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Glidepath Ltd. v. Beumer Corp.

Court of Chancery of Delaware

June 4, 2018

GLIDEPATH LIMITED and SIR KEN STEVENS, KNZM, Plaintiffs,
v.
BEUMER CORPORATION, GLIDEPATH LLC, THOMAS DALSTEIN, and FIN PEDERSEN, Defendants.

          Date Submitted: March 27, 2018

          Francis G.X. Pileggi, Gary W. Lipkin, Alexandra D. Rogin, ECKERT SEAMANS CHERIN & MELLOTT, LLC, Wilmington, Delaware; Attorneys for Plaintiffs.

          Benjamin A. Smyth, McCARTER & ENGLISH, LLP, Wilmington, Delaware; William D. Wallach, McCARTER & ENGLISH, LLP, Newark, New Jersey; Attorneys for Defendants.

          MEMORANDUM OPINION

          LASTER, V.C.

         In January 2014, Glidepath Ltd. ("Parent") and Sir Ken Stevens, KNZM, sold 60% of the equity in Glidepath LLC (the "Company") to Beumer Corp. This decision refers to Parent and Stevens as the "Sellers" and to Beumer Corp. as the "Buyer."

         The transaction was governed by a Membership Interest Acquisition Agreement dated January 16, 2014, and effective as of January 1, 2014 (the "Acquisition Agreement"). The Acquisition Agreement contemplated a period of shared management, albeit with the Buyer in control, that lasted until March 31, 2016. At that point, the Buyer could exercise an option to call the Sellers' remaining 40% interest in the Company, or the Sellers could exercise a reciprocal option to put their remaining interest to the Buyer. The parties negotiated an Amended and Restated Operating Agreement (the "Operating Agreement") to govern the business and affairs of the Company after closing, during the period of shared management.

         Part of the consideration for the 60% interest consisted of an earn-out payment. The Acquisition Agreement contemplated that the period for calculating the earn-out payment would begin on April 1, 2013, and end on March 31, 2016. As noted, the put-call mechanism also keyed off March 31, 2016. Another provision called for the Sellers to receive a distribution equal to 40% of the profits that the Company generated during the earn-out period. That provision also focused on March 31, 2016.

         When the parties first negotiated the Acquisition Agreement and the Operating Agreement, they anticipated that the sale of 60% of the equity would close on April 1, 2013, and that the period for calculating the earn-out payment would correspond with the period of shared control. The Buyer, however, sought to postpone closing for legitimate business reasons. The Sellers did not object, and the transaction ultimately closed in January 2014. The parties did not revise the Acquisition Agreement or the Operating Agreement to adjust the earn-out period or the other provisions that focused on March 31, 2016.

         The Company failed to perform as anticipated, and the parties' relationship soured. The Buyer told the Sellers that they would not receive any earn-out payment, using the measurement period set out in the Acquisition Agreement. The Sellers disputed the measurement period, asserting that the parties contemplated that the earn-out would begin at closing and last a full three years after closing. The Buyer stood on the language of the Acquisition Agreement.

         The parties have raised a variety of claims and defenses. The Sellers' main theories sound in breach of contract, but they also assert claims for breach of fiduciary duty. One of the Sellers' central assertions is that the Acquisition Agreement and the Operating Agreement should be reformed to reflect a full three-year period of shared ownership and management. The resulting decree of reformation would recast each of the provisions that focused on either April 1, 2013, or March 31, 2016, by replacing those dates with January 1, 2014, and December 31, 2016. These revisions would change the period during which the earn-out payment would be calculated. They also would change the date when the Buyer could exercise its call option and acquire the balance of the Sellers' shares, which in turn would affect the period of time during which the Sellers could assert claims for breach of fiduciary duty. Because the success or failure of the reformation claim would affect the analysis of the parties' other claims and the calculation of damages, I directed the parties after trial to brief the reformation claim first.

