Acela Investments LLC v. Raymond DiFalco
This text of Acela Investments LLC v. Raymond DiFalco (Acela Investments LLC v. Raymond DiFalco) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ACELA INVESTMENTS LLC, ACELA ) FIRST INVESTMENTS LLC, ACELA NEW ) INVESTMENTS LLC, and DR. STEFAN ) AIGNER, ) ) Plaintiffs, ) ) v. ) C.A. No. 2018-0558-AGB ) RAYMOND DIFALCO and MANISH ) SHAH, ) ) Defendants, ) ) and ) ) INSPIRION DELIVERY SCIENCES, LLC ) and INSPIRION DELIVERY ) TECHNOLOGIES, LLC, ) ) Nominal Defendants. ) RAYMOND DIFALCO, ) ) Counterclaim and Third-Party ) Plaintiff, ) ) v. ) ) DR. STEFAN AIGNER, ) ) Counterclaim Defendant, ) ) and ) ) INSPIRION DELIVERY SCIENCES, LLC, ) ) Third-Party Defendant. ) MEMORANDUM OPINION
Date Submitted: March 15, 2019 Date Decided: May 17, 2019
Peter B. Ladig and Brett M. McCartney of BAYARD, P.A., Wilmington, Delaware; David H. Wollmuth and Michael C. Ledley of WOLLMUTH MAHER & DEUTSCH LLP, New York, New York. Attorneys for Plaintiffs and Counterclaim Defendant.
Norman M. Monhait and Carmella P. Keener of ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; William T. Reid, IV, Michael Yoder, Jordan L. Vimont, and Ryan M. Goldstein of REID COLLINS & TSAI LLP, Austin, Texas. Attorneys for Defendants and Counterclaim and Third-Party Plaintiff.
BOUCHARD, C. About thirteen years ago, Raymond DiFalco and Manish Shah began working
together on a promising technology to deter the abuse of opioids and other drugs. In
2008, they joined with Stefan Aigner, a pharmaceutical executive, to form the
predecessor of a Delaware limited liability company known as Inspirion Delivery
Sciences, Inc. (“IDS”), which was established in 2016. Today, IDS owns two FDA-
approved drugs but has achieved limited commercial success.
The LLC agreement for IDS contains a bespoke governance structure. It
names Aigner and DiFalco as Chief Executive Officer and President, respectively,
and provides that they each must perform their duties subject to the “advice and
consent” of the other. The LLC agreement further provides that either (i) Aigner or
(ii) DiFalco and Shah together can veto any action of the IDS board of managers.
The LLC agreement also contains a provision that was intended to address conflicts
of interest by having an “Independent Representative” vote in place of a conflicted
manager, but which has become a central point of controversy in its application.
Although Aigner, DiFalco, and Shah began their venture with a promising
technology and presumably the best of intentions, their relationship has devolved
into one of distrust and animosity between Aigner, on the one hand, and DiFalco and
Shah, on the other hand. The two camps have become deadlocked on fundamental
questions concerning who IDS should partner with to manufacture its two current
products and to develop new products, and concerning the strategic direction of the
1 company, in particular whether its limited resources should be used for research and
development or to build an in-house sales force. After a lengthy period of infighting
and numerous unsuccessful efforts to resolve their disputes, Shah resigned from his
positions as Chief Science Officer and a manager of IDS. Shortly after, Aigner
initiated litigation against DiFalco and Shah, prompting DiFalco to request judicial
dissolution of IDS.
In this post-trial decision, the court concludes for the reasons explained in
detail below that it is not reasonably practicable to carry on the business of IDS in
conformity with its LLC agreement and that judicial dissolution of the company is
warranted. In brief, the record shows that Aigner has arrogated to himself virtually
unfettered control over the company’s management in contravention of the
company’s contractually specified governance structure by acting unilaterally
instead of trying to work collaboratively with DiFalco and by using the conflict of
interest provision in the LLC agreement improperly as a weapon to marginalize
DiFalco’s role in managing the company.
I. BACKGROUND
The facts recited in this opinion are my findings based on the testimony and
documentary evidence presented during a three-day trial held in December 2018.
The record includes stipulations of fact from the Pre-Trial Stipulation and Order
(“PTO”), over 350 trial exhibits, and testimony from eight fact witnesses.
2 A. The Players
The company at the center of the dispute in this case is Inspirion Delivery
Sciences, LLC (“IDS” or the “Company”), a Delaware limited liability company that
develops abuse-deterrent pharmaceutical products.1 IDS is the successor to
Inspirion Delivery Technologies, LLC (“IDT”), a Delaware limited liability
company that now serves as a holding company for IDS and owns approximately
72% of its membership interests.2 IDT was co-founded by Stefan Aigner, Raymond
DiFalco, and Manish Shah, the main protagonists in this action.
Aigner is the Chief Executive Officer and a manager of both IDT and IDS.3
Aigner has executive experience in the specialty pharmaceutical industry and is the
owner and/or managing partner of three entities through which he owns membership
interests in IDT and IDS: Acela Investments LLC, Acela First Investments LLC,
and Acela New Investments LLC, all Delaware limited liability companies. 4 For
simplicity, this decision refers to Aigner and these three entities together as “Aigner”
when discussing the plaintiffs collectively.
1 PTO ¶¶ 21, 24, 36; Tr. 7 (Aigner). 2 PTO ¶¶ 23, 36. 3 PTO ¶ 20. 4 PTO ¶¶ 17-20; Tr. 9-10 (Aigner). 3 DiFalco is a member, manager, and President of IDT, and a manager and
President of IDS.5 Aigner attempted to remove DiFalco as President of IDS in
November 2018 but, as discussed below, that action was invalid. DiFalco is trained
in chemical engineering and has expertise in the development and construction of
pharmaceutical manufacturing processes.6
Shah is a member of IDT.7 Shah is a scientist with more than twenty years of
experience in the pharmaceutical industry, primarily in developing pharmaceutical
products.8 Shah was formerly a manager of both IDT and IDS and the Chief Science
Officer of IDS.9 He resigned as a manager of IDT and IDS on July 6, 2018, and as
an officer of both companies on October 15, 2018.10
DiFalco and Shah have been aligned with each other at all relevant times.
They are the co-inventors of the abuse-deterrent technology that was the reason for
creating IDT and that is central to IDS’s business prospects.11 DiFalco and Shah
co-own Cerovene, Inc., a Delaware corporation, which served as IDT’s development
5 PTO ¶ 21. 6 Tr. 662, 664 (DiFalco). 7 PTO ¶ 22. 8 Tr. 547-48 (Shah). 9 PTO ¶ 22. 10 PTO ¶ 22; JX 277. 11 PTO ¶ 22. 4 partner for two drugs (MorphaBond and RoxyBond) and is a party to a supply
agreement with IDS for one of those drugs (MorphaBond).12
Before Shah resigned as a manager of IDS in July 2018, the Company’s board
of managers (the “Board”) consisted of four members: Aigner, DiFalco, Shah, and
Gerard Leduc. Leduc is a French citizen who invested in IDT in 2015 and became
a manager of IDS and IDT in September 2016.13
Most of the funds that were invested in IDT to pay for the development of
MorphaBond and RoxyBond came from the predecessor of an entity known as Trygg
IDT I Holdings Corporation (“Trygg”), a Delaware corporation.14 Trygg is a joint
venture between private equity firm Lindsay Goldberg LLC and Aker AS, a
Norwegian industrial investment company.15 Aigner introduced IDT to Trygg
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ACELA INVESTMENTS LLC, ACELA ) FIRST INVESTMENTS LLC, ACELA NEW ) INVESTMENTS LLC, and DR. STEFAN ) AIGNER, ) ) Plaintiffs, ) ) v. ) C.A. No. 2018-0558-AGB ) RAYMOND DIFALCO and MANISH ) SHAH, ) ) Defendants, ) ) and ) ) INSPIRION DELIVERY SCIENCES, LLC ) and INSPIRION DELIVERY ) TECHNOLOGIES, LLC, ) ) Nominal Defendants. ) RAYMOND DIFALCO, ) ) Counterclaim and Third-Party ) Plaintiff, ) ) v. ) ) DR. STEFAN AIGNER, ) ) Counterclaim Defendant, ) ) and ) ) INSPIRION DELIVERY SCIENCES, LLC, ) ) Third-Party Defendant. ) MEMORANDUM OPINION
Date Submitted: March 15, 2019 Date Decided: May 17, 2019
Peter B. Ladig and Brett M. McCartney of BAYARD, P.A., Wilmington, Delaware; David H. Wollmuth and Michael C. Ledley of WOLLMUTH MAHER & DEUTSCH LLP, New York, New York. Attorneys for Plaintiffs and Counterclaim Defendant.
Norman M. Monhait and Carmella P. Keener of ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; William T. Reid, IV, Michael Yoder, Jordan L. Vimont, and Ryan M. Goldstein of REID COLLINS & TSAI LLP, Austin, Texas. Attorneys for Defendants and Counterclaim and Third-Party Plaintiff.
BOUCHARD, C. About thirteen years ago, Raymond DiFalco and Manish Shah began working
together on a promising technology to deter the abuse of opioids and other drugs. In
2008, they joined with Stefan Aigner, a pharmaceutical executive, to form the
predecessor of a Delaware limited liability company known as Inspirion Delivery
Sciences, Inc. (“IDS”), which was established in 2016. Today, IDS owns two FDA-
approved drugs but has achieved limited commercial success.
The LLC agreement for IDS contains a bespoke governance structure. It
names Aigner and DiFalco as Chief Executive Officer and President, respectively,
and provides that they each must perform their duties subject to the “advice and
consent” of the other. The LLC agreement further provides that either (i) Aigner or
(ii) DiFalco and Shah together can veto any action of the IDS board of managers.
The LLC agreement also contains a provision that was intended to address conflicts
of interest by having an “Independent Representative” vote in place of a conflicted
manager, but which has become a central point of controversy in its application.
Although Aigner, DiFalco, and Shah began their venture with a promising
technology and presumably the best of intentions, their relationship has devolved
into one of distrust and animosity between Aigner, on the one hand, and DiFalco and
Shah, on the other hand. The two camps have become deadlocked on fundamental
questions concerning who IDS should partner with to manufacture its two current
products and to develop new products, and concerning the strategic direction of the
1 company, in particular whether its limited resources should be used for research and
development or to build an in-house sales force. After a lengthy period of infighting
and numerous unsuccessful efforts to resolve their disputes, Shah resigned from his
positions as Chief Science Officer and a manager of IDS. Shortly after, Aigner
initiated litigation against DiFalco and Shah, prompting DiFalco to request judicial
dissolution of IDS.
In this post-trial decision, the court concludes for the reasons explained in
detail below that it is not reasonably practicable to carry on the business of IDS in
conformity with its LLC agreement and that judicial dissolution of the company is
warranted. In brief, the record shows that Aigner has arrogated to himself virtually
unfettered control over the company’s management in contravention of the
company’s contractually specified governance structure by acting unilaterally
instead of trying to work collaboratively with DiFalco and by using the conflict of
interest provision in the LLC agreement improperly as a weapon to marginalize
DiFalco’s role in managing the company.
I. BACKGROUND
The facts recited in this opinion are my findings based on the testimony and
documentary evidence presented during a three-day trial held in December 2018.
The record includes stipulations of fact from the Pre-Trial Stipulation and Order
(“PTO”), over 350 trial exhibits, and testimony from eight fact witnesses.
2 A. The Players
The company at the center of the dispute in this case is Inspirion Delivery
Sciences, LLC (“IDS” or the “Company”), a Delaware limited liability company that
develops abuse-deterrent pharmaceutical products.1 IDS is the successor to
Inspirion Delivery Technologies, LLC (“IDT”), a Delaware limited liability
company that now serves as a holding company for IDS and owns approximately
72% of its membership interests.2 IDT was co-founded by Stefan Aigner, Raymond
DiFalco, and Manish Shah, the main protagonists in this action.
Aigner is the Chief Executive Officer and a manager of both IDT and IDS.3
Aigner has executive experience in the specialty pharmaceutical industry and is the
owner and/or managing partner of three entities through which he owns membership
interests in IDT and IDS: Acela Investments LLC, Acela First Investments LLC,
and Acela New Investments LLC, all Delaware limited liability companies. 4 For
simplicity, this decision refers to Aigner and these three entities together as “Aigner”
when discussing the plaintiffs collectively.
1 PTO ¶¶ 21, 24, 36; Tr. 7 (Aigner). 2 PTO ¶¶ 23, 36. 3 PTO ¶ 20. 4 PTO ¶¶ 17-20; Tr. 9-10 (Aigner). 3 DiFalco is a member, manager, and President of IDT, and a manager and
President of IDS.5 Aigner attempted to remove DiFalco as President of IDS in
November 2018 but, as discussed below, that action was invalid. DiFalco is trained
in chemical engineering and has expertise in the development and construction of
pharmaceutical manufacturing processes.6
Shah is a member of IDT.7 Shah is a scientist with more than twenty years of
experience in the pharmaceutical industry, primarily in developing pharmaceutical
products.8 Shah was formerly a manager of both IDT and IDS and the Chief Science
Officer of IDS.9 He resigned as a manager of IDT and IDS on July 6, 2018, and as
an officer of both companies on October 15, 2018.10
DiFalco and Shah have been aligned with each other at all relevant times.
