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In re Shorenstein Hays-Nederlander Theatres LLC Appeals

Supreme Court of Delaware

June 20, 2019

IN RE: SHORENSTEIN HAYS-NEDERLANDER THEATRES LLC APPEALS

         Submitted: May 8, 2019

          Reargument Denied July 8, 2019

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[Copyrighted Material Omitted]

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          Court Below: Court of Chancery of the State of Delaware, C.A. Nos. 9380-VCMR and 2018-0701-TMR

         Upon appeal from the Court of Chancery. AFFIRMED in part, REVERSED in part, and REMANDED.

         Tammy L. Mercer, Esquire, Jack B. Jacobs, Esquire, Martin S. Lessner, Esquire, and M. Paige Valeski, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware. Of Counsel: Matthew L. Larrabee, Esquire (argued), Benjamin M. Rose, Esquire, Dechert LLP, New York, New York; Michael S. Doluisio, Esquire, Dechert LLP, Philadelphia, Pennsylvania for Appellant/Cross-Appellee Nederlander of San Francisco Associates.

         Raymond J. DiCamillo, Esquire, Susan M. Hannigan, Esquire, and Sarah T. Andrade, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware. Of Counsel: David B. Tulchin, Esquire (argued), Brian T. Frawley, Esquire, and Andrew J. Finn, Esquire, Sullivan & Cromwell LLP, New York, New York for Appellees/Cross-Appellants CSH Theatres LLC, CSH Curran LLC, CSH Productions, Curran Live, LLC, Carole Shorenstein Hays, Dr. Jeffrey Hays and Thomas Hart.

         Before VALIHURA, SEITZ, and TRAYNOR, Justices.

          OPINION

         VALIHURA, Justice:

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          This is a consolidated appeal of two separate actions, both of which arise from a dispute involving a theater partnership.[1] Robert E. Nederlander, Sr. ("Robert")[2] controls Nederlander of San Francisco Associates ("Nederlander"), a California general partnership. Carole Shorenstein Hays ("Carole") and her family control CSH Theatres L.L.C. ("CSH"), a Delaware LLC.[3] Nederlander and CSH each own a fifty-percent membership interest in Shorenstein Hays-Nederlander Theatres LLC ("SHN"), a Delaware LLC that operates theaters in San Francisco under SHN’s Plan of Conversion and Operating Agreement of the Company (the "LLC Agreement").

         In 2010, CSH Curran LLC ("CSH Curran"), an entity that Carole co-manages,[4] purchased the Curran Theatre in San Francisco (the "Curran"). SHN had been operating under a lease from the Curran’s then-owners, the Lurie Company ("Lurie"), since the beginning of the partnership. Carole and her husband, Dr. Jeffrey Hays ("Jeff") (collectively, the "Hayses"), did not extend that lease with SHN when it expired in 2014. Thereafter, the Hayses began staging productions at the Curran. In February 2014, CSH sued Nederlander in the Court of Chancery for a declaratory judgment that it had no legal obligation to renew the Curran lease (the "Declaratory Judgment Action").[5] Nederlander asserted counterclaims against CSH and third-party claims against the Hayses for breaches of their fiduciary and contractual obligations, among other claims.[6] The court held in a thorough July 31, 2018 opinion that there was no enforceable promise to renew the lease of the Curran to SHN, that CSH did not breach the LLC Agreement, and that the Hayses breached their common law fiduciary duties of loyalty (the "Declaratory Judgment Opinion").[7]

         In September 2018, Nederlander sought a preliminary injunction in the Court of Chancery against CSH and the Hayes to

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prevent them from staging Dear Evan Hansen and Harry Potter and the Cursed Child ("Harry Potter ") at the Curran (the "PI Action"). In the PI Action, Nederlander asserted four counts, but focused its injunction efforts on Count I, which asserted breach of contract claims (based upon the "provisions of Section 7.02 of the LLC Agreement or the contractual fiduciary duties owed to SHN and its members under the LLC Agreement")[8] against all defendants in that action.[9] The trial court denied that motion in a November 30, 2018 opinion (the "PI Decision").[10] On December 21, 2018, the trial court entered a partial final judgment as to Count I of Nederlander’s Complaint, pursuant to Court of Chancery Rule 54(b), to allow for an immediate appeal of the PI Decision.

          Nederlander argues on appeal that the trial court erred in the Declaratory Judgment Action by refusing to enforce Section 7.02(a) of the LLC Agreement against the Hayses. Specifically, Nederlander contends that the Hayses engaged in competitive conduct at the Curran that violated their contractual duty under Section 7.02(a) to maximize SHN’s economic success. Alternatively, Nederlander argues that the trial court erred in the PI Decision by holding that the Hayses did not "control" Dear Evan Hansen and Harry Potter, and that the Hayses violated Section 7.02(b) of the LLC Agreement as a result. On cross-appeal, CSH contends that Nederlander’s arguments are irrelevant because the trial court incorrectly held in the Declaratory Judgment Action that CSH’s Affiliates, including the Hayses, are bound by Section 7.02.

         For the reasons explained below, we agree with Nederlander that the Court of Chancery misinterpreted Section 7.02(a) and that the Hayses cannot stage competitive productions (not falling within Section 7.02(b)’s exceptions) at the Curran that violate its contractual duty to maximize SHN’s economic success. Accordingly, we reverse that aspect of the trial court’s decision. Because Nederlander has not challenged the court’s rulings in the Declaratory Judgment Action as to damages and other forms of relief, we decline to remand that action.[11] Further, in view of our reversal of the trial court’s interpretation of Section 7.02(a) in the Declaratory Judgment Action, we order remand of the PI Action for further proceedings consistent with this Opinion. We find no error with any other aspect of the trial court’s decisions.

