IN THE SUPREME COURT OF THE STATE OF DELAWARE
COMPOSECURE, L.L.C., §
§ No. 177, 2018
Plaintiff/Counterclaim §
Defendant-Below, § Case Below:
Appellant, §
§
v. § Court of Chancery
§ of the State of Delaware
CARDUX, LLC f/k/a AFFLUENT §
CARD, LLC, §
§ C.A. No. 12524-VCL
Defendants/Counterclaim §
Plaintiff- Below, §
Appellee. §
Submitted: July 17, 2019
Decided: July 24, 2019
Before VALIHURA, VAUGHN, and SEITZ, Justices.
Following remand to the Court of Chancery. AFFIRMED.
Myron T. Steele, Esquire, Arthur L. Dent, Esquire, Andrew H. Sauder, Esquire, Potter
Anderson & Corroon LLP, Wilmington, Delaware. Of Counsel: Steven M. Coren, Esquire,
David M. DeVito, Esquire, Kaufman, Coren & Ress, P.C., Philadelphia, Pennsylvania for
Appellants.
David J. Margules, Esquire, Elizabeth A. Sloan, Esquire, Jessica C. Watt, Esquire, Ballard
Spahr LLP, Wilmington, Delaware; Burt M. Rublin, Esquire, Ballard Spahr LLP,
Philadelphia, Pennsylvania for Appellees.
VALIHURA, Justice:
CompoSecure, L.L.C., a manufacturer of metal credit cards, has been seeking to
invalidate the Sales Representative Agreement (the “Sales Agreement”) it signed with
CardUX, LLC. The Court of Chancery held in a February 1, 2018 post-trial decision that
the Sales Agreement had not been properly approved under CompoSecure’s Amended and
Restated Limited Liability Company Agreement (the “LLC Agreement”), but that
CompoSecure had impliedly ratified the Sales Agreement by its conduct. CompoSecure
appealed.
In our November 7, 2018 opinion, we agreed with the trial court’s analysis as far as
it went, but we remanded to the trial court to answer a potentially outcome-determinative
question that it had not answered: whether the Sales Agreement is a “Restricted Activity”
under the LLC Agreement. If it is a Restricted Activity, we noted that the Sales Agreement
would be void and unenforceable. We retained jurisdiction. In its report on remand (the
“Report”), the Court of Chancery held that the Sales Agreement was not a Restricted
Activity, and thus, the Sales Agreement is not void. For the reasons below, we agree with
the Court of Chancery’s conclusions.
I.
CardUX was co-founded by a CompoSecure director, Kevin Kleinschmidt, to
market the metal cards that CompoSecure manufactures. The Sales Agreement, which
CompoSecure and CardUX executed on November 9, 2015, provides CardUX with a
fifteen percent commission of the net sales price of any order from a list of “Approved
Prospects.” On January 19, 2016, Amazon agreed with its co-branding partner, Chase, to
2
order CompoSecure’s metal cards. Although CardUX’s marketing efforts did not lead to
the Amazon deal, CardUX, nonetheless, was entitled to fifteen percent of the net sales price
because Amazon was an Approved Prospect. Without paying any commissions to
CardUX, CompoSecure removed Kleinschmidt from the CompoSecure Board in May 2016
and hired litigation counsel who, for the first time, asserted that CompoSecure had not
properly authorized the Sales Agreement under its LLC Agreement.
CompoSecure then sought a declaratory judgment in the Court of Chancery that the
Sales Agreement was invalid based on two provisions in the LLC Agreement, namely,
Section 5.4 (the “Related Party Provision”) and Section 4.1(p)(ix)(A) (the “Restricted
Activities Provision”).1 The Related Party Provision states that, in a conflicted transaction
such as the Sales Agreement, the transaction must be approved by the CompoSecure Board,
the Investors, and the Class A Majority.2 The Restricted Activities Provision prohibits
CompoSecure from entering into “any contract, agreement, arrangement or understanding
requiring the Company or any of its Subsidiaries to make expenditures in excess of
$500,000 during any fiscal year, other than in the ordinary course of business consistent
with past practice,” without prior approval by the Board, the Investors, and, during the
“Earnout Period,” the Class A Majority.3 But the Restricted Activities Provision also
1
CardUX counterclaimed, alleging that CompoSecure breached the Sales Agreement.
2
App. to Opening Br. at A143 (LLC Agreement § 5.4).
3
Id. at A139–40 (LLC Agreement § 4.1(p)(ix)(A)).
