P&TI Acquisition Company, Inc. v. Morgenthaler Partners VII, LP

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

P&TI ACQUISITION COMPANY,
INC.

Plaintiff,

Vv. C.A. NO.: N18C-08-059 AML CCLD

MORGENTHALER PARTNERS
VII, LP; and MORGENTHALER
MANAGEMENT PARTNERS VIL,

)
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LLC )
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Defendants.

Submitted: February 1, 2019
Decided: May 9, 2019

Upon Defendants’ Motion to Dismiss: Granted
MEMORANDUM OPINION

David A. Dorey, Esquire, Craig N. Haring, Esquire, of BLANK ROME LLP,
Wilmington, Delaware, Steven J. Roman, Esquire, Adrien C. Pickard, Esquire, of
BLANK ROME LLP, Washington, D.C., Attorneys for Plaintiff.

Timothy Jay Houseal, Esquire, Jennifer M. Kinkus, Esquire of YOUNG
CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware, and Robert
S. Faxon, Esquire, Michael A. Platt, Esquire of JONES DAY, Cleveland, Ohio,
Attorneys for Defendant.

LeGrow, J.
In February 2012, Defendants and others sold a company to Plaintiff and
executed a stock purchase agreement governing the sale. The stock purchase
agreement precluded Defendants or their affiliates from soliciting or employing
any of the acquired company’s employees for a period of five years. Plaintiff
contends that shortly after the stock purchase agreement’s execution, Defendants’
affiliates formed a new entity and solicted two key executives from the acquired
company in violation of the stock purchase agreement. Plaintiff brought this suit
for breach of contract and breach of the implied covenant of good faith and fair
dealing. Moving Defendants contend all claims should be dismissed for failure to
state a claim.

The pending motion presents two questions: (i) whether Plaintiff adequately
pleaded that Defendants and the newly-formed entity commonly are controlled by
an individual who holds minority ownership interests and some level of managerial
authority at both entities, and (11) whether Plaintiff has pleaded a claim for breach
of the implied covenant of good faith and fair dealing when the non-solicitation
clause in the stock purchase agreement directly addresses what individuals or
entities are precluded from soliciting the company’s personnel.

Here, Plaintiff has not sufficiently pleaded that an individual or “control
group” commonly controls both Defendants and the newly-formed entity.

Defendants and the newly-formed entity therefore are not affiliates under the terms

1
of the stock purchase agreement, and Plaintiff's breach of contract claim must be
dismissed. Additionally, the complaint fails to state a claim that Defendants
breached the implied covenant of good faith and fair dealing because the stock
purchase agreement directly addresses the conduct at issue.
FACTS AND PROCEDURAL BACKGROUND

The following facts are drawn from the complaint and the relevant entities’
governing documents incorporated by reference therein.
The Stock Purchase Agreement

In 2012, Plaintiff P&TI Acquisition Company, Inc. (“Plaintiff”) purchased
PhilTem Holdings, Inc. (“PhilTem”), along with PhilTem’s subsidiary, Phillips &
Temro Industries, Inc. (“Phillips”) from Defendant Morgenthaler Partners VII, LP
(“Fund VII’), represented by its general partner, Defendant Morgenthaler
Management Partners, VII, LLC (“Management VII”) (collectively with Fund VII,
‘“Defendants”). The parties executed a Stock Purchase Agreement (the “SPA”’) on
February 9, 2012. The SPA includes a non-solicitation clause (the “Non-
Solicitation Clause”) that specifically provides:

During the Restricted Period, [Defendants] will not, and will cause

each of his, her or its Affiliates not to, directly or indirectly, as

employee, agent, consultant, director, equityholder, manager, co

partner or in any other capacity without the prior written consent of

[Plaintiff], employ, hire, engage, recruit or solicit for employment or
engagement .. . any Person who is (or was during the one year period
preceding the Closing Date) employed or engaged by [PhilTem or its
subsidiaries]... .'

