IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
L-5 Healthcare Partners, LLC, )
)
Plaintiff, )
Counterclaim Defendant, )
)
v. ) C.A. No. 2019-0412-KSJM
)
Alphatec Holdings, Inc., )
)
Defendant, )
Counterclaim Plaintiff. )
MEMORANDUM OPINION
Date Submitted: July 14, 2020
Date Decided: October 12, 2020
William M. Lafferty, D. McKinley Measley, Thomas P. Will, MORRIS NICHOLS
ARSHT & TUNNELL LLP, Wilmington, Delaware; Antonio Yanez, Jr., Alexander
L. Cheney, WILLKIE FARR & GALLAGHER LLP, New York, New York;
Counsel for L-5 Healthcare Partners, LLC.
Philip A. Rovner, Jonathan A. Choa, Jaclyn C. Levy, POTTER ANDERSON &
CORROON LLP, Wilmington, Delaware; Counsel for Alphatec Holdings, Inc.
McCORMICK, V.C.
This action arises out of a March 2018 share purchase agreement between
Plaintiff L-5 Healthcare Partners, LLC (“L-5”) and Defendant Alphatec Holdings,
Inc. (“Alphatec”). The purchase agreement requires that whenever Alphatec
authorizes the issuance and sale of common stock equivalents to a third-party buyer,
Alphatec must first offer L-5 a pro-rata opportunity to participate in that issuance at
the same price and on the same terms as the third-party.
In November 2018, Alphatec issued warrants convertible into Alphatec
common stock to nonparty Squadron Medical Finance Solutions LLC (“Squadron”)
pursuant to a credit agreement. In March 2019, Alphatec again agreed to issue (and
in June 2019 issued) warrants convertible to Alphatec common stock at a price and
on terms that differed from the first transaction. Later, Alphatec made a proposal to
L-5 to acquire warrants based on a blended version of the prices and terms in the
2018 agreement and the 2019 agreement. Alphatec’s proposal to L-5 was subject to
approval by Alphatec’s board and further negotiations with Squadron.
L-5 filed this lawsuit to enforce its preemption rights. L-5 first claims that the
2019 agreement and subsequent issuance constituted an authorization that triggered
L-5’s preemption rights. L-5 next claims that the blended-terms proposal did not
satisfy L-5’s preemption rights because it did not constitute an offer to sell and
because the blended terms were not the same price or the same terms. L-5 also
claims that it is entitled to fee-shifting and indemnification for its fees and costs
incurred in this litigation.
L-5 has moved for partial judgment on the pleadings, and this decision grants
that motion in part. L-5 is entitled to a declaration that the 2019 agreement with
Squadron triggered L-5’s preemption rights and that Alphatec’s contingent proposal
did not constitute an “offer to sell” sufficient to satisfy L-5’s preemption rights. Yet,
factual issues foreclose judgment on the pleadings on Alphatec’s affirmative
defenses and on the question of whether Alphatec’s blended-terms proposal
complied with the price and term requirements of the purchase agreement. The
motion is denied as to those issues and as to L-5’s claims for fee-shifting and
indemnification, which are more appropriately resolved at a later stage of this action.
I. FACTUAL BACKGROUND
This statement of facts is drawn from the pleadings, and the documents
attached to and incorporated by reference in the pleadings.
A. The Purchase Agreement
L-5 and Alphatec are parties to a Securities Purchase Agreement (“Purchase
Agreement”)1 dated March 8, 2018, under which L-5 purchased 25,000 shares of
1
C.A. No. 2019-0412-KSJM Docket (“Dkt.”) 1, Verified Compl. (“Compl.”) Ex. A
(“Purchase Agreement”).
