Aveta, Inc. v. Bengoa, C.A. No. 5074-VCL (Del. Ch. Sept. 20, 2010), read opinion here.
The five prior decisions in this matter highlighted on this blog are available here.
This is the sixth decision by the Court of Chancery in this case which involves a post-merger dispute that has a tortuous procedural history and also involves related litigation in the Delaware Superior Court, as well as the courts in the Commonwealth of Puerto Rico. The several prior decisions provide additional background facts but the central question addressed in this case is whether all the shareholders of a company are bound by a written agreement that they did not all sign, and which required binding arbitration of post-merger issues.
Despite the fact that the non-controlling shareholders did not sign the transaction agreement and did not vote in favor of the transaction (which only required approval by Class A shares), the Court determined the following: (1) The controlling shareholders were bound by agency law because they appointed a person irrevocably as their representative; and (2) The non-controlling shareholders were bound as a matter of corporate law based on a pre-1996 version of DGCL Section 251.
In addition, the Court determined that res judicata barred the controlling shareholders from taking certain positions, and stare decisis prevented the non-controlling shareholders from doing so.
Lastly, the Court reasoned that the defendants breached the exclusive Delaware forum selection clause in the agreement and would be responsible for the attorneys’ fees incurred because of that breach. The agreement includes a useful discussion of those situations when a non-signatory is bound by an agreement. (In this situation, the non-signatories were bound by the forum selection clause.)
Highlights of Legal Analysis
1) In connection with analyzing a corporate statute from Puerto Rico that was based on the DGCL, the Court analyzed and discussed the amendments in various versions of, and the legislative history of, DGCL Sections 151 and 251 in connection with reference in a merger agreement to, and reliance upon, facts ascertainable outside of the agreement. An example of this would be price terms.
2) The Court discussed the doctrines of res judicata and stare decisis. The Court explained that res judicata bars a party from litigating the same cause of action after a judgment has been entered in a prior suit involving the same party or privies. The Court discussed the five elements of the doctrine on page 33 of the slip opinion. The only contestable issue was privity, but res judicata does not require a direct contractual relationship. Privity for the purposes of res judicata includes parties whose interests are merely closely aligned. See footnote 9.
3) The Court also discussed the concept of stare decisis which is explained at page 35 of the slip opinion. This doctrine prohibited the Class B defendants from re-litigating the document that the Court previously determined was only a “non-binding agreement to agree.” See 986 A.2d at 1186-87 (prior opinion in this case).
4) The Court analyzed the concept of a non-signatory to a contract being estopped from arguing that a dispute-resolution provision does not apply when the non-signatory “consistently maintains that other provisions in the same contract should be enforced to benefit him.” See slip op. at 37-38. The Court explained that: “Equity will not allow a party to sue to enforce the provisions of a contract that it likes, while simultaneously disclaiming the provisions that it does not.” Id.
5) The Court observed that Section 2701 of Title 6 of the Delaware Code imposes joint and several liability on an “obligation or a written contract of several persons” unless otherwise expressed.
6) The Court explained that where a contract places the responsibility for payment of attorneys’ fees on a party who either breaches the contract or fails to perform in accordance with the terms of the contract, courts will enforce the bargained-for provision absent evidence of any ambiguity or contrary intent. Importantly, the Court explained that a contractual obligation to pay attorneys’ fees “cannot be forgiven in whole or in part by a Court out of compassion for a non-prevailing party.” Slip op. at 39-40.
7) The Court also discussed the law of agency and when an agency is irrevocable as applied in the context of a representative of shareholders by agreement.