PHILLIP STEWART, VINCENT PRIEST, TIMOTHY MCCORKLE, and T&K MCCORKLE IRREVOCABLE TRUST, Plaintiffs,
BF BOLTHOUSE HOLDCO, LLC, ROBIN P. SELATI, GEORGE A. PEINADO, and BENJAMIN D. CHERESKIN, Defendants.
Submitted: April 22, 2013
Matthew E. Fischer, Esq., Janine M. Salomone, Esq., Ryan W. Browning, Esq., POTTER ANDERSON & CARROON LLP, Wilmington, Delaware; Michael J. Zdeb, Esq., Richard R. Winter, Esq., Maureen E. Browne, Esq., Michael A. Grill, Esq., HOLLAND & KNIGHT, LLP, Chicago, Illinois; Attorneys for Plaintiffs Phillip Stewart, Vincent Priest, Timothy McCorkle, and T&K McCorkle Irrevocable Trust.
William M. Lafferty, Esq., Leslie A. Polizoti, Esq., Bradley D. Sorrels, Esq., MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Robert B. Ellis, Esq., Benjamin T. Kurtz, Esq., KIRKLAND & ELLIS LLP, Chicago, Illinois; Attorneys for Defendants BF Bolthouse Holdco, LLC, Robin P. Selati, George A. Peinado, and Benjamin D. Chereskin.
PARSONS, Vice Chancellor.
This action involves a dispute between, on one side, a Delaware limited liability company and its board of managers, and on the other, former employees of the company, arising from the company's July 2010 repurchase of the former employees' membership units. The defendant company and its managers allegedly breached both the contract that governed the terms of the repurchase transaction and the terms of the company's limited liability company agreement by valuing the former employees' units at $0.00 in bad faith. The plaintiff former employees further allege that, in coming to the $0.00 valuation decision, the manager defendants breached their fiduciary duties and that the defendants also breached the implied covenant of good faith and fair dealing associated with the contract governing the repurchase. The plaintiffs seek, among other relief, a declaratory judgment invalidating the repurchase transaction and an order restoring their ownership of membership units in the company.
The company and its directors have moved to dismiss the complaint in its entirety for failure to state a claim upon which relief can be granted.
Having considered the parties' briefs and heard argument on the motion, I conclude that the plaintiffs have stated a claim for breach of contract in parts, but not all, of Count I of their complaint. Therefore, I deny in part, and grant in part, the defendants' motion to dismiss Count I. I also conclude that the plaintiffs have failed to state a claim for breach of fiduciary duty or for breach of the implied covenant of good faith and fair dealing in Counts II and III because both claims are foreclosed by, and duplicative of, the plaintiffs' breach of contract claims. Accordingly, I grant the defendants' motion to dismiss Counts II and III.
A. The Parties
Plaintiffs Phillip Stewart, Vincent Priest, and Timothy McCorkle are former employees of Wm. Bolthouse Farms, Inc. ("Bolthouse Farms"), a wholly owned subsidiary of BF Bolthouse Holdco, LLC (the "Company" or "Bolthouse"). Plaintiff T&K McCorkle Irrevocable Trust ("T&K Trust, " and together with Stewart, Priest, and McCorkle, "Plaintiffs") is a trust created by McCorkle and his wife.
Defendant Bolthouse is a Delaware limited liability company in the business of producing foods and premium beverages. Defendants Robin Selati, George Peinado, and Benjamin Chereskin (the "Individual Defendants, " and together with Bolthouse, "Defendants") were members of Bolthouse's board of managers appointed by Bolthouse's controlling shareholder, Madison Dearborn Partners, LLC ("Madison Dearborn")
In December 2005, Madison Dearborn acquired a controlling interest in Bolthouse, a previously family-owned food and beverage producer. At the time Madison Dearborn acquired Bolthouse, the structure and management of the Company was set forth in a Unitholders' Agreement and a limited liability company agreement (the "LLC Agreement"). The Unitholders' Agreement established a five-person board to oversee Bolthouse. Madison Dearborn had the right to designate three of the five board members, and elected to fill those positions with the Individual Defendants. The remaining two seats were allocated to Bolthouse Farm's CEO Andre Radandt, so long as he remained in that position, and a designee of Radandt's choice. The scope of the board's fiduciary duties was defined in Section 6.4 of the LLC Agreement. Under that clause, the board members owed the Company and the other members of the Company the same fiduciary duties that a director of a Delaware corporation would owe a corporation and its stockholders.