2
Alphatec preferred stock for $25 million.2 The Purchase Agreement grants L-5
preemption rights in the event that L-5 achieved an ownership level of at least 12.5%
of Alphatec’s outstanding stock.3 L-5 converted its preferred stock such that, at all
times relevant to this parties’ dispute, L-5’s ownership interest has exceeded the
12.5% threshold.4
L-5’s preemption rights are set forth in Section 4.18(a) of the Purchase
Agreement, which provides that prior to authorizing “the issuance and sale of any
Common Stock or Common Stock Equivalents,” Alphatec “will first offer to sell to
[L-5] a pro rata portion of such securities . . . at the same price and on the same
terms” as those offered to another party.5 Section 4.18(a) reads in its entirety:
Immediately following the Closing, and for so long as the
LI Group beneficially owns such number of shares of
Common Stock on a fully diluted basis (calculated in
accordance with Section 4.11(h)) equal to or greater than
the Threshold Ownership Percentage, if [Alphatec]
authorizes the issuance and sale of any Common Stock or
Common Stock Equivalents (other than any Exempt
Issuance),[6] [Alphatec] will first offer to sell to [L-5], a
2
Compl. ¶ 1, 9.
3
Purchase Agreement § 4.18(a).
4
Compl. ¶ 9.
5
Purchase Agreement § 4.18(a).
6
“Exempt Issuance” is defined to include the issuance of securities in connection with
specified transactions and the filing of a universal shelf registration statement, none of
which are at issue here. See id. § 1.1.
3
pro rata portion of such securities equal to the percentage
determined by dividing (i) the number of shares of
Common Stock held by the LI Group (determined on a
fully-diluted basis (calculated in accordance with Section
4.11(h)), by (ii) the total number of shares of Common
Stock then outstanding (determined on a fully-diluted
basis (calculated in accordance with Section 4.11(h)). The
members of the LI Group (as determined by [L-5]) will be
entitled to purchase all or part of such stock or securities
at the same price and on the same terms as such stock or
securities are to be offered to any other Person.7
“Common Stock Equivalents” is defined to include warrants convertible into
Alphatec common stock.8
Section 4.8 imposes indemnification obligations on Alphatec for all “losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including . . . reasonable attorneys’ fees and costs of investigation that [L-5] may
suffer or incur as a result of or relating to . . . any breach of” the Purchase Agreement,
including violations of Section 4.18.9 In the event of a dispute resulting in an action
to enforce a provision of the Purchase Agreement by either party, Section 5.9
additionally requires that “the prevailing party in such Action or Proceeding shall be
reimbursed by the non-prevailing party for its reasonable attorneys’ fees and other
7
Id. § 4.18(a).
8
Id. § 1.1.
9
Id. § 4.8.
4
costs and expenses incurred with the investigation, preparation and prosecution of
such Action or Proceeding.”10
B. The 2018 Agreement
On November 6, 2018, Alphatec executed a Credit, Security and Guaranty
Agreement (“2018 Agreement”)11 with Squadron.12 Under the 2018 Agreement,
Squadron provided Alphatec with a $35 million term loan facility,13 and Alphatec
granted Squadron warrants entitling Squadron “to purchase 845,000 shares of
common stock of [Alphatec] at $3.15 per share.”14 L-5 did not assert and does not
seek to enforce its preemption rights in connection with the 2018 Agreement.15
C. The 2019 Agreement
Several months later, Alphatec sought additional capital and contacted both
L-5 and Squadron to determine their interest in a debt financing arrangement.16 L-5
declined. Squadron agreed. On March 27, 2019, Alphatec and Squadron executed
10
Id. § 5.9.
11
Compl. Ex. B.
12
Compl. ¶16.
13
2018 Agreement § 2.1(a).
14
Id. §§ 2.1(e), 1.1.
15
Compl. ¶ 17.
16
Dkt. 11, Def.’s Answer to Verified Compl. and Verified Countercls. (“Answer” or
“Countercls.”) ¶¶ 16–17, 19.
5
the First Amendment to Credit, Security and Guaranty Agreement (the “2019
Agreement”).17
Under the 2019 Agreement, Squadron provided Alphatec an additional term
loan of $30 million (the “Additional Term Loan”).18 The 2019 Agreement required
that Alphatec grant Squadron warrants to purchase 4,838,710 shares of common
stock of Alphatec.19 This additional grant of warrants would not become due until
Alphatec drew from the Additional Term Loan.20 The 2019 Agreement alters and
restates the 2018 Agreement’s definition of Warrants to establish a new price of
$2.17.21
17
Compl. Ex. C.
18
Compl. ¶¶ 17, 19; see also 2019 Agreement ¶ 3(B) (amending § 2.1(a) of the 2018
Agreement).
