Clean Harbors Inc. v. Safety-Kleen, Inc., C.A. No. 6117-VCP (Del. Ch. Dec. 9, 2011), read opinion here.
What this Case is about: This case involves a challenge to a decision by the board of directors of a company to call certain of its outstanding shares.
The issue addressed by the Court is whether the company acted too cleverly and thereby breached certain contractual obligations or the implied covenant of good faith and fair dealing.
The Court denied the motion to dismiss in this matter finding that the purchaser of the shares alleged facts that conceivably could support a conclusion that the call price was set below fair market value and that the company acted in bad faith by setting the call price at that value. The applicable documents required fair market value to be paid. The facts involve employee-shareholders of Safety-Kleen selling shares of Safety-Kleen to a competitor, Clean Harbors, for $7.50 per share. The employees who sold those shares did so pursuant to an agreement they signed as employees of Safety-Kleen which gave them stock options to purchase those shares at between $2 and $4 per share. The stock option agreement also allowed Safety-Kleen to buy back the shares at “the fair market value of the share as determined by the committee in its good faith discretion, taking into account such factors as it deems appropriate.” Committee is defined in the plan agreement as any committee or subcommittee of the board of directors. After Clean Harbors purchased those shares from the former employees of Safety-Kleen, Safety-Kleen called all of the shares acquired by Clean Harbors at the same price that Clean Harbors had paid for the shares just hours before.
Clean Harbors filed a complaint with 3 counts: (1) The first count sought a declaration that the determination by the board of Safety-Kleen that $7.50 was the fair market value for the shares, was not made in good faith, and additionally that the shares had a substantially higher value at the time they were called. (2) The second count alleged that Safety-Kleen breached its contractual obligation to determine in good faith the fair market value of the shares. (3) The allegation was also made that Safety-Kleen breached the implied covenant of good faith and fair dealing by calling the shares at a below-market price in order to benefit the remaining shareholders of Safety-Kleen at the expense of Clear Harbors.
The Court applied the procedural standard for a motion to dismiss under Court of Chancery Rule 12(b)(6) as recently reiterated by the Delaware Supreme Court in Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings, LLC, 27 A.3d 531, 537 (Del. Aug. 18, 2011), which is notably different than the U.S. Supreme Court’s interpretation of the counterpart Federal Rule of Civil Procedure 12(b)(6).
The Court of Chancery provided an extensive factual background history and then as a prelude to its discussion of the fair market value issue, it cited to a decision of the United States Supreme Court for a definition of fair market value. See footnote 13. There was an ambiguity in the terms of the applicable agreement regarding whether Safety-Kleen could discount the call price based on the fact that the shares were burdened with an embedded call option which allowed Safety-Kleen to buy back the shares at the fair market value regardless of the price paid by the holder of the shares. It the fair market value should have been determined based on an unencumbered share, then Clean Harbors could succeed in proving that the call price it received was less than fair market value.
The Court determined that $7.50 may have been a submarket value for the shares and that Clean Harbors also alleged sufficient facts that conceivably could support a conclusion that Safety-Kleen acted in bad faith by calling the shares at that price.
Pleadings Standard for Contractual “Bad Faith” Claims
The Court clarified the standard for pleading bad faith claims in contractual cases. The Court explained that to allege a breach of a contractual duty to act in good faith, a complaint need only allege “facts related to the alleged act taken in bad faith, and a plausible motivation for it.” See footnote 31. This is a minimal standard, the purpose of which is to give the defendant notice of the claim being made against it. See footnotes 32 and 33.
Cf. two recent decisions authored by the same jurist who wrote this opinion, highlighted here, in which the Court awarded damages for breach of a contractual duty to negotiate in good faith.
The Court also relied on a decision in the corporate context which found that the plaintiff had sufficiently pled bad faith by asserting “that the directors had a conflicting self-interested motivation to redeem the preferred for an inadequately low price.” See Gale v. Bershad, 1998 WL 118022 (Del. Ch. Mar. 4, 1998). The Court also cited a decision which found bad faith based on a pleading that a company acted in bad faith in valuing its stock, and choosing an interested party to perform its valuation, which benefited its controlling shareholders by that bad faith action. See Winston v. Mandor, 710 A.2d 835, 844 (Del. Ch. 1997).
The Court also explained the definition and contours of a claim based on the implied covenant of good faith and fair dealing, and refused to dismiss that claim as well. Cf. very recent Chancery decision in the Wimbledon case, highlighted on these pages here. That case described bad faith in the context of litigation tactics–a different animal than the absence of good faith in the context of contract negotiations discussed in the instant matter.