The Non-Solicitation Clause prohibited Defendants and their “Affiliates” from
directly or indirectly soliciting or employing any of PhilTem’s or Phillips’s
employees before February 2017. The SPA defines an “Affiliate” as “any other
Person that directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person.” Additionally, the
SPA defines “Control” as “the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.””
The Alleged Solicitation of Phillips Executives

At the time the parties entered the SPA, Harry Sumpter was Phillips’s CEO
and Michael Ramsay was Phillips’s CFO. Plaintiff alleges that in 2014 the
Defendants, through their affiliate MPE Partners, LP (““MPE”), began soliciting
Sumpter and Ramsay for various positions with MPE or one of its portfolio
companies. Specifically, Plaintiff alleges Defendants began soliciting Sumpter to
act as an acquisition consultant for MPE, a board member of dIhBOWLES (an
MPE portfolio company), or a senior advisor to MPE. Additionally, Plaintiff avers

Defendants began recruiting Ramsay to take a position as CFO of a company MPE

' Defs.’ Mot. to Dismiss, Ex. 1 § 5.19(d) [hereinafter “SPA”].
? SPA at 2.
* Id.
planned to acquire. In 2015, MPE acquired Bowles Fluidics Corporation and DLH
Industries, and Sumpter took a position on the Bowles Fluidics board of directors.
Those entities merged to form dJhBOWLES, and in July 2015, Ramsay took a
position as dIhBOWLES’s CFO. Also in 2015, Sumpter began working as a senior
advisor for MPE. Plaintiff claims MPE is Defendants’ “Affiliate” under the SPA
because MPE and Defendants commonly are controlled by the same individuals.
Plaintiff therefore contends Sumpter and Ramsay’s solicitation, recruitment, and
employment by MPE before February 2017 violated the Non-Solicitation Clause.

On August 6, 2018, Plaintiff filed a two-count complaint (the “Complaint”)
for breach of contract and breach of the implied covenant of good faith and fair
dealing against Defendants. Defendants moved to dismiss the Complaint under
Superior Court Civil Rule 12(b)(6), arguing Defendants are not MPE’s “Affiliates”
under the SPA and therefore did not violate the Non-Solicitation Clause.
The Relevant Entities’ Structure and Ownership

In the Complaint, Plaintiff relies on the entities’ organizational documents to
prove that MPE and Defendants commonly are controlled.’ Plaintiff's theory,
repeatedly restated in the Complaint, is that Fund VII, Management VII, MPE, and

dIhBOWLES “are under the common control of Taft, Tuleta, Machado, Yohe and

* Plaintiff agreed at oral argument that the entities’ organizational documents are incorporated by
reference in the Complaint.
others....”° A brief discussion of the relevant entities’ structure and ownership
therefore is necessary.
A. The Morgenthaler Defendants — Fund VII and Management VII

Defendant Fund VII is a limited partnership and Defendant Management VII
is Fund VII’s general partner.© Management VII manages and controls all Fund
VII’s business decisions.’ Management VII has Class A, B, and C members, but
only Class A members have management rights. Peter Taft and seven other
individuals are Management VII’s Class A members. The Class A members have
the power to “carry out any and all of the objects and purposes of [Management
VII]” and enter into contracts on Management VII’s behalf, but only in accordance
with “policies established by a [mJajority of the [m]Jembers.”® Management VII’s
board of managers are the same eight Class A members and make decisions by
majority vote. The Board of Managers’ role is limited to performing specific
organizational tasks, such as determining contribution amounts, admitting
additional members, valuing assets, and making distributions.’ Eight different
individuals therefore manage and control Management VII, and in turn, manage

and control Fund VII. Between his Class A and B units, Taft controls 9.5628% of

> Compl. 7 44. See also id. 9 45-46, 51, 67, 69, 79-81, 83, 101.

° Defs.” Mot. to Dismiss, Ex. 2 § 1.5 [hereinafter “Fund VII Partnership Agreement”].

’ Fund VII Partnership Agreement § 5.1.

® Defs.’ Mot. to Dismiss, Ex. 3 § 5.1(d) [hereinafter “Management VII Operating Agreement”).

