Submitted: May 9, 2019
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.
J. Margules, Elizabeth A. Sloan, Jessica C. Watt, BALLARD
SPAHR LLP, Wilmington, Delaware; Attorneys for
REPORT ON REMAND
Delaware Supreme Court remanded this case with instructions
to determine whether the Sales Agreement required special
approvals under the Restricted Activities
Provision. 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.
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. §
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).
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.
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).
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. 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).
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
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.
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.
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. § 5.2. CardUX
acknowledged in the same provision ...