PWP Xerion Holdings III LLC v. Red Leaf Resources, Inc. ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PWP XERION HOLDINGS III LLC, )
)
Plaintiff, )
)
v. ) C.A. No. 2017-0235-JTL
)
RED LEAF RESOURCES, INC., a Delaware )
corporation, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: September 18, 2019
Date Decided: October 23, 2019
S. Michael Sirkin, Benjamin Z. Grossberg, R. Garret Rice, ROSS ARONSTAM &
MORITZ LLP, Wilmington, Delaware; Jonathan D. Schiller, Christopher D. Belelieu,
Karen A. Chesley, Gary R. Studen, BOIES SCHILLER FLEXNER LLP, New York, New
York; Counsel for Plaintiff.
Michael A. Pittenger, Timothy R. Dudderar, Mathew A. Golden, David M. Hahn, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Kenneth B. Black, Lauren A.
Shurman, Wesley F. Harward, STOEL RIVES LLP, Salt Lake City, Utah; Counsel for
Defendant.
LASTER, V.C.
Defendant Red Leaf Resources, Inc. (“Red Leaf” or the “Company”) is a Delaware
corporation seeking to develop technology to extract oil from shale. Under the certificate
of designations that governs its Series A Preferred Stock, the consent of holders of a
majority of the Series A shares is necessary for authorizing or effecting (i) any transaction
for the benefit of an affiliate of a director of the Company, (ii) any material change in the
Company’s business plan, and (iii) any purchase or redemption of any equity interest in
the Company. At all relevant times, plaintiff PWP Xerion Holdings III LLC (“Xerion”)
held a majority of the Series A shares, meaning that Xerion’s consent was required before
the Company could authorize or effect any of the foregoing actions.
In 2012, the Company entered into a set of joint venture agreements with TOTAL
E&P USA Oil Shale, LLC (“TOTAL Sub”), an indirect, wholly owned subsidiary of
TOTAL S.A. (“TOTAL Parent”). TOTAL Parent is one of a handful of supermajor oil
companies in the world. For a company seeking to develop oil shale technology, an alliance
with a supermajor like TOTAL Parent was obviously a significant development. Not
surprisingly, the Company told its investors that the joint venture represented a material
change in its business plan. As part of the parties’ new relationship, TOTAL Sub purchased
an equity interest in the Company and received the right to designate a member of the
Company’s board of directors (the “Board”).
In 2016, TOTAL Sub notified the Company that it was exiting from the joint
venture, before the planned completion date and without fulfilling all of its contractual
obligations. To settle the ensuing dispute, TOTAL Sub agreed to pay the Company $85
million and return its equity interest. When the Board authorized the settlement, an officer
of TOTAL Sub served as its director designee on the Board.
The Company initially asked Xerion to consent to the settlement. After Xerion
declined, the Company and TOTAL Sub went forward without Xerion’s consent. In an
effort to sidestep the consent requirement, the Company obtained a non-reasoned,
conclusory opinion from its outside counsel stating that TOTAL Sub and the officer of
TOTAL Sub who served on the Board were not affiliates. The Company also tweaked the
settlement so that TOTAL Sub would remain the owner of its equity interests in the
Company unless and until Xerion consented to the settlement and released any claims it
might have under a stockholders agreement and an investors’ rights agreement.
The unwinding of the joint venture represented a material change in the Company’s
business plan. Before the settlement, TOTAL Sub was supporting the Company with
financial, operational, and technological assistance. Together, the Company and TOTAL
were pursuing a pilot project in Seep Ridge, Utah, designed to demonstrate the viability of
extracting oil by heating shale in a single-use, earthenware capsule. After the settlement,
the Company no longer had the support of a supermajor oil company. Moreover, the
Company decided to pivot away from its pilot project in Utah and attempt instead to
commercialize a multi-use, steel capsule that could extract oil from a different form of
shale found in the middle eastern country of Jordan.
Xerion filed this lawsuit for breach of its consent rights. This decision grants
Xerion’s motion for summary judgment on the question of breach. For the reasons set forth
herein, the Company breached Xerion’s consent rights by failing to obtain Xerion’s consent
2
before (i) authorizing and later effecting a transaction for the benefit of an affiliate of a
director and (ii) authorizing and later effecting a material change in the Company’s
business plan. The Company did not breach its obligation to obtain Xerion’s consent before
authorizing a redemption.
I. FACTUAL BACKGROUND
The facts are drawn from the materials that the parties submitted in connection with
the motion for summary judgment.1 When considering Xerion’s motion, any conflicts in
the evidence are resolved in the Company’s favor, and the Company receives the benefit
of all reasonable inferences that can be drawn from the evidence. At this stage of the case,
the court cannot weigh the evidence, decide among competing inferences, or make factual
findings.
A. The Series A Issuance
The Company is a privately held Delaware corporation formed in 2006. For over a
decade, the Company has sought to develop and commercialize technology for extracting
1
Citations in the form “[Name] Dep.” refer to witness testimony from a deposition
transcript. Citations in the form “OX –– at ––” refer to exhibits that Xerion submitted with
its opening brief. See Dkts. 145–46. Citations in the form “AX –– at ––” refer to exhibits
that the Company submitted with its answering brief. See Dkts. 151–59. Citations in the
form “RX –– at ––” refer to exhibits that Xerion submitted with its reply brief. See Dkt.
164. Pinpoint citations identify the internal page number of the exhibit or the last three
digits of a control number. If an exhibit contained paragraph or section numbers, then the
pinpoint citation uses the paragraph or section number. Citations to OX 25 and OX 26 refer
to the complete versions of the draft agreements. See Dkt. 169. Citations in the form “AB
__” refer to the Company’s answering brief in opposition to Xerion’s motion for summary
judgment. See Dkt. 150.
3
oil from shale.
In 2010, the Company raised capital by issuing shares of Series A Preferred Stock.
Xerion is a hedge fund that purchased and continues to own a majority of the issuance.2
During the negotiations over the terms of the Series A Preferred Stock, Xerion
insisted on a “consent rights package” for “fundamental business events.” OX 2 at ‘748.
The final certificate of designations stated:
For so long as shares of the Series A Preferred representing in aggregate more
than 4.5% of the outstanding equity interests in the Corporation on a fully-
diluted and as-if-converted basis are outstanding in addition to any other vote
or consent required herein by law, the vote or written consent of the holders
of more than 50% of the outstanding shares of Series A Preferred, voting
together as a single class, shall be necessary for authorizing, effecting or
validating the following actions (whether by merger, amendment,
consolidation, reclassification, reorganization, recapitalization or otherwise)
by the Corporation . . . .
OX 4 § 3(b)(i). The certificate of designations then listed thirteen different categories of
actions. See id. Three are relevant to this case:
 “Any purchase or redemption of, or payment of any dividend or other distribution
on, any capital stock or any other equity interest in the [Company] . . . .” Id. §
3(b)(i)(F) (the “Redemption Clause”).