         I. Background [12]

         SHN began in 1977 as Shorenstein-Nederlander Productions of San Francisco, a partnership formed between Walter Shorenstein, Carole’s father, and James M. Nederlander, Robert’s brother. Since then, SHN has staged productions at several

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San Francisco theaters. On January 1, 1980, the partnership entered into a ten-year, written lease of the Curran with Lurie.[13] The partners extended the lease in 1989, 1990, and 1997.

         In 1990, Walter Shorenstein sued Nederlander, claiming that it was "[b]ooking productions to play in competing geographic locations" and "[s]cheduling productions to play in nonpartnership theaters on the most advantageous and profitable dates."[14] The partners settled that litigation and supplemented the partnership agreement in 1992. Out of concern for Nederlander competition with the partnership, that supplement included a new provision in the partnership agreement, Section 4, which provided that:

Both partners will devote their efforts to maximize the economic success of the Partnership and avoid conflicts of interest. Neither party will stage any production within 100 miles of San Francisco unless (i) it has first played in a Partnership theatre, or (ii) it has been rejected for booking by the other party, or (iii) the Partnership shares in the profits and/or losses of such booking pursuant to an agreement.[15]

         This trial court found that this provision was "substantially similar" to Section 7.02 of the LLC Agreement, a key provision on appeal.[16] The trial court stated that limiting competition by the Nederlanders was " ‘the most important thing’ the agreement was meant to do."[17]

         On November 6, 2000, the partnership was converted into a Delaware LLC, and Nederlander and CSH entered into the LLC Agreement as members with a fifty-percent ownership stake each. The LLC Agreement provides for a four-member board of directors, to which both members have the right to appoint two directors. Carole served as co-president of SHN between 2000 and June 2, 2014 (except from January 15, 2013 to March 16, 2013, when she served as SHN’s sole president), and as one of the CSH-appointed directors of SHN from 2000 until June 2, 2014. Jeff also served as a CSH-appointed director from 2010 until October 27, 2014. Robert has been a Nederlander-appointed director of SHN since 2000 and its co-president since 2009.[18] Raymond Harris has served

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as the other Nederlander-appointed director since 2012.

         As of 2010, SHN was operating three theaters in San Francisco: the Golden Gate Theatre, the Orpheum Theatre, and the Curran. SHN owned, and still owns, the Golden Gate and Orpheum, but, at that time, it leased the Curran. Producers prefer the Curran for "sit-down" productions— those that play for an extended time, sometimes for multiple years— because it most closely resembles a traditional Broadway theater. In 2009, Lurie had offered to sell the Curran to SHN for $30 million. After negotiations with Robert, Lurie lowered the price to $17.5 million in January 2010. Robert refused to purchase the Curran because he believed the price was still too high. Carole, however, viewed the Curran "as a special place" and decided to purchase it herself. The parties agreed that Carole had asked for Robert’s permission to purchase the Curran, and that he gave his approval. But the parties disputed whether that approval was contingent on leasing the Curran back to SHN following the expiration of the Lurie lease on December 31, 2014. On December 15, 2010, Carole purchased the Curran through CSH Curran for $16.6 million, which she then rebranded as "SHN Curran Theatre."[19]

         After Walter Shorenstein died in 2010, Carole began to feel that Robert was not interested in building a relationship with her. She was also worried about succession plans for SHN, and she "felt maligned, and, indeed, somewhat bullied that [she] was the one who bought" the Curran.[20] Accordingly, Carole "began to focus on obtaining sole control of the Company."[21]

         In 2010 or 2011, Carole began instructing Greg Holland, who had been hired as SHN’s CEO in 2001, not to communicate with Robert or Harris unless she and Jeff were present or part of the conversation. Yet, during that time, Carole and Holland were meeting together three or four times per week outside the presence of any Nederlander representatives. Concerned with Carole’s instructions, Holland hired a personal attorney to advise him on the direction Carole had been giving him. At trial, he testified that Carole would often say that she viewed SHN as her company.[22] Carole also felt that she was doing most of the SHN-related work, and she thought the LLC Agreement should better reflect her work on SHN’s behalf.

          In January 2012, Carole emailed Thomas Hart, one of her business associates and managers of her trusts, saying:

[I]t just seems that the partnership has grown and evolved since it was originally drawn up ... and goodness, within me, dare I say, the Organization would be quite different, we should perhaps look at the whole document ... it’s important that I maintain CONTROL ... so I might suggest this is the IDEAL time to completely restructure the Partnership Agreement ....[23]

         Carole also emailed Jeff and Hart in October 2012, stating that the new Curran

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lease "should lead to [a] new management agreement."[24] And in January 2013, Carole emailed Hart, saying: "I think it is time together [sic] a new management agreement in place, Tom. Succession and fees are key. This is the appropriate time to involve [our lawyer] and get clarity. I firmly believe that to start with the [C]urran lease is foolish. We are in the prime spot."[25] In addition to tying the Curran lease to a new LLC agreement, Carole sent several emails in January 2013 proposing the idea of blocking SHN’s ability to make distributions until a new LLC agreement was in place. The trial court, citing testimony from Holland about Carole physically blocking an exit to a January 14, 2013 SHN board meeting, found that Carole "acted on her desire for more control."[26]

         As Carole contemplated methods to leverage a new LLC agreement, Hart and Harris had been negotiating a new lease of the Curran to SHN. But in an executive session of SHN’s January 28, 2014 board meeting, the Hayses told Robert that they would not continue negotiating a lease on the Curran until a new LLC agreement was contemplated. Carole demanded a new LLC agreement "to be more reflective of the time in which [they] lived, in that [Robert] was never in San Francisco, in that [she] could never get [Robert] on the phone, in that it became apparent that [Robert and Holland] were in constant communication and aligning."[27] Carole even admitted at trial that had Robert offered to give her control through a new LLC agreement, she would have approved the Curran lease "in a heartbeat."[28]

         After several follow-up emails between Robert and the Hayses in February 2014, including a threat of legal action against CSH, the Hayses filed suit in the Court of Chancery on February 24, 2014. In its Complaint, CSH sought a declaratory judgment that it would not be in breach of the LLC Agreement or Delaware law if it did not renew the Curran lease with SHN. Carole resigned as co-president and a director of SHN on June 2, 2014, as the relationship between the Nederlander and Shorenstein-Hays factions continued to deteriorate.[29] Jeff remained a director of SHN for several more months, where, after at least one board meeting, he communicated SHN information to Carole. He did not resign as a director of SHN until October 27, 2014.

