a presumptively perpetual life. This
duty is not the same thing as acting to ensure the LLC’s perpetual existence. A fiduciary
149
See Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del.
2006) (“A failure to act in good faith may be shown, for instance, where the fiduciary
intentionally acts with a purpose other than that of advancing the best interests of the
corporation . . . .”) (quoting In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del.
2006)); Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1051 n.2 (Del. Ch. 1996) (Allen,
C.) (defining a “bad faith” transaction as one “that is authorized for some purpose other
than a genuine attempt to advance corporate welfare or is known to constitute a violation
of applicable positive law”); In re RJR Nabisco, Inc. S’holders Litig., 1989 WL 7036, at
*15 (Del. Ch. Jan. 31, 1989) (Allen, C.) (explaining that the business judgment rule would
not protect “a fiduciary who could be shown to have caused a transaction to be effectuated
(even one in which he had no financial interest) for a reason unrelated to a pursuit of the
corporation’s best interests”).
150
Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).
151
6 Del. C. § 18-201(b).
41
might readily determine that a near-term sale or other shorter-horizon initiative is value-
maximizing even when judged over the long term.152
The fiduciary principle does not require that fiduciaries maximize the value of a
beneficiary’s contractual claim against the firm. A holder of a contract claims must rely on
its contractual rights. When making a decision, fiduciaries can and should consider its
implications for contractual claimants and evaluate what actions those claimants may take
in response. Based on this analysis, fiduciaries may decide not to pursue a particular course
of action because of the resulting implications for the firm and its residual claimants.153
But fiduciaries do not owe duties to contractual claimants.154 To the contrary, a fiduciary
152
See Prod. Res. Gp., L.L.C. v. NCT Gp., Inc., 863 A.2d 772, 791 n.60 (Del. Ch.
2004) (Strine, V.C.) (explaining that sometimes fiduciaries must take action in a context
where preserving the firm as an independent entity would not be value-maximizing).
153
See, e.g., Orban v. Field, 1997 WL 153831, at *9 (Del. Ch. Apr. 1, 1997) (Allen,
C.) (“Certainly in some circumstances a board may elect (subject to the corporation’s
answering in contract damages) to repudiate a contractual obligation where to do so
provides a net benefit to the corporation.”). See generally Frederick Hsu Living Tr. v. ODN
Hldg. Corp., 2017 WL 1437308, at *23–24 (Del. Ch. Apr. 14, 2017), as corrected (Apr.
24, 2017).
154
See, e.g., Simons v. Cogan, 549 A.2d 300, 303 (Del. 1988) (“[A] convertible
debenture represents a contractual entitlement to the repayment of a debt and does not
represent an equitable interest in the issuing corporation necessary for the imposition of a
trust relationship with concomitant fiduciary duties.”); Wolfensohn v. Madison Fund, Inc.,
253 A.2d 72, 75 (Del. 1969) (holding that former preferred stockholders who received
debentures and a share of common stock were not owed fiduciary duties in their capacity
as debenture holders and had only their contractual rights as creditors); Fletcher Int’l, Ltd.
v. ION Geophysical Corp., 2010 WL 2173838, at *7 (Del. Ch. May 28, 2010) (“[R]ights
arising from documents governing a preferred class of stock, such as the Certificates, that
are enjoyed solely by the preferred class, do not give rise to fiduciary duties because such
rights are purely contractual in nature.”); MCG Capital Corp. v. Maginn, 2010 WL
42violates the standard of conduct if the fiduciary seeks to maximize the value of a contractual
claim at the expense of the fiduciary’s beneficiaries.155
In this case, the Company’s fiduciaries had a duty to act in good faith to maximize
the value of the Company over the long term. The Company’s fiduciaries did not have a
duty to maximize the value of the contract claim to the Contingent Consideration. The
Sellers’ argument that the Company’s fiduciaries had a duty to maximize the value of the
Contingent Consideration fails for want of a valid premise. In their capacity as holders of
a contractual claim to the Contingent Consideration, the Sellers had to rely on their contract
rights. They were not entitled to fiduciary protection.