 “Any material alteration to, or change of, the business or business plan of the
[Company] or any of its subsidiaries.” Id. § 3(b)(i)(I) (the “Business Plan Clause”).
 “Any transaction with or for the benefit of any director or officer (or their respective
affiliates).” Id. § 3(b)(i)(M) (the “Interested Party Clause”).
2
Xerion purchased the Series A shares through Xerion Master Fund Ltd., which
later transferred its shares to the plaintiff. The distinction between the entities is not
important for purposes of this decision, which refers simply to Xerion.
4
Because Xerion purchased and has continued to hold a majority of the Series A shares,
Xerion’s consent was necessary for authorizing or effecting any transaction that fell within
the scope of the Redemption Clause, the Business Plan Clause, or the Interested Party
Clause.
B. The Joint Venture
In 2012, the Company entered into a set of joint venture agreements with TOTAL
Sub, a Delaware limited liability company.3 The sole member of TOTAL Sub was TOTAL
E&P USA, Inc. (“TOTAL USA”), which in turn was a wholly owned subsidiary of TOTAL
Parent. To reiterate, TOTAL Parent is one of the few supermajor oil companies in the
world.
Under the terms of the Joint Venture Agreements, TOTAL Sub made an initial
investment of $25 million in the Company and committed to provide personnel
and advisory support for the Company’s laboratory and scientific work. In return, TOTAL
received (i) 16,667 shares of the Company’s common stock, reflecting a 3.5% ownership
stake in the Company, (ii) a warrant exercisable for additional shares of the Company’s
common stock, and (iii) a worldwide license to use the Company’s EcoShale Technology.
TOTAL Sub also received the right to designate a member of the Board.
3
The Company and TOTAL Sub entered into five major agreements—a Purchase
Agreement, a Joint Development Agreement, a Joint Operating Agreement, a Co-
Ownership Agreement, and a License Agreement—plus other ancillary agreements. See
AX 14; AX 20. The Company helpfully refers to them collectively as the “Joint Venture
Agreements.” See AB 9 n.3.
5
The Joint Venture Agreements provided that TOTAL Sub and the Company would
each own a 50% interest in certain oil shale assets and projects located in Utah. The Joint
Venture Agreements contemplated that the parties would develop the Utah projects in a
coordinated manner and identify and acquire additional oil shale assets for joint exploration
and development.
Before entering into the Joint Venture Agreements, the Company “planned to
develop the EcoShale technology and move directly into commercial production.” AB 11.
Under the Joint Venture Agreements, the parties agreed first to pursue an “Early Production
System Phase” (the “EPS Phase”) during which the parties would develop and test the
EcoShale technology at a site in Seep Ridge, Utah. AX 21 at 47. The Seep Ridge project
sought to demonstrate the Company’s ability to extract oil from shale by heating the rock
inside a single-use, earthenware capsule. See generally AX 22, AX 23, AX 25, AX 26.
TOTAL Sub committed to invest $160 million towards developing the EcoShale
Technology, representing 80% of the project budget. OX 9 at ‘367. If the technology
proved commercially viable, then the parties would move on to a production phase. See
OX 1 at ‘462; AX 10 at ‘739; AX 13 at ‘298.
The Company asked Xerion for its consent before entering into the Joint Venture
Agreements. Xerion provided it.
C. The Company’s Pursuit Of The Joint Venture
During the next four years, the Company’s business plan consisted of pursuing the
joint venture with TOTAL Sub. In 2013, a Board member suggested relocating the EPS
Phase from Utah to Jordan, arguing that it would save the Company money. OX 10 at ‘056.
6
The Company’s CEO opposed the idea, stressing that the Company needed to remain
focused on “execut[ing] our business plan as defined by the Board and our JV Partner.”
OX 10 at ‘057.
In 2014, after the price of oil dropped significantly, the Company and TOTAL Sub
agreed to reduce the size of the capsule and to extend the anticipated completion date of
the EPS Phase by eighteen months. In May 2015, the Company and TOTAL Sub agreed to
suspend all work for a period of two years to give the Company an opportunity to re-
engineer a more cost-effective capsule. See AB 13; AX 23 at ‘179, ‘185; AX 28 at ‘730;
AX 29 § 2; DeRidder Dep. 123–25. The re-engineered capsule would still be earthenware
and single-use, but it would have a partially re-designed heating system. AX 23 at ‘185.
D. The Agreement In Principle
In May 2016, TOTAL Sub informed the Company that it wanted to exit the joint
venture, citing concerns over the Company’s technology, declining oil prices, and
environmental issues. See AX 33 at ‘533 to ‘535; DeRidder Dep. at 138, 143, 147–48, 150–
52, 154. The Company estimated that TOTAL Sub still owed $150 million in commitments
to the joint venture through 2020. OX 11 at ‘712.
The Company decided to negotiate a settlement with TOTAL Sub. See OX 13 at
‘159. Around the time that negotiations began, TOTAL Sub replaced its Board designee
with Pierre Germain, an officer of TOTAL Sub who was employed as Vice President for
Business Development at TOTAL USA, the immediate parent of TOTAL Sub.
Recognizing the conflicts of interest that would arise from Germain’s affiliation with
7
TOTAL Sub, the Company asked Germain to recuse himself from any board discussions
regarding the settlement negotiations. Germain agreed.
By January 2017, the parties had reached an agreement in principle that
contemplated the Company releasing TOTAL Sub from all of its obligations under the
Joint Venture Agreements in return for TOTAL Sub (i) paying the Company $85 million,
(ii) forgoing all right, title, and interest in any assets related to the joint venture, and (iii)
returning its 16,667 shares of common stock and the warrant to the Company (collectively
the “Equity Interests”). See AX 39 at ‘695 to ‘696. During the settlement negotiations, both
the Company’s General Counsel and its outside counsel concluded that Germain’s
affiliations with TOTAL Sub meant that Xerion’s consent would be required under the
Interested Party Clause. See OX 16. The Company’s General Counsel prepared a “voting
matrix” for the Board, which noted that Xerion would need to approve the settlement. OX
17 at ‘094. When the Board met to approve the agreement in principle, the Company’s
General Counsel advised the Board that the Company “will need to obtain approval from
[Xerion] . . . because Pierre [Germain] is serving as Director so the transaction may be
considered to be a transaction for the benefit of an affiliate of a Director.” AX 39 at ‘695.
The Board approved the agreement in principle subject to “receiving an affirmative
vote in favor of the . . . settlement from [Xerion].” Id. at ‘696. Xerion’s designee to the
Board voted in favor of the resolution. Id. at ‘697.
E. Xerion Objects To The Post-TOTAL Business Plan.
Also during January 2017, the Board considered what the Company’s business plan
should be after the termination of the joint venture. Without TOTAL Sub, the Company
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lacked the funds to finish the EPS Phase. The Company’s CEO believed that pursuing the
EPS Phase was the Company’s “only approved business plan.” OX 34; see OX 23 at ‘554.
Put differently, the Company had no “approved plan forward other than to advance the
EPS.” OX 35.