3
provides that “any action taken in contravention of the foregoing shall be void and of no
force or effect whatsoever.”4
In its February 1, 2018 post-trial decision,5 the Court of Chancery held that
CompoSecure had failed to obtain the required approvals under the Related Party
Provision. But the court also held that CompoSecure had impliedly ratified the Sales
Agreement because a majority of the Board supported the Sales Agreement—including
Michelle Logan, who controlled the Class A Majority vote, and Mitchell Hollin, who
represented the Investors—and because CompoSecure had treated the Sales Agreement as
a valid and binding contract for months following its execution. As a result, the court
awarded nearly $17 million to CardUX for past-due commissions, legal fees and expenses,
contractual damages, and prejudgment interest. The court did not separately consider
whether the Restricted Activities Provision applied to the Sales Agreement, and, if so,
whether the Sales Agreement is void or merely voidable. Rather, the court only assumed
that the Restricted Activities Provision applied, and the court held that it was “cumulative”
of the Related Party Provision.6
CompoSecure appealed. It argued that the trial court failed to consider the “void”
language in the Restricted Activities Provision. Specifically, it argued that the “void”
language trumped the common law rule that voidable acts—those falling within the power
of a corporation but not properly authorized—are subject to equitable defenses such as
4
Id. at A139 (emphasis added).
5
See CompoSecure, L.L.C. v. CardUX, LLC, 2018 WL 660178 (Del. Ch. Feb. 1, 2018).
6
See id. at *12 n.162.
4
implied ratification. Thus, CompoSecure argued, the Sales Agreement is void and
incapable of being ratified.
In a November 7, 2018 opinion,7 this Court affirmed the Court of Chancery’s
decision that CompoSecure’s failure to comply with the Related Party Provision was a
voidable act subject to implied ratification, and, based on the unchallenged factual findings
by the trial court, we found no error with the court’s conclusion that CompoSecure had
impliedly ratified the Sales Agreement. We agreed with CompoSecure, however, that the
trial court overlooked the “void” language in the Restricted Activities Provision. We held
that, if it is a Restricted Activity, the Sales Agreement is void and incapable of being
ratified. Accordingly, we reversed the Court of Chancery on that issue. But because the
parties disputed whether the Sales Agreement qualified as a Restricted Activity, and
because that determination “require[d] factual findings that the Vice Chancellor is better
equipped to make,” we remanded the case to the trial court and asked the court “to
determine whether the Sales Agreement is a Restricted Activity and to make any necessary
related determinations.”8 We retained jurisdiction.
The Court of Chancery issued its Report on June 5, 2019.9 The court began its
analysis by noting that the “operative term in the Restricted Activities Provision is
‘requiring.’”10 The court held that the term “requiring” is “a commonly used word with a
7
See CompoSecure, L.L.C. v. CardUX, LLC, 206 A.3d 807 (Del. 2018).
8
Id. at 810–11.
9
CompoSecure, L.L.C. v. CardUX, LLC, 2019 WL 2371954 (Del. Ch. June 5, 2019) [hereinafter
Report].
10
Id. at *2.
5
clear meaning.”11 Something that is “required” is “necessary or essential, and a
requirement is something that must take place.”12 Thus, a Restricted Activity “is a contract
that mandates spending in [excess of $500,000 during any fiscal year], without any
contingencies, conditions, or optionality.”13
CompoSecure argued below that the Sales Agreement is a Restricted Activity
because commissions for the Amazon order exceeded $500,000 in a fiscal year. But the
court held that commissions from the Amazon sale—and any other commissions—were
“doubly conditional.”14 That is, to clear the $500,000 hurdle, an Approved Prospect would
have to place an order and CompoSecure would have to accept that order. “The first
condition—receipt of an order from an Approved Prospect—meant that neither CardUX
nor CompoSecure could unilaterally cause any commission payment to be required.”15 The
second condition, provided for in Sections 5.1 and 5.2 of the Sales Agreement, 16 “gave
CompoSecure the ability to determine unilaterally whether it would ever be required to pay
11
Id.
12
Id.
13
Id.
14
Id.
15
Id.
16
Id. (“Section 5.1 of the Sales Agreement specified that ‘[a]ll purchase orders solicited by
[CardUX] from Approved Prospects are subject to approval, rejection or modification by
CompoSecure pursuant to Section 5.2.’ Section 5.2 stated: ‘CompoSecure reserves the right, in
its sole discretion, to: (a) accept, or decline to accept, any purchase order for Products received
from any Person . . . .’ CompoSecure undertook only to ‘review proposed projects and purchase
orders submitted through [CardUX] consistent with the manner in which it conducts its business
in the ordinary course.’ CardUX acknowledged in the same provision that ‘CompoSecure’s
exercise of discretion may result in no Commission owed, or a reduction or delay in the payment
of Commission owed, to [CardUX] under this Agreement.’” (quoting App. to Opening Br. at
A200–01 (Sales Agreement §§ 5.1–5.2))).
