In James Cable, LLC, v. Millennium Digital Media Systems d/b/a “Broadstripe”, et al., No. 3637-VCL (June 11, 2009), read opinion here, Vice Chancellor Lamb was faced with what has become an “all-too-familiar” fact pattern given the state of the economy recently.
Kevin Brady, a highly respected Delaware litigator, provides us with the benefit of his following review of this case.
A company, after signing an asset purchase agreement (“APA”) (wherein it agreed to sell substantially all of its assets to another company), sees its valuations fall, leading to disputes between the parties. The buyer refuses to close, citing alleged breaches by the seller, and the seller files a lawsuit. Thereafter, the buyer files for bankruptcy, following which the claims against the buyer are stayed pursuant to the federal bankruptcy code.
While that is what occurred in this case, in an interesting twist, the seller also filed suit against the buyer’s controlling stockholder (which was not a party to either the APA or any written agreement to provide funding) “in an attempt to reach the deeper pockets of that company.” In particular, the seller claimed that the controlling stockholder promised both parties that it would provide funding for the transaction. While the case was stayed when the buyer filed for bankruptcy, the case proceeded against the controlling stockholder.
The plaintiff, James Cable, and the defendant, Broadstripe, own and operate cable television systems and provide internet services. Highland Management is the controlling ownership of Broadstripe. In its amended complaint, James Cable claimed that Highland Management: (i) tortiously interfered with the APA by refusing to provide funding and by directing Broadstripe to repudiate the APA; (ii) engaged in civil conspiracy with Broadstripe to dishonor the APA; (iii) acted in bad faith in an attempt to insulate itself from its alleged obligation to fund the transaction; and (iv) breached an agreement with Broadstripe to provide funding for the transaction (of which James Cable was a third party beneficiary). James Cable also argued that based upon Highland’s statements/promises regarding funding, it was entitled to recover on a promissory estoppel theory. Highland Management filed a motion to dismiss arguing that the allegations were conclusory and unsupported by specific facts. The Court agreed and granted the motion.
Tortious Interference and Conspiracy Claims
In addressing this issue, the Court stated that in order to succeed on its claim, James Cable had to allege “(1) a valid contract, (2) about which the defendants have knowledge, (3) an intentional act by defendants that is a significant factor in causing the breach of the [contract], (4) done without justification, and (5) which causes injury.”
The Court went on to note that Delaware law “shields companies affiliated through common ownership from tortious interference with contract claims when the companies act in furtherance of their shared legitimate business interests” (citing Shearin v. E.F. Hutton Group, Inc., 652 A.2d 578 (Del. Ch. 1994)). The Court also noted that to overcome the “affiliate privilege” a plaintiff had to adequately plead that the defendant “was motivated by some malicious or other bad faith purpose.” (citing Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020 (Del. Ch. 2006)).
While the Court recognized that James Cable alleged that Highland acted in bad faith when it directed Broadstripe to repudiate the APA, the Court, in finding that James Cable failed to provide any well pleaded factual support for its conclusory allegations, stated:
James Cable does not adequately allege facts to support an inference that Highland had any obligation to fund. To the contrary, the amended complaint and the exhibits attached thereto show that the parties negotiated a transaction where the responsibility to arrange financing fell on Broadstripe’s shoulders. James Cable does not sufficiently allege any purpose behind Highland’s actions outside of an economic interest it shared with Broadstripe. Accordingly, Highland’s alleged actions related to Broadstripe’s repudiation of the APA, taken as true for the purposes of this motion to dismiss, are protected by the affiliate privilege and are insufficient to state a claim for tortious interference with contractual relations.
James Cable also argued that Broadstripe and Highland conspired to tortiously interfere with the APA. However, because civil conspiracy is not an independent claim and there must be underlying wrongdoing (which the Court dismissed), the Court found no basis for the civil conspiracy claim.
Promissory Estoppel Claim
James Cable argued that Highland was liable on a promissory estoppel theory because Highland made statements to James Cable to induce it to enter into the APA. The Court disagreed finding that James Cable failed to show that there was a “real promise” that was “reasonably definite and certain.” The Court noted that some of the alleged promises were made by Broadstripe, some were made after the APA was signed and some were made by Highland but “those did not amount to a real promise.” The Court went on to state that:
In sophisticated merger and acquisition activity with large amounts of money at stake, such as here, the parties typically reduce even seemingly insignificant matters to writing. Parties generally include an integration clause, like the one found in the APA, that expressly states the written agreements compose the entire understanding of the parties. Section 5.5 of the APA states that Broadstripe (not Broadstripe and Highland) had the financial capability necessary to fund the purchase price. If James Cable could have convinced Highland to fund the deal, Highland’s obligations would likely have been extensively negotiated and reduced to writing with a substantial amount of detail.
Breach of Contract/Third Party Beneficiary Claim
James Cable also alleged that Broadstripe and Highland entered into a contract for the benefit of James Cable whereby Highland agreed to provide funding to enable Broadstripe to consummate the APA. Unfortunately, the Court found that James Cable failed to allege any facts (other than the supposed existence of the contract to support its third party beneficiary claim. In particular, the Court noted that James Cable failed to identify the “bargain” or any “consideration” Broadstripe provided to Highland to induce it to enter into a funding agreement. As a result, that claim was dismissed.