On January 28, 2017, the Company’s CEO advised the Board that “hav[ing]
completed a successful negotiation with TOTAL, . . . the [Company] management team is
turning our full attention back to the task of executing our business plan to advance the
Ecoshale technology.” OX 23 at ‘555. Xerion’s director designee objected, asserting that
this course of action was not “funded, wise, or authorized by the board or the shareholders.”
OX 23 at ‘555. As he saw it, TOTAL Sub’s exit meant there was “no funding or approved
business plan.” OX 23 at ‘255.
F. Xerion Withholds Consent.
On January 31, 2017, the Company formally asked Xerion for consent to the
agreement in principle, explaining that its consent was required “[b]ecause a TOTAL
representative is currently serving on the Board.” OX 21 at ‘594. Xerion declined.
The next day, the Company’s General Counsel asked its outside counsel to “provide
a legal memo or opinion (if possible) for our Board on the issue [sic] Series A not having
a consent right for approval of the TOTAL deal if Pierre [Germain] resigns?” OX 23 at
‘552. Outside counsel agreed to provide the memorandum and suggested also analyzing
whether the settlement was a “transaction” and whether TOTAL Sub was an “affiliate” of
Germain. Id.
9
The Company’s General Counsel also became concerned about whether the return
of the Equity Interests triggered the Redemption Clause. He asked the Company’s outside
counsel to develop “a plan to get the TOTAL deal closed which assumes that we don’t get
Series A consent.” OX 24 at ‘963. He suggested that to address the Redemption Clause,
“we will simply carve the stock out of the deal.” Id. at ‘964. Outside counsel agreed with
this strategy and suggested that the Company could “carve it out and even deal with it as a
separate redemption agreement.” Id. at ‘963. Outside counsel viewed the Interested Party
Clause as a “harder issue,” noting that the firm could “come up with some arguments as to
why [the Interested Party Clause] shouldn’t apply, but the best one is still having [Germain]
resign, which [TOTAL Sub] seem[s] unwilling to do.” OX 24 at ‘963; see Waltman Dep.
at 310–11.
Xerion offered to consent to the agreement in principle if the Company returned a
negotiated amount of capital to its investors through a tender offer. AX 46 at ‘359; see AX
47 at ‘016; Kitchen Dep. 97–98. In response, the Board formed a committee consisting of
all of the directors other than the designees of Xerion and TOTAL Sub (the “Committee”)
and gave it exclusive authority to negotiate with Xerion. AX 62 at ‘186. Xerion and the
Committee failed to reach agreement because of objections from Questerre Energy
Corporation (“Questerre”), a licensee of the Company’s technology that was also the
Company’s largest common stockholder.4
See OX 13 at ‘159 to ‘160; OX 41 at ‘001 to ‘002; AX 49 at ‘162; AX 51 at ‘167;
4
AX 52; AX 53; AX 54; AX 55; AX 56; AX 57; AX 58; AX 59; Hood Dep. 183.
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G. The Drafting Of The Settlement Agreement
On February 7, 2017, TOTAL Sub sent the Company a draft settlement agreement.
See OX 25. It called for TOTAL Sub to transfer various “Transferred Interests,” including
the Equity Interests, from TOTAL Sub to the Company. See id. § 2.2, Ex. A at 1, 6, 8. It
also contemplated that the Company would deliver an opinion of counsel at closing stating
that the Company had taken all corporate action necessary to effectuate the transaction,
including obtaining any necessary stockholder approvals. See id. §§ 2.3(f), 3.1.
On February 21, 2017, the Company sent back a revised draft that removed the
obligation to deliver an opinion of counsel. See OX 26 § 2.3. The Company’s General
Counsel asked in-house counsel for TOTAL Sub to “give some thought to whether and
how [TOTAL Sub] may get comfortable closing this deal with no [Xerion] consent.” OX
27 at ‘818.
The final version of the settlement agreement removed the Equity Interests from the
definition of “Transferred Interests,” meaning that the Equity Interests would not be
transferred at closing. See OX 28, Ex. A at 1, 6, 8. The parties added a new Section 2.5,
which states:
As soon as reasonably practicable after receipt by Red Leaf of any required
consent or approval, and conditioned upon the execution and delivery of the
[Stockholders Agreement] Amendment and Release Agreement and the
[Investors’ Rights Agreement] Amendment and Release Agreement by
[TOTAL Sub], Red Leaf, and all other parties required to execute such
agreements, [TOTAL Sub] shall transfer and convey to Red Leaf, and Red
Leaf shall accept, the Equity Interests pursuant to an assignment agreement
substantially in the form of the Assignment.
11
Id. § 2.5. The final version of the settlement agreement restored the language requiring the
Company to deliver a legal opinion at closing, but modified the requirement to address due
authorization “[e]xcept for any stockholder approval required to complete the transactions
contemplated by Section 2.5 of the Settlement Agreement.” Id. at ‘017; see id. § 2.3(e).
H. The Company And TOTAL Sub Enter Into The Settlement Agreement.
On March 13, 2017, the Committee considered whether to proceed with the
settlement without Xerion’s consent or pursue claims against TOTAL Sub. The directors
decided to proceed with the settlement. See AX 63.
After the Committee met, the Company formally took the position that Xerion’s
consent was not necessary to proceed with the settlement. OX 30 at ‘742. The Company’s
outside counsel subsequently delivered a non-reasoned legal opinion which stated, without
analysis, that the settlement did not violate any provision in the certificate of designations
for the Series A Preferred Stock. See OX 28 at ‘014.
On March 22, 2017, the Board approved the settlement. The transaction was signed
and closed on March 28. See id. at ‘949 (the “Settlement Agreement”). Xerion never gave
its consent.
I. The Company’s Business Plan
Meanwhile, in early March 2017, Company management met “to review the draft
of the [Red Leaf] Business Plan” that they had prepared in anticipation of the termination
of the joint venture. OX 36. The EPS Phase that the Company had been pursuing with
TOTAL Sub in Seep Ridge, Utah, sought to demonstrate the commercial viability of
extracting oil from shale by heating the rock inside a single-use, earthenware capsule.
12
Questerre wanted management to “pivot” to an oil shale resource that Questerre owned in
Jordan. OX 37 at ‘823. The single-use, earthenware capsule would not work with the
Jordanian oil shale, and Questerre wanted management to develop a reusable steel capsule
for commercial use in Jordan. See OX 38 at ‘116; OX 39 at ‘886; OX 42 at ‘002.
On March 20, 2017, two days before the Board voted on the Settlement Agreement,
management circulated a presentation titled “Business Plan” to the Board. OX 40 at ‘558,
‘560. The presentation included an analysis of the oil industry, company-level forecasts,
and a proposed budget and schedule for a hypothetical $56 million demonstration project.
See id. at ‘558 to ‘562. The presentation also described the option of pursuing “a
commercial project in a lower labor cost environment” such as Jordan, China, or Mongolia.
Id. at ‘562 to ‘563.