Upon Madison Dearborn's acquisition of Bolthouse, certain employees of Bolthouse and its subsidiaries, including Plaintiffs, were offered the opportunity to obtain an ownership interest in Bolthouse by purchasing Class B Common Units (the "Class B Units" or "Units"). From 2005 through 2008, Plaintiffs collectively acquired 7, 611Units for approximately $25 each. Plaintiffs purchased all of their Units pursuant to an Executive Unit Purchase Agreement (the "Purchase Agreement") that outlined the rights associated with Units ownership.
Under the terms of the Purchase Agreement,  Plaintiffs acquired Units that vested on a daily basis over a five-year period so long as Plaintiffs continuously were employed by Bolthouse Farms. In the event that a Plaintiff's employment at Bolthouse Farms was terminated for any reason, voluntarily or involuntarily, the Purchase Agreement entitled the Company to repurchase, within 210 days of the date of termination, all or part of that Plaintiff's Class B Units (the "Repurchase Option"). The Company could exercise the Repurchase Option for vested Units at their "Fair Market Value, " and could repurchase non-vested Units at the lesser of their Fair Market Value and the price paid for the Units.
According to the terms of the Purchase Agreement, the Fair Market Value of the Units is: (1) decided as of the date a Plaintiff's employment terminated and (2) to be "determined in good faith by the Board in its sole discretion after taking into account all factors determinative of value including, but not limited to, the lack of a readily available market to sell such units, but without regard to minority discounts." The Purchase Agreement does not require Bolthouse to provide the owners of repurchased Units with any information pertaining to the repurchase decision or provide those owners with any right to seek an independent appraisal of their repurchased Units.
In September 2008, the Campbell Soup Company ("Campbell") expressed an interest in acquiring Bolthouse from Madison Dearborn in an all-cash transaction that valued Bolthouse in the range of $1.4 to $1.6 billion. Under the terms of the LLC Agreement, if Bolthouse were sold, the Class B Units would share pro rata in the proceeds of the sale with holders of Class A Units after, generally, repayment of debt and certain unreturned capital contributed by Class A Unit holders. Based on the LLC Agreement, a sale of Bolthouse in the $1.4 to $1.6 billion range would have translated to a valuation for the Class B Units of approximately $1, 000 per Unit. Madison Dearborn and Campbell failed to reach an agreement regarding the sale of Bolthouse in 2008 and their negotiations ended without any commitment to resume sale discussions at a later date.
Between September 2008 and February 25, 2010, Plaintiffs attended several Bolthouse management meetings. These meetings often included discussions of Bolthouse's financial position and the value of the Company's Class B Units. In one such meeting on February 1, 2010, Jeffrey Dunn, President and CEO of Bolthouse, discussed the Company's bright future prospects. Two days later, on February 3, 2010, Dunn sent an email to Plaintiffs and Scott LaPorta, Bolthouse's Chief Financial Officer, stating:
Per our leadership meeting Monday, I have attached a schedule Gareth built which looks at valuation of "B" shares currently and in various future scenarios. The schedule sensitizes various EBITDA levels and net debt levels at an 8.5 times valuation. You will see that currently at our $135M LTM EBITDA that the value of a "B" share is roughly $200. If we were to reach our FY 2013 target of $200M EBITDA at same multiple a "B" share would be worth $2340. The future is uncertain, but I remain confident that the best value creation path is for us to recommit ourselves to growth and make the necessary investments to capture that growth.
On February 25, 2010, Plaintiffs voluntarily terminated their employment with Bolthouse. Shortly after Plaintiffs' departure, Radandt and his designee resigned from Bolthouse's board and were not replaced, leaving the three Individual Defendants as Bolthouse's only board members. Plaintiffs' voluntary termination triggered Bolthouse's right under the Purchase Agreement to repurchase Plaintiffs' vested and unvested Units. On July 22, 2010, which was within the 210-day repurchase period,  Bolthouse gave notice of its decision to repurchase Plaintiffs' Units. LaPorta sent substantially identical letters to each Plaintiff, stating in relevant part:
We hereby notify you and the Trust that, pursuant to paragraph 3(b) of the [Purchase] Agreement, we are repurchasing the [Class B Units] at their Fair Market Value. The Fair Market Value as determined by the board of managers of the Company is $0.00 per Unvested Management Unit and $0.00 per Vested Management Units. Because your Unvested Management Units and your Vested Management Units have no value, your Unvested Management Units and your Vested Management Units will be cancelled for no consideration as of the date hereof.
