IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
FdG LOGISTICS LLC, )
)
Plaintiff/Counterclaim )
Defendant, )
)
v. ) C.A. No. 9706-CB
)
A&R LOGISTICS HOLDINGS, INC., )
)
Defendant/Counterclaimant, )
)
v. )
)
FdG ASSOCIATES LP, DAVID S. )
GELLMAN, JAMES E. BEDEKER, )
CYNTHIA M. BRANKIN, STEVEN R. )
BRANTLEY, NORMAN C. BUCK, JOHN P. )
CISZEK, ROBERT N. DOTSON, PAUL )
GARBER, MICHAEL J. HOGAN, JEREMY )
K. LOHRENS, ANDREW J. MANTEY, )
JEFFREY J. O’CONNOR, BRIAN R. )
REICHERT, LEEANNE RICE, STEPHEN W. )
ROBINSON, PAUL D. SWEEDEN, and )
RICHARD THOMPSON, )
)
Additional Counterclaim )
Defendants. )
OPINION
Date Submitted: November 16, 2015
Date Decided: February 23, 2016
David J. Margules and Evan W. Krick, BALLARD SPAHR LLP, Wilmington, Delaware;
Julian W. Friedman, BALLARD SPAHR LLP, New York, New York; Philip J. Kessler,
Joseph Aviv, Bruce L. Segal, Jennifer Zbytowski Belveal, and B. Michael Ortwein III,
HONIGMAN MILLER SCHWARTZ AND COHN LLP, Detroit, Michigan; Counsel for
Plaintiff/Counterclaim Defendant FdG Logistics LLC and Counterclaim-Defendants FdG
Associates LP and David S. Gellman.
Philip Trainer, Jr. and Toni-Ann Platia, ASHBY & GEDDES, P.A., Wilmington,
Delaware; Counsel for Counterclaim-Defendants James E. Bedeker, Cynthia M. Brankin,
Norman C. Buck, John P. Ciszek, Robert N. Dotson, Paul Garber and Paul D. Sweeden;
Patrick T. Brankin, SCHAIN, BANKS, KENNY & SCHWARTZ, LTD., Chicago,
Illinois; Co-Counsel for Counterclaim Defendants James E. Bedeker and Cynthia M.
Brankin.
C. Barr Flinn and Tammy L. Mercer, YOUNG CONAWAY STARGATT & TAYLOR,
LLP, Wilmington, Delaware; Robert A. Chapman and Shannon T. Knight, CHAPMAN
SPINGOLA, LLP, Chicago, Illinois; Counsel for Counterclaim Defendants Jeffrey J.
O’Connor and Brian R. Reichert.
Michael F. Bonkowski and Nicholas J. Brannick, COLE SCHOTZ PC, Wilmington,
Delaware; Vance L. Liebman, Damon E. Dunn and Neil M. Rosenbaum,
FUNKHOUSER VEGOSEN LIEBMAN & DUNN LTD., Chicago, Illinois; Counsel for
Counterclaim Defendant Andrew J. Mantey.
Peter B. Ladig, Patricia A. Winston and Elizabeth A. Powers, MORRIS JAMES LLP,
Wilmington, Delaware; Counsel for Counterclaim Defendants Steven R. Brantley,
Michael J. Hogan, Jeremy Lohrens and Stephen W. Robinson.
Henry E. Gallagher, Jr. and Ryan P. Newell, CONNOLLY GALLAGHER LLP,
Wilmington, Delaware; David K. Herzog and James P. Hanlon, FAEGRE BAKER
DANIELS LLP, Indianapolis, Indiana; Counsel for Defendant/Counterclaimant A&R
Logistics Holdings Inc.
BOUCHARD, C.
This action arises out of a private equity firm’s 2012 purchase of a trucking
company now owned by A&R Logistics Holdings, Inc. (“A&R” or the “Buyer’) through
a merger transaction. FdG Logistics LLC (“FdG Logistics”) initiated this action as the
representative of the selling securityholders (the “Securityholders”) to recover a pre-
closing tax refund. In response, Buyer asserted counterclaims for indemnification,
violation of the Delaware Securities Act, common law fraud, and unilateral mistake. This
opinion resolves the Securityholders’ motion to dismiss certain parts of the counterclaim,
and FdG Logistics’ motion for summary judgment concerning the tax refund.
The Securityholders seek to dismiss Buyer’s common law fraud claim insofar as
that claim asserts fraud based on extra-contractual statements made to Buyer before it
entered the merger agreement. This aspect of the Securityholders’ motion is denied
because the merger agreement does not contain an affirmative disclaimer of reliance by
Buyer sufficient to preclude it from asserting a claim for fraud based on representations
outside the four corners of the merger agreement under this Court’s precedents.
Buyer’s claim under the Delaware Securities Act fails to state a claim for relief
because Buyer has not established the requisite factual nexus between the challenged
merger and Delaware to trigger application of the Act. Given the absence of such a
nexus, Buyer makes the novel argument that the parties to the merger agreement made
the Delaware Securities Act apply automatically by including in the merger agreement a
Delaware choice of law provision stating that the merger agreement “will be governed by
and construed in accordance with the laws of the State of Delaware.” I conclude that
Buyer’s interpretation of the choice of law provision is not a reasonable construction.
Among other things, such an interpretation would lead to the bizarre result of converting
a blue-sky statute that the Legislature intended to regulate intrastate securities
transactions into one that would regulate interstate securities transactions.
Buyer’s claim of unilateral mistake also fails to state a claim for relief because it
would not be unconscionable to enforce the merger agreement, which was the product of
arm’s-length negotiations between sophisticated parties. This count also fails to state a
claim because it would not be possible in my view to return the parties to the status quo
through rescission of the merger more than three years after it closed.
Finally, I grant FdG Logistics’ motion for summary judgment concerning the tax
refund claim based on the undisputed facts of record and the plain language of the merger
agreement, which expressly states that pre-closing tax refunds are the “property” of the
Securityholders and are to be paid to their representative “promptly” after receipt.
I. BACKGROUND
The facts for purposes of the Securityholders’ motion to dismiss come from
A&R’s Verified Amended Counterclaim dated April 10, 2015 (the “Counterclaim”),
documents incorporated therein, or facts of which the Court may take judicial notice.
Because the issues left for decision on the motion to dismiss are fairly discrete, only a
general summary of the factual background of this case is necessary. 1
1
The Securityholders also moved to dismiss Buyer’s common law fraud claim under
Court of Chancery Rule 9(b) for failure to plead fraud with particularity. I summarily
denied that aspect of their motion during the hearing held on November 16, 2015,
because both parties injected numerous documents (over 100 in total) outside the
pleadings in briefing that issue, making it impossible as a practical matter to resolve the
Rule 9(b) issues on a motion to dismiss. See Tr. of Oral Arg. 7-9 (Nov. 16, 2015).
2
The facts relevant to FdG Logistics’ motion for summary judgment are limited in
number and admitted in A&R’s Amended Answer dated April 10, 2015 (the “Answer”).
A. The Parties
A&R Logistics Holdings, Inc. is a Delaware corporation headquartered in
Louisville, Kentucky. It is the holding company for A&R Logistics, Inc., a trucking
company located in the Midwest (the “Trucking Company”). A&R is a leading provider
of dry bulk transportation and logistics solutions serving the plastics, chemical, and food
industries in North America. It owns and operates a network of approximately twenty-
five terminals and warehouses across the United States.
A&R was the surviving corporation following a merger with A&R Merger Corp.,
a subsidiary of Mason Wells, a private equity firm based in Milwaukee, Wisconsin. In
this opinion, I refer to A&R as it existed before the merger as “Old A&R,” and I refer to
the surviving entity as “A&R” or “Buyer.”
FdG Associates LP (“FdG Associates”) is a Delaware limited partnership
headquartered in New York, New York. FdG Logistics, LLC, a Delaware limited
liability company, was the primary vehicle through which FdG Associates held its
ownership interest in Old A&R. 2 As of the date of the merger, that ownership interest
amounted to approximately 62.15% of Old A&R’s stock. Most if not all of the remaining
shares of Old A&R were owned by individuals who were made parties to this case in
response to A&R’s Counterclaim.
2
FdG Associates actually held its ownership stake in Old A&R through a series of shell
companies. Counterclaim ¶ 11. Those entities are not relevant to the present motions.