Although this straightforward version of the Sellers’ claim fails as a matter of law,
a subtler version requires further analysis. The structure of the Contingent Consideration
1782271, at *15 (Del. Ch. May 5, 2010) (“[D]irectors do not owe preferred shareholders
any fiduciary duties with respect to [their contractual] rights.”).
155
See Revlon, Inc. v. MacAndrews & Forbes Hldgs., 506 A.2d 173, 182 (Del. 1986)
(“[T]he Revlon board could not make the requisite showing of [fiduciary] good faith by
preferring the noteholders and ignoring its duty of loyalty to the shareholders. The rights
of the former already were fixed by contract.”); Blackmore P’rs v. Link Energy LLC, 864
A.2d 80, 85–86 (Del. Ch. 2004) (“[T]he allegation that the Defendant Directors approved
a sale of substantially all of [the company’s] assets and a resultant distribution of proceeds
that went exclusively to the company’s creditors raises a reasonable inference of disloyalty
or intentional misconduct. Of course, it is also possible to infer (and the record at a later
stage may well show) that the Director Defendants made a good faith judgment, after
reasonable investigation, that there was no future for the business and no better alternative
. . . . [I]t would appear that no transaction could have been worse for the unit holders and
reasonable to infer . . . that a properly motivated board of directors would not have agreed
to a proposal that wiped out the value of the common equity and surrendered all of that
value to the company’s creditors.”).
43
caused the Buyer’s incentives to diverge from the interests of the Company. The Buyer
was obligated to pay the Earn Out and the consideration for the Put Option. Although the
Profit Distribution nominally came from the Company, it was part of the package of
consideration paid to eliminate the Sellers from the Company. These payment obligations
created a conflict of interest for the Buyer as a fiduciary, because by depressing the
Company’s performance during the Earn Out Period, the Buyer could minimize the
Contingent Consideration and benefit itself. Dalstein was a fiduciary for the Buyer, so he
shared the conflict. Because Pedersen managed a firm controlled by the Buyer and could
be removed by the Buyer at will, he was beholden to the Buyer, and the conflict affected
him as well.
The resulting conflict did not arise because the defendant fiduciaries owed duties to
the Sellers. The defendant fiduciaries owed duties to the Company and all of its equity
holders. But when making decisions about how to maximize the value of the Company for
the benefit of all of its equity holders, the defendant fiduciaries faced a conflict because of
the Buyer’s competing contractual obligations.
To determine whether fiduciaries have breached their duties, a court applying
Delaware law deploys a standard of review. Delaware’s default standard of review is the
business judgment rule.156 But when the firm’s fiduciaries face a conflict of interest that
undermines their ability to make disinterested and independent decisions, the applicable
156
Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).
44
standard of review is the entire fairness test. When entire fairness governs, the fiduciaries
must establish “to the court’s satisfaction” that their actions were “the product of both fair
dealing and fair price.”157 An honest belief that the action was fair is necessary but not
sufficient. The course of action “must be objectively fair, independent of the [fiduciaries’]
beliefs.”158
Consistent with the fiduciary principle, the entire fairness standard measures the
course of action by its success in promoting the value of the firm. The question in this case
is whether the Buyer, Dalstein, and Pedersen acted to maximize the value of the firm over
the long run. They did not have a duty to maximize the Contingent Consideration, nor did
they have a duty to maximize the returns to the Sellers. They had a duty to maximize the
long-term value of the firm.
The Sellers contend that the Buyer, Dalstein, and Pedersen breached their fiduciary
duty to maximize the long-term value of the firm by “disloyally engaging in a scheme to
depress revenues, increase expenses and divert business opportunities for their own
benefit.”159 The defendants proved that they acted fairly. They subjectively believed that
they were promoting the long-term value of the firm, and they proved at trial that their
actions had that effect.
157
Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995).
158
Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del. Ch. 2006).
