Submitted: April 25, 2013.
Raymond J. DiCamillo, Esquire, Kevin M. Gallagher, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Plaintiff Fiat North America LLC.
Kenneth J. Nachbar, Esquire, Jay N. Moffitt, Esquire, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Robert W. Hirth, Esquire, Isaac S. Greaney, Esquire, SIDLEY AUSTIN LLP, New York, New York; Attorneys for Defendant Brock Fiduciary Services LLC, Appearing on behalf of Defendant and Counterclaim Plaintiff UAW Retiree Medical Benefits Trust in its capacity as the Independent Fiduciary for the UAW Retiree Medical Benefit Trust (Chrysler Separate Retiree Account).
PARSONS, Vice Chancellor.
This action is before me on cross motions for judgment on the pleadings related to the redemption of an option to purchase shares of Chrysler after it had emerged from bankruptcy. In 2009, during the throes of the financial crisis, the old Chrysler, one of America's "Big Three" automakers, filed for bankruptcy. Ultimately, the automaker sold its assets to a newly formed entity, new Chrysler, which issued membership interests to, among others, the United States Department of the Treasury ("U.S. Treasury"), a subsidiary of Fiat, and a trust that provides benefits for current and future retirees of Chrysler. To settle claims that the newly formed entity was responsible for providing retiree medical benefits to one of North America's largest unions, the newly formed entity issued to a health care trust a large note and membership units in new Chrysler and transferred certain assets to that trust. Fiat, the health care trust, and the U.S. Treasury also entered into an agreement whereby Fiat could purchase a percentage of the health care trust's shares pursuant to a set formula.
In July 2012, Fiat exercised its option to purchase shares from the health care trust for a purchase price of $139.7 million. The health care trust did not deliver the shares, and Fiat filed this suit to force delivery of the shares at that price. The health care trust counterclaimed asserting that Fiat had misinterpreted and misapplied the formula, and that the shares involved were worth approximately $343.1 million.
Therefore, an agreement that was intended to avoid disputes and provide a set method for valuing the shares subject to the option has led to a substantial disagreement. Indeed, when one considers that Fiat still possesses an option for many more shares, the value of this dispute potentially could exceed a billion dollars.
Two of the largest drivers of the difference in the parties' respective price calculations are whether: (1) notes worth billions of dollars issued to two health care trusts are debt of Fiat and new Chrysler; and (2) whether net income attributable to non-controlling interests in new Chrysler should be included in Fiat's EBITDA. According to the plaintiff health care trust, those two disputed items account for $78.2 million and $12.2 million of the difference in price, respectively. The health care trust also disputes other parts of Fiat's price calculation, but contends that discovery is necessary to resolve those issues. Finally, the health care trust argues that a purchase of the shares at the $139.7 million price would violate the conditions of an exemption granted by the United States Department of Labor (the "DOL"), and that absent that exemption the Employee Retirement Income Security Act of 1974 ("ERISA") would prohibit the exercise of the option.
Having considered the parties' briefing and heard oral argument on the cross motions for judgment on the pleadings, I find that Fiat's interpretation of the notes as debt and its handling of income attributable to non-controlling interests reflect the only reasonable interpretations of the contract in issue. Therefore, I grant judgment on the pleadings in favor of Fiat on those issues. As to the remaining questions, discovery is needed to determine, for example, the correct way to calculate or interpret the other items in dispute. Finally, I decline to consider at this point whether Fiat's contemplated purchase of shares would violate the conditions of an exemption granted by the DOL. My preliminary view is that this Court lacks subject matter jurisdiction to resolve that question. Because the parties did not address that issue directly in their briefing on the pending motions, my decision on the subject matter jurisdiction question is without prejudice to their ability to pursue that issue further in this proceeding or elsewhere.
A. The Parties
Plaintiff and Counterclaim Defendant, Fiat North America LLC ("Fiat"), is a limited liability company organized under the laws of Delaware and a wholly owned subsidiary of Fiat S.p.A. ("Fiat Parent"). Both Fiat and Fiat Parent are engaged in the design, manufacture, and sale of automobiles.