’ Management VII Operating Agreement §§ 3.1, 3.4, 4.1, 4.4. See also id. § 7.1 (power to
designate and remove officers), § 9.2 (power to wind-up the affairs of the company upon
dissolution or liquidation).
Management VII’s voting interests. Karen Tuleta is one of more than twenty Class
B members and owns 0.1483% of the Class B units.
B. MPE

Peter Taft, Karen Tuleta, Joseph Machado, Matt Yohe, and others formed
MPE in April 2012. Some or all those individuals previously held roles at Fund
VII or Management VII. MPE GP, LLC (“MPE General Partner”) is MPE’s
general partner and manages and controls all MPE’s business decisions.'° MPE
also has limited partners who do not participate in MPE’s management.'' Taft,
Tuleta, Machado, and Yohe do not hold any individual interest in MPE. MPE
General Partner has Class A and Class B members, and Taft, Tuleta, Machado, and
Yohe are among the individuals holding Class A and B units. No individual owns
a majority of the units. Six other individuals or entities also own Class A units.
Taft, Tuleta, and Machado are MPE General Partner’s three officers, who are
subject to the supervision of MPE General Partner’s manager.'’” MPE General
Partner delegates the authority to make business decisions to its manager, MPE
Mgt. Co., LLC (“MPE Management”).'? MPE General Partner’s LLC agreement

allows any MPE Management member to execute documents on MPE General

'© Defs.’ Mot. to Dismiss, Ex. 4 §§ 1.6, 2.1 [hereinafter “MPE Partnership Agreement” ].

'! MPE Partnership Agreement § 5.1.

2 Defs.’? Mot. to Dismiss, Ex. 5 § 6.8 [hereinafter “MPE General Partner LLC Agreement”).

3 MPE Partnership Agreement § 3.1; MPE General Partner LLC Agreement §§ 1.49, 6.1-6.2,
6.4.
Partner’s behalf, but subject to the terms of MPE Management’s LLC agreement.“
According to MPE Management’s LLC agreement, all MPE Management’s
business decisions must be made by a unanimous vote of the board of managers."
Taft, Tuleta, and Machado comprise the board of managers and also are one-third
members of MPE Management.

In summary, Defendants themselves do not hold any ownership interest or
managerial power in MPE or vice versa. Peter Taft and Karen Tuleta are the only
individuals with any ownership interest in both Defendants and MPE. Taft is the
only individual with any managerial authority at all the relevant entities. Taft,
however, is only one of eight individuals with control over Defendants and one of
three individuals with control over MPE.

The Parties’ Contentions

In their motion to dismiss, Defendants contend they did not breach the Non-
Solicitation Clause because they are not MPE’s “Affiliates” within the meaning of
the SPA. Defendants argue the organizational documents demonstrate that
Defendants and MPE have separate entity structures and Defendants have no
ownership interest in MPE, controlling or otherwise. According to Defendants, the

Complaint also fails sufficiently to plead that some person or entity commonly

'4 MPE General Partner LLC Agreement § 6.5.
'S Defs.’ Mot. to Dismiss, Ex. 6 §§ 6.1(a), 6.5(b), 7.2 [hereinafter “MPE Management LLC
Agreement’.
controls MPE and Defendants. Defendants do not dispute that Plaintiff otherwise
has pleaded a breach of contract claim, but Defendants contend the failure to
sufficiently plead control is fatal to that claim. Defendants further argue the Court
should dismiss Plaintiff's implied covenant claim because the contract’s express
terms govern the conduct at issue.

In response to Defendants’ motion, Plaintiff argues it sufficiently has alleged
facts permitting a reasonable inference that Taft, Tuleta, Machado, Yohe, and
others control both Defendants and MPE. Plaintiff contends the issue of control is
a fact-intensive inquiry that cannot be resolved on a motion to dismiss, and
Plaintiff therefore is entitled to proceed to discovery to further explore this issue.
Finally, Plaintiff argues Defendants breached the implied covenant because their
conduct “frustrated the central purpose” of the Non-Solicitation Clause.

ANALYSIS

On a motion to dismiss, the Court must determine whether the “plaintiff
‘may recover under any reasonably conceivable set of circumstances susceptible of
proof.’”!° “If [the plaintiff] may recover, the motion must be denied.”’’ A court
may grant the motion if “it appears to a reasonable certainty that under no state of

facts which could be proved to support the claim asserted would plaintiff be

'6 Holmes v. D’Elia, 2015 WL 8480150, at *2 (Del. Dec. 8, 2015) (quoting Spence v. Funk, 396
A.2d 967, 968 (Del. 1978)).

