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Windy City Investments Holdings, LLC v. Teachers Insurance and Annuity Association of America

Court of Chancery of Delaware

May 31, 2019

WINDY CITY INVESTMENTS HOLDINGS, LLC, Plaintiff,
v.
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA f/k/a TEACHERS INSURANCE AND ANNUITY ASSOCIATION-COLLEGE RETIREMENT EQUITIES FUND, Defendant.

          Date Submitted: February 13, 2019

          David E. Ross and Eric D. Selden, ROSS, ARONSTAM & MORITZ LLP, Wilmington, Delaware; K. Winn Allen, Kasdin M. Mitchell, Holly R. Trogdon, Rebecca W. Forrestal, KIRKLAND & ELLIS LLP, Washington, D.C.; Attorneys for Plaintiff

          Michael A. Pittenger, Jennifer C. Wasson, Tyler J. Leavengood, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Mary Eaton, Zeh Ekono, Le-Ahn Bui, WILKIE FARR & GALLAGHER LLP, New York, New York; Attorneys for Defendant

          MEMORANDUM OPINION

          ZURN, Vice Chancellor

         The parties to this case dispute the meaning of a complex earn-out provision. The plaintiff and defendant, both in the financial services industry, agreed that the defendant would buy one of the plaintiff's independent mutual fund and advisory firms. That firm held approximately $221 billion under management at the time. The parties settled on an initial payment of $6.25 billion, along with an earn-out of up to $278 million payable to the plaintiff.

         The parties now dispute the earn-out amount due to the plaintiff. They have not come to this Court for a final ruling on the amount itself. The purchase agreement subjects that decision to an impartial referee process. Instead, they clash on how to read the contractual variables in the earn-out calculation. The plaintiff brought this case to obtain a declaratory judgment and specific performance on contractual terms to guide the referee's process, as well as specific performance on a contractual books and records dispute.

         The defendant moved to dismiss, claiming that it offers the only reasonable understanding of the earn-out and records provisions, and that the plaintiff failed to state its claims. I disagree with the defendant and deny the motion to dismiss. The earn-out provision is susceptible to more than one interpretation at this early stage. In addition, I find that the plaintiff has adequately pled its other claims.

         I. BACKGROUND

         I draw the relevant facts from the allegations in, and those documents incorporated by reference into, the Verified Complaint (the "Complaint").[1] At the motion to dismiss stage, I presume well-pled allegations to be true.

         A. The Parties Agree To A Purchase Agreement With An Earn-Out Structure.

         Plaintiff Windy City Investments Holdings, LLC ("Windy City") is a Delaware limited liability company. Prior to April 2014, Windy City owned Nuveen Investments, Inc. ("Nuveen"), an independent mutual fund and advisory firm with approximately $221 billion under management at the time. "Nuveen's core business included managing, marketing, and distributing investment funds on behalf of individual and institutional clients."[2] Defendant Teachers Insurance Annuity Association of America ("TIAA") is a New York financial services organization that sells and markets financial products.

         In late 2013, the parties began negotiating a sale of Nuveen to TIAA. The negotiations culminated in a term sheet on February 10, 2014, and a purchase agreement on April 13, 2014 (the "Purchase Agreement").[3] In addition to an initial payment of $6.25 billion, the parties agreed to an earn-out plan (the "Earn-Out"). Under that plan, Windy City could receive an additional cash payout based on Nuveen's profitability.

         The Earn-Out period ran to January 31, 2018.[4] The Earn-Out amount is based on performance benchmarks derived from two variables: cumulative advisory revenues ("Advisory Revenues") and cumulative net flows ("Net Flows"). Section 1.8(b) of the Purchase Agreement defines those terms, respectively, as:

