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Plaze, Inc. v. Callas

Court of Chancery of Delaware

March 29, 2018

Plaze, Inc. & Apollo Aerosol Industries LLC
v.
Chris K. Callas et al

          Submitted: December 7, 2017

          Kevin R. Shannon, Esquire Christopher N. Kelly, Esquire Andrew H. Sauder, Esquire Potter Anderson & Corroon LLP

          John M. Seaman, Esquire E. Wade Houston, Esquire Abrams & Bayliss LLP

         Dear Counsel:

         This letter opinion addresses Defendants' Motion to Dismiss under Court of Chancery Rule 12(b)(6). For the reasons set forth below, the Motion is DENIED.

         I. Background

         All facts are drawn from the Verified Complaint for Injunctive and Other Relief (the "Complaint") and the documents incorporated therein. At this stage of the proceedings, I must take all of Plaintiffs' well-pled facts as true and draw all reasonable inferences in their favor.[1]

         Plaintiff Plaze, Inc. ("Plaze" or the "Buyer") is a "full-service specialty contract manufacturer of automotive, household, insecticide, and pesticide aerosols."[2] Plaze is the sole member of Plaintiff Apollo Aerosol Industries LLC ("Apollo" or the "Company").[3] In 2015, Plaze acquired Apollo from Defendants (or the "Sellers") for $100, 000, 000 pursuant to a stock purchase agreement (the "SPA").[4]

         The parties signed the SPA on November 24, 2015, and the transaction closed on December 15, 2015.[5] The SPA sets out a mechanism for post-closing adjustments to the purchase price, as well as a limitation on the Sellers' post-closing indemnification liability. The SPA contains representations and warranties by Defendants on behalf of Apollo that are at issue in this litigation.[6] These include representations and warranties about the financial records of Apollo, Apollo's compliance with certain laws and contracts, and Apollo's product liability exposure. Indemnification is the sole remedy for a breach of a representation or warranty under the SPA.[7] The SPA also contains several restrictive covenants relevant to this litigation, including non-compete, non-solicit, and confidentiality provisions.[8] The parties agreed that specific performance, an injunction, or other equitable relief are necessary to enforce these provisions of the SPA.[9]

         After the closing, Defendants Chris Callas[10] and Maria Callas continued to work at Apollo, but the relationship soured. On March 28, 2016, Apollo and Chris Callas entered into a mutual separation and settlement agreement (the "Separation Agreement") effective March 31, 2016.[11] The Separation Agreement included a severance amount, a repurchase of LLC units, and a settlement of the purchase price under the SPA, as well as additional representations, warranties, and restrictive covenants applicable to Chris Callas.

          The heart of the Complaint is Plaintiffs' contention that after the Callases departed Apollo they started a competing business and attempted to solicit employees from Apollo. Plaintiffs also contend that several breaches of representations and warranties, for which Defendants owe them indemnification, came to light during the survival period.

         On June 7, 2017, Plaintiffs filed the Complaint seeking to enjoin the competitive behavior of Defendants and compel payment of the indemnification and tax adjustment amounts. Defendants moved to partially dismiss the Complaint on July 7, 2017, and the Court heard oral argument on the Partial Motion to Dismiss on December 7, 2017.

         II. Analysis

         The Complaint contains nine counts, eight of which Defendants move to dismiss.[12] These eight counts fall into two broad categories: (1) breaches of restrictive covenants, for which Plaintiffs seek specific performance or injunctive relief, and (2) breaches of representations and warranties, for which Plaintiffs seek indemnification. Counts I through IV allege breaches of restrictive covenants. Counts V through VIII allege breaches of representations and warranties. In support of their motion to dismiss, Defendants first argue that the subsequent Separation Agreement between Plaintiffs and Defendant Chris Callas settled all claims in Counts V through VIII for breaches of representations and warranties. Second, Defendants argue that the allegations in the Complaint fail to state a claim under Court of Chancery Rule 12(b)(6) as to Counts I through IV and part of Count VIII. I address each argument in turn.

         A. Standard of Review

         When considering a motion to dismiss for failure to state a claim under Court of Chancery Rule 12(b)(6), a court must accept all well-pled factual allegations in the complaint as true, accept even vague allegations in the complaint as well-pled if they provide the defendant notice of the claim, "draw all reasonable inferences in favor of the non-moving party, " and deny the motion unless the plaintiff could not recover "under any reasonably conceivable set of circumstances susceptible of proof."[13]

         All the claims in this case hinge on the Court's interpretation of the parties' contracts. "Delaware adheres to the 'objective' theory of contracts, i.e., a contract's construction should be that which would be understood by an objective, reasonable third party."[14] "When interpreting a contract, this Court 'will give priority to the parties' intentions as reflected in the four corners of the agreement, ' construing the agreement as a whole and giving effect to all its provisions."[15] "In giving sensible life to a real-world contract, courts must read the specific provisions of the contract in light of the entire contract."[16]

         B. The Separation Agreement Does Not Release Any Indemnification Claims for the Breaches of the Representations and Warranties Alleged in Counts V through VIII as a Matter of Law

         Defendants contend that a provision in the Separation Agreement, when read in the context of, and in conjunction with, the SPA, released any indemnification claims against Defendants arising from the SPA as a matter of law. Defendants point to Section 6.3(f) of the SPA and Paragraph 4 of the Separation Agreement to support this contention.

