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In re Oxbow Carbon LLC Unitholder Litigation

Court of Chancery of Delaware

August 1, 2018

IN RE OXBOW CARBON LLC UNITHOLDER LITIGATION

          Date Submitted: June 14, 2018

          Kenneth J. Nachbar, Thomas W. Briggs, Jr., Richard Li, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; R. Robert Popeo, Michael S. Gardener, Breton Leone-Quick, MINTZ, LEVIN, COHN, FERRIS, GLOVSKY & POPEO, P.C., Boston, Massachusetts; Attorneys for Oxbow Carbon LLC.

          Stephen C. Norman, Jaclyn C. Levy, Daniyal M. Iqbal, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; David B. Hennes, C. Thomas Brown, Adam M. Harris, Elizabeth D. Johnston, ROPES & GRAY LLP, New York, New York; Attorneys for Oxbow Carbon & Minerals Holdings, Inc., Ingraham Investments LLC, Oxbow Carbon Investment Company LLC, and William I. Koch.

          Kevin G. Abrams, Michael A. Barlow, April M. Ferraro, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Brock E. Czeschin, Matthew D. Perri, Sarah A. Galetta, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Michael B. Carlinsky, Chad Johnson, Jennifer Barrett, Silpa Maruri, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York; Attorneys for Crestview-Oxbow Acquisition, LLC, Crestview-Oxbow (ERISA) Acquisition, LLC, Crestview Partners, L.P., Crestview Partners GP, L.P., Crestview Advisors, L.L.C., Robert J. Hurst, and Barry S. Volpert.

          J. Clayton Athey, John G. Day, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Dale C. Christensen, Jr., Michael B. Weitman, SEWARD & KISSEL LLP, New York, New York; Attorneys for Load Line Capital LLC.

          MEMORANDUM OPINION

          LASTER, V.C.

         In a lengthy post-trial ruling, [1] I held that the Koch Parties breached the Reasonable Efforts Clause in Oxbow's LLC Agreement by seeking to disrupt, derail, and delay an Exit Sale.[2] I found that "[b]ut for Koch's actions, Oxbow would have entered into a deal with ArcLight, and the Minority Members would have received at least the value of the ArcLight Offer."[3] I further determined that if an Exit Sale did not satisfy the 1.5x Clause for the Small Holders, then the Minority Members could force Oxbow, Oxbow Holdings, and Oxbow's other members to engage in an Exit Sale by providing additional consideration to the Small Holders through a Seller Top Off.

         The parties' post-trial briefing focused predominantly on breach and only minimally on remedy. The Post-Trial Ruling therefore directed the parties to provide supplemental briefing on an appropriate remedy. They complied, and a hearing was held.

         This decision awards a multi-part remedy. The first component is a decree of specific performance. Pursuant to that decree, the parties shall complete the Exit Sale process that the Minority Members initiated. Because the resulting undertaking will be complex, and because the parties have demonstrated their ability to disagree on matters large and small, a court-appointed monitor will oversee the parties' compliance with the Exit Sale Right.

         The second component is a potential award of compensatory damages related to the Exit Sale transaction price. During the events giving rise to this litigation, the Minority Members secured an actionable Exit Sale in the form of the ArcLight Offer. The record establishes that a transaction with ArcLight could have closed by September 30, 2016. But for the Koch Parties' breach, the Minority Members would have secured the value of the ArcLight Offer at that time. An award of specific performance that merely orders the Koch Parties to perform under the LLC Agreement would not address the loss of the ArcLight Offer. It would result in a do-over for the Koch Parties. Throughout the Exit Sale process, the Koch Parties sought to delay any Exit Sale. An award of specific performance framed as a do-over would give them what they sought.

         In my view, a complete remedy for the Koch Parties' breach must take into account the lost value of the ArcLight Offer, including the lost time value of not receiving the consideration by September 30, 2016. It is possible that a resumed Exit Sale process may produce a transaction generating greater value for the Minority Members, even on a time-adjusted basis. If so, then no additional compensatory remedy is warranted for lost transaction value. But if not, then the Minority Members will receive an award of compensatory damages equal to the difference between the value of the Exit Sale that the process generates and the time-adjusted value of the ArcLight Offer.

