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Nationwide Emerging Managers, LLC v. Nationwide Corp.

Supreme Court of Delaware

March 27, 2015

NATIONWIDE EMERGING MANAGERS, LLC, Defendant/Counter-Plaintiff Third-Party Plaintiff Below-Appellant,

Submitted: March 4, 2015

Court Below: Superior Court of the State of Delaware in and for New Castle County C.A. No. N09C-11-141 ALR

Upon appeal from the Superior Court.

Colm F. Connolly, Esquire (argued), Morgan, Lewis & Bockius LLP, Wilmington, Delaware, for Appellants.

Bartholomew J. Dalton, Esquire, Dalton & Associates, P.A., Wilmington, Delaware; Jaye Quadrozzi, Esquire (argued), Rodger D. Young, Esquire, Young & Associates, Farmington Hills, Michigan, for Appellees.

Before STRINE, Chief Justice; VAUGHN, Justice; and LASTER, Vice Chancellor. [*]

STRINE, Chief Justice


When a buyer and seller negotiate a detailed contract, Delaware law requires that the contract's express terms be honored, [1] and prevents a party who has after-the-fact regrets from using the implied covenant of good faith and fair dealing to obtain in court what it could not get at the bargaining table.[2] In this case, the buyer persuaded the Superior Court to award it $15.1 million in damages when the buyer bought a 65% interest in an investment advisory firm for $25 million. The buyer's premise was that it would not have paid $25 million but for its expectancy that it would manage seven funds for three or more years. But the majority of the assets under management at the investment advisory firm were attributable to accounts other than the seven funds. As important, the contract enabled the seller to terminate the buyer's right to manage the seven funds for any reason, so long as it paid a termination fee capped at $3.5 million, and to terminate the buyer without any compensation if the seller believed its fiduciary duties required or if the buyer's performance fell below a contractual standard. And after three years, the seller could terminate the buyer as manager of the funds for any reason and owe no compensation at all.

Instead of giving effect to the parties' contractual bargain, the Superior Court erred by implying contractual obligations on the part of the seller that were inconsistent with the contract's express terms. This enabled the buyer to obtain in litigation benefits in excess of those potentially available under the contract, and contractual protections that the buyer had failed to obtain in negotiations. We therefore reverse the judgment of the Superior Court in favor of the buyer and remand for a determination of what, if any, termination fee is due to the buyer because of the seller's termination of it as manager of the funds.


a. The Parties

NorthPointe Capital, LLC ("NorthPointe Capital") was set up in 1999 to perform sub-advisory work for mutual funds and other investment vehicles.[4] Nationwide

Emerging Managers, LLC ("Nationwide") owned 65% of NorthPointe Capital, with the remaining 35% held by NorthPointe Capital's four managers. Its primary business was managing seventy accounts for institutional investors under investor-specific agreements. Those contracts constituted approximately 80% of NorthPointe Capital's assets under management. Its secondary business was providing sub-advisory services for the seven Nationwide funds that are the focus of this case. Of these seven funds, five were branded as Nationwide funds, and two were branded as NorthPointe funds.[5] Six of the funds had assets under management valued at $100 million or less, but the seventh, Nationwide NVIT Mid Cap Growth Fund (the "NorthPointe NVIT"), held over $400 million in assets and was the "crown jewel" of the portfolio. That fund was a "trust fund in which Nationwide, not direct individual investors, owned the [assets] on behalf of individuals."[6]Nationwide earned a total of $15 million in profits between 1999 and 2006 as the majority member of NorthPointe Capital.[7]

b. The 2007 Management Buy-Out

In 2006, Nationwide decided to sell its interest in NorthPointe Capital as part of a larger strategy to divest itself from direct asset management. With the help of three investors, NorthPointe Capital's four managers created NorthPointe Holdings, LLC ("NorthPointe") to buy Nationwide's interest. From late 2006 through early 2007, NorthPointe and Nationwide negotiated the sale of Nationwide's ownership stake.[8] The final sale price was $25 million, plus additional compensation owed under an earn-out provision. NorthPointe paid $16 million in cash and $9 million in the form of a subordinated note personally guaranteed by the managers. The parties signed a purchase agreement on July 19, 2007 (the "Purchase Agreement"), and the deal closed on September 28, 2007.