159
Dkt. 197 at 2.
45
The Sellers contend that the Buyer, Dalstein, and Pedersen focused the Company
on large-scale projects to ensure that the Company would not achieve the results necessary
to trigger the Contingent Consideration. The evidence showed that the Buyer, Dalstein, and
Pedersen focused the Company on large-scale projects because it was a sound business
strategy. These projects offered higher profit margins and the potential to mitigate liability
risk by negotiating terms and conditions. The Company also faced less competition and
could compete across dimensions other than lowest price. These projects included large
traditional components. The defendants convinced me that focusing on these projects
would maximize the value of the Company over the long run.
The Sellers also argue that the Buyer diverted opportunities from the Company by
making it a subcontractor for certain projects, instead of placing the Company in the more
lucrative general contractor role. Their sole example is Denver, where Collins conceded
that the Company “would not near have qualified to be the main contract.”160 Because next-
generation technology anchored the Denver project, the Company could not act as the
general contractor. It is true that for a brief period, the Buyer and Dalstein considered hiring
one of the Company’s competitors as a subcontractor for the Denver job, and Dalstein
joked that he would “fill out the divestment form for [the Company].”161 They evaluated
this option because Buyer Parent wanted the Buyer to pick the subcontractor that was best
160
Collins Tr. 253.
161
JX 231 at 2.
46
for the Buyer’s bottom line, even if that meant using a competitor.162 If Dalstein had
followed through, that likely would have resulted in a breach, but the issue became moot
when the Buyer subcontracted the work to the Company.
The Sellers contend that Pedersen breached his duties by causing the Company to
incur costs for integration. In particular, they object to $700,000 for training the Company’s
employees in next-generation technology. The Business Plan contemplated these costs. As
fiduciaries, the Buyer, Dalstein, and Pedersen were not obligated to maintain the
Company’s historical business practices during the Earn Out Period; they were obligated
to take steps to maximize the long-term value of the firm. Engaging in employee training
promoted long-term value, as did the broader efforts to integrate the Company’s business
with the Buyer’s.163
The Buyer, Dalstein, and Pedersen proved that they acted at all times to promote the
long-term value of the Company. Although their course of conduct did not maximize the
value of the Contingent Consideration, they had no fiduciary obligation to protect the value
of a contractual claim. The Buyer, Dalstein, and Pedersen proved that for purposes of
fiduciary duty analysis, their conduct was entirely fair.
162
See Dalstein Tr. 1091–1101.
163
See JX 117 at 11, 17, 33, 40–41.
47
C. The Claims Addressed On Summary Judgment
In addition to their principal claims for the Contingent Consideration, the Sellers
sought at trial to address three other breaches of contract: (i) the Buyer’s unauthorized loans
to the Company, (ii) the Buyer’s failure to prepare draft audited financial statements, and
(iii) the Buyer’s failure to pay amounts equal to the Company’s bank balance at specified
dates. In each case, the Sellers previously moved for summary judgment, and the Summary
Judgment Order ruled in favor of the Sellers on the issue of breach. The questions
remaining for trial included the Buyer’s affirmative defenses (principally waiver and
acquiescence) and the quantum of damages. In post-trial briefing, the Buyer recast its
affirmative defenses as reasons why the Sellers failed to prove damages, so this decision
focuses on that issue.