Defendant and Counterclaim Plaintiff, UAW Retiree Medical Benefits Trust (the "VEBA"), is a voluntary employees beneficiary association trust that funds medical health care benefits for retired and to-be-retired members of the International Union, United International Union, United Automobile, Aerospace and Agriculture Implement Workers of America (the "UAW"). The UAW Chrysler Retirees Medical Benefits Plan (the "Chrysler Plan") provides retiree health care benefits to present and future retirees of Chrysler Group LLC ("Chrysler"). The Chrysler Plan is funded by the separately held assets in the VEBA's Chrysler Separate Retiree Account. Brock Fiduciary Services LLC ("Brock") is appearing on behalf of the VEBA in its capacity as the "Independent Fiduciary" for the Chrysler Plan.
1. The bankruptcy and settlement
On April 30, 2009, Old CarCo LLC ("Old CarCo, " formerly known as Chrysler LLC) filed for protection under title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). Old CarCo, Fiat, and New CarCo Acquisition LLC (now Chrysler), a Delaware limited liability company formed by Fiat, entered into a Master Transaction Agreement (the "MTA"), dated as of April 30, 2009, whereby: (1) Old CarCo would transfer all of its operating assets to Chrysler; (2) Chrysler would assume the liabilities of Old CarCo and pay Old CarCo $2 billion in cash; (3) Fiat would contribute technologies and distribution capabilities to Chrysler; and (4) Chrysler would issue membership interests in itself to the VEBA, the U.S. Treasury, and Export Development Canada.
In 2007 and 2009, Old CarCo previously had made commitments to provide retiree medical benefits to the UAW. After Old CarCo's bankruptcy, the UAW asserted that Chrysler was bound by those commitments. Ultimately, on June 10, 2009, the UAW and Chrysler entered into a settlement agreement (the "Settlement Agreement").The Settlement Agreement provided, among other things, that the retiree medical benefits obligations would be transferred to the Chrysler Plan and that the VEBA would be responsible for funding the Chrysler Plan. In return, Chrysler agreed to: (1) transfer assets valued at $1, 589, 500, 000 to the VEBA; (2) give certain Class A limited liability membership units representing 67.69% of the fully diluted ownership of Chrysler (the "Chrysler Shares") to the VEBA; and (3) issue a note from Chrysler to the VEBA with a principal amount of $4, 587, 000, 000 and an implicit interest rate of nine percent to be paid pursuant to a defined schedule (the "VEBA Note"). The VEBA Note is governed by an indenture (the "Indenture").
In August 2010, Chrysler Canada Inc. ("Chrysler Canada") entered into a settlement agreement with the Canadian Auto Workers Union (the "CAW") "to permanently transfer the responsibility for providing postretirement health care benefits . . . to a new retiree plan." As part of that settlement, Chrysler Canada issued a Canadian Health Care Trust Note (the "CHCT Note") to the Canadian Health Care Trust (the "CHCT") "in exchange for settling its retiree health care obligations for" Chrysler Canada retirees.
2. The Call Option Agreement
On June 10, 2009, Fiat, the VEBA, and the U.S. Treasury executed a Call Option Agreement (the "Call Option Agreement") that granted Fiat certain rights to purchase (the "Call Option") from the VEBA 40% of the 676, 924 equity interests held by the VEBA (the "Covered Interests"), i.e., 270, 770 units or 22% of Chrysler's membership interest. The Call Option Agreement further provides that, during any six-month period, Fiat cannot exercise the Call Option with respect to more than 20% of the Covered Interests, i.e., 54, 154 units.