         The third component is an award of damages equal to the Minority Members' pro rata share of (i) the expenses that Koch caused Oxbow to incur for Mintz Levin and (ii) any duplicative amounts that Oxbow must spend on its advisors for the resumed Exit Sale process. Koch originally hired Mintz Levin as his personal counsel, and he used the firm to resist the Minority Members' efforts to generate an Exit Sale. Soon after hiring Mintz Levin, Koch realigned the firm as Oxbow's counsel. In this role, Mintz Levin continued to serve Koch's interests, but Oxbow bore the expense. As result, the Minority Members indirectly bore one-third of the estimated $50 million that Oxbow paid to Mintz Levin. Mintz Levin's efforts on Koch's behalf were an integral part of the breach of the Reasonable Efforts Clause. An Exit Sale will not enable the Minority Members to recoup their share of the amounts paid to Mintz Levin, because a buyer will pay for Oxbow as it is, without giving any credit for sunk costs. Although a suit to recover Mintz Levin's fees typically would be asserted derivatively, the dispute over Oxbow functionally has two sides, and the allocation of proceeds and expenses between the two sides is a zero-sum game. Because of the connection between the payments to Mintz Levin and the breach of the Reasonable Efforts Clause, the Minority Members can recover their share of those amounts as damages in this proceeding.

         A similar analysis applies to amounts that Oxbow paid to its advisors-Goldman and Cravath-that were wasted due to the Koch Parties' breach of the Reasonable Efforts Clause. Some of the work that these advisors performed will have value in the resumed Exit Sale process, but some of its benefits will be lost, and the advisors will have to perform the same tasks again. The losses from having to pay for work twice flow directly from the Koch Parties' breach and will not be recaptured in an Exit Sale. For the Minority Members to be made whole, a remedial award must include their pro rata share of those amounts.

         Finally, the Minority Members will receive pre- and post-judgment interest on any award of compensatory damages. They will also receive an award of costs as the prevailing parties.

         I. LEGAL ANALYSIS

         The Court of Chancery "has broad latitude to exercise its equitable powers to craft a remedy."[4] The court's remedial powers "are complete to fashion any form of equitable and monetary relief as may be appropriate" and "to grant such other relief as the facts of a particular case may dictate."[5] The court is not limited to choosing among the specific proposals advanced by the parties; instead, "this Court frequently has relied on its own remedial discretion to fashion a different remedy than what the parties may have requested when the circumstances so require."[6] Put more poetically, the "protean power of equity" allows a court to "fashion appropriate relief," and a court "will, in shaping appropriate relief, not be limited by the relief requested by the plaintiff."[7] Consequently, "once a right to relief in Chancery has been determined to exist . . . [the court can] shape and adjust the precise relief to be granted so as to enforce particular rights and liabilities legitimately connected with the subject matter of the action."[8] For a proven breach of contract, the Court of Chancery has "the discretion to award any form of legal and/or equitable relief and is not limited to awarding contract damages for breach of the agreement."[9]

         The power to grant factually tailored remedies designed to provide complete redress represents "the fundamental purpose of an equity court"[10] and "closely comports with the historical foundations of Chancery jurisdiction."[11] The Court of Chancery of the State of Delaware traces its jurisdictional lineage to the High Court of Chancery of Great Britain at the time of the separation of the colonies.[12] In the mother country, before the advent of equity, the English courts used forms of action, also known as common law writs, under which the available remedial rights were strictly tied to individual forms. If a case did not fit within the form, then "the injured party was without any ordinary legal remedy, and his only mode of redress was by an application made directly to the King."[13] As the font of authority in a monarchial system, the king could deploy the coercive power of the state to provide relief in a given case. In practice, the king "referred such petitions to his chancellor for action."[14]