         During that time, the Hayses were also planning new ventures at the Curran. On August 1, 2014, Carole invested $1 million

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in the musical production Fun Home . In return, she gained an obligation on the part of Fun Home to "endeavor to present the opening engagement at the Curran in San Francisco, taking into consideration the schedule and availability of the Curran," and a promise that it would not present the production in any other San Francisco area theater without Carole’s approval.[30] After SHN’s lease of the Curran expired on December 31, 2014, the Hayses embarked on a multi-million-dollar renovation of the Curran. The Curran reopened in 2017, after which it staged award-winning Broadway shows like Bright Star, Fun Home, and Eclipsed .

         As the litigation in the Declaratory Judgment Action continued in 2017, the Hayses booked two more Broadway hits. First, on December 11, 2017, Carole and the producers of Dear Evan Hansen entered into a production agreement to play at the Curran from December 5 to December 30, 2018. In that agreement, Carole guaranteed the producers at least $1.3 million per week in revenue.[31] Carole also promised the producers "financial protection in the event that [the Court of Chancery] enjoined the show from playing at the Curran."[32] Second, the Hayses booked Harry Potter for a "sit-down" production scheduled to play from the fall of 2019 through December 31, 2022. The agreement with Ambassador Theater Group ("Ambassador"), an international theater owner and operator, included:

(1) only allowing the presentation of "an extended sit-down production of Harry Potter " unless a replacement production is "approved in writing in advance by [Carole]," (2) guaranteeing revenue for [Carole], (3) Ambassador agreeing to hire current Curran personnel, and (4) [Carole] maintaining control over physical alterations to the theater necessary for Harry Potter .[33]

         Ambassador entered into a separate show license with Harry Potter’s producers, which it signed simultaneously with its deal with CSH Curran on April 20, 2018. The producers of both Dear Evan Hansen and Harry Potter openly negotiated with multiple venues, including SHN theaters, that were competing against each other to stage the productions.[34]

          On September 25, 2018, Nederlander brought the PI Action in the Court of Chancery. Nederlander argued that the defendants breached their contractual and fiduciary duties by entering into contracts to stage Dear Evan Hansen and Harry Potter in violation of the LLC Agreement. Nederlander sought to enjoin the defendants from presenting those plays at the Curran.

          II. Key Terms of the LLC Agreement

          At the center of this dispute on appeal is Section 7.02 of the LLC Agreement, which provides:

SECTION 7.02. Cooperation and Non-Competition .
(a) The Shorenstein Entity and the Nederlander Entity hereby agree to devote their efforts to maximize the economic success of the Company and to avoid any conflicts of interests between the Members. All actions of the Members and their representatives with regard to the Company and theater matters will be carried out in good faith and in a prompt and expeditious manner.

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(b) Until the termination of the Company pursuant to this Agreement, neither the Shorenstein Entity nor the Nederlander Entity will stage any Production that it controls (as defined in Section 7.03) within 100 miles of San Francisco unless (i) such Production has first played in one of the Theatres; or (ii) such Production has been rejected for booking at one of the Theatres by the other Member’s representative on the Board of Directors; or (iii) the Company shares in the profits and/or losses of any booking pursuant to an agreement mutually acceptable to the Members.[35]

          The "Shorenstein Entity" and "Nederlander Entity" are defined through a series of definitions, beginning with the preamble to the LLC Agreement:

This Plan of Conversion and Operating Agreement (the "Agreement") of Shorenstein Hays-Nederlander Theatres LLC (the "Company") is entered into as of November 6, 2000 by and between CSH Theatres LLC, a Delaware limited liability company (together with any Permitted Tranferees, as hereinafter defined, the "Shorenstein Entity" ), and Nederlander of San Francisco Associates, a California general partnership (together with any Permitted Transferees, the "Nederlander Entity" ), as members.[36]

         "Permitted Transferee" "means (a) an Affiliate of any Member or (b) in the case of a Nederlander Entity, a Nederlander Controlled Entity or any member of the Nederlander family."[37] An "Affiliate" is "a Person that, directly or indirectly through one or more intermediaries, Controls, is Controlled by or is under common Control with the subject Person."[38] "Control," "Controls," and "Controlled" are defined as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, through contract, or otherwise."[39] Further, a "Person" is defined as "an individual or a corporation, all types of partnership, trust, unincorporated organization, association, limited liability company or other entity."[40] "Members" means "the Shorenstein Entity and the Nederlander Entity and any additional Person who is admitted to the Company as a Member in accordance with this Agreement and is listed from time to time on the books and records of the Company."[41]

          Finally, two other provisions in Section 7 are relevant to this appeal. Section 7.03 defines "control over the production" as used in Section 7.02(b):

SECTION 7.03. Most Favored Nation Treatment for Shorenstein and Nederlander Productions . If either the Shorenstein Entity or the Nederlander Entity or any Affiliate thereof has control over a Production, that Production and the relevant Theatre will be accorded "most favored nation" treatment by the other in theater licensing arrangements. For purposes of this Section 7.03, "control over production" means the Person having the ability to determine where the

