Delaware Corporate and Commercial Litigation Blog : Delaware Litigation Lawyer & Attorney : Francis G. X. Pileggi : Corporate, Business, Commercial, Delaware Chancery Court

Addy v. Piedmonte, et al., Del. Ch., No. 3571-VCP (March 18, 2009), read opinion here.

Kevin Brady, a highly respected Wilmington lawyer, prepared the following review of this case:

In this Chancery Court decision, Vice Chancellor Parsons dismissed a claim for breach of fiduciary duty in a case with a complex fact pattern involving oil and gas exploration participation agreements, guarantees and notes.

The Court, in a 57-page opinion, addressed a multitude of issues raised by the eleven-count complaint against eleven defendants where the Court characterized the relationships among the parties under the various contracts as, “at best, murky.” In the pending motion, six of the defendants (the “Moving Defendants”) moved to dismiss eight claims for breach of contract, breach of guaranties, fraud and equitable fraud, breaches of fiduciary duty, promissory estoppel, unjust enrichment, and for equitable relief, including specific performance, an accounting, a constructive or resulting trust, and an equitable lien. The Court summed up the factual quagmire by noting “[this] dispute involves the interrelationship of several written contracts each purporting to integrate fully the agreement among the parties with the terms of notes that were described in summary fashion in informal documents, but never formally issued.”

The Court discussed the language of the Participation Agreements and issues related to them including the parties’ intentions, extrinsic evidence, the parol evidence rule and the concept of integration.

The Concept of Integration in Contract Law

With respect to arguments about integration of the contracts in this case, the Court noted:

Clauses indicating that the contract is an expression of the parties’ final intentions generally create a presumption of integration. Courts, however, may consider extrinsic evidence to discern if the contract is completely or partially integrated. Furthermore, in determining whether a contract is fully integrated, the Court focuses on whether it is carefully and formally drafted, whether it addresses the questions that would naturally arise out of the subject matter, and whether it expresses the final intentions of the parties.

With respect to the only claim that was dismissed by the Court (Count VIII Breach of Fiduciary Duty), the Court noted that in early 2006, two defendants, Piedmonte and Stover offered, at approximately the same time, separate investment opportunities to plaintiff. Within three months, the plaintiff, a sophisticated investor, contributed cash to the two investments in an aggregate amount exceeding $3 million. Pursuant to agreements with two of the defendant LLCs, the plaintiff directly provided money to those defendants, which undertook to purchase participation units in the investments from two of the Westside defendants in exchange for notes. The $3 million eventually found its way to two entities, each of which are owned 50% by an entity controlled by Piedmonte and 50% by an entity controlled by Stover.

Creation of Fiduciary Relationship Alleged

In Count VIII, the plaintiff claimed that Stover breached a fiduciary duty with respect to these commercial contracts by inducing his participation in those investments and engaging in self-dealing by retaining a portion of the plaintiff’s cash contribution. On this point, Vice Chancellor Parsons noted:

Under Delaware law, a fiduciary relationship arises where one person places special trust in another or where one person has a special duty to protect the interests of another. Generally, the fiduciary enjoys a position of superiority in knowledge or expertise upon which the other person relies. A fiduciary relationship requires confidence reposed by one side and domination and influence exercised by the other.

Based upon the above, the Court found that Stover did not owe a fiduciary duty to the plaintiff because the Participation Agreements included provisions under which the plaintiff represented that he conducted an independent investigation into Westside, including its business and financial welfare, and that he did not rely on any statements made or investigations performed by other entities.

Fiduciary Relationships v. Commercial Relationships

The Court also discussed the concerns of extending the fiduciary duty doctrine to ordinary commercial transactions:

[I]t is vitally important that the exacting standards of fiduciary duties not be extended to quotidian commercial relationships. This is true both to protect participants in such normal market activities from unexpected sources of liability against which they were unable to protect themselves and, perhaps more important, to prevent an erosion of the exacting standards applied by courts of equity to persons found to stand in a fiduciary relationship to others.

Bargained-for commercial relationships between sophisticated parties do not give rise to fiduciary duties. In addition, this Court is chary of expanding the scope of fiduciary duty to a broad set of commercial relationships which traditionally has been regulated by normal market conditions, rather than the scrupulous concerns of equity for persons in special relationships of trust and confidence.