3
In its Counterclaim, A&R asserts claims against FdG Associates, FdG Logistics,
and eighteen individuals. One of these individuals, David S. Gellman, is the founder and
a manager of FdG Associates. Gellman also was a director and a Vice President and
Secretary of Old A&R. The other seventeen individuals held stock or options in Old
A&R before the merger, and served in one or more capacities as a director, officer or
employee of Old A&R. For simplicity, I use the term “Securityholders” to refer
collectively to FdG Associates, FdG Logistics, and the eighteen individuals named as
counterclaim defendants. 3
A&R Merger Corp., Old A&R, FdG Logistics (as the Securityholders’
Representative), and certain of the Securityholders are parties to an Agreement and Plan
of Merger dated as of December 18, 2012 (the “Merger Agreement”).
B. The History of Old A&R
James E. Bedeker founded Old A&R in 1969. Bedeker began his career as a truck
driver and started his company with three trucks. Over several decades, Bedeker
expanded Old A&R’s operations, acquiring additional facilities and trucks and targeting
the dry-bulk transportation market. During Bedeker’s tenure, Old A&R became one of
the largest dry-bulk carriers operating in North America.
Around 2007, FdG Associates invested in Old A&R, recapitalizing it through a
purchase of over 60% of its equity from Bedeker. FdG Associates created FdG Logistics
3
In doing so, I recognize that no allegation is made that Gellman personally held any
stock or options in Old A&R, and it appears that FdG Associates’ interest in Old A&R
was held through FdG Logistics, but these details are not important for purposes of this
decision.
4
to hold its investment in Old A&R. FdG Associates was an active manager of Old A&R,
and several of its employees are alleged to have worked closely with Old A&R from
2007 to 2012. More specifically, Buyer alleges that FdG Associates exerted control and
domination over Old A&R, dictating how Old A&R was to operate and imposing various
initiatives at the company, including cost-saving and cost-cutting programs, frequently
without Old A&R management’s consent, feedback, or input.
C. The Sale Process
During the summer of 2012, Old A&R’s board solicited interest to sell Old A&R
through an auction process with the assistance of Harris Williams & Co., an investment
bank, and BB&T Capital Markets, a financial advisor. In connection with this process, a
73-page confidential information memorandum was prepared in July 2012 to tell Old
A&R’s story and generate interest in the market. It touted Old A&R’s market leadership
in dry-bulk transportation, stating that Old A&R had the “highest quality fleet of
specialized trucks, trailers, and other equipment in the industry.” 4
On September 13, 2012, representatives of Buyer met with Old A&R’s senior
management team at the company’s headquarters. During the meeting, they received a
38-slide PowerPoint presentation from management. This presentation touted Old
A&R’s “high-quality, specialized fleet of trucks, trailers, and other equipment,” and
4
Counterclaim ¶ 478.
5
emphasized that “A&R’s optimized network, specialized equipment, and ‘can do’ culture
provide customers with exceptional service.” 5
On October 12, 2012, representatives of Buyer submitted a letter outlining the
basic terms of a proposed acquisition of Old A&R, including a transaction price, and
requesting acknowledgement and agreement to the terms from Old A&R and FdG
Logistics. On October 14, 2012, Gellman signed Buyer’s letter of intent on behalf of
both Old A&R and FdG Logistics. The parties then entered into a period of exclusivity,
during which Buyer conducted due diligence, additional information was made available
to Buyer, and the parties negotiated the terms of a deal.
In connection with the sale process, an online data room was established to house
certain information about Old A&R. Although the data room had been made available to
all prospective bidders during the sale process, including Buyer, additional information
was made available to Buyer via the data room after the exclusivity period began.
A key component of the parties’ negotiations involved the preparation of more
than 80 pages of disclosure schedules that form the factual basis for various
representations and warranties in the Merger Agreement. On October 31, 2012, Jeffrey J.
O’Connor, President and Chief Executive Officer of Old A&R, began work on the
disclosure schedules and the representations and warranties. In an email he sent to
certain members of management that day, O’Connor emphasized the importance of
5
Id. ¶¶ 488-89.
6
reviewing these provisions carefully. Old A&R management met numerous times over
the following weeks to discuss the disclosure schedules.
On December 17, 2012, the day before the Merger Agreement was signed,
O’Connor emailed a revised draft of the disclosure schedules to eight individuals, which
included Old A&R’s founder (Bedeker) and senior members of its management, stating:
“If anyone has any additional items for the disclosure statements based on our
conversation yesterday I need to know them now. Thanks and please advise….ASAP.” 6
O’Connor and these eight individuals 7 each signed “Knowledge Certificates,” in which
they certified to Old A&R that:
I have carefully reviewed the representations and warranties and schedules
to the Agreement and Plan of Merger dated as of December __, 2012, by
and among A&R Merger Corp., A&R Logistics Holdings, Inc., FdG
Logistics LLC and the Securityholders named therein (the “Merger
Agreement”), and I have reviewed such representations and warranties with
all of the applicable direct reports listed on Schedule 1 of the Merger
Agreement (such person, the “Direct Reports”).
To the best of my knowledge, after reviewing the representations and
warranties in the Merger Agreement with the Direct Reports, as modified
by the schedules, such representations and warranties are true, correct, and
complete and do not omit to state anything, the omission of which could
make the Representations misleading. 8
6
Counterclaim ¶¶ 532-33.
7
The eight individuals who signed Knowledge Certificates in addition to O’Connor were
Brian R. Reichert, Chief Financial Officer; Andrew J. Mantey, Chief Operating Officer of
the Transportation Division; Robert N. Dotson, Chief Operating Officer of the Packaging
& Distribution Division; John P. Ciszek, Chief Operating Officer of the Global Logistics
Division; Paul D. Sweeden, Senior Vice President of Sales and Marketing; Michael J.
Hogan, Vice President of Sales and Marketing; Jeremy J. Lohrens, Controller; and James
E. Bedeker, Chairman of the Board.
8
Counterclaim ¶ 534.
7
D. The Merger Agreement
On December 18, 2012, A&R Merger Corp. (as Buyer) entered into the Merger
Agreement with Old A&R and two of the Securityholders: FdG Logistics and Bedeker,
which held approximately 62.15% and 19.24% of Old A&R’s stock, respectively. The
Merger Agreement designated FdG Logistics as the “Securityholders’ Representative.”
The merger closed on December 18, the same day the Merger Agreement was signed.
Under the Merger Agreement, each share of each class of Old A&R’s capital stock
the Securityholders owned immediately before the closing was canceled and extinguished
and converted into the right to receive a cash payment, as well as a pro rata share of any
amounts delivered to FdG Logistics under the Merger Agreement for disbursement to the
Securityholders. As a condition of receiving their share of the merger consideration, 9
each of the Securityholders who did not sign the Merger Agreement was required to sign
a Letter of Transmittal acknowledging their indemnification obligations under the Merger
Agreement.
In Article 5 of the Merger Agreement, Old A&R made a series of representations
and warranties with respect to Old A&R and each of its subsidiaries, including the
Trucking Company. The last provision of Article 5 (Section 5.27), which is quoted in
full and discussed later in this opinion, states in uppercase letters that Old A&R makes no
representations or warranties except as expressly set forth in Article 5.
9
The total amount of the merger consideration was the “(i) Enterprise Value [$203
million], minus (ii) the Closing Company Group Indebtedness, plus (iii) the Working
Capital Adjustment, minus (iv) the amount of Transaction Expenses that are unpaid
immediately prior to the Closing.” Merger Agreement § 1.1 at 13.
8
Section 9.2(A) of the Merger Agreement provides that each of the Securityholders,
severally but not jointly, will indemnify A&R for certain losses it may incur for any
inaccuracy in or breach by Old A&R of any representations or warranties made set forth
in the Merger Agreement, including those set forth in Article 5. Subject to certain
exceptions, the Securityholders’s indemnification obligations are not triggered until the
losses exceed $1 million and are subject to a cap of $20.3 million, but these limitations do
not apply in cases of “fraud or intentional breach.” 10 Section 9.4(F) provides, with
certain exceptions, that the indemnification rights set forth in Article 9 shall be the
parties’ “sole and exclusive remedies with respect to any and all claims (other than claims
for fraud or intentional breach) relating to the subject matter” of the Merger Agreement.
The Merger Agreement also contains several provisions relating to how A&R, as
the surviving company, would treat tax refunds for pre-closing periods received after the
closing. Section 9.6(B) of the Merger Agreement requires the surviving corporation to
“prepare and cause to be timely filed, all Tax Returns of any member of the Company
Group that are due after the Closing Date for any period ending on or before the Closing
Date.” Section 9.6(B) further provides procedures by which FdG Logistics, as the
Securityholders’ Representative, shall review and comment on any such tax returns
before filing. Section 9.6(E) of the Merger Agreement acknowledges that tax refunds for
pre-closing tax periods are the “property” of the Securityholders and are to be paid to
them “promptly” after receipt:
10
Merger Agreement § 9.2(A).