          Through the chancellor's exercise of his discretion to solve the challenges of particular cases, the system of equity developed.[15] "Having arisen largely to compensate for the common law's inability to provide full, fair, and just relief in all instances, equity has evolved as a broad and flexible concept, designed to employ judicial principles and tools creatively so as to effect justice in any given circumstance."[16]

Equitable remedies . . . are distinguished by their flexibility, their unlimited variety, their adaptability to circumstances, and the natural rules which govern their use. There is in fact no limit to their variety and application; the court of equity has the power of devising its remedy and reshaping it so as to fit the changing circumstances of every case and the complex relations of all the parties.[17]

         "It cannot be said too forcefully that the general powers of the Court of Chancery refers to that complete system of equity as administered by the High Court of Chancery of Great Britain . . . ."[18] "[T]hree successive [Delaware] Constitutions and 1897- intended 'to establish for the benefit of the people of the state a tribunal to administer the remedies and principles of equity' and the Constitutional provision establishing the Court of Chancery was a 'guarantee to the people of the State that equitable remedies will at all times be available for their protection.'"[19]

         A. Specific Performance

         The primary component of the remedy warranted by the facts of this case is a decree of specific performance. That decree will direct the parties to resume and complete the Exit Sale process.

         "A claim for specific performance is a specialized request for a mandatory injunction, requiring a party to perform its contractual duties."[20] Its purpose "is to place the aggrieved party in the position that it would have been in but for the breach."[21] "[S]pecific performance is a matter of grace that rests in the sound discretion of the court."[22] Its proponent "must prove by clear and convincing evidence that he or she is entitled to specific performance and that he or she has no adequate legal remedy. A party seeking specific performance must establish that (1) a valid contact exists, (2) he is ready, willing, and able to perform, and (3) that the balance of equities tips in favor of the party seeking performance."[23]

         The first two requirements are easily met. The Exit Sale Right is a valid and specifically enforceable provision in the LLC Agreement, which is a valid and specifically enforceable contract, and the Minority Members are ready, willing, and able to perform under its terms.

         The third requirement-that the balance of the equities favors an order of specific performance-is also met. This requirement "reflect[s] the traditional concern of a court of equity that its special processes not be used in a way that unjustifiably increases human suffering."[24] When balancing the equities, the court "must be convinced that specific enforcement of a validly formed contract would [not] cause even greater harm than it would prevent."[25]

         The Minority Members bargained for the right to exit their investment after seven years, without a minority discount.[26] By breaching the Reasonable Efforts Clause, the Koch Parties deprived them of this right.[27] Absent an Exit Sale, deriving a legal remedy measured in dollars will be difficult. As the Post-Trial Ruling observed, an award of compensatory damages could be keyed off the value of the ArcLight Offer, but also would have to take into account that the Minority Members retain their units. To calculate damages, the court would have to ascribe a value to those units and award the delta between that and what the Minority Members would have received if an Exit Sale had closed on the terms implied by the ArcLight Offer.

         Because Oxbow is a private company, determining a point value for the Minority Members' units could be difficult. In this case, the determination would need to reflect the fact that without an Exit Sale, the Minority Members will be trapped in an minority investment with a hostile controller who has demonstrated his antagonism to and disregard for their interests. The award also would need to incorporate some offset for the imperfect substitute of a possible future sale of their minority position.[28] The parties could try to fill in these blanks with expert testimony, but the answers would uncertain and constrained by the inherent limits of human knowledge and insight.[29]

         A decree of specific performance that results in an Exit Sale addresses directly the harm that the Minority Members otherwise would suffer from losing their right to exit by that means. It also provides a market-tested input for any additional calculation of transaction-related compensatory damages. And it has the benefit of enabling two warring factions to go their separate ways. Under the circumstances, a decree of specific performance is "decisively preferable to a vague and imprecise damages remedy that cannot adequately remedy the injury."[30]

         The Koch Parties contend that a decree of specific performance can only order a party to comply with a specific contractual provision as written, without any discretion for the court to tailor the decree to the facts of the case. Building on this premise, they argue that the decree must enforce the Exit Sale Right as a whole, meaning that the parties must start from the beginning, as if the Minority Members were exercising the Exit Sale Right for the first time. Consequently, as the Koch Parties see it, any Exit Sale must satisfy "all the conditions for such a sale, including that such bid equals or exceeds the current fair market value of Oxbow, which should be re-determined to reflect current market conditions."[31]

         Forcing the parties to go back to the beginning would involve a multitude of steps before any sale process could begin.