1. Unauthorized Loans
The Summary Judgment Order ruled that the Buyer breached the Operating
Agreement by making loans to the Company without Seller Parent’s consent. Section 2.2
of the Operating Agreement states:
Additional capital contributions to the Company (each, an “Additional
Capital Contribution”) shall be made only by [the Buyer]. [Seller Parent]
shall not be required to make additional capital contributions to the
Company. If the Manager determines that the Company needs additional
funding and obtains the prior written consent of both Members thereto, then
such funds shall be provided by [the Buyer] either (as [the Buyer] and the
Company may agree) (i) in the form of an Additional Capital Contribution
to be reflected by an increase in the Capital Account of [the Buyer], or (ii) as
a loan documented by a note (for which the Company shall execute a separate
48
security agreement, the form of which shall be approved by the Members).164
In February 2014, the Buyer began making informal loans to the Company. 165 No one
formally notified the Sellers or sought the members’ consent, but Stevens discovered the
loans in May 2014. The loans continued for years, totaling over $5.7 million by the end of
the Earn Out Period.166
To recover damages, Sellers had to prove at trial that they suffered actual harm from
the breach. The Sellers did not try to meet this burden. Instead, they argued that they could
have extracted management concessions in return for their consent.167
The evidence did not support this assertion. Stevens identified the loans in May
2014, but he did not ask the Buyer to stop.168 By September 2014, Stevens knew that the
Buyer had loaned the Company roughly $2.5 million. He still did not ask the Buyer to
stop.169 Stevens “knew [the Company] needed the cash because [they were] burning it
164
JX 65 § 2.2.
165
JX 338 (chart of loans).
166
Id. By January 2015, the cumulative principal on the loans was $3,785,000.
Under an agreement dated January 1, 2015, the Company formalized a $6 million credit
facility with the Buyer. JX 253; Bryan Tr. 661–62. The 5% interest rate was consistent
with the Acquisition Agreement’s requirement that “any cash injection made as a loan to
the Company made by either [of the members] will bear interest at the rate of five percent
per annum.” JX 61 § 3.1.6. Seller Parent did not approve the loan agreement either.
167
See Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2013 WL 6327997 (Del. Ch.
Dec. 4, 2013) (Strine, C.) (using hypothetical negotiation to measure damages).
168
Stevens Tr. 190–91.
169
Id. at 192; see Bryan Tr. 646–48.
49
fast.”170 If the Buyer had not made the loans, the Company “would have ground to a
halt.”171 Stevens testified that he finally objected to the loans at the November 2014
Advisory Board meeting—the same meeting where Stevens learned that the Earn Out was
unlikely to be paid.172 Stevens does not appear to have objected again after November 2014.
Stevens’s conduct undermines the Sellers’ assertion that if they had known about
the loans, they could have extracted concessions. Stevens knew about the loans, and he did
not attempt to extract concessions. He understood that the loans benefitted the Company
by keeping it afloat.
“Even if compensatory damages cannot be or have not been demonstrated, the
breach of a contractual obligation often warrants an award of nominal damages.”173
“Nominal damages are not given as an equivalent for the wrong, but rather merely in
recognition of a technical injury and by way of declaring the rights of the plaintiff.”174 They
“are usually assessed in a trivial amount, selected simply for the purpose of declaring an
170
Stevens Tr. 196.
171
Id. at 199; see id. at 200 (confirming that “payroll would not have been met and
the rent [at the Company’s office] would not have been paid”); Bryan Tr. 649 (“Do you
know what would have happened to the [Company] if the loans were not made? A. It would
not have been able to pay the current payables or payrolls or other financial obligations as
they arose? Q. What does that lead to? A. Failure. Bankruptcy.”); Pedersen Dep. 168–69.
172
Stevens Tr. 197.
173
Ivize of Milwaukee, LLC v. Compex Litig. Support, LLC, 2009 WL 1111179, at
*12 (Del. Ch. Apr. 27, 2009).
174
Id. (internal quotation marks omitted).
50
infraction of the Plaintiff’s rights and the commission of a wrong.”175 This decision awards
one dollar to Seller Parent as nominal damages for the Buyer’s breach of Section 2.2.
