Fortis Advisors LLC v. Stora Enso AB ( 2018 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
417 S. State Street
JOSEPH R. SLIGHTS III Dover, Delaware 19901
VICE CHANCELLOR Telephone: (302) 739-4397
Facsimile: (302) 739-6179
Date Submitted: July 10, 2018
Date Decided: August 10, 2018
Rudolf Koch, Esquire William Lafferty, Esquire
Sarah A. Clark, Esquire John DiTomo, Esquire
Ryan P. Durkin, Esquire Elizabeth Mullin, Esquire
Richards, Layton & Finger, P.A. Morris, Nichols, Arsht & Tunnell LLP
920 North King Street 1201 N. Market Street
Wilmington, DE 19801 Wilmington, DE 19899-1347
Re: Fortis Advisors LLC v. Stora Enso AB
C.A. No. 12291-VCS
Dear Counsel:
This case arises from a contractual dispute between Plaintiff, Fortis Advisors
LLC (“Fortis”), and Defendant, Stora Enso AB (“Stora Enso”), under an agreement
dated June 18, 2014 (the “Merger Agreement”) by which Stora Enso acquired non-
party, Virdia, Inc. (“Virdia”) (the “Merger”). The Merger Agreement provides for
two forms of payment: (1) a $25.27 million purchase price (subject to certain
adjustments) to be paid upon closing; and (2) two post-closing payments to be paid
only upon the achievement of designated milestones (the “Milestone Payments”).
Fortis, as shareholder representative, has filed a complaint in which it alleges that
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Stora Enso breached the Merger Agreement by not making the Milestone Payments.
More specifically, Fortis alleges that the Merger Agreement bound Stora Enso to a
specific performance timeline meant to facilitate its achievement of the two
milestones that would trigger the Milestone Payments. According to Fortis, Stora
Enso failed to comply with that timeline in breach of the Merger Agreement.
Stora Enso has moved to dismiss Fortis’ complaint on the ground that the
Merger Agreement unambiguously did not obligate it to perform under any set
timeline. According to Stora Enso, because the milestones were not achieved as
prescribed in the Merger Agreement, it has no obligation, contractual or otherwise,
to make the Milestone Payments. For the reasons that follow, Stora Enso’s motion
to dismiss must be denied.
I. BACKGROUND
The following facts are drawn from the allegations in Plaintiff’s Verified
Amended Complaint (the “Complaint”), documents incorporated therein by
reference and those matters of which I may take judicial notice.1 As I must on a
motion to dismiss under Court of Chancery Rule 12(b)(6), I accept as true the
1
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169 (Del. 2006).
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Complaint’s well-pled factual allegations and draw all reasonable inferences from
these allegations in the light most favorable to Plaintiff.2
A. Parties and Relevant Non-Parties
Plaintiff, Fortis, is a Delaware limited liability company headquartered in San
Diego, California.3 It represents the interests of Virdia’s pre-merger Common
Stockholders, Option Holders and Warrant Holders (collectively, the “Equity
Holders”), and is pursuing this action on their behalf.4
Defendant, Stora Enso, is a Swedish private limited liability company with its
principal place of business in Stockholm, Sweden.5 It “is a leading provider of
renewable solutions in packaging, biomaterials, wood and paper, with a focus on
replacing non-renewable materials.”6
Prior to the Merger, non-party, Virdia, pursued the business of biorefining,
which is the process of “extracting and refining various products from biomass as a
2
Id. at 168.
3
Compl. ¶ 20.
4
Compl. ¶¶ 1–2.
5
Compl. ¶ 21.
6
Id.
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feedstock or raw material.”7 As a result of the Merger, Virdia became Stora Enso’s
wholly-owned subsidiary.8
B. The Milestones and Other Relevant Contractual Provisions
The parties’ dispute regarding the Milestone Payments implicates several
provisions of the Merger Agreement.9 I discuss each in turn below.