"Cumulative Advisory Revenue" means the cumulative advisory revenues of the Subject Companies, from and including January 1, 2015 through and including December 31, 2017, derived from all assets managed or distributed by the Subject Companies, [5] provided that "Cumulative Advisory Revenue" shall (i) include only 50% of the cumulative advisory revenues of the Subject Companies derived from assets that are advised by TIAA-CREF[6] or products that are distributed through TIAA-CREF captive channels (except as otherwise provided in Section 1.8(c)) and (ii) exclude all cumulative advisory revenues of the Subject Companies derived from general account assets of TIAA-CREF.
. . . .
"Cumulative Net Flows" means the amount, if any, of the excess of all Additions to assets under management by the Subject Companies over Withdrawals from assets under management by the Subject Companies (excluding (a) in each case any increase or decrease in assets under management resulting from market appreciation or depreciation, and (b) dividends and distributions (as Withdrawals), but including reinvestments of dividends and distributions (as Additions)), from and including January 1, 2015 through and including December 31, 2017, provided that "Cumulative Net Flows" shall (i) include only 50% of assets added or withdrawn that are third-party assets advised by TIAA-CREF or third-party products distributed through TIAA-CREF captive channels and (ii) exclude all assets added or withdrawn that are general account assets of TIAA-CREF.

         The Earn-Out amount is calculated based on Nuveen's Advisory Revenues and Net Flows relative to floor and cap performance targets. For Advisory Revenues, the floor target was $3.15 billion and the cap target was $3.375 billion.[7]For Net Flows, the floor target was $10 billion and the cap target was $22 billion.[8]Windy City would receive a contribution under the Earn-Out if Nuveen's Advisory Revenues or Net Flows met the corresponding floor target. The amount of that contribution increased until Nuveen hit the corresponding cap target.

         The Purchase Agreement calculated the Earn-Out contributions using formulas established in Section 1.8(b)'s definitions for the "Cumulative Advisory Revenue Payment Amount" and "Cumulative Net Flows Payment Amount." Under those definitions, if Nuveen met or cleared the unadjusted floor targets for each variable, Windy City was due (i) at least $20 million, and up to $125.1 million, for the Advisory Revenues Payment Amount, and (ii) at least $25 million, and up to $152.9 million, for the Net Flows Payment Amount.[9] The maximum Earn-Out payment equaled a total of $278 million.

         The Purchase Agreement also defines a number of levers to raise or lower the Earn-Out amount. The floor and cap targets could be adjusted "[i]n the event of acquisitions or divestitures" from non-TIAA affiliated parties.[10] Section 1.8(c)(iii) explains that if Nuveen acquired or divested investment advisory businesses or assets from or to a party not affiliated with TIAA, the targets should "be adjusted upward (in the case of an acquisition) or downward (in the case of a divestiture)."[11]And if TIAA sold, transferred, or disposed of all of substantially all of the businesses or assets of Nuveen, Windy City would receive the maximum Earn-Out payment.[12]On the other hand, the Purchase Agreement did not alter the Earn-Out calculation based on acquisitions or divestitures between Nuveen and TIAA's affiliates or successors. The targets did not adjust if Nuveen acquired investments, advisory businesses, or assets from a TIAA affiliate or successor that did not count towards the Earn-Out amount prior to the acquisition.[13] Nor would those acquired businesses and assets begin counting towards the Earn-Out amount through either Advisory Revenues or Net Flows. Similarly, if Nuveen divested investments, advisory businesses, or assets to a TIAA affiliate or successor that counted towards the Earn-Out amount prior to the divestiture, they continued to count towards Advisory Revenues and Net Flows, and the floor and cap targets remained the same.[14]

         With that framework in place, the parties also agreed to protections against intents to smother the Earn-Out. Section 1.8(f) prohibited TIAA from taking, or causing the Subject Companies to take, "any action the intent of which is to reduce the Earn-Out Amount."

         Section 1.8(h) lays out the structure for TIAA to provide Windy City with a written statement "setting forth in reasonable detail its good faith calculation of the Earn-Out Amount, including the calculation of Cumulative Net Flows Payment Amount and Cumulative Advisory Revenue Payment Amount" (the "Preliminary Earn-Out Statement"). Windy City could dispute the Preliminary Earn-Out Statement within sixty days of receipt by "setting forth, in reasonable detail, the basis for such dispute." The Purchase Agreement also provided some rights of cooperation between the parties and Windy City's review of TIAA's records:

Seller and Buyer shall assist and cooperate with the other in all commercially reasonable respects in Seller's review of, and the resolution of any dispute with respect to, the Preliminary Earn-Out Statement and the calculations of the Earn-Out Amount, Cumulative Net Flows Payment Amount and Cumulative Advisory Revenue Payment Amount, including by providing the other party and its accountants and advisors with reasonable access to relevant personnel (including its accountants), work papers and books and records related to the Subject Companies that are in its possession or under its control. Seller and Buyer shall use their commercially reasonable efforts to cause their accountants and advisors to reasonably cooperate with and respond to the other party's reasonable inquiries.