The Court found that the plaintiff entered into an agreement to purchase participation units in the two projects at issue after he had ample opportunity to review their terms and negotiate new terms if required before contributing any money. Thus, the plaintiff’s claim that Stover breached his fiduciary duties was without merit, and as a result, it was dismissed.

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D Gyms, LLC v. Robino-Bay Court Plaza, LLC, Del. Ch., No. 3649-VCN, (Jan. 15, revised on Feb. 12, 2009), read letter opinion here.

This Chancery Court letter decision ordered specific performance of the terms of a shopping center lease relating to signage space allowed for the tenant. 

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BAE Systems Information and Electronic Systems Integration Inc. v. Lockheed Martin, (Del. Ch., Feb. 3, 2009), read opinion here.

We are fortunate to have the following review and analysis of this case prepared by Kevin Brady,  a partner in the Business Law Group at the Wilmington, Delaware, office of Connolly Bove.  

In this Delaware Chancery Court decision involving a post-closing dispute about the intent of transaction agreements, Vice Chancellor Noble denied a motion to dismiss an amended complaint in a contract dispute between the world’s largest and third largest defense contractors. The dispute arose out of the sale of a business unit by Lockheed Martin to the purchaser, plaintiff BAE Systems Information and Electronic Systems Integration Inc. (“BAE”). BAE argued that it expected that the business unit sold to BAE would continue to do business with Lockheed Martin after the sale and that BAE had adequately articulated its expectation in the sale contract. The Court was then faced with the issue of whether the sale contract was specific enough to allow for what it called “unknown work in the future while recognizing that price and scope will necessarily depend upon the specific work.”

Lockheed Martin, as an enterprise, operates through numerous unincorporated business units, such as Lockheed Martin STS-Orlando (“LMSTS”), Lockheed Martin Aerospace (“LM Aero”), and Sanders. Lockheed Martin’s Sanders business unit was part of Lockheed Martin’s Aerospace and Electronics Systems (“AES”) business segment before 2000. In June 1996, Sanders and LMSTS executed an internal memorandum of agreement (the “Internal MOA”) which outlined the manner by which the two Lockheed Martin business units would approach future opportunities for Automated Test Systems (“ATS”) business.

Four years later, in July 2000, Lockheed Martin entered into an agreement for the sale of its AES business, including the Sanders business unit (the “Transaction Agreement”), to BAE for $1.67 billion. The Transaction Agreement provided that while LMSTS and Sanders would continue to operate under the terms of the Internal MOA, BAE would become the new owner of the Sanders business unit. In addition, Lockheed Martin and BAE agreed to execute a new memorandum of agreement memorializing the arrangements reflecting, among other things, the parties post-closing rights and obligations regarding AES business opportunities and the Sanders business unit. That new Memorandum of Agreement (the “MOA”), which was executed by Lockheed Martin and BAE on the same day the AES transaction closed, is virtually identical to the Internal MOA executed in 1996 between Sanders and LMSTS.

According to the Complaint, the parties expected that the MOA would allow LMSTS and BAE/Sanders to “cooperatively align their respective business strategies to maximize the focus and effectiveness of resources, increase corporate business, and jointly broaden the market aperture for ATS.” The parties agreed that they would, “seek to utilize each other’s technology, market, and production strengths to achieve and exploit the advantages of joint cooperation.” Four years after the MOA was executed, however, BAE began to suspect that LMSTS was not acting in a manner consistent with how BAE expected LMSTS to act under the MOA. In particular, BAE suspected that new ATS work was being generated by LM Aero’s F-35 fighter-jet project and that work should have been allocated to BAE under the MOA. BAE approached Lockheed Martin in an attempt to address these concerns and to ensure proper allocation of ATS work arising from the LM-Areo F-35 project. BAE was unsuccessful in getting Lockheed Martin to change how that work was being allocated. As a result, BAE filed this action claiming that Lockheed Martin has breached the MOA. In response, Lockheed Martin claimed that the MOA was wholly-unenforceable and merely outlined a general approach for the parties to follow only when it made “good business sense” to do so.

BAE sought specific performance, or in the alternative, damages for breach of contract and breach of the implied covenant of good faith and fair dealing. Lockheed Martin moved to dismiss the complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief may be granted, or in the alternative, for a more definite statement. BAE amended its Complaint and added claims for unjust enrichment and declaratory judgment. Lockheed Martin then renewed its motion to dismiss.

