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Shareholder Representative Services LLC v. RSI Holdco, LLC

Court of Chancery of Delaware

May 22, 2019

SHAREHOLDER REPRESENTATIVE SERVICES LLC, as representative of the stockholders and optionholders of Radixx Solutions International, Inc., Plaintiff/Counterclaim Defendant,
v.
RSI HOLDCO, LLC and TA XII-A, L.P., Defendants/Counterclaim Plaintiffs. RSI HOLDCO, LLC and TA XII-A, L.P., Third-Party Plaintiffs,
v.
RONALD J. PERI, JAMES L. JOHNSTON, THOMAS R. ANDERSON, DENIS P. COLEMAN, and JUDI LOGAN, Third-Party Defendants.

          Date Submitted: February 21, 2019

          Rudolf Koch, Susan M. Hannigan, Matthew W. Murphy, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Christopher F. Robertson, Alison K. Eggers, SEYFARTH SHAW LLP, Boston, Massachusetts; Counsel for Shareholder Representative Services LLC, Ronald J. Peri, James L. Johnston, Thomas R. Anderson, Denis P. Coleman, and Judi Logan.

          John P. DiTomo, Jarrett W. Horowitz, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Roberto M. Braceras, Adam Slutsky, Ezekiel L. Hill, GOODWIN PROCTER LLP, Boston, Massachusetts; Counsel for RSI Holdco, LLC and TA XII-A, L.P.

          MEMORANDUM OPINION

          McCORMICK, V.C.

         In September 2016, RSI Holdco, LLC acquired Radixx Solutions International, Inc. ("Radixx"). The merger agreement provided for a $9 million "holdback amount" to account for post-closing indemnification and set-off claims. An entity designated by the merger agreement as the selling stockholders' representative, Shareholder Representative Services LLC ("Representative"), commenced this litigation to recover the holdback amount. In response, the acquirer counterclaimed that Radixx's founder fraudulently induced the merger. As relief, the acquirer seeks in part to rescind the merger agreement. It also brought a third-party claim for unjust enrichment against five (of over one hundred) of the selling stockholders. Representative and the five selling stockholders named as third-party defendants have moved for partial dismissal of the request for rescission and unjust enrichment claim.

         In requesting to rescind the merger, acquirer and its affiliate ask this Court to undo the merger agreement. Generally, a litigant seeking to rescind an agreement must join in the lawsuit all parties to that agreement. In this case, the acquirer argues that it need not join each Company Holder to the litigation; it need only sue Representative to achieve rescission. This argument ignores that Representative's authority flows from and is limited by the merger agreement, and a claim for rescission falls outside of the merger agreement's four corners. The acquirer cannot seek a remedy outside of the merger agreement from Representative, whose representation is solely limited to matters arising under the four corners of that agreement. Thus, the acquirer's request for rescission is dismissed, but without prejudice to permit the absent sellers to be joined as parties.

         The unjust enrichment claim survives the partial motion to dismiss. Although generally, an unjust enrichment claim cannot lie when a contract governs the parties' relationship, in this case, the acquirer claims that the merger agreement arose from fraud and thus does not govern the parties' relationship. Accordingly, the claim for unjust enrichment may proceed.

         I. FACTUAL BACKGROUND

         The facts are drawn from the Verified Counterclaims and Third-Party Complaint, [1] the documents incorporated by reference therein, and matters not subject to reasonable dispute, including allegations admitted in the non-movants' Answer and Affirmative Defenses.[2]

         A. Events Leading to This Litigation

         Radixx is a cloud-based provider of travel distribution and passenger service system software.[3] Ronald J. Peri founded Radixx and served as its CEO until November 2016.[4]

