Computer Sciences Corp. v. Pulier

• Court: Court of Chancery of Delaware
• Decided: May 21, 2019
• Docket: C.A. 11011-CB
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE ANDRE G. BOUCHARD LEONARD L. WILLIAMS JUSTICE CENTER CHANCELLOR 500 N. KING STREET, SUITE 11400 WILMINGTON, DELAWARE 19801-3734

Date Submitted: March 5, 2019 Date Decided: May 21, 2019

Peter J. Walsh, Jr., Esquire Martin S. Lessner, Esquire Jacob R. Kirkham, Esquire Elisabeth S. Bradley, Esquire Jay G. Stirling, Esquire Daniel M. Kirshenbaum, Esquire Potter Anderson & Corroon LLP Young Conaway Stargatt & Taylor, LLP 1313 North Market Street Rodney Square Wilmington, DE 19899 1000 North King Street Wilmington, DE 19899

RE: Computer Sciences Corporation v. Eric Pulier, et al. Civil Action No. 11011-CB Dear Counsel:

This letter constitutes the court’s decision on the motion of Computer

Sciences Corporation (“CSC”) for partial summary judgment on Count IX of its

Verified Second Amended Complaint. For the reasons explained below, the motion

will be denied.

I. Background1

CSC is a publicly held Nevada corporation that provides information

technology and professional services. In 2013, CSC acquired ServiceMesh, Inc. for

1 The facts recited herein come from the allegations of the Second Amended Complaint that are not in dispute as well as affidavits and documents submitted in connection with CSC’s motion for partial summary judgment. Computer Sciences Corp. v. Pulier, et al. C.A. No. 11011-CB May 21, 2019

over $260 million under the terms of an Equity Purchase Agreement, dated as of

October 29, 2013 (the “EPA”).2 The transaction closed on November 15, 2013.3

After receiving an initial cash payment, the former equityholders of

ServiceMesh received an earnout payment of approximately $98 million based on

revenue generated by ServiceMesh during a “measurement period” that ran from

January 1, 2013 through January 31, 2014.4 Relevant to the pending motion, the

equityholders agreed in Section 10.1 of the EPA to indemnify and hold CSC and

ServiceMesh harmless, severally and not jointly, for certain categories of losses.

On May 12, 2015, CSC filed this action against Eric Pulier, the founder and

former Chief Executive Officer of ServiceMesh, and Shareholder Representative

Services LLC (“SRS”), in its capacity as the exclusive agent and attorney-in-fact for

the former equityholders of ServiceMesh.5 As the court explained in deciding a

previous motion in this case, the gravamen of the Second Amended Complaint is

that Pulier, acting on behalf of ServiceMesh, entered into a secret “side agreement”

with executives at Commonwealth Bank of Australia Limited that allegedly involved

2 Second Am. Compl. ¶ 1 (Dkt. 53); Stirling Aff. Ex. 2. 3 Second Am. Compl. ¶ 33. 4 Id. ¶ 1; EPA § 3.1(e) (providing for an earnout payment) & Sched. 3.1(e) (defining the “measurement period”) (Stirling Aff. Ex. 2). 5 Second Am. Compl. ¶¶ 5-6, 12.

2 Computer Sciences Corp. v. Pulier, et al. C.A. No. 11011-CB May 21, 2019

paying them bribes to enter into contracts with ServiceMesh in order to artificially

inflate ServiceMesh’s revenue during the measurement period and trigger the

earnout payment.6 According to CSC, no earnout payment would have been due but

for these actions.7

In August 2015, Pulier demanded that CSC and/or ServiceMesh advance the

fees and expenses he had incurred in defending this action.8 By letter dated

September 2015, CSC notified SRS of Pulier’s advancement demand and explained

that if CSC was required to provide advancement to Pulier, the former equityholders

may be required to indemnify CSC under several subsections of Section 10.1 of the

EPA.9

In February 2016, Pulier filed a separate action (C.A. No. 12005-CB) seeking

advancement from CSC and ServiceMesh for expenses he had incurred and would

incur in the future in defense of this action.10 On May 12, 2016, the court granted in

part and denied in part Pulier’s motion for summary judgment on his advancement

6 See Dkt. 82 at 7-8 (Apr. 29, 2016). 7 Id. 8 Stirling Aff. Ex. 3. 9 Stirling Aff. Ex. 4. 10 Pulier v. Computer Sciences Corp., C.A. No. 12005-CB, Verified Compl. for Advancement (Dkt. 1).