'? Deuley v. DynCorp Int’l, Inc., 2010 WL 704895, at *3 (Del. Super. Feb. 26, 2010) (citing
Parlin vy. DynCorp Int'l, Inc., 2009 WL 3636756, at *1 (Del. Super. Sept. 30, 2009) (quoting
Spence, 396 A.2d at 968)), aff'd, 8 A.3d 1156 (Del. 2010).

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entitled to relief.”'® When applying this standard, the Court will accept as true all
non-conclusory, well-pleaded allegations.” In addition, “a trial court must draw
all reasonable factual inferences in favor of the party opposing the motion.””” The
Court, however, is not required to accept every “strained interpretation of the
allegations proposed by the plaintiff’ and “a claim may be dismissed if allegations
in the complaint or in the exhibits incorporated into the complaint effectively
negate the claim as a matter of law.”

A. Because no individual or entity owns a majority interest in Defendants
and MPE, Plaintiff must plead that one or more individuals dominates
or controls those entities with voting or managerial power that
effectively precludes the other managers or members from acting
independently.

Plaintiff's breach of contract claim turns on whether some individual or
entity commonly controls Defendants and MPE. The SPA defines “Control” as
“the possession, directly or indirectly, of the power to direct or cause the direction
of the management and policies of a Person, whether through the ownership of

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voting securities, by contract or otherwise. The parties agree this contractual

18 Fish Eng’g Corp. v. Hutchinson, 162 A.2d 722, 724 (Del. 1960) (citing Danby v. Osteopathic
Hosp. Ass’n of Del., 101 A.2d 308, 315 (Del. Ch. 1953), aff'd, 104 A.2d 903 (Del. 1954)); Nero
y. Littleton, 1998 WL 229526, at *3 (Del. Ch. Apr. 30, 1998).

'9 Pfeffer v. Redstone, 965 A.2d 676, 683 (Del. 2009).

20 Doe v. Cahill, 884 A.2d 451, 458 (Del. 2005) (citing Ramunno v. Cawley, 705 A.2d 1029,
1034 (Del. 1998) (citing Solomon v. Pathe Commc’ns Corp., 672 A.2d 35, 38 (Del. 1996)) (other
citations omitted)).

a1 Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001).

*° SPA at 2.
definition effectively adopts the meaning of control Delaware courts apply when
deciding whether a corporation has a controlling stockholder.

Under Delaware law, a controlling stockholder exists when “(1) [the
stockholder] owns more than 50% of the voting power of a corporation or (2) owns
less than 50% of the voting power of the corporation but ‘exercises control over
the business affairs of the corporation.”””? If the stockholder does not own more
than 50% of the voting power, the complaint must contain well-pleaded facts
showing the minority stockholder “exercised actual domination and control over . .
. [the] directors” and the minority controller’s power must be “so potent that
independent directors . . . cannot freely exercise their judgment.”** Allegations
suggesting the purported controller has power over day-to-day management are not
enough; the plaintiff also must allege facts to support a reasonable inference that
the individual controls the board of directors or an equivalent governing body.”
The alleged control may exist over the entire entity or over a specific challenged

transaction.”° Although control ultimately is a factual issue that can be difficult to

*3 In re Tesla Motors, Inc. Stockholder Litigation, 2018 WL 1560293, at *12 (Del. Ch. Mar. 28,
2018) (citing Kahn v. Lynch Comme’n Sys., Inc., 638 A.2d 1110, 1113-14 (Del. 1994)).

4 In re Morton's Restaurant Group, Inc. Shareholders Litigation, 74 A.3d 656, 664-665 (Del.
Ch. 2013).

°° In re KKR Financial Holdings LLC Shareholder Litigation, 101 A.3d 980, 993-995 (Del. Ch.
2014).

°© In re Western Nat’l Corp. Shareholders Litigation, 2000 WL 710192, at *20 (Del. Ch. May
22, 2000).

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resolve on the pleadings, the Court will dismiss the Complaint if the well-pleaded
allegations do not permit a reasonable inference of control.”’