They are the co-inventors of the abuse-deterrent technology that was the reason for
creating IDT and that is central to IDS’s business prospects.11 DiFalco and Shah
co-own Cerovene, Inc., a Delaware corporation, which served as IDT’s development
5 PTO ¶ 21. 6 Tr. 662, 664 (DiFalco). 7 PTO ¶ 22. 8 Tr. 547-48 (Shah). 9 PTO ¶ 22. 10 PTO ¶ 22; JX 277. 11 PTO ¶ 22. 4 partner for two drugs (MorphaBond and RoxyBond) and is a party to a supply
agreement with IDS for one of those drugs (MorphaBond).12
Before Shah resigned as a manager of IDS in July 2018, the Company’s board
of managers (the “Board”) consisted of four members: Aigner, DiFalco, Shah, and
Gerard Leduc. Leduc is a French citizen who invested in IDT in 2015 and became
a manager of IDS and IDT in September 2016.13
Most of the funds that were invested in IDT to pay for the development of
MorphaBond and RoxyBond came from the predecessor of an entity known as Trygg
IDT I Holdings Corporation (“Trygg”), a Delaware corporation.14 Trygg is a joint
venture between private equity firm Lindsay Goldberg LLC and Aker AS, a
Norwegian industrial investment company.15 Aigner introduced IDT to Trygg
through Egil Bodd, a Norwegian doctor and clinical pharmacology specialist who
was working at Lindsay Goldberg at the time. Bodd invested in IDT personally and
facilitated Trygg’s investment in IDT as well as an investment from his friend, Per
Wold-Olsen, a Norwegian citizen who previously worked with Bodd at Merck
Pharmaceuticals.16 Aaron Kramer is the CEO of Trygg and serves as a Board
12 PTO ¶ 30. 13 PTO ¶ 25. 14 PTO ¶ 27. 15 PTO ¶ 27. 16 Tr. 145, 150-54 (Bodd); PTO ¶¶ 28-29. 5 observer under the IDS LLC agreement.17 John Aiello, a partner at Lindsay
Goldberg, also is a Board observer.18
B. Basic Process for Production of New Drugs
The production of new drugs in the United States typically proceeds in the
following stages: formulation, clinical development, commercial manufacturing,
and commercialization.19 Formulation involves developing specific formulas for a
new drug, which can be done in-house or by an outside firm.20 Clinical development
includes performing studies to show that the new drug is effective, filing a new drug
application (“NDA”) with the Food and Drug Administration (the “FDA”), and
receiving FDA approval.21 The cost of obtaining FDA approval for a single drug of
the kind IDS develops is approximately $10 to $15 million.22
Commercial manufacturing entails large-scale manufacturing of the drug,
which may include a transfer of technology or “tech transfer” to a high-capacity
manufacturing facility under the guidance of the drug developers.23 Third-party
firms that perform the commercial manufacturing are called contract manufacturing
17 PTO ¶ 27. 18 PTO ¶ 27. 19 Tr. 16-18 (Aigner); Tr. 624 (Shah). 20 Tr. 16 (Aigner). 21 Tr. 16-17 (Aigner). 22 Tr. 156 (Bodd); Tr. 550-51 (Shah); Tr. 700 (DiFalco). 23 Tr. 17 (Aigner). 6 organizations or “CMOs.”24 Finally, commercialization focuses on the marketing
and sale of the new drug by a sales force, which can range in size from about thirty
to 500 people.25 A pharmaceutical company may employ its own sales force or
license its products to an outside firm with a sales force.26
C. The Formation of IDT
It is well documented that the United States is facing an opioid crisis. A
contributing factor to the abuse of opioids and other drugs is that the time-release
characteristic of tablets of such drugs can be compromised by crushing the tablets,
which allows for faster absorption of the drug. In 2006 and 2007, DiFalco and Shah
worked together to develop a promising technology to deter abuse by preventing the
rate of release of the drug from changing significantly if the tablets are crushed as
compared to taking the tablets intact.27
In 2008, Aigner, DiFalco, and Shah formed Abuse Deterrent Pharmaceuticals
LLC, which was renamed IDT in 2009, to develop pharmaceutical products,
including abuse-deterrent opioid pain medications.28 Aigner provided $1.2 million
of initial capital while DiFalco and Shah contributed all patents and other intellectual
24 Tr. 17 (Aigner). 25 Tr. 18 (Aigner). 26 Tr. 18 (Aigner). 27 Tr. 549-50 (Shah); see Tr. 7 (Aigner). 28 PTO ¶ 31; Tr. 552 (Shah). 7 property related to abuse-deterrent products.29 To document their contribution of
intellectual property, DiFalco and Shah entered into Invention Assignment
Agreements dated June 17, 2008.30
The contribution of intellectual property from DiFalco and Shah included
MorphaBond and RoxyBond.31 MorphaBond is a monotherapy, abuse-deterrent,
extended-release formulation of morphine sulfate; RoxyBond is a monotherapy,
abuse-deterrent, immediate-release formulation of oxycodone hydrochloride.32 The
FDA approved MorphaBond in November 2015 and RoxyBond in April 2017, but
29 PTO ¶ 31; see Tr. 21-23 (Aigner); Tr. 552 (Shah). 30 PTO ¶ 31. A dispute arose over whether DiFalco and Shah attempted to alter the Invention Assignment Agreements to narrow the scope of the technology they assigned from all inventions they conceived “concerning or related to abuse deterrent technology” to all such inventions “concerning or related to tablet coated solid oral dosage form abuse deterrent technology.” JX 11 at 3, 10 (broader versions); JX 12 at 2, 8 (narrower versions). The evidence of record is too inconclusive to support such a finding. According to Aigner, when organizing a data room in 2015, the Company could not find copies of the Invention Assignment Agreements and asked DiFalco to provide original copies. The copies DiFalco provided were the narrower versions (JX 12), which prompted Aigner to accuse DiFalco and Shah of creating forged documents. Tr. 35-39 (Aigner). On the other hand, the broader versions (JX 11), which Aigner claimed to be the originals that DiFalco and Shah signed in 2008, contain a footer bearing the date “03/13/2015.” On cross-examination, Aigner could not explain this discrepancy, conceding that it “[d]oesn’t make any sense.” Tr. 257 (Aigner). In a March 2016 email that Aigner sent to DiFalco and Shah, Aigner characterized the matter as a “misunderstanding” and suggested they all “move on.” JX 13 at 1; Tr. 258-59 (Aigner). New agreements were prepared “to eliminate the misunderstanding,” which DiFalco and Shah signed. JX 13 at 1; Tr. 702-03 (DiFalco). Also in 2016, DiFalco and Shah assigned to IDT a patent that originally had been filed in Cerovene’s name that Aigner contends was covered by the Invention Assignment Agreements. Tr. 40-42 (Aigner); Tr. 703-05 (DiFalco). 31 PTO ¶ 31. 32 PTO ¶ 31. 8 only MorphaBond, which was launched commercially in 2017, is available for sale
today.33 The abuse-deterrent technology that DiFalco and Shah invented could be
applied to other drugs, but no other products have been developed by IDT or IDS to
date.34
D. Trygg Invests in IDT
On April 30, 2012, IDT entered into a letter agreement with Trygg IDT I LLC
(“Trygg LLC”)—a predecessor of Trygg—to establish a joint venture with, and
secure financing from, Trygg LLC.35 The purpose of Trygg LLC’s investment was
“to fund the development of the pharmaceutical products” by IDT.36 Specifically,
this meant financing the “pre-commercial activities” for three future IDT products
with an option for the development of three additional products. 37 As part of its
investment, Trygg LLC financed the build-out of improvements at a manufacturing
facility located in Orangeburg, New York (the “Orangeburg Facility”).38
Trygg LLC invested $10 million in IDT initially, with approximately $8
million earmarked for the Orangeburg Facility build-out, and it anticipated investing
33 Tr. 8 (Aigner); Tr. 155 (Bodd). 34 Tr. 557 (Shah). 35 PTO ¶ 32; JX 3. 36 Tr. 817 (Kramer). 37 Tr. 817-18 (Kramer); PTO ¶ 32; see Tr. 700 (DiFalco). 38 PTO ¶ 32. 9 approximately $30 million more “upon the successful reaching of milestones.”39 In
total, Trygg LLC and its successor (Trygg) invested over $45 million in IDT.40
E. The Trygg Dispute and Formation of IDS
In 2014 or 2015, “a major disagreement” arose between Trygg LLC and IDT
over funding the development of additional products.41 From Trygg LLC’s
perspective, time had “run out” and it was “impossible” for Trygg LLC to justify
making any further investment in IDT because of the company’s lack of progress on
many fronts, including that IDT was not even “finished with development [of its]
two first products.”42
Trygg LLC commenced arbitration proceedings against IDT, which the
parties settled in August 2016.43 The details of the arbitration are confidential, but
as a result of the settlement, IDT formed IDS into which Trygg LLC was merged,
with IDS as the surviving entity.44 In connection with the merger, Trygg LLC’s
members became members of IDS, IDT became the majority member of IDS, and
IDT contributed to IDS all of its intellectual property related to abuse-deterrent
39 Tr. 816, 820 (Kramer). 40 Tr. 817 (Kramer). 41 Tr. 26 (Aigner); Tr. 159 (Bodd). 42 Tr. 159 (Bodd). 43 PTO ¶ 36; Tr. 30 (Aigner); JX 344. 44 Tr. 26 (Aigner); PTO ¶ 36; JX 38. 10 products.45 IDS thereafter assumed all pharmaceutical development efforts
previously undertaken by IDT.46 Also in connection with the merger, Trygg LLC
transferred to IDS the assets on its balance sheet associated with the Orangeburg
Facility and released IDT and its officers, including DiFalco and Shah, from any
claims arising out of or related to the letter agreement under which Trygg LLC had
funded the build-out of the Orangeburg Facility.47
The management and ownership structures of IDT and IDS after the
settlement with Trygg LLC are depicted below based on their operative LLC
agreements at the time:48
45 PTO ¶ 36. Trygg LLC’s members at the time consisted of Trygg, Acela Investments LLC (affiliated with Aigner), Mininaste AS (affiliated with Bodd), Mario Family Partners, LP (affiliated with Ernest Mario), and Wold-Olsen. PTO ¶¶ 33, 36. 46 PTO ¶ 36. 47 PTO ¶ 36; JX 344 § 1.2(b). 48 The information for IDT comes from its Fourth Amended and Restated LLC Agreement dated as of August 23, 2016. JX 39 § 5.2, Sched. 1. The IDT membership percentages are calculated on a fully diluted basis, including non-voting profit interests. The information for IDS comes from its Second Amended and Restated LLC Agreement dated as of September 28, 2016. JX 44 § 5.02(a), Ex. A. The IDS membership figures are based on common unit ownership. All membership figures are rounded to the nearest tenth.
11 IDT Managers Members Percentage Aigner DiFalco and Shah (affiliated) 38.8 DiFalco Aigner (affiliated) 24.4 Shah Others 15.7 Mininaste AS (Bodd) 6.0 Wold-Olsen 6.0 Mario (affiliated) 4.9 SC Transition (Leduc) 4.2
IDS Managers Members Percentage Aigner IDT 71.9 DiFalco Trygg 21.0 Shah SC Transition (Leduc) 4.2 Leduc Mininaste AS (Bodd) 1.0 Wold-Olsen 1.0 Mario Family Partners, LP (Mario) 0.5 Acela Investments LLC (Aigner) 0.5
F. Continued Disputes over the Build-Out of the Orangeburg Facility
The resolution reached with Trygg LLC over the Orangeburg Facility did not
end the disputes over that facility between Aigner and DiFalco and Shah. In mid-
2016, before the dispute with Trygg LLC was resolved, Aigner discovered that
Cerovene’s landlord at the Orangeburg Facility was Corporate Drive
Properties\Medlantis, LLC (“Medlantis”), a New Jersey limited liability company
owned by DiFalco and Shah.49 This surprised Aigner, who thought that a third party
49 PTO ¶ 35; JX 4 at 1; JX 20; Tr. 43 (Aigner). 12 owned the facility.50 Aigner later learned that Empire Construction Management
Group, LLC, a company owned by DiFalco’s brother, had billed approximately $4.5
million in connection with the build-out of the Orangeburg Facility.51
DiFalco oversaw the build-out of the Orangeburg Facility.52 The
arrangements for the build-out were informal. There was no contract governing the
build-out between Cerovene and Trygg LLC or IDT, or between Cerovene and
Empire.53 According to DiFalco, his brother (Salvatore) acted as a general
contractor on the project for “one or two years” and was paid $250,000 for his
work.54 When Salvatore’s role ended, the cash in Empire’s accounts was transferred
to a company DiFalco owned called International Innovative Technologies Group,
through which DiFalco completed the build-out project.55 DiFalco acknowledges he
“didn’t have the greatest accounting of everything” for the build-out of the
Orangeburg Facility, but insists that “millions of dollars” were saved on the
project.56
50 Tr. 43 (Aigner). 51 Tr. 44 (Aigner); JX 21 at 1. 52 PTO ¶ 34. 53 Tr. 683, 795 (DiFalco); DiFalco Dep. 34. 54 DiFalco Dep. 26-28, 34-35; Tr. 795-96 (DiFalco). 55 Tr. 796 (DiFalco); DiFalco Dep. 34. 56 Tr. 796-800 (DiFalco); DiFalco Dep. 218. 13 To date, the Orangeburg Facility has never been used to manufacture product
for IDS.57 Cerovene owns another facility located in Valley Cottage, New York (the
“Valley Cottage Facility”), which was used to make test batches of MorphaBond
and RoxyBond during the NDA process and which currently manufactures
MorphaBond.58
G. Initial Attempts to Address Conflicts of Interest
In the summer of 2016, in connection with making arrangements to
manufacture products, Aigner, DiFalco, and Shah discussed ways to handle conflicts
of interest arising from DiFalco and Shah’s ownership of Cerovene.59 On July 8,
2016, Robert F. Coyne, IDS’s outside counsel at the law firm of Gibbons, P.C.,
emailed Aigner, DiFalco, and Shah: (i) drafts of a resolution “authorizing [DiFalco
and Shah] to proceed with certain actions which involve a potential conflict of
interest,” including voting on a supply agreement with Cerovene that was being
negotiated and participating in the selection of future CMOs; and (ii) draft language
addressing conflicts of interest generally that was to be included in the operating
agreements for IDT and IDS.60 In general terms, the draft conflicts of interest
language for the operating agreements identified Hafid Touam as “an independent
57 Tr. 35, 78, 106 (Aigner); Tr. 697-98 (DiFalco). 58 Tr. 82-83 (Aigner); JX 68 at 11; Tr. 682 (DiFalco). 59 See JX 14. 60 JX 17 at 1, 4. 14 party” who would vote for any manager who had a conflict of interest with respect
to certain transactions.61 Touam had worked with Aigner for many years dating back
to 1999 or 2000, and had known DiFalco and Shah for a similar length of time. 62
On August 8, 2016, Coyne emailed Aigner, DiFalco, and Shah a draft of a
written consent for the members and managers of IDT to address past and current
conflicts of interest involving IDT and Cerovene.63 The draft written consent stated
that DiFalco and Shah own Cerovene, “have an ownership and/or leasehold interest”
in “buildings” being used for IDT’s operations, and have employed and will continue
to employ in connection with those buildings “companies in which family members
related to” DiFalco and Shah have an “ownership interest.”64 The draft also
contained a qualified waiver of claims against DiFalco and Shah relating to “any and
all” conflicts, but it was not executed.65
On August 22, 2016, Aigner, DiFalco, and Shah executed a written consent
as managers of the newly formed IDS to implement a “transparency policy.”66 The
policy states that members and managers “engaged in business with the Company
61 JX 17 at 1. 62 Tr. 389-90 (Touam). 63 JX 28. 64 JX 28 at 10. 65 JX 28 at 6-9. 66 JX 37. 15 shall provide full disclosure and transparency in regard to such affiliated transaction,
including supply chain issues and planning” and that “[a]ny potential conflict shall
be disclosed completely and immediately in writing with attention to the Board.”67
H. The IDS Agreement
At the times relevant to this action, IDS has been governed by a Second
Amended and Restated Limited Liability Company Agreement dated September 28,
2016 (the “IDS Agreement”).68 The “full and entire management of the business
and affairs of” IDS is vested in a board of managers (as defined above, the
“Board”).69 The IDS Agreement provides that “[p]rior to an IPO, the Board shall
consist entirely of the individuals designated by the IDT Investors . . . , which
initially shall be Stefan Aigner, Ray DiFalco, Manish Shah and Gerard Leduc.”70
The IDS Agreement contains several provisions critical to this case that
govern Board actions. Two provisions—one for actions taken at Board meetings
and another for Board actions taken by written consent—expressly provide that no
Board action shall be effective unless the action is approved by both (i) Aigner and
(ii) either DiFalco or Shah (the “Veto Rights”). For example, Section 5.03, which
governs actions taken at Board meetings, states as follows:
67 JX 37 at 3. 68 PTO ¶¶ 1, 37; JX 44. 69 PTO ¶ 37; JX 44 § 5.01(a). 70 JX 44 § 5.02(a). 16 A majority of the Managers then in office shall constitute a quorum for the transaction of business at any meeting, so long as such quorum shall include (a) Stefan Aigner and (b) at least one of Ray DiFalco or Manish Shah; provided that a quorum may only exist if proper notice of a meeting was provided in accordance with Section 5.07 (including to each Observer). Action of the Board shall be authorized by the vote of a majority of the Managers present at the time of the vote if there is a quorum, unless otherwise provided by this Agreement; provided, however, that such majority shall include the affirmative vote of (i) Stefan Aigner and (ii) at least one of Ray DiFalco or Manish Shah.71
The same requirement is included in a provision governing Board action taken by
written consent.72
Section 5.14 provides that IDS’s managers “shall have fiduciary duties of
loyalty and care similar to that of directors of business corporations organized under
the Delaware General Corporation Law.”73 Section 5.14 further provides a
mechanism that was intended to address conflicts of interest. Specifically, Section
5.14(b)(ii) provides that an “Independent Representative” will exercise “voting,
consent or similar rights as a member of the Board with respect to any Affiliate
Transaction” in the place of an “Interested Manager,” meaning one who has “a
conflict of interest concerning an Affiliate Transaction.”
71 Id. § 5.03 (emphasis added). 72 Id. § 5.09 (“Any action required or permitted to be taken by the Board may be taken without a meeting if a majority of the members of the Board, which majority shall include (a) Stefan Aigner and (b) at least one of Ray DiFalco or Manish Shah, consent in writing or by electronic transmission to the adoption of a resolution authorizing the action . . . .”) (emphasis added). 73 Id. § 5.14(a). 17 Section 5.14(b)(ii) names Touam as the initial Independent Representative for
DiFalco and Shah, and Kip Martin as the initial Independent Representative for
Aigner.74 Martin worked with Aigner early in his career and is currently the Vice
President of Finance and Business Development of IDS.75 The text of Section 5.14
is discussed in detail later in this opinion.
Section 5.15 of the IDS Agreement provides that the Board may appoint
officers and names Aigner as the initial Chief Executive Officer and DiFalco as the
initial President.76 Section 5.15 further provides that the performance of the duties
of the CEO and President are not only subject to the control of the Board, but are
subject to the “advice and consent” of each other:
The Chief Executive Officer of the Company shall, subject to the control of the Board, in general supervise and control the business and affairs of the corporation subject to the advice and consent of the President. The President shall have such powers and duties as usually pertain to such office. The President’s powers and duties shall be subject to the control of the Board and to the advice and consent of the Chief Executive Officer.77
In other words, the IDS Agreement contemplates a management structure in which
the CEO and President are essentially co-equal fiduciaries who must communicate
regularly and who share decision-making authority.
74 Id. § 5.14(b)(ii). 75 Tr. 461-63 (Martin). 76 JX 44 § 5.15. 77 Id. (emphasis added). 18 Finally, Section 5.16 of the IDS Agreement provides informational rights to
the Board observers—currently Kramer and Aiello. It states, in relevant part, that:
The Company shall, within a reasonable period of time after learning of any material development affecting the Company’s or any of its direct or indirect Subsidiaries’ business and affairs, update each of the Observers regarding any such material development. The Company agrees to, and to cause management of its Subsidiaries to, consider in good faith the recommendations of the Observers on matters on which it is consulted, recognizing that the ultimate discretion with respect to all matters shall be retained by the Company and its Subsidiaries. 78
I. The IDT Agreement
At the times relevant to this action, IDT has been governed by a Fourth
Amended and Restated Limited Liability Company Agreement dated August 23,
2016 (the “IDT Agreement”),79 which was entered into in connection with IDT’s
settlement with Trygg LLC. Section 5.1 of the IDT Agreement vests management
and control of IDT in a board of managers, which consisted of Aigner, DiFalco, and
Shah as of August 2016.80
Important here, the IDT Agreement provides that, prior to a transaction
defined as the “Exchange,” which has not occurred,81 the managers of IDS cannot
be removed or replaced without the approval of the IDT board, including the specific
78 Id. § 5.16. 79 JX 39. 80 Id. § 5.1, Sched. 2 (list of initial managers). 81 The “Exchange” involves an exchange of certain securities in IDT following a “Qualified Financing.” Id. §§ 4.4(a), 4.6(a), App. I-4-5. 19 approval of Aigner (as the “Series B Manager”) and either DiFalco or Shah (as the
“Founder Members”):
Section 5.4. Major Actions. The Company shall not commit any of the following acts without, in addition to any other vote required by law or this Agreement, the written consent or affirmative vote of the Board (including, prior to the Exchange, the Series B Manager and either one of the Founder Members) followed by the affirmative vote of the Members pursuant to Section 4.7.