• First, the Minority Members would secure an opinion as to the Fair Market Value of their units and submit a demand to have Oxbow purchase their units at that price.
• Second, Oxbow would determine whether to accept that valuation or not. If it declined, Oxbow would retain an investment bank of its own and have that bank generate an opinion as to Fair Market Value.
• Third, if the two valuations were within 10% of each other, then Fair Market Value would be the average of the two. If the two valuations differed by more than 10%, then the two banks would select a third bank.
• Fourth, if necessary the new bank would prepare a valuation, and Fair Market Value would be the median of the three valuations.
• Fifth, once Fair Market Value had been determined, Oxbow would decide whether to purchase the Minority Members' units at that price.
• Sixth, if Oxbow did not purchase the Minority Members' units for Fair Market Value, then that figure would become the hurdle for the FMV Clause.
• Seventh, after Oxbow had failed to purchase the Minority Members' units, then the Minority Members could cause Oxbow to begin pursuing an Exit Sale.[32]

         The first time around, accomplishing these steps took approximately five months and provided fertile ground for machinations and disputes.

         Consistent with their desire for a restart, Koch Parties also believe that Oxbow must select an entirely new financial advisor and entirely new counsel. The Koch Parties believe that Oxbow should not use Goldman or Cravath because after the positions those firms took during the interrupted sale process and this litigation, working with them would be difficult.

         Conceptually, the Koch Parties' position imbues the remedial decree of specific performance with the brittle stiffness of the old, common law writs. By arguing that an equitable decree can only enforce the entirety of a contractual provision as written, without any tailoring to the facts of the case, they adopt a view fundamentally inconsistent with the essence of equitable remedies: "their flexibility, their unlimited variety, their adaptability to circumstances, and the natural rules which govern their use."[33] To restate, equity is "a broad and flexible concept, designed to employ judicial principles and tools creatively so as to effect justice in any given circumstance."[34]

         On the facts, the Koch Parties' approach to specific performance would turn lemons (having been found to have breached the Reasonable Efforts Clause) into lemonade (a complete do-over). The Koch Parties breached the Reasonable Efforts Clause because they wanted to "obstruct [and] derail" or "delay" the Exit Sale process.[35] The decree they propose would reward them for their breach by wiping the slate clean and telling everyone to start over, thereby giving the Koch Parties the benefit of a multiyear delay.

         The decree of specific performance that this decision adopts is a remedial decree intended to address the Koch Parties' breach of the Reasonable Efforts Clause. It seeks to put the Minority Members in at least the same position as they would have been in if the Koch Parties had not breached and the parties had completed an Exit Sale in accordance with the terms of the ArcLight Offer. The decree therefore calls for the resumption and continuation of the Exit Sale process at the decisive point of breach: the Koch Parties' successful frustration of the otherwise actionable ArcLight Offer after Oxbow received it on May 27, 2016. The decree does not wipe the slate clean and call for a complete do-over. It instructs the parties to resume the Exit Sale process as the state of play existed at that point.[36]

         One consequence of this ruling is that Oxbow shall continue to use Goldman and Cravath as its advisors in connection with the Exit Sale process. This aspect of the ruling confers the additional benefits of enabling Oxbow to benefit from the expertise and knowledge that Goldman and Cravath developed, avoiding the additional cost required to bring new advisors up to speed, and sidestepping potential complications that could arise from Goldman's contingent compensation arrangement if a new banker came onboard and completed the assignment.

         Another consequence of this ruling is that the terms for compliance with the FMV Clause shall remain at the value that was established at the time of breach. To satisfy the FMV Clause, the Exit Sale must result in consideration of at least $2.65 billion, equating to at least $169 per unit.[37] Consistent with the Post-Trial Ruling's determination regarding the implied covenant, if the process generates an Exit Sale that clears the FMV Clause, then the Minority Members can satisfy the 1.5x Clause through a Seller Top Off.