At oral argument, Plaintiff acknowledged that the Court must apply the
applicable pleading standard under Superior Court Civil Rule 12(b)(6) and
Delaware precedent examining control. Plaintiff noted, however, that most of the
cases the parties cited involved corporations subject to public disclosure
requirements, and the plaintiffs in those cases therefore had access to substantially
more information regarding control, individual relationships, and the internal
workings of the companies at issue. The Defendants in this case, on the other
hand, are private entities, and Plaintiff therefore contends it is unreasonable to
expect more detailed allegations without an opportunity for discovery.

The Court rejects the principle that the pleading standard for control differs
depending on whether an entity is public or private. A pleading standard that
varied based on an entity’s status as public or private would be arbitrary and
unworkable. For example, even Plaintiff conceded at oral argument that the depth
of companies’ public filings greatly differs. Plaintiff's proposed pleading standard
effectively would require the Court to measure the specificity of a company’s

public filings before deciding whether the complaint sufficiently pleaded a claim.

In short, it is axiomatic that Plaintiff must meet the existing pleading standard for

27 Tesla, 2018 WL 1560293, at *13; Morton’s Restaurant Group, 74 A.3d 656.
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control under Rule 12(b)(6) and sufficiently state a claim before being given an
opportunity for discovery.”

B. Plaintiff has not sufficiently pleaded that Defendants and MPE are
under common control.

Taft is the only individual with any power to direct or cause the direction of
both Defendants’ and MPE’s management and policies. Although the Complaint
mentions Tuleta, Machado, Yohe, and unnamed “others,” Taft was the focus of
Plaintiff's briefing and argument. Plaintiff sufficiently must plead that Taft either
(1) has more than 50% of the voting control over both entities, or (2) has less than
50% of the voting control, but nonetheless dominates and controls those entities’
governing bodies.”

Plaintiff concedes that Taft does not hold more than 50% of any entity’s
voting control. Taft holds 9.5628% of Management VII’s voting control and is one
of eight managing Class A members. He likewise owns a one-third interest in
MPE Management and does not own (i) a majority of the voting control at MPE
General Partner or (ii) any individual interest in MPE.

In order to plead that MPE and Defendants are “Affiliates,” Plaintiffs

burden therefore is to allege sufficient facts demonstrating Taft exercises

8 Moreover, Plaintiff's suggestion that it cannot effectively plead control before obtaining
discovery ignores that Plaintiff already had the benefit of some discovery in an arbitration
proceeding with one of the solicited employees.

” Tesla, 2018 WL 1560293, at *12 (citing Kahn, 638 A.2d at 1113-14).

12
domination and control over both entities’ governing bodies.” According to
Plaintiff, it has met this burden by alleging Taft holds “various positions of
managerial and executive power” and has the power to “(1) enter into contracts, (2)
buy, sell, exchange, transfer or acquire investments, (3) provide guarantees and (4)
exercise, terminate, amend, waive or otherwise change the rights of [Fund VI]?!
Further, Plaintiff argues it has pleaded “detailed facts regarding Taft, Tuleta and
Machado’s managerial and directorial control over MPE, including through its
manager, [MPE Management].”*

Here, the Complaint does not contain well-pleaded facts permitting an
inference that Taft dominates and controls either MPE or Defendants, let alone
both MPE and Defendants. Plaintiff does not offer anything more than conclusory

allegations of Taft’s control while seeking inferences contradicted by the relevant

entities’ governing documents.

3° The parties dispute whether Plaintiff must plead “actual control” or simply “potential control.”
See Tesla, 2018 WL 1560293, at *13 n.215 (quoting In re Zhongpin Inc. Stockholders Litigation,
2014 WL 6735457, at *7 (Del. Ch. Nov. 26, 2014), rev’d on other grounds, In re Cornerstone
Therapeutics, Inc. Stockholder Litigation, 115 A.3d 1173 (Del. 2015) (“Here, Plaintiffs do not
need to prove that [the alleged controller] was a controlling stockholder in order to withstand the
motions to dismiss. Rather, Plaintiffs must plead facts raising the inference that [the alleged
controller] could control [the company].”)). But see Morton’s Restaurant Group, 74 A.3d at 664
(quoting Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989) (“[A]
plaintiff must allege domination by a minority shareholder through actual control of corporate
conduct.”)); Williamson v. Cox Communications, Inc., 2006 WL 1586375, at *4 (Del. Ch. June
5, 2006) (“Simply alleging they had the potential ability to exercise control is not sufficient.”).
The distinction, however, is not material in this case because even if pleading potential control is
sufficient, Plaintiff has not met that burden.

