CURRENT MONTH (June 2021)
M&A Law
Delaware Superior Court Sides with CANarchy on Breach of Implied Covenant Claim in connection with its Purchase of Deep Ellum Brewing
By Kolby A. Boyd
On June 4, 2021, the Superior Court of the State of Delaware (the “Court”) granted a motion to dismiss on one of four counts in connection to a lawsuit brought by John Reardon, a representative of the Sellers of Texas-based brewery Deep Ellum Brewing (the “Plaintiff”), against CANarchy, a company that owns several breweries and was the buyer of Deep Ellum Brewing (“CANarchy”, and collectively with several related entities, the “Defendants”), based on an alleged breach of the implied covenant of good faith and fair dealing. The lawsuit also involves three counts of alleged breach of contract that were not addressed in the present opinion.
In 2018, CANarchy agreed to buy Deep Ellum Brewing pursuant to a purchase agreement that contained an earnout provision under which the sellers were entitled to receive additional post-closing consideration based on the number of barrels of Deep Ellum branded beer that CANarchy sold, with a schedule whereby CANarchy would report the number of barrels sold and make earnout payments. A subordinated promissory note provided that principal and interest payments would be made on a set schedule, and those payments were guaranteed by several of the Defendants under a guaranty agreement. Plaintiff alleged that CANarchy failed to timely report the number of barrels sold and make the scheduled payment in 2019, after which Plaintiff and CANarchy entered into a forbearance agreement where CANarchy agreed to pay Plaintiff approximately $10.5 million to cure the default. Plaintiff alleged that CANarchy again failed to deliver the necessary report and earnout payment in 2020. Additionally, Plaintiff alleged that CANarchy did not devote enough resources to brewing, which left numerous orders unsatisfied, invested less in marketing Deep Ellum Brewing than represented in the forbearance agreement, and cut Plaintiff off from the brewery’s operations, all of which led to Deep Ellum Brewing missing sales milestones for earnout payments. Plaintiff subsequently filed suit against the Defendants for three counts of breach of contract and one count of breach of the implied covenant of good faith and fair dealing.
On the alleged breach of the implied covenant of good faith and fair dealing, Defendants argued that Plaintiff failed to identify any gap in the parties’ agreements, that such agreements specifically addressed the alleged breaches, and therefore, the implied covenant claim was fundamentally flawed. Because the agreements specifically governed the Defendants’ obligations to deliver earnout reports and payments and guaranteed those payments, the Defendants asserted that Plaintiff’s implied covenant claim just repackaged the breach of contract claims. While Plaintiff tried to argue that the Defendants had implied obligations to increase awareness of the Deep Ellum Brewing brand and utilize the Plaintiff’s assistance, the Court ultimately agreed with the Defendants that no such implied covenant existed and declined to alter the contract’s express terms as there was no contractual gap and the purchase agreement explicitly stated that the buyer could not take any action to intentionally reduce earnout payments. The Court expanded on this to say that “[t]he implied covenant only exists to fill unanticipated contractual gaps … [i]t is not a vehicle to rebalance one party’s economic interests that adversely were affected by foreseeable post-contracting events” and that implied covenant claims are not available when the subject at issue is expressly covered by the contract. Additionally, the Court found that the claim was duplicative of the Plaintiff’s third breach of contract claim.
Delaware Court of Chancery Rules in Favor of Swift Current Energy on Aiding and Abetting and Unjust Enrichment Claims in connection with its Acquisition of Relight U.S.
By Kolby A. Boyd
On June 8, 2021, the Court of Chancery of the State of Delaware (the “Court”) granted summary judgment on claims of aiding and abetting and unjust enrichment in favor of Swift Current Energy LP and Wind Holdco 2 LLC, a renewable energy company (collectively, “Swift”), over former minority shareholders, including private equity firm Cambria Equity Partners L.P. (collectively, the “Plaintiffs”) of Relight U.S., a wind farm company (“Relight U.S.”), in connection with Swift’s purchase of Relight U.S. from Relight Enterprises S.A. (“Relight”), the majority shareholder of Relight U.S.
The deal, which closed in 2016, involved Relight buying out all of Relight U.S.’s minority shareholders at a purchase price based on the value of Relight U.S. in its subsequent sale to Swift. The price of such sale was to be determined based on the performance of the underlying operations at certain intervals. After the closing, Relight and Swift lowered the purchase price twice, from approximately $14 million to approximately $6 million, which substantially lowered the price the minority shareholders would be paid. In 2018, the Plaintiffs learned of the amendments to the purchase price and alleged that Swift’s and Relight’s principals colluded to inflate the purchase price before closing to entice the Plaintiffs to sell and then lowered the purchase price to decrease the payments to the minority shareholders and increase the transaction value for Swift and Relight.
The Court found that the Plaintiffs’ theory was not supported by any evidence of such an agreement, and instead there was evidence that Plaintiffs were included in the negotiation of the purchase agreement and failed to bargain for any minimum purchase price or cash-out price. The evidence also showed that Relight had negotiated for quicker payments in exchange for the lower price, which, while to the Plaintiff’s detriment, did not make Swift liable for aiding and abetting and did not lead to unjust enrichment. Swift’s behavior was a result of negotiating at arm’s length to further its own interests. Thus, the Court granted summary judgment in Swift’s favor.