         Section 6.3 of the SPA governs "Sellers' Indemnification" and lays out a comprehensive indemnification scheme.[17] Section 6.3(f) of the SPA states: "[a]ll indemnification payments under this Section 6.3 shall be deemed adjustments to the Final Purchase Price."[18] Paragraph 4 of the Separation Agreement states:

Employee, in his capacity as a Seller (as defined in the Purchase Agreement) and Representative (as defined in the Purchase Agreement), and Plaze hereby agree that the Final Purchase Price (as defined in the Purchase Agreement) and the related purchase price adjustment under Section 2.4 of the Purchase Agreement ("the Final Purchase Price Adjustment") are each set forth on Annex C attached hereto and that such Final Purchase Price and the Final Purchase Price Adjustment shall be final, conclusive, and binding on the parties to the Purchase Agreement.[19]

         Defendants argue that Paragraph 4 of the Separation Agreement settled all indemnification payments under Section 6.3 because any indemnification payment must adjust the Final Purchase Price due to Section 6.3(f) of the SPA. But the Final Purchase Price and Final Purchase Price Adjustment in the Separation Agreement were "final, conclusive, and binding" on the parties, which would make any indemnification adjustment required under Section 6.3(f) impossible. Thus, any indemnification claims must have been settled by the Separation Agreement.

         In response, Plaintiffs first argue that Defendants' interpretation of Section 6.3(f) of the SPA is incorrect. Plaintiffs point to the United States Supreme Court case Arrowsmith v. Commissioner[20] as evidence that Section 6.3(f) merely relates to the parties' intended tax treatment of any indemnification payments. Next, Plaintiffs argue that it would be absurd to read the Separation Agreement to nullify the complex eighteen-month indemnification provisions of the SPA in the way Defendants suggest. Plaintiffs point to the fact that Paragraph 4 of the Separation Agreement explicitly mentions Section 2.4 of the SPA, which governs the Post-Closing Adjustment to the Final Purchase Price, but the Separation Agreement does not mention anything about indemnification or Section 6.3 of the SPA.[21] The Separation Agreement's final paragraph states: "For the avoidance of doubt, nothing contained in this Agreement shall limit, modify, or otherwise affect any party's obligations under the [SPA] . . ., "[22] Thus, Plaintiffs contend nothing in the Separation Agreement evidences the intent of the parties to gut the indemnification provisions of the SPA.

         In light of Plaintiffs' arguments, Defendants, at best, offer another possibly reasonable interpretation of the contract. While this may entitle them to discovery related to the parties' intentions, it does not entitle them to dismissal as a matter of law at this stage.

         Defendants argue in the alternative that, at the very least, the Separation Agreement released Plaintiffs' claims for breach of the financial statement representations and warranties because Section 2.4 includes working capital adjustments, and accounts receivable and accounts payable are both part of the working capital calculation. I agree with Plaintiffs that this argument "conflates the SPA's post-closing working capital adjustment process-i.e., the process for determining a 'final, conclusive, and binding' Final Purchase Price as set forth in Section 2.4 of the SPA-with the parties' right to seek indemnification for breach of representations, warranties, and covenants under Article VI of the SPA."[23] The Motion to Dismiss Counts V through VIII therefore is DENIED.

         C. Plaintiffs Have Pled Sufficient Facts to State a Claim for Breach of the Non-Compete and Non-Solicit Provisions of the SPA

         The Complaint contains well-pled facts that state a reasonably conceivable claim that Defendants violated Sections 6.16(b) and 6.16(c) of the SPA, which contain the restrictive covenants that prohibit competition and solicitation by Defendants post-closing.

         Section 6.16(b) is the restrictive covenant prohibiting post-closing competition. It states:

Each Seller covenants that during the period commencing on the date hereof and ending on the third anniversary of the date hereof (the "Restricted Period"), other than at the request or direction of Buyer, such Seller shall not, directly or indirectly, invest or own any interest in, manage, control, participate in (whether as an operator, consultant, director, employee, agent, representative or otherwise), consult with, render services for or otherwise engage in any business or entity that competes with the Company Group's businesses as conducted or actively planned to be conducted on the date hereof within any geographic location in which the Company Group operates or actively plans to operate on the date hereof (it being understood that such geographic area currently comprises the United States); provided, however, that nothing in this Section 6.16(b) shall prevent a Seller from being a passive owner of not more than 5% of the outstanding equity securities of any publicly traded entity, so long as such Seller has no active participation in the business of such entity.[24]

         Section 6.16(c) is the restrictive covenant prohibiting post-closing solicitation of Apollo employees. It states:

Each Seller covenants that during the Restricted Period, other than at the request or direction of Buyer, such Seller shall not, directly or indirectly, (i) (x) induce or attempt to induce any employee or independent contractor of the Company or any Subsidiary who is employed or engaged by the Buyer Group to leave the employ of the Buyer Group, or in any way knowingly interfere adversely with the relationship between the Buyer Group and any employee thereof or (y) actually hire any employee or independent contractor that is or was, at any time within six months of such proposed hiring, employed by the Buyer Group; (ii) solicit or induce or attempt to solicit or induce any customer, supplier, licensor, licensee or lessor of the Company or any Subsidiary (each a "Business Relation") to cease or refrain from doing business with, or otherwise modify adversely the business done with, the Company or the Subsidiaries; or (iii) in any way knowingly interfere with the relationship (or prospective relationship) between any Business Relation ...

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