         The Sellers had the burden of proving their reformation claim by clear and convincing evidence. Although there was some evidence to support their position, they failed to carry their burden of proof regarding either (i) the existence of a mutual mistake of fact during the negotiations that resulted in an erroneously drafted agreement or (ii) a unilateral mistake of fact by the Sellers during the negotiations, coupled with knowing silence on the part of the Buyer.

         The evidence instead reflected that the Buyer's principals subjectively believed that the earn-out period would start to run on April 1, 2013, regardless of the fact that the transaction did not close until January 2014. The Buyer's parent company previously had completed an acquisition in which a delay pushed the closing into the earn-out period. They had used that deal as a precedent when drafting the Acquisition Agreement, and they saw no reason why the same result would not apply. The Buyer's principals realized in April 2015, long after the negotiations were complete, that the Sellers had a different belief about the timing of the earn-out period.

         Judgment is entered in favor of the Buyer on the Sellers' claim for reformation. The provisions in the governing agreements that focused on April 1, 2013, and March 31, 2016, shall continue to focus on those dates. The period of shared ownership and management thus ran from January 1, 2014, until April 1, 2016, when the Buyer exercised its call right. The earn-out period ran from March 31, 2013, until March 31, 2016.

         I. FACTUAL BACKGROUND

         Trial took place over four days. The parties submitted 354 exhibits and lodged eighteen depositions. Ten witnesses testified live. The parties proved the following facts.

         A. The Makings Of A Business Deal

         The parties to this case and their affiliates are engaged in the business of designing, installing, and maintaining baggage handling systems for airports.[1] At the risk of over simplification, baggage-handling systems come in two types: traditional systems and next-generation systems.[2] The handling systems can also differ in the measurement standard they utilize. The United States persists in using inches, feet, ounces, pounds, and other measures inherited from the British Empire, which consequently are called "Imperial measurements." The rest of the world uses the metric system.[3]

         During the period relevant to the parties' dispute, the market in the United States remained dominated by traditional systems using Imperial measurements. The United States had been slow to embrace next-generation systems, which have a higher upfront cost. American customers also continued to harbor skepticism about the reliability of next- generation systems, recalling the problems that Denver International Airport encountered when it attempted to implement one.[4]

         Non-party BEUMER Group GmbH & Co. KG (the "Beumer Group") is an international industrial conglomerate headquartered in Germany. Among other lines of business, the Beumer Group designs, installs, and maintains airport baggage handling systems at airports around the world. The Beumer Group conducted its operations in the United States through the Buyer.

         The Beumer Group and the Buyer were market leaders in next-generation systems, but the Beumer Group had enjoyed its principal success outside of the United States. The Buyer had limited experience with contracting in the United States and even less experience with traditional baggage handling systems utilizing Imperial measurements. As a result, the Buyer was having difficulty penetrating the American market.[5]

         Parent also designs, installs, and maintains airport baggage handling systems at airports around the world. Parent conducted its operations in the United States through the Company. Unlike the Beumer Group and the Buyer, the Company had established itself as a significant player in the United States, and it was skilled in producing traditional systems that used Imperial measurements.[6]

         But the Company had a problem of its own: it had been struggling because of its limited bonding capacity.[7] In the United States, airports typically are owned by governments or quasi-government entities, and agreements with these entities are subject to government contracting requirements. To secure a job installing or maintaining a baggage-handling system, the contractor typically must supply a performance bond. The contractor's financial strength affects whether it can secure a performance bond and on what terms. Parent and the Company did not have the financial strength required to secure significant bonding capacity. Because of its lack of bonding capacity, the Company had been unable to win jobs. As a result, the Company suffered a net loss of approximately $4 million in the fiscal year that ended on March 31, 2012.[8]

         In summer 2012, the Buyer approached the Sellers about acquiring the Company. The Buyer believed that the acquisition would enable the Beumer Group to expand its American footprint.[9] Both sides believed that the Beumer Group's financial strength would satisfy the need for bonding capacity and enable the Company to win jobs.