2. Draft Annual Financials
The Summary Judgment Order ruled that the Buyer breached the Operating
Agreement because the Company’s accountants failed to provide Seller Parent with “Draft
Annual Financials,” a term defined in the Operating Agreement. Section 11.1(b) of the
Operating Agreement states:
As soon as practicable, but in any event within ninety (90) calendar days
following March 31st of any applicable calendar year, an independent
accounting firm appointed by [the Buyer] and approved by [Seller Parent],
which approval shall not be unreasonably withheld (the “Independent
Accountants”) shall prepare and deliver to the Company and the Members a
copy of draft audited balance sheets and related statements of income and
retained earnings and cash flows of the Company for fiscal year of the
Company then ended (“Draft Annual Financials”). Each of the Members
shall have forty-five (45) calendar days following receipt of such Draft
Annual Financials to provide written notice to the other Members and the
Company of its acceptance of, or disagreement with, the Draft Annual
Financials, setting forth in reasonable detail the basis for such disagreement,
if any.176
Seller Parent never received any Draft Annual Financials.177 The Company’s accountants
instead created final financial statements without Seller Parent’s input, and Seller Parent
175
Penn Mart Supermarkets, Inc. v. New Castle Shopping LLC, 2005 WL 3502054,
at *15 (Del. Ch. Dec. 15, 2005).
176
JX 65 § 11.1(b).
177
Glidepath Ltd. v. Beumer Corp., 2018 WL 321788, at *1–3 (Del. Ch. Jan. 5,
2018) (ORDER).
51
received final statements for the years 2014, 2015, and 2016.178
As with the unauthorized loans, the Sellers do not argue that the failure to provide
Draft Annual Financials resulted in actual, compensatory damages. They instead argue that
if the Company had complied with the Operating Agreement, then Seller Parent could have
withheld its approval of the Draft Annual Financials unless the Company followed the
Acquisition Plan.
As with the unauthorized loans, the Sellers’ conduct shows that they did not care
about the lack of Draft Financial Statements. James Webber, an accountant who sat on
Seller Parent’s advisory board, testified that Seller Parent received “monthly board profit
and loss accounts, and there would be no cause for [Seller Parent] to ask for draft audited
financial statements. [Seller Parent] would have known the picture.”179 There also is no
reason to think that the Sellers would have gained any leverage through Seller Parent’s
approval right. The Sellers bore the burden of proof on this point, but they tried to sidestep
the issue by arguing that “doubts about the extent of damages are generally resolved against
the breaching party.”180 That is a correct statement of law, but a plaintiff still must “prove
the fact of damages with reasonable certainty.”181 The Sellers did not prove that they could
178
Webber Dep. 70.
179
Id.; accord id. at 71 (“[W]e didn’t ask for draft financials. And we didn’t discuss
it.”).
180
SIGA Techs., Inc. v. PharmAthene, Inc., 132 A.3d 1108, 1131 (Del. 2015).
Id. at 1111; see Fletcher, 2013 WL 6327997, at *17 (“To prevail in a claim for
181
damages for breach of contract, a plaintiff ‘must show both the existence of damages
52
have extracted any business concessions by objecting to the Draft Annual Financials.
The Sellers take the view that if the court resolves doubts about the extent of
damages against the Buyer, then they should receive as damages the full amount of the
Contingent Consideration. There is no causal connection between the failure to provide
Draft Annual Financial Statements and the underperformance of the Company’s business.
Instead, a larger causation problem looms: In November 2015, Stevens conceded that it
was “an impossible mission” to achieve the Earn Out in three years.182 In hindsight, he
would have sought a five-year Earn Out Period.183 The evidence showed that Stevens
accurately diagnosed the problem. The Company achieved success at Denver and San
Francisco after the Earn Out Period. If the period had been longer, then the Sellers might
have received the Contingent Consideration.
In support of their contention that the Sellers would have received the Contingent
provable to a reasonable certainty, and that these damages flowed from defendant’s
violation of the contract.’ In other words, a plaintiff ‘must show that the injuries suffered
are not speculative or uncertain and that the Court may make a reasonable estimate as to
an amount of damages.’” (footnote omitted)).
182
JX 316 at 2.
183
Id. There is some evidence that the parties discussed a five-year earn-out period
when they negotiated the transaction. The parties modeled the transaction documents on
Buyer Parent’s acquisition of a Belgian company. That deal involved a five-year earn out.