9
All refunds of Taxes (whether in the form of a direct payment or as a credit
or other offset against other Taxes payable) for Pre-Closing Tax Periods (to
the extent not included in Closing Net Working Capital as finally
determined) shall be property of the Securityholders in accordance with
their Pro Rata Share. To the extent that any member of the Company Group
receives a refund that is property of Securityholders (whether as a direct
payment or as a credit or other offset against other Taxes payable), the
Surviving Corporation shall promptly pay, or cause the Company Group
promptly to pay, the amount of such refund (plus related interest received
by the Company Group) to the Securityholders’ Representative on their
behalf. 11
E. Buyer Asserts Indemnification Claims and Alleges that Illegal and
Fraudulent Practices at Old A&R Were Concealed from It
Less than six months after the merger closed on December 18, 2012, Buyer began
sending a series of notices of claims for indemnification to FdG Logistics, for itself and
as the Securityholders’ Representative. Buyer sent at least twelve indemnification
notices. 12 The Securityholders dispute these indemnification claims.
In this action, Buyer more broadly asserts that it discovered after the merger
closed that Old A&R had engaged in an extensive series of illegal and improper activities
that were concealed from it during pre-merger due diligence before Buyer entered the
Merger Agreement. Examples of these alleged activities include the following:
• The Trucking Company’s drivers systematically falsified their hours-of-
service logs, in violation of federal regulations, to increase their daily miles
driven by 30-40%.
11
Merger Agreement § 9.6(E).
12
Specifically, Buyer sent notices on May 10, 2013, May 17, 2013, May 25, 2013, June
3, 2013, October 24, 2013, December 24, 2013, March 21, 2014, May 5, 2014, May 16,
2014, June 17, 2014, June 18, 2014, and October 7, 2014. Counterclaim Exs. 3-14.
10
• The Trucking Company intentionally manipulated its drivers’ scale tickets
and time stamps.
• The Trucking Company’s tank wash facility in Joliet, Illinois discharged
industrial wastewater in violation of environmental laws.
• FdG Logistics directed a massive operation to cut truck maintenance costs
by nearly half before the merger, which caused personnel to falsely report
regular maintenance as capital expenditures to avoid budget caps in order to
keep the trucks running.
• The Trucking Company systematically created fake “wash tickets”
indicating that its trucks had been properly cleaned before hauling sensitive
loads and fraudulently charged customers for these never-performed
services.
• Two of the Trucking Company’s facilities were badly impaired structurally,
requiring over $2 million in repair costs for each.
• The Trucking Company hired aliens who were not authorized to work in
the United States.
F. A&R Files for, and Receives, the 2012 Tax Refund
A&R received extensions of time to file its 2012 federal and state tax returns. On
August 22, 2013, after receiving copies of the 2012 federal and state tax returns, FdG
Logistics provided comments on them. A&R later filed the 2012 federal and state tax
returns, which relate to pre-closing tax periods. At some point before April 10, 2015,
11
when it amended its answer in this action, Buyer received refunds with respect to the
2012 federal and state tax returns totaling $2,080,650 (the “2012 Tax Refund”).
G. Procedural History
On May 28, 2014, FdG Logistics filed a complaint asserting a single claim for
breach of the Merger Agreement for failing to remit the 2012 Tax Refund to the
Securityholders’ Representative. On October 7, 2014, A&R filed its initial answer and
counterclaim, which it amended on April 10, 2015. As amended, the Counterclaim,
which covers 596 paragraphs, asserts four claims based on the allegedly illegal and
improper activities summarized above. Count I asserts a claim for indemnification for
alleged inaccuracies in and breaches of numerous representations and warranties in the
Merger Agreement. Counts II and III assert claims for fraud under the Delaware
Securities Act and the common law, respectively. Count IV asserts a claim for rescission
based on an alleged unilateral mistake.
On May 29, 2015, FdG Logistics moved for summary judgment on its 2012 Tax
Refund claim. On July 10, 2015, the Securityholders moved to dismiss Counts II, III and
IV of the Counterclaim. 13
13
One individual defendant (Andrew J. Mantey) also moved to dismiss the
indemnification claim in Count I under Court of Chancery Rules 8(a) and (e) for failure
to state a “short and plain” claim for indemnification because of, in essence, the length of
the Counterclaim, which spans 174 pages and contains 596 paragraphs. This argument is
rejected. Although brevity in pleadings is admirable, the length of the Counterclaim is
largely due to the need to satisfy the particularity requirements of Rule 9(b) for purposes
of the fraud claims A&R has asserted in Counts II and III. Mantey, moreover, provides
no analysis to explain why any of the specific grounds for indemnification recited in the
Buyer’s indemnification notices, which are attached to the Counterclaim and
incorporated into Count I, fail to state a claim for relief. See Counterclaim ¶ 578.
12
II. LEGAL ANALYSIS
This opinion first addresses the motions to dismiss Counts II, III and IV of the
Counterclaim and then addresses FdG Logistics’ motion for summary judgment.
A. The Securityholders’ Motions to Dismiss
Under Court of Chancery Rule 12(b)(6), a motion to dismiss for failure to state a
claim must be denied “unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances.” 14 “In determining whether a pleading
meets this minimal standard, this Court draws all reasonable inferences in the plaintiff’s
favor, accepts all well-pleaded factual allegations as true, and even accepts ‘vague
allegations in the Complaint as ‘well pleaded’ if they provide the defendant notice of the
claim.’” 15
1. Count II of the Counterclaim Fails to State a Claim for Violation
of the Delaware Securities Act
In Count II of its Counterclaim, A&R asserts that the Securityholders’ statements
and omissions during the sale process and in the Merger Agreement violated the
Delaware Securities Act, which imposes liability on anyone who “[o]ffers, sells or
purchases a security by means of any untrue statement of a material fact.” 16 The
Securityholders contend that Count II fails to state a claim for relief because the
14
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 535
(Del. 2011); see also Winshall v. Viacom Int’l., Inc., 76 A.3d 808, 813 n.12 (Del. 2013).
15
Seinfeld v. Slager, 2012 WL 2501105, at *2 (Del. Ch. June 29, 2012) (quoting Cent.
Mortg. Co., 27 A.3d at 536)).
16
6 Del. C. § 73-605(a)(2).
13
transaction at issue lacks a sufficient nexus to Delaware to trigger application of the
Delaware Securities Act. 17 I agree with the Securityholders.
Enacted in 1973, the Delaware Securities Act is Delaware’s “blue-sky” law. This
term generally refers to state legislation regulating the sale of securities. 18 The primary
purpose of the Delaware Securities Act is “to provide a basis for stopping intrastate
securities fraud.” 19
In Singer v. Magnavox Co., which appears to be the first case construing the
Delaware Securities Act, the Delaware Supreme Court noted that there is “a presumption
that a law is not intended to apply outside the territorial jurisdiction of the State in which
17
Defendants also contend that the Delaware Securities Act does not apply to merger
transactions. See 6 Del. C. § 73-103(a)(17)(d) (excluding from definition of “sale” or
“sell” “any act incident to a vote by stockholders . . . pursuant to the certificate of
incorporation, or the provisions of Title 8, on a merger . . . in consideration of the
issuance of securities of the same or another corporation.”). A&R disagrees on the theory
that the Act only exempts stock-for-stock mergers. Because I conclude that Count II fails
to state a claim for relief for lack of a sufficient nexus to Delaware to trigger application
of the Delaware Securities Act, I do not address this issue.
18
See generally Paul G. Mahoney, The Origins of the Blue-Sky Laws: A Test of
Competing Hypotheses, 46 J.L. & Econ. 229 (2003); see also id. 229 (Noting that such
laws “are known as ‘blue-sky’ laws, purportedly because one of their supporters claimed
that many securities salesmen were so dishonest that they would sell ‘building lots in the
blue sky.’”) (citing Louis Loss & Edward M. Cowett, Blue Sky Law 7 n.22 (1958)).
19
1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations and
Business Organizations § 17.7[A], at 17-43 (3d ed. Supp. 2014). See also 6 Del. C.
§ 73-101(b) (“The purpose of the Delaware Securities Act is to prevent the public from
being victimized by unscrupulous or overreaching broker-dealers, investment advisers
and other agents in the context of selling securities or giving investment advice, as well
as to remedy any harm caused by securities law violations.”)