3! P].’s Opp’n Br. at 18-19.

*? Td. at 19.

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As to Defendants, the Complaint pleads that Taft, as a Class A member of
Management VII, “had the power to control and actually did exert control over
(either directly or indirectly, or in combination with others) the management and
policies of [Management VII],” by carrying out its purposes, entering into
contracts, and performing acts “that he deemed necessary, advisable or incidental

°33 In addition,

thereto in accordance with the policies of [Management VII].
Plaintiff avers Taft was a Management VII officer and member of its board of
managers and “had ‘the authority, responsibilities and duties as are customary for
officers holding similar positions.””**

With respect to MPE, the Complaint alleges that “Taft, Tuleta and Machado,
among others,” were appointed managing directors of MPE and given “the powers
and duties granted to such Person pursuant to consent by the Board.”
Additionally, Plaintiff alleges Taft, Machado, and Tuleta each serve on MPE
Management’s board of managers, which effectively manages MPE. According to
the Complaint, “[i]n this role, these individuals had and exercised actual,
constructive or legal control over the management and policies of MPE, directly,

indirectly, or in combination with others.”*° These, and other similar allegations,

coupled with all reasonable inferences to be drawn from them, do not satisfy

3 Compl. 4 56.

4 Id. 4 61:

Id. 478.

36 Id. 479. See also, id. 49 44-46, 51, 57-60, 62-63, 67, 69, 80-81, 83, 86, 88-89.

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Plaintiff's burden of pleading that Taft dominates and controls Defendants’ or
MPE’s governing bodies.

The cases in which Delaware courts concluded a Plaintiff pleaded or proved
that a minority stockholder was a controlling stockholder involve substantially
more than the amorphous allegations on which Plaintiff relies. For example, in In
re Tesla Motors, Inc. Stockholder Litigation, the Court of Chancery found the facts
alleged in the complaint were sufficient to support a reasonable inference that
Tesla’s Chairman, CEO, and Chief Product Architect Elon Musk was a controlling
stockholder even though he held only 22.1% of the company’s voting control.”’
The complaint contained detailed allegations concerning Musk’s influence as the
“face” of Tesla and his ability to rally other stockholders to support his proposals.*®
Additionally, the company’s own public filings acknowledged Tesla was
dependent on Musk’s leadership and his loss would cause disruption and a decline
in the company’s stock price.*” The complaint also detailed Musk’s past ouster of
senior management with whom he disagreed, his control over the board’s
discussion of the challenged acquisition, and his personal relationships with other

directors." The combination of these well-pleaded facts regarding Musk’s

37 Tesla, 2018 WL 1560293, at *12-19.
38 Td. at *15.

39 Td. at *18-19.

40 Td. at *15-17.

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influence were sufficient to meet the plaintiffs’ burden in that case, although the
Court described that conclusion as a “close call”.”!

Likewise, in In re Zhongpin Inc. Stockholders Litigation, the court found the
complaint adequately pleaded that Zhongpin’s Chairman, CEO, founder, and
largest shareholder Xianfu Zhu was a controlling shareholder even though he only
owned 17.3% of the voting control.“” The company had acknowledged in its 10-K
that (i) Zhu had significant influence over the company’s management and affairs,
(ii) the company substantially relied on Zhu, and (iii) losing Zhu would have a
material adverse effect on the company.” Additionally, through Zhu’s stock
ownership and influence at the company, he could exercise significant power over
shareholder approvals for major company decisions and impede a potential
acquirer or change in control.“* Considering those well-pleaded facts, the court
found the plaintiffs alleged an “indicia of domination[] sufficient to raise an
inference that Zhu exercised control over Zhongpin.”””

Finally, in In re Cysive, Inc. Shareholders Litigation, the Court of Chancery

held in a post-trial opinion that a minority shareholder was a controlling

shareholder.*® In that case, Cysive’s Chairman and CEO Nelson Carbonell owned

4" Td. at *1, 19.

” Zhongpin, 2014 WL 6735457, at *6-9.

