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Glidepath Ltd. v. Beumer Corp.

Court of Chancery of Delaware

February 21, 2019

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

          Date Submitted: November 26, 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.

         Glidepath LLC (the "Company") is a Delaware limited liability company. The plaintiffs sold the Company to defendant Beumer Corporation (the "Buyer") in a two-stage transaction. In the first stage, the Buyer purchased a 60% member interest in the Company from the plaintiffs and took over management of the Company's operations. A period of shared ownership followed. To complete the second stage, either party could exercise an option under a reciprocal put-call mechanism. The Buyer exercised its call and acquired the plaintiffs' remaining 40% member interest.

         The bulk of the purchase price took the form of contingent payments based on the Company's performance over a three-year period. When the Company's performance did not warrant any additional payment, the plaintiffs filed suit.

         The plaintiffs claim that the Buyer and the two individual defendants breached express provisions in the transaction documents and violated the implied covenant of good faith and fair dealing, which the plaintiffs say should result in an award of damages equal to the contingent consideration. This decision rejects those theories.

         The plaintiffs also claim that the Buyer and its representatives breached their fiduciary duties while managing the Company. The plaintiffs again seek damages equal to the contingent consideration. This decision agrees that the Buyer and its representatives owed fiduciary duties to the Company and its members, but holds that those duties did not include any obligation to ensure that the plaintiffs received the contingent consideration. Recognizing that the Buyer and its representatives faced a conflict of interest when managing the Company because of the divergent incentives created by the Buyer's contractual obligations, this decision nevertheless holds that the Buyer and its representatives properly sought to maximize the long-term value of the Company. The defendants' actions were entirely fair.

         In a pre-trial ruling on a motion for summary judgment, the plaintiffs obtained an order finding that the Buyer breached the transaction agreements in three respects. The plaintiffs seek damages for those breaches. Two warrant only nominal awards. The third warrants damages of $377, 282.57, plus pre- and post-judgment interest at the legal rate.

         The plaintiffs' final claim is for breach of an exclusive territory provision. This provision binds the plaintiffs; it does not apply to the defendants.

         I. FACTUAL BACKGROUND

         Trial took place over four days. The parties submitted 354 exhibits and lodged eighteen depositions. Eight fact witnesses and two experts testified live at trial. The parties proved the following facts by a preponderance of the evidence.[1]

         A. The Players

         The Company designs, installs, and maintains baggage-handling systems at airports in the United States. Before the events giving rise to this litigation, the Company was a wholly owned subsidiary of Glidepath Ltd. ("Seller Parent"), which designs, installs, and maintains baggage-handling systems at airports around the world. Plaintiff Ken Stevens controls Seller Parent. This decision refers to Stevens and Seller Parent jointly as the "Sellers."

         The Buyer designs, installs, and maintains baggage-handling systems at airports in the United States. The Buyer is a subsidiary of BEUMER Group GmbH & Co. KG ("Buyer Parent"), which designs, installs, and maintains baggage-handling systems at airports around the world. Dr. Christoph Beumer controls Buyer Parent.

         At the risk of oversimplification, baggage-handling systems come in two types: traditional systems and next-generation systems. Manufacturers build baggage-handling systems using two measurement standards: the Imperial system and the metric system.

         During the period relevant to the parties' dispute, traditional systems using Imperial measurements dominated the market for baggage-handling systems in the United States. American airports were slow to embrace next-generation systems, which have a higher upfront cost. Decision-makers at American airports also harbored skepticism about the reliability of next-generation systems, recalling the problems at the Denver International Airport when it attempted to implement one many years before.

         Buyer Parent was a market leader in next-generation systems, but Buyer Parent had enjoyed its principal success outside of the United States. The Buyer had limited experience contracting in the United States and even less experience designing, supplying, and maintaining traditional systems that used Imperial measurements. As a result, the Buyer struggled to penetrate the American market.