The Call Option Agreement contains a formula detailing how to calculate the purchase price for any called units. The exact formula depends on whether or not an initial public offering ("IPO") has occurred. The Call Option Agreement defines the "Post-IPO Call Option Exercise Price" as being equal to the volume-weighted average price per share of common stock of Chrysler for the twenty consecutive trading days immediately prior to the date of exercise. The "Pre-IPO Call Option Exercise Price" is "equal to one percent (1%) of the Company Equity Value." Where the Pre-IPO Call Option Price is the operative formula—as is undisputedly the case here—Fiat is required to pay the VEBA, in exchange for the delivery of any called units, the Pre-IPO Call Option Exercise Price less the Contingent Value Rights Settlement Price. The Contingent Value Rights Settlement Price shall be no greater than 20%, and no less than 10%, of the Pre-IPO Call Option Exercise Price. Here, Fiat has agreed to use the minimum 10% figure as the Contingent Value Rights Settlement Price.
The "Company Equity Value" is defined as the product of the "Market Multiple" times the aggregate of Chrysler's reported "EBITDA" for the most recent four financial quarters for which financial statements have been delivered or were required to be delivered less Chrysler's "Net Industrial Debt" as of the date of Chrysler's consolidated financial statements that most recently were delivered or required to be delivered. Because Fiat has agreed to use the "Fiat Multiple, " which is basically Fiat Parent's Enterprise Value over its EBITDA in lieu of the "Market Multiple, " the formula for calculating Company Equity Value can be expressed as follows:
Company Equity Value
Fiat Parent Enterprise Value
x Chrysler EBITDA — Chrysler Net Industrial Debt
Fiat Parent EBITDA
The inputs to Company Equity Value relevant to this dispute are defined as follows:
● "EBITDA" means, for any Person, the consolidated net income (loss) of that Person plus (i) interest charges to the extent deducted from consolidated net income; (ii) consolidated income taxes; (iii) depreciation, amortization, depletion and non-cash charges; and (iv) other extraordinary charges.
● "Market Multiple" means, for any Entity, the average EBITDA trading multiple for the Reference Automotive Manufacturers (determined by each Reference Automotive Manufacturer's Market Enterprise Value, divided by such Reference Automotive Manufacturer's EBITDA as reported for the four most recent fiscal quarters for which financial data has been reported); provided that in determining the Market Multiple, any of the Reference Automotive Manufacturers whose EBITDA trading multiple differs from the average of the other Reference Automotive Manufacturers by more than one standard deviation shall be excluded; and provided further that the Market Multiple shall not, in any event, exceed the Fiat Multiple.
● "Net Industrial Debt" means, for any Entity, total indebtedness for borrowed money less cash and cash equivalents, of the Entity and its subsidiaries each as reported on a consolidated cash basis in accordance with GAAP; provided that the calculation of Net Industrial Debt shall exclude obligations in respect of retirees and indebtedness of finance companies to the extent included in the consolidated results of such Entity.
Other important definitions necessary to calculate inputs to Company Equity Value are:
● "Fiat Multiple" means, at any time, Fiat's Market Enterprise Value, divided by Fiat's EBITDA as reported for the four most recent fiscal quarters for which financial data has been reported.
● "Market Enterprise Value" means, for any Entity, the sum of (i) the Net Industrial Debt of such Entity as of such Entity's most recently reported financial statements and (ii) such Entity's Market Equity Value.
● "Market Equity Value" means, for any Entity, the product of (i) the number of outstanding shares or units of such Entity's equity securities as of the most recently reported date times (ii) the volume-weighted average price per share or unit of such Entity's equity securities as reported on the Entity's principal securities exchange for each day during the twenty (20) Scheduled Trading Days immediately preceding the date of determination.
3. The prohibited transaction exemption
On May 18, 2009, before entering into the Call Option Agreement, Chrysler applied to the DOL for an exemption from the purportedly prohibitive sections of ERISA. For example, Chrysler acknowledged that its contribution of shares to the VEBA, on behalf of the Chrysler Plan, "may violate Section 406(a)(1)(A), which prohibits a direct or indirect sale or exchange of any property between a plan and a party in interest." The request sought an exemption from various provisions of ERISA, including that "Section 406(a) and 406(b) shall not apply to . . . [t]he disposition of Shares in connection with Fiat's exercise of the Call Options."