14
it is enacted” and specifically held that the Act does not apply to a Delaware corporation
simply by virtue of the act of incorporating in Delaware:
[W]e read the Securities Act as a Blue Sky Law governing transactions
which are subject to Delaware jurisdiction under traditional tests. To state
it another way, we do not read the Act as an attempt to introduce Delaware
commercial law into the internal affairs of corporations merely because
they are chartered here. Of course, a Delaware corporation is bound by the
Act, if it is otherwise applicable. But it is not bound simply because the
company is incorporated here. 20
Singer involved a stockholder challenge to the merger of a Delaware corporation. The
plaintiff stockholders were residents of Pennsylvania. They were not solicited in
Delaware, and there was no indication that the merger agreement was negotiated in
Delaware or that any part of the alleged “sale” of their securities occurred in Delaware. 21
From this record, the Supreme Court concluded that “[i]t follows that the Delaware
Securities Act does not apply.” 22 Applying Singer, this Court has held that the Delaware
Securities Act “only applies where there is a sufficient nexus between Delaware and the
transaction at issue.” 23
20
380 A.2d 969, 981 (Del. 1977), overruled on other grounds by Weinberger v. UOP,
Inc., 457 A.2d 701 (Del. 1983).
21
Id.
22
Id.
23
Vichi v. Koninklijke Philips Elecs. N.V., 2009 WL 4345724, at *19 (Del. Ch. Dec. 1,
2009); Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, 2014 WL 2457515, at *18
(Del. Ch. May 30, 2014) (same); see also Dofflemyer v. W.F. Hall Printing Co., 558 F.
Supp. 372, 377 (D. Del. 1983) (Delaware Securities Act did not apply because “[t]he
parties have not suggested any connection between the events challenged . . . and the
State of Delaware, other than the fact that the defendant corporations are incorporated” in
Delaware). The Uniform Securities Act, upon which the Delaware Securities Act is
based, is also understood to generally enforce such a nexus requirement. See 12 Joseph
15
This Court recently confirmed the need to demonstrate a nexus to Delaware to
trigger application of the Delaware Securities Act in Eurofins Panlabs, Inc. v. Ricerca
Biosciences, LLC. 24 In that case, a buyer of a business argued that the Act applied to the
transaction based on a contractual choice of law provision stating that “all disputes [ ] be
resolved according to Delaware law in the Delaware Court of Chancery.” 25 In a brief
footnote, the Court held that “[c]ertainly, an analysis of whether the Delaware Securities
Act applies is an application of Delaware law and therefore complies with the choice of
law provision.” 26 The Court then analyzed whether the buyer had pled sufficient facts in
its complaint to establish the requisite nexus to trigger application of the Delaware
Securities Act. Finding that the buyer had not, the Court dismissed its Delaware
Securities Act claim. The implied rationale of the Court’s approach in Eurofins is that, if
one assumes that a generic Delaware choice of law provision encompassed the Delaware
Securities Act, it is reasonable to assume that the parties (at least absent expressing a
contrary intent) intended to incorporate the Act “as is,” which would include the
jurisdictional limitations inherent in the Act.
C. Long, Blue Sky Law § 4:2 (2015) (“the drafters of the Uniform Act consciously
rejected citizenship or residence within a particular state as the policy base for application
of the Uniform Act. Instead, they elected a territorial base, requiring that a transaction
have some physical nexus with a state.”)
24
2014 WL 2457515, at *18 (Del. Ch. May 30, 2014).
25
Id. at *18 n.136.
26
Id.
16
Here, A&R does not attempt to identify any of the type of facts one would
typically consider in determining whether the requisite nexus exists to trigger the
application of a Blue Sky Law. A&R does not assert, for example, that it was solicited to
purchase the securities of Old A&R in Delaware, or that any of the negotiations over the
Merger Agreement occurred in Delaware. Instead, similar to the plaintiff in Eurofins,
A&R argues that the Delaware Securities Act applies because of the choice of law
provision in the Merger Agreement. That provision states that “[a]ll issues concerning
the Transaction Documents . . . will be governed by and construed in accordance with the
laws of the State of Delaware, without giving effect to any choice of law or conflict of
law provision or rule . . . that would cause the application of the law of any jurisdiction
other than the State of Delaware.” 27 In an effort to distinguish the summary rejection of
this argument in Eurofins, A&R invokes 6 Del. C. § 2708, which the Court in Eurofins
did not consider.
Section 2708 was adopted in 1993, twenty years after the Delaware Securities Act
became law. It provides, in relevant part, that:
The parties to any contract, agreement or other undertaking . . . may agree
in writing that the contract, agreement or other undertaking shall be
governed by or construed under the laws of this State, without regard to
principles of conflict of laws . . . if the parties, either as provided by law or
in the manner specified in such writing are, (i) subject to the jurisdiction of
the court of, or arbitration in, Delaware and (ii) may be served with legal
process. The foregoing shall conclusively be presumed to be a significant,
27
Merger Agreement § 10.9. The term “Transaction Documents” includes the Merger
Agreement. Id. § 1.1 at 15.
17
material and reasonable relationship with this State and shall be enforced
whether or not there are other relationships with this state. 28
Section 2708 only applies to contracts involving $100,000 or more. 29 Before Section
2708 was enacted, a Delaware court ordinarily would have analyzed a parties’ contractual
choice of law under the Restatement (Second) of Conflict of Laws, enforcing the parties’
choice unless:
(a) the chosen state has no substantial relationship to the parties or the
transaction and there is no other reasonable basis for the parties’ choice, or
(b) application of the law of the chosen state would be contrary to a
fundamental policy of a state which has a materially greater interest than
the chosen state in the determination of the particular issue and which,
under the rule of § 188, would be the state of the applicable law in the
absence of an effective choice of law by the parties. 30
Using similar language as the Restatement, Section 2708 essentially stipulates that for
purposes of deciding whether to apply a Delaware choice of law provision, courts may
assume a negative answer to both of these exceptions. 31
At its core, Section 2708 is intended to provide certainty to parties who are subject
to jurisdiction in Delaware that their choice of Delaware law regarding the construction
and enforceability of their contracts will be respected. That is the conclusion then-Vice
Chancellor Strine reached in Abry Partners V, L.P. v. F & W Acquisition LLC, 32 in
28
6 Del. C. § 2708(a).
29
Id. § 2708(c)(2).
30
Restatement (Second) of Conflict of Laws § 187(2).
31
See Larry E. Ribstein, Delaware, Lawyers and Contractual Choice of Law, 19 Del. J.
Corp. L. 999, 1004.
32
891 A.2d 1032 (Del. Ch. 2006).
18
construing a choice of law provision similar to the one at issue here 33 to encompass not
only the contract law of Delaware to interpret the contract, but also Delaware’s tort law
for purposes of determining the enforceability of the contract:
Parties operating in interstate and international commerce seek, by a choice
of law provision, certainty as to the rules that govern their relationship. To
hold that their choice is only effective as to the determination of the
contract claims, but not as to tort claims seeking to rescind the contract on
grounds of misrepresentation, would create an uncertainty of precisely the
kind that the parties’ choice of law provision sought to avoid.
*****
When parties have chosen a state’s contract law to govern their contract, it
is illogical to assume that they wished to have the enforceability of that
contract judged by another state’s law. Section 2708 of Title 6 of the
Delaware Code represents our General Assembly’s intent to prevent
perverse dichotomies in the linguistics used to determine the meaning and
enforceability of contracts. When satisfied, as here, § 2708 also establishes
that this State has a material relationship sufficient to satisfy § 187 of the
Restatement (Second) of Conflict of Laws. 34
Consistent with the Court’s analysis in Abry and other cases applying the statute,35
I view Section 2708 as intending to permit contracting parties to incorporate the law of
33
The choice of law provision in Abry stated that the stock purchase agreement “shall be
governed by, and construed in accordance with the Laws of the State of Delaware,
regardless of the Laws that might otherwise govern under applicable principles of
conflicts of law.” Id. at 1046.
34
Id. at 1048, 1049.
35
See, e.g., Transdigm Inc. v. Alcoa Global Fasteners, Inc., 2013 WL 2326881, at *4-5
(Del. Ch. May 29, 2013) (following Abry to apply Delaware common law to fraud claims
arising from stock purchase agreement with Delaware choice of law provision); QTP
Fund LP v. Eurohypo Capital Funding LLC I, 2011 WL 2672092, at *8 (Del. Ch. July 8,
2011) (applying Delaware common law to determine interpretation of term “preference
shares” as used in LLC and trust agreements with Delaware choice of law provisions);
Greetham v. Sogima L-A Manager, LLC, 2008 WL 4767722, at *14 (Del. Ch. Nov. 3,
2008) (following Abry to apply Delaware common law to both contract and promissory
19
Delaware, which primarily would concern its common law, to decide questions
concerning the interpretation and enforceability of a contract. What Section 2708 does
not stand for, in my view, is a mechanism for the wholesale importation of every
provision of Delaware statutory law into the commercial relationship of contracting
parties. Significantly, A&R cites no authority construing Section 2708 in this manner,
which would risk absurd results contrary to basic principles of statutory construction. 36
Would, for example, a Delaware choice of law provision stating that a merger agreement
is to “be governed by” Delaware law trigger application of the Delaware tax code to a
merger where it otherwise would not apply? Could entities incorporated outside of
Delaware find themselves bound by the Delaware General Corporation Law’s
requirements for stockholder approval of a merger by including such a provision in their
merger agreement, contrary to the internal affairs doctrine? 37 It is difficult to imagine
that this was the intention of Section 2708 or that parties to a merger agreement ever
estoppel claims under LLC operating agreement containing Delaware choice of law
provision); Pharmathene, Inc. v. Siga Techs., Inc., 2008 WL 151855, at *7-8 (Del. Ch.
