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Composecure, L.L.C. v. Cardux, LLC

Supreme Court of Delaware

July 24, 2019

COMPOSECURE, L.L.C., Plaintiff/Counterclaim Defendant-Below, Appellant,
CARDUX, LLC f/k/a AFFLUENT CARD, LLC, Defendants/Counterclaim Plaintiff- Below, Appellee.

          Submitted: July 17, 2019

          Court of Chancery of the State of Delaware C.A. No. 12524-VCL

         Following remand to the Court of Chancery. AFFIRMED.

          Myron T. Steele, Esquire, Arthur L. Dent, Esquire, Andrew H. Sauder, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware. Of Counsel: Steven M. Coren, Esquire, David M. DeVito, Esquire, Kaufman, Coren & Ress, P.C., Philadelphia, Pennsylvania for Appellants.

          David J. Margules, Esquire, Elizabeth A. Sloan, Esquire, Jessica C. Watt, Esquire, Ballard Spahr LLP, Wilmington, Delaware; Burt M. Rublin, Esquire, Ballard Spahr LLP, Philadelphia, Pennsylvania for Appellees.

          Before VALIHURA, VAUGHN, and SEITZ, Justices.


         CompoSecure, L.L.C., a manufacturer of metal credit cards, has been seeking to invalidate the Sales Representative Agreement (the "Sales Agreement") it signed with CardUX, LLC. The Court of Chancery held in a February 1, 2018 post-trial decision that the Sales Agreement had not been properly approved under CompoSecure's Amended and Restated Limited Liability Company Agreement (the "LLC Agreement"), but that CompoSecure had impliedly ratified the Sales Agreement by its conduct. CompoSecure appealed.

         In our November 7, 2018 opinion, we agreed with the trial court's analysis as far as it went, but we remanded to the trial court to answer a potentially outcome-determinative question that it had not answered: whether the Sales Agreement is a "Restricted Activity" under the LLC Agreement. If it is a Restricted Activity, we noted that the Sales Agreement would be void and unenforceable. We retained jurisdiction. In its report on remand (the "Report"), the Court of Chancery held that the Sales Agreement was not a Restricted Activity, and thus, the Sales Agreement is not void. For the reasons below, we agree with the Court of Chancery's conclusions.


         CardUX was co-founded by a CompoSecure director, Kevin Kleinschmidt, to market the metal cards that CompoSecure manufactures. The Sales Agreement, which CompoSecure and CardUX executed on November 9, 2015, provides CardUX with a fifteen percent commission of the net sales price of any order from a list of "Approved Prospects." On January 19, 2016, Amazon agreed with its co-branding partner, Chase, to order CompoSecure's metal cards. Although CardUX's marketing efforts did not lead to the Amazon deal, CardUX, nonetheless, was entitled to fifteen percent of the net sales price because Amazon was an Approved Prospect. Without paying any commissions to CardUX, CompoSecure removed Kleinschmidt from the CompoSecure Board in May 2016 and hired litigation counsel who, for the first time, asserted that CompoSecure had not properly authorized the Sales Agreement under its LLC Agreement.

         CompoSecure then sought a declaratory judgment in the Court of Chancery that the Sales Agreement was invalid based on two provisions in the LLC Agreement, namely, Section 5.4 (the "Related Party Provision") and Section 4.1(p)(ix)(A) (the "Restricted Activities Provision").[1] The Related Party Provision states that, in a conflicted transaction such as the Sales Agreement, the transaction must be approved by the CompoSecure Board, the Investors, and the Class A Majority.[2] The Restricted Activities Provision prohibits CompoSecure from entering into "any contract, agreement, arrangement or understanding requiring the Company or any of its Subsidiaries to make expenditures in excess of $500, 000 during any fiscal year, other than in the ordinary course of business consistent with past practice," without prior approval by the Board, the Investors, and, during the "Earnout Period," the Class A Majority.[3] But the Restricted Activities Provision also provides that "any action taken in contravention of the foregoing shall be void and of no force or effect whatsoever."[4]