          Defendant Thomas Dalstein, who served as the Buyer's President and CEO during the relevant period, led the discussions on its behalf. Stevens led the discussions for the Sellers and the Company. Wayne Collins, a member of Parent's board of directors, assisted Stevens.

         B. The Term Sheet

         The parties reached an agreement in principle, memorialized in a term sheet that Dalstein sent to Stevens and Collins on January 11, 2013.[10] The term sheet called for the Buyer to acquire 100% of the Company's equity for "aggregate, maximum consideration" of $6 million.[11] The term sheet divided the total possible consideration into four different components.

         The Buyer would pay the first two components in return for 60% of the Company's equity.[12] The most straightforward component was a "Fixed Purchase Price" of $1 million in cash, paid at closing.[13] The second component was an earn-out payment of up to $1.56 million (the "Earn Out") based on the Company's performance during "fiscal years 2014, 2015 and 2016" (the "Earn Out Period").[14] If the Company's aggregate net profit during the Earn Out Period reached $2.6 million or more, then the Sellers would receive the maximum Earn Out of $1.56 million. Otherwise, the Sellers would receive a sum equal to "the actual, aggregate net profit over the Earn Out Period multiplied by 0.6."[15] Put more simply, the Earn Out contemplated that the Buyer would pay the Sellers an amount equal to 60% of the net profits generated by the Company during the Earn Out Period, up to a maximum $1.56 million.

         The third component of consideration was a distribution equal to 40% of the net profit generated by the Company during the Earn Out Period, up to a maximum of $1.04 million.[16] The Earn Out and the distribution worked together to give the Sellers the benefit of all of the net profit generated by the Company during the Earn Out Period.

         The fourth and final component was a payment of up to $2.4 million in return for the remaining 40% of the Company's equity. The purchase would take place pursuant to a put-call mechanism generally exercisable beginning on March 31, 2016 (the "Put-Call Mechanism").[17] The maximum consideration of $2.4 million consisted of a fixed payment of $400, 000 plus a variable portion of up to $2 million. If the Company's aggregate net profit during the Earn Out Period equaled or exceeded $2.6 million, then the Sellers would receive the maximum. If the net profit was less, then the variable element would "be reduced proportionately."[18]

         C. The Parties Miss Their Target Closing.

         The parties hoped to close immediately after the completion of the Company's 2013 fiscal year, which ended on March 31, 2013.[19] With that goal in mind, they moved quickly to negotiate binding transaction documents after agreeing on the term sheet.[20]

         In a decision that would redound profoundly to their detriment, the Sellers did not formally involve outside counsel and did not retain counsel in the United States.[21] Stevens testified that he consulted at times with a New Zealand solicitor, but the solicitor did not play a meaningful role in the negotiations.[22] In substance, Stevens and Collins attempted to handle everything themselves, including both the business negotiations and the documentation of the transaction.

         The Buyer took a different approach. Dalstein continued to lead the business negotiations, now with the assistance of Norbert Hufnagel, the Beumer Group's CFO. The Buyer also retained outside counsel, who took primary responsibility for drafting the transaction documents and responding to the Sellers' comments.[23]

         The Buyer's outside counsel modeled the transaction documents on the Buyer's recent acquisition of Indec Airport Automation BVBA, a Belgian company.[24] The Indec acquisition closed at the end of 2012. The transaction documents contemplated an upfront payment plus an earn-out payment. The earn-out was calculated based on a period intended initially to begin immediately after closing. But after intellectual property issues delayed the closing, the parties left the dates for the earn-out period unchanged. The result was that the earn-out period in the Indec transaction commenced prior to closing. Although the Indec transaction will not result in an earn-out payment, the timing of the earn-out period has not generated any disputes.[25]