Hufnagel Dep. 96–97; Hufnagel Tr. 805–06. Hufnagel testified that he offered a five-year
earn-out but that Stevens insisted on three years. Hufnagel Tr. 764, 805–08, 848–49; see
also JX 316 at 2 (Stevens referring to the “wisdom in [his] flippant 5 year earn-out”).
Stevens denied receiving a five-year proposal from Hufnagel, and there is no
contemporaneous documentary evidence regarding a five-year proposal. See Stevens Tr.
117–18.
53
Consideration if the Company had continued to focus on pure-play traditional projects, the
Sellers relied on an expert witness who opined that the Company would have earned an
additional $47.2 million in revenue during the Earn Out Period if it had bid on ten more
projects.184 The expert assumed a 25% win rate with an average contract value of $18.9
million.185 The assumed contract value was more than 50% higher than the typical
maximum value the Company historically had obtained ($12 million). Moreover, as the
Sellers’ witnesses conceded at trial, the Company did not have the resources to bid on or
complete another ten projects.186 To handle the hypothetical projects, the Company would
have been forced to reallocate resources from the work it actually won, sacrificing its real-
world projects.187 The Sellers did not make a persuasive case that the Company could have
184
JX 342 at 15. For context, the Company’s 2014 revenue was $13,863,869. JX
252 at 16. In 2014, the Company took on $45,934,631 in new contracts, purchase orders,
and approved change orders. After adjusting for the 2014 revenue, the Company’s backlog
at the end of 2014 was $37,825,923. “Backlog represents the amount of revenue the
Company expects to realize from work to be performed on uncompleted projects in
progress . . . and from contractual agreements on which work has not begun.” Id. By
contrast, at the end of 2013, the backlog was only $4,317,646. Given the gap between what
the Buyer bought and what it achieved, it is a stretch to think a different strategy would
have radically improved results.
185
JX 342 at 15.
186
Stevens Tr. 149–51; Graviet Tr. 288.
187
See JX 346 at 22–24; Cowhey Tr. 455–57, 462; see also Stevens Tr. 168 (“Q.
Please tell the Court how the [Company] could have performed both in Chicago and West
Palm Beach on an overlapping schedule. A. I can’t because Chicago wasn’t contemplated
on the acquisition business plan.”). The Company’s resource limitations were not confined
to bonding; they included problems with personnel, logistics, and engineering. See JX 7 at
5; JX 106; JX 114 at 2; see also JX 2 at 2–3; JX 297 at 2.
54
achieved the results necessary to trigger the Contingent Consideration by following a
different strategy.
Finally, the Sellers make the technical point that because they did not receive the
Draft Annual Financials, it is impossible to determine Net Profit for purposes of calculating
the Contingent Consideration, because the relevant formulas in the transaction documents
use defined terms based on the financial statements. Thus, Section 3.2.2 of the Acquisition
Agreement provides that the “Net Profit shall be calculated on the basis of the respective
Final Audited Annual Accounts for the respective fiscal year.”188 Under Section 11.1(b) of
the Operating Agreement, the Final Audited Annual Accounts are the Draft Annual
Financials once Seller Parent has the opportunity to review them and resolve any objections
through a dispute resolution process.189 The Sellers argue that without Draft Annual
Financials, there cannot be Final Audited Annual Accounts, and hence there can be no
calculation of the Net Profit.
As a strictly logical matter, this reasoning is correct, which is why the Summary
Judgment Order ruled in favor of the Sellers on their claim of breach. But it does not follow
that any actual damages resulted from the failure to prepare the Draft Financial Statements.
It remained possible to calculate the Net Profit based on the Company’s books and records,
and the parties litigated over whether the Company could have generated sufficient Net
188
JX 61 § 3.2.2.
189
JX 65 §§ 11.1(b), 12.13.
55
Profit to trigger the Contingent Consideration. As with the unapproved loans, the Sellers
proved a breach of contract without proving compensable damages. They are again entitled
to nominal damages of one dollar.