6
a commission.”17 Thus, the court concluded, “[b]ecause of the second condition,
CompoSecure could never be required to pay a commission unless CompoSecure
determined that the order from an Approved Prospect provided sufficient value to
CompoSecure to warrant accepting the order and making the commission payment.”18
The trial court also rejected CompoSecure’s arguments concerning initial
projections of commissions from the Sales Agreement, made by CardUX principals, and
its reliance on ThoughtWorks, Inc. v. SV Investment Partners.19 As to the initial
projections, the court held that they were “preliminary, speculative, and remote from the
final Sales Agreement, both temporally and conceptually.”20 Further, it held that those
projections “at most represented one side’s expectations during an early phase of the
negotiations,” and that “[p]rojections are predictions, not requirements.”21 As to
ThoughtWorks—which involved a $10 million line of credit in the context of an
expenditure-based restricted activities provision—the court concluded that it was
distinguishable for three reasons: the narrower language in the Restricted Activities
Provision; the structural differences between the Sales Agreement and the line of credit in
17
Id.
18
Id. at *3 (emphasis added). The court noted that “CompoSecure might decline an order for
myriad potential business reasons,” for example, “[a]n order might seek discounts that would not
be sufficiently profitable,” or “an order might require product changes or increased capacity that
would necessitate additional investment by CompoSecure and distract from other opportunities.”
Id.
19
902 A.2d 745 (Del. Ch. 2006).
20
Report, 2019 WL 2371954, at *3.
21
Id.
7
ThoughtWorks; and, unlike here, the management in ThoughtWorks attempted to act
contrary to the interests of the preferred stockholders whom the restricted activities
provision was meant to protect.
Given those facts, the court found that the Sales Agreement required only two
expenditures: an annual expense reimbursement capped at $20,000 and a commission
advance of $10,000 per month during the first fifteen months. Combined, those two
required expenditures fell short of the $500,000 hurdle. Thus, the court held that the Sales
Agreement was not subject to the Restricted Activities Provision, and, as such, “the LLC
Agreement did not require any additional approvals, and it was not void because of a failure
to obtain them.”22 Rather, the court held that “CompoSecure’s management team and its
owners are now invoking the Restricted Activities Provision in an effort to enable their
current selves to escape the consequences of actions taken by their former selves.” 23
II.
On June 7, 2019, CompoSecure submitted a letter to this Court requesting that we
allow supplemental briefing or memoranda “[g]iven the important nature of the issues
addressed on remand.”24 CardUX objected to CompoSecure’s request the same day.25 This
Court wrote to the parties on June 11, 2019, granting CompoSecure’s request and directing
the parties to file simultaneous supplemental memoranda on July 17, 2019.
22
Id. at *5.
23
Id.
24
Dkt. No. 31 (CompoSecure’s June 7, 2019 Letter to the Court).
25
Dkt. No. 32 (CardUX’s June 7, 2019 Letter to the Court).
8
In its supplemental memorandum, CompoSecure raises three challenges to the
Report. First, CompoSecure argues that the trial court effectively added language to the
Restricted Activities Provision; namely, that Restricted Activities are those “requiring
payment above $500,000 in any fiscal year ‘without any contingencies, conditions, or
optionality.’”26 Because the parties could have written the Restricted Activities Provision
to exclude contracts with conditional requirements, but did not, CompoSecure contends
that the court impermissibly rewrote that provision. Second, CompoSecure argues that the
trial court incorrectly determined that a contract with conditions imposes no
“requirements.” Third, CompoSecure argues that ThoughtWorks is not distinguishable in
any significant way, and that the trial court’s decision “eviscerates” the purpose of the
Restricted Activities Provision and “provides a playbook for management of any Delaware
company to use.”27 CardUX argues in its supplemental memorandum that the Report is
correct.
Upon consideration of the record before us, we agree with the Vice Chancellor’s
well-reasoned Report. The trial court did not “rewrite” the Restricted Activities
Provision—rather, it interpreted the plain meaning of “requiring.” Citing numerous
definitions from several dictionaries, the court determined that “requiring” is a common
word that means “necessary or essential,” or “something that must take place.”28 Focusing
26
CompoSecure Suppl. Mem. at 6 (quoting Report, 2019 WL 2371954, at *2) (emphasis added).
27
Id. at 13, 14.
28
Report, 2019 WL 2371954, at *2.