19
2019 Agreement ¶ 3(A) (amending § 1.1 of the 2018 Agreement).
20
Id.
21
Id. (defining “Warrants” as “(i) the warrants granted to [Squadron] (including any
designee of [Squadron]) in connection with the Initial Term Loan on the Closing Date to
purchase 845,000 shares of common stock of [Alphatec] at $3.15 per share and (ii) the
warrants to be granted to [Squadron] (including any designee of [Squadron]) on the date of
the initial drawing by [Alphatec] under the Additional Term Loan to purchase 4,838,710
shares of common stock of Holdings at $2.17 per share, such Warrant shall be substantially
in the form of Exhibit B”).
6
D. The Proposal
Alphatec and L-5 had been in communication during Alphatec’s negotiations
with Squadron regarding the 2019 Agreement.22 On March 7, 2019, in response to
a letter from L-5’s counsel, Alphatec provided L-5 a copy of the binding
commitment letter and attached term sheet that Squadron had executed earlier that
day.23 After some back-and-forth between Alphatec and L-5 as to whether the 2019
Agreement triggered L-5’s preemption rights, Alphatec made a proposal pursuant to
Section 4.18 on May 17, 2019 (the “Proposal”).24 The Proposal took the form of a
term sheet that purported to reflect the terms of Alphatec’s agreement with
Squadron.25
Noting the ongoing disagreement as to L-5’s preemption rights, the Proposal
referenced the protections of “Fed. Rule of Evid. 408 and Cal. Evid. Code 1152” and
was labeled with the heading: “For Mediation Purposes Only.”26
The Proposal sought to replicate the price and terms of the 2018 Agreement
and the 2019 Agreement together. To that end, it required that L-5 initially make a
22
Countercls. ¶¶ 33–36.
23
Id. ¶¶ 37–39.
24
Countercls. Ex. C; accord Countercls. ¶ 62.
25
Proposal; Countercls. ¶ 62.
26
Proposal at 1.
7
first term loan of $11,550,137 in exchange for warrants to purchase 256,839
Alphatec common shares at $3.15 per share27—the exercise price set forth in the
2018 Agreement.28 It then required that L-5 commit to make a second term loan of
$9,118,529.29 Upon Alphatec’s draw on the second term loan, L-5 would receive
warrants to purchase 1,470,731 shares of Alphatec common stock at $2.17 per
share30—the exercise price set forth in the 2019 Agreement.31 L-5 calculates the
weighted average of the exercise price of L-5’s warrants as $2.32, or around 7%
more than the $2.17 exercise price available to Squadron in the 2019 Amendment.32
The Proposal was contingent. It contemplated that L-5 would provide
Alphatec with a credit facility representing a pro rata portion of the loans Alphatec
obtained from Squadron.33 The Proposal additionally provided that it was “subject
27
Id. at 1–2.
28
2019 Agreement ¶ 3(A).
29
Proposal at 1.
30
Id. at 2.
31
2019 Agreement ¶ 3(A).
32
L-5 calculates the weighted average by “(i) taking the sum of the exercise price of the
warrants multiplied by the number of corresponding shares that could be acquired with
those warrants, and (ii) dividing that sum by the total number of shares L-5 could acquire
with its warrants. In this instance, the formula is: (($3.15 x 256,839) + ($2.17 x
1,470,731)) / (256,839 + 1,470,731) = $2.32.” Dkt. 17, Pl.’s-Countercl. Def.’s Mem. of
Law in Supp. of Its Mot. for J. on the Pleadings (“Pl.’s Opening Brief”) at 8–9 n.2.
33
Proposal at 1.
8
to final approval” by Alphatec’s Board of Directors.34 As Alphatec clarified in a
May 23, 2019 letter, execution of the Proposal also depended on Squadron agreeing
to retroactively carve out a pro rata portion of the warrants it received under the 2018
and 2019 Agreements.35 The letter stated:
[T]he [Proposal], if accepted by L-5, requires Squadron to
carve out a pro rata portion of its pre-existing security
position . . . . [Alphatec] is unwilling to disrupt, potentially
significantly, its relationship with its largest lender,
without L-5 first making a binding commitment to execute
the resulting deal.36
Squadron had no obligation to allow a carve-out, and would have been well within
its rights under the 2019 Agreement to reject L-5’s involvement.37
The Proposal made explicit that Alphatec was “under no obligation to draw”
from the L-5 loan.38 The deal contemplated by the Proposal thus created a scenario
34
Id. at 1 n.1.