         If, following a dispute, the parties could not agree on the Earn-Out Amount, Section 1.8(h) called for them to submit the issues to a referee (the "Referee") for final resolution.[15] However, the Referee "shall be bound by the provisions of [] Section 1.8," which the parties agree means, at least in this instance, that the Referee may not determine the meaning of disputed contract terms. To interpret those terms, the parties would have to seek judicial review first, and then take the Court's interpretations to the Referee for use in determining "disputed items" or "calculations" under the Purchase Agreement.[16]

         B. TIAA Provides, And Windy City Disputes, The Preliminary Earn-Out Statement.

         The sale closed in October 2014. Following that, TIAA began marketing its funds through Nuveen's brand and distribution networks. Nuveen started offering not only funds it advised, but also TIAA-advised funds. Through Nuveen's sales force and distribution, TIAA was able to generate "substantial advisory revenues and net flows."[17]

         In January 2018, TIAA delivered its Preliminary Earn-Out Statement to Windy City. TIAA's calculations put Advisory Revenues at $3.141 billion and Net Flows at approximately $17.915 billion.[18] The Preliminary Earn-Out Statement included nearly 100 pages of data supporting the calculation.[19] TIAA contends its data shows that the Earn-Out was based on 100% credit for Nuveen's advisory revenues and net flows generated from providing investment advisory services, 50% credit for revenues and flows on which TIAA or Nuveen served as sub-advisor to the other, and 50% credit for revenues and flows that were advised by Nuveen and distributed through TIAA's captive channel.[20]

          A month later, TIAA made an unprompted revision based on an error it found, increasing Net Flows to $18.189 billion, but decreasing Advisory Revenues to approximately $3.140 billion. Both the original and revised Statements pegged Advisory Revenues under its floor target of $3.15 billion, and Net Flows over its floor target of $10 billion. Based on the revised Statement, TIAA set the Earn-Out amount due to Windy City at approximately $112.283 million, well below the maximum potential payout of $278 million.[21] TIAA paid Windy City on January 31 and February 27, 2018.

         Windy City exercised its contractual rights to review the books and records underlying TIAA's Earn-Out calculations. The Complaint acknowledges that TIAA provided Windy City with a series of documents and a one-hour conference call with TIAA personnel. But it also alleges that TIAA failed to provide:

• Documents relating to "the responsibilities of TIAA's Joint Sales Force;"[22]
• Documents relating to "the extent to which Nuveen employees distributed TIAA Products;"[23]
• Documents relating to "how Nuveen employees were compensated for such sales (for example, through Nuveen's Long Term Performance Program or otherwise);"[24]
• Documents relating to "how Nuveen employees' sales activity for TIAA Products was tracked by TIAA for accounting purposes;"[25]
• "[A]n organizational chart for Nuveen Finance, LLC;"[26]
• "[T]he amount of total advisory revenues and net flows derived from Nuveen's management or distribution of TIAA Products during the relevant three-year period;"[27] and
• "[T]he underlying documents relating to valuation analyses performed by TIAA's outside accounting firm, Ernst & Young ("EY"), including a February 22, 2017 analysis in which EY projected that the cap and floor targets for both Cumulative Advisory Revenue and Cumulative Net Flows would have to be adjusted downward under the terms of the Purchase Agreement."[28]

         On March 22, 2018, Windy City disputed the Preliminary Earn-Out Statement. On June 7, 2018, it filed suit in this Court. The primary dispute concerns how to treat TIAA financial products that Nuveen distributed, but did not advise. Windy City seeks a declaratory judgment to settle those rights (Count I), and two counts of specific performance ordering TIAA to comply with Windy City's interpretation of the Purchase Agreement (Counts II and III). The Complaint also alleges TIAA used four specific corporate arrangements to divert money from the Earn-Out under TIAA's interpretation of Section 1.8(c), or even to intentionally depress the Earn-Out under Section 1.8(f), and seeks an equitable adjustment to the Earn-Out amount in light of those acts (Count IV). Finally, Windy City seeks an order compelling access to TIAA personnel, books, and other records under Section 1.8(h) (Count V).

