Submitted: March 24, 2015
Upon Defendants' Motion to Dismiss Count I Against AIP: GRANTED.
Upon Defendants' Motion to Dismiss Count II Against AIP: GRANTED, in part, and DENIED, in part.
Upon Defendants' Motion to Dismiss Counts I through V Against the Individual Defendants: GRANTED.
Steven B. Feirson, Esquire (pro hac vice) (argued), Dechert LLP, Michael H. Park, Esquire (pro hac vice), and Rebecca Kahan Waldman, Esquire (pro hac vice), Dechert LLP, Ann Mary Olson, Esquire (pro hac vice), Dechert LLP, P. Clarkson Collins, Jr., Esquire, and Meghan A. Adams, Esquire, Morris James LLP, Attorneys for Plaintiff.
Peter D. Doyle, Esquire (pro hac vice) (argued), and Seth Fier, Esquire (pro hace vice), Proskauer Rose LLP, John E. Roberts, Esquire (pro hac vice), Proskauer Rose LLP, William D. Johnston, Esquire, and Mary F. Dugan, Esquire, Young Conaway Stargatt & Taylor, LLP, Lawrence Portnoy, Esquire (pro hac vice), and Jillian Rennie Stillman, Esquire (pro hac vice), Davis Polk & Wardwell LLP, Attorneys for Defendants.
Before the Court is Defendants American Industrial Partners Capital Fund IV, L.P., American Industrial Partners Capital Fund IV (Parallel), L.P., and AIPCF IV, LLC's ("AIP") Motion to Dismiss Counts I and II of the Complaint; and Defendants Kim Marvin, Paul Bamatter, and Eric Baroyan's ("Individual Defendants") Motion to Dismiss Counts I through V ("Defendants" includes AIP and the Individual Defendants).
Plaintiff ITW Global Investments Inc. ("ITW") alleges that Defendants committed fraud, fraud in the inducement, and breach of contract in connection with ITW's acquisition of Brooks Instrument ("Brooks") from AIP ("Transaction"). According to ITW, Defendants committed fraud and breached the Securities Purchase and Sale Agreement ("SPSA") by misrepresenting the financial statements and other provisions in the SPSA, and orchestrated a series of "sham sales" designed to fraudulently induce ITW to enter into an agreement it otherwise would not have entered into by artificially inflating Brooks' November 2011 sales.
In opposition, AIP argues that Count I (fraud) of the Complaint should be dismissed because it impermissibly "rehashes" the damages allegedly caused by ITW's breach of contract claim. AIP contends that Count II (fraud in the inducement) of the Complaint should be dismissed because: (1) any alleged fraud based on misrepresentations in the SPSA constitutes an "impermissible bootstrap" to ITW's breach of contract claim; and (2) any alleged fraud based on extra-contractual statements was disclaimed in the SPSA.
The Individual Defendants contend that all counts in the Complaint should be dismissed because: (1) the Complaint fails to plead sufficient facts showing they had knowledge of the alleged misrepresentations; and (2) alternatively, this Court does not have personal jurisdiction over them.
For the following reasons, AIP's Motion to Dismiss Count I (fraud) is GRANTED; AIP's Motion to Dismiss Count II (fraud in the inducement) is GRANTED, in part, and DENIED, in part; and the Individual Defendants' Motion to Dismiss all counts against them is GRANTED.
ITW, a Delaware corporation with its principal place of business in Illinois, is a public company specializing in the manufacture, sales, and service of industrial components and equipment.
AIP is a middle-market private equity firm that invests primarily in industrial manufacturing businesses. Kim Marvin is a Partner in AIP and resident of Maryland. Paul Bamatter is a Partner in AIP, AIP's Chief Financial Officer, and a resident of Connecticut. Eric Baroyan is a Partner in AIP and a resident of New York.
On December 31, 2007, AIP purchased Brooks from Emerson Electric Company. Brooks is a Pennsylvania-based manufacturing company that manufactures advanced flow, pressure, and vacuum measurement and control solutions.