1. The Milestone Payments
The Merger Agreement, at § 2.14, defines Stora Enso’s contingent obligation
to make the Milestone Payments. Under Section 2.14(a), “[i]f following the Closing
Date and prior to December 31, 2015 . . . the milestones set forth in Annex B-1 [to
the Merger Agreement] shall have been completed, [Stora Enso] shall pay to
[Fortis] . . . $12,000,000,”10 less certain bonuses owed to former Virdia executives
7
Compl. ¶ 2.
8
Compl. ¶¶ 1, 31.
9
Compl., Ex. A (“Merger Agmt.”).
10
The Merger Agreement defines “Closing Date” as “within three (3) Business Days after
the last of the conditions set forth in Article VI [‘Conditions Precedent’] is satisfied or
waived . . . or at such other date, time or place as the parties hereto shall agree in writing.”
Merger Agmt. § 2.9(a). The Merger closed on June 19, 2014. Compl. ¶ 31.
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(the “First Milestone Payment”).11 Under Section 2.14(b), “[i]f following the
Closing Date and prior to June 30, 2017 . . . the milestones set forth on Annex B-2
shall have been completed, [Stora Enso] shall pay to [Fortis] . . . $17,300,000” (the
“Second Milestone Payment”).12
Annex B-1 and Annex B-2, in turn, set forth the requirements for achievement
of each of the two milestones. The first milestone (“Milestone 1”), outlined in
Annex B-1, required Stora Enso to complete three principal steps by December 31,
2015: (1) the construction and “commission”—defined as “the process of assuring
all systems and components are designed, installed, tested, operated and maintained
properly”—of a “pilot plant” in Danville, Virginia (the “Danville Pilot Plant”);
(2) the completion of three seventy-two-hour extraction campaigns from two
biomass feedstocks—sugar cane bagasse and eucalyptus13; and (3) the production of
three products that meet certain specifications.14 The parties understood that the
11
Merger Agmt. § 2.14(a).
12
Id.
13
Compl. ¶ 36. One extraction “was aimed at separating hemi-sugars from ligno-cellulosic
biomass,” while the other “was aimed at separating lignin from cellulose.” Compl. ¶ 25.
14
Merger Agmt., Annex B-1.
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“centerpiece” of the Danville Pilot Plant would be a piece of equipment called a
“Skid,” a machine designed to extract certain materials from biomass.15 As provided
in Section 2.14(a), if Stora Enso completed Milestone 1 by December 31, 2015, it
would be required to make the First Milestone Payment ($12 million) to Fortis for
distribution to the Equity Holders.
The second milestone (“Milestone 2,” together with Milestone 1, the
“Milestones”), as defined in Annex B-2, required Stora Enso to complete two steps
by June 30, 2017: (1) the construction and commission of a “commercial plant” in
Raceland, Louisiana (the “Raceland Plant”), and (2) “the production of 7,000 US
tons of liquid xylose (a sugar isolated from wood) at a variable cost at or below $650
per ton.”16 If Milestone 2 was completed by June 30, 2017, Stora Enso would be
obliged to pay out the Second Milestone Payment ($17.3 million) to Fortis for
distribution to the Equity Holders.17
15
Compl. ¶ 7. The “Skid” is “an integrated modular system” used “to separate lignin from
[] lignocellulosic material.” Compl. ¶ 28.
16
Compl. ¶ 14–15.
17
Compl. ¶ 2.
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2. Stora Enso’s Merger Agreement Representations
In Section 4.2 of the Merger Agreement, Stora Enso represented that, at the
time of execution, it had “the requisite corporate power and authority and ha[d] taken
all corporate action necessary to execute and deliver [the Merger] Agreement, to
perform its obligations hereunder and to consummate the transactions contemplated
hereby.”18 Stora Enso further represented that “[n]o other corporate action . . . [was]
necessary to authorize the execution, delivery and performance of [the Merger]
Agreement . . . and consummation of the transactions contemplated hereby.”19
3. Merger Agreement § 5.15 and Schedule 5.15
Section 5.15(a) states that Stora Enso “shall conduct the business of [Virdia,
post-close,] as provided in the financial and human resource plan attached [to the
Merger Agreement] as Schedule 5.15, other than as would, in the good faith belief
of [Stora Enso], increase the likelihood that the [M]ilestones set forth on Annex B-
1 and Annex B-2 will be achieved, and [Stora Enso] shall not Willfully take any
action or omit to take any action in order to avoid paying the Milestone Payments in
18
Merger Agmt. § 4.2(a) (emphasis supplied).
