Date Submitted: January 30, 2014
Matthew E. Fischer, Esquire, Timothy R. Dudderar, Esquire, and Justin H. Morse, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware, and Todd Wind, Esquire, Crystal M. Patterson, Esquire, and Erin M. Secord, Esquire of Fredrikson & Byron, P.A., Minneapolis, Minnesota, Attorneys for Plaintiff.
Gregory V. Varallo, Esquire, Richard P. Rollo, Esquire, and Kevin M. Gallagher, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Defendants.
NOBLE, Vice Chancellor
A judge's objective in reading a contract is usually to glean the parties' shared intent, which may be found in the words of the contract. The Plaintiff claims that its intentions were frustrated by the disingenuousness or fraud of the Defendants. It invokes a variety of representations attributed to the Defendants that were neither accurate nor incorporated into the otherwise detailed contract of these sophisticated parties. A combination of buyer's remorse and "wishing makes it so" may persuade a frustrated and disappointed buyer that only the seller's misrepresentations could have placed the buyer in its unhappy predicament. How far a plaintiff can go with this approach, in the context of resisting a motion to dismiss for failure to state a claim, may be the question before the Court.
The dispute concerns the Stock and Asset Purchase Agreement (the "SAPA") entered into in September 2012, by Plaintiff Eurofins Panlabs, Inc. ("Eurofins") and Defendants Ricerca Biosciences, LLC ("Ricerca") and Ricerca Holdings, Inc. ("RHI"). Eurofins alleges that Ricerca, its Chairman and Chief Executive Officer, Defendant Ronald Ian Lennox ("Lennox"), and RHI (collectively, the "Defendants") made fraudulent statements concerning the business to be sold to Eurofins, a key customer relationship, its pension obligations, and other details. Certain of those false statements are also alleged as breaches of contract or asserted under a unilateral mistake theory, and, in addition, Eurofins brings claims under the implied covenant of good faith and fair dealing and for violation of the Delaware Securities Act.
Defendants' effort to obtain dismissal is notable for the prodigious number of arguments they raise. To some extent, perhaps because of briefing constraints, certain arguments are conclusory or avoid portions of Eurofins's Verified Amended Complaint (the "Complaint"). Nonetheless, many of Eurofins's claims are dismissed. Specifically, its claims concerning the assets sold to it under the SAPA and the associated transfer of technical knowledge, its claims concerning the extension of a sublease, its fraud claim concerning the pension plan of Ricerca Taiwan (as defined herein), its unilateral mistake claim involving the transfer of anti-infection models, and its claims arising under the Delaware Securities Act and the implied covenant of good faith and fair dealing are dismissed as to all Defendants. Additionally, all claims against Lennox, aside from those based on the relationship with a key customer, are dismissed. Eurofins's other claims survive.
A. The Parties
Eurofins is a Delaware corporation with its principal place of business in Bothell, Washington. It is an indirect, wholly-owned subsidiary of Eurofins SE, a publicly traded company incorporated in Luxembourg with its headquarters in Brussels, Belgium. Eurofins SE provides a range of analytical testing services to clients spanning multiple industries. Eurofins was incorporated to enter into the SAPA and to operate the acquired business, which provides early stage drug research services to the pharmaceutical industry.
Ricerca is a Delaware limited liability company with its principal place of business in Concord, Ohio. Ricerca offered drug testing and research services to pharmaceutical companies. RHI is a Delaware corporation and is the sole shareholder of Ricerca Intermediate Holdings, Inc. ("Ricerca Intermediate"), which is the sole member of Ricerca. Lennox was, at all relevant times, an officer or director of Ricerca. B. The Events Preceding the SAPA's Execution
Ricerca's early stage drug research services included molecular pharmacology (how a drug operates at the molecular level) and functional pharmacology (how a drug impacts the function of targeted and other cells).Ricerca performed services in a least four locations: Concord, Ohio; Bothell, Washington; Taipei, Taiwan; and Lyon, France. In 2012, it began actively marketing certain parts of its business, including its physical assets and business operations in Bothell, Washington and the stock of Ricerca Taiwan, Ltd. ("Ricerca Taiwan"), a wholly-owned subsidiary organized under the laws of Taiwan. The Ricerca Taiwan operation and the Bothell operation are, collectively, the "PHA Division."