8 Id. at *7-8.

44 Td. at *9.

45 Id

*6 Tm re Cysive, Inc. Shareholder Litigation, 836 A.2d 531, 551-53 (Del. Ch. 2003).

16
35% of the voting control, and had up to a 40% voting block including stock
options and his family members’ shares.*’ The court noted that the practical
realities of this voting block allowed Carbonell effectively to remove and replace
the board of directors with little or no support from other shareholders."® Carbonell
also was a hands-on CEO who was “involved in all aspects of the company’s
business,” and even placed “two of his close family members in executive

949

positions at the company.””’ Based on these factors, the court concluded Carbonell

possessed a “combination of stock voting power and managerial authority that
enable[d] him to control the corporation, if he so wishe[d].””°

The facts Plaintiff pleads about Taft’s control at MPE or Defendants do not
approach the level of those found sufficient in Tesla, Zhongpin, or Cysive. As to
Management VII, the Complaint only makes generalized assertions regarding the
power and authority granted to Taft as a Class A member, board member, and
officer of Management VII. The governing documents make clear that any
individual member or officer’s authority is subject to the policies established by
the Class A members or board of managers, depending on the power at issue.

Those governing documents also make clear that the members or board of

managers make decisions and set policies for Fund VI by majority vote. Plaintiff

47 Td. at 535.
48 Td. at 552.
49 Id.

°° Td. at 553.

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fails to allege Taft has any unique influence over the other seven Class A members
or managers of Management VII. Merely alleging that Taft has one vote out of
eight among the Class A members, or that he (along with all other class members)
can act on Defendants’ behalf to carry out day-to-day functions, subject to the
control of the majority of the Class A members, is not sufficient to permit an
inference that he dominates and controls Defendants’ governing bodies.”!

The Complaint also does not describe any special influence Taft has in his
roles at MPE, MPE General Partner, or MPE Management, or that he dominates
and controls Tuleta and Machado. Instead, the Complaint merely recites grants of
power and authority as they appear in the entities’ operating agreements. The fact
that Taft is one of MPE General Partner’s three officers, with the authority to act
on its behalf, does not, without more, permit an inference of control because that
authority is subject to MPE Management’s control, which in turn is directed by the
unanimous decisions of its three-member board of managers. As one member of
MPE Management’s board, Taft lacks the power to force any particular action, and

the Complaint does not allege that he otherwise wields sufficient influence to

>! In its opposition to the motion to dismiss, Plaintiff seized on the fact that Fund VII’s
partnership agreement defines “General Partners” as Management VII’s members. Fund VII
Partnership Agreement at 5. Plaintiff argues this at least permits an inference that Taft, as one
such member, is Fund VII’s general partner. This inference is a stretch since Fund VII’s
partnership agreement elsewhere makes clear that Management VII is the Fund’s only general
partner. In any event, even if Taft is one of eight “General Partners,” Management VII’s
operating agreement makes clear that his authority is limited to acting in accordance with the
policies established by a majority of Management VII’s Class A members. Management VII
Operating Agreement §§ 5.1(d), 5.2.

18
dominate the other two board members. Although Taft effectively has a veto
power by virtue of the unanimity requirement, that power alone or in conjunction
with Plaintiff's other allegations is not sufficient to permit an inference that any
one board member is a “controller” under Delaware law.” Moreover, although
Plaintiff relies on statements MPE made on its website, to potential investors, and
in press releases” suggesting the Defendants and MPE were and are linked, none
of those statements suggest that one entity controls the other or is “commonly
controlled,” which is what Plaintiff must plead to support its claim that the entities
are “Affiliates” under the SPA.

In summary, the Complaint fails to allege any special relationships or
influence Taft has over either entity’s managing members or his domination and
control over board level decision-making. Accordingly, the Complaint does not
sufficiently plead that Taft is a controlling person or Defendants and MPE
commonly are controlled.

C. Plaintiff has not sufficiently pleaded a control group.
The Complaint collectively refers to Taft, Tuleta, Machado, Yohe, and

unidentified “others” controlling Defendants and MPE, collectively or

*2 Williamson, 2006 WL 1586375, at *5 (“There is no case law in Delaware . . . holding that
board veto power in and of itself gives rise to a shareholder’s controlling status.”). See also
Tesla, 2018 WL 1560293, at *15 (the Court considered “Musk’s ability to utilize his 22% stake
as a blocking position on significant matters” as one of many factors relevant to the controller
analysis).