19
Id.
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accordance with Section 2.14.”20 Section 5.15(b) provides that, in the event Stora
Enso “materially breaches” Section 5.15(a), “any remaining funds due under the
Milestone Payments shall become due and payable in full.”21
Schedule 5.15, referenced in Section 5.15, contains four tabs. Tab one,
labeled “Summary Headcount,” sets forth a chart displaying each step of the
milestone process through Milestone 2 with corresponding employee headcounts.22
Tab two, labeled “Team Assignments,” lists employees, their location, as well as
current and planned assignments as related to the Milestones.23 Tab three, labeled
“Virdia Quarterly Budget,” depicts Virdia’s quarterly budgets during the relevant
timeframe.24 Finally, Tab four, labeled “Q2_2014 Detail,” lists salary, rental and
lease costs and other expenses.25
20
Merger Agmt. § 5.15(a). The Merger Agreement defines “Willful” as “an act or failure
to act by any party with the actual knowledge that the taking of such act or failure to take
such act would cause a breach of this Agreement.” Merger Agmt. § 1.1 (defining Willful).
21
Merger Agmt. § 5.15(b).
22
Merger Agmt., Schedule 5.15.
23
Id.
24
Id.
25
Id.
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C. Procedural Posture
Fortis initiated this action on May 3, 2016, to recover the First Milestone
Payment, asserting Stora Enso failed to achieve Milestone 1 due to material breaches
of the Merger Agreement. Fortis filed the now-operative amended complaint on
September 27, 2017, alleging the same for Milestone 2 and the Second Milestone
Payment. On November 27, 2017, Stora Enso filed its motion to dismiss, pursuant
to Court of Chancery Rule 12(b)(6), for failure to state a viable breach of contract
claim.
II. ANALYSIS
Under Court of Chancery Rule 12(b)(6), a complaint must be dismissed if the
plaintiff would be unable to recover under “any reasonably conceivable set of
circumstances susceptible of proof” based on the facts as pled in the complaint.26
In considering a motion to dismiss, the court must accept as true all well-pled
allegations in the complaint and draw all reasonable inferences from those facts in
Plaintiff’s favor.27
26
Gen. Motors, 897 A.2d at 168.
27
Id.
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Generally, the interpretation of a contract is a question of law that is suitable
for determination on a motion to dismiss.28 The court may grant a motion to dismiss
based on contractual language, however, only if the contractual language is
unambiguous—meaning, the language is susceptible of only one reasonable
interpretation.29 “Even if the [] Court considered the defendants’ interpretation more
reasonable than the plaintiffs’, on a Rule 12(b)(6) motion, [the Court may not] select
the ‘more reasonable’ interpretation as legally controlling.”30 Thus, to prevail on its
motion, Stora Enso must demonstrate that its proffered interpretation of the Merger
Agreement is the only reasonable interpretation.31
28
Micro Strategy Inc. v. Acacia Research Corp., 2010 WL 5550455, at *5 (Del. Ch.
Dec. 30, 2010).
29
VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615 (Del. 2003) (denying
motion to dismiss where contractual provisions were ambiguous); Kaiser Aluminum Corp.
v. Matheson, 681 A.2d 392, 395 (Del. 1996) (holding that ambiguity exists “when the
provisions in controversy are reasonably or fairly susceptible of different interpretations”).
30
Appriva S’holder Litig. Co., LLC v. EV3, Inc., 937 A.2d 1275, 1292 (Del. 2007)
(citing Vanderbilt Income & Growth Assoc. v. Arvida/JMB Managers, Inc., 691 A.2d 609
(Del. 1996)) (emphasis supplied).
31
VLIW, 840 A.2d at 615 (“Dismissal, pursuant to Rule 12(b)(6), is proper only if the
defendants’ interpretation is the only reasonable construction as a matter of law.” (emphasis
in original)).
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As I explain below, Defendant has not proffered the only reasonable
interpretation of the contractual provisions in controversy. Consequently, the
motion to dismiss must be denied.
