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CompoSecure, L.L.C. v. Cardux, LLC

Court of Chancery of Delaware

June 5, 2019

COMPOSECURE, L.L.C., Plaintiff/Counterclaim Defendant,
CARDUX, LLC f/k/a AFFLUENT CARD, LLC, Defendant/Counterclaim Plaintiff.

          Submitted: May 9, 2019

          Myron T. Steele, Berton W. Ashman, Jr., Andrew H. Sauder, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Steven M. Coren, KAUFMAN, COREN & RESS, P.C., Philadelphia, Pennsylvania; Attorneys for Plaintiff/Counterclaim Defendant.

          David J. Margules, Elizabeth A. Sloan, Jessica C. Watt, BALLARD SPAHR LLP, Wilmington, Delaware; Attorneys for Defendant/Counterclaim Plaintiff.


          LASTER, V.C.

         The Delaware Supreme Court remanded this case with instructions to determine whether the Sales Agreement required special approvals under the Restricted Activities Provision.[1] This report finds that the Sales Agreement was not subject to the Restricted Activities Provision because it did not require CompoSecure to expend more than $500, 000 in any fiscal year.

         The Restricted Activities Provision called for the Board to adopt an annual budget and an annual business plan. LLCA § 4.1(p). Except as set forth in the annual budget or the annual business plan, CompoSecure could not undertake any action that fell within a list of "Restricted Activities" without "the prior approval of the Board and Investors (and during the Earnout Period, the Class A Majority) . . . ." Id. The list of eighteen "Restricted Activities" included "enter[ing] into . . . any contract, agreement, arrangement or understanding requiring the Company . . . to make expenditures in excess of $500, 000 during any fiscal year, other than in the ordinary course of business consistent with past practice . . . ." Id. § 4.1(p)(ix)(A).

         The Sales Agreement did not receive prior approval from the Board, the Investors, or the Class A Majority. The evidence at trial established that all three groups in fact supported the Sales Agreement and would have provided the formal approvals had anyone flagged the issue. The vote of the Class A Majority was controlled by CompoSecure's CEO, Michelle Logan; she participated in the negotiations over the Sales Agreement, signed it on behalf of CompoSecure, and supported it. The vote of the Investors was controlled by a private equity firm; Mitchell Hollin represented the firm, negotiated the final terms of the Sales Agreement, and supported it. The Board was briefed on the Sales Agreement and supported it. The Board members included Logan and her father as well as Hollin and one of his fellow managing directors from the private equity firm. To reiterate, the only reason that the formal approvals were not obtained is because no one focused on them at the time. See CompoSecure, L.L.C. v. CardUX, LLC (Trial Op.), 2018 WL 660178, at *6-8, *13-14 (Del. Ch. Feb. 1, 2018).

         After the parties signed the Sales Agreement, everyone treated it as valid. That changed only after CompoSecure accepted a major order-the Amazon Sale-that triggered a multi-million-dollar commission for CardUX. At that point, CompoSecure began coming up with reasons not to pay. See id. at *16, *18. After hiring litigation counsel, CompoSecure asserted for the first time that the Sales Agreement had never received the approvals required by the LLC Agreement. Id. at *18.

         The Sales Agreement did not require prior approvals under the Restricted Activities Provision because it did not require expenditures of more than $500, 000 in any fiscal year. When analyzing a provision in an LLC agreement, "a court applies the same principles that are used when construing and interpreting other contracts." Godden v. Franco, 2018 WL 3998431, at *8 (Del. Ch. Aug. 21, 2018). "When interpreting a contract, the role of a court is to effectuate the parties' intent." Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006). Absent ambiguity, 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." Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (internal quotation marks omitted). The "contract's construction should be that which would be understood by an objective, reasonable third party." Id. at 367-68 (internal quotation marks omitted). The contract's "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." Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997). A court will "construe the contract in accordance with that plain meaning and will not resort to extrinsic evidence to determine the parties' intentions." BLG Hldgs. LLC v. enXco LFG Hldg., LLC, 41 A.3d 410, 414 (Del. 2012). "To be ambiguous, a disputed contract term must be fairly or reasonably susceptible to more than one meaning." Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012).

         The operative term in the Restricted Activities Provision is "requiring." That verb is a commonly used word with a clear meaning. Something required is necessary or essential, and a requirement is something that must take place.[2] In the context of the Restricted Activities Provision, a contract "requiring the Company . . . to make expenditures in excess of $500, 000 during any fiscal year" is a contract that mandates spending in that amount, without any contingencies, conditions, or optionality. LLCA § 4.1(p)(ix)(A).

         The Sales Agreement only required CompoSecure to make two expenditures: (i) an annual expense reimbursement capped at $20, 000 and (ii) a commission advance of $10, 000 per month during the first fifteen months. SA §§ 4.2(a), 6.2(a). The Sales Agreement thus required total expenditures falling well below the threshold in the Restricted Activities Provision.

         CompoSecure claims that the Sales Agreement required CompoSecure to pay commissions and points out that the commission for the Amazon Sale exceeds $500, 000. It is true that the Sales Agreement contemplated commissions, but any payment obligation was doubly conditional. CompoSecure only would have an obligation to pay a commission if two contingencies were met. First, an "Approved Prospect" would have to place an order. Second, CompoSecure would have to accept the order.

         The first condition-receipt of an order from an Approved Prospect-meant that neither CardUX nor CompoSecure could unilaterally cause any commission payment to be required. Because of the second condition, CompoSecure could unilaterally block any commission from being due, but neither CardUX nor CompoSecure could single-handedly cause a commission to be due. Whether anyone placed an order was an eventuality entirely within the control of the third parties who might order cards, and only orders placed by third parties found on the list of Approved Prospects could satisfy the first condition. Absent an order from an Approved Prospect, CompoSecure would never be required to pay a commission. The existence of the Sales Agreement, standing alone, did not require a commission payment.

         The second condition-a decision by CompoSecure to accept the order-gave CompoSecure the ability to determine unilaterally whether it would ever be required to pay a commission. Section 5.1 of the Sales Agreement specified that "[a]ll purchase orders solicited by [CardUX] from Approved Prospects are subject to approval, rejection or modification by CompoSecure pursuant to Section 5.2." Section 5.2 stated: "CompoSecure reserves the right, in its sole discretion, to: (a) accept, or decline to accept, any purchase order for Products received from any Person . . . ." CompoSecure undertook only to "review proposed projects and purchase orders submitted through [CardUX] consistent with the manner in which it conducts its business in the ordinary course." Id. ยง 5.2. CardUX acknowledged in the same provision ...

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