*****
(w) any consent, vote, authorization ratification or approval by the Company with respect to its membership interest or rights in [IDS] related to or in connection with (i) any action described in Subsections (a) through (v) above, when undertaken or occurring at [IDS], mutatis mutandis; and (ii) the removal, replacement, or designation of the Company’s managers in [IDS] (the initial managers in [IDS] are Stefan Aigner, Ray DiFalco, and Manish Shah).82
J. The Patheon, Cerovene, and Daiichi Agreements
In October 2016, the Board approved resolutions authorizing the Company to
enter into three agreements pertaining to the manufacture and supply of products.83
Under the first agreement, Patheon Pharmaceuticals Inc. was to provide
development, tech transfer, and CMO services to IDS (the “Patheon Agreement”).84
82 Id. § 5.4(w); see also id. § 5.2(b)(i)(A) (designating Aigner as the initial Series B Manager), App. I-2 (defining “Founder Members” to mean DiFalco and Shah). The same form of approval is necessary to terminate or remove a manager of IDT. Id. § 5.4(r). 83 JX 47; JX 49. 84 JX 47; JX 46; Tr. 250-51 (Aigner). 20 IDS ran into problems transferring technology to Patheon, which has not
manufactured any products for IDS to date.85
The second agreement, dated October 12, 2016, is a Product Validation and
Supply Agreement with Cerovene (the “Cerovene Agreement”).86 Under the
Cerovene Agreement, Cerovene agreed to supply MorphaBond to IDS for a seven-
year period at predetermined prices.87
The third agreement, dated October 21, 2016, is a licensing and supply
agreement with Daiichi Sankyo, Inc. (the “Daiichi Agreement”).88 Daiichi is an
international pharmaceutical company based in Japan with significant operations in
the United States.89 Under the Daiichi Agreement, IDS agreed to: (i) provide
MorphaBond to Daiichi in order for Daiichi to commercialize MorphaBond; and (ii)
“co-promote” MorphaBond and RoxyBond with Daiichi, which means to use a
“coordinated sales force” that is either “employed directly by” IDS or “through Third
Parties” to market the products.90 In exchange, Daiichi agreed to make royalty and
85 Tr. 77-78 (Aigner); Tr. 611, 615 (Shah). 86 PTO ¶ 38; JX 48. 87 JX 48 at 7, 27, 44; Tr. 69 (Aigner). 88 PTO ¶ 39; JX 51. 89 Tr. 19, 32 (Aigner). 90 JX 51 §§ 1.16, 7.1; PTO ¶ 39; Tr. 510-11 (Innaurato). Section 7.2(c) of the Daiichi Agreement gives IDS the right to opt out of the co-promotion obligation upon 180 days’ written notice to Daiichi. 21 milestone payments to IDS.91 Daiichi also agreed to reimburse IDS for the cost of
co-promotion.92 Significantly, the Daiichi Agreement made Daiichi “responsible for
making all material decisions with respect to the transfer of MorphaBond and
RoxyBond manufacturing to” another CMO “in consultation with” IDS if the
transfer to Patheon “is no longer commercially reasonable.”93
DiFalco and/or Shah signed the resolutions adopting and approving the
Patheon, Cerovene, and Daiichi Agreements.94 Touam was not involved in these
transactions as the Independent Representative under Section 5.14 of the IDS
Agreement.95
K. The March 2017 Resolutions
On March 30, 2017, Aigner emailed Coyne, DiFalco, Shah and others copies
of a series of written consents of the managers of IDS and, in one case, for IDT, to
approve certain actions.96 In the email, Aigner instructed Coyne to hold the
91 JX 51 §§ 8.1-8.3. 92 Id. § 7.2; see also Post-Trial Tr. 132-34 (Dkt. 140). 93 JX 51 § 6.8(c). 94 See JX 47 at 3; JX 49 at 3. 95 Tr. 251 (Aigner); see JX 44 § 5.14(b). 96 Tr. 83-84 (Aigner); JX 68; see also JX 71 (April 17 email with copies of consents with additional signatures). 22 resolutions “in escrow until I . . . notify you that they should be released” (the “March
2017 Resolutions”).97 Among other things, the written consents:
Authorized distributions to each of the members of IDS;98
Authorized employment agreements for certain IDS employees, including Aigner, Martin, Michael A. Innaurato (Chief of Commercial Operations), and Matthew Iverson (Vice President of Regulatory and Clinical Development), and bonus payments from IDS to Aigner, DiFalco, Shah, and others;99
Acknowledged on behalf of IDS that DiFalco and Shah “diligently and efficiently supervised the construction of” improvements and infrastructure at the Orangeburg and Valley Cottage Facilities (the “Infrastructure”) and resolved to “adopt, ratify, and approve of the actions taken by [DiFalco and Shah] and adopt and approve of the transfer and sale of any and all right, title and interest in the Infrastructure to Cerovene in consideration for Cerovene’s forgiveness of” approximately $810,000 in payables IDS owed Cerovene (the “Infrastructure Resolution”);100
Authorized and approved “the negotiation and execution of a Development Agreement by and between [IDS] and Cerovene” for the development of two new drugs;101 and
Authorized IDT to make bonus payments to Martin, DiFalco, and Shah in the amount of $50,000 and to Aigner in the amount of $550,000, and to make additional bonus payments to approximately twenty Cerovene employees.102
97 JX 68 at 1. 98 Id. at 2. 99 Id. at 6, 8, 10. 100 Id. at 11-12. The final signature page for the Infrastructure Resolution was obtained on April 18, 2017. See JX 71 at 11-12; JX 75 at 2. 101 JX 68 at 16, 19. 102 Id. at 20, 22-23. 23 In addition to transferring the Infrastructure to Cerovene in exchange for forgiveness
of about $810,000 that IDS owed Cerovene and putting to rest Aigner’s grievance
with DiFalco and Shah over the build-out of the Orangeburg Facility, the
Infrastructure Resolution stood to benefit IDS by saving it approximately $500,000
per year in maintenance costs.103
On April 24, 2017, Aigner sent Coyne an email stating: “Just a reminder –
the IDS resolutions were a package deal, and cannot be released yet until Trygg
sign[s] off on all resolutions.”104 Martin, an officer of IDS who is subordinate to and
has acted as a loyal supporter of Aigner, confirmed that the Infrastructure Resolution
was part of a package deal with the other resolutions listed above.105
On May 2, 2017, Aigner sent Coyne an email purporting to “rescind” his
consent to the Infrastructure Resolution and directing him to “regard it [as] null and
void.”106 The email, which was not sent to DiFalco or Shah, states that Aigner was
rescinding his consent “[g]iven new information” without explaining what the
information was.107 When asked in deposition to explain what the “new
103 Id. at 12; Tr. 267-68 (Aigner). 104 JX 77 (emphasis added). 105 Tr. 490 (Martin); see also Tr. 718 (DiFalco). 106 JX 84; Tr. 93-94 (Aigner). 107 JX 84. 24 information” was, Aigner initially had no recollection and then refused to answer
further questions on the subject through invocation of the attorney-client privilege.108
The court finds that the March 2017 Resolutions were a “package deal.”109
Nevertheless, Aigner implemented some of them—including the resolution
awarding him a $550,000 bonus—while refusing to implement the Infrastructure
Resolution.110 Aigner provided no credible justification for doing this. Adding
insult to injury, after Aigner caused IDS to renege on the Infrastructure Resolution,
IDS failed to pay the $810,000 in payables and $500,000 in annual maintenance
costs it owed Cerovene.111
L. Galephar Comes on the Scene
By July 2017, Aigner began considering Galephar Pharmaceutical Research,
Inc., a pharmaceutical company based in Puerto Rico, as an alternative CMO to
Patheon because IDS “had no success with Patheon.”112 Aigner concealed from
DiFalco and Shah his exploration of Galephar as an alternative CMO. They only
108 Aigner Dep. 334-35. 109 Aigner equivocated at trial about whether the March 2017 Resolutions were a “package deal.” See Tr. 275 (Aigner). His testimony on this point is not credible given, among other evidence, Aigner’s own contemporaneous acknowledgement in writing that the March 2017 Resolutions were a “package deal.” See JX 84. 110 Tr. 276 (Aigner). 111 Tr. 268-69 (Aigner); Tr. 719-21 (DiFalco). 112 Tr. 100-02 (Aigner); Tr. 400 (Touam). 25 learned about it when Aaron Kramer, Trygg’s CEO and a Board observer, forwarded
to DiFalco an email Kramer received from Aigner on July 9, 2017, referencing a
term sheet for Galephar.113 Kramer forwarded the email to DiFalco because he
believed “it was obviously something that should have been intended for the Board
and the people involved in manufacturing and not just for me.”114
Aigner was so upset with Kramer for bringing DiFalco and Shah into the loop
that he tried to enlist Lindsay Goldberg, one of Trygg’s joint venture partners, to
have Kramer removed as an observer on the Board.115 As discussed later in this
opinion, Aigner’s pursuit of Galephar became a significant point of controversy
between him and DiFalco and Shah that bears directly on the deadlock between the
parties with respect to which CMO IDS should recommend to Daiichi to
manufacture IDS’s products.
M. The July 2017 Board Meeting
On July 14, 2017, IDS held a Board meeting at the New York offices of
Lindsay Goldberg in which all the Board members (Aigner, DiFalco, Shah, and
Leduc), Board observers (Kramer and Aiello), and Touam participated.116 The night
before the meeting, Aigner had sent Shah a “threatening letter,” which set “a very
113 Tr. 726 (DiFalco); Tr. 843 (Kramer); JX 104. 114 Tr. 844 (Kramer). 115 JX 113; Tr. 846 (Kramer). 116 JX 111 at 1. 26 acrimonious tone” for the meeting.117 The parties had a “wide-ranging discussion”
that focused on their grievances with each other.118 Aiello introduced the agenda,
which began: “The Board, which controls the full and entire management of the
business and affairs of the Company, had become deadlocked.”119
Aigner “indicated that Cerovene has failed to provide IDS with necessary
information and updates on the status of the manufacturing.”120 Shah expressed
frustration that IDS had failed to support Cerovene’s manufacturing efforts in
connection with the Daiichi Agreement and indicated that he may “resign from IDS
and take total control at Cerovene, while [DiFalco] focused solely on his roles at
IDS.”121 Shah then left the Board meeting “due to his extreme frustration.”122
DiFalco “suggested that the Board composition be changed so as to break the
deadlock.”123 DiFalco:
indicated that he needs four things for successful management of the product: 1) improved corporate governance, to be obtained by adding a Trygg representative to the Board, and putting Aaron Kramer in charge of the Company’s IPO efforts, 2) the [transfer of the Infrastructure at the Orangeburg Facility to Cerovene], 3) direct dealings with [Daiichi] (as opposed to dealing with [Daiichi] through
117 Tr. 840 (Kramer); see JX 111 at 2. 118 JX 111 at 1. 119 Id. 120 Id. at 2. 121 Id. at 2-3. 122 Id. at 3. 123 Id. 27 IDS) for the completion of the manufacturing batches, and 4) a development program, aka a new manufacturing agreement, between IDS and Cerovene for the development of future products.124
DiFalco reiterated that “the Company’s corporate governance needs to be fixed” and
“offered to guarant[ee] a successful manufacture of the batches” by Cerovene if
Aigner agreed to a Board change.125 “No formal vote was taken on any topic.”126
After DiFalco and Shah left the meeting, Kramer implored Aigner to give
DiFalco and Shah “what they’re asking for” and said that the money at stake in
Aigner’s disagreements with DiFalco and Shah was “peanuts compared to the value
of the Company.”127 Kramer credibly recounted Aigner’s response, as follows:
And [Aigner’s] position was “No. We need to starve them. We need to keep them hungry. We need to, you know, wield this big stick, the threat of litigation, of bankrupting them, and we need to starve them by, you know, delaying payments and not giving them what they want. That’s the only way they’re going to behave.” And I think he used the term like you’re going to get ray-gunned, that I was naïve in believing that by offering the carrot rather than the stick, that there would be some resolution, that – he was very certain that these are rotten guys and they’re not able to manufacture the product.128
Kramer’s testimony about Aigner’s approach to dealing with DiFalco and Shah is
consistent with the court’s own assessment of his actions and motivations based on
124 Id. at 4. 125 Id. at 3-4. 126 Id. at 6. 127 Tr. 841-42 (Kramer). 128 Tr. 842 (Kramer). 28 the entirety of the record. As an example, the court finds from the weight of the
evidence that Aigner’s decision to renege on the Infrastructure Resolution was not
motivated by a desire to pursue what was in the best interest of IDS’s business, but
instead was motivated by Aigner’s personal desire to retain the ability to threaten
litigation against DiFalco and Shah concerning the Orangeburg Facility in order to
exert leverage over them as part of an overall scheme to manage the Company
unilaterally.