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Production plays and the terms and conditions of said engagement .[42]

          Section 7.06 sets forth the parties’ general ability to engage in non-SHN business:

SECTION 7.06. Outside Activities . Subject to the other provisions of this ARTICLE VII, including Section 7.02, any Member, any Affiliate of any Member or any officer or director of the Company shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Company, and may engage in the ownership, operation and management of businesses and activities, for its own account and for the account of others, and may (independently or with others, whether presently existing or hereafter created) own interests in the same properties as those in which the Company or the other Members own an interest, without having or incurring any obligation to offer any interest in such properties, businesses or activities to the Company or any other Member, and no other provision of this Agreement shall be deemed to prohibit any such Person from conducting such other businesses and activities. Neither the Company nor any Member shall have any rights in or to any independent ventures of any Member or the income or profits derived therefrom.[43]

          III. The Court of Chancery Proceedings

          A. The Declaratory Judgment Action

         CSH sued Nederlander in the Court of Chancery on February 24, 2014, seeking a declaratory judgment that CSH would not be in violation of the LLC Agreement if it did not renew the Curran lease. Nederlander counterclaimed against CSH and asserted third-party claims against CSH Curran, Carole, and Jeff, including breaches of the LLC Agreement and breaches of the Hayses’ fiduciary duties, among other claims. As to the breach of the LLC Agreement, Nederlander asserted "that the Hayses were competing directly with SHN, misappropriated SHN’s confidential information, and used the Curran as a means of attempting to seize control of the Company."[44] The related common law fiduciary claims[45] focused on "(1) the competing shows; (2) the withholding of the Curran lease, (3) alleged misuse of confidential information; and (4) waste of assets."[46] Nederlander sought relief in the form of damages, a permanent injunction, a declaratory judgment, and specific performance of renewal of the Curran lease.

         CSH moved to dismiss Nederlander’s claims. In its April 21, 2015, Motion to Dismiss Opinion, the Court of Chancery granted in part and denied in part CSH’s motion to dismiss.[47] In that opinion, the

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court evaluated some of the contractual issues now relevant on appeal, and it held that the LLC Agreement was unclear in two respects. First, the court held that the definition of "Shorenstein Entity" was ambiguous. The court noted that a literal reading of the LLC Agreement’s definitions includes "Affiliates" in the definition of "Shorenstein Entity."[48] As CSH pointed out, however, other provisions such as Section 7.03 refer to "the Shorenstein Entity ... or any Affiliate thereof ," indicating that the parties may not have intended to bind Affiliates. Because the court held that CSH’s interpretation was not the only plausible one, it declined to dismiss Nederlander’s allegations of breach of the LLC Agreement.[49]

         Second, the court held that the definition of "control" in Section 7.03 could have two potentially reasonable interpretations. CSH essentially argued that, because neither a producer nor theater owner could unilaterally set the terms of staging any play, "control" only encompasses actions in which the producer also owned the theater— although the court noted that "[i]t is questionable whether this extremely narrow interpretation is reasonable."[50] The court found Nederlander’s interpretation to be reasonable in that, "[b]ecause the family entities appear to be in the business of running theaters, rather than producing plays, the language and structure of Sections 7.02 and 7.03 seemingly contemplate shows being under one of the entities’ ‘control’ even though the entity controls only the venue."[51] Regardless, because the definition of "control" was possibly ambiguous, the court refused to dismiss that aspect of Nederlander’s claims.

         The parties proceeded to trial in late 2017, and the Court of Chancery issued its Declaratory Judgment Opinion on July 31, 2018. The Court of Chancery first held that Nederlander failed to meet its burden of showing that Carole promised to renew the lease of the Curran to SHN[52] or that the promise was otherwise enforceable.[53] The Court of Chancery also held that

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there were no contractual breaches, but that the Hayses breached their common law fiduciary duties while serving as directors and managers of SHN. The court first addressed the contractual claims. Looking to the plain text of the LLC Agreement, the court analyzed the definition of "Shorenstein Entity":

The LLC Agreement defines the "Shorenstein Entity" as CSH Theatres "together with any Permitted Transferees." For the Shorenstein Entity, a Permitted Transferee is "an Affiliate." An Affiliate is "a Person that, directly or indirectly through one or more intermediaries, Controls, is Controlled by or is under common Control with the subject Person." Under the LLC Agreement, a Person is "an individual or a corporation, all types of partnership, trust, unincorporated organization, association, limited liability company or other entity." Control, Controls, or Controlled "means the possession, direct or indirect, of the power to direct or cause the direction of the management and polices of a Person, whether through the ownership of voting securities, through contract, or otherwise."
Under these definitions in the LLC Agreement, the Hayses and any entities they control are Affiliates and part of the Shorenstein Entity and, therefore, are bound by Section 7.02(a).[54]

         CSH objected to the court’s interpretation of "Shorenstein Entity" because of the LLC Agreement’s definition of "Members," which is defined as "the Shorenstein Entity and the Nederlander Entity," along with subsequently admitted members. If CSH is not synonymous with "Shorenstein Entity" and Nederlander is not synonymous with "Nederlander Entity," CSH argued, it would lead to absurd results in other provisions. The trial court recognized that it "may well be the case" that its interpretation could lead to absurd results, but it noted that if it were to adopt CSH’s interpretation, the string of definitions stemming from "Shorenstein Entity" would "become mere surplusage."[55] The court also reasoned that the drafters of the LLC Agreement used "Members" in certain provisions and "the Shorenstein Entity and the Nederlander Entity" in others, "which suggests the terms mean different things."[56] The court held that CSH’s argument raised an ambiguity at the most.