         TIAA moved to dismiss on August 13, 2018 (the "Motion"). The parties completed briefing on October 18. I heard argument on February 13, 2019 (the "Hearing").

         II. ANALYSIS

         TIAA moved to dismiss under Court of Chancery Rules 12(b)(1) and 12(b)(6). Rule 12(b)(1) tests the Court's subject matter jurisdiction. "Plaintiff[] bear[s] the burden of establishing subject matter jurisdiction."[29] "There is a strong public policy in favor of arbitration in Delaware; thus, a motion to dismiss for lack of subject matter jurisdiction will be granted if the 'dispute is one that, on its face, falls within the arbitration clause of the contract.'"[30] Rule 12(b)(6) tests whether plaintiffs have stated a claim. "The standards governing a motion to dismiss for failure to state a claim are well settled: (i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are 'well-pleaded' if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and [(iv)] dismissal is inappropriate unless the 'plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.'"[31]

         A. Count I Is Not Dismissed Because The Definitions Of Advisory Revenues And Net Flows Are Ambiguous.

         The parties dispute the interpretations of Advisory Revenues and, less vigorously, Net Flows. The core disagreement is whether revenues or flows advised or managed solely by TIAA, but distributed through Nuveen, generate credit in the Earn-Out calculations.[32] Windy City believes it gets 50% credit for all such gains, while TIAA believes that Windy City only receives credit where Nuveen advised on the financial products.

         "To determine what contractual parties intended, Delaware courts start with the text."[33] "[A] court interpreting any contractual provision . . . must give effect to all terms of the instrument, must read the instrument as a whole, and, if possible, reconcile all the provisions of the instrument."[34] "When the contract is clear and unambiguous," Delaware courts "will give effect to the [plain meaning] of the contract's terms and provisions."[35] But when the Court "may reasonably ascribe multiple and different interpretations to a contract, [it] will find that the contract is ambiguous."[36] "To be ambiguous, a disputed contract term must be fairly or reasonably susceptible to more than one meaning."[37] "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."[38]

         To prevail on its Motion, TIAA must demonstrate that its interpretations of Advisory Revenues and Net Flows are the only reasonable readings. I find that TIAA has failed to meet that burden. But Windy City's interpretations are likewise not the only reasonable readings. Each party's constructions leave something to be desired and would require the Court to minimize deliberately placed language or, in some cases, import extra-contractual concepts to reconcile that language.

         1. Advisory Revenues

         As the parties' dispute requires a granular reading of the definition of Advisory Revenues, I restate it here for reference:

"Cumulative Advisory Revenue" means the cumulative advisory revenues of the Subject Companies, from and including January 1, 2015 through and including December 31, 2017, derived from all assets managed or distributed by the Subject Companies, provided that "Cumulative Advisory Revenue" shall (i) include only 50% of the cumulative advisory revenues of the Subject Companies derived from assets that are advised by TIAA-CREF or products that are distributed through TIAA-CREF captive channels (except as otherwise provided in Section 1.8(c)) and (ii) exclude all cumulative advisory revenues of the Subject Companies derived from general account assets of TIAA-CREF.[39]

         TIAA believes that the parties intended to give Windy City credit only where Nuveen helped advise or manage, and not where Nuveen merely distributed TIAA-advised or TIAA-managed financial products. In shorthand form, TIAA reads the disputed portions of Advisory Revenues to provide Earn-Out credit for:

1. 100% of revenues from products that are advised by Nuveen; except only
2. 50% of revenues from products that are:
(a) jointly advised by Nuveen and ...

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