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American Capital Acquisition Partners, LLC v. LPL Holdings, Inc.

Court of Chancery of Delaware

February 3, 2014

AMERICAN CAPITAL ACQUISITION PARTNERS, LLC; LEE ARGUSH; NICHOLAS MARINIELLO; and ALAN F. GAVORNIK, Plaintiffs,
v.
LPL HOLDINGS, INC.; LPL FINANCIAL LLC; FORTIGENT, LLC; and ANDREW PUTTERMAN, Defendants.

Date Submitted: December 3, 2013

Richard J. Thomas, of Young Conaway Stargatt & Taylor, LLP; OF COUNSEL: Anthony R. Caruso, Charles A. Yuen, and Eleanor Grinshteyn, of Scarinci & Hollenbeck, LLC, Attorneys for the Plaintiffs.

A. Thompson Bayliss and Steven C. Hough, of Abrams & Bayliss LLP; OF COUNSEL: Robert S. Fischler and Helen Gugel, of Ropes & Gray LLP, Attorneys for the Defendants.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor.

The Plaintiffs here are the former owner of an acquired company and that company's former directors and officers; they argue that the Defendant acquirer has denied them some of the contractual benefits to which they are entitled under the stock purchase agreement governing the sale of the acquired entity. In addition to the sale price already received, the Plaintiffs would be due certain contingent payments if the acquired entity had met performance guidelines that, in fact, it failed to meet. The Plaintiffs' various theories fall into two groups: claims based on alleged misrepresentations that the acquirer had, or would obtain, the technological ability to allow the acquired entity to prosper, which in fact the acquirer did not have and failed to pursue; and claims that clients, personnel and opportunities were diverted from the acquired entity to another subsidiary of the acquirer, denying the acquired entity any opportunity to meet its performance guidelines, and thus rendering the potential for contingent payments illusory. For the reasons that follow, I find generally that claims in the first group cannot withstand the Defendant's Motion to Dismiss, but that those in the latter group survive.

I. FACTS

A. The Stock Purchase Agreement

American Capital Acquisition Partners, LLC ("American Capital"), the corporate Plaintiff in this action, is a New Jersey LLC and former parent of Concord Capital Partners, Inc. ("Concord"), "an industry leader in providing technology and open architecture investment management solutions for trust departments of financial institutions."[1] LPL Holdings, Inc. ("LPL") is a Massachusetts corporation that provides "an integrated platform of proprietary technology, brokerage and investment advisory services to over 12, 000 independent financial advisors and financial advisors at financial institutions;"[2] LPL Financial LLC ("LPL Financial") is a wholly-owned subsidiary of LPL. On April 20, 2011, the corporate Plaintiff and LPL entered into a Stock Purchase Agreement ("SPA") whereby LPL acquired 100% of the outstanding equity interests in Concord, which became Concord-LPL. The individual Plaintiffs also entered into supplemental employment agreements with LPL Financial.[3] At that time, LPL issued a press release explaining the strategy behind the acquisition:

As a result of [the Concord] acquisition, LPL Financial will have the ability to support both the brokerage and trust business lines of current and prospective financial institution partners. The unique combination of offerings will create an integrated wealth management solution for financial institutions that the company believes will redefine the market.[4]

The press release went on to note that LPL Financial was "excited about the potential for this transaction, which will significantly expand the services and support we can offer the trust departments of our existing financial institution customers and create multiple new expansion opportunities for us in the space."[5] The transaction closed on June 22, 2011.[6]

In addition to a specified purchase price, the SPA includes a contingent purchase price provision. That provision is contained in Section 2.06(a) of the SPA, which states:

In addition to the Closing Purchase Price payable at Closing, and subject to the terms and conditions set forth in this Section 2.06, [the Plaintiffs] shall be entitled to an additional purchase price payment from [LPL] in an aggregate amount, if any (such aggregate purchase price payment is referred to herein as the "Contingent Purchase Price Payment") of (i) for every $250, 000 in 2013 Gross Margin in excess of $5, 500, 000 but less than or equal to $7, 250, 000, $215, 000 up to a maximum payment of $1, 500, 000 and (ii) for every $250, 000 in 2013 Gross Margin in excess of $7, 250, 000, $675, 000 up to a maximum payment of $13, 500, 000; provided, however, the maximum Contingent Purchase Price Payment shall not exceed $15, 000, 000.

In addition, Plaintiffs Argush, Marniello, and Gavornik—who were directors and senior executives of Concord—executed new employment agreements with Concord-LPL. Those agreements, dated April 14, 2011, stated that the Plaintiffs' offers for employment were contingent on the transaction closing, and were signed by the individual Plaintiffs on June 21, 2011, the day before the transaction closed.[7] The employment agreements provide that the Plaintiffs will receive additional compensation based on Concord-LPL's reaching revenue targets of $975, 000 in 2011, $3, 750, 000 in 2012, and $7, 700, 000 in 2013.[8]

B. Pre-Agreement Representations

At the heart of this dispute is the Plaintiffs' expectation that LPL's acquisition of Concord would enable Concord to develop a "custody services business" for its trust accounts. The Plaintiffs describe that business as "providing technology and open architecture investment management solutions for trust departments of financial institutions."[9] Those "management solutions" include "intake, recording, and processing of account assets and related transactions, " as well as "settling trades, investing cash balances, collecting income, processing corporate actions, pricing securities positions and providing recordkeeping and reporting services" for trust clients.[10]