         Because of that possible ambiguity, the trial court considered extrinsic evidence. Looking at the supplement to the partnership agreement executed in 1992 that was meant to guard against competition by the Nederlanders, the court concluded that "[t]he only way Walter and Carole’s fears of competition by the Nederlanders are assuaged is if Nederlander Entity means more than just NSF Associates, which is consistent with the definition in the LLC Agreement."[57] That is, if the partnership agreement or LLC Agreement applied only to Nederlander and CSH, it would do nothing to limit Nederlander competition— " ‘the most important thing’ the agreement was meant to do."[58] Additionally, the court found that Nederlander’s course of conduct favored the court’s interpretation. For example, Nederlander Affiliates in the San Francisco area made offers to SHN to participate in some, but not all, shows. The court reasoned that those offers would only be necessary if Affiliates

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believed they were bound by Section 7.02.[59]

         Despite holding that the Hayses and their affiliated entities are part of the "Shorenstein Entity" bound by Section 7.02(a), the court held that "[w]hile Section 7.02(a) requires the ‘Shorenstein Entity’ to ‘devote their efforts to maximize the economic success of the Company and avoid any conflicts of interest between the Members,’ Section 7.06 contains an exception to this broad provision."[60] The trial court further held that "[t]his exception is itself limited by Section 7.02(b)."[61] In other words, the Shorenstein and Nederlander Entities may compete with SHN unless that competition violates Section 7.02(b)— that is, if it occurs in the form of staging a controlled production within one-hundred miles of San Francisco, assuming none of the exceptions in Section 7.02(b) applies.

         The court held that, by staging Fun Home, Carole appeared to have violated the general prohibition in Section 7.02(b) on staging controlled productions within one-hundred miles of San Francisco because she had invested $1 million in the venture and received the right of first refusal to stage the production in the Bay Area.[62] Thus, Carole had "control" of Fun Home as defined in Section 7.03. Although Fun Home had not played at either of SHN’s theaters, the court noted that there was no evidence in the record regarding whether the other exceptions to the one-hundred-mile prohibition applied, e.g., whether the Nederlanders had rejected Fun Home or entered a profit-sharing agreement with CSH’s presentation at the Curran. Because of those failures of proof, along with Nederlander’s failure to prove damages related to the staging of Fun Home, the court held that Nederlander had not satisfied the final element in its breach of contract claim.[63]

         As to the common law fiduciary claims, the court held that Carole breached her duty of loyalty as a director and co-president of SHN by (1) threatening fellow board members with refusing to approve the subscription series[64] unless Robert

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agreed to give her more control of SHN, (2) using her fiduciary position to prevent SHN from pursuing shows she wanted for her competing business, and (3) instructing Holland not to communicate with her co-president and fellow SHN directors.[65] Likewise, the court held that Jeff breached his common law fiduciary duties as a director of SHN by sharing confidential information with a director of a competitor company and attempting to secure confidential information to hire away SHN’s employees. "These actions were not in the best interest of the Company; instead the Hayses took these actions, while acting in their capacities as fiduciaries of the Company, to advance their own interest at the expense of the Company."[66]

         As to damages, Nederlander presented "one unified remedy theory" in which it alleged that the Hayses’ conduct was part of a larger scheme to take control of SHN, or, if that failed, to sabotage and improperly compete with SHN.[67] The court held that it was unable to award damages for the parts of Nederlander’s case that it was able to prove because "it has given me no way to separate the actual harm to the Company from the consequences of allowed behavior by the Hayses."[68] Specifically, the court observed that:

[Nederlander] has not provided the Court with any information about the harm caused to the Company by (1) the Company’s reliance on the purported promise to lease the Curran to the Company— e.g., the rebranding of the Curran and the booking of shows into the Curran after December 31, 2014; (2) the Hayses attempting to steal shows from the Company; (3) the Hayses presenting shows that violate Section 7.02(b); (4) Carole’s threats and actions that violated her fiduciary duties while she was a manager of the Company; or (5) Jeff’s disclosure of confidential information to Carole while he was a manager of the Company. Any attempt by the Court to determine the harm caused by these actions would be entirely speculative conjecture, and thus, I award only nominal damages for the breaches of fiduciary duty .[69]

         On September 20, 2018, the Court of Chancery entered its final order and judgment in the Declaratory Judgment Action.[70] The court ruled in favor of CSH on its sole count of declaratory judgment, holding that it did not breach the LLC Agreement or any other duty by not renewing the Curran lease with SHN. As to Nederlander’s Counterclaims, the court entered judgment on Count I (breach of common law fiduciary duties) in Nederlander’s favor and awarded nominal damages. The court also enjoined the Hayses from using confidential SHN information to compete with SHN. Further, the court granted partial relief as to Count VI (declaratory judgment), in which the court declared that Section 7.02(b) applies to

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CSH and its Affiliates as a part of the Shorenstein Entity and that the Hayses breached their fiduciary duties as directors and managers of SHN. However, the court declared that CSH may operate the Curran in competition with SHN as long as it complies with Section 7.02(b). The trial court denied all other claims asserted under Count VI (declaratory judgment), and it dismissed all remaining counts in Nederlander’s Counterclaims.[71] Finally, the court awarded attorney’ fees and costs of $32,219.94 to Nederlander for Carole’s bad faith deposition conduct.[72]

         Following issuance of the post-trial decision and final judgment in the Declaratory Judgment Action, on August 6, 2018, Nederlander and SHN filed a Motion for Clarification. They argued that "the Opinion should be clarified to state that the Shorenstein Entity must comply with Section 7.02(b) with respect to Dear Evan Hansen and Harry Potter ."[73] The trial court denied the motion, holding that "the existence of Dear Evan Hansen and Harry Potter is not new evidence about the definition of control under Sections 7.02(b) and 7.03 of the LLC Agreement," and that, "[i]nstead, these productions at the Curran are new potential breaches, and Counterclaim Plaintiff will have to litigate them as such."[74]

          B. The PI Action

         Accordingly, and on September 25, 2018, Nederlander filed the PI Action in the Court of Chancery to prevent the Hayses from staging Dear Evan Hansen and Harry Potter at the Curran, arguing that they controlled both productions and had breached Section 7.02(b).[75] In part of its analysis in the PI Decision, the court interpreted Nederlander’s argument to mean that staging virtually any production at the Curran amounts to control as defined in Section 7.03. The court rejected that argument for several reasons.