         The Koch Parties have argued that the FMV Clause figure is stale and must be updated, but that would give them the do-over that they do not deserve. Moreover, the Koch Parties only have the opportunity to argue now that the FMV Clause hurdle is stale because they breached the Reasonable Efforts Clause two years ago and prevented a transaction based on the ArcLight Offer from closing. To the extent that the FMV Clause hurdle is stale, the Koch Parties brought that situation on themselves. To update the FMV Clause hurdle now would enable the Koch Parties to benefit from their breach and penalize the Minority Members.

         The parties shall begin preparing Oxbow for an Exit Sale as soon as reasonably possible. The Exit Sale should be completed no more than one year from final judgment (including the completion of any appeals), subject to reasonable requests to extend the process for good cause shown.

         B. The Appointment Of A Monitor

         An additional component of the primary remedy warranted by the facts of this case is the appointment of a monitor to supervise the parties' compliance with the decree of specific performance. The Post-Trial Ruling suggested that it might be appropriate to appoint a receiver with the authority to carry out the Exit Sale process. The Minority Members embraced this proposal; the Koch Parties resisted it. At this stage in the proceedings, I believe a monitor is a better solution.

         When determining whether to award specific performance, a court of equity must take into account the complexity of the task that the parties will be directed to undertake.[38] Chancellor Allen once dismissed a claim seeking specific performance of an obligation to use best efforts to obtain regulatory approval for a merger, observing that

the remedy of specific enforcement of a contractual obligation to proceed in good faith, while available in appropriate instances, is unavailable where the contract sued upon relates to a future, evolving complex commercial transaction and any attempt to specifically enforce a right to good faith best efforts would necessarily involve either an order of such vague generality as to give little or no specific direction to the person or entity subject to the order or would involve the court in the detailed administration of an ongoing, complex transaction.[39]

         In other circumstances, this court has held that the facts warranted a decree of specific performance that directed the parties to complete an acquisition.[40]

         Courts of equity have tools at their disposal to mitigate the problem of supervising a complex remedy. One proven tool is to appoint an agent of the court to provide assistance. In his treatise on equity jurisprudence, Professor Pomeroy discusses the power of a court to appoint a receiver "after judgment" in order "to carry into effect a special decree, which could not otherwise be efficiently executed by ordinary process."[41] In a treatise focusing on receivers, Professor Clark recognizes that a receiver can be appointed "after judgment . . . either for the purpose of carrying the judgment into effect, or for the preservation of the property until judgment shall be executed."[42] In his treatise on remedies, Professor Dobbs observes that "a master might be appointed to monitor the execution of and compliance with a complex decree and report to the court if the defendant fails to comply."[43]

         Federal courts have long exercised this authority. In 1920, the United States Supreme Court held that "[c]ourts have . . . inherent power to provide themselves with appropriate instruments required for the performance of their duties."[44] That inherent power was subsequently codified in Federal Rule of Civil Procedure 53, which governs the appointment of masters.[45] The rule empowers the courts to appoint a master to "address . . . post-trial matters that cannot be effectively and timely addressed by an available district judge or magistrate judge of the district."[46] The federal courts have construed the rule to supplement, rather than displace, their inherent authority to appoint officers to aid in the enforcement of judgments.[47]

         The federal courts have deployed this authority broadly in what scholars have called institutional reform litigation.[48] In these cases, the courts "sought to reform constitutional and statutory defects in the structures and practices of various social institutions, "[49] such as schools, [50] prisons, [51] and mental health institutions.[52] Confronted with difficult and ongoing remedial challenges, the courts developed oversight mechanisms "grounded on recognized equitable powers of the courts," such as receivers, custodians, and monitors.[53]Courts that have incorporated oversight mechanisms into their remedial decrees have cited many factors to justify their use. One major factor is the existence of a "polycentric problem that cannot easily be resolved through a traditional courtroom-bound adjudicative process."[54] Another factor is a significant risk of noncompliance.[55]