         The Company was skilled in designing, supplying, and maintaining traditional systems that used Imperial measurements, and it had established itself as a significant player in the U.S. market. But the Company was struggling financially. To secure a job installing or maintaining a baggage-handling system, a contractor typically must supply a performance bond. The contractor's financial strength determines the amount of bonding capacity it can obtain. The Company lacked the financial strength necessary to support significant bonding capacity, which limited the Company's ability to win jobs.[2]

         During the fiscal year that ended on March 31, 2012, the Company suffered a net loss of approximately $4 million.[3] Because of these poor results, Stevens wanted to sell the Company.[4]

         B. The Buyer Approaches The Company.

         In summer 2012, the Buyer contacted Stevens about the Company. The Buyer saw an acquisition as a means of expanding its American footprint.[5] The Buyer also believed that with its financial backing, the Company would be able to compete for larger jobs that could incorporate next-generation components.[6]

         Stevens understood why the Buyer was interested in the Company, and he played up the Company's ability to help the Buyer meet its goals.[7] In a July 2012 presentation to the Buyer, Stevens argued that a post-acquisition Company could sell both traditional and next-generation systems.[8] His presentation identified thirteen large prospects that could involve next-generation systems, including a "Favored Project" at Denver International Airport worth $30 million and bigger projects in Boston and Newark.[9] Stevens argued that pursuing these projects had advantages, because "[c]ompetition is less intense at [the large-projects] level and correspondingly, margins are higher."[10]

         But pursuing these projects would be a new frontier for the Company, which had a policy of not attempting projects valued at over $12 million.[11] Although the Company had captured roughly one-third of the American market for mid-sized projects in the $5-$10 million range, it historically could not compete for larger projects valued at over $20 million and had only taken on three projects in the $25 million category in its entire history.[12]

         C. The Terms Of The Transaction

         Stevens offered to sell the Company for $5.5 million in cash. The Buyer thought it was worth much less. To bridge the valuation gap, the Buyer suggested an earn out.[13]

         In January 2013, the parties reached an agreement in principle, memorialized in a term sheet, on a transaction that included a package of contingent consideration.[14] They hoped to close the transaction immediately after the Company's 2013 fiscal year, which ended in March.[15] With that goal in mind, they moved quickly to negotiate binding transaction documents.[16]

         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.[17] Stevens consulted at times with a New Zealand solicitor, but the solicitor did not play a meaningful role in the negotiations.[18] In substance, Stevens and his colleague, Wayne Collins, attempted to handle everything themselves, including both the business negotiations and the legal documentation.

         The Buyer took a different approach. The Buyer's CEO, Dr. Thomas Dalstein, led the business negotiations. Buyer Parent's CFO, Norbert Hufnagel, assisted him. The Buyer's outside counsel took primary responsibility for drafting the deal documents.[19]

         By the end of March 2013, the transaction documents were substantially complete.[20] The two principal documents were a Membership Interest Acquisition Agreement (the "Acquisition Agreement") and an Amended and Restated Operating Agreement (the "Operating Agreement"). The Acquisition Agreement governed the first-stage transaction in which the Buyer acquired a 60% member interest in the Company from Seller Parent. The Operating Agreement governed the internal affairs of the Company during a period of shared ownership, culminating in a second-stage transaction in which the Buyer completed the acquisition. The mechanism for the Buyer to acquire Seller Parent's remaining 40% member interest was a reciprocal put-call mechanism (the "Put-Call Option"). As between the parties, it was virtually inevitable that one side or the other would exercise the Put-Call Option. If the option price undervalued the remaining 40% member interest in the Company, then the Buyer would exercise its call. If the option price overvalued the remaining 40% member interest in the Company, then Seller Parent would exercise its put.

         The Acquisition Agreement specified that in exchange for its 60% member interest, the Buyer would pay Seller Parent $1 million in cash at closing, plus two forms of contingent consideration. The first 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").[21] The second was a distribution equal to 40% of the Company's net profit during the Earn Out Period, up to a maximum of $1.04 million (the "Profit Distribution").[22] In combination, the Earn Out and the Profit Distribution entitled Seller Parent to an amount equal to the Net Profit during the Earn Out Period, capped at $2.6 million, with 60% of the Net Profit paid by the Buyer under the Earn Out and 40% paid by the Company through the Profit Distribution.

         Through the Put-Call Option, the Operating Agreement provided for the balance of the contingent consideration. Regardless of which side exercised the option, the consideration consisted of a fixed payment of $400, 000, plus a variable portion of up to $2 million tied to the Company's performance during the Earn Out Period.[23] In the aggregate, the consideration received by Seller Parent from the $1 million at closing, the Earn Out, the Profit Distribution, and the Put-Call Option could not exceed $6 million.[24] The Acquisition Agreement also provided that Seller Parent would receive payments pegged to the size of the Company's bank balance on two specified dates.[25]

         This decision refers to the Earn Out, the Profit Distribution, and the Put-Call Option as the "Contingent Consideration." The parties typically referred to these components colloquially as the "earn out."

