October 28, 2010
In Aveta Inc. v. Cavallieri, C.A. No. 5074-VCL (Del. Ch. Sept. 20, 2010), the Court of Chancery held that the contractual process for calculating post-closing adjustments to plaintiff’s purchase price for Preferred Medical Choice Inc. (“PMC”) was binding on all former PMC stockholders.
In 2006, Aveta Inc. (“Aveta”), a Delaware corporation, acquired PMC, a Puerto Rico corporation, in a transaction involving both a purchase of shares and a merger (together, the “transaction”). Aveta purchased PMC’s Class A shares from its controlling stockholders (the “Principal Stockholders”) for 60.93% of the total transaction consideration and then merged a Puerto Rico acquisition subsidiary into PMC. In the merger, PMC’s Class B shares were converted into the right to receive the remaining 39.07% of the transaction consideration. The transaction agreement (the “Agreement”) provided that the transaction consideration was subject to certain post-closing adjustments and included a procedure for calculating such adjustments. The Agreement contemplated that Aveta would calculate the post-closing adjustments based on PMC’s books and records and provide its calculations to the PMC stockholders’ representative for review. If the stockholders’ representative and Aveta agreed on the calculations, the result would be final and binding. If the stockholders’ representative and Aveta could not agree on the calculations, their disputes would be resolved through binding arbitration. The Agreement designated Roberto L. Bengoa, a Principal Stockholder, as the PMC stockholders’ representative.
After closing, Aveta provided Bengoa its calculation of the post-closing adjustments. Aveta and Bengoa were unable to reach an agreement on the calculations. During the course of exploring potential resolutions, Aveta and Bengoa executed an informal agreement outlining a framework for potentially resolving disputes (the “Total Proposal”). Aveta and Bengoa also began the arbitration procedure. For nearly a year, Aveta attempted to arbitrate with Bengoa to resolve the post-closing adjustments calculation, but Bengoa refused to proceed any further with arbitration. In 2008, the Court of Chancery ordered Bengoa to arbitrate pursuant to the terms of the Agreement. See Aveta Inc. v. Bengoa, 2008 WL 5255818 (Del. Ch. Dec. 11, 2008). Bengoa failed to arbitrate and the Court held Bengoa in contempt of the arbitration order. See Aveta Inc. v. Bengoa, 986 A.2d 1166 (Del. Ch. 2009). Meanwhile, former PMC stockholders purported to revoke the designation of Bengoa as the stockholders’ representative. Former PMC stockholders also filed actions in Puerto Rico, challenging Aveta’s calculation of the post-closing adjustments, alleging that the Total Proposal superseded the Agreement and seeking specific performance of the Total Proposal. In response, Aveta filed the present action and the Puerto Rico actions were stayed pending the outcome of this action.
The central question for the Court was whether all former PMC stockholders were bound by the contractual process for calculating post-closing adjustments, including the outcome of the arbitration. The Court held that the Principal Stockholders were bound by the determinations made in the post-closing adjustment process, including the results of the arbitration, under agency law. The Court found that because the Principal Stockholders were signatories to the Agreement, which irrevocably appointed Bengoa as their agent, the Principal Stockholders were bound by Bengoa’s actions. Because Bengoa, as a Principal Stockholder, had an interest in PMC, the Agreement and the calculation of the transaction consideration, the Court held that Bengoa’s authority was coupled with an interest sufficient to make it irrevocable. Alternatively, the Court validated the grant of irrevocable authority to Bengoa under the principles articulated in Abercrombie v. Davies, 123 A.2d 893 (Del. Ch. 1956), rev’d on other grounds, 130 A.2d 338 (Del. 1957). As was stated by the Court of Chancery in Abercrombie, “the irrevocability of the grant of authority in this case was essential to functioning of the interrelated provisions of the agreement” and each of the parties “relied on the irrevocability of the grant of authority in entering into the [transaction] agreement.” The Court concluded that the Principal Stockholders clearly and unambiguously granted Bengoa irrevocable authority to act as their stockholder representative, and they could not later revoke that authority. Thus, the Principal Stockholders were bound by Bengoa’s actions as a matter of agency law.
With regard to the Class B Stockholders, who did not sign the Agreement, the Court held that corporate law rather than agency law dictated the same result. Because the merger converting PMC’s Class B shares into a percentage of the consideration occurred between two Puerto Rico corporations, the merger was governed by Section 3051 of the General Corporation Law of 1995 of the Commonwealth of Puerto Rico, a section that paralleled Section 251 of the DGCL as it existed in 1995. Like Section 251, Section 3051 provided that any of the terms of a merger agreement “may depend upon facts ascertainable outside of such agreement.” In interpreting that provision to determine whether the post-closing adjustment calculations were “facts ascertainable,” the Court looked to the legislative history of Section 251, case law interpreting Section 251 and the similar “facts ascertainable” provision of Section 151 of the DGCL. The Court noted that in 1994, Section 151(g) was amended to specify that the term “facts” includes “the occurrence of any event, including a determination or action by any person or body, including the corporation,” and that Section 251 was likewise amended in 1996. The Court noted that Section 251 permits a merger agreement to provide for merger consideration that is contingent on future circumstances, such as future earnings or the net worth of a corporation at a future date.
The Court concluded that the post-closing adjustments were clearly and expressly set forth in the Agreement and qualified as facts ascertainable outside of such agreement, as the calculations turned on financial figures from PMC’s books and records. Moreover, the Court concluded that requiring the post-closing adjustments to be determined by a neutral arbiter, unless the parties agreed on the calculations, placed a natural check on the exercise of Aveta’s discretion. For those reasons, the Court held that all Class B stockholders were bound by the determinations made in the post-closing adjustment process, including the results of the arbitration.
The Court also addressed Aveta’s argument that, by filing suit in Puerto Rico, the stockholders had breached the exclusive forum selection clause in the Agreement. The Court concluded that the Principal Stockholders were bound by the choice of forum clause in the Agreement as signatories thereto and that the Class B stockholders were bound by their conduct. The Court noted that under Delaware law, “a non-signatory to a contract will be estopped from arguing that a dispute-resolution provision does not apply when the non-signatory consistently maintains that other provisions of the same contract should be enforced to benefit him.” The Court found that the Class B stockholders were estopped from arguing that the forum selection clause did not apply because their claims in Puerto Rico relating to the Total Proposal were dependent on the terms of the Agreement. The Court concluded that, by invoking the terms of the Agreement, the Class B stockholders were estopped from “picking only the provisions they liked and ignoring others.” The Court held that the stockholders had breached the Agreement by pursuing the actions in Puerto Rico and were jointly and severally liable to Aveta for the costs it had incurred in the Puerto Rico actions.
For the foregoing reasons, the Court granted plaintiff’s motion for summary judgment and denied defendant stockholders’ cross-motion for summary judgment.