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Horton v. Organogenesis Inc.

Court of Chancery of Delaware

July 22, 2019

KENNETH L. HORTON, as the Representative for and on behalf of Payees KENNETH L. HORTON and NUTECH MEDICAL, INC., Plaintiff/Counterclaim Defendant,
v.
ORGANOGENESIS INC., Defendant/Counterclaim Plaintiff.

          Date Submitted: April 25, 2019

          John L. Reed, Matthew Denn, Peter H. Kyle, DLA PIPER LLP (US), Wilmington, Delaware; Counsel for Plaintiff and Counterclaim Defendant Kenneth L. Horton.

          Carl D. Neff, Kasey H. DeSantis, FOX ROTHSCHILD LLP, Wilmington, Delaware; Matthew C. Baltay, FOLEY HOAG LLP, Boston, Massachusetts; Counsel for Defendant and Counterclaim Plaintiff Organogenesis Inc.

          MEMORANDUM OPINION

          McCORMICK, V.C.

          The parties to a 2017 merger dispute the sellers' entitlement to post-closing consideration in light of the buyer's claim for indemnification. The buyer seeks indemnification for two categories of losses, and the sellers have moved to dismiss the buyer's claim. For the first category, the sellers contend that the buyer's purported notice of its indemnification claim failed to satisfy the contractual notice requirements. For the second category, the sellers contend that the buyer's request for indemnification is not yet ripe because relevant costs have yet to be incurred. This decision concludes that the buyer's notice as to the first category satisfied the merger agreement's notice requirements. As to the second category, the Court agrees with the sellers that the indemnification claim is not yet ripe. Accordingly, the sellers' motion to dismiss is denied in part and granted in part.

         I. FACTUAL BACKGROUND

         The facts are drawn from the buyer's Amended Verified Counterclaim for Contractual Indemnification, the documents incorporated by reference therein, and matters not subject to reasonable dispute, including allegations admitted in the buyer's answer to the complaint.[1]

         In March 2017, defendant and counterclaim plaintiff Organogenesis Inc. ("Organogenesis") acquired NuTech Medical, Inc. ("NuTech") for a mix of cash and stock. Both Organogenesis and NuTech operated in the regenerative medicine field.

         The parties executed a merger agreement ("Merger Agreement")[2] on March 18, 2017, and the merger closed on March 24, 2017. The Merger Agreement designated plaintiff and counterclaim defendant Kenneth L. Horton as the sellers' representative.[3]

         Under the Merger Agreement, Organogenesis agreed to pay the sellers consideration comprised of $20 million in cash and 1, 794, 455 shares of Organogenesis common stock.[4] Of the cash payment, (1) $12 million was to be paid at closing, (2) $1 million was to be paid on each quarterly anniversary of the closing for the first four quarters following the closing, and (3) $4 million was to be paid on the fifteen-month anniversary of the closing, or June 24, 2018.[5] The Merger Agreement defines the last two categories of cash payments as "Post-Closing Cash Consideration"[6] and further requires Organogenesis to pay simple interest on the Post-Closing Cash Consideration at a rate of 6% per annum, due with the last cash payment.[7]

          The sellers agreed to indemnify Organogenesis, subject to certain restrictions and caps, for eight categories of "Losses," two categories of which are relevant in this case. The first category includes Losses incurred in connection with any breaches of representations and warranties in the Merger Agreement by the sellers and NuTech.[8] The second category includes Losses incurred in connection with litigation pending in the United States District Court for the Northern District of Alabama captioned MiMedx Group, Inc. v. NuTech Medical, Inc., C.A. No. 2:15-cv-00369-VEH (the "MiMedx Litigation").[9] The Merger Agreement defines "Loss" to include "any damage, liability, demand, claim, action, cause of action, cost, . . . or other loss or out-of-pocket expense[.]"[10]

         Section 12.1(d) of the Merger Agreement imposed restrictions on how and when Organogenesis could assert claims for indemnification for breaches of representations or warranties.[11]