          Both factors are present in this case. The sale of a company like Oxbow is inherently a "polycentric problem" requiring concerted efforts from principals, advisors, and market participants. Absent the aid of a court-appointed agent, it will be difficult for the court to remain informed about developments, much less properly oversee compliance with its orders. Equally important, given the parties' behavior to date, there is reason to believe that they will clash on many issues and seek to acquire advantages whenever possible. That was true during the events giving rise to this litigation, it was true during this litigation, and it almost certainly will be true after this litigation. Having overseen this case for two years, addressed a plethora of disputes, presided over the trial, and heard the principals testify firsthand, I am convinced that disputes are likely to arise and to require ongoing judicial involvement during the remedial phase. Although I hope to be disappointed in this prediction and for the parties to have the satisfaction of proving me wrong, at this point I believe it is necessary to put in place a mechanism to help the parties solve their polycentric problem and minimize the number of disputes.

         An oversight remedy is therefore warranted. The next question is what form should it take. "Court appointed agents are identified by a variety of terms-monitor, master, master hearing officer, human rights committee, ombudsman, administrator, advisory committee."[56] Unfortunately, these titles lack inherent meaning or well-understood characteristics, such that "[t]erminological confusion is compounded by functional confusion."[57] For present purposes, the critical question is not what the role is called, but the nature of the charge and the powers it carries.

         One possibility would be to empower a court-appointed agent to take control of Oxbow and carry out the Exit Sale process.[58] Although it is tempting to preempt the problem of future disputes by putting a neutral person in charge, I do not believe there is need (yet) to go that far. The LLC Agreement contemplates that both the Minority Members and the Board will cooperate to effectuate an Exit Sale.[59] They should be given a chance to do so.

         A less intrusive possibility involves appointing an officer of the court empowered to monitor compliance with the court's order, but not to enforce the order directly.[60] "The monitor's role is to report on the defendant's compliance with the decree and on the achievement of the decree's goals."[61] Rather than making a report and recommendation to the court, the monitor typically makes recommendations to the parties and "resort[s] to court enforcement only when these overtures have failed."[62] "Monitors normally have no enforcement powers; their role is to observe a defendant's activities and to elicit cooperation in settling technical problems which would otherwise require judicial hearing and decision."[63]

         In my view, appointing a monitor is the best option under these circumstances. The monitor will supervise the parties' compliance with the decree of specific performance. The monitor will not have decisional authority of its own and will not have the power to compel the parties to take a particular course of action. The monitor is encouraged to evaluate the parties' conduct objectively, provide suggestions, and facilitate the resolution of disputes. If the monitor believes that the parties are not complying with the court's order and the monitor's efforts to persuade have failed, the monitor will be free to communicate with the court. Depending on the content of the report, the court may take action.

         To fulfill this role, the monitor will have expansive informational rights. The monitor will have access to any books and records of Oxbow that the monitor believes in subjective good faith are helpful to fulfilling the monitorship role. The monitor may seek summary determinations from the court to enforce these informational rights, which are at least as broad as the rights afforded a director under Section 220(d) of the Delaware General Corporation Law.[64] In addition, the parties shall copy the monitor in real time on all written communications relating to the Exit Sale unless the monitor requests otherwise. The parties also shall allow the monitor to participate in any other communication relating to the Exit Sale, whether in-person, telephonic, or otherwise.

         The monitor will provide the court with monthly status reports and may submit reports more frequently if warranted. If the parties have a dispute, then they will present the dispute to the monitor in the first instance so that the monitor can attempt to facilitate a resolution. If those efforts are unsuccessful, then the parties may present their concern to the court by motion. Briefing will not proceed unless the monitor confirms that the parties consulted with the monitor beforehand. After briefing, the monitor will provide the court with a recommendation regarding the proper outcome.

         An important question when appointing any court-appointed agent is who will bear the expense. Because the breach of the Reasonable Efforts Clause necessitated the decree of specific performance and the ...


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