Jan. 16, 2008) (citing Abry, Restatement Section 187 and 6 Del. C. § 2708 to apply
Delaware common law to contract, tort and promissory estoppel claims where merger
agreement contained Delaware choice of law provision).
36
See State v. Cooper, 575 A.2d 1074, 1076 (Del. 1990) (“Literal or perceived
interpretations, which yield illogical or absurd results, should be avoided in favor of
interpretations consistent with the intent of the legislature.”); see also Reddy v. PMS Ins.
Co., 20 A.3d 1281, 1288 n.33 (Del. 2011) (same) (collecting authorities).
37
See McDermott Inc. v. Lewis, 531 A.2d 206, 215 (Del. 1987) (“The internal affairs
doctrine requires that the law of the state of incorporation should determine issues
relating to internal corporate affairs.”) (citing First Nat’l City Bank v. Banco Para el
Comercio Exterior de Cuba, 462 U.S. 611, 621 (1983)).
20
would have intended these outcomes by virtue of including a choice law provision similar
to Section 10.9 of the Merger Agreement here.
More to the point, construing Section 10.9 as A&R advocates would lead to the
bizarre result of allowing contractual parties to convert a blue-sky law that was intended
to regulate intrastate commerce into one that would apply to interstate commerce. A&R
has not cited any authority suggesting that the General Assembly intended to rewrite the
Delaware Securities Act in such a radical way sub silentio through the later adoption of
Section 2708, and I decline to do so. 38 Indeed, this outcome not only would be
inconsistent with the legislative intent of the Delaware Securities Act as discussed in
Singer, but also would implicate issues of federal preemption. 39 Accordingly, I conclude
that it would be unreasonable to construe Section 10.9 of the Merger Agreement to
encompass the Delaware Securities Act and make it apply automatically in this case.
38
The synopsis of the legislation resulting in Section 2708 does not mention the
Delaware Securities Act. It states, in relevant part: “In many commercial transactions
that have material relationships with jurisdictions other than Delaware, the parties choose
Delaware law to govern their agreements. This Bill is designed to give maximum effect
to the principle of freedom of contract and the enforceability of such provisions in
contracts previously made and to be made, and to provide the parties to such agreements
with certainty that courts sitting in Delaware will enforce such choice of law provisions.”
69 Del. Laws ch. 127, § 1 (1993).
39
See, e.g., Edgar v. MITE Corp., 457 U.S. 624, 641-43 (1982) (finding invalid Illinois
blue-sky law “purport[ing] to regulate directly and to interdict interstate commerce,
including commerce wholly outside the state”) (“The Court’s rationale for upholding
blue-sky laws was that they only regulated transactions occurring within the regulating
States. . . . The Commerce Clause also precludes the application of a state statute to
commerce that takes place wholly outside of the State’s borders, whether or not the
commerce has effects within the State.”).
21
Instead, the applicability of the Act must depend on whether a sufficient nexus exists
between Delaware and the merger transaction at issue.
Turning to that analysis, the merger here was negotiated on the buy side by Mason
Wells, a private equity firm, and on the sell side by FdG Logistics, the majority owner of
Old A&R. Mason Wells is based in Milwaukee, Wisconsin. 40 FdG Logistics is a
subsidiary of FdG Associates, which is based in New York City. 41 The headquarters of
Old A&R at the time was in Morris, Illinois. 42 No negotiations concerning the merger
are alleged to have taken place in Delaware, and none of the allegedly underlying
fraudulent business practices or violations is alleged to have occurred in Delaware. The
sole connection that A&R can draw to Delaware—that the merger parties were
incorporated here—is insufficient under Singer and its progeny to demonstrate the
required nexus. As the Court stated in Eurofins, “an allegation based solely on the status
of certain parties to the litigation is insufficient to allege a nexus capable of stating a
claim under the Delaware Securities Act.” 43 In sum, A&R has failed to allege a sufficient
nexus to Delaware to sustain a claim under the Delaware Securities Act. Count II is thus
dismissed for failure to state a claim for relief.
40
The Court takes judicial notice of the headquarters of Mason Wells listed in the
“Notices” section of the Merger Agreement. See Merger Agreement § 10.2.
41
Counterclaim ¶ 11.
42
See id. ¶ 484.
43
2014 WL 2457515, at *18.
22
2. Count III States a Claim for Common Law Fraud Relating to
Pre-Merger Materials
In Count III of its Counterclaim, Buyer asserts a claim for common law fraud
against each of the Securityholders based, in part, on alleged misrepresentations and
omissions concerning certain documents they provided to Buyer before it entered into the
Merger Agreement. These documents, which I refer to as the “Pre-Merger Materials,”
include the July 2012 confidential information memorandum, the September 2012
management presentation, and other materials provided in due diligence.
To state a fraud claim under Delaware common law,
the plaintiff must plead facts supporting an inference that: (1) the defendant
falsely represented or omitted facts that the defendant had a duty to
disclose; (2) the defendant knew or believed that the representation was
false or made the representation with a reckless indifference to the truth; (3)
the defendant intended to induce the plaintiff to act or refrain from acting;
(4) the plaintiff acted in justifiable reliance on the representation; and (5)
the plaintiff was injured by its reliance. 44
The Securityholders move to dismiss Count III for failure to state a claim for relief
insofar as it relates to alleged misrepresentations outside the four corners of the Merger
Agreement. More specifically, the Securityholders argue that Buyer cannot establish as
a matter of law that it justifiably relied on any representations in any of the Pre-Merger
Materials because of the effects of Sections 5.27 and 10.7 of the Merger Agreement.
Section 5.27, which is quoted in full below, states that Old A&R (defined in the
Merger Agreement as the “Company”) was not making any representation or warranty
outside of the Merger Agreement and, more specifically, that it was not making any
44
DCV Hldgs., Inc. v. ConAgra, Inc., 889 A.2d 954, 958 (Del. 2005).
23
representation or warranty about any “projections, estimates or budgets” or “any other
information or documents” with respect to Old A&R that were made available to the
Buyer or its representatives:
EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 5, THE
COMPANY MAKES NO REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, AT LAW OR IN EQUITY AND ANY SUCH
OTHER REPRESENTATIONS OR WARRANTIES ARE HEREBY
EXPRESSLY DISCLAIMED INCLUDING ANY IMPLIED
REPRESENTATION OR WARRANTY AS TO CONDITION,
MERCHANTABILITY, SUITABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. NOTWITHSTANDING ANYTHING TO
THE CONTRARY, (A) THE COMPANY SHALL NOT BE DEEMED TO
MAKE TO BUYER ANY REPRESENTATION OR WARRANTY
OTHER THAN AS EXPRESSLY MADE BY THE COMPANY IN THIS
AGREEMENT AND (B) THE COMPANY MAKES NO
REPRESENTATION OR WARRANTY TO BUYER WITH RESPECT
TO (I) ANY PROJECTIONS, ESTIMATES OR BUDGETS
HERETOFORE DELIVERED TO OR MADE AVAILABLE TO BUYER
OR ITS COUNSEL, ACCOUNTANTS OR ADVISORS OF FUTURE
REVENUES, EXPENSES OR EXPENDITURES OR FUTURE
FINANCIAL RESULTS OF OPERATIONS OF THE COMPANY
UNLESS ALSO EXPRESSLY INCLUDED IN THE
REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS
ARTICLE 5, OR (II) EXCEPT AS EXPRESSLY COVERED BY A
REPRESENTATION AND WARRANTY CONTAINED IN THIS
ARTICLE 5, ANY OTHER INFORMATION OR DOCUMENTS
(FINANCIAL OR OTHERWISE) MADE AVAILABLE TO BUYER OR
ITS COUNSEL, ACCOUNTANTS OR ADVISORS WITH RESPECT TO
THE COMPANY. 45
The integration clause in Section 10.7 of the Merger Agreement states as follows: “This
Agreement, the Transaction Documents and the documents referred to herein and therein
contain the entire agreement between the Parties and supersede any prior understandings,
45
Merger Agreement § 5.27.
