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Fortis Advisors LLC v. Stora Enso AB

Court of Chancery of Delaware

August 10, 2018

Fortis Advisors LLC
Stora Enso AB

          Submitted: July 10, 2018

          Rudolf Koch, Esquire Sarah A. Clark, Esquire Ryan P. Durkin, Esquire Richards, Layton & Finger, P.A.

          William Lafferty, Esquire John DiTomo, Esquire Elizabeth Mullin, Esquire Morris, Nichols, Arsht & Tunnell LLP

         Dear Counsel:

         This case arises from a contractual dispute between Plaintiff, Fortis Advisors LLC ("Fortis"), and Defendant, Stora Enso AB ("Stora Enso"), under an agreement dated June 18, 2014 (the "Merger Agreement") by which Stora Enso acquired non-party, Virdia, Inc. ("Virdia") (the "Merger"). The Merger Agreement provides for two forms of payment: (1) a $25.27 million purchase price (subject to certain adjustments) to be paid upon closing; and (2) two post-closing payments to be paid only upon the achievement of designated milestones (the "Milestone Payments"). Fortis, as shareholder representative, has filed a complaint in which it alleges that Stora Enso breached the Merger Agreement by not making the Milestone Payments. More specifically, Fortis alleges that the Merger Agreement bound Stora Enso to a specific performance timeline meant to facilitate its achievement of the two milestones that would trigger the Milestone Payments. According to Fortis, Stora Enso failed to comply with that timeline in breach of the Merger Agreement.

         Stora Enso has moved to dismiss Fortis' complaint on the ground that the Merger Agreement unambiguously did not obligate it to perform under any set timeline. According to Stora Enso, because the milestones were not achieved as prescribed in the Merger Agreement, it has no obligation, contractual or otherwise, to make the Milestone Payments. For the reasons that follow, Stora Enso's motion to dismiss must be denied.

         I. BACKGROUND

         The following facts are drawn from the allegations in Plaintiff's Verified Amended Complaint (the "Complaint"), documents incorporated therein by reference and those matters of which I may take judicial notice.[1] As I must on a motion to dismiss under Court of Chancery Rule 12(b)(6), I accept as true the Complaint's well-pled factual allegations and draw all reasonable inferences from these allegations in the light most favorable to Plaintiff.[2]

         A. Parties and Relevant Non-Parties

         Plaintiff, Fortis, is a Delaware limited liability company headquartered in San Diego, California.[3] It represents the interests of Virdia's pre-merger Common Stockholders, Option Holders and Warrant Holders (collectively, the "Equity Holders"), and is pursuing this action on their behalf.[4]

         Defendant, Stora Enso, is a Swedish private limited liability company with its principal place of business in Stockholm, Sweden.[5] It "is a leading provider of renewable solutions in packaging, biomaterials, wood and paper, with a focus on replacing non-renewable materials."[6]

         Prior to the Merger, non-party, Virdia, pursued the business of biorefining, which is the process of "extracting and refining various products from biomass as a feedstock or raw material."[7] As a result of the Merger, Virdia became Stora Enso's wholly-owned subsidiary.[8]

         B. The Milestones and Other Relevant Contractual Provisions

         The parties' dispute regarding the Milestone Payments implicates several provisions of the Merger Agreement.[9] I discuss each in turn below.

         1. The Milestone Payments

         The Merger Agreement, at § 2.14, defines Stora Enso's contingent obligation to make the Milestone Payments. Under Section 2.14(a), "[i]f following the Closing Date and prior to December 31, 2015 . . . the milestones set forth in Annex B-1 [to the Merger Agreement] shall have been completed, [Stora Enso] shall pay to [Fortis] . . . $12, 000, 000, "[10] less certain bonuses owed to former Virdia executives (the "First Milestone Payment").[11] Under Section 2.14(b), "[i]f following the Closing Date and prior to June 30, 2017 . . . the milestones set forth on Annex B-2 shall have been completed, [Stora Enso] shall pay to [Fortis] . . . $17, 300, 000" (the "Second Milestone Payment").[12]

         Annex B-1 and Annex B-2, in turn, set forth the requirements for achievement of each of the two milestones. The first milestone ("Milestone 1"), outlined in Annex B-1, required Stora Enso to complete three principal steps by December 31, 2015: (1) the construction and "commission"-defined as "the process of assuring all systems and components are designed, installed, tested, operated and maintained properly"-of a "pilot plant" in Danville, Virginia (the "Danville Pilot Plant"); (2) the completion of three seventy-two-hour extraction campaigns from two biomass feedstocks-sugar cane bagasse and eucalyptus[13]; and (3) the production of three products that meet certain specifications.[14] The parties understood that the "centerpiece" of the Danville Pilot Plant would be a piece of equipment called a "Skid," a machine designed to extract certain materials from biomass.[15] As provided in Section 2.14(a), if Stora Enso completed Milestone 1 by December 31, 2015, it would be required to make the First Milestone Payment ($12 million) to Fortis for distribution to the Equity Holders.