The letter did not provide any explanation or analysis regarding the valuation of $0.00 for either the vested or unvested Units. Following receipt of the letter, McCorkle made several phone calls to various Bolthouse executives seeking an explanation of the Bolthouse board's decision, but no explanation was provided. Counsel for Plaintiffs also inquired of Bolthouse as to the board's methodology in valuing the Units. Those efforts, however, were equally fruitless.
In August 2012, after renewed negotiations, Campbell successfully acquired Bolthouse from Madison Dearborn in a cash transaction for approximately $1.55 billion. As a result of that acquisition, Class B Unit Holders received consideration of approximately $1, 200 per Unit.
C. Procedural History
On December 18, 2012, Plaintiffs commenced this action. The Complaint seeks, among other relief, a declaration that, due to breaches of contract and fiduciary duties by Bolthouse and the Individual Defendants, the July 22, 2010 repurchase of Units by Bolthouse was null and void. On February 22, 2013, Defendants moved to dismiss the Complaint in its entirety. After full briefing on that motion, I heard argument on April 22, 2013. This Memorandum Opinion constitutes my ruling on the motion to dismiss.
D. Parties' Contentions
Plaintiffs have asserted claims for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing. With respect to the breach of contract claim, Plaintiffs allege three sets of breaches. First, they aver that Defendants' determination that Plaintiffs' Units had a Fair Market Value of $0.00 was made in bad faith and thus in breach of both the Purchase Agreement and Section 6.4 of the LLC Agreement. Second, Plaintiffs assert that Defendants failed to deliver Bolthouse's audited financial statements to Plaintiffs within 120 days of March 31, 2010 in violation of Section 11.4(a) of the LLC Agreement. And third, Defendants stand accused of impermissibly "cancelling" the Units repurchased from Plaintiffs in violation of both the Purchase Agreement and the LLC Agreement. In addition, Plaintiffs allege that the Individual Defendants owed them fiduciary duties pursuant to Section 6.4 of the LLC Agreement and the common law and that the Individual Defendants breached those duties because: (1) they had a conflict of interest when they determined the Fair Market Value of Plaintiffs' Units and are unlikely to be able to prove that the value of $0.00 they assigned was entirely fair; and (2) their valuation of $0.00 was made in bad faith. Plaintiffs' final claim is that, by their bad faith conduct, Defendants also breached the implied covenant of good faith and fair dealing in relation to the Fair Market Value provision of the Purchase Agreement.
Defendants counter that Plaintiffs have failed to state a claim for breach of the Purchase Agreement or of the LLC Agreement because the facts alleged are insufficient to support a claim of bad faith. Defendants also argue that, because Plaintiffs were no longer "Members" of Bolthouse when the audited financial information was disseminated, they had no right to receive such disclosures under Section 11.4(a) of the LLC Agreement. As to the final breach of contract allegation, Defendants deny that they acted in breach of either the Purchase Agreement or the LLC Agreement when they "cancelled" Plaintiffs' Units, because they acted pursuant to their express right to repurchase those Units. Regarding the alleged breach of fiduciary duties, Defendants contend that Plaintiffs claims are duplicative of their breach of contract claims and should be dismissed based on the supremacy of contract law over fiduciary law in Delaware. Finally, Defendants assert that the implied covenant of good faith and fair dealing does not apply to the Fair Market Value provision of the Purchase Agreement because it is controlled by an express term agreed to by the parties. To the extent the implied covenant of good faith and fair dealing may have given rise to an additional obligation, Defendants also maintain that it would not apply to the Individual Defendants because none of them were parties to the Purchase Agreement.
Pursuant to Court of Chancery Rule 12(b)(6), this Court may grant a motion to dismiss for failure to state a claim if a complaint does not assert sufficient facts that, if proven, would entitle the plaintiff to relief. As recently reaffirmed by the Delaware Supreme Court, "the governing pleading standard in Delaware to survive a motion to dismiss is ...