         During the period of joint ownership, the Operating Agreement established a manager-managed governance structure in which a single Manager would exercise "the powers of the Company," manage its "business and affairs," and "make all decisions and take all actions for the Company . . . ."[26] The Buyer had the right to appoint the Manager.[27]The Operating Agreement did not modify or eliminate the Manager's fiduciary duties. It did contain two internally inconsistent exculpatory provisions, one of which granted exculpation for breaches of the duty of care, while the other retained liability for gross negligence.[28]

         Consistent with the manager-managed structure, the Operating Agreement provided that no individual member would have the right, power, or authority to act for or on behalf of the Company, or to take any action that would bind the Company.[29] Notwithstanding the otherwise plenary grant of authority to the Manager, two sections of the Operating Agreement specified lists of actions that the Manager could not take without member approval. The first section identified major actions that the Manager could not take without the affirmative vote of members holding a 75% member interest in the Company. These actions included matters such as dissolving the Company, amending its certificate of formation, changing the legal form of the company, and admitting new members.[30]

         More importantly for the present case, a second section specified a list of operational activities that the Manager could not take without the prior written consent of members holding a majority interest.[31] The list identified the following items:

(i) The appointment and/or removal of the next management level below the Manager;
(ii) Any single capital expenditure or disposition above $10, 000.00;
(iii) Any single contract above $3, 000, 000.00;
(iv) Entry into any project contract as to which the aggregate liability of the Company is not capped at an amount of 50% or less of the contract value;
(v) Any bid bond above $200, 000.00 and any performance bond above $2, 000, 000.00;
(vi) Any cash-negative project with an aggregate negative cash position of $1, 000, 000.00 at any point in the contract;
(vii) Any project with a gross profit level below 10%;
(viii) Any material deviation from the Business Plan; and
(ix) Entering any agency or representative agreements.[32]

         Notably, the Operating Agreement provided that for purposes of this list of actions, the members had delegated their voting rights to Dalstein, who had "the power to act on their behalf . . . and . . . shall take on their behalf any action otherwise required to be taken by the Members . . . ."[33] As a result, Dalstein had the ability to veto any of the identified actions by blocking them at the member level. Equally important, Dalstein had the ability to authorize the Manager to take any of these actions, because the Operating Agreement provided that once the necessary member vote had been obtained, "then any such decision or consent shall constitute a decision or action by the Manager . . . and shall be binding on each Manager, Member, officer and employee of the Company . . . ."[34] This decision refers to the members' ability to veto or authorize material operational activities, with Dalstein controlling the outcome, as the "Member Authorization Provision."

         Dalstein's ability to veto or authorize operational matters under the Member Authorization Provision diminished the protection afforded to the Sellers by the only other limitation in the Operating Agreement on the Manager's authority: compliance with the Company's business plan (the "Business Plan"). The Operating Agreement provided that

[t]he Manager shall prepare an updated Business Plan for the Company on a calendar year or fiscal year basis. Such Business Plan (the "Business Plan") shall set forth all material activities of the Company in reasonable detail, provide a budget and specify strategic plans of the Company for the ensuing year. The Manager shall at all times act within the Business Plan and within the Manager's limits of authority set forth therein.[35]

         But by exercising his delegated authority under the Member Authorization Provision, Dalstein could authorize a "material deviation from the Business Plan."[36]

         The Operating Agreement only called for the members to meet once per year, although any member holding at least a 10% member interest (viz., either of them) could call a special meeting on not less than 10 days' nor more than 60 days' notice. The Operating Agreement specified that at any meeting of members, the Buyer would be represented by Dalstein, Hufnagel, and Beumer. The Sellers would be represented by Stevens and Collins.[37] The parties have referred to this group as the "Advisory Board."

         The Operating Agreement imposed only one affirmative obligation on the Buyer: "[The Buyer] shall support the Company with the realization of the Business Plan by way of its bonding line."[38] Otherwise, neither the Operating Agreement nor the Acquisition Agreement identified any actions that the Buyer or Buyer Parent had to take to enhance the likelihood that the Sellers would receive the Contingent Consideration.

