CURRENT MONTH (August 2018)
Delaware Court of Chancery Exercises Broad Remedial Powers to Address Breach of a Contractual Right to an Exit Sale
By K. Tyler O’Connell, Morris James LLP
In a February 2018 post-trial decision, the Delaware Court of Chancery held that the majority member of Oxbow Carbon LLC–an entity controlled by billionaire William I. Koch–impeded a potential company sale in breach of an obligation in the parties’ limited liability company agreement to use “reasonable efforts” to sell the company, resulting in a lost liquidity opportunity. In a recent follow-on decision, In re Oxbow Carbon LLC Unitholder Litig., 2018 WL 3655257 (Del. Ch. Aug. 1, 2018), the Court canvassed available precedent in applying its broad remedial discretion to award a Court-monitored sale of the company as well as compensatory damages related to the frustrated sale process.
The Court first explained that it has broad powers to grant full, fair and just relief in all circumstances–authority with roots tracing back to the English monarchy’s practice of referring difficult disputes to a chancellor with greater discretion than the common law afforded. Here, the Court invoked that power to grant the minority members of the company specific performance of their bargained for right to exit the business, thus “enabling two warring factions to go their separate ways.” In doing so, the Court rejected Koch’s arguments that complex procedural steps in the parties’ agreement must be satisfied anew before any sale, reasoning that would provide Koch a “do over” rather than providing the minority with a sufficient remedy, and that such an approach also would imbue the remedy of specific performance “with the brittle stiffness of the old, common law writs.”
As a component of that remedy, the Court reviewed precedent throughout the United States concerning the use of oversight mechanisms and court-appointed neutrals (e.g., receivers, masters and monitors) to implement complex remedies. It reasoned that use of a Court-appointed agent was appropriate here in light of the complexity of conducting the sale and the parties’ past behavior indicating they would “clash on many issues…” The Court accordingly ordered that a neutral be appointed to monitor the process and report on compliance, noting that was less intrusive than appointing a receiver to conduct the sale, a step that could be taken if future developments warranted. The Court also ordered that the minority members would be entitled to compensatory damages if the sale process did not result in a transaction at least as lucrative as the prior, frustrated potential transaction.
Finally, the Court ordered that the minority members be paid their pro rata share of large attorneys’ fees Koch caused the company to incur in order to frustrate the prior sale process. Koch’s personal counsel was hired as company counsel and assisted in frustrating the potential transaction when, in the circumstances, the Court believed the company and its counsel “should not have been picking sides” in the members’ dispute. The Court rejected Koch’s suggestion to treat the resulting harm as derivative in nature, reasoning that the dispute in essence was “two-sided and zero sum,” rendering the direct/derivative distinction less relevant. Under the circumstances, the Court reasoned, “a court of equity can address the realities of this two-sided dispute, look past the derivative characterization” and award directly to the minority members their pro rata share of what the Court viewed as improper expenses.
In sum, the recent Oxbow Carbon decision both explains in detail and demonstrates the broad remedial discretion a court possesses to address complex harms and attempt to return a claimant to roughly the situation she would be in but for a breach. It is important reading for counsel and clients considering the judicial system’s ability to employ creative and powerful remedies tailored to specific factual circumstances.