3 Computer Sciences Corp. v. Pulier, et al. C.A. No. 11011-CB May 21, 2019

claims. In brief, the court found that Pulier was entitled to advancement from

ServiceMesh (but not CSC) arising from his position as an officer of ServiceMesh

before the closing for certain (but not all) of the claims in this action under (i)

ServiceMesh’s bylaws and (ii) an indemnification agreement Pulier had entered into

with ServiceMesh in November 2011.11

In February 2017, Pulier filed a second action (C.A. No. 2017-0081-CB)

seeking advancement from ServiceMesh, this time to cover “the expenses he has

incurred and continues to incur to defend against investigations instituted by the

United States and Australian Governments.”12 On August 7, 2017, the court granted

Pulier’s motion for judgment on the pleadings, finding that the criminal

investigations relate to “the same earnout bribery scheme that is the subject of CSC’s

allegations in the Underlying Action [C.A. No. 11011-CB], and that puts Pulier’s

conduct as an officer of ServiceMesh squarely at issue.”13

From July 20, 2017 until January 30, 2019, this action was stayed at the

request of the United States Government during the pendency of a federal criminal

11 Pulier v. Computer Sciences Corp., C.A. No. 12005-CB, at 20, 27-28 (Del. Ch. May 12, 2016) (TRANSCRIPT). 12 Pulier v. CSC Agility Platform, Inc., C.A. No. 2017-0081-AGB, Verified Compl. ¶ 1 (Dkt. 1). 13 Pulier v. CSC Agility Platform, Inc., C.A. No. 2017-0081-AGB, at 14, 25-26 (Del. Ch. Aug. 7, 2017) (TRANSCRIPT). 4 Computer Sciences Corp. v. Pulier, et al. C.A. No. 11011-CB May 21, 2019

proceeding against Pulier, which ultimately was dropped. On February 7, 2019, after

the stay was lifted, CSC filed its motion for partial summary judgment on Count IX

of its Second Amended Complaint, seeking to recover a portion of the amount it had

advanced to Pulier on behalf of ServiceMesh under the advancement orders entered

in C.A. Nos. 12005-CB and 2017-0081-AGB. According to CSC, that amount

exceeds $18 million.14

II. Analysis

Under Court of Chancery Rule 56(c), summary judgment “shall be rendered

forthwith if the pleadings, depositions, answers to interrogatories and admissions on

file, together with the affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment as a matter of law.”15

“[T]he court must view the evidence in the light most favorable to the non-moving

party.”16 “When interpreting a contract, the role of a court is to effectuate the parties’

intent. In doing so, [the court is] constrained by a combination of the parties’ words

and the plain meaning of those words where no special meaning is intended.”17

14 Deckelman Decl. ¶ 4 (Stirling Aff. Ex. 1). 15 Del. Ch. Ct. R. 56(c). 16 Merrill v. Crothall-Am., Inc., 606 A.2d 96, 99 (Del. 1992). 17 Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006).

5 Computer Sciences Corp. v. Pulier, et al. C.A. No. 11011-CB May 21, 2019

Additionally, as our Supreme Court has said, “indemnity provisions are to be

construed strictly rather than expansively” under Delaware law.18

Count IX of the Second Amended Complaint seeks a declaration determining

the validity and amount of CSC’s indemnification claims against SRS and certain

former equityholders of ServiceMesh.19 CSC seeks partial summary judgment on

Count IX, contending that it is entitled to indemnification as a matter of law for a

portion of the amounts it has advanced to Pulier to date on behalf of ServiceMesh

under Section 10.1(d)(ii) of the EPA.20 That provision states that the equityholders

of ServiceMesh:

shall, severally and not jointly, indemnify and hold [CSC and ServiceMesh] harmless from and against any and all . . . losses . . . arising out of or resulting from:

***** (d) any claims . . . (ii) by any officer, director, employee or other agent of [ServiceMesh] for indemnification or advancement of expenses required under the Company’s Organizational Documents or under any indemnification agreement or otherwise to the extent such indemnification or advancement of expenses obligations relate to the authorization and approval of this Agreement [the EPA] and the

18 Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 824 n.42 (Del. 2013) (internal quotation marks omitted). 19 Second Am. Compl. ¶ 211. 20 Pl.’s Opening Br. ¶ 31(a).

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transactions contemplated hereby by the [ServiceMesh] Board of Directors.21

Focusing on the language italicized above, defendants (Pulier and SRS) argue that

CSC’s motion must be denied because the plain language of this provision does not

cover the advancement obligations at issue here. The court agrees.22

As I read Section 10.1(d)(ii), it imposes an indemnification obligation on the

former equityholders of ServiceMesh only for advancement obligations that “relate

to the authorization and approval” by the ServiceMesh Board of Directors of (i) the

EPA or (ii) “the transactions contemplated” by the EPA.23 In other words, to trigger

an indemnification obligation on the equityholders for the advancement expenses

that ServiceMesh has paid for litigation defense, the underlying claims must

challenge the ServiceMesh Board’s authorization and approval of the EPA or the

transactions contemplated by the EPA. An example would be a lawsuit for breach

21 EPA § 10.1(d)(ii) (emphasis added). The term “Organizational Documents” is defined to include ServiceMesh’s bylaws. Id. § 1.1. Thus, those bylaws fall within the scope of Section 10.1(d)(ii) along with the second source of Pulier’s right to advancement, i.e., his November 2011 indemnification agreement with ServiceMesh. 22 Given the court’s conclusion that the plain language of Section 10.1(d)(ii) does not apply, the court does not address Pulier’s other arguments. 23 EPA § 10.1(d)(ii).