24
agreements or representations by or between the Parties, written or oral, which may have
related to the subject matter hereof in any way.” 46
Delaware law enforces clauses which identify the specific information on which a
party has relied and foreclose reliance on other information. 47 Numerous decisions of
this Court have analyzed the enforceability of such clauses. 48 Most significantly, the law
in this area is largely defined by then-Vice Chancellor Strine’s decision in Abry, where he
carefully considered the need to strike an appropriate balance between holding
sophisticated parties to the terms of their contracts and simultaneously protecting against
the abuses of fraud. 49 Surveying the case law at the time, the Vice Chancellor explained
that:
[t]he teaching of this court, through cases such as Great Lakes; H–M
Wexford; Progressive, and Kronenberg is that a party cannot promise, in a
clear integration clause of a negotiated agreement, that it will not rely on
promises and representations outside of the agreement and then shirk its
46
Id. at § 10.7.
47
See, e.g., RAA Mgmt., LLC v. Savage Sports Hldgs., Inc., 45 A.3d 107, 116-17 (Del.
2012).
48
See, e.g., Prairie Capital III, L.P. v. Double E Hldg. Corp, 2015 WL 7461807 (Del.
Ch. Nov. 24, 2015); Anvil Hldg. Corp. v. Iron Acquisition Co., Inc., 2013 WL 2249655
(Del. Ch. May 17, 2013); Abry P’rs V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032
(Del. Ch. 2006) (Strine, V.C.); Kronenberg v. Katz, 872 A.2d 568 (Del. Ch. 2004)
(Strine, V.C.); H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129 (Del. Ch. 2003);
Progressive Int’l. Corp. v. E.I. Du Pont de Nemours & Co., 2002 WL 1558382 (Del. Ch.
July 9, 2002) (Strine, V.C.); Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544
(Del. Ch. 2001).
49
Abry, 891 A.2d at 1058.
25
own bargain in favor of a ‘but we did rely on those other representations’
fraudulent inducement claim. 50
On the other hand, as the Court further explained, because of the venerable public policy
to guard against fraud, we will not insulate a party from liability for its counterparty’s
reliance on fraudulent statements made outside of an agreement absent a clear statement
by that counterparty—that is, the one who is seeking to rely on extra-contractual
statements—disclaiming such reliance:
[T]his court has consistently respected the law’s traditional abhorrence of
fraud in implementing this reasoning. Because of that policy concern, we
have not given effect to so-called merger or integration clauses that do not
clearly state that the parties disclaim reliance upon extra-contractual
statements. Instead, we have held, as in Kronenberg, that murky
integration clauses, or standard integration clauses without explicit anti-
reliance representations, will not relieve a party of its oral and extra-
contractual fraudulent representations. The integration clause must contain
“language that . . . can be said to add up to a clear anti-reliance clause by
which the plaintiff has contractually promised that it did not rely upon
statements outside of the contract’s four corners in deciding to sign the
contract.” This approach achieves a sensible balance between fairness and
equity—parties can protect themselves against unfounded fraud claims
through explicit anti-reliance language. If parties fail to include
unambiguous anti-reliance language, they will not be able to escape
responsibility for their own fraudulent representations made outside of the
agreement’s four corners. 51
Two recent decisions illustrate how this Court has applied the principles
articulated in Abry. In Anvil Holding Corp., a case on which Buyer relies, a buyer of a
company asserted fraud claims based on extra-contractual statements where the purchase
agreement stated that neither the subject company nor any seller “makes any other
50
Id. at 1057.
51
Abry, 891 A.2d at 1058-59 (quoting Kronenberg, 872 A.2d at 593).
26
express or implied representation or warranty with respect to the Company” and that the
agreement “constitutes the entire Agreement among the Parties.” 52 Refusing to dismiss
the fraud claims, the Court reasoned that these provisions were not expressed from the
point of view of the buyer, and thus did not “reflect a clear promise by the Buyer that it
was not relying on statements made to it outside of the Agreement to make its decision to
enter the Agreement.” 53
More recently, in Prairie Capital III, L.P. v. Double E Holdings Corp., 54 the Court
reached the opposite conclusion in dismissing fraud claims that a buyer of a company
asserted based on extra-contractual representations. Critically, unlike in Anvil, the Court
found that the provisions at issue 55 reflected an affirmative expression by the aggrieved
buyer that it had relied only on the representations and warranties in the purchase
agreement:
The Exclusive Representations Clause is not framed negatively. It does not
say that the Buyer did not rely on any representations other than those set
forth in the SPA [Stock Purchase Agreement]. Instead it is framed
positively. It represents affirmatively that the Buyer only relied on the
52
2013 WL 2249655, at *8.
53
Id. (emphasis added).
54
2015 WL 7461807 (Del. Ch. Nov. 24, 2015).
55
One of those provisions stated, in relevant part, that “[i]n making its determination to
proceed with the Transaction, the Buyer has relied on (a) the results of its own
independent investigation and (b) the representations and warranties of the Double E
Parties expressly and specifically set forth in this Agreement” and that “THE BUYER
UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL OTHER
REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS
OR IMPLIED . . . ARE SPECIFICALLY DISCLAIMED BY THE DOUBLE E
PARTIES.” Id. at *7.
27
representations and warranties in the SPA. If a party represents that it only
relied on particular information, then that statement establishes the universe
of information on which that party relied. Delaware law does not require
magic words. In this case, the Exclusive Representations Clause and the
Integration Clause combine to mean that the Buyer did not rely on other
information. They add up to a clear anti-reliance clause. 56
Here, similar to Anvil but unlike Prairie Capital, the critical language missing
from Sections 5.27 and 10.7 of the Merger Agreement is any affirmative expression by
Buyer of (1) specifically what it was relying on when it decided to enter the Merger
Agreement or (2) that it is was not relying on any representations made outside of the
Merger Agreement. Instead, Section 5.27 amounts to a disclaimer by the selling company
(Old A&R) of what it was and was not representing and warranting. Moreover, the
integration clause contained in Section 10.7 merely states in general terms that the
Merger Agreement constitutes the entire agreement between the parties, and does not
contain an unambiguous statement by Buyer disclaiming reliance on extra-contractual
statements.
The difference between a disclaimer from the point of view of a party accused of
fraud and from the point of view of a counterparty who believes it has been defrauded
may seem inconsequential, like two sides of the same coin. The difference is critical,
however, because of the strong public policy against fraud. As explained in Abry, the
Court will not bar a contracting party from asserting claims for fraud based on
representations outside the four corners of the agreement unless that contracting party
unambiguously disclaims reliance on such statements. The language to disclaim such
56
Id. at *8.
28
reliance may vary, as the Court noted in Prairie Capital, 57 but the disclaimer must come
from the point of view of the aggrieved party (or all parties to the contract) to ensure the
preclusion of fraud claims for extra-contractual statements under Abry and its progeny.
Because the language of Section 5.27 and 10.7 of the Merger Agreement does not contain
this type of unambiguous anti-reliance disclaimer by Buyer, those provisions are not
sufficient to preclude its common law fraud claim relating to the Pre-Merger Materials.
Finally, attempting to reconcile this case with Abry, the Securityholders assert that
Section 5.27 of the Merger Agreement closely tracked the agreement at issue there
because the seller in that case disclaimed making any contractual representations. 58 This
argument is meritless. The Securityholders glaringly overlook a separate provision in
Abry in which the buyer expressly agreed that it was not relying on any representations
outside of the agreement:
Acquiror acknowledges and agrees that neither the Company nor the
Selling Stockholder has made any representation or warranty, express or
implied, as to the Company or any Company Subsidiary or as to the
accuracy or completeness of any information regarding the Company or
any Company Subsidiary furnished or made available to Acquiror and its
representatives, except as expressly set forth in this Agreement . . . and
neither the Company nor the Selling Stockholder shall have or be subject to
any liability to Acquiror or any other Person resulting from the distribution
to Acquiror, or Acquiror’s use or reliance on, any such information or any
information, documents or material made available to acquirer in any “data
rooms,” “virtual data rooms,” management presentations or in any other
57
2015 WL 7461807, at *9 (“Language is sufficiently powerful to reach the same end by
multiple means, and drafters can use any of them to identify with sufficient clarity the
universe of information on which the contracting parties relied.”).
58
See Countercl. Defs.’ Reply Br. Supp. Mot. to Dismiss 26-27 n.10 (quoting Section
3.23 of the stock purchase agreement in Abry).