         D. The Buyer Postpones The Closing.

         In spring 2013, the Buyer postponed the closing. Buyer Parent wanted the Buyer to be able to fund the $1 million payment due at closing out of cash on hand, which the Buyer was not yet able to do. Buyer Parent also wanted the Buyer to have an individual ready to take over as Manager, but the Buyer had not yet identified a suitable candidate.[39]

         Stevens recognized that the postponement could affect the Contingent Consideration, particularly because the Company continued to struggle financially.[40] After two years during which the Company's CEO position had gone unfilled, Collins took over as acting CEO in June 2013, but he had no prior experience running an American baggage-handling company.[41] On his watch, the Company experienced significant cost overruns.[42]Ultimately, 2013 fell short of expectations.

         E. The Transaction Closes.

         By November 2013, the Buyer had accumulated the cash necessary to fund the closing payment. The Buyer also had identified defendant Finn Pedersen, an individual affiliated with Buyer Parent, as the Manager.[43] With these requirements met, the parties targeted a closing in January 2014.[44]

         On January 10, Collins sent signature pages to Stevens to be signed and held in escrow pending closing.[45] When the Buyer's counsel continued to make minor comments on the agreements, Collins complained to Dalstein: "Enough is enough, we have our commercial agreement based on the mutual trust between us, let's get on with it."[46]

         On January 16, 2014, Collins released the signature pages from escrow, and the transaction closed.[47] Neither Stevens nor Collins reviewed the documents again.[48] Stevens was on vacation and relied on Collins.[49]

         F. Early Indications Regarding The Buyer's Strategy

         Soon after the deal closed, the Sellers received indications that the Buyer intended to reorient the Company towards larger projects that offered higher profit margins, the ability to negotiate terms and conditions, and the potential inclusion of next-generation components. That should have come as no surprise to the Sellers, because the Buyer had made clear during the deal negotiations that it wanted to pursue these goals, and Stevens had pitched the Company to the Buyer as a means of achieving them.

         The first indication involved a project for a traditional baggage-handling system at John Wayne Airport in Orange County, California.[50] When the deal closed, the Company was preparing its bid and needed a performance bond. The Buyer tried to obtain a bond through the Company's broker, but could not secure enough capacity without a guarantee from Buyer Parent.[51] Buyer Parent decided that "a parent-company guarantee should be avoided"[52] and asked the Buyer to look at international options for bonding.[53]

         After analyzing the terms of the John Wayne bid, the Buyer concluded that the project was too risky. The terms and conditions were non-negotiable, and the key to success was making the lowest bid, which squeezed the profit margin.[54] Dalstein decided that the Company would not bid on the project-which he had the power to do under the Member Authorization Provision.[55] Collins became upset, because historically the Company had bid on projects like the John Wayne opportunity.[56] Collins objected that if the Company changed its strategy, then "it could have serious repercussions [for the] Earn Out."[57]

         On January 29, 2014, after meeting with the bid team, Dalstein reversed course.[58]The Company obtained bonding from Buyer Parent and ultimately won the bid.[59]

         The second indication involved Denver International Airport. When the deal closed, Denver was preparing to solicit bids for the major baggage-handling project that Stevens had identified as a "Favored Project" when pitching the Buyer on the Company.[60] Collins did not believe the Company should bid, and he omitted the Denver opportunity from a spreadsheet that identified the Company's pipeline and backlog.[61] The Buyer proposed adding Denver and a similar project at San Francisco International Airport, noting that each would include both a next-generation component and a traditional component.[62]

         G. Pedersen Takes Over.

         In mid-February 2014, Pedersen took over from Collins and assumed the position of Manager under the Operating Agreement.[63] By early March, Stevens and Collins felt left in the dark. They were accustomed to total control over the Company, but now Pedersen was running the show.[64]

         Pedersen encouraged Dalstein to meet with Collins and reach agreement on how the Company would be operated. Dalstein pointed out that the Buyer owned 60% of the member interests and had the authority to operate the business. He recognized that "important decisions" would require "a common understanding" between the Sellers and the Buyer, but stressed that it was the Buyer and Pedersen who managed the business.[65]