         Starting from the Indec precedent, the Buyer's counsel circulated several iterations of the agreements.[26] During this period, the parties also discussed whether to change the Company's accounting from a fiscal year to a standard calendar year, which would conform to the Beumer Group's accounting practices.[27]

         By the end of March 2013, the documents were substantially complete.[28] At this point, the Beumer Group delayed closing. The Beumer Group wanted the Buyer to fund the $1 million due at closing out of cash on hand, which the Buyer was not in a position to do. The Beumer Group also wanted to find a suitable CEO to operate the Company before closing the transaction and taking over operations.[29] Stevens and Collins accepted the Beumer Group's reasons for delay.[30]

         In June 2013, the Buyer's accountants reviewed and commented on the Acquisition Agreement. They noted that it "refer[s] to fiscal years here but I believe the intent [is] to change the [Company] to a 12/31 year end."[31] Despite this comment, the parties never changed the dates in the draft agreements.[32]

         D. The Transaction Closes.

         By November 2013, the Buyer had secured the necessary financing to fund the transaction. The Buyer also had identified defendant Finn Pedersen as the CEO who would run the Company after closing.[33]

         With these goals achieved, the parties targeted a closing in January 2014.[34] They again reviewed the documents and reopened and renegotiated several final points. On December 3, 2013, Collins sent a detailed issues list identifying a number of objections by clause number. Included in that list was a "suggestion" that "we make the Earn Out as being paid out of the Company so we can shield it from tax and you don't have liability for tax on it."[35] Despite focusing on the Earn Out, Collins did not make any comments about the dates for the Earn Out Period.

         The Buyer's CFO, Christopher Bryan, also reviewed the agreements. He focused on the "Purchase Price" and "Call and Put Option" sections.[36] He likewise did not make any comments about the dates. Bryan understood the possibility of using calendar year dates. While securing financing from Bank of America, he told the bank that the transaction was "expected to close in November with a 'cash at closing' from [the Buyer] of $1.0 million and an earnout over the next three years based on EBIT with total consideration, including cash at closing, not to exceed $6.0 million."[37] At trial, Bryan agreed that his statement to the bank implied an earn-out period that would run for three full years after closing.[38] To reiterate, Bryan did not suggest changing any of the dates in the agreements.

         By January 7, 2014, the documents were substantially complete. Collins reviewed them again and identified "only two issues, the Cash at Closing and the new indemnity on tax."[39] On January 10, Collins sent Stevens signature pages to be signed and held in escrow pending closing.[40] When the Buyer's counsel continued to make minor comments on the agreements, Collins admonished that he did not "want any more copies of the documents until you can assure me that your client is finished making changes or requires no further information."[41] He then emailed Dalstein and Hufnagel, telling them: "Enough is enough, we have our commercial agreement based on the mutual trust between us, let's get on with it."[42]

         On January 16, 2014, Collins agreed to release the signature pages from escrow, and the transaction closed.[43] Neither Stevens nor Collins reviewed the documents a final time before Collins released the signature pages.[44] Stevens was on vacation and placed his trust in Collins.[45] Collins testified at trial that he "overlooked the fact that [the Acquisition Agreement] still had the reference to fiscal year when I thought it was going to be a calendar year."[46]

         E. The Operative Terms Of The Agreements

         The executed Acquisition Agreement contained the following provision summarizing the consideration that the Sellers would receive:

3.1.1 The aggregate purchase price (the "Purchase Price") payable by the Purchaser to the Seller in respect of the Purchased Membership Interest shall consist of:
(i) the Cash at Closing and payments, if any;
(ii) the Earn Out; and
(iii) the Profit Distribution.[47]

         The executed Acquisition Agreement defined "Cash at Closing" as "One Million Dollars, " plus (i) "a further payment of $500, 000, provided that [the] Company's bank balance is $500, 000 or greater on March 31, 2014, " and (ii) "a further payment in the amount equal to the Company's bank balance at June 30, 2014, not to exceed $1, 000, 000, less [the $500, 000 payment, if previously made]."[48]