See Compl. Jf 91-96.

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individually. Assuming Plaintiff is asserting that these individuals are a control
group within Defendants or MPE, the Complaint fails to plead the existence of a
control group. Delaware law recognizes “‘a number of shareholders, each of whom
individually cannot exert control over the corporation . . . can collectively form a
control group where those shareholders are connected in some legally significant
way-e.g., by contract, common ownership, agreement, or other arrangement-to

1.”°* Merely alleging a group of stakeholders

work together toward a shared goa
have the same interests is not sufficient as a matter of law to prove a control group
exists.” Here, apart from conclusory statements regarding Taft, Machado, Tuleta,
Yohe and “others” and their positions as officers or employees of Defendants and
MPE, Plaintiff has not pleaded that those individuals are connected in some legally
significant way. Conclusory allegations of control are not sufficient.”®
Accordingly, Plaintiff has not sufficiently alleged Defendants and MPE are
“Affiliates” under the SPA, and the Complaint therefore fails adequately to plead a

breach of contract claim against Defendants.

D. The Complaint does not state a claim for breach the implied covenant of
good faith and fair dealing.

The Complaint alleges the SPA contains an implied covenant of good faith

and fair dealing requiring Defendants to “refrain from engaging in arbitrary or

- Dubroff v. Wren Holdings, LLC, 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009).
Id.
°° Morton’s Restaurant Group, 74 A.3d at 664.

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unreasonable conduct that had the effect of preventing [Plaintiff] from receiving
the fruits of its bargain under that contract.” Plaintiff contends Defendants
breached that covenant when they, through their “Affiliate,” solicited and

°7 Defendants contend the SPA’s express terms

employed Sumpter and Ramsay.
cover the issue here, and the Court cannot rewrite those terms to provide a broader
definition of “Affiliate” than the one for which Plaintiff negotiated.

To sufficiently plead a breach of the implied covenant of good faith and fair
dealing, the complaint “must allege a specific implied contractual obligation, a
breach of that obligation by the defendant, and resulting damage to the plaintiff.””*
The Court will not imply contractual obligations unless there were “developments
or contractual gaps that the asserting party pleads neither party anticipated.” The
implied covenant does not apply when the contract’s express terms address the
conduct at issue, and the implied covenant cannot “grant contractual protections

69 The Court may not utilize the

that parties forwent at the bargaining table.
implied covenant to rewrite a contract simply because one party later believes it

was a bad deal.

>? Compl. 4§ 106-107.

8 Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 888 (Del. Ch. 2009) (quoting Fitzgerald v.
Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998)).

*? Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010).

60 4shland LLC v. Samuel J. Heyman 1981 Continuing Trust for Heyman, 2017 WL 1224506, at
*7 (Del. Super. Mar. 30, 2017) (citing Aspen Advisors LLC v. United Artists Theatre Co., 861
A.2d 1251, 1260 (Del. 2004)). See also Nationwide Emerging Managers, LLC v. Northpointe
Holdings, LLC, 112 A.3d 878, 896 (Del. 2015).

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The Non-Solicitation Clause in the SPA plainly addresses the solicitation or
employment of a Phillips employee by Defendants or one of their “Affiliates”
before February 2017. The parties expressly defined “Affiliate” and “Control” and
thereby established the parameters of the Non-Solicitation Clause. Accordingly,
the express terms of the contract govern, and Defendants’ conduct either was a
breach of the Non-Solicitation Clause or it was not. The parties negotiated the
contract’s terms, and this Court cannot use the implied covenant to broaden the
specifically contracted-for definition of “Affiliate” to cover the conduct in this
case. The Court will not insert contractual protections that Plaintiff failed to
negotiate for itself. Because the express terms of the SPA govern the alleged
conduct, Plaintiffs claim for breach of the implied covenant of good faith and fair
dealing must be dismissed.

CONCLUSION
For the foregoing reasons, Defendants’ Motion to Dismiss is GRANTED.

IT IS SO ORDERED.

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