Credit Suisse Securities (USA) LLC v. West Coast Opportunity Fund, LLC, No. 4380-VCN (Del. Ch., July 30, 2009), read opinion here.
The issue addressed by the Chancery Court in this case was whether an entity known as Investment Hunter, LLC was bound by an agreement that was signed by a person named Gary Evans “as CEO.” A separate company called GreenHunter was involved but was not a party to the agreement. Evans did not sign the agreement in his capacity as a member or a manager of Investment Hunter. The court followed the ordinary rule that only formal parties to a contract are bound by its terms. (citing Alliance Data Sys. Corp. v. Blackstone Capital Partners V L.P., 963 A.2d 746, 760 (Del. Ch. 2009)).
Investment Hunter, LLC pledged the shares it owned in GreenHunter Energy Inc. With those pledged shares, Investment Hunter established a margin account and borrowed substantial sums from Credit Suisse. Gary Evans, in his capacity as manager of Investment Hunter, signed a pledge agreement. Evans is the CEO and President of GreenHunter. An investor in GreenHunter required it to deliver a lock-up agreement from Evans that prohibited the transfer of GreenHunter stock for a certain period of time. Evans signed that lock-up agreement as CEO, but he was not the CEO of Investment Hunter. All of his holdings in GreenHunter were held indirectly by Investment Hunter. Evans is the sole owner, member and manager of Investment Hunter – – but is not the CEO.
Though Evans had signed the agreement purportedly to confirm his agreement not to transfer the shares of GreenHunter stock, he did not personally own GreenHunter stock nor did any entity for which he was CEO own any GreenHunter stock. Thus, the agreement was not effective to prohibit the transfer of shares of GreenHunter.
This suit sought to prevent the transfer of GreenHunter stock owned by Investment Hunter to Credit Suisse in satisfaction of a margin clause. Even if Evans had intended that the agreement would prohibit the transfer of shares, nothing on the face of the agreement expressed any intent to bind Investment Hunter or any other entity in which Evans had a relationship. Rather, it only bound Evans.
Because Investment Hunter was not bound by the agreement, there was no other document that prohibited the transfer of GreenHunter’s shares to Credit Suisse, and because Evans was not a party before the court, the court could not address whether he violated the agreement by pledging GreenHunter’s shares owned by Investment Hunter. (As an aside, the court did not address the culpability of Evans in what appears to have been, based on the description of facts in the opinion, a lack of forthrightness on his part.)
UPDATE: Here is a later decision by the Chancery Court in this case to grant a somewhat unusual request for an interlocutory appeal of its decision. Now the Delaware Supreme Court must decide whether or not to accept the interlocutory appeal.