         In September 2016, RSI Holdco, LLC ("Holdco") acquired Radixx from its more than one hundred stockholders (the "Company Holders") pursuant to an Agreement and Plan of Merger (as amended, the "Merger Agreement").[5] Under the Merger Agreement, Holdco agreed to pay a nominal amount of $120 million. The Merger Agreement reduced that nominal amount by applying multiple purchase price adjustments, [6] to exclude consideration attributable to a portion of Peri's equity that would be rolled-over into the new entity, [7] and to "holdback" $9 million (the "Holdback Amount") to account for post-closing indemnification and set-off claims.[8] Accounting for these reductions, at closing, Holdco paid approximately $86.4 million.[9]

         TA XII-A, L.P. ("TA") owns and operates Holdco. With the Merger Agreement, TA executed a Guaranty dated as of September 19, 2016 ("Guaranty") in favor and for the benefit of the Company Holders.[10] Through the Guaranty, TA promised "the full and punctual payment of the Holdback Amount required to be paid by [Holdco] and [Radixx] in accordance with Section 3.01 of the Merger Agreement," subject to the terms of the Merger Agreement.[11]

         Post-closing, the parties disputed purchase price adjustments. As required by the Merger Agreement, Holdco and Representative submitted the dispute to an accountant for arbitration. In November 2017, the arbitrator issued its report, awarding a post-closing purchase price adjustment of $1, 008, 114 in Holdco's favor.[12] On January 30, 2018, Holdco filed a complaint in this Court against Representative and all of the Company Holders seeking payment of the arbitrator's award as well as "'undisputed amounts' of $762, 597" in purchase price adjustments.[13] Holdco voluntarily dismissed the action after Representative and the Company Holders made payments to Holdco.

         The voluntary dismissal of the purchase-price adjustment action did not end the parties' post-closing disputes. Under the Merger Agreement, Holdco was scheduled to pay the Holdback Amount to the Company Holders in March 2018, subject to any then-pending indemnification claims and proposed set-offs.[14] A few weeks before the deadline, Holdco submitted to Representative a "Claim Certificate" asserting breaches of representations and warranties in the Merger Agreement and indemnification claims.[15] The Claim Certificate "estimate[d] that these indemnifiable Losses and fraud claims will greatly exceed the $9, 000, 000 Holdback Amount" and stated that the Holdback Amount would be retained in full.[16] Representative objected to Holdco's Claim Certificate, asserting that it was "procedurally and substantively deficient" and sought "recovery for alleged losses already adjudicated by the [arbitrator] . . . ."[17] In its objection, Representative further asserted that Holdco had "affirmatively breached Article 9 of the Merger Agreement relating to tax returns and tax refunds and credits . . . ."[18]

         Holdco continues to withhold the Holdback Amount.[19] TA, as guarantor, has likewise not paid the Holdback Amount.[20]

         B. This Litigation

         On July 17, 2018, Representative commenced this litigation against Holdco and TA.[21] Representative asserts three breach of contract claims, two relating to the Holdback Amount and one claiming that Holdco breached portions of the Merger Agreement relating to Radixx's 2016 tax returns.[22]

         On August 20, 2018, Holdco and TA answered Representative's complaint and asserted their third-party claims. Holdco and TA name as defendants Representative and five Company Holders: Peri, James Johnston, Thomas Anderson, Denis Coleman, and Judi Logan.[23] Holdco and TA assert three causes of action against Representative and these individuals.[24] Count I claims that Peri fraudulently induced Holdco, TA, and TA's affiliate TA Associates Management L.P. to close the merger by misrepresenting material facts.[25] Count II claims that the Company Holder defendants were unjustly enriched by the merger consideration.[26] Count III claims breaches of the Merger Agreements' representations and warranties and as a result of the Company Holders' failure to pay $762, 597 in purchase price adjustments.[27]

         On October 5, 2018, Representative and the Company Holder defendants moved for partial dismissal of the Third-Party Complaint.[28] The parties completed briefing on the motion for partial dismissal on November 20, 2018, [29] and the Court heard oral arguments on February 21, 2019.

