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Judge LeGrow Analyzes Stock Purchase Agreement and Dismisses Claims Related to Breach of Non-Solicitation Clause due to Plaintiff's Failure to Plead Affiliate Status

August 7, 2019

In P&TI Acquisition Company, Inc., v. Morgenthaler Partners VII, LP, et al., C.A. No. N18C-08-059 AML [CCLD], Judge LeGrow dismissed breach of contract and breach of the implied covenant of good faith and fair dealing claims against all defendants. This case stemmed from the plaintiff’s purchase of PhilTem Holdings, Inc. from the defendants in 2012 under a stock purchase agreement that included a non-solicitation clause. The non-solicitation clause prohibited the defendants, as sellers, from soliciting any PhilTem employee during the restricted period. Moreover, the non-solicitation clause also prohibited affiliates of the sellers from soliciting any employee of the company. Despite this clause, the plaintiff claimed that defendants solicited employees of PhilTem through an affiliate, MPE Partners, LP.

In considering the defendant’s motions to dismiss, the central issue was whether MPE was an affiliate of the defendants. Judge LeGrow found that the plaintiff’s pleadings were insufficient to show that MPE was an affiliate of any of the defendants bound by the non-solicitation clause because there was nothing to indicate that the defendants controlled MPE. Further, Judge LeGrow found that no defendant had a managing interest in MPE. Judge LeGrow also considered whether the defendants could control MPE as a control group, but concluded that the plaintiff failed to plead sufficient facts to support a control group theory. Accordingly, dismissal of the breach of the non-solicitation claim was warranted.

Finally, Judge LeGrow also considered a claim for breach of the implied covenant of good faith and fair dealing that alleged that the implied covenant warranted MPE being considered as an affiliate. Judge LeGrow dismissed this claim because affiliate was defined in the stock purchase agreement. Therefore, there was no gap in the contract to fill, and application of the implied covenant was improper.

Analysis: Over the years, the CCLD has become a popular venue to resolve disputes involving purchase and sale agreements. The CCLD has developed significant experience in handling the complex disputes that often arise from M&A transactions. Here, Judge LeGrow was tasked with reviewing the applicable agreement and analyzing the myriad definitional terms to determine whether the plaintiff had met the pleading standards required under Delaware law.

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