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HBMA Holdings, LLC v. LSF9 Stardust Holdings LLC

Court of Chancery of Delaware

December 8, 2017

HBMA HOLDINGS, LLC, a Delaware limited liability company, STRUCTHERM HOLDINGS LIMITED, an English private limited company, HANSON AMERICA HOLDINGS (4) LIMITED, an English private limited company, and HANSON PACKED PRODUCTS LIMITED, an English private limited company, Plaintiffs,
LSF9 STARDUST HOLDINGS LLC, a Delaware limited liability company, and LSF9 CONCRETE LTD., a Channel Islands company, Defendants.

          Submitted Date: September 21, 2017

          Thomas E. Hanson, Jr., BARNES & THORNBURG LLP, Wilmington, Delaware; Joseph R. Kave, BARNES & THORNBURG LLP, Chicago, Illinois; Attorneys for Plaintiffs.

          Raymond J. DiCamillo and Matthew D. Perri, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Angela C. Zambrano, Yolanda C. Garcia, and Robert S. Velevis, SIDLEY AUSTIN LLP, Dallas, Texas; Attorneys for Defendants.



         This case arises from a dispute concerning the proper earnout the purchasers should pay to the sellers under a purchase agreement. The purchasers and sellers entered into a purchase agreement in 2014 that allowed for an earnout payment of up to $100 million based on the first year of performance after the sale. At the end of the first year, they came to different conclusions about the amount of earnout owed to the sellers, and their disagreements did not stop there.

         The purchase agreement included a special arbitration provision for disputes about the earnout amount that required the parties first to negotiate with each other and then to engage a neutral accountant to settle any unresolved objections to the earnout calculation. The parties could not agree on which documents needed to be exchanged between them to determine the unresolved objections, which unresolved objections should go to the neutral accountant, or even what types of claims the sellers were pursuing.

         The sellers come to the Court seeking an order that requires arbitration of all the sellers' unresolved objections to the earnout calculation. The sellers also assert breach of contract and indemnification claims and seek damages for the same. The purchasers have moved to dismiss the complaint for two reasons. First, although the purchasers agree that arbitration is required, they argue that the neutral accountant can only consider a narrow set of accounting-related disputes. Second, the purchasers contend that the only available breach of contract claim under the purchase agreement is an indemnification claim for breach of a covenant. But, the purchasers assert that the statute of limitations has run for any indemnification claims under the purchase agreement.

         The contract language grants the neutral accountant authority over the sellers' unresolved objections. A review of all the related contract provisions reveals that, in actuality, the interrelated contract terms give the neutral accountant jurisdiction over the calculation of adjusted EBITDA under the purchase agreement. I hold that this jurisdiction includes the ability to determine which of the sellers' unresolved objections to consider when calculating the adjusted EBITDA. In the event that the neutral accountant finds it cannot consider a particular unresolved objection, then the only available remedy for the sellers would be to bring an indemnification claim. I hold, however, that such claims are time barred.

         I. BACKGROUND

         All facts derive from the Verified First Amended Complaint (the "Complaint") and the documents incorporated therein.

         A. Parties

         The Plaintiffs are HBMA Holdings, LLC, a Delaware limited liability company with a principal place of business in Irving, Texas; Structherm Holdings Limited, Hanson America Holdings (4) Limited, and Hanson Packed Products Limited, are all English private limited companies with principle places of business in Maidenhead, United Kingdom.

         The Defendants are LSF9 Stardust Holdings LLC, a Delaware limited liability company with an address for service in Wilmington, Delaware, and LSF9 Concrete Ltd., a Channel Islands company with a principal place of business at St. Helier, Jersey. LSF9 Concrete Ltd. is the assignee of all LSF9 Stardust Holdings LLC's rights, title, and interest in the purchase agreement.

         B. Facts

         On December 23, 2014, Plaintiffs entered into a purchase agreement (the "Agreement") to sell to Defendants several building products companies (the "Companies") in North America and the United Kingdom.[1] The transaction closed on March 13, 2015 with a purchase price of $1.4 billion-$100 million of which was payable as an earnout based on the Companies' performance from January 1 to December 31, 2015 (the "Earnout Period").[2] The Agreement included an arbitration agreement, whereby disagreements about the earnout would be decided by "an internationally recognized accounting firm reasonably acceptable to the [Plaintiffs] and [Defendants]" (the "Neutral Accountant").[3]

         Pursuant to the Agreement, Defendants provided an Initial Earnout Statement[4]on April 14, 2016.[5] This Initial Earnout Statement calculated Adjusted EBITDA, [6]the agreed upon metric for measuring performance, to be $164 million.[7] The threshold Adjusted EBITDA for Plaintiffs to receive any earnout was $212.2 million, and for them to receive the full $100 million earnout, Adjusted EBITDA needed to be $223.7 million.[8]

         Under the Agreement, Plaintiffs had forty-five days after receipt of the Initial Earnout Statement to deliver to Defendants their notice of acceptance of the Initial Earnout Statement or "a detailed statement describing its objections to the Initial Earnout Statement, " defined in the Agreement as the "Notice of Disagreement."[9]During this forty-five day period, the Agreement required Defendants to give Plaintiffs "reasonable access" to "the relevant financial books and records" and "the individuals responsible for the preparation of the Initial Earnout Statement and 2015 Financial Statements."[10]