9
on the context of these specific business arrangements, the trial court explained why the
Sales Agreement is not subject to the Restricted Activities Provision:
When the parties entered into the Sales Agreement, CompoSecure was not
required to pay any commissions to CardUX, and it certainly was not
required to pay a commission for the Amazon Sale. To reiterate,
CompoSecure did not have any obligation to pay commissions to CardUX
unless two conditions were met: first, an order from an Approved Prospect,
and second, a decision by CompoSecure to accept that order. Both
conditions were beyond CardUX’s control. The first was a third-party
decision; the second rested in CompoSecure’s sole discretion. For the
Amazon Sale, the first contingency was not satisfied until CompoSecure
received the order for the Amazon Sale. The second contingency was not
satisfied until CompoSecure decided to accept the order.29
CompoSecure argues that conditions in the Sales Agreement do not change the
mandatory nature of CompoSecure’s payment obligation once those conditions are met.
The trial court carefully considered the language of the contract as well as the factual
record. It specifically found that “[t]he Sales Agreement only required CompoSecure to
make two expenditures: (i) an annual expense reimbursement capped at $20,000 and (ii) a
commission advance of $10,000 per month during the first fifteen months.”30 Further,
based on the record, the court found that CardUX’s projected commissions were mere
“predictions, not requirements,” that were “preliminary, speculative, and remote from the
final Sales Agreement, both temporally and conceptually.”31 Although the Sales
Agreement contemplated commissions, “any payment obligation was doubly
29
Id. at *3.
30
Id. at *2.
31
Id. at *3. CompoSecure challenges this finding. See CompoSecure Suppl. Mem. at 9 n.9.
However, we see no compelling reason to depart from the Vice Chancellor’s findings based on his
thorough review of the record.
10
conditional.”32 Thus, the trial court concluded that the Sales Agreement “required total
expenditures falling well below the threshold in the Restricted Activities Provision,” and
that, “[w]hen the parties entered into the Sales Agreement, CompoSecure was not required
to pay any commissions to CardUX, and it certainly was not required to pay a commission
for the Amazon Sale.”33
In rejecting CompoSecure’s argument that ThoughtWorks suggests that the
Restricted Activities Provision should apply since the Sales Agreement contemplated
future commission payments if the conditions were met, the trial court noted a difference
between the two provisions. The restricted activities provision in ThoughtWorks contained
the phrase, “any contractual arrangement providing for the payment of $500,000 or more
per year,”34 which is broader than the language at issue here, which applies to “any contract,
agreement, arrangement or understanding requiring the Company or any of its
subsidiaries to make expenditures in excess of $500,000 or more.”35
CompoSecure argues that this distinction is insignificant. Instead, it argues that the
contracts here and in ThoughtWorks are structurally similar in that, if approvals need not
be obtained before entering into the contract, and approvals need not be obtained when
later accepting an order that requires a commission under the contract, then management
is free to commit the company to expenditures far in excess of $500,000 without ever
32
Report, 2019 WL 2371954, at *2.
33
Id. at *2–3.
34
ThoughtWorks, 902 A.2d at 748 (emphasis added).
35
App. to Opening Br. at A139–40 (LLC Agreement § 4.1(p)(ix)(A)) (emphasis added).
11
obtaining any approvals. Although there is some logic to this argument, we decline to find
fault with the trial court’s ruling, which, in addition to the difference in language in the two
provisions, was also based upon an important factual difference.
Unlike in ThoughtWorks, where the company management’s interests conflicted
with the preferred stockholders’ interests protected by the restricted activities provision in
that case, the trial court here found that “every one of those constituencies” protected by
the Restricted Activities Provision—the Investors, the Class A Majority, and the Board—
had been “involved in the negotiation of the Sales Agreement and wanted to go forward
with the contract.”36 Further, the court also found that CompoSecure’s management team
and its owners were aligned on, and uniformly supported, the decision to enter into the
Sales Agreement. These findings are not clearly erroneous, and the trial court, based upon
the well-developed record before it, grounded its ruling on its well-supported view that
CompoSecure’s management team and owners are now invoking the Restricted Activities
Provision in an effort to avoid their decision to enter into the Sales Agreement.37 For this
reason, we reject CompoSecure’s contention that the trial court’s interpretation provides a
“playbook” for the management of other Delaware entities to evade the requirements of
36
Report, 2019 WL 2371954, at *5.
37
See id. at *5 (“Having chosen to go forward with the Sales Agreement, and having chosen to go
forward with the Amazon Sale, CompoSecure’s management team and its owners are now
invoking the Restricted Activities Provision in an effort to enable their current selves to escape the
consequences of actions taken by their former selves.”); see also CompoSecure, 206 A.3d at 811
(“CompoSecure admitted at oral argument that the Sales Agreement was a ‘bad contract’ . . . .”).
12
similar provisions. Thus, like the trial court, we find CompoSecure’s arguments
unpersuasive.
III.
For the reasons set forth above, we AFFIRM the Court of Chancery’s Report.
13