         One of Pedersen's first tasks was to update the Business Plan that was incorporated by reference in the Acquisition Agreement (the "Acquisition Plan").[66] The Buyer and the Sellers had jointly developed the Acquisition Plan during their negotiations in early 2012, before the closing was delayed. It consisted of a one-page spreadsheet, with columns for each fiscal year from 2013 through 2016, and rows labeled order intake, secured sales, revenue, contribution margin, indirect expense, gross margin, SG&A, and EBIT.[67] The plan divided the projected sales figures into four categories: "BHS Large projects (>$15M)," "BHS Small projects (<$15M)," "BHS Manufacturing," and "CSS Service & Support." For FY 2014, the plan anticipated an order intake of $25 million from large projects and $16 million from small projects. For FY 2015, the plan anticipated an order intake of $35 million from large projects and $12 million from small projects. Four explanatory bullet points appeared the bottom of the page:

• "Revenue figures are [Company] stand-alone and do not include revenue from tote, DCV, or tilt tray systems" (i.e., next-generation systems);
• "Revenue growth driven by complementary applications with BEUMER Group Logistics-Airports technologies and after-market (customer support/service) / base load development";
• "Margin quality improvement driven by prize realization (i.e., market selectivity), cost-savings and process synergies, and mix development (i.e., after-market / base load development)"; and
• "EBIT growth driven by margin quality improvement and BEP (break-even point) development)."[68]

         Dalstein wanted Pedersen to prepare a new plan that took into account the delayed closing and observed that "[b]asically we can move all numbers by almost one year."[69]Pedersen worked on the new plan with Eddie Perez, the Company's CFO, and Christopher Bryan, the Buyer's CFO. They initially developed a plan that called for growth in EBIT of 1.2% in 2014 with accelerated growth in 2015 and beyond, [70] but they worried that Stevens and Collins would object to the plan because the projected results would not generate the maximum Contingent Consideration.[71] Perez modified the plan to contemplate more aggressive results in 2015, but the plan still would not achieve the near-term results required to maximize the Contingent Consideration.[72]

         Pedersen presented the new Business Plan at the first meeting of the Advisory Board, which took place on March 25, 2014. The plan projected Net Profit of $290, 096 in 2014, and $2, 083, 737 in 2015.[73] Compared to the Acquisition Plan, the new Business Plan emphasized the Company's long-term prospects.[74] Stevens and Collins expressed concerns about the plan, including the inclusion of integration costs. They objected that the Buyer was treating the Company as if it was "suddenly 100% BEUMER."[75]

         The Advisory Board held another meeting on May 22-23, 2014. The year-to-date financial results were poor.[76] Stevens and Collins felt that the Company was turning down jobs that it historically would have pursued. The Buyer felt the Company was making sound business decisions by emphasizing larger projects with the potential for higher margins and negotiable terms and conditions.[77]

         H. The Chicago Project

         An opportunity at O'Hare International Airport in Chicago suited the Company's new strategy: It was valued at $20-30 million, offered higher margins, and the terms and conditions were negotiable.[78] But in June 2014, after Pedersen and the Company had been working on the Chicago bid for a month, problems emerged.[79] The work needed to be completed on a faster schedule, and to meet it, the Company would have to preorder parts before the bid was awarded. The pre-award purchases would set up the Company for a loss if its bid failed.[80]

         After these problems emerged, Pedersen decided not to bid on the project. [81] Collins objected and asserted that declining to bid the job required Advisory Board consent.[82] That was not correct. The Advisory Board had no authority over whether or not to decline a bid. Instead, because of the size of the project, the Member Authorization Provision gave Dalstein authority to either veto or authorize the bid. Pedersen correctly informed Collins that he only had to report to Dalstein on these matters.[83]

         I. Disagreements Over Strategy

         In July 2014, the Company's Vice President of Sales, Michael Baggett, complained privately to Collins that the Company "had been forced to decline to bid over $100 million in business over the past 30 days because [Buyer Parent] didn't want to waste their bonding capacity on us."[84] But as the Sellers' witnesses conceded at trial, the Company could not bid on all of its prospects.[85] The Company had to select the most promising opportunities, and Pedersen and Dalstein preferred different types of opportunities than what the Company traditionally had pursued.[86]

         In August 2014, Baggett griped to members of management that the Company was not working hard enough to pursue an opportunity involving traditional systems at Palm Beach International Airport.[87] The Company pursued and won the project, which became the largest pure-play traditional project in the Company's history.[88]