3. The Bank Balances
The Summary Judgment Order held that the Buyer failed to pay Seller Parent a
component of the purchase price based on the Company’s bank balance at specified dates.
Section 3.1.3 of the Acquisition Payment required the Buyer to pay Seller Parent
“$500,000, provided that [the Company’s] bank balance is $500,000 or greater on March
31, 2014, and further provided that at the request of [the Buyer] (based on [the Buyer’s]
cash position) that payment may be delayed until 30 June.”190 Section 3.1.4 of the
Acquisition Agreement required
a further payment in the amount equal to the Company’s bank balance at June
30, 2014, not to exceed $1,000,000, less any payment made pursuant to
Section 3.1.3, and further provided that such payment may be delayed until
the earliest date (a) the Purchaser has resolved its legal issue in Canada, or
(b) September 30, 2014.191
As of June 30, 2014, the Company’s bank balance was $377,282.57, but the Buyer failed
to pay Seller Parent this amount.192 Seller Parent remains entitled to this amount as part of
its damages award.
Seller Parent is also entitled to pre-judgment interest. In Delaware, pre-judgment
190
JX 61 § 3.1.3.
191
Id. § 3.1.4.
192
Glidepath, 2018 WL 321788, at *4–5.
56
interest is awarded as a matter of right.193 Subject to the court’s discretion, a party may also
receive post-judgment interest until the date of payment.194 Unless the parties have
specified another rate by contract or the court determines that a different rate is warranted
by the equities, the statutory rate serves as a guide.195 Because the parties have not specified
a different rate, this decision award pre- and post-judgment interest at the legal rate, which
will fluctuate with changes in the underlying reference rate.196
The parties dispute whether the interest award should be simple or compound.
“[C]ompanies neither borrow nor lend at simple interest rates.”197 The court has discretion
to award compound interest, which is warranted here.198 The court also has discretion to
193
Brandywine Smyrna, Inc. v. Millennium Builders, LLC, 34 A.3d 482, 485–87
(Del. 2011).
194
See Beard Research, Inc. v. Kates, 8 A.3d 573, 620–21 (Del. Ch. 2010).
195
See 6 Del. C. § 2301(a) (establishing legal rate); Summa Corp. v. Trans World
Airlines, Inc., 540 A.2d 403, 409 (Del. 1988) (“While the legal rate of interest has
historically been the benchmark for pre-judgment interest, a court of equity has broad
discretion, subject to principles of fairness, in fixing the rate to be applied. In the Court of
Chancery the legal rate is a mere guide, not an inflexible rule.” (citations omitted)).
196
See Levey v. Brownstone Asset Mgmt., LP, 2014 WL 4290192, at *1 (Del. Ch.
Aug. 29, 2014) (explaining rationale for fluctuating rate).
197
Henke v. Trilithic Inc., 2005 WL 2899677, at *13 (Del. Ch. Oct. 28, 2005).
198
See Brandin v. Gottlieb, 2000 WL 1005954, at *28–30 (Del. Ch. July 13, 2000)
(Strine, V.C.) (explaining rationale for awarding compound interest instead of simple
interest); accord ONTI, Inc. v. Integra Bank, 751 A.2d 904, 929 (Del. Ch. 1999); see also
Smith v. Nu-West Indus., 2001 WL 50206, at *1 (Del. Ch. Jan. 12, 2001) (following
Brandin). But see Branin v. Stein Roe Inv. Counsel, LLC, 2015 WL 4710321, at *8 (Del.
Ch. July 31, 2015) (adhering to precedent construing 6 Del. C. § 2301 as permitting only
simple interest).
57
select a compounding interval, which in this case will be quarterly. 199
In a breach of contract case, interest runs from the date “when the effects of the
breach would have first manifested themselves.”200 For purposes of calculating pre-
judgment interest on the $377,282.57 judgment, the applicable date is September 30, 2014.