         II. LEGAL ANALYSIS

         Pursuant to Court of Chancery Rule 12(b)(6), Representative and the Company Holder defendants (together, "Movants") seek dismissal of the portion of the fraudulent inducement claim against Peri (Count I) seeking rescission as well as the unjust enrichment claim against the Company Holder defendants (Count II).[30]

         In deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court "accept[s] all well-pleaded factual allegations in the [c]omplaint as true," and "draw[s] all reasonable inferences in favor of the plaintiff . . . ."[31] "[E]ven vague allegations are 'well-pleaded' if they give the opposing party notice of the claim[.]"[32] The court is neither required to "accept conclusory allegations unsupported by specific facts, nor . . . draw unreasonable inferences in the plaintiff's favor."[33] The Court denies the motion "unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof."[34]

         A. The Request for Rescission (Count I)

         Count I of the Third-Party Complaint "request[s] that the Court rescind the Merger and order [Movants] to return all consideration received in connection with the Merger, plus interest."[35] Movants argue that each Company Holder is indispensable to a request for rescission, [36] and because Holdco and TA did not join each of the Company Holders as parties, Count I's request for rescission must be dismissed under Court of Chancery Rule 19.[37]

         Court of Chancery Rule 19 establishes a multi-step test for determining whether absent persons are necessary or indispensable to pending litigation. First, evaluating the criteria set forth in Rule 19(a), "the court must determine whether an absent person should be party to the litigation."[38] If the absent persons should be joined, then the court determines whether joinder is feasible.[39] If joinder is feasible, Rule 19(a) "directs the Court to order the joinder[.]"[40] If joinder is not feasible, then Rule 19(b) calls for a "balancing test whereby the Court must determine whether the action can equitably proceed without the absent party. Where the Court finds that the action cannot so proceed, the absent party is regarded as 'indispensable' and the action must be dismissed."[41]

         Turning to the first step, Rule 19(a) describes the criteria for regarding a party as necessary for a full adjudication.[42] A person should be a party to the litigation if: "(1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest . . . ."[43]

         Both of the Rule 19(a) criteria are easily met. On the face of the Third-Party Complaint, Holdco and TA seek to rescind the Merger Agreement.[44] This is extreme relief, which cannot be accomplished absent all parties to the agreement.[45] Also, the Company Holders, as recipients of consideration from the merger, [46] have interests relating to the subject of the action, the requested rescission of the merger.[47]Disposition of the action without the Company Holders may impair or impede their ability to protect their interests.

         Holdco and TA contend that joinder of the Company Holders is unnecessary Because Representative will "fully represent the interests of the Company Holders[.]"[48] Holdco and TA argue that Representative cannot use its status as representative for the Company Holders as both a sword and a shield by claiming the ability to pursue claims for recovery on behalf of the Company Holders, but rejecting the ability to defend against claims seeking recovery from the Company Holders.[49]

         This argument misses the mark. The Representative's authority is defined by contract. The Merger Agreement limits the scope of Representative's authority to "any matter relating to or under this [Merger] Agreement."[50] Count I for fraudulent inducement, through which Holdco and TA seek rescission, claims that the Merger Agreement is void as a result of the alleged fraud. Holdco and TA cannot seek a remedy outside of the scope of the Merger Agreement from Representative alone, when Representative's authority is limited to matters relating to or arising under the four corners of that agreement. Holdco and TA cite to no case interpreting a similar provision as expressly empowering a stockholder representative to defend a claim for rescission, reach into the pockets of each Company Holder, or otherwise compel each Company Holders to return the consideration each Company Holder received.[51]

         Because the Company Holders should be joined, Rule 19(a) directs the Court to determine whether they can be joined. Here, it appears that the unnamed Company Holders were named as defendants in the prior purchase price adjustment litigation filed by Holdco in this Court, [52] suggesting that they can be named as defendants in this litigation.[53]

         The Court thus dismisses Holdco's and TA's request for rescission of Count I without prejudice to permit them to join the currently-unnamed Company Holders as third-party defendants.[54]

         B. The Unjust Enrichment Claim (Count II)

         Count II of the Third-Party Complaint asserts a claim of unjust enrichment against the Company Holder defendants ...


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