         First, the court held that Nederlander’s interpretation would turn "large parts of Section 7 of the LLC Agreement into ‘mere surplusage.’ "[76] Second, although the court considered Section 7.02 unambiguous, it looked to extrinsic evidence for additional support. It noted that Section 4 of the partnership agreement barred staging any production, while Section 7.02(b) of the LLC Agreement narrowed the provision to controlled productions. The trial court concluded from that change "that ‘stage’ and ‘control’ do not have the same

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meaning."[77] Third, the court distinguished Dear Evan Hansen and Harry Potter from Fun Home — which the court held in the Declaratory Judgment Action was a Hays-controlled production— based on several important facts that Nederlander had acknowledged. Thus, because "[s]taging does not mean control under the LLC Agreement," the court held that Nederlander "failed to show a likelihood of success on the merits" necessary to win a preliminary injunction.[78] The court then entered final judgment as to Nederlander’s alleged breach of Section 7.02(b) pursuant to Court of Chancery Rule 54(b).

          IV. Claims on Appeal

         Nederlander raises two arguments on appeal. First, as to the Declaratory Judgment Action, it argues that the Hayses breached their duty under Section 7.02(a) to maximize SHN’s economic success by staging competing productions at the Curran.[79] Nederlander claims that the Court of Chancery erred by subjecting Section 7.02(a) to Section 7.06, which the court held allowed competition unless that competition violated Section 7.02(b). Nederlander did not appeal (and did not discuss in its opening brief) any of the trial court’s rulings denying relief in the form of damages, declaratory relief (as to renewal of the lease), permanent injunctive relief, or disgorgement. Second, Nederlander argues, in the alternative,[80] that the court erred in the PI Action by holding that the Hayses did not "control" Dear Evan Hansen and Harry Potter, and that the trial court "mischaracterized" and "misunderstood" its arguments. Nederlander does not challenge any of the factual findings relating to that decision.[81]

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          On cross-appeal, CSH contends that Nederlander’s arguments are irrelevant because the trial court incorrectly held in the Declaratory Judgment Action that CSH’s Affiliates, including the Hayses, are bound by Section 7.02. CSH also contends that Nederlander waived any claim under Section 7.02(a) because it abandoned that theory in the Declaratory Judgment Action.

          V. Standard of Review

          "This Court ‘will uphold the trial court’s factual findings unless they are clearly erroneous.’ We review questions of law and contractual interpretation, including the interpretation of LLC agreements, de novo ."[82]

          VI. Analysis

          We first address the threshold question on cross-appeal, in which CSH argues that the Court of Chancery erred by holding that CSH Affiliates are included in the definition of "Shorenstein Entity." Next, we consider Nederlander’s primary argument on appeal: that the Court of Chancery erred in its interpretation of Section 7.02(a) in the Declaratory Judgment Action. We conclude by addressing Nederlander’s alternative argument that the court erred in the PI Action by holding that CSH does not "control" Dear Evan Hansen and Harry Potter .

          We agree with Nederlander that the Court of Chancery misinterpreted Section 7.02(a), and we reverse that aspect of that decision. But we decline to order a remand in the Declaratory Judgment Action because Nederlander has not challenged the trial court’s ruling in that action that it failed to prove damages relating to its contractual or fiduciary claims. Nor does it address on appeal in any way the denial of other possible forms of relief. However, reversal of the trial court’s interpretation of Section 7.02(a) in the Declaratory Judgment Action impacts the decision in the PI Action. Although we are reluctant to remand the PI Action for the reasons stated below, we reverse and remand for further proceedings consistent with this Opinion.

          A. We Affirm the Court of Chancery’s Interpretation of "Shorenstein Entity" in the Declaratory Judgment Action

         On cross-appeal, CSH argues that the Court of Chancery erred in the Declaratory Judgment Action by holding that "Shorenstein Entity" includes CSH Affiliates, including the Hayses, and therefore Section 7.02 does not bind Affiliates of CSH. It relies on both the plain language of the LLC Agreement and extrinsic evidence. If CSH is correct that Section 7.02 binds only Nederlander and CSH, then Nederlander’s arguments on appeal must fail.

          We interpret contracts "as a whole and we will give each provision and term effect, so as not to render any part of the contract mere surplusage," and "will not read a contract to render a provision or term meaningless or illusory."[83] "When the contract is clear and unambiguous, we will give effect to the plain-meaning of the

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contract’s terms and provisions."[84] "When a contract’s plain meaning, in the context of the overall structure of the contract, is susceptible to more than one reasonable interpretation, courts may consider extrinsic evidence to resolve the ambiguity."[85] Applying those principles, we affirm the Court of Chancery’s interpretation of "Shorenstein Entity."

          CSH advances two primary arguments in support of its position that "Shorenstein Entity" means only CSH. First, it argues that as a general principle, only formal parties— CSH and Nederlander— are bound by the terms of the LLC Agreement. As such, "Permitted Transferees" refers only to parties that may one day become "Members" and thereafter part of the Shorenstein Entity. Second, CSH argues that the trial court’s interpretation creates absurdities and surplusage. For example, because the term "Members" in the LLC Agreement is defined as the Shorenstein and Nederlander Entities, the trial court’s interpretation would grant Affiliates the same distribution and voting rights as Nederlander and CSH. Additionally, CSH argues that other sections of the LLC Agreement, such as Section 7.03, include terms like "the Shorenstein Entity or the Nederlander Entity or any Affiliate thereof ," which would be superfluous if the entities include Affiliates by definition.