N. Events Preceding the September 2017 Board Meeting
On August 22, 2017, DiFalco sent Aigner and others an email asking a series
of due diligence questions concerning the possibility of using Galephar as a CMO
for RoxyBond.129 The next day, in an apparent act of retaliation, Aigner had IDS’s
counsel circulate to the Board for consideration two written consents (the “August
2017 Consents”).130 The first one purported to authorize the transfer of
pharmaceutical manufacturing equipment from the Orangeburg Facility to
Galephar.131 The second one stated that Company “management other than [DiFalco
and Shah] shall have the discretion to exclude and instruct all Company employees,
advisors, and consultants to exclude [DiFalco and Shah] from communications
129 JX 126. 130 JX 128. 131 Id. at 2-3. 29 relating to Affiliate Transactions.”132 Touam signed both written consents later that
day as the Independent Representative for DiFalco and Shah.133
On August 29, after speaking to DiFalco,134 Touam circulated to Aigner,
DiFalco, Shah, and others a revocation of his approval of the two written consents,
stating:
When I signed the Consents, I did so with the incorrect understanding that the Consents would be protecting Ray DiFalco and Manish Shah. I now understand that the Consents took rights away from Ray DiFalco and Manish Shah and would exclude Ray DiFalco and Manish Shah from communications which I believe they are entitled to receive under the IDS Agreement. I thereby revoke my Consents, effective immediately.135
On September 8, 2017, Aiello emailed Aigner a proposed settlement term
sheet intended “to resolve outstanding issues” in part by expanding the Board to five
members, including Kramer.136 On September 10, DiFalco emailed the IDS
managers, members, and observers an agenda for an upcoming Board meeting.137
The agenda contained a number of proposals, including to discuss possible
132 Id. at 6. 133 JX 129 at 1 (email from Touam at 10:09 pm on August 23, 2017). 134 Tr. 410-11 (Touam). 135 JX 135 at 2. 136 JX 148 at 1-2. 137 JX 149. 30 manufacturing options for RoxyBond and to expand the Board to five managers with
no veto rights and simple majority rule.138
On September 11, Aigner, Leduc, and Touam (as Independent Representative
for DiFalco and Shah) signed a resolution purporting to authorize IDS to retain the
law firm of Zuckerman Spaeder LLP to perform certain services (the “Zuckerman
Resolution”).139 The Zuckerman Resolution states, in relevant part, that:
IDS has a commercial relationship with Cerovene, Inc., a manufacturer and developer of pharmaceutical products that is owned and managed by Ray DiFalco and Manish Shah, who also have ownership interests and managerial responsibilities at IDS. Zuckerman is being engaged to take reasonable and necessary steps to provide legal advice to IDS regarding any situation with respect to Cerovene that creates or could create a conflict of interest for IDS and to ensure in light of this business relationship a decision-making process at IDS that provides for appropriate, independent and arms-length decisions that will protect IDS’s interests and maximize shareholder value.140
The Zuckerman Resolution was circulated to the Board on the evening of
September 11.141 Over the next two days, before a Board meeting scheduled for
September 15, DiFalco and Shah had a number of discussions with Touam
expressing their disappointment that he signed the Zuckerman Resolution without
138 Id. at 2. 139 PTO ¶ 40; JX 153. 140 JX 153 at 1-2. 141 Tr. 416-17 (Touam). 31 speaking to them first and suggesting that he should resign as the Independent
Representative.142
O. The September 2017 Board Meeting
On September 15, 2017, the Board met again at Lindsay Goldberg’s offices.143
Aigner, DiFalco, Shah, Touam, Kramer, Aiello, Martin, Tim Mergenthal (from
Lindsay Goldberg), Coyne, Robert Johnson (from Gibbons), Yehuda Buchweitz and
Adam Dickson (counsel for Trygg), and Aigner and DiFalco’s personal lawyers all
attended in person.144 Leduc, Wold-Olsen, Ola Snove (of Aker AS), Bodd, and Keith
James (IDS’s Controller) participated telephonically.145
Kramer described the meeting as “a circus from the beginning to the end.”146
Aigner had invited attorneys from Zuckerman Spaeder to attend the meeting, but
Aiello prevented them from entering the premises.147 According to minutes of the
meeting, DiFalco explained that he had not approved retaining Zuckerman Spaeder
and Kramer added that “[Aigner] and [Leduc] have a prior relationship with
142 Tr. 416-18 (Touam); Tr. 793-94 (DiFalco). 143 JX 162. 144 Id. at 1. 145 Id.; Tr. 336-37 (Aigner); Tr. 850 (Kramer). 146 Tr. 851 (Kramer). 147 JX 162 at 2. 32 Zuckerman Spaeder and therefore Zuckerman is not independent.”148 When an
attorney for Trygg (Buchweitz) asked “who retained Zuckerman Spaeder,” Aigner
replied that he, Leduc, and Touam retained the firm on behalf of the Board under
Section 5.14(b) of the IDS Agreement, to which Buchweitz responded that he
interpreted that provision to require that DiFalco and Shah “first determine that they
have a conflict and then disclose the facts concerning the conflicts of interest to the
Board in order to determine that there is an Affiliate Transaction.”149 Aigner asserted
“that conflicts of interest are the most important issue for the Company and are the
cause of the deadlock.”150
During the course of the meeting, the Board voted on seven proposals:
1. DiFalco, through his lawyer, proposed “that only Company Board members and Observers should be permitted to stay in the meeting as well as their legal counsel and Gibbons P.C., as Company counsel.”151
2. DiFalco and Shah proposed “to expand the Company’s Board from four (4) members to five (5) members, with none of the members having veto rights.”152
148 Id. In March 2018, a “revised” set of the minutes was prepared at the request of Aigner and Martin because “they did not want detailed minutes of everyone’s grievances in the record book.” JX 227; JX 230. The accuracy of the original minutes has not been questioned. 149 JX 162 at 2-3. 150 Id. at 2. 151 Id. at 3. 152 Id. at 8. 33 3. DiFalco proposed “for the Board to instruct Company counsel to release the [Infrastructure Resolution] from escrow.”153
4. Aigner and DiFalco made several competing proposals regarding Zuckerman Spaeder. Aigner proposed to let the firm join the meeting, that the Board investigate whether DiFalco and Shah have a conflict of interest “as it relates to Cerovene,” and “that the Board retain Zuckerman Spaeder . . . to advise the Board on conflicts of interest issues and process.” DiFalco proposed to “formally fire Zuckerman (whose retention is disputed).”154
5. Aigner proposed to “send a delegation to the Galephar facility” including Shah and Touam to “make a determination of Galephar’s product development and manufacturing capabilities and report back to the Board in ten (10) days. Within that same time, the Company shall choose 2 or 3 other CMO’s to be evaluated as soon as possible.”155
6. Someone proposed “[t]o remove the development equipment related to the manufacture of RoxyBond currently located at the [Orangeburg Facility] and [place it] in storage with a neutral party.”156
7. DiFalco proposed “to combine [IDT] and [IDS] into one merged company.”157
153 Id. at 9. 154 Id. at 10-11. 155 Id. at 12. 156 Id. 157 Id. at 13. 34 Only the fifth and sixth proposals passed.158 Aigner vetoed the second, third, and
seventh resolutions, which were supported by the three other Board members:
DiFalco, Shah, and Leduc.159
During the Board meeting, Kramer stated that Aigner had been “trying to use”
the Affiliate Transaction provision of Section 5.14(b) “to effectively push Mr. Shah
and Mr. DiFalco out of [the] decision-making” process.160 At some point during the
meeting, Aigner’s lawyer “said that [Aigner] would be willing to give up his veto
rights in certain circumstances and that they would give us a proposal in writing”
within a number of days, but Aigner never did so.161
At the end of the September 15 Board meeting, Touam orally resigned as
Independent Representative.162 A few days later, on September 20, Touam wrote to
the Board, stating: “I no longer wish to serve as an Independent Representative as
that term is defined under Section 5.14(b)([ii]) of the IDS Operating Agreement. I
hereby rescind my signature on the IDS Board written consent of September 11 th
2017, engaging the Zuckerman law firm.”163
158 Id. at 12-13. 159 Id. at 9, 13-14. 160 Tr. 852 (Kramer); JX 162 at 4. 161 Tr. 854 (Kramer). 162 Tr. 419 (Touam); JX 162 at 15. 163 JX 163; Tr. 419 (Touam). 35 P. Aigner Tries to Outflank DiFalco by Reaching Out to Shah
After the September 2017 Board meeting, Aigner reached out to Shah
repeatedly in an effort to get Shah to take his side. It is not surprising that Aigner
focused on Shah. A scientist by training, Shah displayed a calm and non-
confrontational demeanor at trial in sharp contrast to the combative attitude that
Aigner and DiFalco displayed. Aigner’s effort to appeal to Shah ultimately failed
and led Shah to resign from the Board and his position as Chief Science Officer.
On October 23, 2017, Aigner’s counsel wrote to Shah’s counsel, requesting
that Shah meet with Aigner or his designee and without DiFalco in order “to discuss
a productive path forward.”164 The letter criticized “certain actions by or on behalf
of Ray DiFalco” and stated that “[i]f Mr. Shah is not forthcoming in response to this
letter he is likely to become the target of further investigation” and that the letter
may not be disclosed to Lindsay Goldberg or Trygg, IDS’s major investors.165 A
copy of the letter “was delivered by messenger” to Shah’s house during dinnertime
with his wife, which distressed Shah.166 Shah read the letter to mean that Aigner
164 JX 184 at 2. 165 Id. at 2, 5; Tr. 585-86 (Shah). 166 Tr. 581 (Shah). 36 would investigate and sue him unless he met with Aigner.167 Shah also asked Aigner
to stop making deliveries to his home, but Aigner “repeatedly kept doing it.”168
In early November 2017, Shah and Aigner met in New York with their
lawyers.169 During the meeting, when the lawyers had left the room, Aigner
confirmed that his purpose for meeting with Shah was to get DiFalco out of the
Company.170 After the meeting, between Christmas and the New Year, Shah’s
lawyers worked to put together a “comprehensive” set of proposals “to take the
Company forward” that were sent to Aigner and his lawyers, but no progress was
made.171
On May 15, 2018, Gibbons, IDS’s outside counsel, emailed the Board a “draft
IDS Resolution appointing Navin Advani as a replacement Independent
Representative for Manish Shah and re-appointing Hafid Touam as Independent
Representative for Ray DiFalco.”172 DiFalco responded the next day, saying “this is
the first time I am seeing [this] resolution,” “I find it rather disturbing that it is being
circulated without any review on my part,” and “I have NOT chosen Hafid to
167 Tr. 580 (Shah). 168 Tr. 581 (Shah). 169 Tr. 583 (Shah). 170 Tr. 584-85 (Shah). 171 Tr. 586-87 (Shah). 172 JX 254 at 2. 37 represent me at this time.”173 On May 17, 2018, Aigner emailed IDS’s lawyers at
Gibbons, DiFalco, Shah, Touam, and Martin, stating: “At this point please cease all
activities on the release and other bundled resolutions. Currently there is no path
forward for a global solution.”174
On May 30, 2018, Shah emailed Aigner, DiFalco, Leduc, Touam, and others
a series of proposed resolutions as “an honest effort to move IDS further.”175 The
main resolution was an “omnibus” resolution to approve six agreements including:
(i) consulting agreements between IDS and each of DiFalco and Shah; (ii) an
agreement between Galephar and IDS for Galephar to provide development and tech
transfer services to IDS; (iii) an amendment to the Cerovene Agreement providing,
among other things, that Cerovene “shall give priority to the manufacture of
MorphaBond”; (iv) a master development agreement for Cerovene to develop three
new drugs for IDS; and (v) a general release and purchase agreement between IDS
and Cerovene regarding the Orangeburg Facility.176 Aigner rejected Shah’s package
of proposals, which he thought should not be “bundled.”177
173 Id. at 1. 174 JX 255 at 1. 175 JX 258 at 2. 176 Id. at 1, 42, 65; Tr. 212-13 (Aigner). 177 Tr. 220 (Aigner). 38 On June 26, 2018, Aigner sent an email addressed only to Shah with the
subject line, “Time to think carefully,” which stated:
We are at a cross roads here. If you resign you are closing doors on potential solutions which in my opinion will leave no other path than litigation. If you want to avoid being part of it, a resignation from the IDS or IDT Board is the last thing you want to do. It is time to think carefully which side you want to be on and what you want your future to be . . . .178
Ignoring Shah’s prior request, Aigner had a copy of this email delivered to Shah’s
home.179
On July 6, 2018, Shah’s lawyer contacted Aigner saying that if he did not
agree to the bundle of resolutions by the end of the day, Shah “would resign from
the Board.”180 After Aigner did not agree, Shah resigned as a manager of IDS and
IDT later that day in a letter addressed to “IDS/IDT Board and Members.”181 The
letter stated that Shah’s resignation “is contingent on Ray DiFalco retaining his ‘veto
power’ over Board action unless and until the corporate governance structure is
revised” and that he wanted to
confirm that any individual appointed to replace me as a Manager of IDS does not fully step [into] my shoes, in the sense that he does not assume my authority under Section 5.03, and therefore that any future Board action requires the affirmative vote of Stefan and Ray (again, pending revision of that entire governance structure). I am delivering 178 JX 271 at 1. 179 Tr. 594 (Shah). 180 Tr. 221-22 (Aigner). 181 Tr. 222 (Aigner); JX 277. 39 a copy of this Resignation to Gibbons, corporate counsel for IDS, seeking their confirmation of this interpretation. If they disagree, please consider this Resignation voided and of no force or effect, and thereby rescinded.182
Also on July 6, Aigner sent DiFalco and Shah a notice of dispute in
anticipation of filing this action, which listed as one of the “disputed issues” “Manish
Shah’s further breach of fiduciary duty in threatening to resign as a member of the
board of IDS and IDT if the other board members did not agree to provide certain
personal benefits to him, Ray DiFalco, and their affiliated companies.”183 The notice
arrived by messenger at Shah’s home “minutes” before Shah resigned.184 Aigner
filed this action a few weeks later, on July 27, 2018.185
Q. Post-Filing Events
On August 16, 2018, in advance of a Board meeting scheduled for August 22,
Aigner circulated a presentation describing the current state of IDS.186 The
presentation stated that IDS’s year-to-date revenues from Daiichi through June 2018
were approximately $2.9 million, and that total expenses for the same period were
182 JX 277. 183 JX 280 at 1-2; Tr. 598-99 (Shah). 184 Tr. 598-99 (Shah). 185 Dkt. 1. 186 JX 292. 40 approximately $7.4 million.187 As of trial, IDS was expected to have a negative cash
flow of approximately $6 million for all of 2018.188 According to the presentation,
IDS’s cash balance by the fourth quarter of 2019 was projected to be approximately
$4.1 million and thus “IDS can only afford limited R&D activities until fund raising
can be completed.”189
On August 23, 2018, the day after the Board meeting, DiFalco circulated an
email criticizing Aigner for unilaterally breaking the quorum for the meeting before
the Board could address “many of the pressing issues included on the agenda” and
stating that “[t]he company, as it stands now, is still operating without a board-
approved budget, and without board approval for many of the transactions in which
the company is engaged.”190 DiFalco also proposed a Board resolution to appoint
Arthur Bedrosian, a pharmaceutical company executive, as an Independent
Representative to fill the vacancy left by Touam’s resignation.191 The Board did not
act on this proposal even though Aigner’s original complaint in this action asserted
that “[t]he IDS Operating Agreement and Delaware law require DiFalco and Shah
187 Id. at 30-31. IDS’s revenues to date have come from the Daiichi Agreement. See Tr. 306 (Aigner); Tr. 858 (Kramer). 188 Tr. 499 (Martin). 189 JX 292 at 34, 36. 190 JX 297 at 1. 191 Id. at 1, 6, 9-10. 41 to nominate or approve an Independent Representative to” fill the vacancy created
by Touam’s resignation and sought injunctive relief directing them to do so.192
On September 14, 2018, Aigner sent an email to the Board and various IDS
members with the subject line: “Hafid Touam reassuming his role as Independent
Representative for Ray.”193 Attached to the email was a signed statement from
Touam, which said: “I, Hafid Touam, hereby rescind my letter of resignation as
Independent Representative . . . and state that I am willing and able to resume my
service as an Independent Representative pursuant to Section 5.14 of the” IDS
Agreement.194 A written consent of the Board was drafted to reinstate Touam but it
was never approved.195
On September 19, 2018, DiFalco filed counter- and third-party claims seeking
judicial dissolution of IDS, appointment of a liquidating trustee, and declaratory and
injunctive relief.196 On September 21, 2018, Aigner had a letter and a draft of an
amended complaint delivered to Shah’s house, once again by messenger.197 In the
manner of a bully, Aigner threatened that the litigation could affect Shah’s family:
192 Tr. 351 (Aigner); Dkt. 1 ¶¶ 64-67. 193 JX 313 at 1. 194 Id. at 2. 195 JX 311 at 1, 4; Tr. 358 (Aigner). 196 Dkt. 17 ¶¶ 182-215. 197 JX 320; Tr. 601 (Shah). 42 In my original complaint, I only brought limited claims for rulings on the agreement so the Company could move forward. It is unfortunate that the whole development is now where it is. I always had a feeling that you and I were trying to move IDS forward, but at this point [DiFalco’s] counterclaims push me to file an amendment . . . which could affect you and your family.
The attached filing, which my lawyers shared with yours, will be filed Wednesday unless we find a solution before, which I know we could do, but appears unlikely given [DiFalco] and his lawyers’ responses to date. Please review it with your personal counsel.198
On October 15, 2018, Shah resigned as an officer of IDT and IDS.199 On
November 3, 2018, Aigner emailed DiFalco what he described as “a duly enacted
resolution discharging Ray DiFalco as President of IDS effective today” that was
signed by Aigner, Leduc, and Touam.200
On November 28, 2018, Aigner and Leduc signed a set of three written
consents for the IDS Board: (i) authorizing and approving a Master Development
Services Agreement with Galephar; (ii) stating that the Board, except DiFalco,
opposes dissolution of IDS; and (iii) purporting to elect Roelof Rongen as a manager
of IDS (the “November 2018 Resolutions”).201 Touam signed the first two
resolutions as well.202 Rongen is a former employee and “close friend” of
198 JX 320 (emphasis added). 199 PTO ¶ 22. 200 JX 323 at 1, 4-5. 201 JX 332 at 1, 5-6, 8. 202 Id. at 3, 7. 43 Aigner’s.203 The first resolution states that it shall be of no effect if it is determined
in this action that Touam is not a valid Independent Representative for DiFalco and
the third resolution references that the question of whether Rongen inherits Shah’s
voting rights under the IDS Agreement is an issue in this action.204
On November 30, 2018, the FDA sent Daiichi a “Complete Response” letter
stating that the FDA “cannot approve” Daiichi’s NDA for RoxyBond, dated August
1, 2018, which “proposes [the] addition of” Galephar as a manufacturing site.205 The
letter also stated that “[d]uring a recent inspection of Galephar . . . , our field
investigator observed objectionable conditions at the facility,” and listed a number
of specific steps Daiichi should take to rectify the situation.206 At the time, DiFalco
had “never even seen” a Complete Response letter issued in connection with a tech
transfer.207
203 Tr. 864 (Kramer). 204 JX 332 at 2, 8. 205 JX 338 at 4, 6. The FDA sends Complete Response letters “if the agency determines that [it] will not approve the application . . . in its present form” for various reasons, including that the “methods to be used in, and the facilities and controls used for, the manufacture, processing, packing, or holding of the drug substance or the drug product are inadequate to preserve its identity, strength, quality, purity, stability, and bioavailability.” 21 C.F.R. §§ 314.110, 314.125. 206 JX 338 at 4-5. 207 Tr. 777 (DiFalco). At Daiichi’s request, Cerovene has not been involved in the tech transfer of RoxyBond to Galephar. Iverson Dep. 43. As of trial, Daiichi and IDS had been working with another CMO called Catalent to manufacture RoxyBond, but the status of that effort is unclear from the record. See Tr. 614-16 (Shah); Tr. 881 (Kramer). 44 After trial, on January 7, 2019, the FDA issued a second Complete Response
letter.208 The second letter is substantively the same as the first but concerns a
different (fifteen milligram) dosage of RoxyBond.209
II. PROCEDURAL HISTORY
After this action was filed on July 27, 2018, Aigner amended his complaint
three times, culminating in a third amended complaint filed on December 8, 2018
(the “Complaint”).210 On September 19, 2018, DiFalco and Shah filed an answer to
an earlier pleading and DiFalco filed three counterclaims and third-party claims
seeking the same relief against Aigner and IDS, respectively (the
“Counterclaim”).211
The Complaint asserts six claims: (1) breach of fiduciary duty for damages;
(2) fraud; (3) breach of contract; (4) declaratory relief; (5) a second claim for breach
of fiduciary duty; and (6) breach of the IDS Agreement and its transparency policy.
The Counterclaim asserts three claims for: (1) judicial dissolution of IDS under 6
Del. C. § 18-802; (2) appointment of a liquidating trustee under 6 Del. C. § 18-803;
and (3) declaratory and injunctive relief.