7 Computer Sciences Corp. v. Pulier, et al. C.A. No. 11011-CB May 21, 2019

of fiduciary duty challenging the ServiceMesh Board’s approval of the EPA as being

the product of a flawed sale process under Revlon and its progeny.24

The fact that a transaction broadly relates to the EPA—such as by implicating

the earn-out provision therein—does not mean that it falls within Section 10.1(d)(ii).

Rather, the provision is meant to target advancement for lawsuits specifically

relating to the ServiceMesh Board’s authorization and approval of either the EPA or

transactions arising from the EPA.25

CSC argues that Section 10.1(d)(ii) should be read to encompass “not only

advancement claims dealing directly with the ServiceMesh Board’s authorization

and approval of the EPA and the transactions contemplated thereby, but also any

advancement claims that touch on or derive from that authorization and approval.”26

This construction is unreasonable in my opinion. The language from Section

24 See Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 185 (Del. 1986) (affirming a preliminary injunction where the directors breached their fiduciary duties by “allow[ing] considerations other than the maximization of shareholder profit to affect their judgment” in the course of a sales process). 25 The parties disagree about the meaning of “relate to” and how broadly or narrowly it should be read, with both sides marshalling cases to support their positions. The scope of the term “relate to” does not control the result here. Even if “relate to” were given its broadest meaning, Pulier and other former equityholders of ServiceMesh would not have an indemnification obligation with respect to the claims for which Pulier has received advancement because of the narrowing effect of the language “authorized and approved” and “by the Board of Directors” that appears in Section 10.1(d)(ii). 26 Pl.’s Opening Br. ¶ 22. 8 Computer Sciences Corp. v. Pulier, et al. C.A. No. 11011-CB May 21, 2019

10.1(d)(ii) italicized above begins with the phrase “to the extent,” which serves as a

limitation on the circumstances under which the equityholders will be required to

indemnify ServiceMesh for advancement expenses it has paid. To repeat, to impose

such an obligation, the claim for which advancement is provided must “relate to” an

act of Board “authorization and approval.”

CSC’s interpretation focuses on whether there is a nexus between the claims

for which advancement was provided and the EPA or its related transactions rather

than whether there is a nexus between the Board’s approval of the EPA or its related

transactions and the claims for which advancement was provided. In other words,

CSC’s interpretation effectively reads out of Section 10.1(d)(ii) the phrases

“authorized and approved” and “by the Board of Directors,” contrary to the basic

principle that “a contract should be interpreted in such a way as to not render any of

its provisions illusory or meaningless.”27

Turning to the facts here, as discussed previously, the claims for which Pulier

has received advancement from CSC relate to the “side agreement” that Pulier

allegedly authorized (as an officer of ServiceMesh) in order to inflate revenues

during the measurement period and trigger the earnout as part of an illegal bribery

27 Sonitrol Hldg. Co. v. Marceau Investissements, 607 A.2d 1177, 1183 (Del. 1992); see also Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396-97 (Del. 2010) (stating that the court must not “render any part of the contract mere surplusage”). 9 Computer Sciences Corp. v. Pulier, et al. C.A. No. 11011-CB May 21, 2019

scheme. CSC does not contend that the ServiceMesh Board ever authorized or

approved the side agreement or that the side agreement was one of the transactions

contemplated by the EPA. Nor could it. This is because the claims for which Pulier

obtained advancement from ServiceMesh all proceed from the premise that Pulier

engineered the side agreement to circumvent the earnout provision in the EPA

through an illegal scheme that the ServiceMesh Board never authorized.28

III. Conclusion

For the reasons explained above, the advancement of funds to Pulier at issue

here does not trigger an indemnification obligation under Section 10.1(d)(ii) of the

EPA. Accordingly, CSC’s motion for partial summary judgment on Count IX of its

Second Amended Complaint is DENIED.

IT IS SO ORDERED.

Sincerely,

/s/ Andre G. Bouchard

Chancellor

AGB/gm

28 See Dkt. 82 at 19 (explaining that the alleged side agreement had “been undertaken to circumvent certain provisions of the EPA and not for the purpose of performing obligations arising under the EPA”). 10