         The executed Acquisition Agreement described the Earn Out as follows:

3.2.1 The Purchaser shall pay to the Seller a further amount (the "Earn Out") in an amount determined as follows:
(i) If the cumulated, aggregate Net Profit of the Company in its fiscal years 2014, 2015 and 2016 (collectively, the "Earn Out Period") is greater than or equal to Two Million Six Hundred Thousand and No/100 Dollars (US$2, 600, 000.00), then the Earn Out shall equal One Million Five Hundred Sixty Thousand and No/100 Dollars (US$1, 560, 000.00); and
(ii) If the cumulated, aggregate Net profit of the Company in the
Earn Out Period is less than Two Million Six Hundred Thousand and No/100 Dollars (US$2, 600, 000.00), then the amount of the Earn Out shall be equal to sixty percent (60%) of the Net Profit for the Earn Out Period.
3.2.2 The Company's Net Profit shall be calculated on the basis of the respective Final Audited Annual Accounts for the respective fiscal year.[49]

         The Earn Out Period was thus defined in terms of the Company's "fiscal years 2014, 2015, and 2016." In substance, the two-part equation called for an earn-out payment equal to 60% of the Net Profit during the Earn Out Period, capped at $1, 560, 000.

         The executed Acquisition Agreement also described the Profit Distribution. It stated:

3.4.1 Within ten (10) Business Days following agreement by the Purchaser and the Seller on the Final Audited Annual Accounts for the Company's fiscal year 2016 in accordance with Section 11.1 of the Operating Agreement, the Parties shall cause the Company to distribute to the Seller out of funds legally available therefor an amount equal to the product obtained when the cumulative, aggregate Net Profit of the Company during the Earn Out Period, is multiplied by 0.40 (the "Profit Distribution"); such Profit Distribution shall be capped at and shall not exceed One Million Forty Thousand and No/100 Dollars (US$1, 040, 000.00), and to the extent there is a loss carry forward (the "NOL Amount") of the Company on the Closing Date that would otherwise preclude the Company from effecting the full amount of the Profit Distribution otherwise payable, the Purchaser shall pay to the Seller at a mutually agreeable time an amount up to the NOL Amount in place of the Profit Distribution of equal amount by the Company to the Seller . . . .[50]

         The combination of the Profit Distribution and the Earn Out Period operated to entitle the Sellers to an amount equal to the Company's net profit during the Earn Out Period, capped at $2.6 million, with the 60% from the Earn Out coming from the Buyer and the 40% from the Profit Distribution coming from the Company.

         Finally, the executed Operating Agreement contained provisions governing the Put-Call Mechanism. The reciprocal options would become generally exercisable after March 31, 2016, and would result in the Buyer acquiring the remaining 40% of the equity in the Company in return for

an amount equal to the sum of Four Hundred Thousand and No/100 Dollars ($400, 000.00) plus a variable component of either (x) Two Million and No/100 Dollars ($2, 000, 000.00) (the "Maximum Amount"), if the cumulated, aggregate Net Profit of the Company in the Earn Out Period (as such term is defined in the Membership Interest Acquisition Agreement) is greater than or equal to Two Million Six Hundred Thousand and No/100 Dollars ($2, 600, 000), or if not, then (y) an amount equal to the product obtained when the Maximum Amount is multiplied by the fraction obtained when the cumulative, aggregate Net Profit of the Company during the Earn Out Period is divided by Two Million Six Hundred Thousand and No/100 Dollars ($2, 600, 000.00) . . . .[51]

         In the aggregate, the consideration received by the Sellers from the Cash at Closing, the Earn Out, the Profit Distribution, and the Put-Call Mechanism could not exceed $6 million.[52]