Questerre and Company management “jointly outlined a plan to proceed with a
focus on developing the EcoShale process for Questerre’s Jordan project.” OX 43 at ‘003.
A week after the Board approved the Settlement Agreement, the Company’s Vice President
of Business Development and Investor Relations informed Questerre that Red Leaf was
“ready to pivot to a Jordan focused game plan with the idea that the Jordan approach may
be the best for Utah as well.” OX 44.
On March 31, 2017, the Company sent a letter to its investors explaining that it had
devoted time during the previous months “toward modifying our basic capsule design to
work on very different oil shale resources in Jordan.” AX 79 at ‘881. The letter identified
problems with using the Company’s previous design on the Jordanian resource and stated
that in light of these problems, “our engineering team began to develop concepts for a
13
reusable capsule.” Id. The Company added that “[s]everal promising design concepts for
reusable capsules are working their way through early economic and engineering analysis.”
Id.
J. The Committee’s Expanded Role
On March 30, 2017, Xerion filed this action. In response, the Board expanded the
Committee’s authority to include overseeing the litigation “and any other matters that may
involve or implicate a conflict or potential conflict between the Company and [Xerion]” or
matters for which “it is in the best interests of the Company and its stockholders other than
[Xerion] that deliberations, discussions or decisions be kept confidential from [Xerion].”
AX 73 at ‘141.
The Company’s General Counsel recommended that the Committee take charge of
“certain discussions related to the Company’s business plan.” OX 29 at ‘772. On April 19,
2017, Company management presented the Committee with five “business plan options”
that the Company could pursue following TOTAL Sub’s exit from the joint venture. OX
49 at ‘177 to ‘178, ‘184 to ‘191; see also OX 50 at ‘001, ‘004 to ‘009. The members of the
Committee were instructed to keep “the direction of the Company’s business and business
plan” confidential from Xerion’s board designee. OX 49 at ‘177.
Company management recommended a business plan with the following
components:
 “Suspend the EPS design work pending development of reusable
containment concept,”
 “Test reusable containment concept for [Utah] commercial project,”
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 “Support project development in Jordan,”
 “Pursue additional licensees in Jordan and elsewhere,”
 “Pursue new partners for Utah and international projects,” and
 “Potential future tender agreements will be negotiated between
shareholders.”
Id. at ‘190 to ‘191. The Committee adopted management’s recommendation. Id. at ‘178. A
Company senior officer recorded the vote as, “Plan + Budget all in favor.” OX 52 at ‘809
(formatting altered). He noted that a Committee member advised his fellow directors not
to say that they had suspended the EPS Phase, but rather that they were “just moving
forward” and “focusing on specific elements of plan.” Id.
Since this meeting, the Company has not pursued any further development of the
single-use, earthenware capsule that was the focus of the joint venture with TOTAL Sub.
The Company instead has focused on commercializing a reusable steel capsule. See OX 53
at ‘067 to ‘069; Waltman Dep. 288–89. In June 2017, management recommended to the
Board that the Company (i) use a reusable steel capsule at its Utah site and (ii) support
licensees’ projects in Jordan through lab tests, feasibility studies, and engineering design.
AX 75 at ‘365. The presentation omitted any use of the term “business plan,” and the Board
did not vote on whether to adopt the recommendations.
II. LEGAL ANALYSIS
Xerion seeks partial summary judgment determining that the Company breached
the Interested Party Clause, the Business Plan Clause, and the Redemption Clause.
Summary judgment may be granted only when “there is no genuine issue as to any material
fact” and the “moving party is entitled to judgment as a matter of law.” Ct. Ch. R. 56(c).
15
Summary judgment “must be denied if there is any reasonable hypothesis by which the
opposing party may recover, or if there is a dispute as to a material fact or the inferences
to be drawn therefrom.” Vanaman v. Milford Mem’l Hosp., Inc., 272 A.2d 718, 720 (Del.
1970).
Summary judgment may be “appropriately granted even where ‘colorable . . . or
[in]significantly probative [evidence]’ is present in the record, if no reasonable trier of fact
could find for the [non-movant] on that evidence.” Haft v. Haft, 671 A.2d 413, 419 (Del.
Ch. 1995) (final alteration added) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
249–50 (1986)). “The ‘mere existence of a scintilla of evidence in support of the [non-
movant]’s position’ is not sufficient.” Haft, 671 A.2d at 419 (quoting Anderson, 477 U.S.
at 252).
A. Principles Of Contract Interpretation
The Interested Party Clause, the Business Plan Clause, and the Redemption Clause
appear in the certificate of designations that governs the Series A Preferred Stock. “The
rules of construction which are used to interpret contracts and other written instruments are
applicable to corporate charters and certificates of designation.” Matulich v. Aegis
Commc’ns Gp., Inc., 942 A.2d 596, 600 (Del. 2008). “Thus, if the charter language is clear
and unambiguous, it must be given its plain meaning.” Benihana of Tokyo, Inc. v.
Benihana, Inc., 906 A.2d 114, 120 (Del. 2006). “[A] court interpreting any contractual
provision, including preferred stock provisions, must give effect to all terms of the
instrument, must read the instrument as a whole, and, if possible, reconcile all the
16
provisions of the instrument.” Elliott Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 854
(Del. 1998).
“Absent some ambiguity, Delaware courts will not destroy or twist [contract]
language under the guise of construing it.” Rhone-Poulenc Basic Chems. Co. v. Am.
Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992). “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.” City Investing Co. Liquidating Tr. v. Cont’l
Cas. Co., 624 A.2d 1191, 1198 (Del. 1993). “Contract language is not ambiguous merely
because the parties dispute what it means. To be ambiguous, a disputed contract term must
be fairly or reasonably susceptible to more than one meaning.” Alta Berkeley VI C.V. v.
Omneon, Inc., 41 A.3d 381, 385 (Del. 2012) (footnote omitted).
B. The Interested Party Clause
The Interested Party Clause makes Xerion’s consent “necessary for authorizing [or]
effecting” any transaction for the benefit of any affiliate of a Company director without
Xerion’s consent. The Company breached the Interested Party Clause by both authorizing
and effecting the Settlement Agreement.
Under the plain meaning of the term, someone “affiliated” with a person or
organization is “closely associated with” the person or organization, “typically in a
dependent or subordinate position.” Affiliated, Merriam Webster, https://www.merriam-
17
webster.com/dictionary/affiliated (last visited Oct. 14, 2019). As customarily interpreted,
an officer or director of an entity is affiliated with that entity.5
Other definitions of affiliate reach the same endpoint by more explicitly
incorporating the concept of control. Under Section 203 of the Delaware General
Corporation Law, “‘[a]ffiliate’ means a person that directly, or indirectly through 1 or more
intermediaries, controls, or is controlled by, or is under common control with, another
person.” 8 Del. C. § 203(c)(1). The term “‘control, including the terms ‘controlling,’
‘controlled by’ and ‘under common control with,’ means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and policies of
a person, whether through the ownership of voting stock, by contract or otherwise. . . .” 8
Del. C. § 203(c)(4). A stockholders’ agreement that was one of the Joint Venture
Agreements defined an “affiliate” as “any other Person that, directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common control with,
such Person, as such terms are used and construed under Rule 144 [of the Securities Act].”