208 Def.’s Reply Br. Ex. A (Dkt. 126). 209 Id. at 1; JX 338 at 4. 210 Dkt. 108. 211 Dkt. 17. 45 On November 13, 2018, the parties agreed to bifurcate their claims so that the
only claims to be tried initially would be Aigner’s claim for declaratory relief (the
fourth cause of action in the Complaint) and the three claims in DiFalco’s
Counterclaim.212 Although Aigner’s articulation of the declaratory relief he seeks
has shifted from time to time, his post-trial brief seeks four declarations along the
following lines, i.e., that:
1. Section 5.14 of the IDS Agreement bars DiFalco from using his Veto Rights on the selection of CMOs or development partners;
2. Touam validly rescinded his resignation as Independent Representative and is currently authorized to act as an Independent Representative under Section 5.14 of the IDS Agreement;
3. The Zuckerman Resolution was validly approved and not revoked; and
4. Rongen was validly elected as a manager of IDS and assumed Shah’s Veto Rights.213
212 Dkt. 69 at 30; see also PTO ¶ 15. 213 Pl.’s Opening Br. 38, 46, 50, 52 (Dkt. 135). The Complaint and the Pre-Trial Order sought some additional or differently worded declarations. See, e.g., Compl. ¶ 138 (seeking declaration “that individuals that are not managers (or Observers or Independent Representatives, in the case of IDS) are not entitled to attend board meetings unless such individuals are invited to attend by appropriate action of the board”); PTO ¶ 87 (seeking declaration that “DiFalco is conflicted for purposes of Section 5.14 of the IDS Agreement with respect to any decision by the Board relating to this litigation or his claim for dissolution”); PTO ¶ 88 (seeking declaration “that only Managers and Observers may attend meetings of the Board unless the Board votes to permit others to attend”). To the extent any declaration sought in the Complaint or Pre-Trial Order was not addressed in Aigner’s opening post-trial brief, such request for relief is waived. See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”). 46 On November 16, 2018, Aigner sought injunctive relief to require DiFalco
and Shah to provide documents to IDS’s auditor, BDO USA, LLP, concerning the
build-out of the Orangeburg Facility. According to Aigner, BDO had sought these
documents to complete its review of the financial statements of IDS and IDT for
2016 and 2017.214 On December 6, 2018, the court denied Aigner’s request for
injunctive relief, which was not the subject of any claim in Aigner’s pleading at the
time, but permitted him to amend his pleading to add such a claim in order to litigate
the issue at trial if he wished to do so.215
On December 7, 2018, Daiichi filed a motion to intervene in this action.216
The motion was focused on protecting Daiichi’s interests if the court ordered
dissolution. Accordingly, the motion was placed in abeyance pending the court’s
ruling on whether IDS should be dissolved.217
A three-day trial was held from December 10-12, 2018. Post-trial argument
and submissions were completed by March 15, 2018.
214 Dkt. 53 at 1-2. 215 Dkt. 115 at 46-56. 216 Dkt. 107. 217 Dkt. 130 at 140-42. 47 III. ANALYSIS
Unless otherwise indicated below, the proponent of each claim has “the
burden of proving each element, including damages, of each” cause of action “by a
preponderance of the evidence.”218 “[P]roof by a preponderance of the evidence
means that something is more likely than not.”219 For purposes of the following
analysis, the court refers primarily to DiFalco, rather than to DiFalco and Shah, in
addressing issues of deadlock for simplicity and given Shah’s resignation as a
manager of IDS and IDT before trial.220
The core issue in this case is whether it is reasonably practicable for IDS to
carry on its business in accordance with the IDS Agreement. Before analyzing this
issue, the court will address two declarations Aigner seeks in order to clarify the
current state of the governance of IDS: Aigner’s request for declarations (1) that
Touam is currently authorized to act as DiFalco’s Independent Representative under
Section 5.14 of the IDS Agreement on the theory that he validly rescinded his
resignation, and (2) that Rongen was validly elected as a manager of IDS and
assumed Shah’s voting rights under the IDS Agreement.
218 Physiotherapy Corp. v. Moncure, 2018 WL 1256492, at *3 (Del. Ch. Mar. 12, 2018) (citation and internal quotation marks omitted). 219 Id. 220 PTO ¶ 22; JX 277. 48 The issues addressed in this opinion all turn on the contractual interpretation
of provisions in the IDS Agreement, which is governed by Delaware law.221 The
court’s “task is to fulfill the parties’ shared expectations at the time they contracted,
but because Delaware adheres to an objective theory of contracts, the contract’s
construction should be that which would be understood by an objective, reasonable
third party.”222 “The contract must also be read as a whole, giving meaning to each
term and avoiding an interpretation that would render any term ‘mere
surplusage.’”223 “If a contract is unambiguous, extrinsic evidence may not be used
to interpret the intent of the parties, to vary the terms of the contract or to create an
ambiguity.”224 “A contract is not rendered ambiguous simply because the parties do
not agree upon its proper construction.”225 “If, after applying these canons of
contract interpretation, the contract is nonetheless reasonably susceptible [to] two or
more interpretations or may have two or more different meanings, then the contract
221 JX 44 § 13.03. 222 Leaf Invenergy Co. v. Invenergy Renewables LLC, 2019 WL 1965888, at *6 (Del. May 2, 2019) (internal quotation marks and alterations omitted). 223 Sunline Commercial Carriers, Inc. v. CITGO Petroleum Corp., 2019 WL 1068183, at *8 (Del. Mar. 7, 2019). 224 Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997). 225 Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992). 49 is ambiguous and courts must resort to extrinsic evidence to determine the parties’
contractual intent.”226
A. Touam Ceased to Be an Independent Representative When He Resigned from the Position in September 2017
It is stipulated that (i) Touam was the person designated in Section 5.14 of the
IDS Agreement as the Independent Representative for DiFalco and Shah in
situations involving conflicts of interest, (ii) he orally resigned from this position on
September 15, 2017, and (iii) he confirmed his resignation in writing by letter dated
September 20, 2017.227 That letter stated: “I no longer wish to serve as an
Independent Representative as that term is defined under Section 5.14(b)([ii]) of the
IDS Operating Agreement.”228 The record thus reflects that Touam resigned from
his position as Independent Representative unconditionally as of September 15,
2017.229 Despite these established facts, Aigner advances essentially two arguments
for why the court should declare that Touam is currently authorized to act as the
Independent Representative for DiFalco under Section 5.14. Both arguments fail.
226 Sunline, 2019 WL 1068183, at *8 (citation and internal quotation marks omitted). 227 PTO ¶ 26. 228 JX 163. 229 See Rypac Packaging Mach. Inc. v. Coakley, 2000 WL 567895, at *5 (Del. Ch. May 1, 2000) (director and officer resigned as of date he told another officer he “was resigning,” which was about two months before he submitted a formal resignation letter). 50 First, Aigner contends as a factual matter that DiFalco and Shah improperly
pressured Touam to resign so that the “only equitable result would be to put the
parties back in the position they were ex ante” by declaring that Touam shall be
DiFalco’s Independent Representative “so long as he is willing and able” to perform
that task.230 Aigner fails to identify any legal authority or specific provision of the
IDS Agreement to support this type of request. Putting that aside, the argument fails
because its factual premise is not supported by the record.
It is correct, as Aigner points out, that Touam testified that he would not have
resigned in September 2017 if DiFalco and Shah had not asked him to do so.231 But
Touam also testified credibly that DiFalco and Shah never threatened or coerced him
into resigning and that he made the decision to resign because he did not want to
continue to be put in the middle of a “difficult situation” between Aigner, on the one
hand, and DiFalco and Shah, on the other hand—all of whom Touam had known for
many years and considered to be friends.232
It is entirely understandable that Touam would reach this conclusion given the
evident animosity and lack of trust that pervaded the relationship between Aigner
and DiFalco and Shah in the months leading up to his resignation. In particular,
230 Pl.’s Reply Br. 27 (Dkt. 128); Pl.’s Opening Br. 47. 231 Tr. 419 (Touam). 232 Tr. 438-40 (Touam); see also Touam Dep. 181-82, 185-86; Tr. 793-94 (DiFalco); Tr. 653 (Shah). 51 Aigner had been asking Touam to approve written consents purporting to authorize
actions on behalf of DiFalco and Shah only to learn after the fact that they took
exception to them, and for legitimate reasons. Aigner employed this tactic in
connection with the August 2017 Consents, which caused Touam to revoke his
signature after realizing the consents took rights away from DiFalco and Shah,233
and in connection with the Zuckerman Resolution, where legitimate questions were
raised about Aigner and Leduc’s past relationship with the law firm. Based on the
preponderance of the evidence, including Touam’s testimony, the court finds that
Touam’s resignation in September 2017 was voluntary and that DiFalco and Shah
did not act in an improper manner with respect to Touam’s resignation that would
justify reinstating him as Independent Representative by equitable decree.234
Second, Aigner contends that Touam resumed his position as an Independent
Representative on September 14, 2018, when he purported to rescind his resignation.
233 JX 135 at 2. 234 In Godden v. Franco, the court found that an “Independent Manager” provision in an LLC agreement “envisions ongoing independence” and not just independence at the time of election and that “the implied covenant of good faith and fair dealing would prohibit either side from co-opting the Independent Manager after he was selected.” 2018 WL 3998431, at *16 (Del. Ch. Aug. 21, 2018). Here, although the evidence is too obscure to support any definitive findings, it appears that Touam may have been offered opportunities that could have affected his independence in the direction of both factions at various times. See Tr. 411-13 (Touam); JX 147 at 1 (referencing potential employment opportunity for Touam at Cerovene); Tr. 424-26 (Touam); JX 299 (discussing promise Aigner, DiFalco, and Shah collectively made to pay Touam a $275,000 bonus if “Galephar delivers RoxyBond before end of August 2018”). 52 According to Aigner, this is because “there is no provision [in the IDS Agreement]
for Touam to resign permanently” and thus he “could be ‘unable or unwilling’ at one
point in time (e.g., ill or out of the country) but willing and able at other times” to
serve as an Independent Representative.235 In other words, as Aigner sees it, Touam
was free to oscillate in and out of the role of Independent Representative at will and
thus was free to return to the position when he purported to rescind his resignation
without even obtaining Board approval. The fundamental flaw in this novel
argument is that it cannot be squared with the plain language of the IDS Agreement.
Section 5.14(b)(ii) of the IDS Agreement states, in relevant part, that Touam
“shall” exercise DiFalco’s voting rights when DiFalco is an Interested Manager and
that “[i]n the event” that “Touam is unwilling or unable to serve as an Independent
Representative, the Board shall appoint a replacement.”236 The italicized language
supports the conclusion that, upon indicating an unwillingness to serve, 237 Touam
relinquished and could not unilaterally resume the position of Independent
Representative because, in that circumstance, the Board is obligated to appoint a
235 Pl.’s Opening Br. 46. 236 JX 44 § 5.14(b)(ii). 237 Indicating an unwillingness to serve is substantively the same as resigning in my view. For this reason, I disagree with Aigner’s bizarre suggestion that the IDS Agreement does not permit “Touam to resign permanently” based on the fact that Sections 5.11 and 5.12 permit a manager to “resign at any time” and be replaced by the remaining members of the Board. See Pl.’s Opening Br. 46-47. 53 replacement. This interpretation is bolstered by the absence of any language in the
IDS Agreement (i) suggesting that an Independent Representative could resume that
role after a period of unwillingness to serve or (ii) making conditional the tenure of
a “replacement” so as to provide an opening for an Independent Representative to
resume the position automatically if he wished to do so.
In short, it would make no sense for the IDS Agreement to require that the
Board “appoint a replacement” without qualification after an Independent
Representative indicates he is unwilling or unable to serve if, as Aigner contends,
the intent of the provision was to allow the Independent Representative to pop in and
out of the position of his own accord. Rather, Section 5.14 plainly contemplates a
binary situation, i.e., either the Independent Representative occupies the position and
thus is available to vote for an Interested Manager when necessary or, if he becomes
unwilling or unable to serve, he is out of the position and a replacement is to be put
in his place. The provision is equally unequivocal that Board action is necessary to
fill a vacancy after an Independent Representative becomes unwilling or unable to
serve.
Notably, Aigner, DiFalco, and Shah each recognized—before and after this
litigation began in July 2018—that this is how Section 5.14 was intended to operate
because they both attempted to fill the Independent Representative position that
Touam vacated in 2017 through Board action. On May 15, 2018, IDS’s counsel
54 circulated a draft resolution to reappoint Touam as Independent Representative for
DiFalco and Shah.238 On September 7, 2018, about one week before Touam
purported to rescind his resignation, Aigner circulated a written consent of the Board
to “approve of the reappointment of Hafid Touam to serve as the Independent
Representative” in order to authorize an amendment of the Cerovene Agreement.239
Similarly, on September 15, 2018, a day after Touam purported to rescind his
resignation, Aigner circulated a draft resolution of the Board to “acknowledge that
Hafid Touam shall resume his service as Independent [Representative] pursuant to
Section 5.14 of the [IDS] Agreement.”240 If Aigner believed that the IDS Agreement
permitted Touam to resume his role as Independent Representative unilaterally,
circulating these resolutions would have been unnecessary.
For his part, DiFalco twice attempted to fill the vacancy created by Touam’s
resignation as Independent Representative through Board action. The first attempt
was on October 23, 2017, when DiFalco asked the Board to approve Navin Advani
to replace Touam as the Independent Representative for himself and Shah under
238 JX 254 at 2. 239 JX 307 at 2-3. This was Aigner’s second line of attack to fill the vacancy created by Touam’s resignation. As noted above, Aigner’s initial complaint sought injunctive relief requiring “DiFalco and Shah to nominate or approve an Independent Representative” to fill the vacancy. Dkt. 1 ¶¶ 64-67. 240 JX 310 at 2; JX 311 at 1-2. 55 Section 5.14.241 The second attempt was on August 23, 2018, when DiFalco
circulated a written consent of the Board to appoint Arthur Bedrosian as Touam’s
replacement under Section 5.14.242 Finally, Shah sought to reappoint Touam as the
Independent Representative through Board action, albeit for the sole purpose of
authorizing certain resolutions in May 2018 that Shah proposed in an effort to
resolve the disputes with Aigner.243
In sum, even if Section 5.14(b)(ii) were ambiguous, which it is not in the
court’s opinion, the parties’ course of conduct demonstrates their shared
understanding that Board action is necessary to fill a vacancy of the Independent
Representative position and that a person who resigned from that position cannot
unilaterally reinstate himself by purporting to rescind his resignation.244
For the reasons explained above, under the plain language of Section 5.14,
Touam has had no authority to serve as an Independent Representative since
September 15, 2017, when he unequivocally expressed his unwillingness to serve in
that role. Three consequences flow from this ruling. First, Aigner’s request for a
241 JX 185. 242 JX 297 at 6. 243 JX 258 at 97. 244 See In re Viking Pump, Inc., 148 A.3d 633, 648 (Del. 2016) (“When construing ambiguous contractual provisions, Delaware courts are permitted to consider the parties’ course of dealing.”). 56 declaration that Touam is currently authorized to serve as an Independent
Representative must be denied. Second, the November 3, 2018 written consent
terminating DiFalco as President, which Touam purported to sign as an Independent
Representative on behalf of DiFalco, is invalid.245 Third, the November 28, 2018
written consent approving a Master Development Services Agreement with
Galephar, which was conditioned on the court determining that Touam was
authorized to act on behalf of DiFalco, is of no force or effect by its own terms.246
B. Rongen Was Not Validly Elected as a Manager of IDS and Would Not Have Assumed Shah’s Voting Rights Even if He Were
Aigner requests a declaration that “Rongen should be confirmed as a manager
of IDS with Shah’s voting rights.”247 This request implicates two questions: (1) was
Rongen validly elected as a manager of IDS and, if so, (2) would Rongen have
assumed Shah’s voting rights? For the following reasons, the answer to both
questions is no.
1. Rongen Was Not Validly Elected as a Manager of IDS
The facts relevant to determining Rongen’s status are straightforward and not
in dispute. On July 6, 2018, Shah resigned as a manager of IDS (as well as IDT),
creating a vacancy on the Board, which then consisted of three managers: Aigner,
245 See JX 323. 246 See JX 332 at 2. 247 Pl.’s Opening Br. 52. 57 DiFalco, and Leduc.248 On or about November 28, 2018, Aigner and Leduc signed
a written consent of the Board purporting to elect Rongen as a manager of IDS
“effective immediately” (the “Rongen Consent”).249 The Rongen Consent further
stated that “the question whether Mr. Roelof Rongen as a Manager will have voting
rights identical to Manish Shah will be resolved in” this action.250 Whether Rongen
was validly elected to the Board is a pure legal question that implicates several
provisions in the IDS and IDT Agreements.
First, Section 5.12 of the IDS Agreement, which addresses Board vacancies,
provides as follows:
Any vacancy in the Board, including one created by an increase in the number of Managers, may be filled by (a) election at a meeting of the Members called for that purpose by the affirmative vote of the Members holding a majority of the aggregate number of outstanding Common Units at such time or (b) the affirmative vote of a majority of the remaining Managers (though less than a quorum of the Managers).251
Subsection (a) of this provision is irrelevant because Rongen’s putative appointment
was not implemented by a vote of IDS’s members but instead was implemented by
a vote of managers acting by written consent under subsection (b).