In September 2011, ITW and AIP began to negotiate the Transaction. On September 22, 2011, at AIP's direction, Brooks' management provided ITW with historical financial information and future financial projections that it intended ITW to use as the basis for valuing Brooks. AIP projected that Brooks' revenue would be approximately $210 million in fiscal year 2011, $247 million in fiscal year 2012, and $322 million in fiscal year 2013.
On October 28, 2011, ITW delivered a Letter of Intent to purchase Brooks for $500 million. On November 3, 2011, AIP accepted the Letter of Intent, promising to operate Brooks in "a normal and customary manner" and "not to engage in any transaction which may adversely and materially affect the decision of ITW to pursue" the purchase of Brooks.
On November 10, 2011, Brooks' management informed AIP (specifically, the Individual Defendants) that Brooks' sales had fallen from $15.2 million in September 2011 to $10.8 million in October 2011––Brooks' worst sales month in 2011. Brooks also informed AIP that its sales projections for November would reach only approximately $13 million. When Bamatter learned of the financial results and projections, he asked Clark Hale, Brooks' Chief Executive Officer, and Waqar Nasim, Brooks' Chief Financial Officer, "is there a story that is not scary?" Thereafter, according to ITW, Baroyan pushed Brooks' sales team to "book the hell out of everything we possibly can over the next 10–15 days to ease any concern ITW is going to have once they see October data."
On November 18, 2011, ITW learned of the October financial results. AIP explained to ITW that the October sales drop was an anomaly caused by three days of lost production due to a year-end physical inventory and a one-time unusual supplier delay. AIP then provided projections that Brooks' November 2011 sales would be $17 million and December 2011 sales would be $21.5 million. After the October sales drop, ITW decided to hold off on the purchase of Brooks until after the November 2011 sales met AIP's projections.
Throughout the month of November, Baroyan was in daily contact with Hale and Nasim, monitoring Brooks' progress toward AIP's $17 million sales forecast.Through Baroyan and others at AIP, AIP directed Brooks to maximize its November sales.
ITW alleges that AIP directed Brooks to enter into a series of "sham sales" with AIP affiliates, Ichor Systems ("Ichor") and Precision Flow Technologies ("PFT"), throughout the fall of 2011 in an effort to inflate Brooks' sales figures to meet AIP's revenue projection. ITW alleges that in order for AIP to "effectuate this scheme, " in the fall of 2011, Brooks' management, including Hale (CEO) and Bhushan Somani (Vice President Global Account Management) attempted to sell a large amount of soon-to-be-discontinued products to Applied Materials, Inc. ("AMAT"). When the parties were unable to reach an agreement, AIP and Brooks arranged to "sell" the products to Ichor ("Last Time Buy Agreement").
After those negotiations deteriorated, a second version of the Last Time Buy Agreement was prepared on November 21, 2011 by Geoffrey Chriswisser on behalf of Ichor, which required Brooks to repurchase up to 20 percent of the original quantity of product acquired by Ichor as part of the Last Time Buy Agreement ("partial right of return"). According to ITW, Brooks agreed to repurchase certain legacy products in Ichor's excess inventory at a later date in order to induce Ichor to enter into the transaction. The Brooks accounting team, however, strongly objected to recording the shipments as revenue because doing so (given the partial right of return) would violate Generally Accepted Accounting Principles ("GAAP").
On December 1, 2011, Chriswisser drafted a final Last Time Buy Agreement that removed the partial right of return and Brooks' obligation to repurchase Ichor-owned legacy products, but Hale simultaneously affirmed by email to Ichor's Chief Executive Officer that Brooks would buy back certain products later–– completely inconsistent with the final Last Time Buy Agreement. ITW alleges that this partial right of return inflated Brooks' revenue, making Brooks more attractive to ITW. Accordingly, ITW alleges that AIP granted the partial right of return with the hope that the products would not be returned until after ITW had taken control of Brooks.
ITW further alleges that AIP and Brooks effectuated a similar scheme of "sham sales" with PFT––another AIP affiliate. From September to November 2011, Brooks recorded $867, 029 in sales to PFT. The agreement between PFT and Brooks included an obligation for Brooks to buy back any product that had no usage for 120 days. Nevertheless, ...