Ricerca developed a Confidential Information Memorandum ("CIM") for distribution to potential purchasers of the PHA Division. The CIM's content was drafted by several key Ricerca employees, including Dr. James Baumgartner ("Baumgartner"), Senior Vice President of Pharmacology and a long-time employee of Ricerca; Gerald (Gary) Jacobson ("Jacobson"), Executive Vice President and Chief Financial Officer of Ricerca; and Roger Gasper ("Gasper"), Vice President of Accounting and Finance of Ricerca. Lennox and Jacobson allegedly directed and controlled the CIM's content by, in part, instructing Baumgartner and Gasper as to what should and should not be included in it.Eurofins also contends that Lennox orchestrated Ricerca's and RHI's negotiations with Eurofins, including directing the written and oral communications of other individuals involved in negotiations.
Eurofins received a version of the CIM and became interested in the possibility of acquiring the PHA Division. On August 10, 2012, Eurofins Scientific, Inc. entered into a Letter of Intent to acquire the PHA Division with the sale price based on information in the CIM. The companies initiated due diligence and on September 18, 2012, Eurofins, Ricerca, and RHI signed the SAPA.
The parties agreed that a portion of the initial payment would be placed in an indemnification escrow, none of which has been released to date. The purchase price under the SAPA consisted of the initial payment and an earn-out based on Eurofins's revenues for the period from September 1, 2012 through December 31, 2012. The earn-out was further subject to adjustments for the closing date value of the pension plan sponsored by Ricerca Taiwan and the closing date working capital of the PHA Division.
The parties closed the transaction on October 1, 2012. Lennox is alleged to have received a portion of the funds from the initial payment as well as a bonus for closing. The parties calculated the post-closing purchase price adjustments, although neither has paid amounts due under them. They agree that nothing is owed under the earn-out because the target revenue projections were not met.
The Complaint recounts certain factual events during negotiations which allegedly resulted in fraudulent statements or breaches of the SAPA, or which otherwise require relief under more exotic theories such as the implied covenant of good faith and fair dealing or the Delaware Securities Act. The background to these claims does not naturally form a linear narrative and thus the Court describes each event before it evaluates the sufficiency of the pleadings on the Defendants' motion to dismiss.
The Complaint contains eight counts. Its first count requests an injunction to cause Defendants to transfer all anti-infection models and certain technical know-how to Eurofins and to stop competing against it. Its second count requests rescission of the SAPA based upon Defendants' misrepresentations and upon the doctrine of unilateral mistake. Counts III and IV assert intentional and negligent misrepresentations, respectively, concerning the models from the Concord facility that Eurofins asserts should have been transferred to it, the loss of a major customer, the Ricerca Taiwan pension plan, and a sublease and certain expenses. In Count V, Eurofins claims Defendants violated the Delaware Securities Act when Ricerca Taiwan's shares were sold by means of untrue statements and omissions of material facts. In Counts VI-VIII, Eurofins alleges breaches of contract and breaches of the implied duty of good faith and fair dealing against Ricerca and RHI for the loss of a major customer, the failure to identify the Concord models in the agreement, competing against Eurofins in violation of the agreement, and the sublease and expenses.
Defendants first argue that all of Eurofins's claims should be dismissed because it failed to comply with certain formalities they claim the SAPA requires. They then proceed to explain why each set of factual circumstances underlying the fraud or breach of contract claims fails to state a claim. Finally, they argue that the Delaware Securities Act should not apply to the sale of Ricerca Taiwan's stock, that the implied covenant of good faith and fair dealing cannot be invoked because the parties' obligations are expressly defined by the SAPA, and that the claims against Lennox should be dismissed.
Defendants have moved under Court of Chancery Rule 12(b)(6) to dismiss all of Eurofins's claims. The Court thus accepts all well-pled facts as true and draws all reasonable inferences in favor of Eurofins. The Court accepts even vague allegations in the Complaint as well-pled if Defendants were provided notice of the claim. The reasonable conceivability standard, which asks whether there is a possibility of recovery, applies and the Rule 12(b)(6) motion will be denied if Eurofins's well-pled factual allegations would entitle Eurofins to relief under a reasonably conceivable set of circumstances. Nonetheless, the Court need not accept conclusory allegations that are unsupported by specific facts or draw unreasonable inferences in favor of Eurofins.
A. Did Eurofins Comply with the SAPA's Procedural Requirements?
Defendants argue that Eurofins failed to provide "reasonable detail" of the "factual basis" for its claims and failed to allege that the $150, 000 basket requirement of the SAPA was satisfied in the aggregate or with respect to each individual claim. The Court rejects Defendants' arguments.