         In its February 1, 2018 post-trial decision, [5] the Court of Chancery held that CompoSecure had failed to obtain the required approvals under the Related Party Provision. But the court also held that CompoSecure had impliedly ratified the Sales Agreement because a majority of the Board supported the Sales Agreement-including Michelle Logan, who controlled the Class A Majority vote, and Mitchell Hollin, who represented the Investors-and because CompoSecure had treated the Sales Agreement as a valid and binding contract for months following its execution. As a result, the court awarded nearly $17 million to CardUX for past-due commissions, legal fees and expenses, contractual damages, and prejudgment interest. The court did not separately consider whether the Restricted Activities Provision applied to the Sales Agreement, and, if so, whether the Sales Agreement is void or merely voidable. Rather, the court only assumed that the Restricted Activities Provision applied, and the court held that it was "cumulative" of the Related Party Provision.[6]

         CompoSecure appealed. It argued that the trial court failed to consider the "void" language in the Restricted Activities Provision. Specifically, it argued that the "void" language trumped the common law rule that voidable acts-those falling within the power of a corporation but not properly authorized-are subject to equitable defenses such as implied ratification. Thus, CompoSecure argued, the Sales Agreement is void and incapable of being ratified.

         In a November 7, 2018 opinion, [7] this Court affirmed the Court of Chancery's decision that CompoSecure's failure to comply with the Related Party Provision was a voidable act subject to implied ratification, and, based on the unchallenged factual findings by the trial court, we found no error with the court's conclusion that CompoSecure had impliedly ratified the Sales Agreement. We agreed with CompoSecure, however, that the trial court overlooked the "void" language in the Restricted Activities Provision. We held that, if it is a Restricted Activity, the Sales Agreement is void and incapable of being ratified. Accordingly, we reversed the Court of Chancery on that issue. But because the parties disputed whether the Sales Agreement qualified as a Restricted Activity, and because that determination "require[d] factual findings that the Vice Chancellor is better equipped to make," we remanded the case to the trial court and asked the court "to determine whether the Sales Agreement is a Restricted Activity and to make any necessary related determinations."[8] We retained jurisdiction.

         The Court of Chancery issued its Report on June 5, 2019.[9] The court began its analysis by noting that the "operative term in the Restricted Activities Provision is 'requiring.'"[10] The court held that the term "requiring" is "a commonly used word with a clear meaning."[11] Something that is "required" is "necessary or essential, and a requirement is something that must take place."[12] Thus, a Restricted Activity "is a contract that mandates spending in [excess of $500, 000 during any fiscal year], without any contingencies, conditions, or optionality."[13]

         CompoSecure argued below that the Sales Agreement is a Restricted Activity because commissions for the Amazon order exceeded $500, 000 in a fiscal year. But the court held that commissions from the Amazon sale-and any other commissions-were "doubly conditional."[14] That is, to clear the $500, 000 hurdle, an Approved Prospect would have to place an order and CompoSecure would have to accept that 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."[15] The second condition, provided for in Sections 5.1 and 5.2 of the Sales Agreement, [16] "gave CompoSecure the ability to determine unilaterally whether it would ever be required to pay a commission."[17] Thus, the court concluded, "[b]ecause of the second condition, CompoSecure could never be required to pay a commission unless CompoSecure determined that the order from an Approved Prospect provided sufficient value to CompoSecure to warrant accepting the order and making the commission payment."[18]

         The trial court also rejected CompoSecure's arguments concerning initial projections of commissions from the Sales Agreement, made by CardUX principals, and its reliance on ThoughtWorks, Inc. v. SV Investment Partners.[19] As to the initial projections, the court held that they were "preliminary, speculative, and remote from the final Sales Agreement, both temporally and conceptually."[20] Further, it held that those projections "at most represented one side's expectations during an early phase of the negotiations," and that "[p]rojections are predictions, not requirements."[21] As to ThoughtWorks-which involved a $10 million line of credit in the context of an expenditure-based restricted activities provision-the court concluded that it was distinguishable for three reasons: the narrower language in the Restricted Activities Provision; the structural differences between the Sales Agreement and the line of credit in ThoughtWorks; and, unlike here, the management in ThoughtWorks attempted to act contrary to the interests of the preferred stockholders whom the restricted activities provision was meant to protect.

         Given those facts, the court found that the Sales Agreement required only two expenditures: an annual expense reimbursement capped at $20, 000 and a commission advance of $10, 000 per month during the first fifteen months. Combined, those two required expenditures fell short of the $500, 000 hurdle. Thus, the court held that the Sales Agreement was not subject to the Restricted Activities Provision, and, as such, "the LLC Agreement did not require any additional approvals, and it was not void because of a failure to obtain them."[22] Rather, the court held that "CompoSecure's management team and its owners are now ...

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