The Court addressed two issues: (1) was there was any reasonable possibility that BAE could prevail in proving intent to be bound on the part of Lockheed Martin and (2) whether it was reasonable to believe that the terms of the MOA might be proven sufficiently definite for enforcement. In addressing the sufficiency of the contract, Vice Chancellor Noble followed the “objective” theory of contracts, which meant that the contract’s construction would be viewed as “that which would be understood by an objective, reasonable third party,” focusing on the parties’ overt manifestations of assent, rather than the parties subjective desires. BAE argued that Lockheed Martin performed under the terms of the MOA for at least four years following its execution and that during this period, at least fifteen contracts were performed pursuant to the MOA.

Based upon that four-year pattern of behavior plus the execution of the MOA at the same time the Transaction Agreement was completed and the references to the MOA found within the Transaction Agreement, the Chancery Court found that there was a sufficient pleading of objective facts to demonstrate Lockheed Martin’s intent to be bound to the MOA. As a result, the complaint stated facts sufficient to survive Lockheed Martin’s motion to dismiss.

Lockheed Martin also argued that the absence of pricing terms, or a pricing structure and the insufficiently definite terms governing how future ATS work and responsibility would be allocated rendered the MOA unenforceable. The Chancery Court disagreed, however, finding that the Amended Complaint contained distinct allegations that precluded dismissal. For example, there was an allegation that the MOA required Lockheed Martin to offer BAE an opportunity to participate in the pursuit of ATS business opportunities as they arose. The Court found that this allegation sufficiently implicated a situation where the indefiniteness Lockheed Martin complained of, might be excused and as a result rendered the Amended Complaint sufficient to survive Lockheed’s motion to dismiss. In addition, the Court found that “a rough skeleton of definite obligations exists in the MOA upon which prior course of dealings and industry custom could, by reasonable inference, add sufficient flesh to justify enforcement of the resulting form.”

While the MOA had no specific requirement that Lockheed Martin “shares news of various work opportunities with it,” BAE attempted to save that claim by invoking the covenant of good faith and fair dealing to impose a duty on Lockheed Martin to provide news of various work opportunities to BAE. Although Lockheed Martin argued that the MOA imposed no notification requirement, the Court noted that the covenant “might imply a notice provision were BAE successful in proving its interpretation of the contract.” Because the Chancery Court found that the covenant could be found to require the addition of a notification requirement and BAE had pled facts sufficient to sustain a cause of action for its breach, the motion to dismiss as to the covenant of good faith and fair dealing was denied.

BAE also raised two equitable claims -- specific performance and unjust enrichment. The Court found that under the facts as alleged, it was reasonably conceivable that BAE could demonstrate the existence of an enforceable agreement of some scope. However, with respect to BAE’s claims of unjust enrichment, because unjust enrichment recovery is unavailable when a contract governs the parties’ relationship (and the Court found that the relationship of the parties was governed by “a complex contract negotiated by sophisticated parties”), the Court dismissed BAE’s claim for unjust enrichment recovery. Interestingly, the Court did not agree with BAE’s claim that its unjust enrichment claim should survive because it was pled as an alternative to its contract claim, and such a pleading should be allowed. The Court noted that in some instances, both a breach of contract and an unjust enrichment claim may survive a motion to dismiss when pled as alternative theories for recovery. The Court went on to state that: “[a] right to plead alternative theories does not obviate the obligation to provide factual support for each theory. Here, there is no independent basis for an unjust enrichment claim because the Amended Complaint contains no facts challenging Lockheed Martin conduct on a basis not comprehensively governed by the MOA. Because BAE pleads no right to recovery not controlled by contract there can be no claim for unjust enrichment.”

Finally, the Court refused to dismiss the declaratory judgment aspect of the relief sought. Moreover, it found no factual basis to support Lockheed Martin’s claim of laches.

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In Hexion Specialty Chemicals, Inc. v. Huntsman Corp.,  (Del. Ch., Sept. 29, 2008), read opinion here, the Delaware Chancery Court rejected the arguments of Hexion, which is 92% owned by private equity group Apollo, that it should be relieved of its contractual obligations to buy 100% of Huntsman's stock based on a July 2007 agreement that was valued at $10.6 billion. Hexion/Apollo argued that the "material adverse effect" clause  in the parties' agreement was triggered, and in light of a report (that the court found to be unreliable), that the combined companies would together be insolvent, it should not be required to complete the merger. (Wrong.)