Delaware Chancery Court Denies Motion to Dismiss Arising out of Albertsons/Plated Merger
By Dixon Babb
On June 7, 2021, the Court of Chancery of the State of Delaware (the “Court”) denied a motion to dismiss breach of contract claims by Shareholder Representative Services LLC, an investment advisory company (the “Plaintiff”) against Albertsons Cos. Inc., a company that operates the second-largest supermarket enterprise in the United States (“Albertsons”), arising out of its 2017 merger with DineInFresh Inc. d/b/a Plated, a subscription meal kit delivery company (“Plated”). In September 2017, Albertsons and Plated entered into a merger agreement, whereby Plated was merged into a wholly owned subsidiary of Albertsons. The merger agreement had an upfront cash payment of $175 million, which would be followed by up to $125 million in earnout considerations payable over the next three years. Earnout thresholds were based on that year’s net revenue. Plaintiff was acting on behalf of Plated stockholders to bring the post-merger claims.
A hallmark of the Plaintiff’s complaint was that Albertson’s said it would follow Plated’s e-commerce business plan when, in reality, it had no intention of doing so. Rather, Albertsons reallocated Plated’s resources to get its products in approximately 1,000 stores instead of focusing on Plated’s e-commerce platform. According to the complaint, the Plaintiff alleged that Albertsons lured Plated shareholders to sell with assurances that it would support the meal subscription service while also expanding into in-store meal kits. Following the merger, several Plated employees left, and earning targets were not met. According to the Plaintiff, this was due to the transition away from the e-commerce business and an increase in reliance on Albertson’s supply chain that increased Plated’s costs. Because of this, the post-merger earnout goals were never reached. The Court found that a reasonable inference can be drawn from the allegations in the complaint that Albertson’s altered Plated’s business plan with the intent to avoid paying earnout and denied the motion to dismiss.
International M&A
Delaware Chancery Court Denies Motion to Dismiss in Lawsuit Over the Reorganization of a Cannabis Industry Firm
By Courtney Black
On June 1, 2021, the Court of Chancery of the State of Delaware (the “Court”) issued a memorandum opinion denying four grounds for dismissal under its review. The litigation originated out of the downstream merger of Privateer Holdings, Inc., a private equity firm for cannabis industry investments (“Privateer”) and its subsidiary Tilray, Inc. (“Tilray”), a Canadian cannabis research and distribution company (the “Downstream Merger”). The Downstream Merger was part of a reorganization effort for tax benefits.
Tilray’s stockholders (the “Plaintiffs”) filed the lawsuit claiming Privateer and its founders used their control of Tilray to reorganize without adequate compensation to Tilray and its minority stockholders. In response, Tilray and its founders (collectively, the “Defendants”) filed a motion to dismiss on four grounds.
Defendants first moved to dismiss under Rule 12(b)(6) for Plaintiffs’ failure to adequately allege that the founders comprised a control group. Under Delaware law, the test for showing whether a group of stockholders exercised collective control is that the stockholders are connected in a legally significant way and working toward a shared goal. Here, Plaintiffs sufficiently alleged the founders’ unique, shared interest was the desire to reorganize for tax benefits. Plaintiffs also alleged “plus factors” in support of a control group: the founders had historical and current ties (they were former classmates and ventured into the start-up world together) and transaction ties (they held themselves out as founders and partners in proxy references to the reorganization). The Court thus held there was a control group and denied the motion to dismiss.
Defendants also moved under Rule 12(b)(6) for Plaintiffs’ failure to adequately allege the reorganization was a self-dealing transaction subject to an entire fairness standard. Defendants attempted to interpret the leading case, Sinclar Oil Corporation v. Levien, to require exclusive benefit to the fiduciary and detriment to the minority stockholders. Yet, the Court flatly rejected this reading based on Delaware precedent and reiterated that the entire fairness standard applies whenever a controller extracts a non-ratable or unique benefit. Here, the founders gained a unique benefit from Tilray – they needed the Board’s approval of the reorganization matters, including the downstream merger, to obtain the tax benefits.
Defendants further moved to dismiss under Court of Chancery Rule 23.1 for Plaintiffs’ failure to adequately allege that the derivative suit’s demand requirement was futile and excused. Under Delaware law, the test for excusing demand is whether the directors are incapable of making an impartial decision. Here, the Court found one director was conflicted because he was a director of both Privateer and Tilray, who were on opposite sides of the reorganization transaction. The Court found a second director was interested because she worked for Crestview Strategy, a lobbying firm who received substantial business from Privateer and Tilray. A third director’s interest was not disputed, which created a majority of conflicted directors. The Court thus found demand was futile and excused and denied the motion to dismiss.
Defendants’ final motion to dismiss centered on a lack of personal jurisdiction for two founders. Plaintiffs alleged personal jurisdiction for these two founders under a conspiracy theory of jurisdiction, which requires (1) a conspiracy existed, (2) defendant was a member, (3) a substantial act or effect in furtherance of the conspiracy occurred in the forum state, (4) the defendant knew or had reason to know of the acts or effects, and (5) the act or effect was a direct and foreseeable result of the conduct in furtherance of the conspiracy. Here, the Court used the control group claim to satisfy the first two elements and the formation of a Delaware entity in the reorganization for the third, fourth, and fifth elements. The Court thus held it had personal jurisdiction over the two founders at issue and denied the motion to dismiss.