35
Countercls. Ex. D, Letter from Craig Hunsaker, General Counsel, Alphatec Spine, Inc.,
to John Staikos, attorney, LS Power and John Wade, Chief Compliance Officer, LS Power
(May 23, 2019) (“May 23, 2019 Letter”).
36
Id.
37
The 2019 Agreement explicitly restricted third-party participation: “The terms and
provisions of this Amendment shall be for the sole benefit of the parties hereto and their
respective successors and assigns; no other person, firm, entity or corporation shall have
any right, benefit or interest under this Amendment.” 2019 Agreement ¶ 13.
38
Proposal at 1.
9
where if Alphatec chose to draw from the Squadron loan but not the L-5 loan,
Squadron would obtain additional warrants and L-5 would not.39
E. The 2019 Issuance
On June 13, 2019, the Board approved a draw on the Additional Term Loan
and issue the corresponding warrants to Squadron (the “2019 Issuance”).40 The
Board resolution also approved a warrant issuance to L-5 in the event it accepted the
Proposal.41
F. This Litigation
L-5 filed this litigation on June 4, 2019, to enforce its preemption rights. L-5’s
Complaint asserts three causes of action. In Count I, L-5 seeks a declaration that the
2019 Agreement triggered L-5’s preemption rights. In Count II, L-5 seeks a
declaration that Alphatec breached the Purchase Agreement by failing to offer L-5
the opportunity to participate in the 2019 Amendment at the same price and on the
39
Section 5.1 of the 2018 Agreement restricted Alphatec’s ability to incur additional
subsequent debt without Squadron’s permission, effectively giving Squadron veto power
over Alphatec’s ability to draw down on the L-5 loan in the Proposal and on Alphatec’s
issuance of warrants to L-5 pursuant to that loan. See 2018 Agreement, § 5.1 (“No
Borrower will . . . create, incur, assume, guarantee or otherwise become or remain directly
or indirectly liable with respect to, any Debt, except for Permitted Debt.”); see also id. §
1.1 (defining “Debt” and “Permitted Debt”).
40
Countercls. ¶¶ 70–71.
41
Id.
10
terms as Squadron. In Count III, L-5 seeks indemnification under Sections 4.8 and
5.9 of the Purchase Agreement for its reasonable attorneys’ fees and other costs and
expenses incurred in connection with this action.
On July 30, 2019, Alphatec filed its answer and asserted two counterclaims
seeking declarations that mirror the relief sought in Counts I and II of the
Complaint.42 L-5 answered the counterclaims on September 18, 2019.43
On January 31, 2020, L-5 moved for partial judgment on the pleadings as to
all questions of liability, leaving only the remedy to be determined.44 The parties
completed briefing on the motion on May 6, 2020,45 and the court held oral argument
on July 14, 2020.46
II. LEGAL ANALYSIS
A motion for judgment on the pleadings under Court of Chancery Rule 12(c)
may be granted “where the movant is entitled to judgment as a matter of law and
42
Answer and Countercls.
43
Dkt. 14, Pl.-Countercl. Def. L-5 Healthcare P’rs. LLC’s Ans. and Affirmative Defenses.
44
Pl.’s Opening Br. at 2.
45
See Dkt. 27, Def.-Countercl. Pl.’s Answering Br. in Opp’n to Pl.-Countercl. Def.’s Mot.
for Partial J. on the Pleadings (“Def.’s Ans. Br.”); Dkt. 29, Pl.-Countercl. Def.’s Reply Br.
in Supp. of Its Mot. for Partial J. on the Pleadings (“Pl.’s Reply Br.”).
46
Dkt. 38, Oral Argument and Partial Rulings of the Ct. Via Zoom on L-5 Healthcare P’rs.,
LLC’s Mot. for Partial J. on the Pleadings and Mot. for Stay of Disc. (“Oral Argument
Tr.”).