         We reject both of CSH’s arguments. Plainly read, "Permitted Transferees" is defined as "an Affiliate of any Member"— not an Affiliate of any Member who has received or will receive transferred membership interests. Contracts may impose obligations on affiliates in this context.[86] Additionally, the LLC Agreement contains some inconsistencies and contractual surplusage regardless of whose interpretation is applied. For example, CSH’s interpretation renders the definition of "Shorenstein Entity" and "Nederlander Entity" in the preamble to the LLC Agreement mere surplusage, and the trial court’s interpretation renders some of the language in provisions like Section 7.03 unnecessary. Further, as the trial court noted, the LLC Agreement uses both "Members" and "Nederlander Entity" or "Shorenstein Entity," which suggests that they have different meanings.

         We agree with the Court of Chancery’s initial determination in the Motion to Dismiss Opinion that those inconsistencies render the meaning of "Shorenstein Entity" and "Nederlander Entity" ambiguous.[87] Nonetheless, CSH argues that the extrinsic evidence supports its interpretation.[88] We disagree and instead find no fault with,

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and defer to, the trial court’s evaluation of the extrinsic evidence.[89]

         In light of the previous litigation between the Nederlander and Shorenstein partners, the trial court noted that limiting competition from the Nederlanders was " ‘the most important thing’ the agreement was meant to do."[90] The court also reasoned that limiting the partnership and LLC Agreements to only the partner or member entities "would do nothing to limit competition" from the Nederlanders.[91] Indeed, under CSH’s interpretation, it could set up a shell entity next door to the other theaters and compete directly with SHN’s core business. Further, the trial court found that Nederlander Affiliates in or near San Francisco had made offers to SHN to participate in certain shows.[92] That is, the conduct of Nederlander Affiliates indicates that they considered themselves to be bound by Section 7.02. We agree with the Court of Chancery that Affiliates are bound by Section 7.02, and we affirm that aspect of the Declaratory Judgment Opinion.

          B. The Court of Chancery Erred in Interpreting Sections 7.02(a) and 7.06

          Nederlander argues on appeal that the Court of Chancery misinterpreted Section 7.02(a) of the LLC Agreement in the Declaratory Judgment Opinion by subjecting it to Section 7.06, which, the court held, allows competition between CSH and SHN subject to the limitations in Section 7.02(b). CSH argues that the court’s determination was correct, but that we need not reach the merits of that argument because Nederlander abandoned its Section 7.02(a) claim below. We first address the threshold issues of abandonment and waiver in the Declaratory Judgment Action, followed by the merits of Nederlander’s Section 7.02(a) argument. We conclude that Nederlander fairly raised its Section 7.02(a) argument in the Declaratory Judgment Action, but that the Court of Chancery erred in its interpretation of that provision.

          1. Nederlander Fairly Presented its Section 7.02(a) Claim in the Declaratory Judgment Action

         CSH’s contention that Nederlander did not fairly present its Section 7.02(a) argument in the Declaratory Judgment Action largely focuses on two points. First, CSH claims that Nederlander abandoned its Section 7.02(a) argument in its briefing. A review of the briefing below reveals that this argument is incorrect. In Count II of its counterclaims, Nederlander alleged that:

Section 7.02(a) of the LLC Agreement requires members and their affiliates to devote their efforts to maximize SHN’s economic success, avoid conflicts of interests between members, and act in regard to the Company and theatre matters in a good faith and prompt and expeditious manner.... By failing to act in good faith by withholding use of the Curran Theatre, lying in regard to the purchase-lease agreement, stalling lease renewal efforts, blocking theatre sponsorships and advertisements, wasting corporate assets, promoting their own interests to the detriment of SHN, directly competing with SHN, using

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SHN’s confidential and proprietary information to further this competition, and attempting to seize control of the Company and unilaterally rewrite the terms of the LLC Agreement, CSH, through Mr. and Mrs. Hays, has breached the LLC Agreement.[93]

          Nederlander likewise consistently advanced Section 7.02(a) in its pretrial briefing, either expressly or by referencing language found only in Section 7.02(a):

• "The LLC Agreement obligates the Shorenstein Entity (CSH) and its Affiliates (the Hayses and CSH Curran) to devote their efforts to maximize the economic success of SHN and to avoid any conflicts of interest between the Members. JX 10, LLC Agreement § 7.02(a). It provides further that all actions of CSH, its Affiliates, and their representatives must be carried out in good faith and in a prompt and expeditious manner."[94]
• "The Hays Group has breached the fiduciary and contractual duties owed to SHN and NSF.... [T]he Hays Group and CSH refused to act in the best interest of SHN and to maximize SHN’s business. Most significantly, the Hays Group refused to lease the Curran Theater to SHN and, over the recommendation of their attorneys, established a competing business at the Curran."[95]
• "The fiduciary duties CSH and the Hayses owed to [Nederlander] and SHN are mirrored in the LLC Agreement, which obligates the Shorenstein Entity to devote its efforts to maximize the economic success of SHN and to avoid any conflicts of interest between the Members.... The Hays Group willfully and in bad faith breached these obligations."[96]

          Finally, Nederlander preserved its Section 7.02(a) arguments in its post-trial briefing:

• "Perhaps most egregious, the Hayses’ position, if accepted, would permanently harm SHN, leaving the Company to face a lifetime of improper competition from a 50% owner, which started this unlawful competition while its principals were SHN officers or directors, with duties of loyalty and duties to maximize SHN’s economic success."[97]
• "Section 7.02 of the LLC Agreement imposes duties on the Hays Group, including duties to ‘maximize the economic success of [SHN]’; ‘avoid any conflicts of interest between the Members’; act ‘in good faith’; and avoid competition within 100 miles of San Francisco unless certain conditions (not met here) have been satisfied. Mr. Nederlander and Mr. Harris have always understood that Section 7.02 binds both the Nederlander and Shorenstein affiliates. Prior to trial, the Hayses admitted that, as directors, officers, or owners, they had duties to act in SHN’s best interests, maximize the company’s success, act in good faith, maintain SHN’s confidential information,

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avoid conflicts between the Members, and not compete with SHN within 100 miles."[98]
• "These [fiduciary] duties are mirrored in the LLC Agreement. See ... § 7.02(a) (imposing duties to maximize SHN’s economic success; avoid Member conflicts; and carry out actions in good faith) .... The evidence establishes conclusively that the Hays Group knowingly acted in bad faith, breached the duty of loyalty, and caused CSH to breach the contractual duties in the LLC Agreement by: Competing against SHN, and not acting in SHN’s best interests, by presenting Broadway shows at the Curran that SHN sought to present ... [f]ailing to otherwise act in the best interests of SHN, and to maximize SHN’s business, by refusing to renew the Curran lease; attempting to bar SHN’s CEO from meeting with agents and producers .... None of these actions was in SHN’s best interest. Rather, they were taken solely to benefit the Hayses and their competing business at the Curran. By putting their own interests ahead of SHN’s interests, the Hays Group breached the LLC Agreement and the duty of loyalty (including the duty to act in good faith)."[99]
• "The Hayses were warned by counsel that operating the Curran outside of SHN would expose them to litigation risk, and the Hayses acknowledged that they had duties not to compete, to maximize SHN’s economic interests, and to maintain SHN’s information in confidence. They knowingly violated each of these duties."[100]

          Although Nederlander’s post-trial briefs clearly focused much more on Section 7.02(b) than Section 7.02(a), Nederlander fairly raised and preserved its Section 7.02(a) argument in its briefing in the Declaratory Judgment Action.

         Second, CSH argues that Nederlander waived its Section 7.02(a) claim because Robert "unequivocally testified that Section 7.02(a) applies to ‘just NSF’ ‘on the Nederlander side, and that NSF’s Permitted Transferees ‘didn’t have to’ ‘devote[ ] their efforts to maximizing the success of SHN.’ "[101] The Court of Chancery made no findings concerning the credibility or meaning of Robert’s testimony on this point, and it declined to afford any weight to the "inordinate emphasis" the parties placed on fact witnesses’ testimony on legal questions.[102] Further, read in its full

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context, Robert’s testimony appears to be inconsistent on its face.[103] Based upon the record before us, we decline to conclude that Robert’s inconsistent trial testimony effected a waiver of Nederlander’s Section 7.02(a) argument.

          2. The Court of Chancery Misinterpreted Section 7.02(a)

         Nederlander contends that the Court of Chancery erred because finding that "Section 7.06 allows competition, without regard to the obligations expressed in Section 7.02(a), contravenes the plain language of the LLC Agreement and deprives Section 7.02(a) of meaningful effect."[104] The court held that "[w]hile Section 7.02(a) requires the ‘Shorenstein Entity’ to ‘devote their efforts to maximize the economic success of the Company and avoid any conflicts of interest between the Members,’ Section 7.06 contains an exception to this broad provision."[105] The court then held that Section 7.02(b) limited Section 7.06.[106]

          We see two problems with the court’s interpretation. First, Section 7.06 does not discuss competition . Rather, Section 7.06 provides that:

SECTION 7.06. Outside Activities . Subject to the other provisions of this ARTICLE

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VII, including Section 7.02, any Member, any Affiliate of any Member or any officer or director of the Company shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Company, and may engage in the ownership, operation and management of businesses and activities, for its own account and for the account of others, and may (independently or with others, whether presently existing or hereafter created) own interests in the same properties as those in which the Company or the other Members own an interest, without having or incurring any obligation to offer any interest in such properties, businesses or activities to the Company or any other Member, and no other provision of this Agreement shall be deemed to prohibit any such Person from conducting such other businesses and activities. Neither the Company nor any Member shall have any rights in or to any independent ventures of any Member or the income or profits derived therefrom.[107]

         This provision speaks to the parties’ rights to engage in outside business activities— it says nothing about the right to compete against SHN.[108]

          Second, and even more problematic, the trial court held that Section 7.02(b), but not Section 7.02(a), limited Section 7.06. In doing so, the court ignored the language stating that Section 7.06 is subject to Section 7.02 in its entirety. Section 7.06’s "subject to" provision does not exclude Subsection 7.02(a). The plain language reading of Section 7.06 is that individuals and entities bound by the LLC Agreement may engage in business unless that business interferes with the obligations in Section 7.02, including the obligation in Section 7.02(a) to maximize the economic success of SHN and avoid conflicts of interest.

         Even so, Section 7.02(a) must still be interpreted in light of Section 7.02(b), which is a more narrowly drafted provision. Usually, "[s]pecific language in a contract controls over general language, and where specific and general provisions conflict, the specific provision ordinarily qualifies the meaning of the general one."[109] We must therefore consider how those provisions interact and the extent to which Section 7.02(a) is qualified by Section 7.02(b).

         One possible reading of Section 7.02(b) is that it qualifies Section 7.02(a) entirely as to competing productions. Under that reading, because Section 7.02(b) only limits controlled productions, it implicitly allows competing productions near San Francisco so long as they are not under the "control" of either entity. If so, the key question in Nederlander’s Section 7.02(a) breach allegation is whether CSH "controls" the productions it stages at the Curran. Nederlander, however, advocates for another reading of Section 7.02(a)— one in which ...


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