248 PTO ¶ 22; JX 277. 249 JX 332 at 8-10. 250 Id. at 8. 251 JX 44 § 5.12. 58 Second, Section 5.02(a) of the IDS Agreement states that “[p]rior to an IPO,
the Board shall consist entirely of the individuals designated by the IDT Investors,
acting together . . . , which initially shall be Stefan Aigner, Ray DiFalco, Manish
Shah, and Gerard Leduc.”252 Section 5.11 contains a parallel provision. It states that
the managers of IDS “may only be removed and replaced by the IDT Investors then
holding Common Units.”253 Importantly, as of the date of the Rongen Consent,
Section 5.4(w) of the IDT Agreement prohibited “any consent, vote, authorization
ratification or approval by [IDT] with respect to its membership interest or rights in
[IDS] related to or in connection with . . . the removal, replacement, or designation
of [IDT’s] managers in [IDS]” without “the written consent or affirmative vote of”
both Aigner and DiFalco.254
Third, as discussed above, Sections 5.03 and 5.09 of the IDS Agreement
contain Veto Rights that, subject to the conflict of interest provision in Section 5.14,
permit Aigner and DiFalco to veto any action of the Board.
DiFalco argues that the interplay of these provisions renders the Rongen
Consent invalid for two independent reasons. The court agrees for the reasons
explained next.
252 Id. § 5.02(a). The term “IDT Investors” means IDT and IDT Royalty, LLC. Id. at 5. 253 Id. § 5.11. 254 JX 39 § 5.4(w). 59 DiFalco’s lead argument is that the Rongen Consent violated Section 5.02(a)
of the IDS Agreement because IDT never designated Rongen to serve on the IDS
Board and IDT could not do so because DiFalco’s approval would have been
necessary for IDT to take that action. Aigner does not dispute that Section 5.02(a)
means that before an IPO of IDS, which has not occurred, the IDS Board must
consist of individuals acceptable to IDT, the 72% owner of IDS. Nor does Aigner
dispute that DiFalco had the authority under Section 5.4(w) of the IDT Agreement
to veto Rongen as a designee to the IDS Board.
Aigner’s only substantive response to the legal effect of Section 5.02(a) is
that, “[t]o the extent Sections 5.02 and 5.12 conflict, settled rules of contract
interpretation require that the court prefer specific provisions over more general
ones.”255 Under Delaware law, “the specific provision ordinarily qualifies the
meaning of the general one” only “where specific and general provisions
conflict.”256 In this case, however, there is no conflict. Section 5.12(b) permits the
255 Pl.’s Reply Br. 28 (internal quotation marks and alterations omitted). Aigner argues in the alternative that Sections 5.02(a) and 5.12 “can be harmonized” by reading Section 5.02(a) “to apply to removal and replacement [of] managers pursuant to Section 5.11 . . . but not necessarily to filling the vacancy of [a] manager that has resigned under Section 5.12.” Id. at 29. As noted above, Section 5.11 provides that “[a]ny Manager may resign at any time” and that prior to an IPO, “the Managers may only be removed and replaced by the IDT Investors then holding Common Units.” JX 44 § 5.11. Aigner offers no logical reason why Section 5.02(a) should be applied differently depending on how the vacancy was created (i.e., resignation versus removal) and the court sees none. 256 DCV Hldgs., Inc. v. ConAgra, Inc., 889 A.2d 954, 961 (Del. 2005) (“Specific language in a contract controls over general language, and where specific and general provisions 60 remaining managers to fill a vacancy on the Board notwithstanding the potential lack
of a quorum (subject to Aigner and DiFalco’s Veto Rights, as discussed next) while
Section 5.02(a) is a qualification provision that limits the pool of potential candidates
before an IPO to individuals acceptable to IDT. Consistent with foundational
principles of contract interpretation, this construction harmonizes and gives meaning
to both provisions at issue, obviating any need to prefer one over the other.257
DiFalco next argues that the Rongen Consent violated his Veto Rights in
Sections 5.03 and 5.09, which require DiFalco’s approval for any action of the
Board. Section 5.03 states, in relevant part, that
[a]ction of the Board shall be authorized by the vote of a majority of the Managers present at the time of the vote if there is a quorum, unless otherwise provided by this Agreement; provided, however, that such majority shall include the affirmative vote of (i) Stefan Aigner and (ii) at least one of Ray DiFalco or Manish Shah.258
conflict, the specific provision ordinarily qualifies the meaning of the general one.”) (emphasis added) (affirming trial court’s holding that specific-over-the-general rule applied where the two relevant provisions conflicted such that the application of one “would render [the other] meaningless”); see also Sonitrol Hldg. Co. v. Marceau Investissements, 607 A.2d 1177, 1184 (Del. 1992) (stating that “where there is an inconsistency between general provisions and specific provisions, the specific provisions ordinarily qualify the meaning of the general provisions”) (quoting Stasch v. Underwater Works, Inc., 158 A.2d 809, 812 (Del. Super. Ct. 1960)); Katell v. Morgan Stanley Gp., Inc., 1993 WL 205033, at *4 (Del. Ch. June 8, 1993) (same); Restatement (First) of Contracts § 236(c) (“Where there is an inconsistency between general provisions and specific provisions, the specific provisions ordinarily qualify the meaning of the general provisions.”) (emphasis added). 257 See Sunline, 2019 WL 1068183, at *8 (“The contract must also be read as a whole, giving meaning to each term and avoiding an interpretation that would render any term ‘mere surplusage.’”). 258 JX 44 § 5.03. 61 Focusing on the phrase italicized above, Aigner counters that “Section 5.12
‘otherwise provides’ an alternative voting mechanism that differs from the voting
mechanism set forth in Section 5.03.”259 This argument misconstrues the use of the
phrase “otherwise provided” in Section 5.03. That phrase plainly modifies the
immediately preceding text that requires as a default rule a quorum to take Board
action at a meeting.
The fallacy in Aigner’s argument also is borne out by the fact that the phrase
“otherwise provided” does not even appear in Section 5.09, which applies the same
Veto Rights to action taken by written consent. No logical reason has been advanced
why Section 5.12 would provide an “alternative voting mechanism” for a Board
action taken at a meeting as opposed to (and as was attempted here with the Rongen
Consent) a Board action taken by written consent.
“When interpreting a contract,” Delaware courts “will give priority to the
parties’ intentions as reflected in the four corners of the agreement, construing the
agreement as a whole and giving effect to all its provisions.”260 Here, Sections 5.03,
5.09, and 5.12 are easily harmonized. Sections 5.03 and 5.09 afford specific
individuals special Veto Rights for any Board action while Section 5.12 simply
259 Pl.’s Opening Br. 53. 260 Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (internal quotation marks omitted). 62 provides that for one particular Board action—filling a vacancy in the Board—the
Board “may” act by the “affirmative vote of a majority of the remaining Managers”
even in the absence of a quorum without disturbing the Veto Rights. Given that all
three provisions are given effect through this construction without curtailing the
unbounded nature of the Veto Rights, and given the absence of any reference
whatsoever to the Veto Rights in Section 5.12, it would be unreasonable in my
opinion to read into Section 5.12 a sub silentio exception to the Veto Rights
expressly set forth in Sections 5.03 and 5.09.
2. Rongen Would Not Have Assumed Shah’s Voting Rights Even if He Had Been Validly Appointed as a Manager
Having concluded that Rongen was not validly elected as a manager of IDS,
it is not necessary to decide whether he would have assumed Shah’s voting rights
had he been validly elected. In the interest of providing the litigants additional
guidance to assess their options going forward, however, the court will reach this
issue.
In my opinion, Rongen would not have assumed Shah’s voting rights even if
he had been validly appointed to the Board. Sections 5.03 and 5.09 confer the Veto
Rights on Aigner, DiFalco, and Shah by name without stating or suggesting that
those rights could be assumed by their successors as managers.261 It is entirely
261 See JX 44 §§ 5.03, 5.09. 63 logical that these rights were intended to be personal to these specific individuals
given their status as the founders of the business. Indeed, the IDS Agreement
distinguishes between the “Managers” as a whole and the three founders. Section
5.02 of the IDS Agreement provides that the IDS Board “initially” shall consist of
four managers and adds as the fourth manager a person (Leduc) who—unlike
Aigner, DiFalco, and Shah—was not a founder and does not have Veto Rights. The
provision of Veto Rights to Aigner, DiFalco, and Shah by name in Sections 5.03 and
5.09, while not providing such rights to Leduc or to the founders’ successors as
managers elsewhere in the IDS Agreement, demonstrates that new managers of IDS
were not intended to share in the special rights assigned to the founders personally.
Aigner cites no language in the IDS Agreement suggesting that the Veto
Rights conferred on the founders by name were intended to pass on to their
replacements. Given that it was foreseeable when the IDS Agreement was signed
that managers could resign, die, or become incapacitated, it would have been easy
for the drafters to include such language, but they did not. Bereft of any textual
support for his position, Aigner resorts to arguing that he “bargained for” a voting
structure that left him “an option” not to have to deal solely with DiFalco because
he “viewed Shah as more reasonable.”262 Aigner’s subjective views about what he
262 Pl.’s Opening Br. 54-55; Pl.’s Reply Br. 31. Relying on the text of the IDT Agreement, Aigner also argues that “the way the IDS Agreement abandons the ‘Founder Member’ concept and declines to give DiFalco and Shah the right to approve the replacement of the 64 believes he did or did not bargain for, however, are not relevant to interpreting the
text of the IDS Agreement under Delaware’s objective theory of contracts.263
Finally, Aigner argues that holding that the Veto Rights pass to Shah’s
replacement is “necessary to allow the Board to function.”264 This misses the point.
By creating Veto Rights and assigning them to named individuals, the parties created
the possibility that the Board might deadlock and cease to function if those
individuals cannot agree on important decisions. The “policy” of the Delaware
Limited Liability Company Act is “to give the maximum effect to the principle of
freedom of contract.”265 Unfortunately, as this case shows, that freedom allows
parties to adopt contractual arrangements that do not work, particularly when the
principals do not trust each other and do not get along.
other managers of IDS” is probative of “what each party ‘bargained for.’” Pl.’s Reply Br. 31. Apart from the fact that I have concluded that the Veto Rights do apply to the filling of a Board vacancy, as discussed above, this extrinsic evidence is irrelevant because I do not find the IDS Agreement to be ambiguous with respect to the personal nature of the Veto Rights. See Eagle Indus., 702 A.2d at 1232 (“If a contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract or to create an ambiguity.”). 263 See, e.g., Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (“Delaware adheres to the ‘objective’ theory of contracts, i.e. a contract’s construction should be that which would be understood by an objective, reasonable third party.”) (internal quotation marks omitted and emphasis added). 264 Pl.’s Opening Br. 55; see Pl.’s Reply Br. 31. 265 6 Del. C. § 18-1101(b). 65 C. Judicial Dissolution Is Warranted in This Case Because It Is Not Reasonably Practicable to Carry on the Business of IDS in Conformity with the IDS Agreement
The court next addresses DiFalco’s counterclaim for dissolution. The
Delaware LLC Act provides that “[o]n application by or for a member or manager
the Court of Chancery may decree dissolution of a limited liability company
whenever it is not reasonably practicable to carry on the business in conformity with
a limited liability company agreement.”266 The IDS Agreement expressly
incorporates this provision. It states that IDS “shall be dissolved and its affairs
wound up upon . . . the entry of a decree of judicial dissolution with respect to the
Company under Section 18-802 of the Delaware Act.”267 DiFalco is a manager of
IDS and in that capacity has advanced a claim for dissolution.268 Thus, the only
question before the court is whether it is “reasonably practicable” for IDS “to carry
on [its] business” in conformity with the IDS Agreement.
“The ‘not reasonably practicable’ standard does not require a petitioner to
show that the purpose of the limited liability company has been completely
frustrated.”269 “The text of § 18-802 does not specify what a court must consider in
266 6 Del. C. § 18-802. 267 JX 44 § 10.02(c). 268 PTO ¶ 21; Dkt. 17 ¶ 184. 269 In re: GR BURGR, LLC, 2017 WL 3669511, at *5 (Del. Ch. Aug. 25, 2017) (internal quotation marks omitted). 66 evaluating the ‘reasonably practicable’ standard, but several convincing factual
scenarios have pervaded the case law: (1) the members’ vote is deadlocked at the
Board level; (2) the operating agreement gives no means of navigating around the
deadlock; and (3) due to the financial condition of the company, there is effectively
no business to operate.”270 None of these factors is “individually dispositive; nor
must they all exist for a court to find it no longer reasonably practicable for a
business to continue operating.”271
With respect to deadlock, “when an LLC agreement requires that there be
agreement between two managers for business decisions to be made, those two
managers are deadlocked over serious issues, and the LLC agreement provides no
alternative basis for resolving the deadlock, it is not reasonably practicable to
continue to carry on the LLC business in conformity with [its] limited liability
company agreement.”272 Ultimately, if the “deadlock cannot be remedied through a
legal mechanism set forth within the four corners of the operating agreement,
dissolution becomes the only remedy available as a matter of law.”273
270 Fisk Ventures, LLC v. Segal, 2009 WL 73957, at *4 (Del. Ch. Jan. 13, 2009) (Chandler, C.). 271 Id. 272 Vila v. BVWebTies LLC, 2010 WL 3866098, at *7 (Del. Ch. Oct. 1, 2010) (internal quotation marks omitted and emphasis removed) (Strine, V.C.). 273 Fisk Ventures, 2009 WL 73957, at *7. 67 The court will analyze whether it is reasonably practicable for IDS to carry on
its business in accordance with the IDS Agreement in two parts: first, by examining
whether the Board is deadlocked over important issues, and second, by examining
whether the IDS Agreement provides a mechanism for resolving the deadlock.274
These issues are addressed in turn below.
1. The IDS Board Is Deadlocked on Numerous Important Issues
As explained in detail above, the relationship between Aigner, on the one
hand, and DiFalco and Shah, on the other hand, has been turbulent and defined by
distrust and animosity for at least two years. An early episode occurred in May 2017,
when Aigner reneged on implementing the Infrastructure Resolution, which was
intended to put to rest any controversy over the Orangeburg Facility as part of a
“package deal” of resolutions. As explained previously, Aigner took this action
while implementing other resolutions in the package beneficial to him in order to
preserve his ability to threaten litigation over the Orangeburg Facility as leverage
over DiFalco and Shah.
In July 2017, tensions increased when DiFalco learned from Trygg’s CEO
(Kramer) that Aigner secretly was exploring using Galephar as a CMO. After
DiFalco found out, Aigner sought to remove Kramer as a Board observer in advance
274 See, e.g., Vila, 2010 WL 3866098, at *6-8 (analyzing deadlock, then whether the agreement contained a solution); Fisk Ventures, 2009 WL 73957, at *4-5 (same). 68 of an acrimonious Board meeting held later that month, during which Aigner
confessed to Kramer his plan “to starve” DiFalco and Shah to make them “behave”
when Kramer questioned Aigner’s refusal to compromise with DiFalco and Shah.275
Over the following months, Aigner obtained Touam’s approval of the August
2017 Consents and the Zuckerman Resolution hurriedly before DiFalco or Shah
could have any say on those matters. When these tactics did not achieve their
intended result, Aigner tried to outflank DiFalco by appealing to Shah, DiFalco’s
longtime friend and business partner, to take Aigner’s side. These efforts became
confrontational and led to Shah’s resignation in July 2018 as a manager of the
Company he co-founded—an act of apparent frustration and desperation in dealing
with Aigner. Aigner then filed suit and, while this litigation was pending, attempted
to install Rongen as a manager, to resurrect Touam as an Independent
Representative, and to have Touam sign a resolution without any advance notice to
DiFalco to conditionally approve a product development agreement with Galephar.
Underlying the rupture in their relationship, Aigner, DiFalco, and Shah have
been at loggerheads over issues of fundamental importance to the Company and its
future. Three examples of significant deadlocks between the two sides follow.276
275 Tr. 842 (Kramer). 276 In the context of a dissolution claim, “deadlock” means disagreement and discord between the parties. See Vila, 2010 WL 3866098, at *7 (citing as evidence of “deadlock” the fact that the managers “are unable to agree” on several important issues); Fisk Ventures, 2009 WL 73957, at *4 (discussing the parties’ “long history of disagreement and discord” 69 First, Aigner and DiFalco fundamentally disagree over who IDS should
partner with to develop new products. This is perhaps the most pressing issue facing
the Company. Aigner believes that Galephar would be a suitable development
partner and enlisted Touam’s assistance just weeks before trial to approve a new
agreement with Galephar for it to provide development and tech transfer services to
IDS for two new products.277 On the other hand, DiFalco and Shah have articulated
ostensibly legitimate concerns about using Galephar (both as a CMO and as a
development partner), namely Galephar’s: (i) location in Puerto Rico, which poses
logistical issues; (ii) lack of understanding of aspects of the manufacturing process
for IDS’s products and deficiencies in its equipment; (iii) willingness to sell its
facility to IDS, which DiFalco perceives to be Galephar’s real agenda; (iv)
unwillingness to include a non-compete provision in an agreement with IDS; and (v)
failure to successfully manufacture RoxyBond.278 DiFalco also is understandably
in analyzing whether “deadlock” exists); see also Meyer Nat. Foods LLC v. Duff, 2015 WL 3746283, at *3 (Del. Ch. June 4, 2015) (“Deadlock refers to the inability to make decisions . . . .”). 277 JX 332 at 1, 3; see JX 258 at 54, 59. As noted above, the resolution purporting to approve the agreement with Galephar was expressly made conditional on the court determining that Touam validly rescinded his resignation as Independent Representative. JX 332 at 2. 278 Tr. 727-35, 775-78 (DiFalco). Kramer also expressed serious concerns about partnering with Galephar due to the extreme damage inflicted on Puerto Rico by Hurricane Maria in September 2017. JX 170; see JX 169. 70 concerned about Aigner’s secrecy regarding his communications with Galephar.279
Second, Aigner and DiFalco disagree about which CMO to recommend to
Daiichi. From Aigner’s perspective, Galephar is an attractive option for a CMO
because it: (i) has experience with a unique ingredient used in IDS’s products; (ii)
represented that it could complete a tech transfer for RoxyBond without any
assistance from Cerovene; and (iii) indicated that it was willing to sell its
manufacturing facility to IDS “down the road.”280 DiFalco, on the other hand, has
opposed Galephar as a CMO for the reasons explained above. The second Complete
Response letter received after trial from the FDA raises additional questions about
Galephar’s suitability to manufacture RoxyBond, consistent with DiFalco’s
concerns. The disagreement is consequential because of its obvious importance to
the commercial success of IDS’s only two FDA-approved products.