A. Merger Agreement § 4.2 is Ambiguous
Fortis alleges Stora Enso breached Merger Agreement § 4.2 because, at the
time Stora Enso made the representations in that section, it had not obtained internal
authorization to order and purchase the “Skid,” the key piece of equipment required
for the timely completion of Milestone 1.32 As alleged in the Complaint, in order to
meet Milestone 1, Virdia “understood that the Skid had to be, and would be, ordered
[by Stora Enso] promptly upon the closing of the [M]erger.”33 Because Stora Enso
had not obtained internal authorization for the purchase prior to the Merger, it failed
to order the Skid promptly. This delay, in turn, caused Stora Enso to fail to meet the
Milestone 1 deadlines.34
32
Compl. ¶¶ 35–39.
33
Compl. ¶ 39. Schedule 5.15 “provided for the Skid to be commissioned by the end of
June 2015.” Tr. of Hr’g Apr. 16, 2018, 16:10–11.
34
Compl. ¶¶ 50–57.
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Stora Enso counters that Section 4.2 is nothing more than a standard corporate
authorization provision that simply acknowledged Stora Enso’s legal authority to
enter into and consummate the Merger.35 According to Stora Enso, any construction
of this provision that would require it to have obtained pre-closing authorization for
each post-closing purchase required for achievement of the Milestones is not
reasonable.36
There is more than one reasonable construction of Section 4.2. One
reasonable construction is, as Stora Enso posits, that Stora Enso merely
acknowledged its authority to enter into the Merger and that it had received all
necessary approvals to consummate that transaction.37 Another reasonable
construction, however, is that the language in Section 4.2, in light of the particular
Def.’s Opening Br. in Supp. of Its Mot. to Dismiss Pl.’s Verified Am. Compl. (“Def.’s
35
Opening Br.”) 13.
36
Def.’s Opening Br. 14.
37
See Lou R. Kling, Eileen T. Nugent & Brandon A. Van Dyke, Negotiated Acquisitions
of Companies, Subsidiaries and Divisions § 11.04[6] (1992) (2018 update) (explaining that
a corporate authorization clause may include language representing that the company has
the power and authority “to perform its obligations under th[e] Agreement” or “to perform
the transactions provided [in the Agreement]” and that “whether such nuances in language
have any meaningful effect will vary from case to case,” depending in part “on whether
there are ancillary documents of importance”).
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circumstances, reflected Stora Enso’s representation that it had received
authorization to order the Skid pre-closing. Specifically, in Section 4.2, Store Enso
represented not only that it had authority “to consummate the [merger],” but also
that it had “taken all corporate action necessary . . . to perform its obligations” under
the Merger Agreement and that “[n]o other corporate action . . . [was] necessary to
authorize its . . . performance obligations under [the Merger] Agreement.”38 This
provision can reasonably be construed to reflect that Stora Enso was representing
that it had received approval to order the Skid—the centerpiece of Milestone 1—
such that it could timely acquire the Skid post-closing in order to allow the Danville
Pilot Plant to be operational in time to meet Milestone 1. Thus, Defendant’s
interpretation is not the only reasonable interpretation.
B. Merger Agreement § 5.15 is Ambiguous
According to Fortis, Merger Agreement § 5.15 and Schedule 5.15 together
required Stora Enso to complete certain steps within the timeframes designated in
Schedule 5.15.39 Specifically, Fortis contends that “[b]oth [Schedule 5.15’s] number
38
Merger Agmt. § 4.2(a) (emphasis supplied).
39
Compl. ¶¶ 45–46.
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and timing of personnel [] were inextricably linked or correlated with specific
milestone phases and the timing of those phases.”40 With this construction in mind,
Fortis alleges that Stora Enso’s delay in ordering the Skid, failure to comply with its
commitments under Schedule 5.15, and the consequent failure to allow sufficient
time for the completion of Milestone 1’s extraction campaigns constitute a breach
of Section 5.15.41 These failures, along with unauthorized changes in the design and
engineering of the Raceland Plant, also caused Stora Enso’s failure to achieve
Milestone 2.