         Beginning on April 15, 2016, Plaintiffs attempted to reconcile the Initial Earnout Statement and requested support from Defendants.[11] Allegedly, this process was difficult, and Plaintiffs contend that Defendants did not give them the reasonable access required under the Agreement.[12] On May 23, the Parties agreed to a fifteen- day extension to allow Plaintiffs to issue their Notice of Disagreement by June 13, 2016.[13]

         On June 13, 2016, Plaintiffs issued their Notice of Disagreement, wherein they objected to three categories of Defendants' actions: (1) Defendants' calculation of Adjusted EBITDA;[14] (2) Defendants' running of the company during the Earnout Period;[15] and (3) Defendants' refusal to provide the access to documents and financial information required by the Agreement.[16]

         The Parties attempted to negotiate the Disputed Items[17] in the Notice of Disagreement until June 30, 2016, when Defendants requested that the Parties engage a Neutral Accountant.[18] The Parties attempted to draft an engagement letter for the Neutral Accountant from June 30 until September 27, 2016, but they never reached an agreement.[19]

         Plaintiffs filed their Verified Complaint (the "Original Complaint") on October 5, 2016. Defendants filed their first Motion to Dismiss on November 7, 2016. Plaintiffs filed their Verified First Amended Complaint (the "Complaint") on January 6, 2017. Defendants filed this Motion to Dismiss on January 23, 2017. The Court heard oral arguments on this Motion to Dismiss on September 21, 2017.

         II. ANALYSIS

         A. Standard of Review

         Defendants move to dismiss the Complaint under Delaware Court of Chancery Rules 12(b)(1), arguing the Court lacks subject matter jurisdiction due to an arbitration agreement between the Parties. Defendants also seek dismissal under Rule 12(b)(6), contending Plaintiffs fail to state a claim because their indemnification claims are time barred.

         1. Rule 12(b)(1): Motion to Dismiss for Lack of Subject Matter Jurisdiction

         Plaintiffs bear the burden of establishing subject matter jurisdiction.[20] In reviewing a motion to dismiss for lack of subject matter jurisdiction a court may consider documents outside the complaint.[21] A court must also "examine the pleadings to determine the true substance of the relief the [plaintiff] seeks, and will not be bound by the form of relief as described [by the plaintiff]."[22]

         Delaware courts lack subject matter jurisdiction to resolve disputes that litigants have contractually agreed to arbitrate.[23] There is a strong public policy in favor of arbitration in Delaware; thus, a motion to dismiss for lack of subject matter jurisdiction will be granted if the "dispute is one that, on its face, falls within the arbitration clause of the contract."[24]

         2. Rule 12(b)(6): Motion to Dismiss for Failure to State a Claim

         When reviewing a motion to dismiss for failure to state a claim, a court must accept all well-pled factual allegations as true, and "even vague allegations are 'well-pleaded' if they give the opposing party notice of the claim."[25] A court also must draw all reasonable inferences in favor of the non-moving party.[26] Dismissal will be appropriate only if the "plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof."[27]

         Though the Court must accept well-pled facts as true, it is not required to accept any conclusory allegations "without specific supporting factual allegations."[28] Moreover, a trial court must accept only those "reasonable inferences that logically flow from the face of the complaint" and "is not required to accept every strained interpretation of the allegations proposed by the plaintiff."[29]

         A claim will be dismissed for failure to comply with the statute of limitations "if the facts pled in the complaint, and the documents incorporated within the complaint, demonstrate that the claims are untimely."[30] The plaintiff bears the burden to plead facts that demonstrate the applicability of an exception to the statute of limitations.[31] "When that burden is not met, the court must dismiss the complaint if filed after expiration of the limitations period."[32]

         B. The Parties Agree that the Neutral Accountant Has the Ability to Compel Discovery Between the Parties

         The Parties reached an agreement at oral argument that the Neutral Accountant has the power to compel discovery between the Parties, not just for the documents that must be turned over to the Neutral Accountant, but also as to any documents to be exchanged between the Parties in order to complete briefing for the Neutral Accountant.[33] Thus, there is no dispute between them on this issue.

         C. The Neutral Accountant Has Jurisdiction over the Calculation of Adjusted EBITDA

         The Parties disagree about the scope of the Neutral Accountant's jurisdiction. Defendants argue that the Neutral Accountant only has jurisdiction over "a narrow set of accounting-related disputes over the calculation of the earnout payment using a fixed accounting methodology."[34] Plaintiffs argue that the Neutral Accountant has jurisdiction over all Disputed Items in the Notice of Disagreement.[35] Ultimately, I conclude that the Neutral Accountant has jurisdiction over the calculation of Adjusted EBITDA, which includes the ability to determine which of the Disputed Items fall into the definition of Adjusted EBITDA.

         "Under the identical teaching of the United States Supreme Court and the Delaware Supreme Court, questions of substantive arbitrability require judicial resolution unless the parties' contract clearly and unmistakably provides otherwise."[36] The court must engage in a two-part inquiry to determine substantive arbitrability.

First, the court must determine whether the arbitration clause is broad or narrow in scope. Second, the court must apply the relevant scope of the provision to the asserted legal claim to determine whether the claim falls within the scope of the contractual provisions that require arbitration. If the court is evaluating a narrow arbitration clause, it will ask if the cause of action pursued in court directly relates to the right in the contract. If the arbitration clause is broad in scope, the court will defer to arbitration on any issues that touch on contract rights or contract performance.[37]

         Following this two-part inquiry, I first hold that the clause at issue in this case ...

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