5
See Sec. & Exch. Comm’n v. Longfin Corp., 316 F. Supp. 3d 743, 759 (S.D.N.Y.
May 1, 2018) (describing a person’s status as an “officer, director, or 10% shareholder” as
“hallmarks of an affiliate status”); SMSW Enters., LLC v. Halberd Corp., 2015 WL
1457605, at *10 (C.D. Cal. Mar. 30, 2015) (“Generally, an affiliate [under Rule 144] is
either an officer or director of the company or someone who owns 10% of the issued and
outstanding shares of stock.”); Trustcash Hldgs., Inc. v. Moss, 668 F. Supp. 2d 650, 660
(D.N.J. 2009) (“Affiliates are most often officers, directors, or majority shareholders—
people who exercise control and influence over the company’s policies or finances.”)
(internal quotation marks omitted); see also Revision of Rule 144, Rule 145, and Form
144, Securities Act Release No. 7391, 1997 WL 70601, at *4–5 (Feb. 20, 1997) (observing
that “[m]any practitioners . . . use [these] criteria as a guide”).
18
OX 18 § 1. Like Section 203, Rule 144 defines “control” to mean “the possession, direct
or indirect, of the power to direct or cause the direction of the management and policies of
a person, whether through the ownership of voting securities, by contract, or otherwise.”
17 C.F.R. § 230.405.
Under these control-based definitions, an officer or employee of an entity is
affiliated with that entity. An officer meets the definition because he is under the control
of and accountable to the governing body of the entity he serves. See Amalgamated Bank
v. Yahoo! Inc., 132 A.3d 752, 780 (Del. Ch. 2016) (“Officers . . . are agents who report to
the board of directors in its capacity as the governing body for the corporation. . . .
[O]fficers have a duty to comply with the board’s directives.”), abrogated on other grounds
by Tiger v. Boast Apparel, Inc., --- A.3d ---, 2019 WL 3683525 (Del. Aug. 7, 2019). An
employee is similarly under the control of and accountable to the entity that employs him.
See TD Ameritrade, Inc. v. McLaughlin, Piven, Vogel Sec., Inc., 953 A.2d 726, 736 n.37
(Del. Ch. 2008) (citing RESTATEMENT (THIRD) OF AGENCY § 7.07).
When the Board approved the Settlement Agreement, Germain served as an officer
of TOTAL Sub, as Vice President for Business Development of TOTAL USA, and as a
member of the board of directors of TOTAL USA. Through these positions, Germain was
affiliated with TOTAL Sub and TOTAL USA under the commonly understood meaning
of the term, which recognizes that an officer or director of an entity is affiliated with that
entity. Germain was also affiliated with TOTAL Sub, TOTAL USA, and TOTAL Parent
under the control-based understanding of the term. As an officer of TOTAL Sub, Germain
reported to Jose Ignacio Sanz, the President and CEO of TOTAL USA and TOTAL Sub,
19
and German was under the control of Sanz for purposes taking action as an officer of
TOTAL Sub. TOTAL USA was the sole member of TOTAL Sub, and as an officer of
TOTAL Sub, Germain and TOTAL Sub were under the common control of TOTAL USA.
As a result, (i) Germain was under the control of and affiliated with TOTAL Sub, (ii) both
TOTAL Sub and Germain were under common control of TOTAL USA, and (iii) TOTAL
USA, TOTAL Sub, and German were under the common control of TOTAL Parent. Under
the control-based approach to affiliate status, Germain was an affiliate of TOTAL Sub,
TOTAL USA, and TOTAL Parent.
Before it became advantageous to argue otherwise, both the Company’s General
Counsel and its outside counsel regarded Germain as an affiliate of TOTAL Sub and
believed that Xerion’s approval was necessary under the Interested Party Clause. See OX
16; OX 17 at ‘094; OX 20 at ‘695. After Xerion declined to consent, the Company’s
General Counsel asked its outside counsel to develop “a plan to get the TOTAL deal closed
which assumes that we don’t get Series A consent.” OX 24 at ‘963. The Company’s outside
counsel responded that they could “come up with some arguments as to why [the Interested
Party Clause] shouldn’t apply,” but the best solution was to have Germain resign before
the vote on the Settlement Agreement. Id. Germain did not resign before the vote.
The Company now contends that because Germain did not participate in the day-to-
day activities of TOTAL Sub and because he largely did not participate in the settlement
negotiations, he should not be considered an affiliate of TOTAL Sub. The extent of
Germain’s participation is irrelevant to the affiliate inquiry. The Interested Party Clause
establishes a bright-line rule that requires Xerion’s consent for any transaction with an
20
affiliate of a director, whether that director participated in the transaction or the day-to-day
activities of the affiliate.
The Company also contends that Germain did not receive instructions from TOTAL
Sub on how to vote, so he could not be under TOTAL Sub’s control for purposes of
determining affiliate status. There is evidence that TOTAL Sub did provide Germain with
instructions about how to vote. See Germain Dep. 44. But whether Germain actually
received instructions is immaterial. Germain was an officer of TOTAL Sub and an
employee and officer of TOTAL USA who served on the Board at their pleasure. If TOTAL
Sub or TOTAL USA disagreed with Germain’s decisions, he could be removed.
The Company breached the Interested Party Clause because when the Settlement
Agreement was approved and virtually all of the transactions it contemplated were
completed, Germain was both a director of the Company and an affiliate of TOTAL Sub
(as well as TOTAL USA and TOTAL Parent), and because the settlement benefitted
TOTAL Sub (as well as TOTAL USA and TOTAL Parent) by allowing TOTAL Sub to
exit from the Joint Venture Agreements on negotiated terms. Xerion separately argued that
the Company breached the Interested Party Clause when approving the Settlement
Agreement because it had provided deferred compensation to two officers under
arrangements where their compensation would increase if the Company and TOTAL Sub
reached agreement on a settlement. This decision need not reach that issue. The Company
breached the Interested Party Clause by authorizing and later effecting the settlement
without Xerion’s consent while Germain served on the Board.
21
C. The Business Plan Clause
The Business Plan Clause makes Xerion’s consent “necessary for authorizing [or]
effecting” any “material alteration to, or change of” the Company’s “business or business
plan.” OX 4 § 3(b)(i)(I). The plain meaning of a “business plan” is “[a] document that
explains what a company wants to do in the future and how it plans to accomplish those
goals; specif[ically], a written proposal explaining a new business or business idea and
usu[ally] covering financial, marketing, and operational plans.”6
During the time that the Company and TOTAL Sub were parties to the Joint Venture
Agreements, the Company’s business plan consisted of pursuing the steps specified in
those agreements, starting with the EPS Phase. OX 10 at ‘057. That phase involved
pursuing a pilot project in Seep Ridge, Utah, for the extraction of oil from shale by heating
it inside a single-use, earthenware capsule. TOTAL Sub committed to support the project
with $160 million, representing 80% of the project budget. OX 9 at ‘367. TOTAL Sub also
provided personnel, technological support, and operational assistance.