Fortis maintains that any other construction of Section 5.15 and Schedule 5.15
would allow Stora Enso, without recourse, to drag its feet, sit on the technology
acquired in the Merger and delay performance beyond the deadlines for triggering
the Milestone Payments. According to Fortis, “when read in full and situated in
commercial context between the parties,”42 particularly given that the contingent
40
Pl.’s Br. in Opp’n to Def’s. Mot. to Dismiss Pl.’s Verified Am. Compl. (“Pl.’s Answering
Br.”) 43.
41
Compl. ¶¶ 70–74.
42
Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co., 166 A.3d 912, 926–27
(Del. 2017).
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nature of the merger consideration was a prominent feature of this transaction, the
Merger Agreement cannot reasonably be construed to allow this result.
In response, Stora Enso contends that the Complaint lacks any allegation that
Stora Enso “failed to have the required number of employees or make the required
expenditures as set forth in the ‘financial and human resource plan,’” and that the
timeframes depicted in Schedule 5.15 were merely guidelines, not mandatory
requirements or “binding commitments.”43 This, according to Stora Enso, is the only
reasonable interpretation of Schedule 5.15 because Fortis’ construction would
nullify the contingency of Section 2.14’s Milestone Payments and would require
Stora Enso to make the Milestone Payments regardless of whether or not the
Milestones were actually achieved.44
Having considered the various provisions relating to the Milestone Payments
alongside Schedule 5.15, I am unable to render a definitive “four corners”
construction of Section 5.15. When interpreting a contract, “it is helpful to look at
the transaction from a distance [in order to give] sensible life to a real-world
43
Def.’s Opening Br. 22–23.
44
Def.’s Opening Br. 21.
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contract.”45 Here, the Equity Holders sold technology to Stora Enso in exchange for
which they received $25.27 million at closing (subject to certain adjustments) as
well as the prospect of receiving an additional $12 million to approximately
$30 million if Virdia’s technology delivered as promised by the negotiated
Milestone due dates. This structure contemplated that, if the technology performed
as Virdia had promised, the Equity Holders would receive the remainder of their
bargained-for consideration (potentially more than was paid at closing); if the
technology did not deliver, they would receive no further payments. The Merger
Agreement also contemplated, however, that Stora Enso would deploy its enhanced
resources to move the project forward in order to test the deal thesis (that Virdia’s
technology would work as promised) with the understanding that a failure to do so
could, under certain circumstances, expose Stora Enso to a breach of contract
claim.46 Against this backdrop, it is reasonable to construe the time markers in
45
Heartland Payment Sys., LLC v. Inteam Assocs., LLC, 171 A.3d 544, 557 (Del. 2017)
(internal quotation and citation omitted); see also Chicago Bridge & Iron Co. N.V., 166
A.3d at 927 (“The basic business relationship between [contracting] parties must be
understood to give sensible life to any contract.”).
46
See Merger Agmt. § 5.15.
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Schedule 5.15 as deadlines with which Stora Enso was required to comply or, at
least, as deadlines from which Stora Enso could not materially deviate.
On the other hand, Stora Enso’s interpretation is also reasonable. To the
extent Fortis’ construction of Section 5.15 would allow Fortis to recover the
Milestone Payments in all events when the Milestones are not achieved by the
established deadlines, even if that failure is due to issues with the technology or other
matters beyond Stora Enso’s control, this construction would seem contrary to the
contingent nature of the Milestone Payments. Read in this light, Stora Enso’s
construction of Section 5.15 and Schedule 5.15 as setting guidelines for the
performance of certain steps along the pathway towards achieving the Milestones,
but not as mandatory performance deadlines, is also a reasonable construction.
III. CONCLUSION
The meaning of Section 4.2 and Section 5.15 (with its accompanying
schedule) cannot be discerned as a matter of law from the language within the four
corners of the Merger Agreement. Accordingly, the parties will be afforded the
opportunity to discover and present extrinsic evidence in support of their competing
constructions of these provisions.
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Stora Enso’s Motion to Dismiss is DENIED.
IT IS SO ORDERED.
Very truly yours,
/s/ Joseph R. Slights III