AQSR India Private, Ltd., et al. v. Bureau Veritas Holdings, Inc., No. 4021-VCS (June 16, 2009), read opinion here.
Kevin Brady, a highly respected Delaware litigator, provides us with the following synopsis.
In this Chancery Court decision, Vice Chancellor Strine addressed a motion to dismiss a 15-count complaint and motion for judgment on the pleadings arising from an all-too-common fact pattern where a buyer refused to complete a transaction. But this case had a bizarre twist — the prospective sellers voluntarily turned over operational control of the business (AQSR India Private, Ltd. (“AQSR India”), an affiliate of a group of companies known as the “AQSR Group”) to be sold to the prospective buyers, defendant Bureau Veritas Holdings, Inc., before the closing of the sale. The Court denied the motion for judgment on the pleadings, and granted the motion to dismiss in part and denied it in part.
Round One — The Stock Purchase Agreement
Bureau Veritas’ purchase of AQSR India was part of a larger transaction in which Bureau Veritas intended to purchase all of the outstanding equity in each member of AQSR Group under separate stock purchase agreements, including one covering AQSR India (the “India SPA”). The parties structured the transactions to include a global Stock Purchase and Sale Agreement (the “Global SPA”) and various regional stock purchase agreements relating to specific members of the AQSR Group, such as AQSR India. The transactions were intended to close at the same time. The Global SPA closed on September 28, 2007 but the India SPA did not close due to a delay in getting the approval from the India Foreign Investment Promotion Board, which did not occur until for an additional two months.
The Buyers Take Control before Closing
After the Global SPA closed but before the regulatory approval was received, AQSR India voluntarily turned over operational control of AQSR India to the Buyers. Thereafter, AQSR India’s incumbent directors resigned and new directors and managers installed by the Buyers took over. A number of changes to the business were made including obtaining new confidentiality agreements in favor of the Buyers. When the regulatory approval was finally received in November 2007 and the Sellers were ready to close, the Buyers refused to close. Then in January 2008, for the first time, the Buyers claimed that AQSR India suffered a “Material Adverse Effect” when an oversight Board in December 2007 suspended AQSR India’s accreditation. The Buyers claimed that this event had discharged the Buyers from their obligations under the India SPA, even though the suspension of the accreditation did not prevent Bureau Veritas from certifying AQSR India’s clients under the Bureau Veritas name. After extended negotiations, the parties were at an impasse about what to do and instead of filing a lawsuit and seeking expedited resolution of this dispute, the Sellers entered into negotiations with the Buyers and eventually agreed to terminate the equity India SPA and replace it with an asset purchase agreement (the “APA”), wherein Bureau Veritas would purchase certain customer contracts from AQSR India.
Round Two – The Asset Purchase Agreement
Under the APA, the Buyers agreed to purchase certain AQSR India customer contracts. The APA was executed on May 2, 2008 and was scheduled to close after the parties determined which contracts the Buyers were going to purchase through an elaborate process of reviewing all of AQSR India’s customer contracts for compliance with specific criteria (the “Review Process”). Ironically, the parties agreed to mutually release their obligations under the India SPA once the APA closed. The parties never completed the Review Process and the APA never closed. More importantly, while the SPA and APA were being negotiated, “[t]he uncertainty and turmoil caused by AQSR India’s state of ownership limbo for nearly a year” resulted in many key employees and customers leaving the company. The Sellers filed suit in September 2008 taking “a splatter-gun approach to pleading,” alleging breach of contract, breach of implied covenant of good faith and fair dealing, as well as various tort and statutory claims. The Buyers filed a counterclaim alleging that Sellers failed to follow certain procedures regarding the Review Process. The Buyers then filed a motion for judgment on the pleadings with regard to the Counterclaim and a motion to dismiss the Complaint in its entirety.
Motion for Judgment on the Pleadings
The Buyers sought a judgment on the pleadings with respect to their counterclaim – to require the Sellers to participate in the Review Process with a referee. The Court noted that this is “a narrow dispute resolution mechanism that is designed to take advantage of the technical expertise, rather than the arbitration skills, of the Referee, and is only triggered when the parties teed up a narrow, technical question in the course of the Review Process.” The Court found that the Complaint alleged that the Buyers failed to perform their obligations with regard to the Review Process. Under contract law, for a party to be entitled to specific performance, that party must have substantially performed under the contract. Based upon the allegations in the Complaint regarding the failed Review Process, the Court denied the motion.
Motion to Dismiss
Breach of Contract
The Court denied the motion with respect to Counts 1 and 3, which allege breach of contract claims under the India SPA and the APA because the terms of both of those agreements remained in force, and the Sellers plead sufficient facts in their Complaint to support their allegations that the Buyers breached both agreements.
The Court granted the Buyers’ motion to dismiss the count which sought specific performance of the India SPA, because “the parties expressly agreed as part of the execution of the [APA] that the India SPA could not be performed.” Moreover, the Court found that the Sellers unreasonably delayed in bringing the action for specific performance making their claim time-barred under the doctrine of laches. The Sellers waited almost ten months to seek a judicial order requiring the Buyers to close and once the Sellers did file, they did not seek to expedite the litigation.
Good Faith and Fair Dealing
The Court also granted the Buyers’ motion to dismiss the counts of the complaint alleging that the Buyers breached the implied covenant of good faith and fair dealing, by “arbitrarily and in bad faith claiming the suspension of AQSR India’s authority to certify compliance with certain automobile standards was a Material Adverse Effect.” The Court noted that the covenant of good faith and fair dealing is recognized only where a contract is silent as to the issue in dispute. The Court went on to note:
Here, the breach of the implied covenant of good faith and fair dealing claim and the breach of contract claim are essentially the same — that the Buyers wrongfully refused to close the sale of AQSR India even though they were contractually obligated to do so because there had been no Material Adverse Effect and all other conditions of closing were met.
Absent a contractual provision dictating a standard of conduct, there is no legal difference between breaches of contract made in bad faith and breaches of contract not made in bad faith. Both are simply breaches of the express terms of the contract. At base, both Count 1, for breach of contract, and Count 5, for breach of the implied covenant of good faith, allege that the Buyers should have closed because there had been no Material Adverse Effect. Whether there was a Material Adverse Effect is governed by the express terms of the India SPA, which in this case leave no interstitial space in which the doctrine of the implied covenant might operate.
Economic Duress and the Remaining Claims
With respect to the allegations regarding unjust enrichment, tortious interference with economic advantage, conversion, trade secret misappropriation, and unfair competition, the Court denied those motions because the Court could not conclude at this stage in the litigation “that the Sellers’ remedies for harms arising from the Buyers’ control of AQSR India are limited to those available under contract law.” The Court also denied the motion to dismiss with respect to the counts in the complaint that alleged a variety of “secondary and remedy-based claims,” such as civil conspiracy and constructive trust on the basis that the Sellers had adequately pled the underlying claims on which the secondary claims rested.
In particular with respect to the Sellers allegations relating to “economic duress,” (that the Sellers were forced to turn over control of the company and then enter into the asset purchase agreement instead of filing suit), the Court dismissed that count on the grounds that the Sellers pled no facts to support a reasonable inference that the Sellers were unable to “seek adequate legal protection” when the Buyers refused to close. Moreover, there was no indication as to why the Sellers could not have elected to assert their rights under the India SPA and file suit for specific performance rather than acquiesce in the demands made by the Buyers.