Exhibit D of the Purchase Agreement specified Nationwide's obligations to NorthPointe after the sale, as well as remedies for breaches of the Agreement. For three years, Section 1(a) of Exhibit D (the "Termination Provision") prevented Nationwide from terminating NorthPointe's sub-advisory services, or taking any action that would cause NorthPointe's termination, for the seven funds listed on Schedule 1 of Exhibit D ("Schedule 1"). The Termination Provision provided:

[Nationwide] hereby agrees that for a three-year period following the Closing Date . . . it shall . . . not terminate . . . for the [Sub-Advised Funds] included on Schedule 1 . . . [NorthPointe's] sub-advisory agreement with such Sub-Advised Fund, or take any other action to cause such termination; [but if Nationwide terminates NorthPointe's] sub-advisory agreement with [any] Sub-Advised Fund . . ., [Nationwide] shall pay a fee to [NorthPointe] in the amount set forth on Schedule 1 . . . under the name of such Sub-Advised Fund under the heading "Termination Fee" . . .; provided further, . . . the aggregate of all Termination Fees payable to [NorthPointe under] this subsection shall not exceed $3.5 million and all such Termination Fees shall be paid by reducing the principal amount of the . . . Note by the amount of such Termination Fees.[9]

Accordingly, Nationwide was required to pay a "Termination Fee, " capped at $3.5 million, if Nationwide terminated NorthPointe as sub-advisor for any of the seven funds during the three-year period. Schedule 1 also set forth formulas for calculating the Termination Fee for several of the funds (listed under a "Termination Fee" heading).[10] The NorthPointe NVIT is the first fund to appear under the "Termination Fee" heading. Under the formulas, the total damage award would decline over the course of the three-year contractual period, so that NorthPointe's highest recovery would occur if Nationwide breached the Termination Provision early, although the award could never exceed $3.5 million because of the cap.

Under the Termination Provision, Nationwide did not have to pay any Termination Fee if one of two conditions was met. The first condition was if Nationwide "determined in good faith that its termination [is] necessary for [Nationwide] to satisfy its fiduciary obligations to the shareholders of the Sub-Advised Fund" (the "Fiduciary Exception").[11]The second was if NorthPointe failed to "satisf[y] the performance standards specified in Schedule 2" for that fund (the "Cause Exception").[12] The only performance standard relevant to this appeal required NorthPointe not to "have [a] performance rank in the bottom third of its peer group over a period of three consecutive years or five consecutive quarters" (the "Performance Period").[13] In other words, by the plain language of the contract, Nationwide had to pay an aggregate Termination Fee of no more than $3.5 million if it terminated NorthPointe's sub-advisory agreement for any reason.[14] But if Nationwide terminated the sub-advisory agreement because doing so was necessary to abide by its fiduciary obligations to its stockholders, or as a result of NorthPointe's sub- par performance, it would not owe NorthPointe any Termination Fee for that fund.

Section 1(b) of Exhibit D (the "Replacement Provision") included additional protection for NorthPointe related to the NorthPointe NVIT, by far the largest fund listed on Schedule 1. The Replacement Provision provided:

[S]ubject to [NorthPointe's] compliance with the [performance standards], [Nationwide will not] replace [NorthPointe] or engage a concurrent sub-advisor with respect to the [NorthPointe NVIT] such that, immediately after . . . such replacement . . ., [NorthPointe has] less than $300 million in assets under management in such fund . . . .[15]

The Cause Exception also applied to the Replacement Provision; that is, if the NorthPointe NVIT's performance fell below the standards established in the Purchase Agreement, Nationwide was permitted to replace NorthPointe as sub-advisor or engage another sub-advisor.

Exhibit D of the Purchase Agreement contained additional covenants binding Nationwide.[16] But Nationwide did not promise not to open a fund that would compete with any of the seven funds, nor did it promise to manage any of the other funds it owned or controlled in any particular way. Restrictive covenants ...

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