Before entering into the Joint Venture Agreements, the Company had been
6
Business Plan, BLACK’S LAW DICTIONARY (11th ed. 2019); see Business Plan,
Cambridge Dictionary (“a detailed plan describing the future plans of a business”),
https://dictionary.cambridge.org/dictionary/english/business-plan (last visited Oct. 14,
2019); Business Plan, Lexico (“A document setting out a business’s future objectives and
strategies for achieving them.”),
https://en.oxforddictionaries.com/definition/business_plan (last visited Oct. 14, 2019);
Business Plan, Collins Dictionary (“a detailed plan for setting up or developing a business,
especially one that is written in order to borrow money”),
https://www.collinsdictionary.com/dictionary/english/business-plan (last visited Oct. 14,
2019).
22
attempting to commercialize its technology immediately and on its own. Not surprisingly,
the Company described its entry into the Joint Venture Agreements as a “significant
change[]” in “the business plans of the Corporation.” OX 8 at ‘764. By entering into the
Settlement Agreement, unwinding the Joint Venture Agreements, and exiting from the joint
venture, the Company materially changed its business plan.
The Company’s conduct underscores its material change in direction. While the
parties were negotiating the Settlement Agreement, Company management recognized the
need to prepare a new business plan that accounted for TOTAL Sub’s departure. See OX
34. As part of that effort, the Company’s CEO developed and distributed a nineteen-page
presentation entitled “Business Plan” that contemplated developing a smaller steel capsule
and potentially pursuing a project in Jordan. See OX 40 at ‘558 to ‘562.
In April 2017, the Committee met to vote on several “business plan options”
developed by management. See OX 49 at ‘477 to ‘478; see also OX 50. The Committee
was voting on these items, instead of the Board, because the Board empowered the
Committee to address matters where Xerion had conflicting interests. If the Company was
simply continuing to pursue its existing business plan, there would have been no reason to
route the discussions and decision to the Committee. Only a change in direction created a
potential conflict with Xerion. The minutes of the Committee meeting reflect that the
Committee decided to pursue a new business plan involving the commercial development
of a reusable steel capsule that potentially could be deployed in Jordan, along with the
suspension of the Company’s prior EPS project in Utah. See OX 49 at ‘177 to ‘178, ‘190
to ‘191, ‘196 to ‘199. The change in technology and the potential change in project location
23
affected the Company’s budget, technology development timeline, staffing needs,
contracting needs, and day-to-day operations. As one member of the Board testified, “[I]f
the business plan is the steps that you need to execute a particular outcome, yes,
obviously . . . you are going to approach a reusable capsule in Jordan development
different than continue with the current EPS project.” Street Dep. 393–94.
In an effort to defeat summary judgment, the Company has claimed that its business
plan “was and continues to be to develop, commercialize, and license its oil shale
technology.” AB 6. During discovery, the Company’s directors and officers testified in
lockstep about the Company’s business plan, describing it at a similar level of generality
using effectively the same nine words.7 Based on this testimony, the Company argues that
it has never changed its business plan.
The Company’s argument confuses its “business” with its “business plan.” The
Business Plan Clause requires Xerion’s consent for a material change to the Company’s
“business or business plan.” OX 4 § 3(b)(i)(I) (emphasis added). The plain meaning of the
term “business” is the “commercial enterprise” or the activity that the Company conducts.8
A business plan is more than a headline-level description of the company’s business. It
7
See Bailey Dep. 86–87; Binnion Dep. 53, 100; Bocock Dep. 86–87; Lechtenberger
Dep. 177; Lehnhof Dep. 142–44; Vogel Dep. 89; Waltman Dep. 63.
8
Business, BLACK’S LAW DICTIONARY (11th ed. 2019); see Business, Merriam-
Webster (“a usually commercial or mercantile activity engaged in as a means of
livelihood”), https://www.merriam-webster.com/dictionary/business (last visited Oct. 14,
2019).
24
describes how the Company will carry out its business and achieve its goals. Consistent
with the plain meaning of the term, this court has recognized that a business plan is a
confidential document precisely because of the sensitive strategic and financial information
it contains. See, e.g., Mountain W. Series of Lockton Cos. v. Alliant Ins. Servs., Inc., 2019
WL 2536104, at *7 (Del. Ch. June 20, 2019). In this case, the Company designated
information about its business plan as confidential. See, e.g., RX 6 at ‘789. If the
Company’s business plan was nothing more than a single sentence summary of its business,
then confidential treatment would be unavailable.
The Company’s witnesses only testified in generic terms about the nature of its
business, not its business plan. The contemporaneous documents show that the Company
has always understood its business plan to include the steps needed to carry out its business.
See, e.g., RX 2; RX 3; OX 40; OX 50. The Company’s newfound understanding of a
general, non-specific “business plan” fails to raise a material dispute of fact.9
The Company breached the Business Plan Clause when it entered into the
Settlement Agreement without Xerion’s consent. It subsequently breached the Business
9
See i/mx Info. Mgmt. Sols., Inc. v. Multiplan, Inc., 2014 WL 1255944, at *12 n.43
(Del. Ch. Mar. 27, 2014) (granting motion for summary judgment based on “objective
documentary evidence” that could not be disproven by testimony); Loppert v.
WindsorTech, Inc., 865 A.2d 1282, 1285–86 & n.25 (Del. Ch. 2004) (granting summary
judgment for plaintiff over defendant’s “self-serving revelations” where documentary
evidence established claim), aff’d, 867 A.2d 703 (Del. 2005); see also Merck & Co. v.
SmithKline Beecham Pharm. Co., 1999 WL 669354, at *47 (Del. Ch. Aug. 5, 1999) (post-
trial decision refusing to credit testimony interpreting a contractual provision because
“testimony cannot contradict the plain language of the agreement”), aff’d, 766 A.2d 442
(Del. 2000).
25
Plan Clause when the Committee approved a new business plan without Xerion’s consent.
Ever since, the Company has been continuing to breach the Business Plan Clause by
pursuing a business plan that Xerion never approved. Summary judgment is granted in
Xerion’s favor as to the Company’s past and continuing violations of the Business Plan
Clause.
D. The Redemption Clause
The Redemption Clause makes Xerion’s consent “necessary for authorizing [or]
effecting” a purchase or redemption by the Company of its common stock or warrants. The
Company has been careful not to effect a redemption of the Equity Interests, so the only
question is whether the Company authorized a redemption without Xerion’s consent. By
definition, Xerion’s consent is necessary for a redemption to be authorized. Because Xerion
has not given its consent, the redemption is not authorized, and the Company has not
violated this dimension of the Redemption Clause. Nor does the Settlement Agreement
authorize the Company to proceed with the redemption without Xerion’s consent. It instead
conditions the Company’s ability to proceed with the redemption upon receipt of Xerion’s
consent.
