Julian v. Julian, C.A. No. 1892-VCP (Del. Ch. March 22, 2010), read opinion here. This is the latest in a series of decisions by the Court of Chancery in this case that involves litigation over the break-up of several affiliated family businesses. Prior Chancery opinions in this long-running internecine imbroglio have been highlighted here, here, here and here.
Three issues addressed by the Court of Chancery in this opinion should be of particular interest to readers of this blog because they are likely to be of wide-ranging applicability for those dealing with valuations of closely held businesses based on a stockholders’ agreement in connection with a business break-up.
First, in the context of a valuation provision in a stockholders’ agreement, the Court was called on to determine if it had the power to alter or set-aside an appraisal done pursuant to that agreement but that one of the parties argued was flawed.
Second, the Court decided whether the reference to real estate holdings in the agreement, required a valuation to be done of interests that the company had in other LLCs which owned real estate (as opposed to the company owning the real estate directly).
Third, the Court explained the principle known as "course of performance" as a method to interpret an otherwise ambiguous contract. The Court decided many other issues in this ruling that are likely to be of the sui generis variety and so will not be covered in this overview.
Contract Interpretation Principles.
After reciting the well-known principles of Delaware’s objective theory of contracts, whose goal is to determine the intent of the parties as expressed in the clear language of the document, the Court next addressed what to do when the language of the parties’ agreement is not so clear. If there are two reasonable interpretations of the agreement, it is deemed ambiguous and the Court may then consider factors outside the four corners of the document. In determining the intent of the parties in light of ambiguous language, the Court may consider the following objective evidence:
“the overt statements and acts of the parties [e.g., the drafting history of a document], the business context, the parties’ prior dealings and industry custom.” (See fn. 37)(brackets are mine).
In this search, the Court cited to the Restatement (Second) of Contracts for the principle that: “…courts should consider the parties’ course of performance as the ‘most persuasive evidence of the [meaning of] the parties agreement’” See fn. 38 (brackets in original). Footnote 38 also cites to a case that is quoted for the following statement of Delaware law: “Course of performance …may also be used to supply an omitted term when a contract is silent on an issue.”
In connection with the foregoing, the Court of Chancery examined correspondence among the parties to the agreement that preceded the amendment of the agreement at issue in this case. The Court also examined communications among the parties after the amendment to the agreement was signed to review how the parties referred to and understood the provisions in the agreement at issue in this case.
The Court quoted from Black’s Law Dictionary and a standard English dictionary in its analysis of the word “hold” in order to determine if the phrase “real estate held by the company” should include options to buy real estate (no), and interests in other entities that owned real estate (yes).
Review of Appraisal Report based on Valuation Formula in Stockholders’ Agreement
The parties wanted the Court to invalidate certain appraisal reports performed ostensibly pursuant to valuation formulae in the parties’ stockholders’ agreement. The Court refused to examine the minutiae of the myriad aspects of the disputed appraisals, but instead reviewed them in the same deferential manner that it would review the decision of an arbitrator in light of the similarity between the decision of an appraiser and the decision of an arbitrator empowered by the provisions of an agreement among parties to a dispute. Of course, the Court’s work on this issue was made easier by the consent of the parties to this review standard due to the absence of any procedure in the agreement that addressed the circumstances under which a party could challenge an appraisal submitted by another. See footnotes 81 and 82.
Specifically, the parties agreed that the Court should only set aside an appraisal in this context where there is evidence that the appraisal is the product of fraud, bad faith, partiality or deception.
Despite arguments that the appraiser did not consider all relevant factors and did not comply with the applicable MAI standards, the Court did not find that the allegations rose to the level of fraud, bad faith, partiality or deception, and thus refused to set aside or modify the appraisals at issue.
Although footnote 82 refers to cases that recognize the notion that Courts have greater authority to review contractually-provided appraisals than arbitration awards, footnote 83 discusses the comparably high threshold under the Delaware Uniform Arbitration Act at Sections 5714 and 5715 of Title 10 of the Delaware Code, that must be met before a Court may either vacate or modify an arbitral award.(e.g., when the arbitrator exceeded her authority or the arbitrator ruled on an issue outside the scope of matters submitted to her.)
Sub-Issue: What if a second appraisal obtained by the parties is for an amount less than the challenged one? Answer: It can be discarded if not formally submitted.
An ancillary issue arose in the context of a provision in the agreement that allowed a party who disagreed with the MAI appraiser of one party, to obtain a second MAI appraisal and the two would be averaged. However, in this case, the party who obtained a second MAI appraisal apparently later realized that his MAI appraisal turned out to be lower than the original MAI appraisal obtained by the adverse party he was challenging.
Thus, the issue presented was whether he was “stuck” with the second appraisal he obtained (which would have been averaged with the first one and lowered the amount payable to him), or if he could “take it back” and decide not to use the second one he obtained.
The Court reasoned, based on the wording of the agreement that did not require the second “challenger” appraisal to be “averaged with the first appraisal” unless it was formally submitted to the opposing party for that purpose, and because the “the party that initially wanted to challenge the first appraisal” did not “formally submit the second appraisal”, it was not required to be used to “average out” the first appraisal. Apparently, the reason he obtained a second appraisal, is because he regarded the first appraisal as confusing and did not realize that the first appraisal resulted in a higher valuation than he had thought.
Sub-Issue: May a settlement offer still be accepted after new Counteroffer is made? No
The Court discussed whether a settlement offer could still be accepted after a counteroffer was made. Footnote 94 cites to cases that stand for the basic contract law that, generally speaking, a counteroffer is a rejection of the offer and “terminates the power of acceptance” if it is not identical to the terms of the offer.
Although other ancillary issues are addressed by the Court, the foregoing are the only ones that are likely to be of widespread interest or application by readers of this blog or those engaged in business litigation for a living (or “students” of corporate law generally).