         As to timing, the Merger Agreement precluded the parties from raising indemnification claims after expiration of the contractual limitation period applicable to the corresponding representations and warranties, unless those claims were timely and appropriately noticed.[12] The contractual limitation period for representations and warranties relevant to this litigation terminated fifteen months after the closing-i.e., on June 24, 2018.[13]

         As to process, the Merger Agreement required Organogenesis to provide notice of its claims as follows:

deliver[] written notice to the other party of an indemnification claim for a breach of the representations, warranties and covenants (stating in reasonable detail the nature of, and factual and legal basis for, any such claim for indemnification and, if known, an estimate and calculation of the amount of Losses resulting therefrom) . . . .[14]

         If Organogenesis delivered the requisite notice before June 24, 2018, its indemnification claims for breaches of representations and warranties would "survive until resolved or judicially determined."[15] The Merger Agreement did not impose similar restrictions on indemnification claims resulting from the MiMedx Litigation.

         Organogenesis failed to make multiple payments post-closing. On March 24, 2018, Organogenesis did not make the last of the quarterly $1 million payments. Then, on June 24, 2018, Organogenesis did not make either the final $4 million post-closing payment or the contemporaneously due interest payment.

         The parties exchanged correspondence concerning Organogenesis's nonpayments. On June 23, 2018, Organogenesis sent a letter to Horton (the "June 23 Notice"), the express purpose of which was "to preserve [Organogenesis's] rights under the Merger Agreement[.]"[16] This Notice informed Horton of five post-closing "issues."[17] For each issue, the Notice included a short factual description. The Notice further stated that "these matters are ongoing and may involve breaches of representations and warranties in the Merger Agreement."[18]

         On June 28, 2018, Horton's counsel responded challenging the sufficiency of the June 23 Notice. Horton further asserted that Organogenesis had breached its payment obligations under the Merger Agreement and demanded immediate payment of $5, 917, 465.75 for the unpaid Post-Closing Cash Consideration and interest thereon.[19] Horton gave Organogenesis until July 3, 2018, to satisfy the demand. Organogenesis did not accede to the demand.

         On July 24, 2018, Horton commenced this litigation. Horton's Verified Complaint asserts three counts for breach of contract, specific performance, and declaratory judgment. Organogenesis answered the Verified Complaint and asserted one counterclaim for contractual indemnification. Horton moved to dismiss Organogenesis's counterclaim. In response, Organogenesis filed an amended counterclaim for contractual indemnification. Horton renewed his motion to dismiss and the parties completed briefing on March 14, 2019.[20] The Court heard oral argument on April 25, 2019.[21]

         II. LEGAL ANALYSIS

         Horton has moved to dismiss Organogenesis's amended counterclaim pursuant to Court of Chancery Rule 12(b)(6). On a motion pursuant to Rule 12(b)(6), the Court accepts "all well-pleaded factual allegations in the Complaint as true, [and] accept[s] even vague allegations in the Complaint as 'well-pleaded' if they provide the defendant notice of the claim[.]"[22] The Court "is not, however, required to accept as true conclusory allegations without specific supporting factual allegations."[23] The Court draws "all reasonable inferences in favor of the plaintiff, and den[ies] the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof."[24]

         As discussed above, Organogenesis seeks indemnification for two categories of Losses: those incurred in connection with alleged breaches of representations and warranties in the Merger Agreement and those incurred in connection with the ongoing MiMedx Litigation.[25] Horton argues that Organogenesis fails to state a claim in connection with either category.

         First, Horton contends that Organogenesis's claim for indemnification for alleged breaches of representations and warranties must be dismissed because (i) the June 23 Notice failed to comply with the notice requirements set forth in Section 12.1(d) of the Merger Agreement and (ii) Organogenesis fails to adequately plead damages resulting from the subject breaches.[26]

         "Delaware adheres to the objective theory of contracts, i.e. a contract's construction should be that which would be understood by an objective, reasonable third party."[27] "To determine what contractual parties intended, Delaware courts start with the text."[28] "When the contract is clear and unambiguous, [Delaware Courts] will give effect to ...


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