D. The Exclusive Territory Provision
Finally, the Sellers contend that the Buyer breached a non-competition provision in
the Operating Agreement by doing business in Canada. The Operating Agreement
contained a non-competition provision, but it applied to the Sellers, not the Buyer.
Section 12.20.2 of the Operating Agreement states:
[Seller Parent] and Sir Stevens acknowledges and agrees [sic] that . . . the
Company may and/or will engage in the business of designing,
manufacturing and selling airport baggage handling system solutions (the
“Exclusive Business”) throughout the United States, the Bahamas and
Mexico (the “Exclusive Territory”) and that engagement by [Seller Parent],
Sir Stevens or any of their respective Affiliates in the Exclusive Business or
provision of products or services competitive with the Exclusive Business by
any of them anywhere in the Exclusive Territory other than through the
Company could cause irreparable damage to the Company and each of them.
For so long as [Seller Parent] and Sir Stevens are parties to this Agreement
and for a time period of two (2) calendar years thereafter (provided, that the
obligations hereunder of the parties shall be extended by adding to such term
199
See Taylor v. Am. Specialty Retailing Gp., Inc., 2003 WL 21753752, at *13 (Del.
Ch. July 25, 2003) (applying quarterly compounding interval when awarding interest based
on the legal rate “due to the fact that the legal rate of interest most nearly resembles a return
on a bond, which typically compounds quarterly”); accord One Va. Ave. Condo. Ass’n of
Owners v. Reed, 2005 WL 1924195, at *15 (Del. Ch. Aug. 8, 2005). But see Charles K.
Korsmo & Minor Myers, Interest in Appraisal, 42 J. Corp. L. 109, 129–30 (2016)
(questioning validity of comparison between legal rate and bonds).
200
BTG Int’l Inc. v. Wellstat Therapeutics Corp., 188 A.3d 824, 2018 WL 2966941,
at *1 (Del. June 11, 2018) (TABLE).
58
the length of time, if any, during which any of them and/or their respective
Affiliates shall be or remain in violation of their obligations under this
Section 12.20 as finally determined by a court of competent jurisdiction),
neither [Seller Parent] (whether directly or through an Affiliate), Sir Stevens,
nor any of their respective Affiliates shall, without the prior written consent
of a Majority in Interest of the Members, (i) engage anywhere within the
Exclusive Territory, directly or indirectly, alone or as a stockholder (other
than as a holder of less than 5% of the capital stock of any publicly-traded
corporation), partner, officer, director, employee, consultant, independent
contractor, agent or otherwise in or with any business organization other than
the Company that is engaged in or becomes engaged in the Exclusive
Business or otherwise competes with the Company in the Exclusive
Business, (ii) solicit, divert, or in any way attempt to solicit, or divert, to any
potential, current, past or prospective competitor of the Company in the
Exclusive Business any customer of the Company or any of its affiliates that
is located within the Exclusive territory, or (iii) solicit or encourage any
officer, employee or consultant of the Company with substantial
responsibilities for the Exclusive Business of the Company to leave their
employ for employment by or with any of them or any of their respective
Affiliate(s) or any competitor of the Company.201
The Acquisition Agreement contains a similar provision.202 These provisions
prohibited the Sellers from competing in the Exclusive Territory, defined as the United
States, the Bahamas, and Mexico. The Exclusive Territory restrictions did not apply to the
defendants. At most, the transaction documents suggest that the Company would operate
chiefly in the Exclusive Territory, but they did not prevent the Company or the Buyer from
operating in other regions.
201
JX 65 § 12.20.2 (emphasis added).
202
JX 61 § 7.4.1.
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III. CONCLUSION
The Buyer is liable to Seller Parent for damages of $377,284.57, with pre- and post-
judgment interest compounded quarterly. As part of a final order, judgment will be entered
in favor of Seller Parent and against the Buyer in this amount, and otherwise against the
plaintiffs and in favor of the defendants. Within ten business days, the parties shall submit
a joint letter identifying any other issues that need to be resolved to bring this matter to a
close at the trial level.
60