29
form in expectation of or in connection with, the transactions contemplated
hereby. 59
The above-quoted clause was the “critical provision” in Abry because it operated to
“define what information the Buyer relied upon in deciding to execute the Agreement”
and, “[b]y its plain terms, the Buyer promised that neither the Company nor the Seller
had made any representation or warranty as to the accuracy of any information about the
Company except as set forth in Agreement itself.” 60 Indeed, because of the potency of
this provision, the buyer in Abry did not seek relief based on extra-contractual
representations but instead amended its complaint “to premise its claims solely upon
alleged misrepresentations of fact that are represented and warranted in the Stock
Purchase Agreement itself.” 61 This kind of affirmative disclaimer from the point of view
of Buyer is the critical piece that is missing in this case. 62 Accordingly, the motion to
dismiss Count III is denied.
3. Count IV of the Counterclaim Fails to State a Claim for
Unilateral Mistake
In Count IV of its Counterclaim, A&R seeks to rescind the Merger Agreement
based on its alleged unilateral mistake. Rescission of a transaction because of a unilateral
mistake is an extraordinary remedy. It is only available under Delaware law when a party
59
Abry, 891 A.2d at 1041 (emphasis added).
60
Id.
61
Id.
62
Because the other cases on which the Securityholders rely were considered in Abry,
which defines the operative standard, it is not necessary to consider them separately.
30
can demonstrate that “(1) the enforcement of the agreement would be unconscionable; (2)
the mistake relates to the substance of the consideration; (3) the mistake occurred
regardless of the exercise of ordinary care; and (4) it is possible to place the other party in
the status quo.” 63 Count IV fails to state a claim for relief because A&R has failed to
plead facts demonstrating that enforcement of the Merger Agreement would be
unconscionable, and because it would not be possible to return the parties to the status
quo over three years after the closing.
a. Enforcement of the Merger Agreement Would Not Be
Unconscionable
When analyzing unconscionability under Delaware law, “[t]he traditional test is
this: a contract is unconscionable if it is such as no man in his senses and not under
delusion would make on the one hand, and as no honest or fair man would accept, on the
other.” 64 As then-Vice Chancellor Strine noted in Progressive, “[t]he doctrine of
unconscionability is sparingly used in the law . . . .” 65 Continuing, he explained:
For a contract clause to be unconscionable, its terms must be so one-sided
as to be oppressive. Put another way, unconscionability has generally been
recognized to include an absence of meaningful choice on the part of one of
the parties together with contract terms which are unreasonably favorable to
the other party. Courts have been reluctant to apply the doctrine,
recognizing among other things that the parties’ bargaining power will
63
In re ENSTAR Corp., 604 A.2d 404, 411 (Del. 1992) (citing 13 Williston on Contracts
§ 1573 (3d ed. 1970)), overruled on other grounds by Scion Breckenridge Managing
Member, LLC v. ASB Allegiance Real Estate Fund, 68 A.3d 665 (Del. 2013).
64
Tulowitzki v. Atl. Richfield Co., 396 A.2d 956, 960 (Del. 1978) (internal quotation
marks omitted).
65
2002 WL 1558382, at *2 (Del. Ch. July 9, 2002).
31
rarely be equal. Further, courts are particularly reluctant to apply the
doctrine in favor of sophisticated corporations. 66
Here, sophisticated parties engaged in arm’s-length negotiations over the terms of
the Merger Agreement. 67 It is not alleged, nor would it be credible to suggest, that the
Securityholders wielded such overwhelming bargaining power as to present Mason
Wells, a private equity firm, with an absence of meaningful choice. Assuming all of its
allegations to be true, Buyer may have vastly overpaid for Old A&R, but a dispute over
price alone—even a substantial one—is not grounds for finding an agreement between
sophisticated parties to be unconscionable. 68
A&R relies on two cases for the proposition that “a sale is unconscionable if the
buyer grossly overpays.” 69 First, A&R characterizes In Re ENSTAR Corp. as a case
where “a buyer’s paying approximately double the value of what it purchased meant that
‘enforcement of the parties’ agreement would be unconscionable.’” 70 In ENSTAR,
66
Id. at *11 (citing Farnsworth on Contracts § 4.28 (2d ed. 2000)) (internal quotation
marks and modifications omitted).
67
See, e.g., Tr. of Oral Arg. at 97 (Nov. 16, 2015) (counsel for A&R: “We had
sophisticated parties here. These weren’t mom-and-pop operations.”); id at 187 (counsel
for FdG Logistics: “. . . let’s start with the fact that the merger agreement is an
agreement between sophisticated parties . . .”).
68
See, e.g., Bryant v. Way, 2012 WL 1415529, at *12 (Del. Super. Apr. 17, 2012) (“Here,
both parties are real estate brokers and former partners. There is no disparity in
bargaining power. There is nothing unreasonable about the memorandum. While the
date discrepancy has resulted in a dispute over a substantial sum, the financial
implications alone do not make the agreement unreasonable.”)
69
A&R’s Ans. Br. Opp’n Mot. to Dismiss 44.
70
Id. at 44 (quoting In Re ENSTAR, 604 A.2d at 413).
32
however, it was not the price discrepancy that the Court found unconscionable, but rather
the fact that sellers of securities mistakenly were “being paid for the value of their shares
twice.” 71 The other case on which A&R relies involved an overpayment in an appraisal
action based on “two computational errors, which caused the Court to overstate the fair
value of the shares by $2.27 per share.” 72 The Court sensibly found that “[d]efendants
are only entitled to the fair value determined by the Court, not an inflated value based on
miscalculations.” 73
Neither of the cases on which Buyer relies is remotely similar to the situation here.
Based on the facts alleged in the Counterclaim, it is not reasonably conceivable that A&R
can demonstrate that it would be unconscionable to enforce the Merger Agreement.
b. Rescission Would Not Be Feasible
Count IV also fails to state a claim for relief because it would not be possible in
my view to return the parties to the status quo. “[T]he ordinary rule is that it is
impractical to unwind a consummated merger.” 74 As this Court stated in Winston v.
Mandor, when assessing the feasibility of rescission:
71
In Re ENSTAR, 604 A.2d at 413 (“[E]nforcement of the parties’ agreement would be
unconscionable because it would result in the Belzbergs being paid for their shares twice,
a result which even the Belzbergs do not advocate.”).
72
Am. Bottling Co. v. Crescent/Mach I P’rs, L.P., 2009 WL 3290729, at *1 (Del. Super.
Sept. 30, 2009).
73
Id. at *4.
74
Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *6 n.3 (Del. Ch. Jan. 25, 1999),
aff’d, 741 A.2d 16 (Del. 1999).
33
Two factors must go into the analysis: 1) the current circumstances of the
challenged transaction, and 2) whether, the plaintiff would be unfairly
prejudiced in some way by determination at this early stage of litigation,
that he is foreclosed from obtaining a particular form of relief.
Consideration of the first factor necessarily includes, among others, the
time elapsed since completion of the challenged transaction; the complexity
of that transaction, and thus the difficulty of undoing it; whether the
transaction involves publicly traded securities and the percentage and
number of such shares in public hands; possible unfair prejudice to the
defendant(s) if the transaction were rescinded. The second factor is a
relatively straightforward inquiry: Assuming plaintiff were to prevail on all
of the claims as alleged in the complaint, would plaintiff be unfairly
prejudiced in some way by relegation to a monetary equivalent
(i.e. rescissory damages) rather than the equitable relief originally sought. 75
Examining the first factor, the current circumstances of the challenged transaction
weigh decisively against the feasibility of rescission. To start, A&R did not seek
rescission until about 22 months after the merger closed. Over three years have now
passed since the closing, which is a lifetime in the operation of a business. 76 During that
period, Buyer relocated the company’s headquarters, replaced the entire management
team, and sold the tank wash in Joliet, Illinois, which features prominently in Buyer’s
allegations of fraud. 77 Unwinding the merger would be unduly complicated due to these
and other changes A&R has made since taking over the company. Put differently, if
forced to return the merger consideration and to retake ownership of the Trucking
Company, the Securityholders would own a company fundamentally different from the
one they sold over three years ago.
75
710 A.2d 831, 833-34 (Del. Ch. 1996).
76
The Court in Winston found that the passage of “one full year . . . weigh[ed] against
undoing the transactions.” Id. at 834.
77
Counterclaim ¶¶ 8, 53-55, 258, 484.
34
As to the second Winston factor, an award of money damages would not unduly
prejudice A&R if it prevails on its fraud claims. In fact, A&R’s Counterclaim explicitly
seeks damages as an alternative to rescission. 78 If A&R proves its fraud claims,
moreover, the amount of damages it may recover is not limited under the Merger
Agreement, which carves out from the indemnification cap losses arising in respect of
“fraud or intentional breach.” 79 Given A&R’s ability to recover an uncapped amount of
damages if it can prove its fraud claims, it would not suffer unfair prejudice by the
absence of a rescission remedy.