Aigner asserts that “there is no current disagreement as to CMOs” because
“the Board approved Patheon, Galephar and Catalent.”281 That assertion is
misleading. Under the Daiichi Agreement, Daiichi is “responsible for making all
material decisions with respect to the transfer of MorphaBond and RoxyBond
manufacturing to” another CMO if Patheon is unable to act as the CMO, and to do
279 See Tr. 726 (DiFalco). 280 Tr. 102-03 (Aigner). 281 Pl.’s Opening Br. 56 n.20. 71 so “in consultation with” IDS.282 Patheon has never successfully manufactured
either product.283 Currently, only MorphaBond is being manufactured, and only by
Cerovene, which does not have the capacity of CMOs like Patheon or Catalent.284
Thus, the question of which CMO to recommend to Daiichi remains open for both
products—that is, which CMO to recommend for RoxyBond to commence
commercial manufacturing of that product, and which to recommend for
MorphaBond for any additional capacity needed beyond what Cerovene can provide.
Third, Aigner and DiFalco disagree over the strategic vision for the Company,
in particular whether IDS should expend resources to employ its own sales
representatives to market its products. Aigner envisions IDS as an integrated
pharmaceutical company with its own in-house sales force, which he thinks will
deliver better margins than hiring an outside firm.285 DiFalco has opposed
developing an in-house sales force because he believes that is not the Company’s
“sweet spot” and that IDS’s priority should be drug development.286 The sales force
282 JX 51 § 6.8(c). 283 Tr. 611, 614-15 (Shah). 284 Tr. 549, 599-600 (Shah). 285 Tr. 18 (Aigner). 286 Tr. 764 (DiFalco); JX 187 at 1 (stating in an email to Aigner and others regarding the sales force issue that “the ability to rely upon a seasoned [Daiichi] sales force that [Daiichi] will train and provide all of the necessary experience and information seems vastly preferable to me”). 72 issue not only has long term consequences, but directly impacts the current financial
condition of the Company. In the first half of 2018, IDS spent about as much on
sales and marketing as it did on manufacturing and research and development
combined as the Company aggressively hired sales representatives at Aigner’s
direction.287
Aigner contends that the disagreement regarding the sales force is a “trumped-
up fiction” and a “red herring” because the Daiichi Agreement “requires [IDS] to
retain a sales force” and because “DiFalco never presented the issue to the Board for
a vote and, if he did, he would be in the minority.”288 The court disagrees. As to the
first contention, the Daiichi Agreement does require IDS to “co-promote” the
products “using a coordinated sales force of” sales representatives, but the
representatives may be “employed directly by” IDS or hired “through Third Parties,”
which are defined as “any legal person, entity or organization other than” IDS,
Daiichi, or their affiliates.289
As to the second contention, Aigner has it backwards. The problem is not that
DiFalco would not get his way if he sought Board approval to fire employees. The
287 JX 292 at 7 (noting that “44 IDS Specialty Sales Representatives” had been hired and trained “since March 2018 thru June/July” of 2018), 31 (showing expenses of $2,477,134 for sales and marketing and $2,535,134 for manufacturing and research and development). 288 Pl.’s Opening Br. 57-59. 289 JX 51 §§ 1.16, 1.68, 7.1. The agreement also gives IDS the right to opt out of the co- promotion obligation altogether upon 180 days’ written notice to Daiichi. Id. § 7.2(c). 73 problem is that Aigner did not obtain DiFalco’s approval to make the strategic
decision to hire a sales force in the first place. To be more specific, there is no
indication in the record that the Board ever affirmatively approved hiring a sales
force, a proposal DiFalco would have been within his rights to block using his Veto
Rights, or that Aigner ever obtained DiFalco’s consent under Section 5.15 to hire a
sales force acting in his capacity as CEO.290
In sum, the current state of play at the Company is that the Board consists of
three managers (Aigner, DiFalco, and Leduc), two of whom (Aigner and DiFalco)
disagree vehemently on issues critical to the Company’s management and business
strategy. Those same two individuals have Veto Rights that apply by default to any
action of the Board and consent rights that apply to officer-level decisions. If that
were the end of the analysis, dissolution of the Company would be a foregone
conclusion.291 Thus, the only question that remains is whether the conflicts of
290 Citing an October 2017 email exchange (JX 187), Aigner contends that “DiFalco ultimately never objected to an internal salesforce.” Pl.’s Reply Br. 36. To repeat, Section 5.15 provides that the CEO shall “in general supervise and control the business and affairs of the corporation subject to the advice and consent of the President.” JX 44 § 5.15. Fairly read, the October 2017 email exchange reflects a discussion of alternatives and cannot legitimately be construed as unqualified consent by DiFalco to employ an internal sales force. 291 See, e.g., Vila, 2010 WL 3866098, at *1 (granting dissolution of LLC because of deadlock between two owners who controlled equal 49% stakes with the remaining 2% held by a trust that took no position in the dispute); Haley v. Talcott, 864 A.2d 86, 89 (Del. 74 interest provision in Section 5.14 provides a viable mechanism to make it reasonably
practicable to carry on the business of the Company. That issue is addressed next.
2. Section 5.14(b) Does Not Provide a Workable Mechanism to Resolve the Deadlock
As with all things in this case, Aigner and DiFalco sharply disagree over the
meaning of Section 5.14(b) and whether it provides a workable mechanism to
resolve the parties’ fundamental disagreements concerning the management of IDS
and its business strategy. Aigner contends that the provision can work and that the
Company’s current dysfunction will be resolved if the court grants his request for a
categorical declaration that Section 5.14(b) bars DiFalco from using his Veto Rights
on the selection of CMOs or development partners. DiFalco contends that the
provision does not work and that Aigner has misused the provision as a weapon to
marginalize DiFalco’s role in managing the Company. For the reasons explained
next, the court concludes that Section 5.14(b) does not provide a workable
mechanism to resolve the deadlock between Aigner and DiFalco so as to make it
reasonably practicable to carry on the business of IDS in conformity with the IDS
Agreement.
Ch. 2004) (Strine, V.C.) (granting dissolution of LLC because petitioner “demonstrated an indisputable deadlock between the two 50% members of the LLC”). 75 Section 5.14(b) states, in relevant part, that IDS “shall not take any action
pertaining to the rights and obligations of [IDS] relating to an Affiliate Transaction,
other than in accordance with the paragraphs below:”
(i) Any Manager with a conflict of interest concerning an Affiliate Transaction (an “Interested Manager”) shall disclose the conflict of interest to the Board and shall describe all material facts concerning the Affiliate Transaction and the conflict of interest that are known to the Interested Manager.
(ii) In case Stefan Aigner is the Interested Manager, the voting, consent or similar rights as a member of the Board with respect to any Affiliate Transaction shall be exercised by Kip Martin, as an independent party (an “Independent Representative”), whether at a meeting of the Board or by written consent. In case Ray DiFalco or Manish Shah is the Interested Manager, the voting, consent or similar rights as a member of the Board with respect to any Affiliate Transaction shall be exercised by Hafid Touam, as an Independent Representative, whether at a meeting of the Board or by written consent. In the event Kip Martin or Hafid Touam is unwilling or unable to serve as an Independent Representative, the Board shall appoint a replacement Independent Representative.292
Subsection (b)(i) is referred to, at times, as the “Disclosure Requirement.” The term
“Affiliate Transaction” is defined in Section 5.14(b) broadly to encompass not only
actual arrangements involving a manager, but transactions that “could impact” an
arrangement involving a manager:
An “Affiliate Transaction” shall mean: (i) an arrangement for goods, services or space by and between the Company and a Manager or any Affiliate of a Manager, (ii) a Company transaction which could impact
292 JX 44 § 5.14(b). 76 an arrangement with an Affiliate in which a Manager has a direct or indirect personal or financial interest, (iii) any business dealing, undertaking, contract, agreement, lease or other arrangement where a Manager has a conflict of interest, including any arrangement for goods, services or space, or (iv) a transaction that could impact other Affiliate Transactions which the Company entered into or is contemplating entering into.293
As an initial matter, because of Touam’s resignation, no Independent
Representative is currently in place to vote for DiFalco on matters to which Section
5.14(b) might apply. Board action would be required to name a replacement, and
there is every reason to believe that Aigner and DiFalco would deadlock on this
decision as well. Indeed, all of their efforts to date to appoint a new Independent
Representative to replace Touam have failed. For this reason alone, Section 5.14(b)
fails to provide a workable mechanism to break the deadlock between Aigner and
DiFalco. But even if a new Independent Representative for DiFalco were in place—
for example, if the court were to appoint one—Section 5.14(b) would fail to provide
a workable solution to the deadlock in my opinion.
Trial of this action exposed two aspects of Section 5.14(b) that appear to be
the root cause of the problems with its application. First, Section 5.14(b) does not
specifically address who decides when the Independent Representative must step in
293 Id. (emphasis added). The term “Affiliate” is defined as “any other Person that, directly or indirectly, Controls, is under common Control with or is Controlled by such Person.” Id. § 1.01. “Person” means both individuals and business entities and “Control” is “the power to direct or cause the direction of the management and policies of such Person.” Id. 77 to vote for an Interested Manager. Second, the scope of the provision is inherently
vague and ambiguous. These two issues are addressed, in turn, below.
On the first issue, DiFalco contends that “Section 5.14(b) is not an automatic
recusal provision . . . but rather a procedural safeguard designed to protect a
conflicted Manager from potential liability for duty of loyalty breaches.”294
According to DiFalco, the provision is not triggered unless a manager steps forward
to acknowledge that he has a “conflict of interest concerning an Affiliate
Transaction.”295 Put differently, DiFalco argues that satisfaction of the Disclosure
Requirement in subsection (b)(i) is a precondition to the ability of an Independent
Representative to vote under subsection (b)(ii).
For his part, Aigner observes that “the term ‘Interested Manager’ is defined
as a Manager with a conflict of interest concerning an Affiliate Transaction, not a
Manager with a conflict who also discloses his interest in the transaction.”296 Aigner
thus argues that “determining whether a Manager is an Interested Manager is an
objective standard, not dependent on whether the Manager discloses that interest.”297
And, although he does not say so explicitly, Aigner’s past conduct demonstrates that
he believes that if he determines in his own mind that DiFalco is an Interested
294 Def.’s Opening Br. 56 (Dkt. 122). 295 JX 44 § 5.14(b)(i). 296 Pl.’s Opening Br. 44 (emphasis in original). 297 Id. at 44-45. 78 Manager with respect to some matter, he may immediately proceed to invoke the
Independent Representative provision unilaterally.
In my opinion, DiFalco’s interpretation accords with the text and structure of
Section 5.14(b) and provides the only reasonable interpretation on the “who decides”
question. I begin with the text. Section 5.14(b) states, in the sentence immediately
preceding subsections (b)(i) and (b)(ii), that the “Company shall not take any action
pertaining to the rights and obligations of the Company relating to an Affiliate
Transaction, other than in accordance with the paragraphs below.”298 This sentence
indicates that the Company cannot take any action regarding an Affiliate Transaction
unless both subsections (b)(i) and (b)(ii) are followed. In other words, the plain
language of Section 5.14(b) supports the conclusion that disclosure by the Interested
Manager—which is the only obligation set forth in subsection (b)(i)—is required in
order to utilize the Independent Representative to vote on a Board matter under
subsection (b)(ii).
The structure of Section 5.14(b) confirms this interpretation. The Disclosure
Requirement in subsection (b)(i) appears before the Independent Representative
provision in subsection (b)(ii), and logically should be satisfied before the
Independent Representative provision is triggered. This sequence makes sense
298 JX 44 § 5.14(b) (emphasis added). 79 because the other Board members would need to know about the facts and
circumstances concerning a conflict of interest before they would know to use the
Independent Representative provision. It also serves the salutary purpose of
permitting the Independent Representative (and other Board members) to consider
the Interested Manager’s disclosure of “all material facts concerning the Affiliate
Transaction and the conflict of interest that are known to the Interested Manager” in
order to vote in a fully informed manner.299
The fundamental problem with Aigner’s interpretation is that, by letting any
manager unilaterally invoke the Independent Representative provision in subsection
(b)(ii), it reads the Disclosure Requirement out of Section 5.14(b). Thus, as a textual
matter, Aigner’s interpretation is unreasonable because it violates the basic principle
that “a contract should be interpreted in such a way as to not render any of its
provisions illusory or meaningless.”300 Furthermore, as a practical matter, Aigner’s
interpretation is problematic because it provides opportunities for mischief by
permitting someone to circumvent the Veto Rights set forth in Sections 5.03 and
5.09 of the IDS Agreement.
Consider, for example, when Aigner took it upon himself in August 2017 to
obtain Touam’s signature on a written consent to effectively allow Aigner to
299 Id. § 5.14(b)(i). 300 Sonitrol, 607 A.2d at 1183. 80 “exclude” DiFalco and Shah “from communications relating to Affiliate
Transactions” as an apparent act of retaliation after DiFalco asked due diligence
questions about using Galephar as a CMO for RoxyBond.301 By invoking Section
5.14(b) unilaterally, Aigner circumvented DiFalco’s Veto Rights in an effort to
rewrite his contractual informational rights as a manager and President of IDS and
to curtail his common law informational rights as a fiduciary of the Company.302
The court can discern no justification for this action.
On the other side of the ledger, an obvious challenge to applying Section
5.14(b) under DiFalco’s interpretation is that its utility depends on the good faith of
the manager to identify a conflict of interest. If one manager believes another
manager failed to make a required disclosure, judicial relief is available to provide a
remedy,303 although it is not difficult to imagine scenarios where the Company’s
301 JX 129 at 2, 4. 302 The IDS Agreement provides that the “Managers shall have fiduciary duties of loyalty and care similar to that of directors of business corporations organized under the Delaware General Corporation Law.” JX 44 § 5.14(a). Under Delaware law, a “director’s right to information is essentially unfettered in nature” and presumptively includes “equal access to board information.” Kalisman v. Friedman, 2013 WL 1668205, at *3 (Del. Ch. Apr. 17, 2013) (internal quotation marks omitted); Moore Bus. Forms, Inc. v. Cordant Hldgs. Corp., 1996 WL 307444, at *5 (Del. Ch. June 4, 1996) (internal quotation marks omitted). 303 Aigner cites Mobile Communications Corp. of America v. MCI Communications Corp., 1985 WL 11574, at *4 (Del. Ch. Aug. 27, 1985), which holds that “[t]he ‘prevention doctrine’ provides that a party may not escape contractual liability by reliance upon the failure of a condition precedent where the party wrongfully prevented performance of that condition precedent.” Consistent with this holding, DiFalco and Shah expressly acknowledge that they could face liability for failing to make a disclosure required under Section 5.14(b)(i). See Def.’s Opening Br. 60 n.213; Def.’s Reply Br. 26-27. 81 governance could become paralyzed if that were its only recourse. That said, the
presumption that managers will act in good faith in complying with their obligations
in Section 5.14(b) is supported by the plain text and structure of the provision, and
Aigner has not identified a single occasion when DiFalco or Shah failed to make a
disclosure he believes should have been made under Section 5.14(b)(i) of the IDS
Agreement since that agreement became effective.304
When pressed at post-trial argument on the source of Aigner’s putative
authority to decide when the Independent Representative should vote, his counsel
advanced a brand new argument that Touam is the one who gets to decide.305 There
are many problems with that suggestion, including that (i) no text in the IDS
Agreement supports this interpretation, (ii) there is no indication in the record that
this is how Section 5.14(b) actually has been implemented, (iii) having the
Independent Representative decide when to vote does not negate the Disclosure
Requirement in subsection (b)(i), and (iv) having the Independent Representative
decide without the benefit of the disclosure from a putatively Interested Manager
would be a recipe for uninformed decision-making.306
304 Aigner takes issue with DiFalco’s failure to disclose “various related-party transactions in connection with the Orangeburg Facility build-out.” Pl.’s Reply Br. 17. That conduct, however, predated implementation of the IDS Agreement. 305 Post-Trial Tr. 49. 306 In support of the “Touam should decide” argument, Aigner’s counsel pointed to an unsigned draft of a joint written consent of the members and managers of IDT Royalty, LLC from August 2016 that apparently was acceptable to DiFalco and Shah. Post-Trial 82 In short, of the two interpretations of Section 5.14(b) the parties have
proffered on the question of who decides when the Independent Representative
provision is triggered, DiFalco’s interpretation is the only textually reasonable one.