         The second milestone ("Milestone 2," together with Milestone 1, the "Milestones"), as defined in Annex B-2, required Stora Enso to complete two steps by June 30, 2017: (1) the construction and commission of a "commercial plant" in Raceland, Louisiana (the "Raceland Plant"), and (2) "the production of 7, 000 U.S. tons of liquid xylose (a sugar isolated from wood) at a variable cost at or below $650 per ton."[16] If Milestone 2 was completed by June 30, 2017, Stora Enso would be obliged to pay out the Second Milestone Payment ($17.3 million) to Fortis for distribution to the Equity Holders.[17]

         2. Stora Enso's Merger Agreement Representations

         In Section 4.2 of the Merger Agreement, Stora Enso represented that, at the time of execution, it had "the requisite corporate power and authority and ha[d] taken all corporate action necessary to execute and deliver [the Merger] Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby."[18] Stora Enso further represented that "[n]o other corporate action . . . [was] necessary to authorize the execution, delivery and performance of [the Merger] Agreement . . . and consummation of the transactions contemplated hereby."[19]

         3. Merger Agreement § 5.15 and Schedule 5.15

         Section 5.15(a) states that Stora Enso "shall conduct the business of [Virdia, post-close, ] as provided in the financial and human resource plan attached [to the Merger Agreement] as Schedule 5.15, other than as would, in the good faith belief of [Stora Enso], increase the likelihood that the [M]ilestones set forth on Annex B-1 and Annex B-2 will be achieved, and [Stora Enso] shall not Willfully take any action or omit to take any action in order to avoid paying the Milestone Payments in accordance with Section 2.14."[20] Section 5.15(b) provides that, in the event Stora Enso "materially breaches" Section 5.15(a), "any remaining funds due under the Milestone Payments shall become due and payable in full."[21]

         Schedule 5.15, referenced in Section 5.15, contains four tabs. Tab one, labeled "Summary Headcount," sets forth a chart displaying each step of the milestone process through Milestone 2 with corresponding employee headcounts.[22]Tab two, labeled "Team Assignments," lists employees, their location, as well as current and planned assignments as related to the Milestones.[23] Tab three, labeled "Virdia Quarterly Budget," depicts Virdia's quarterly budgets during the relevant timeframe.[24] Finally, Tab four, labeled "Q2_2014 Detail," lists salary, rental and lease costs and other expenses.[25]

         C. Procedural Posture

         Fortis initiated this action on May 3, 2016, to recover the First Milestone Payment, asserting Stora Enso failed to achieve Milestone 1 due to material breaches of the Merger Agreement. Fortis filed the now-operative amended complaint on September 27, 2017, alleging the same for Milestone 2 and the Second Milestone Payment. On November 27, 2017, Stora Enso filed its motion to dismiss, pursuant to Court of Chancery Rule 12(b)(6), for failure to state a viable breach of contract claim.

         II. ANALYSIS

         Under Court of Chancery Rule 12(b)(6), a complaint must be dismissed if the plaintiff would be unable to recover under "any reasonably conceivable set of circumstances susceptible of proof" based on the facts as pled in the complaint.[26]In considering a motion to dismiss, the court must accept as true all well-pled allegations in the complaint and draw all reasonable inferences from those facts in Plaintiff's favor.[27]

         Generally, the interpretation of a contract is a question of law that is suitable for determination on a motion to dismiss.[28] The court may grant a motion to dismiss based on contractual language, however, only if the contractual language is unambiguous-meaning, the language is susceptible of only one reasonable interpretation.[29] "Even if the [] Court considered the defendants' interpretation more reasonable than the plaintiffs', on a Rule 12(b)(6) motion, [the Court may not] select the 'more reasonable' interpretation as legally controlling."[30] Thus, to ...

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