Finally, A&R argues it is inappropriate to rule out the feasibility of rescission on a
motion to dismiss. I disagree. This Court has not hesitated to make this call on a motion
to dismiss where, as here, it is apparent that the remedy of rescission would “be
impracticable and the dismissal of that remedy in light of the requested alternatives, not
unfairly prejudicial.” 80 Here, I “can conceive of no possible circumstance in which I
would rescind the Merger,” 81 which closed more than three years ago. Accordingly,
Count IV of the Counterclaim is dismissed for this reason as well as A&R’s failure to
plead facts demonstrating that enforcement of the Merger Agreement would be
unconscionable.
78
Id. at 182(c). See also Tr. of Oral Arg. at 184 (Nov. 16, 2015).
79
Merger Agreement § 9.3(D).
80
Winston v. Mandor, 710 A.2d 831, 832-35 (Del. Ch. 1996) (granting motion to dismiss
rescission claim); see also RGC Int’l Investors, LDC v. Greka Energy Corp., 2000 WL
1706728, at *16 n.59 (Del. Ch. Nov. 8, 2000) (Strine, V.C.) (same).
81
RGC Int’l Investors, 2000 WL 1706728 at *16 n.59.
35
B. FdG Logistics’ Motion for Summary Judgment
The complaint that started this action asserts a single claim demanding that A&R
promptly remit to FdG Logistics, as the Securityholders’ Representative, the 2012 Tax
Refund under Section 9.6(E) of the Merger Agreement, which governs the disposition of
pre-closing tax refunds. FdG Logistics has moved for summary judgment on this claim.
This motion is straightforward.
Under Court of Chancery Rule 56(c), summary judgment “shall be rendered
forthwith if the pleadings, depositions, answers to interrogatories and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any material
fact and that the moving party is entitled to a judgment as a matter of law.” The evidence
must be viewed in the light most favorable to the non-moving party, and summary
judgment is warranted only where no rational trier of fact would fail to find that the
moving party is entitled to judgment. 82
Section 9.6(E) of the Merger Agreement plainly states that any tax refunds
received after closing for pre-closing periods are the “property” of the Securityholders
and that they should be paid “promptly” to the Securityholders’ Representative on behalf
of the Securityholders. When “a writing is plain and clear on its face, i.e. its language
conveys an unmistakable meaning, the writing itself is the sole source for gaining an
82
See Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1150-51 (Del. 2002)
(“[T]he judge as gate-keeper merely considers whether the finder of fact could come to a
rational conclusion either way . . . .”).
36
understanding of intent.” 83 A&R does not contend that Section 9.6(E) is ambiguous in
any respect.
There also is no dispute as to any material fact concerning the 2012 Tax Refund.
A&R admits that A&R’s 2012 federal and state tax returns relate to pre-closing tax
periods, that A&R has received $2,080,650 in refunds in connection with those filings,
and that it has not remitted those refunds to FdG Logistics as the Securityholders’
Representative. 84 Based on a straightforward application of these undisputed facts and
the plain language of the contract, A&R has breached Section 9.6(E) of the Merger
Agreement by refusing to pay over the 2012 Tax Refund to FdG Logistics as the
Securityholders’ Representative.
Unable to identify any ambiguity in the text of Section 9.6(E) or any genuine issue
of material fact, 85 A&R opposes the entry of summary judgment based on its demand for
rescission, which it seeks under the Delaware Securities Act and based on a unilateral
83
City Investing Co. Liquidating Trust v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del.
1993) (citing Citadel Hldgs. Corp. v. Roven, 603 A.2d 818, 822 (Del. 1992).
84
Answer ¶¶ 17-18, 21.
85
In opposition to the summary judgment motion, A&R submitted an affidavit under
Court of Chancery Rule 56(f) in which it asserts that discovery “is in the early stages”
and “Buyer does not have access to many of the facts needed to flesh out its
counterclaims, or the corresponding defenses to plaintiff’s claims.” The affidavit
describes the need for discovery to support A&R’s fraud claims and is not relevant to
FdG Logistics’ claim for summary judgment on the 2012 Tax Refund. Thus, I decline to
deny the motion for summary judgment based on this affidavit. See Intrepid Invs., LLC
v. Selling Source, LLC, 2015 WL 6157318, at *4 (Del. Ch. Oct. 20, 2015) (“Because
discovery within the context of Rule 56(f) would not be material to the Court’s summary
judgment decision, Intrepid’s motion for relief under that rule is denied . . . .”).
37
mistake. According to A&R, if the Merger Agreement were rescinded, A&R would owe
no contractual obligation to remit the 2012 Tax Refund to the Securityholders’
Representative. 86 A&R also argues that, even if it could not obtain rescission under the
Delaware Securities Act, FdG Logistics would not be entitled to summary judgment as
long as A&R can establish any right to relief under the Act. That is because the
Delaware Securities Act provides that “[n]o person who has made or engaged in the
performance of any contract in violation of any provision of this chapter . . . may base
any suit on the contract.” 87 In short, all of the grounds A&R advances to defeat the
motion for summary judgment depend on the viability of its claims under the Delaware
Securities Act and for rescission based on a unilateral mistake. Because I have concluded
that A&R fails to state a claim for relief on both of those grounds, A&R has no defense to
FdG Logistics’ motion and summary judgment will be entered in FdG Logistics’ favor.
As part of its summary judgment motion, FdG Logistics requests the entry of a
partial final judgment under Court of Chancery Rule 54(b) so that it may receive the
payment for the 2012 Tax Refund now and not have to wait until the remaining claims in
this case have been adjudicated. A&R counters that an interlocutory payment to FdG
Logstics would be inappropriate because the damages A&R seeks in its Counterclaim far
exceed the amount of the 2012 Tax Refund. According to A&R, it “rarely makes sense
86
There is no equity in this argument. Even if the merger were rescinded, A&R still
would have no right to the 2012 Tax Refund because, in that event, the refund would
belong to Old A&R, the ownership of which would return to the Securityholders.
87
6 Del. C. § 73-605(f).
38
to order payment on a smaller claim until it is known whether it will be swallowed up by
a larger one.” 88 A&R grounds this argument on what it describes as “principles of
offset—and of common sense,” 89 rather than citing any binding authority mandating the
result it seeks.
The flaw in A&R’s argument is that it cannot be squared with the plain language
of the Merger Agreement. As discussed above, Section 9.6(E) of the Merger Agreement
expressly provides that A&R “shall promptly pay” pre-closing tax refunds to the
Securityholders’ Representative. A&R, a sophisticated contracting party, could have
bargained for the right to delay payment of the tax refunds pending the resolution of its
indemnification or other claims arising out of Merger Agreement. It did not do so. To
the contrary, it agreed when it signed the Merger Agreement to “promptly” remit pre-
closing tax refunds to the Securityholders’ Representative while simultaneously agreeing
that $10.4 million of the merger price would be withheld and placed in an escrow account
as security for indemnification claims. 90 It would be inappropriate to rewrite the
unambiguous terms of the Merger Agreement governing pre-closing tax refunds to have
it serve A&R’s current strategic interests in delaying payment of an obligation that is now
owed. 91
88
A&R’s Ans. Br. Opp’n Mot. Summ. J. 28.
89
Id. at 27.
90
Merger Agreement §§ 2.13(B)(5), 9.5.
91
See Fletcher Int’l, Ltd. v. Ion Geophysical Corp., 2011 WL 1167088, at *5 (Del. Ch.
Mar. 29, 2011) (“Fletcher, a sophisticated contracting party, could have bargained for the
39
There is, in short, no just reason to delay payment of the 2012 Tax Refund to the
Securityholders’ Representative. Accordingly, I will enter a partial final judgment under
Court of Chancery Rule 54(b) requiring that payment of the 2012 Tax Refund, plus
interest, be made to the Securityholders’ Representative within ten days after the entry of
judgment. I also will enter a final judgment under Rule 54(b) concerning the dismissal of
A&R’s claims under the Delaware Securities Act and for rescission based on unilateral
mistake (Counts II and IV of the Counterclaim) because A&R argues that they provide a
defense to the 2012 Tax Refund claim. In this way, all of the issues potentially relevant
to the 2012 Tax Refund claim may considered together if A&R wishes to seek appellate
review.
III. CONCLUSION
For the foregoing reasons, the Securityholders’ motions to dismiss Counts II and
IV of the Counterclaim are granted, and denied as to Count III of the Counterclaim. FdG
Logistics’ motion for summary judgment is granted. A form of implementing order
accompanies this opinion.
right it now in effect claims . . . . It did not, and this court is not empowered to rewrite
an unambiguous contract in order to have it meet Fletcher’s current business needs.”).
40