11
there are no disputed material facts.”47 Judgment on the pleadings “is a proper
framework for enforcing unambiguous contracts because there is no need to resolve
material disputes of fact.”48 The court “must draw all reasonable inferences from
those facts in the light most favorable to the nonmoving party” and “may consider
the agreements attached to the pleadings in making its determination.”49 The court
also may take judicial notice of a corporation’s public filings.50
L-5 moves for judgment on the pleadings as to the following issues:
(i) whether the 2019 Amendment triggered L-5’s preemption rights; (ii) whether
Alphatec breached the Purchase Agreement by failing to offer L-5 the opportunity
to participate in the 2019 Amendment “at the same price and on the same terms” as
offered to Squadron; and (iii) whether Alphatec is required to indemnify L-5 under
Section 4.8 and reimburse L-5 under Section 5.9 of the Purchase Agreement.51 This
decision tackles the issues in that order.
47
Cantor Fitzgerald, L.P. v. Cantor, 2001 WL 1456494, at *4 (Del. Ch. Nov. 5, 2001).
48
Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 925
(Del. 2017) (citation omitted); accord Fortis Advisors LLC v. Meds. Co., 2019 WL
7290945, at *1 (Del. Ch. Dec. 18, 2019) (ORDER).
49
CorVel Enter. Comp, Inc. v. Schaffer, 2010 WL 2091212, at *1 (Del. Ch. May 19, 2010).
50
Tyson Foods, 2007 WL 2351071, at *2 (Del. Ch. Aug. 15, 2007).
51
Pl.’s Opening Brief at 22.
12
A. L-5’s Preemption Rights Were Triggered.
Under Section 4.18 of the Purchase Agreement, L-5 is entitled to exercise its
preemption rights if Alphatec “authorizes the issuance and sale of any . . . Common
Stock Equivalents” to a third-party.52 The parties agree that the warrants were
Common Stock Equivalents.53 They dispute whether the issuance and sale of
warrants were “authorized” so as to trigger L-5’s preemption rights.
L-5’s primary argument is that its preemption rights were triggered by the
2019 Issuance. This is a good argument, as the 2019 Issuance was unequivocally an
“issuance and sale” that Alphatec “authoriz[ed].” Alphatec does not respond to this
argument on its merits. Instead, Alphatec argues that the court should ignore the
2019 Issuance because it occurred after L-5 filed the Verified Complaint. Alphatec,
however, admitted the fact of the 2019 Issuance in its Counterclaims.54 Consistent
with the purpose of Rule 12(c),55 the court can take judicial notice of Alphatec’s
52
Purchase Agreement § 4.18(a) (emphasis added).
53
Answer ¶ 9.
54
Countercls. ¶¶ 70–71.
55
See 5C Federal Practice and Procedure § 1367 (3d ed. 2020) (describing the purpose of
the analogous Federal Rule of Civil Procedure as “to provide a means of disposing of cases
when the material facts are not in dispute between the parties and a judgment on the merits
can be achieved by focusing on the content of the competing pleadings, exhibits thereto,
matters incorporated by reference in the pleadings, whatever is central or integral to the
claim for relief or defense, and any facts of which the district court will take judicial
notice”).
13
admission for the purpose of this motion.56 The 2019 Issuance, therefore, triggered
L-5’s preemption rights under Section 4.18.
For completeness, this decision addresses L-5’s alternative argument, which
is that 2019 Agreement, standing alone, constituted the requisite “authorization” of
the issuance and sale of warrants that triggered L-5’s preemption rights. This too is
a good argument. “Authorize” means “to formally approve,”57 or to “give official
permission for or approval to.”58 The 2019 Agreement did just that, setting forth the
terms and conditions under which the issuance and sale of warrants would occur.
Alphatec responds that under the 2019 Agreement, no warrants were due until
Alphatec drew on the Additional Term Loan,59 and the 2019 Amendment did not
56
See Merrill v. United Parcel Serv., 956 A.2d 1196, 1201–02 (Del. 2008) (“Voluntary
and knowing concessions of fact made by a party during judicial proceedings (e.g.,
statements contained in pleadings . . .) are . . . . traditionally considered conclusive and
binding upon both the party against whom they operate, and upon the court.”); Airborne
Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 130 (Del. Ch. 2009) (reiterating permissible
sources of facts on a motion for judgment on the pleadings, including defendant’s “answer
and counterclaims.”).