The Plaintiffs aver that they participated in several meetings with executives at LPL and LPL Financial, the purpose of which was to "formulate[] a plan to maximize synergy via the combination of LPL Financial and Concord, " whereby "after the closing LPL Financial would provide custodial services for Concord-LPL based trust accounts. On the one hand, LPL Financial would obtain directly enhanced revenue for performing custody services for the additional Concord-LPL-based trust accounts. On the other hand, Concord-LPL would perform its work and generate enhanced revenue from having access to the Concord-LPL trust assets as custodied by LPL Financial."[11] Thus, the Plaintiffs contend that the parties anticipated that LPL Financial and Concord-LPL would work together to create synergies and to generate custody-based revenue in anticipated amounts of $1 million in 2011, $4.3 million in 2012, $9.3 million in 2013, $14.8 million in 2014, and $20.4 million in 2015.[12] According to the Plaintiffs, because an acquisition by a company that performed custody services would generate significant synergies, the Plaintiffs "rejected a competing bid from a bidder which did not perform custody services, even though the rejected bid set forth an option for a greater initial cash payment and a potentially greater overall sale price."[13]

The Amended Complaint avers that prior to closing, Plaintiffs Argush, Mariniello and Gavornik met with various LPL and LPL Financial executives, including Arnold, LPL's CFO; Feeney, Managing Director of LPL's technology group; and Hardin, LPL Financial's Executive Vice President.[14] According to the Plaintiffs, at those meetings, "LPL Financial advised plaintiffs that it was amply addressing any potential issues of potential concern regarding any technical limitations in LPL Financial's computer systems, including specifically as to [sic] they pertained to possible problems in regard to LPL Financial's custody of relevant trust assets."[15] According to the Plaintiffs, "[i]t was anticipated that the computer-based system used by LPL Financial to provide custodial services would require minimal and routine technical adaptation of LPL Financial's software and data management systems, "[16] and "some of the due diligence performed by [the Plaintiffs] prior to the closing included acquiring knowledge of and assurances as to LPL's data servicing capabilities."[17] The parties, however, did not include in the SPA a provision requiring LPL to make, or to use its best efforts to make, any technical adaptations necessary to allow Concord-LPL to develop its custody business. Still, the Plaintiffs aver generally that "LPL failed to disclose, and concealed, the true nature of LPL Financial's technical limitations to the plaintiffs but yet knew that plaintiffs would rely upon its public statements, " and in fact, LPL Financial was unable or unwilling to facilitate Concord's entry into the custody business;[18] "LPL failed to disclose that LPL Financial's computer systems could not easily be adapted so that LPL Financial could provide such similar services [for Concord's use], and that LPL Financial would likely therefore resist making the changes;"[19] and "LPL Financial confirmed directly to Concord that LPL Financial could, and would, make any necessary ministerial technical changes to its computer system by the fourth quarter of 2011."[20] According to the Plaintiffs, while LPL and LPL Financial represented that they had, in the past, serviced large financial services companies, they did not inform the Plaintiffs that they had done so by creating a costly exception logic sequence, and not by truly integrating the serviced company into LPL's own compliance and processing oversight management systems.[21]

C. Technical Difficulties after Closing

Despite LPL's and LPL Financial's alleged indications that they were in a position to, and would, make technological adaptations in order to enable LPL Financial to provide custody services to Concord-LPL, the Plaintiffs aver that after the acquisition, the Defendants were unable or unwilling to do so. According to the Amended Complaint, LPL refused to customize its system in order to facilitate LPL Financial's providing custody services to Concord-LPL. The Plaintiffs explain that after the acquisition, they discovered that "LPL Financial's computer systems could not be easily adapted for Concord-related custodial accounts in a way which would be compatible with Concord-LPL's business model. LPL Financial systems could not, for example, easily segregate Concord-related custodial accounts from irrelevant compliance, oversight, accounting, and other processing applications."[22] Consequently, Concord-LPL was unable to service old clients, acquire new clients, or otherwise generate revenue it could have generated prior to the acquisition, or if the technological adaptations had been made.[23] The Plaintiffs argue that the Defendants' refusal to make those adaptations "is arbitrary and in bad faith, motivated, for example, by avoiding making contingent payments to plaintiffs yet retaining the profit and further profiting from the retention of Concord-LPL's technology and from the other provisions in the Agreement and Employment Agreements."[24]

The Amended Complaint avers that after the Plaintiffs realized LPL was resistant to making the needed technological adaptations, Plaintiff Argush met with LPL President Robert Moore to discuss his "30/30 plan, " under which the adaptations would be made in thirty days for $30, 000. According to the Plaintiffs, LPL Financial refused to implement this plan because it was "motivated in significant part by a desire to profit from the time restrictions on the additional Contingent Purchase Price Payment set forth in the Agreement and in the Targets in the Employment Agreements."[25] The Plaintiffs also allege that, in accordance with that motivation, LPL Financial and Fortigent, [26] another wholly-owned subsidiary of LPL, agreed to "pivot" sales from Concord-LPL to Fortigent;[27]"Concord-LPL was told to 'stand down' in regard to its relationships with existing clients;"[28] and Fortigent's CEO, Andrew Putterman, directed Concord-LPL staff not to recommend its services to prospective clients.[29] In addition, ...


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