         Internally, some members of the Buyer's team empathized with the Sellers regarding the changes in the Company's management and direction.[89] But they also described the serious problems with the Company's historical approach, including a lack of meaningful financial oversight.[90]

         On September 10, 2014, the Advisory Board held its third meeting. Pedersen reported on the Company's activities, projecting a worst-case scenario for the year of $24 million in sales with a best-case scenario of $80 million.[91] One lowlight of the year was that the Company had been forced to decline several bidding opportunities due to its efforts to win the Denver project.[92] The Company invested heavily in the Denver opportunity, both because Pedersen understood from meetings with stakeholders that it was "ours to lose, "[93] and because the Denver project would involve a traditional component valued at $60-70 million and a next-generation component valued at $30-40 million.[94] Stevens understood the significance of the Denver project and was excited about the opportunity.[95]

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

         By November 2014, the Buyer and Pedersen had determined that the Company was unlikely to produce enough Net Profit for the Sellers to receive any Contingent Consideration.[96] They decided that they needed to inform the Sellers.

         The next meeting of the Advisory Board meeting was scheduled for November 19, 2014. Pedersen prepared a presentation that explained "the earn out, the situation and the different scenarios."[97] 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.[98] 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.[99] Anticipating that the presentation would not be well received, the Buyer had counsel review the deck.[100]

         During the November 2014 meeting, the Sellers learned for the first time that they were unlikely to receive any Contingent Consideration. Stevens was "shocked, "[101] and his demeanor was "icy."[102] He did not raise any objections to the analysis.[103]

         Four months later, in March 2015, Stevens asked to meet with Beumer. In his email, Stevens emphasized that he needed to "achieve the earn out" and had "relied heavily on the strength and reputation of Beumer Corporation."[104] Beumer responded that

in all fairness, [the Company] was definitely not in the shape [Collins] always communicated and made us [] believe. The earn out based on the 2014 numbers will not be achievable anymore as planned. . . . 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.[105]

         Beumer's answer infuriated Stevens, and he sent back an angry email filled with criticisms of the Buyer.[106]

         After exchanging several heated emails, Beumer and Stevens agreed it was best to meet in person.[107] They met in Dallas on April 29, 2015.[108] The meeting was short and unsuccessful.

         K. This Litigation

         On September 18, 2015, the Sellers commenced an arbitration against the Buyer. On April 1, 2016, while the arbitration remained pending, the Buyer exercised its call option. On April 15, the Sellers filed their complaint in this action and a motion seeking to enjoin the exercise of the call. On April 22, I denied the motion.[109]

         The parties agreed to forego the arbitration and litigate in this court.[110] The Sellers filed an amended complaint that asserted claims against the Buyer for breach of the Acquisition Agreement, breach of the Operating Agreement, and breach of the implied covenant of good faith and fair dealing. It asserted claims for breach of fiduciary duty and civil conspiracy. The complaint also sought reformation of the dates governing the Earn Out Period.

         In November 2017, the Sellers moved for partial summary judgment. By order dated January 5, 2018, I granted the motion as to specific claims for breach of contract (the "Summary Judgment Order").[111]

         After trial, I directed the parties to present the reformation issue first, because the outcome of that issue determined the relevant time periods for the other contractual claims. In a memorandum opinion dated June 4, 2018, I rejected the Sellers' claim for reformation.[112] That decision directed the parties to brief the remaining post-trial issues, including the quantum of damages for the claims addressed on summary judgment.

         While this litigation was pending, the Company achieved success in Denver and San Francisco. If either project had come through earlier, it singlehandedly could have resulted in full payment of the Contingent Consideration. Instead, due to events beyond the parties' control, both arrived after the Earn Out Period.

         II. LEGAL ANALYSIS

         The Sellers raise a series of claims. They first contend that the defendants operated the Company in a manner that deprived the Sellers of the Contingent Consideration. The Sellers assert that the Buyer and its representatives operated the Company in a manner that (i) breached the express terms of the Operating Agreement, (ii) violated the implied covenant of good faith and fair dealing, and (iii) constituted a breach of fiduciary duty. As damages, the Sellers seek the full value of the Contingent Consideration. This decision rejects those theories.

         The Sellers also seek remedies for three breaches of contract that they established through a motion for summary judgment. Two of the breaches warrant awards of only nominal damages. The third warrants damages of $377, 282.57, plus pre- and post-judgment interest at the legal rate.