This conclusion has an important consequence, which is that the Independent
Representative provision cannot be applied—and thus DiFalco’s Veto Rights remain
intact—unless and until DiFalco discloses to the Board that he has “a conflict of
interest concerning an Affiliate Transaction.”307 Because that process was not
followed when Aigner unilaterally obtained signatures for the Zuckerman
Resolution, that action was invalid.308
The second interpretative issue with Section 5.14(b) concerns the scope of the
provision. Subsection (b)(i) defines an “Interested Manager” as a manager “with a
conflict of interest concerning an Affiliate Transaction.”309 The term “conflict of
interest” is not defined in Section 5.14(b) or anywhere else in the IDS Agreement.
Tr. 78-81. It states, with respect to supply chain issues, that “[s]hould Hafid Touam determine in his sole judgment that the Founding Members [i.e., DiFalco and Shah] do not appear to be acting in good faith towards [IDT Royalty, LLC], the Founding Members shall recuse themselves from a vote and Hafid Touam shall cast their votes.” JX 28 at 4. This language never made its way into the IDS Agreement and thus is irrelevant. 307 JX 44 § 5.14(b)(i). 308 See supra Section I.N. The Zuckerman Resolution is invalid for the independent reason that DiFalco was not provided notice of the proposed action at least two business days before the written consent was signed. See JX 44 § 5.09 (requiring that notice of a proposed action by written consent be “delivered to each Manager and Observer at least two (2) Business Days prior to such action”). 309 Id. § 5.14(b)(i). 83 As discussed previously, Section 5.14(b) defines the term “Affiliate Transaction” in
four subparts, two of which appear to encompass potential conflicts of interest, i.e.,
those that “could impact” certain arrangements or other transactions.310
Focusing on the definition of “Interested Manager,” Aigner contends that the
phrase “conflict of interest concerning an Affiliate Transaction” simply means that
the manager “has an interest in the Affiliate Transaction.”311 But this construction
gives no independent meaning to the term “conflict of interest” as used in that
definition. One way to give the term “conflict of interest” independent meaning for
purposes of defining what constitutes an “Interested Manager” is to construe the term
to apply only to “actual” conflicts of interest.
The distinction between “actual” and “potential” conflicts of interest is
important under Delaware law. It has been used to demarcate when a fiduciary
wearing two hats can be liable for acting disloyally.312 Relatedly, in the context of
interested director transactions, only “sufficiently material” interests can rebut the
business judgment rule presumption, the determination of which is a “fact-
dominated question.”313 Notably, one of the four subparts of the definition of
310 Id. § 5.14(b). 311 Post-Trial Tr. 66-67. 312 See Cooke v. Oolie, 2000 WL 710199, at *12-13 (Del. Ch. May 24, 2000) (Chandler, C.) (holding that plaintiffs failed to rebut presumption of business judgment rule where they had only identified “a potential conflict of interest” as opposed to “an actual conflict”). 313 Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 364 (Del. 1993). 84 “Affiliate Transaction” refers to “where a Manager has a conflict of interest,”
suggesting that this narrower meaning of the term may have been intended for
purposes of Section 5.14(b).314 The court, however, cannot discern from the four
corners of the contract whether this meaning was intended or whether “conflict of
interest” was intended to mean any potential conflict of interest. In other words, the
definition of the term “Interested Manager” is facially ambiguous.
The drafting history of Section 5.14(b) shows that Aigner sought to broaden
the provision to cover potential conflicts of interest by adding the phrase “could
impact” in various drafts, but it is unclear whether the ultimate provision reflects a
shared intention on that point. As the drafting history shows, it was suggested at one
point that the term “conflict of interest” be defined to include the “could impact”
language, but that definition ultimately was dropped and the undefined term was
used instead to qualify the term “Affiliate Transaction” when defining the term
“Interested Manager”:
The first draft of Section 5.14(b) defined “Conflict of Interest” as when a manager “has a direct or indirect personal or financial interest in a transaction or other matter involving the Company,” and defined “Affiliate Transaction” simply as “any arrangement for goods, services or space by and between the Company and a Manager or any Affiliate of a Manager.”315 It omitted the “could impact” language altogether.
314 JX 44 § 5.14(b). 315 JX 17 at 1. 85 The second iteration, which appears to have come from the Aigner side of the table, formally defined the term “Conflict of Interest,” providing that one exists with respect to a transaction if the “transaction could impact other agreements the company might have entered into or is contemplating entering . . . which is an Affiliate Transaction.”316
The third iteration dropped the formal definition of “Conflict of Interest,” using the undefined term “conflict of interest” instead, but it introduced the “could impact” language in two parts of an expanded, four-part definition of Affiliate Transaction and defined an “Interested Manager” as simply a manager “with a conflict of interest.”317
The fourth iteration, which became the operative version of Section 5.14(b), changed the definition of Interested Manager to a manager “with a conflict of interest concerning an Affiliate Transaction.”318
In sum, the court cannot discern from the plain language of Section 5.14(b) or its
drafting history whether the shared intention of the parties was that a manager would
be an “Interested Manager” only if he had an actual conflict of interest or if he had
either an actual or potential conflict of interest. Equally problematic, the court
cannot discern what the outer boundary of the latter concept would be even if that
was the shared intention given the inherent vagueness of the term “could impact.”
316 JX 29 (emphasis added). 317 JX 30 at 1. 318 JX 36 at 1, 28-29. 86 The bottom line is that the scope of Section 5.14(b) is inherently vague and
ambiguous.
What is clear from the record in this case is that the ambiguity and vagueness
inherent in the scope of Section 5.14(b), combined with the fact that the provision is
silent on who decides when the Independent Representative provision is triggered,
has allowed Aigner to use Section 5.14(b) improperly to circumvent DiFalco’s Veto
Rights and to marginalize his managerial role in the Company. Consider the parties’
dispute over the selection of a CMO for RoxyBond.
DiFalco testified credibly that “Cerovene is not involved in making
RoxyBond,” “we never said we were going to make it,” and “[w]e don’t want to
make it.”319 Cerovene also does not have the capacity or equipment to make
RoxyBond.320 Despite these facts, Aigner has excluded DiFalco from any decision-
making role in the selection of a CMO for RoxyBond and asks the court for a
categorical, forward-looking declaration that Section 5.14(b) bars DiFalco from
using his Veto Rights on the selection of any CMOs as well as development partners.
In essence, Aigner’s position appears to be that, so long as DiFalco owns an interest
319 Tr. 752-53 (DiFalco). 320 Tr. 549 (Shah) (explaining that Cerovene’s current production capacity is limited to making “small batches” of MorphaBond); Tr. 735-36 (DiFalco) (explaining that “coating equipment . . . integral to the production of RoxyBond and MorphaBond” was removed from the Orangeburg Facility). 87 in Cerovene and it is theoretically possible that he could change his mind about
having Cerovene make RoxyBond, DiFalco should be disqualified from having any
say on the important business issue of what CMO to recommend to Daiichi.321 This
seemingly limitless interpretation of the scope of Section 5.14(b) defies common
sense and demonstrates the unworkability of the provision.322
In Vila v. BVWebTies LLC, Chief Justice Strine, writing as Vice Chancellor,
commented that “this court has rejected the notion that one co-equal fiduciary may
ignore the entity’s governing agreement and declare himself the sole ‘decider.’” 323
After finding that the manager of an LLC with a duty to cooperate with a co-equal
manager had “unilaterally arrogated to himself decisionmaking authority over” the
321 See Post-Trial Tr. 175 (arguing that DiFalco retained a conflict of interest on the selection of a CMO for RoxyBond even after equipment necessary for its production was moved out of the Orangeburg Facility because “the equipment can be put back in”). 322 Lest there be any doubt, the court rejects Aigner’s request for a categorical declaration that Section 5.14(b) bars DiFalco from using his Veto Rights on the selection of CMOs or development partners. Apart from the fact that such a declaration would not be warranted based on the facts as of the time of trial, it would be imprudent to grant what amounts to an advisory opinion about hypothetical conflicts of interest that may exist in the future, the resolution of which would necessarily depend on the specific facts and circumstances at the time. See KLM Royal Dutch Airlines v. Checchi, 698 A.2d 380, 382 (Del. Ch. 1997) (“Advisory opinions ill-serve the judicial branch and the public by expending resources to decide issues that may never come to pass. More importantly, the judiciary’s role in the lawmaking process is an interstitial one, carried out by the application of legislative enactments and common law principles to concrete factual circumstances that have created real and present controversies. An action seeking declaratory relief is not exempt from these requirements and must present the court with an actual controversy that is ripe for judicial decision. The dispute between the parties, therefore, must be actual, not hypothetical.”) (emphasis added). 323 2010 WL 3866098, at *8. 88 company, the court ordered judicial dissolution based on its conclusion that “it is not
reasonably practicable for the LLC to operate consistently with its operating
agreement.”324 The same conclusion is compelled here.
To summarize, the IDS Agreement is structured to require Aigner and DiFalco
to obtain each other’s “advice and consent” in fulfilling their duties as CEO and
President, respectively, and—now that Shah has resigned as a manager—provides
each of them with the presumptive right to veto any Board action. In other words,
the operating agreement affords Aigner and DiFalco co-equal rights to manage the
Company. As a factual matter, the past two years of their relationship demonstrates
that Aigner and DiFalco do not trust each other, do not get along, and are deadlocked
on issues critical to the Company. And, for the reasons discussed above, Section
5.14(b) provides no workable solution to these problems. To the contrary, by acting
unilaterally to invoke the Independent Representative provision, and by exploiting
the inherently ambiguous and vague scope of that provision in the process, Aigner
has arrogated to himself virtually unfettered control over the Company’s
management in contravention of the governance structure contemplated in the IDS
Agreement. Given this reality, the court concludes that it is not reasonably
324 Id. at *1, *6; see also Haley, 864 A.2d at 91, 96, 98 (holding that it was “not reasonably practicable for the LLC to continue to carry on business in conformity with the LLC Agreement” where one co-equal manager had “forbid[]” the other “to enter the premises” of the business and argued “that the LLC can and does continue to function” under his sole management). 89 practicable to carry on the business of the Company in conformity with the IDS
Agreement. The only remaining question is one of remedy, which is addressed next.
3. Judicial Dissolution of IDS Is Warranted
Section 10.02(c) of the IDS Agreement provides that IDS “shall be dissolved
and its affairs wound up upon . . . the entry of a decree of judicial dissolution . . .
under Section 18-802 of the Delaware Act.”325 Although dissolution “is a
discretionary remedy” under that statute,326 this court routinely exercises its
discretion to dissolve LLCs when the statutory standard is met. 327 Section 18-803
of the Delaware LLC Act further provides that the court may appoint a liquidating
trustee upon dissolution of an LLC for “cause shown.”
In a footnote, Aigner argues that, “[i]f the Court enters any relief, it should be
similar to the limited relief awarded in Kleinberg v. Aharon.”328 In that case, the
court declined to order the sale of a deadlocked company and instead appointed a
custodian with the power to vote as a tie-breaking director under Section 226 of the
325 JX 44 § 10.02(c). 326 Meyer Nat. Foods, 2015 WL 3746283, at *3. 327 See, e.g., GR BURGR, 2017 WL 3669511, at *1; Meyer Nat. Foods, 2015 WL 3746283, at *5-6; In re Shawe & Elting LLC, 2015 WL 4874733, at *1 (Del. Ch. Aug. 13, 2015); Vila, 2010 WL 3866098, at *1, *14; Fisk Ventures, 2009 WL 73957, at *1; In re Silver Leaf, L.L.C., 2005 WL 2045641, at *11 (Del. Ch. Aug. 18, 2005); Haley, 864 A.2d at 98. 328 Pl.’s Opening Br. 60 n.22. 90 Delaware General Corporation Law.329 The court declines to follow that course here
and finds that cause has been shown to appoint a liquidating trustee under Section
18-803 of the Delaware LLC Act for essentially three reasons.
First, unlike the entity at issue in Kleinberg, IDS is a Delaware limited liability
company. Limited liability companies have been described as “creatures of
contract”330 in reference to the policy of the Delaware LLC Act “to give the
maximum effect to the principle of freedom of contract and to the enforceability of
limited liability company agreements.”331 In this case, the IDS Agreement does not
contain a buy-sell provision or any other provision prescribing a solution for
deadlock where the mechanism in Section 5.14(b) has proven unworkable. And, as
a former Chancellor once said, the court “is in no position to redraft the LLC
Agreement for these sophisticated and well-represented parties.”332
Second, the dispute between Aigner and DiFalco (as well as Shah before his
resignation) extends back more than two years during which all of their attempts to
fix the Company’s governance problems have failed. Aigner single-handedly
defeated one of those attempts over eighteen months ago when he vetoed a resolution
to expand the Board from four to five members without veto rights even though the
329 2017 WL 568342, at *1, *15 (Del. Ch. Feb. 13, 2017). 330 TravelCenters of Am., LLC v. Brog, 2008 WL 1746987, at *1 (Del. Ch. Apr. 3, 2008). 331 6 Del. C. § 18-1101(b). 332 Fisk Ventures, 2009 WL 73957, at *7. 91 proposal was supported by Leduc,333 whose independence Aigner has repeatedly
touted. The court has no confidence that a reprise of that proposal in the form of a
custodian with the power to vote as a tie-breaking manager would work now,
particularly given the deep-seated distrust and animosity between the principals that
now exists as well as the evidence of Aigner’s repeated designs to marginalize
DiFalco’s managerial role in the Company.
Third, by all accounts, time is of the essence. The FDA approved
MorphaBond in November 2015, but only limited quantities of that product have
been made since.334 The FDA approved RoxyBond in April 2017, but that product
has never been manufactured on a commercial scale.335 The Company has not
created any new products since its formation, has not entered into a product
development agreement, and has no obvious source of financing for the $10 to $15
million necessary to obtain FDA approval for a new drug. As Bodd and DiFalco
both testified, the window of opportunity for the Company is rapidly closing because
its patents are expiring.336
Under these circumstances, the court concludes that dissolution of the
Company is the best and only realistic option to force the parties to find a solution
333 JX 162 at 8-9. 334 Tr. 155 (Bodd); Tr. 549 (Shah); JX 292 at 7. 335 Tr. 155 (Bodd); Tr. 535 (Innaurato); Tr. 615 (Shah). 336 Tr. 184 (Bodd); Tr. 764-65 (DiFalco). 92 where they have failed before, or, if they cannot, to yield value for them by selling
the Company’s assets. Accordingly, the court will declare the Company to be
dissolved and appoint a liquidating trustee to wind up its affairs.
D. The Issues Concerning BDO
Shortly before trial, Aigner amended his pleading to add two claims that relate
to DiFalco’s alleged failure to provide documents to BDO concerning the build-out
of the Orangeburg Facility: (1) a fifth cause of action for breach of fiduciary duty
seeking declaratory and injunctive relief as well as damages; and (2) a sixth cause
of action for breach of the IDS Agreement and its transparency policy seeking
declaratory relief and damages.337 These claims exceed the scope of the type of
claim that the court intended to permit Aigner to add to his complaint for purposes
of the trial at the conclusion of the hearing held on Aigner’s motion for injunctive
relief on December 6, 2018. To be more specific, the court only had in mind an
amendment to add a claim focused on resolving whether DiFalco should be required
to provide certain information to BDO. During trial, little attention was paid to that
issue, and no testimony was provided from a BDO witness.
Given these circumstances, with one exception, the court will not take any
action with respect to the fifth and sixth causes of action in the Complaint, which are
337 Dkt. 108 ¶¶ 139-56. 93 the subject of a motion to dismiss.338 The exception is that the liquidating trustee to
be appointed in this action will be authorized to address any issues concerning
BDO’s need, if any, for information concerning the Orangeburg Facility.
IV. CONCLUSION
For the reasons explained above, judgment is entered in favor of DiFalco and
Shah, as the case may be, and against Aigner with respect to (i) the fourth cause of
action in the Complaint, (ii) the first two claims in the Counterclaim, and (iii) the
third claim in the Counterclaim insofar as it seeks a declaration that Touam is not
currently a validly appointed Independent Representative under Section 5.14 of the
IDS Agreement.
The parties are directed to confer to see if they can agree on a liquidating
trustee and, if no such agreement can be reached after five business days, each side
is directed to file with the court within five business days thereafter the names of
two proposed liquidating trustees (with their qualifications) who are willing to
accept the assignment. The parties are further directed to confer and to submit to the
court an implementing order consistent with this decision within five business days.
IT IS SO ORDERED.
338 Dkt. 118. 94
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Cite This Page — Counsel Stack
Acela Investments LLC v. Raymond DiFalco, Counsel Stack Legal Research, https://law.counselstack.com/opinion/acela-investments-llc-v-raymond-difalco-delch-2019.