57
Authorize, Black’s Law Dictionary (11th ed. 2019).
58
PWP Xerion Hldgs. III LLC v. Red Leaf Res., Inc. 2019 WL 5424778, at *12 (Del. Ch.
Oct. 23, 2019) (citations omitted).
59
Def.’s Ans. Br. at 18; see 2019 Agreement ¶ 3(A).
14
mandate that Alphatec ever draw on the loan.60 Alphatec thus argues that the 2019
Agreement alone did not constitute an authorization of the issuance or sale of
warrants because an intervening event—Alphatec’s decision to draw on the loan—
was required.
Alphatec’s interpretation does not work. Many agreements authorize the
payment or issuance of consideration upon the completion of a condition, and the
presence of a condition in the 2019 Agreement did not render that consideration—
the issuance of warrants—somehow less “authorized.” In essence, Alphatec’s
interpretation confuses the authorization of an issuance and sale with the distinct act
of satisfying the conditions of that issuance and sale. It further conflates the
authorization of the issuance and sale of warrants with the distinct act of authorizing
a draw on the Additional Term Loan.
B. The Proposal Was Not an “Offer to Sell.”
Having determined that the 2019 Amendment and subsequent issuance
triggered L-5’s preemption rights, the analysis next turns to the question of whether
Alphatec complied with its obligations under Section 4.18 of the Purchase
60
The 2019 Agreement, however, imposes a fine of $300,000 “in the event Borrowers have
not completed an initial drawing under the Additional Term Loan on or before June 30,
2019.” 2019 Agreement ¶ 3(B).
15
Agreement to “offer to sell” to L-5 a pro rata portion of the warrants “at the same
price and on the same terms.”61 Alphatec argues that the Proposal contained the
“same price” and “same terms” in compliance with this obligation. In response, L-
5 raises a threshold issue, arguing that the Proposal was not in fact an “offer to sell”
as required by Section 4.18.
An offer “is a manifestation of assent that empowers another to enter into a
contract by manifesting assent in return.”62 A valid offer “confers upon the offeree
the power to create a contract.”63 The validity of an offer thus requires that “one
making an offer assent[] in advance to the proposed bargain, after which all that is
required to complete the mutual assent necessary is the assent of the offeree.” 64 A
valid offer contains sufficient finality such that an offeree’s acceptance of an offer
constitutes the last step in forming a contract.65 Provisions that allow the proponent
61
Purchase Agreement § 4.18(a).
62
E. Allan Farnsworth & Zachary Wolfe, 1 Farnsworth on Contracts § 3.13 at 3-77 (4th
ed. 2019).
63
Id. § 3.03 at 3-7.
64
1 Williston on Contracts § 4:3 (4th ed. 2020).
65
Restatement (Second) of Contracts § 24 cmt. a (Am. L. Inst. 2020) (“[T]he key concept
involves giving the addressee the apparent power to conclude a contract without further
action by the other party.”); see also Id. § 35 cmt. c (“Exercise of the power of acceptance
concludes an agreement and a bargain, and thus satisfies one of the requirements for
formation…”).
16
of a proposal to unilaterally withdraw it or withhold assent pending approval are
typically an indication that a proposal is not an offer.66
In light of its contingent nature, L-5 is correct that the Proposal does not
constitute an “offer” as required by Section 4.18. The Proposal was contingent on
Board approval.67 The Proposal was also contingent on further negotiations with
Squadron. As clarified by the May 23 Letter, if L-5 had accepted the Proposal,
Alphatec would then “approach Squadron to negotiate L-5’s pro rata security
interest.”68 Squadron, through restrictive covenants on Alphatec’s ability to take on
more debt69 and the explicit exclusion of third parties to the 2019 Agreement,70 had
66
Farnsworth on Contracts § 3.13 at 3-86 (“[T]he insertion into a proposal of a clause that
reserves to its maker the power to close the deal is a compelling indication that the proposal
is not an offer. A common example provides that the agreement is not binding until it has
been approved at the home office of the maker of the proposal.”); Restatement (Second) of
Contracts § 24 (“An offer is the manifestation of willingness to enter into a bargain, so
made as to justify another person in understanding that his assent to that bargain is invited
and will conclude it.” (emphasis added)); see also Wilgus v. Salt Pond Inv. Co., 498 A.2d
151, 156 (Del. Ch. 1985) (finding an offer pursuant to a right of first refusal contingent
because it required investor approval and holding that, “[a]lthough Short signed the
document it remained unenforceable as to the investors and until such time as the investors
approved its terms it was merely an offer to further negotiate.”), superseded by statute on
other grounds, as recognized in Wilm. & N. Ry. Co. v. Del. Valley Ry. Co., 1999 WL
463705, at *6 (Del. Super. Mar. 30, 1999).