The SAPA does not define reasonable notice or explain how the Court should enforce a failure to comply with the provision. The initial notice Eurofins sent to Defendants included a draft copy of its original complaint which appears to be substantially similar to its current Complaint. Additionally, Defendants' reply letter to this notice was titled "Notice Contesting Indemnification Claims, " indicating they understood the purpose of Eurofins's letter providing notice. The Court concludes the notice complies with the SAPA's requirement.
Defendants also urge the Court to dismiss the Complaint because it does not explicitly state that Eurofins provided notice which complied with the SAPA's notice requirements. Again, no provision in the SAPA requires this result and the Court will not re-write the contract to impose such a requirement.
Next, Defendants contended at oral argument that Eurofins failed to comply with the SAPA's notice provision requiring that the parties "shall meet to discuss a reasonable settlement of all claims" during the 45-day period when a claim can be contested. In a similar situation, one in which the parties to an agreement did not observe a mandated negotiation provision before filing suit,  the Court concluded, on a motion to dismiss, that the complaint could not be dismissed because the agreement did not "state that a failure to negotiate would be grounds to dismiss an Indemnified Party's later complaint." The same result applies here.
Concerning the SAPA's basket threshold, Eurofins supplied Defendants with an estimate of the combined value of its claims at $5.5 million, an amount exceeding the $150, 000 basket requirement. Furthermore, the Complaint alleges that Eurofins overvalued the PHA Division by more than $1 million, which also exceeds the $150, 000 basket requirement. Though Eurofins did not assign a dollar value to each of its claims or represent that their total value will not exceed the SAPA's $3.5 million cap, it need not do so to bring a claim. The SAPA's terms do not specify pleading requirements and the Court will not independently impose them.
B. Did Eurofins Fail to State an Indemnification Claim?
Defendants next argue that the SAPA only permits a remedy of indemnification, and that the Complaint requests remedies Eurofins agreed to forego, such as unspecified damages or injunctive relief. The SAPA's Sole and Exclusive Remedies clause provides:
[T]he rights of the Indemnified Parties under this Article IX shall be the sole and exclusive remedies of the Indemnified Parties . . . with respect to claims resulting from any breach of a representation or warranty or failure to perform any covenant or agreement contained in this Agreement or otherwise relating to the transactions that are the subject of this Agreement . . . .
However, Defendants acknowledge that the SAPA contains a fraud exception and indeed elsewhere state "Eurofins has only two potential paths: (i) sue under the indemnification provisions in the Agreement, or (ii) alleged [sic] a viable fraud count."
Thus, Defendants' argument seems to be essentially a technical one—that Eurofins has not pled indemnification. The Court will not dismiss Eurofins's claims because the Complaint does not invoke the word "indemnification" or because Eurofins requested remedies in Counts I or II. Under the well-pled standard of a motion to dismiss, even vague allegations in the Complaint are well-pled if Defendants were provided notice of the claim.
Defendants also argue that Eurofins has failed to allege a rescission claim because it must establish (1) the existence of a fraud that would give rise to the remedy sought, and (2) that restoration of the status quo ante is possible. They argue that Eurofins has not established or alleged that the status quo ante could be restored, but do not explain why the status quo cannot be restored here. Instead, they only quote a variety of cases with distinguishable factual circumstances. Because Defendants have not explained what factors make this transaction difficult to unwind or why these distinguishable cases must be applied here, Eurofins's rescission count survives as a remedy for its fraud claims.
Eurofins's second theory supporting rescission is unilateral mistake—based on its allegations that a former Ricerca employee stated that Ricerca knew it should transfer all of the anti-infection models and that Lennox sought to cover up the loss of a major customer. To prevail on its claim, Eurofins must demonstrate that it was mistaken and that Ricerca knew of its mistake but remained silent.Moreover, the agreement may only be rescinded on this theory if: "(1) the enforcement of the agreement would be unconscionable; (2) the mistake relates to the substance of the consideration; (3) the mistake occurred regardless of the exercise of ordinary care; and (4) it is possible to place the other party in the status quo." Court of Chancery Rule 9(b) also requires that mistake claims be pled with particularity.
As discussed within, Eurofins's allegations concerning the former Ricerca employee do not satisfy Rule 9(b) and thus Eurofins cannot recover on its mistake claim on that ground. Regarding the loss of the client relationship, Defendants argue that the loss of the client does not go to the substance of the SAPA's consideration. The Court disagrees; Eurofins was purchasing a business, which included its client list and revenues, and thus the loss of a major revenue source alters the substance of the consideration exchanged as the business purchased was not what it anticipated. Additionally, Eurofins's claims ...