A prior decision in this case was summarized on this blog here.

In this 91-page post-trial opinion, the court found that:

"the seller [Huntsman] has not suffered a material adverse effect, as defined in the merger agreement, and further concludes that the buyer has knowingly and intentionally breached numerous of it covenants under that contract. Thus, the court will grant the seller's request for an order specificaly enforcing the buyer's contractual obligations to the extent permitted by the merger agreement itself."

The court clarified its holding at page 86 and 87 of the opinion as follows:

"... the agreement does not allow Huntsman to specifically enforce Hexion's duty to consummate the merger. Instead, if all other conditions precedent to closing are met, Hexion will remain free to choose to refuse to close. Of course, if Hexion's refusal to close results in a breach of contract, it will remain liable to Huntsman for damages."

Moreover, the court held that:

"Hexion’s utter failure to make any attempt to confer with Huntsman when Hexion first became concerned with the potential issue of insolvency, both constitutes a failure to use reasonable best efforts to consummate the merger and shows a lack of good faith." (see  page 74.  Is "lack of good faith" here tantamount to "bad faith"?)

 As I did for the 100-page Chancery decision I summarized a few days ago on this blog, the only practical way to highlight this 91-page decision in an appropriate length for a blog post, is to use bullet points for selected key parts of the decision and then encourage readers to download the whole opinion at the link above if the issues addressed are of interest to them.

• Procedurally, it is notable that the Amended Complaint was filed on July 7, 2008 and expedited proceedings on limited issues were allowed on July 9, 2008, and a six-day trial started less than two months later, on September 8, 2008. That is what I call lightening speed, especially for a case of this magnitude.
• Hexion beat out Basell as a bidder for Huntsman even after Basell had signed an agreement at $25.25 per share, and Basell refused to raise its offer based on its assertion (almost ironic now) that it (Basell) was "more certain to close." Less than three weeks after Basell signed an agreement, Hexion signed an all cash deal to buy Huntsman for $28 per share.

         The MAE  Discussion

• The court's analysis and reasoning about why it did not find a trigger of the MAE clause can be found at pages 39 to 56 of the opinion. Footnotes 52 to 64 discuss some of the cases that the court relies on. For example, the logic of the Chancery Court's 2001 decision in IBP, although based on New York law, was still found applicable.
• The court observed that: "Many commentators have noted that Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement. This is not a coincidence."
• The burden of proof was placed on Hexion, as the party who first sought the declaratory judgment.

         The Breach of Contract Discussion

• Both parties claimed a right to a declaratory judgment that the other party committed a "knowing and intentional" breach. The court was critical of both parties' sloppy language and explained that such a phrase does not appear either in the Williston treatise on contracts nor in the Restatement of Contracts, and is more at home in criminal law.  The court noted at the end of footnote 87 by analogy that a "director need not know that his action breaches a fiduciary duty for liability for that breach to lie: gross negligence is sufficient for breach of a duty of care, and no showing of knowledge is required."
• As used in the agreement, a "knowing and intentional breach" was found by the court to include, as here, a deliberate commission of an act that constitutes a breach of a covenant in the merger agreement.
• The court emphasized the "fundamental proposition of contract law that damages in contract are solely to give the non-breaching party the "benefit of the bargain" and not to punish the breaching party". (see footnotes 89 to 92)(emphasis mine).
• The court found that Hexion failed to use its best efforts to consummate the financing and also failed to give Huntsman notice of its concerns. (The first time that Huntsman became aware of the insolvency opinion is when Hexion attached it to the complaint they filed--and publicized it at the same time to the bankers. Of course, this had a negative impact on the financiers' desire to finance the deal.)
• Footnote 99 refers to the section of the Williston treatise that describes the need for a breach by one party to be material before it can excuse performance by another party.

The court did not address the issue of whether the combined entity would be insolvent or not as it was not currently ripe. Of course, there is much more to be written on this case, but for a meager blog post, this is already longer than the average blog entry.

UPDATE:  The AmLaw Daily picked up this post here.  Law.com picked it up here.

UPDATE II:  Professor Bainbridge kindly links to this post here and provides his views from the hallowed halls of academia.

UPDATE III: The Wall Street Journal's  "Law Page" has picked up the post here.

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