1. Authorization.
The plain meaning of “authorize” is to “[g]ive official permission for or approval
to.”10 Xerion argues that the Company has done everything it needs to do to give its official
10
Authorize, Lexico, https://en.oxforddictionaries.com/definition/authorize (last
visited Oct. 14, 2019); see, e.g., Authorize, Merriam-Webster (“to endorse, empower,
26
permission for the redemption except for receiving Xerion’s consent. In support of this
observation, Xerion cites Section 2.5 of the Settlement Agreement, which provided as
follows:
As soon as reasonably practicable after receipt by Red Leaf of any required
consent or approval, and conditioned upon the execution and delivery of the
[Stockholders Agreement] Amendment and Release Agreement and the
[Investors’ Rights Agreement] Amendment and Release Agreement by
[TOTAL Sub], Red Leaf, and all other parties required to execute such
agreements, [TOTAL Sub] shall transfer and convey to Red Leaf, and Red
Leaf shall accept, the Equity Interests.
OX 28 § 2.5. As Xerion points out, this language is mandatory and leaves no room for
reconsideration, re-authorization, or re-approval once the “required consent or approval”
is received. But this language also conditions the Company’s performance on receipt of
Xerion’s consent. Until that is provided, the Company is not authorized to proceed with
the redemption.11
Xerion also points out that under Section 2.3 of the Settlement Agreement, the
Company was obligated to deliver to TOTAL Sub at closing resolutions from the Board
“authorizing the execution, delivery, and performance by Red Leaf of this Agreement and
justify, or permit by or as if by some recognized or proper authority”),
https://www.merriam-webster.com/dictionary/authorize (last visited Oct. 14, 2019); see
also Waltman Dep. 126.
11
Section 2.5 also conditions the redemption on TOTAL Sub, Red Leaf, and other
parties providing releases. This decision need not express any view on whether the
inclusion of this condition subsequent would enable the Company to argue that the
redemption was not fully authorized, separate and apart from the Company’s obligation to
obtain Xerion’s consent.
27
all documents required to be executed and delivered by Red Leaf in accordance with this
Agreement, and the releases, covenants, and transactions contemplated hereby and
thereby.” Id. § 2.3(d). Compliance with this covenant meant that the Board had authorized
the transactions. It did not mean that the Company had received all other consents
necessary to authorize the transactions.
The most difficult provision in the Settlement Agreement for the Company is
Section 3.1(c), where the Company represented flatly that the transactions that the
Settlement Agreement contemplated were fully authorized:
Authorization and Enforceability. The execution, delivery, and performance
by Red Leaf of this Agreement and all documents required to be executed
and delivered by Red Leaf in accordance with this Agreement, and the
releases, covenants, and transactions contemplated hereby and thereby, have
been duly and validly authorized by all necessary corporate action on the part
of Red Leaf, including the board of directors or stockholder action, and the
individual executing this Agreement on Red Leaf’s behalf is duly authorized
to do so. This Agreement and all documents required to be executed and
delivered by Red Leaf in accordance with this Agreement have been duly
executed and delivered by Red Leaf and this Agreement and such documents
constitute the valid and binding obligation of Red Leaf, enforceable in
accordance with its terms.
Id. § 3.1(c). By making this representation, the Company obligated itself contractually to
TOTAL Sub and, as between those parties, assumed the risk of any inaccuracy. By doing
so, the Company exposed itself to remedies for breach if TOTAL Sub sought to enforce
the representation on the theory that Xerion’s failure to provide consent rendered the
representation inaccurate. Under those circumstances, it is conceivable that Xerion might
have some type of claim against the Company for harm it suffered as a result of an
inaccurate representation about due authorization made in violation of Xerion’s contractual
28
consent rights, but those facts are not presented by this case. Here, Xerion claims that the
Company breached the Redemption Clause by entering into the Settlement Agreement,
even though the Settlement Agreement conditioned the Company’s authority to proceed
with the redemption on receipt of Xerion’s consent. Because of the condition subsequent,
the entry into the Settlement Agreement did not breach the “authorizing” dimension of the
Settlement Agreement. The flat representation may well create risk for the Company vis-
à-vis TOTAL Sub, but it does not mean that the redemption was authorized in violation of
the Redemption Clause.12
Xerion has also observed that under Section 6.20 of the Settlement Agreement, the
settlement became effective immediately upon TOTAL Sub’s payment of the $85 million
in cash, without any aspect of the parties’ relationship being held in suspension pending
further developments. Written in all caps and bolded for emphasis, Section 6.20 stated:
Effectiveness. SUBJECT TO RED LEAF’S RECEIPT OF THE CASH
FEE, THE ASSUMPTION OF OBLIGATIONS, RELEASES,
12
In any dispute over the accuracy of Section 3.1(c), the Company perhaps would
have arguments that its flat representation was not so flat. Separately, in Section 3.1(e), the
Company represented:
Except for any consent or approval required for the consummation . . . of the
[return of the Equity Interests], no consent, approval, authorization or permit
. . . is required for or in connection with the execution, delivery, and
performance of this Agreement by Red Leaf or the consummation by Red
Leaf of the transactions contemplated by this Agreement.
Id. § 3.1(e). The Company might well assert that the specific and qualified representation
it made in Section 3.1(e) governed the authorization of the redemption of the Equity
Interests, rather than the broader representation in Section 3.1(c) that addressed the
transaction as a whole.
29
COVENANTS, AND INDEMNITIES IN THIS AGREEMENT ARE
EFFECTIVE IMMEDIATELY AND ARE NOT CONDITIONED
UPON THE PERFORMANCE OF ANY OBLIGATION, THE
CONSUMMATION OF ANY TRANSACTION, OR THE
OCCURRENCE OF ANY OTHER EVENT, INCLUDING THE
FUTURE PERFORMANCE BY EITHER PARTY OF ANY
OBLIGATION CONTAINED IN THIS AGREEMENT OR THE
FUTURE CONSUMMATION OF ANY TRANSACTION
CONTEMPLATED BY THIS AGREEMENT. THE PARTIES
RECOGNIZE AND AGREE THAT MUTUAL CONSIDERATION
EXISTS ON THE EFFECTIVE DATE TO SUPPORT THIS
PROVISION OF IMMEDIATE EFFECTIVENESS.
Id. § 6.20. The inclusion of this provision supports the Company’s view of the transaction.
Because the redemption was not authorized and would not be completed until after Xerion
gave its consent, the parties did not want anyone to be able to argue that the settlement had
not been implemented. Section 6.20 makes clear that the principal aspects of the transaction
had been implemented and completed. Once Xerion gives its consent and the redemption
becomes authorized, that aspect of the transaction will also be completed.