         F. The Sellers Learn That An Earn Out Payment Is Unlikely.

         During the first three quarters after the acquisition, the Company struggled. By November 2014, the Buyer and Company management had determined that the Company was unlikely to produce a "cumulated, aggregate Net Profit" during the Earn Out Period. As a result, the Earn Out would not yield any additional consideration for the Sellers.[53]

         A regular meeting of the Company's members was scheduled for November 19, 2014. The Buyer and Company management decided that they needed to inform the Sellers about the Company's performance and its effect on the Earn Out. Pedersen prepared a presentation that explained "the earn out, the situation and the different scenarios."[54]Commenting on the slides, Bryan emphasized the need for a slide that depicted an "earn-out scenario" that "begins at 4/1/2013 and ends on 3/31/2016."[55] The next draft demonstrated progress towards the Earn Out (or lack thereof) as measured by fiscal years ending March 31.[56] Anticipating that the presentation would not be well received, the Buyer had outside counsel review the deck.[57]

         The meeting convened as scheduled. The presentation showed that the Company had incurred a net operating loss of $1.56 million for the fiscal year that ended on March 31, 2014.[58] It forecasted continuing losses for the fiscal year ending March 31, 2015. The presentation forecasted modest gains in 2016, but projected they would be inadequate to generate a cumulative net profit since the closing of the acquisition.[59]

         The November 2014 meeting was the first time the Sellers learned that they were unlikely to receive any consideration from the Earn Out. Stevens was "shocked"[60] and his demeanor was "icy."[61] But he did not raise any objections to the analysis.[62]

         G. The Sellers Raise Questions About The Earn Out.

         Despite the grim news from the November 2014 meeting, Stevens did not follow up about the Earn Out until four months later. On March 10, 2015, he asked for a meeting with Christoph Beumer, the Chairman of the Beumer Group. In his email, Stevens emphasized that "I need us both to achieve the earn out. I relied heavily on the strength and reputation of Beumer Corporation to pull this through. Maybe this will be a better year-I certainly hope so."[63]

         Beumer did not share Stevens' optimism. He responded that

the numbers in 2014 are very bad and in all fairness, [the Company] was definitely not in the shape Wayne [Collins] always communicated and made us [] believe. The earn out based on the 2014 numbers will not be achievable anymore as planned. I fully understand that this is more than difficult and a serious situation for you but the p[l]anning was based on figures which just did not materialize. Therefore we need to talk. So I really would appreciate to get your view prior to the board meeting before we meet. This will give me the opportunity to talk also to my colleagues and [develop] a fair solution to all parties based on facts. I definitely want to find a fair solution but we both also have to acknowledge that the numbers turned out to be different at the end as we all wanted them to be.[64]

         Beumer's response infuriated Stevens. He shot back that the November 2014 presentation had been a "rambling mess" and he lamented that "[w]e appear to have gone side-ways for 5 months."[65] Stevens argued that he turned over the Company in strong financial condition and that the Beumer Group necessarily understood the Company's financial position after conducting extensive due diligence.[66] He derided Beumer's statements about Collins as "serious and libelous."[67] Stevens concluded his email by expressing a desire to "settle our affairs amicably."[68]

         Several heated emails followed before Stevens and Beumer agreed it was best to meet in person.[69] In advance of that meeting, Dalstein suggested in an email to Hufnagel and Beumer on April 24, 2015, that Stevens and Collins did not appear to understand how the Earn Out worked. Dalstein observed that "Wayne [Collins] still has not recognized that the last year was the second year of the earnout."[70] At trial, Dalstein agreed that he believed as of April 2015 that Stevens and Collins were under a "misimpression" about the structure of the Earn Out.[71] Dalstein explained that based on the statements that Stevens and Collins were making, he thought that they still were not aware of the timing of the Earn Out Period, notwithstanding the language of the Acquisition Agreement and the dates in the November 2014 presentation.[72] Collins, by contrast, testified at trial that he became aware of the disagreement over how the Earn Out operated during the November 2014 meeting.[73]

         H.The Sellers Realize Their ...


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