A recent Delaware Court of Chancery opinion should be read by all lawyers who seek to avoid the risk of a fully executed contract being ruled unenforceable due to a court later finding, perhaps suprisingly, that the agreement did not accurately express the understanding of the parties. In Kotler v. Shipman Associates, LLC, C.A. No. 2017-0457-JRS (Del. Ch. Aug. 21, 2019, corrected (typo on page four) Aug. 27, 2019), the court reviewed in extensive detail the multi-year history of negotiations and exchanges of draft agreements, with little contemporary evidence of the circumstances surrounding the fully-executed document–which one of the parties sought to enforce, and found the agreement, a warrant for stock, to be unenforceable.
In this short blog post, the most effective way to express the most important takeaways from this 47-page opinion (40-pages of which was a thorough recitation of the detailed facts), is to highlight what at least this reader considers the “lessons learned” from the misfortunes of the parties involved in this case, after a quick factual overview.
Brief Factual Overview of Case:
This case involves a claim for equity in a cosmetics company that was formed in the founder’s kitchen in 1999. About 18 years later, the company was valued at about $500 million. During the early years of the company, a commission-only sales consultant worked for the company and was, by all accounts, a very successful salesperson. During the approximately 5 years that she worked at the company, she was promised a right to purchase equity in the company by means of a warrant. Although the company continually promised her that it would formalize that right, they strung her along for many years without formalizing her right to equity.
During the lengthy negotiations and the exchange of many draft warrant agreements, one of the terms that the parties could not reach agreement on was the scope of a non-competition provision. Naturally, the company wanted to restrict any competition after the salesperson left the company, but the salesperson wanted the right to compete after she left.
The court, in its extensive review of the factual background, determined that notwithstanding a fully executed agreement, the former salesperson who was seeking to enforce the fully executed warrant agreement, was not credible and could not explain the absence of the non-competition provision that the company always insisted on as a deal-breaker in the negotiations. A key factual issue at trial was whether or not the sole signature page was attached to a version of the agreement that the company did not agree to–or whether the signature page was attached to a version of the warrant agreement that expressed the intent of all the parties. The court held that despite the fully executed document, the signature page was attached to a version of the agreement that the overwhelming evidence indicated was not the version that expressed the intent of the company.
Key Takeaways:
· Careful practitioners should consider the risk (in light of this case) inherent in allowing a client to sign an “orphan” signature-page as a separate page by itself–and then later attaching that page (only) to a document that the signature-page is not indubitably a part of. Rather, a lawyer should be able to prove that the signatory has read and agrees to all the terms of the agreement that the signature-page is attached to. That may seem obvious, but the contract at issue in this case was ruled to be unenforceable because the signature-page was formatted in such a way that it could be–and was–attached to a version of the contract other than the one that the signatory thought it belonged to. This risk also applies to the common practice of allowing “counterpart signatures” that may not be attached to the agreement at the time it is signed.
· Kotler, the employee or independent contractor at the center of this case, was “strung along” by the company’s president, and repeatedly told that she would be given equity in the company, or a warrant for equity in the company, over many years, but formal documentation was never finalized in an enforceable agreement. The lessons in that “not unusual” situation should be self-explanatory.
· A fully executed agreement is not necessarily enforceable if there is overwhelming evidence to support the argument that notwithstanding one’s signature “attached to” an agreement, the signature was not intended to express consent for the terms of the contract that the signature was attached to. See Slip op. at 44.
· The Court explained that:
“[The] ‘fully executed’ version of the warrant agreement does not overcome the credible and convincing evidence that these parties were not operating from the same page, or more precisely the same agreement, as they negotiated its material terms. The circumstances surrounding the execution of the warrant agreement, cloudy as they are, reflect it is just as (if not more) likely Marissa [the CEO] believed she was signing a version with a perpetual non-compete as one with Kotler’s [consultant-employee] diluted covenants. This is particularly so since Kotler could recall nothing of importance regarding the negotiations or circumstances surrounding the execution of the warrant agreement. Incredibly, she could not even recall who she engaged as counsel to represent her during the negotiations, thereby cutting off a likely source of contemporaneous evidence.”
Slip op. at 44.
· The court also explained earlier drafts had a “deal-breaker” provision that the company always insisted on–but Kotler could not explain why the company would abruptly agree to waive that key term. This severely undermined Kotler’s credibility.
· In addition, the court reasoned that other contemporaneous and after-the-fact circumstantial evidence explained the “disconnect” between the long history of the parties’ positions during negotiations and the final document, such as the court’s following post-trial findings of fact: (i) counsel for the company prepared a subsequent draft that post-dated the version that Kotler sought to enforce; (ii) that later draft had a signature-page that the CEO signed and sent by itself–with no agreement attached; and (iii) that signature-page was likely attached to something other than the version that the company thought was the “final” version of the agreement that reflected its position. Id. at 45. See footnote 197 (citing Eagle Force Hldgs., LLC v. Campbell, 187 A.3d 1209, 1230 (Del. 2018) (allowing courts to resolve issues of fact by considering evidence of the parties’ prior or contemporaneous agreement and negotiations in evaluating whether the parties intended to be bound by an agreement)). See also footnote 200 (citing to case law indicating that the actions of the parties after the deal are informative regarding their intent).
· Reciting basic contract formation principles, the court ultimately found that despite the agreement being fully executed, the terms of the agreement did not express the consent of the parties to material terms, and that a contract cannot be enforceable if the parties did not manifest an intent to be bound to essential terms as “determined objectively based upon their expressed words and deeds as manifested at the time, rather than by their after-the-fact professed subjective intent.” Slip op. at 42-43. (Although the court refers to the absence of a “meeting of the minds,” the standard for contract interpretation is an objective one.)
· In sum, this opinion should be read as a cautionary tale that underscores the risk for any lawyer or client who prefers to sign a signature-page separately–instead of keeping the signature-page and the corresponding agreement “together” at all times.