67
Proposal at 1 n.1.
68
May 23, 2019 Letter at 1.
69
2018 Agreement § 5.1.
70
2019 Agreement ¶ 13 (“The terms and provisions of this Amendment shall be for the
sole benefit of the parties hereto and their respective successors and assigns; no other
17
functional veto power over L-5’s receipt of warrants. Squadron thus had no
obligation to revise the 2019 Agreement, to permit L-5’s participation, or to allow
Alphatec to draw down on an L-5 loan. L-5’s acceptance of the Proposal as the
offeree would not have been the final step in establishing a contract for these
reasons.71
Because the Proposal was contingent on approval by both Alphatec’s Board
and Squadron, it lacked sufficient finality to constitute an offer. The Proposal was
thus a promise to further negotiate and not an “offer to sell” as required by Section
4.18 of the Purchase Agreement.72
person, firm, entity or corporation shall have any right, benefit or interest under this
Amendment.”).
71
One way Alphatec could have avoided conditioning the Proposal on further negotiations
with Squadron was to first make the “offer to sell” to L-5 before entering into a final
agreement with Squadron, as the Purchase Agreement seems to contemplate. Purchase
Agreement § 4.18(a) (providing that Alphatec “first offer to sell to [L-5] a pro rata portion
of such securities . . . at the same price and on the same terms” as those offered to another
party (emphasis added)).
72
L-5 also argues that the Proposal is a settlement offer and not an “offer to sell.” Alphatec
labeled the Proposal “For Mediation Purposes Only” and “Subject to Fed. Rule of Evid.
408 and Cal. Evid. Code 1152,” Proposal at 1, designations that L-5 asks the court to
uphold. Generally, Rule 408 prohibits parties for relying on settlement communications to
prove or disprove liability. D.R.E. 408; see also Grunstein v. Silva, 2011 WL 378782, at
*6 (Del. Ch. Jan. 31, 2011) (noting that, under Delaware Rule of Evidence 408, “evidence
of an offer in compromise is inadmissible if offered for the purpose of proving or
disproving liability”). This decision considers the substance of the Proposal because doing
so does not prejudice L-5.
18
Because the Proposal was not an “offer” as required by Section 4.18(a) of the
Purchase Agreement, this decision does not reach the question of whether the
blended terms of the Proposal complied with Section 4.18(a).73
C. Reimbursement and Indemnification
Section 5.9 provides that Alphatec must reimburse L-5 for its “reasonable
attorneys’ fees and other costs and expenses incurred with the investigation,
preparation and prosecution” of this litigation if L-5 prevails in this action.74 Section
4.8 of the Purchase Agreement further provides that Alphatec must indemnify L-5
for all “losses, liabilities, obligations, claims, contingencies, damages, costs and
expenses, including all judgments, amounts paid in settlements, court costs and
reasonable attorneys’ fees and costs of investigation that [L-5] may suffer or incur
as a result of or relating to . . . any breach of . . . [the Purchase Agreement].”75
73
It bears noting that this question is not one that lends itself to resolution on the pleadings
because evaluating the scope of L-5’s preemptive rights raises inherently factual issues.
See HUMC Holdco, LLC v. MPT of Hoboken TRS, LLC, 2020 WL 3620220, at *8 (Del.