In their request for an exemption, Chrysler represented that:
The exercise price of the Call Options will be determined pursuant to certain formulas, the use of which depends upon whether or not [Chrysler] has completed an initial public offering before Fiat exercises any Call Options, and which have been designed to approximate the fair market value of the Shares at the time of exercise.
Notably, Chrysler stated in its request for an exemption that "[t]he exemptions are conditioned upon adherence to the material facts and representations described herein."In subsequent correspondence with the DOL regarding the proposed exemption, Chrysler reiterated that "[t]he exercise price is determined pursuant to a formula designed to arrive at the fair market value of the interests."
On October 5, 2009, the DOL issued a Notice of Proposed Exemption Involving Chrysler LLC (the "Notice of Proposed Exemption"). In it, the DOL proposed relief from Section 406(a)(1)(A) for the disposition of shares in Chrysler sold in a transaction involving a party in interest, such as pursuant to the Call Option. The Notice of Proposed Exemption directed that the VEBA "in its sole discretion, will appoint an Independent Fiduciary" to, among other things, act on behalf of the VEBA "in connection with the discretionary management and disposition" of the Chrysler Shares and the "Call Option." The Notice of Proposed Exemption reiterated that "[t]he exercise price will be determined pursuant to a formula which is designed to arrive at the fair market value of the interests." Finally, the Notice of Proposed Exemption was conditioned on the truthfulness and accuracy of the application.
On April 26, 2010, the DOL granted to Chrysler an individual exemption from certain prohibited transaction restrictions of ERISA (the "PTE"). Specifically, the PTE stated that the restrictions of certain sections of ERISA would not apply, effective June 10, 2009, to, among other things, "[t]he sale by the [Chrysler Plan] to Fiat . . . of Shares pursuant to the exercise by Fiat of the Call Option Agreement." The PTE also disclosed that the Chrysler Plan had retained Brock as the Independent Fiduciary. Finally, the PTE contained the following conditions, among others:
(a) The Committee appoints a qualified Independent Fiduciary to act on behalf of the [Chrysler Plan] for all purposes related to the transfer of the Shares and Note to the Plan for the duration of the Plan's holding of the Shares and Note, except for the voting of the Shares. Such Independent Fiduciary will have sole discretionary responsibility relating to the holding, disposition and ongoing management of the Shares and the Note. The Independent Fiduciary will determine, before taking any of the actions regarding the Shares and the Note, that each such action or transaction is in the interest of the [Chrysler Plan].
(c) The Independent Fiduciary authorizes the Trustee of the [Chrysler Plan] to dispose of the Shares and the Note only after the Independent Fiduciary determines, at the time of the transaction, that the transaction is feasible, in the interest of the [Chrysler Plan], and protective of the participants and beneficiaries of the Plan.
(h) The terms of any transaction exempted herein are no less favorable to the [Chrysler Plan] than the terms negotiated at arms' length under similar circumstances between unrelated parties.
4. Fiat exercises the Call Option
In a June 8, 2012 letter, Fiat notified both the VEBA and the U.S. Treasury of its intent to exercise the Call Option in respect to 54, 154 units of Chrysler (the "Called Shares"). In accordance with Section 2.2(c) of the Call Option Agreement, on June 27, 2012, Fiat provided the VEBA and the U.S. Treasury with a statement setting forth the details of its calculation. Finally, on July 2, 2012, Fiat furnished the VEBA and U.S. Treasury with a Call Option Exercise Notice notifying them of its exercise as to the Called Shares and specifying a settlement date of July 11, 2012 pursuant to Section 2.2(d). Fiat's exercise price calculation, attached to the Call Option Exercise Notice, showed a Fiat Multiple of 1.17 and a Pre-IPO Call Option Exercise Price ...