Xerion’s strongest interpretive argument criticizes the Company’s approach for
collapsing the distinction between “authorizing” and “effecting,” rendering the former a
nullity. As Xerion sees it, for the restriction on “authorizing” to have meaning, it must be
possible for the Company to breach the authorization requirement without having obtained
Xerion’s consent. Put differently, by including the authorization of a redemption without
Xerion’s prior consent as a separate category of breach, the parties necessarily envisioned
that a redemption could be sufficiently authorized to support a breach if Xerion’s consent
had not yet been obtained.
30
Xerion’s reading is likely correct. There could be a set of facts in which the
Company claimed to have authorized a redemption and was in the process of moving
forward towards effecting it. Under those circumstances, Xerion could assert a claim for
breach of the “authorizing” dimension of the Redemption Clause. But that is not the
situation here. In this case, the Settlement Agreement conditioned the Company’s authority
to proceed with the redemption on receipt of Xerion’s consent. The Company therefore did
not violate the Redemption Clause by entering into the Settlement Agreement.
2. The Step Transaction Doctrine
In the alternative, Xerion turns to the step transaction doctrine. This doctrine “treats
the ‘steps’ in a series of formally separate but related transactions involving the transfer of
property as a single transaction if all the steps are substantially linked. Rather than viewing
each step as an isolated incident, the steps are viewed together as components of an overall
plan.” Noddings Inv. Gp., Inc. v. Capstar Commc’ns, Inc., 1999 WL 182568, at *6 (Del.
Ch. Mar. 24, 1999) (internal quotation marks omitted); accord Bank of N.Y. Mellon Tr. Co.
v. Liberty Media Corp., 29 A.3d 225, 239–40 (Del. 2011). “The purpose of the step
transaction doctrine is to ensure the fulfillment of parties’ expectations notwithstanding the
technical formalities with which a transaction is accomplished.” Coughlan v. NXP B.V.,
2011 WL 5299491, at *7 (Del. Ch. Nov. 4, 2011). “The step-transaction doctrine applies
if the component transactions meet one of three tests.” Liberty Media, 29 A.3d at 240.
“First, under the ‘end result test,’ the doctrine will be invoked ‘if it appears that a
series of separate transactions were prearranged parts of what was a single transaction, cast
from the outset to achieve the ultimate result.’” Id. (quoting Noddings, 1999 WL 182568,
31
at *6). “Second, under the ‘interdependence test,’ separate transactions will be treated as
one if ‘the steps are so interdependent that the legal relations created by one transaction
would have been fruitless without a completion of the series.’” Id. (quoting Noddings, 1999
WL 182568, at *6). If the nominally separate elements have meaning “‘only as part of the
larger transaction,’” then the interdependence test is met and the step transaction doctrine
applies. Coughlan, 2011 WL 5299491, at *8 (quoting Noddings, 1999 WL 182568, at *6).
“The third and ‘most restrictive alternative is the binding-commitment test under which a
series of transactions are combined only if, at the time the first step is entered into, there
was a binding commitment to undertake the later steps.’” Liberty Media, 29 A.3d at 240
(quoting Noddings, 1999 WL 182568, at *6).
The step-transaction doctrine is inapposite because the question in this case is not
whether nominally separate transactions are actually parts of a single transaction. The
question in this case is whether the final aspect of a single transaction should be treated as
if it were authorized even though the Company’s ability to proceed was conditioned
expressly on Xerion’s consent. The Settlement Agreement is a single transaction—a
settlement—that admittedly has multiple parts. One of those parts—the redemption—has
not yet taken place because the Company has not yet authorized it. If the Company was
claiming that the redemption was not part of the settlement, then the step-transaction
doctrine would defeat that argument, most obviously because the Settlement Agreement
would satisfy the binding commitment test. But that is not the issue. The question is rather
whether the Company is currently authorized to redeem the Equity Interests in compliance
with an otherwise binding commitment imposed by the Settlement Agreement. The
32
Settlement Agreement conditions the Company’s obligation to redeem the Equity Interests
on receipt of Xerion’s consent, which is necessary for the Company to authorize the
redemption. The step transaction doctrine cannot supply an authorization that does not yet
exist. Once again, the Company did not breach the Redemption Clause when it entered into
the Settlement Agreement without Xerion’s consent.
E. Other Arguments
The Company made other points in its papers that do not impede granting summary
judgment on the issue of liability for breach of the Interested Party Clause and the Business
Plan Clause. When discussing the Company’s development of its technology and past
interactions between the Company and Xerion, the Company pointed out a series of
occasions when Xerion did not assert a consent right, even though it theoretically could
have. The Company did not argue that Xerion waived its consent right, and Xerion’s
decision not to assert a consent right on previous occasions under different factual
circumstances would not prevent Xerion from asserting its consent rights in connection
with the settlement and subsequent developments. The Company also did not argue that
Xerion’s decision not to assert a consent right on previous occasions resulted in a course
of dealing that should be used to interpret the consent rights. Because the consent rights
are clear and unambiguous, resort to extrinsic evidence such as the parties’ course of
dealing is unwarranted.
The Company also argued repeatedly and at length that the Board acted in good
faith and complied with its fiduciary duties when approving the settlement and making
decisions regarding the post-settlement business plan. Xerion has not asserted a claim for
33
breach of fiduciary duty. Xerion has asserted a claim for breach of contract. The two legal
frameworks are separate. A board can readily comply with its fiduciary duties while
making a decision that breaches a contract, just as a board could opt to comply with a
contract under circumstances where its fiduciary duties would call for engaging in efficient
breach. See Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *24 (Del.
Ch. Apr. 14, 2017).
Along similar lines, the Company observed that Xerion’s designee on the Board
congratulated Company management on achieving the settlement and voted in favor of the
initial resolution that approved the settlement subject to receiving Series A consent. A
stockholder and its director designee occupy different roles, are subject to different
decisional frameworks, and can have different views.
Stockholders in Delaware corporations have a right to control and vote their
shares in their own interest. They are limited only by any fiduciary duty owed
to other stockholders. It is not objectionable that their motives may be for
personal profit, or determined by whim or caprice, so long as they violate no
duty owed other shareholders.
Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 845 (Del. 1987). A director is a fiduciary
who must seek loyally, in good faith, and with due care to pursue the best interests of the
corporation and maximize its value for the ultimate benefit of the undifferentiated equity
in the aggregate. See ODN, 2017 WL 1437308, at *17–22.
The fact that Xerion’s director designee viewed the transaction as favorable for the
Company when acting in his capacity as a director does not limit Xerion’s ability to
withhold consent for the same transaction in its capacity as a stockholder. This conclusion
does not mean that the actions of Xerion’s director designee are irrelevant to the ultimate
34
outcome of the case. During a later phase of the case, the views of Xerion’s director
designee may provide probative evidence on the quantum of damages. But this case has
not yet reached the damages phase. The question presently is whether the Company
breached Xerion’s consent rights.
III. CONCLUSION
Partial summary judgment is granted in favor of Xerion as to the Company’s breach
of the Interested Party Clause and the Business Plan Clause. Xerion’s motion is otherwise
denied.
35