         Finally, the Sellers claim that the Buyer breached an exclusive territory provision. This claim fails because the provision binds the Sellers, not the Buyer.

         A. Breach of Contract

         In their first theory, the Sellers contend that the Buyer and its representatives operated the Company in a manner that deprived the Sellers of the Contingent Consideration. The Sellers assert that the defendants' business decisions constituted a breach of the express terms of the Operating Agreement and the implied covenant of good faith and fair dealing.

         1. The Express Terms Of The Operating Agreement

         "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."[113] When interpreting a contract, the 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.[114] "Contract terms themselves will be controlling when they establish the parties' common meaning so that a reasonable person in the position of either party would have no expectations inconsistent with the contract language."[115] "The meaning inferred from a particular provision cannot control the meaning of the entire agreement if such an inference conflicts with the agreement's overall scheme or plan."[116]

         The Sellers contend that the Buyer breached the express terms of the Operating Agreement in three ways. First, the Sellers claim that the Buyer failed to support the Company with its bonding line. Second, the Sellers claim that the Buyer breached a recital that required the Buyer to contribute its "skills, expertise, collateral and interests" to the Company. Third, the Sellers contend that Pedersen breached the Operating Agreement by failing to manage the Company in conformity with the Acquisition Plan.

         a. Bonding

         Section 2.5 of the Operating Agreement states: "[The Buyer] shall support the Company with the realization of the Business Plan by way of its bonding line."[117] The Sellers contend that the Buyer breached this provision by failing to provide sufficient bonding capacity for the Company to win jobs. The Sellers maintain that with more bonding capacity, the Company could have won more jobs and generated financial results that would have supported a full payment of the Contingent Consideration.

         The Buyer did not have its own bonding line until well into the Earn Out Period.[118]Until it secured its own line, the Buyer obtained bonds through Buyer Parent.[119] The Sellers contend that Buyer Parent refused to provide bonding for traditional projects because it wanted to save its bonding capacity for next-generation projects. The Sellers also argue that the Buyer should have done more to obtain guarantees from Buyer Parent.

         The Sellers' argument about bonding capacity fails because the Operating Agreement did not impose an obligation on Buyer Parent. It only imposed an obligation on the Buyer. The obligation that the Buyer undertook did not include any commitment to cause Buyer Parent to take affirmative actions to provide bonding. Because of the structure of the Operating Agreement, Buyer Parent's refusals to provide bonding for particular jobs could not give rise to breach.[120] The plaintiffs proved that Buyer Parent was risk averse when making bonding decisions.[121] But the Operating Agreement did not obligate Buyer Parent to provide bonding, nor did it obligate the Buyer to cause Buyer Parent to provide bonding. The Buyer only had to support the Company with its own line.

         The Sellers' argument also depends on the premise that Section 2.5 of the Operating Agreement obligated the Buyer to support the Acquisition Plan and achieve the results it projected. Section 2.5 in fact refers to the "Business Plan," which the Manager was obligated to update every year. Through that process, the Company shifted its strategy away from its historical focus on smaller-sized jobs involving exclusively traditional technology in which the lowest-cost provider won the bid and towards larger jobs involving both traditional and next-generation components that offered higher profit margins.

         The Operating Agreement allowed that shift. Indeed, Stevens convinced the Buyer to buy the Company by arguing that the Company could help the Buyer secure larger, more complex jobs. Even the Acquisition Plan had contemplated that the Company would pursue projects that combined next-generation and traditional technology.[122] There was no mandate to pursue projects involving exclusively traditional systems.

         The Sellers contend that the Company's lack of bonding capacity forced it to turn down opportunities. There is some evidence that supports their position.[123] But the evidence does not show that the Buyer failed to support the Company with its bonding capacity, such as it was. The Buyer sought in good faith to obtain greater bonding capacity from Buyer Parent, [124] and Buyer Parent did provide bonding on multiple occasions, including for strictly traditional projects. Examples include the traditional projects at John Wayne and Palm Beach, which collectively had a value of $35 million.[125]

         The Buyer did not breach its contractual obligation to support the Company with its bonding capacity. The Buyer did not support every bid that some at the Company wanted to make, but the Buyer had legitimate reasons for doing so.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b.The Efforts Claim Against ...


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