Ch. July 2, 2020) (denying judgment on the pleading where scope of preemptive rights
raised factual issues). If L-5 defeats Alphatec’s affirmative defenses, it seems likely that
this issue will be pertinent to the remedy analysis, and development of the factual record
will be necessary to determine the relationship of the 2019 Agreement to the 2018
Agreement, among other things.
74
Purchase Agreement § 5.9.
75
Id. § 4.8.
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Claims for reimbursement for legal expenses under a prevailing-party
provision are premature in that judicial fee-shifting is awarded “in relation to the
results obtained” in the underlying litigation.76 Claims for indemnification like those
at issue here are not ripe for adjudication until the underlying breach has been
properly resolved and the breaching party has refused to honor its obligations.77 L-
5’s claims for contractual fee-shifting and indemnification are thus premature,
unripe.
D. Alphatec’s Affirmative Defenses
Alphatec argues that its affirmative defenses of acquiescence and estoppel are
sufficient to defeat L-5’s motion for judgment on the pleadings. Alphatec argues in
briefing that L-5 goaded Alphatec into triggering its preemption rights by remaining
silent after the 2018 Agreement was executed and that such conduct gives rise to
estoppel and acquiescence defenses.78 L-5 responds that these defenses are
conclusory and unsupported by the facts as plead in Alphatec’s answer.79
76
Mooney v. Echo Therapeutics, Inc., 2015 WL 3413272, at *12 (Del. Ch. May 28, 2015).
77
See, e.g., LaPoint v. AmerisourceBergen Corp., 970 A.2d 185, 194 (Del. 2009) (holding
that claims stemming from a “right to indemnification did not ripen until [defendant] was
judged to be in breach of the Merger Agreement and [defendant] refused to honor its
indemnification obligation”).
78
Def.’s Answering Br. at 27–29.
79
Pl.’s Reply Br. at 14–16.
20
Generally speaking, affirmative defenses that amount to “rhythmic
incantation[s]” of the menu options of defenses set forth in Court of Chancery
Rule 12 will not suffice to defeat a motion for judgment on the pleadings.80 A party
must plead or otherwise support the basis for those defenses when faced with a Rule
12(c) motion.
In this case, Alphatec has asserted counterclaims, and Alphatec is entitled to
inferences that may be drawn from the factual assertions plead in its counterclaims.81
Accepting those assertions as true, the court finds non-frivolous bases for Alphatec’s
affirmative defenses which, if proven, could entitle Alphatec to relief from its
contractual obligations. The facts as presented warrant further discovery and
preclude judgment on the pleadings in L-5’s favor.
80
GreenStar IH Rep, LLC v. Tutor Perini Corp., 2017 WL 5035567, at *8 & nn.73–74
(Del. Ch. Oct. 31, 2017) (collecting cases).
81
See, e.g., Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624
A.2d 1199, 1206 (Del. 1993) (a party moving for judgment on the pleadings “concede[s]
all well-pleaded allegations to be true”); Airborne Health 984 A.2d at 130 (including
counterclaims as pleadings to be considered on a motion for judgment on the pleadings);
see also Ct. Ch. R. 12(c) (“[A]ny party may move for judgment on the pleadings”); Ct. Ch.
R. 13(a) (“A pleading shall state as a counterclaim any claim, which at the time of serving
the pleading the pleader has against any opposing party, if it arises out of the transaction
or occurrence that is the subject matter of the opposing party’s claim . . . .”). Alphatec’s
counterclaim is part and parcel of its pleading answering L-5’s Complaint and asserts facts
arising from the same transaction that is the subject matter of L-5’s claim. It is thus a
pleading to be considered on this 12(c) motion for judgment on the pleadings.
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III. CONCLUSION
For the foregoing reasons, L-5 is entitled to a declaration that the 2019
Agreement and 2019 Issuance triggered L-5’s preemption rights and that the
Proposal did not constitute an “offer” compliant with Section 4.18(a) of the Purchase
Agreement. This decision does not resolve Alphatec’s affirmative defenses, what
terms and conditions would be required to match Alphatec’s 2019 Agreement with
Squadron, or whether L-5 is entitled to its reasonable attorneys’ fees and other costs.
The motion for partial judgment on the pleadings is GRANTED in part and DENIED
in part.
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