This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Chancery Court recently green-lighted key parts of an investment company’s suit against officers and owners who allegedly inflated their I.T. and data center services provider’s worth, finding the buyer plaintiff was more likely the victim of fraud and breach of contract rather than mere buyer’s remorse in LightEdge Holdings LLC, et al. v. Anschutz Corporation et al., No. 2019-0710-JRS, memorandum opinion (Del. Ch. June 11, 2020.)
Vice Chancellor Joseph R. Slights’ June 11 ruling denied the seller defendants’ motion to dismiss LightEdge Holdings LLC and parent Anschutz Corporation’s well-plead charges that they concealed bad financial news and doctored the business prospects of Delaware-chartered OnRamp Access, LLC during sale negotiations.
Fraud, contract claims survive
He found that fraud and breach of contract allegations are well-supported and unjust enrichment and some extra-contractual representations claims are not barred by the anti-reliance provision in the sale document. However, he said the buyer failed to state viable aiding and abetting claims, civil conspiracy, conversion and Colorado and Texas state law charges.
In early May 2018, LightEdge Holdings, LLC had been negotiating a $106 million sale with defendants Brown Robin Capital, LLC, a Delaware-chartered Limited Liability Company, OnRamp CEO Lucas Braun, President and Board Chairman Ryan Robinson and CFO Jack D’Angelo when OnRamp disclosed news that literally gave LightEdge and parent Anschutz pause. A major OnRamp client had cancelled its services subscription for a $600,000 revenue loss and OnRamp’s April sales were less than 1/3 of its target.
According to the opinion, the buyers were assured of the company’s continued bright prospects and talks resumed because, “under the direction of the OnRamp insiders, company management secretly falsified the product pipeline by adding more than $6 million in illusory projected annual revenue.”
In addition, one of OnRamp’s biggest customers had told its management during the sales negotiations that it planned to cut its business in half but that was concealed from the buyers, as was the un-collectability of numerous client accounts, the September 2019 complaint says.
Defendants moved to dismiss the entire 13-count complaint, but the vice chancellor found the breach of contract claims were not barred by the sales agreement, the fraud claims were not boot-strapped breach of contract claims and the unjust enrichment claims were not duplicative of the breach of contract claims.
Parent helps finance
He found that even though LightEdge was the official buyer, Anschutz, which contributed $62 million toward the purchase, had standing to sue as a defrauded buyer.
The court spent most of the June 11 ruling parsing other claims that defendants argued were duplicative of other charges or barred under Delaware law – including Colorado statutory theft and securities fraud and Texas statutory fraud and securities fra
The vice chancellor said Delaware General Corporation Law applies to both the plaintiffs’ contractual and extra-contractual claims. He said § 2708 “requires courts to presume that, where parties have chosen Delaware law in their contract, the transaction memorialized in the contract has a material relationship with our state.”
Abry is controlling
He says the extra-contractual claims are governed by Delaware law as established by then-Vice Chancellor Leo Strine’s seminal 2006 opinion in Abry P’rs V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1046 (Del. Ch. 2006), which Vice Chancellor Slights quotes:
“To hold that their choice is only effective as to the determination of contract claims, but not as to tort claims seeking to rescind the contract on grounds of misrepresentation, would create uncertainty of precisely the kind that the parties’ choice of law provision sought to avoid.”
Vice Chancellor Slights agreed with that “persuasive” logic, writing that, “To try to parse out what exactly should be decided under Delaware law and what falls under another state’s law … would be a foolhardy endeavor almost certain to result in the kind of confusion contractual choice of law provisions are meant to avoid.”
Relying on anti-reliance?
Regarding defendants’ assertion that various sections of the sale agreement could be read as an anti-reliance statement, the vice chancellor said Delaware courts have consistently held that:
“sophisticated parties to negotiated commercial contracts may not reasonably rely on information that they contractually agreed did not form a part of the basis for their decision to contract.”
But he said anti-reliance language must be explicit and comprehensive, meaning the parties must:
“forthrightly affirm that they are not relying upon any representation or statement of fact not contained [in the contract].”
And although the sale contract contains a standard integration clause, “What is notably absent from these provisions is any disclaimer of reliance by Buyer,” the Court noted.