Edinburgh Holdings, Inc. v. Education Affiliates, Inc.
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
EDINBURGH HOLDINGS, INC., : : Plaintiff, : : v. : C.A. No. 2017-0500-JRS : EDUCATION AFFILIATES, INC., : RETS TECH CENTER INC., and : JLL PARTNERS FUND IV, L.P., : : Defendants. : ------------------------------------------------ : EDUCATION AFFILIATES INC. and : RETS TECH CENTER, INC., : : Counterclaim Plaintiffs, : : v. : : EDINBURGH HOLDINGS, INC., : : Counterclaim Defendant. : ------------------------------------------------ : EDUCATION AFFILIATES INC. and : RETS TECH CENTER, INC., : : Third-Party Plaintiffs, : : v. : : STEVEN J. KNIER, DAVID MANTICA, and : FRANK BEANLAND, : : Third-Party Defendants. : MEMORANDUM OPINION
Date Submitted: March 20, 2018 Date Decided: June 6, 2018
Ryan P. Newell, Esquire and Kyle Evans Gay, Esquire of Connolly Gallagher LLP, Wilmington, Delaware, and Lee M. Whitman, Esquire and Samuel A. Slater, Esquire of Wyrick Robbins Yates & Ponton LLP, Raleigh, North Carolina, Attorneys for Plaintiff and Counterclaim Defendant Edinburgh Holdings, Inc. and Third-Party Defendants Steven J. Knier, David Mantica and Frank Beanland.
Douglas D. Herrmann, Esquire and Christopher B. Chuff, Esquire of Pepper Hamilton LLP, Wilmington, Delaware, Attorneys for Defendants, Counterclaim Plaintiffs and Third-Party Plaintiffs Education Affiliates Inc. and RETS Tech Center, Inc.
SLIGHTS, Vice Chancellor In 2013, the American Society of Professional Education, Inc. (“ASPE”) sold
its proprietary education business to a subsidiary of Education Affiliates, Inc.
(“EA”) (the “Transaction”). The Transaction was memorialized in an Asset
Purchase Agreement dated August 14, 2013 (the “APA”). The APA provides that
the buyer would pay a set price upon closing and then make future payments
contingent upon the acquired business’ achieving certain revenue targets post-
closing. The contingent purchase price was payable in annual installments over four
years. After closing, ASPE’s management continued to operate ASPE’s former
business (the “ASPE Business Unit”), which became one of EA’s several
educational offerings.
EA and its wholly-owned subsidiary, RETS Tech Center, Inc. (“RETS”),1
made the contingent purchase price payments as provided in the APA for fiscal years
2013, 2014 and 2015. In 2017, however, Buyers refused to make the final payment
(for fiscal year 2016), alleging that the payment obligation was excused as a result
of Transaction-related misconduct on the part of ASPE’s former management—
Steven Knier, David Mantica and Frank Beanland.
1 The original buyer, EA’s subsidiary, Fortis ASPE, Inc. (“Fortis”), assigned its rights and obligations under the APA to RETS following the Transaction. While only Fortis is a party to the APA, for the sake of clarity, where appropriate, I refer to EA, RETS, Fortis and JLL Partners Fund IV, L.P. (“JLL”), another EA affiliate and party defendant, collectively as “Buyers.” The entities are distinguished where necessary.
1 ASPE, which changed its name to Edinburgh Holdings, Inc. (“Edinburgh”)2
post-closing, responded by filing a complaint in this Court on July 10, 2017, in which
it seeks to recover the remaining contingent purchase price payment due under
the APA. Edinburgh’s complaint alleges, among other things, that Buyers have
breached (1) the APA by failing to pay the remaining amounts; and (2) the covenant
of good faith and fair dealing inherent in the APA “by preventing, refusing, and
obstructing” the required payment.
Buyers answered Edinburgh’s complaint on September 8, 2017, and brought
counterclaims against Edinburgh and third-party claims against Knier, Mantica and
Beanland. 3 Specifically, Buyers allege that (1) ASPE and Knier fraudulently
induced Buyers to sign the APA by falsely promising revenue growth; (2) ASPE,
Knier, Mantica and Beanland breached the APA by mismanaging the ASPE
Business Unit after the Transaction’s closing; and (3) Knier, Mantica and Beanland
breached fiduciary duties owed to Buyers and the ASPE Business Unit by failing to
operate the ASPE Business Unit in compliance with the APA and in a manner that
would allow the business to achieve “promised” revenue targets.
2 Edinburgh and ASPE refer to the same company; I use both names throughout this opinion as appropriate depending upon the context. 3 Where appropriate, I refer to Edinburgh/ASPE and third-party defendants, Knier, Mantica and Beanland, in their capacity as officers of ASPE, as “Sellers.”
2 Buyers have moved to dismiss Count V of Edinburgh’s complaint
(for breach of the implied covenant of good faith and fair dealing) as duplicative of
Edinburgh’s breach of contract claim. Sellers have moved to dismiss all of Buyers’
counterclaims and the third-party complaint.4 For the reasons that follow, Buyers’
motion to dismiss Count V of Edinburgh’s complaint is GRANTED. Sellers’ motion
to dismiss is GRANTED as to the fraudulent inducement and breach of fiduciary
duty claims, and DENIED as to the breach of contract claim.
I. BACKGROUND
In accordance with Court of Chancery Rule 12(b)(6), the facts are drawn from
the pleadings, documents incorporated into the pleadings by reference and matters
of which the Court may take judicial notice.5
A. Parties and Relevant Non-Parties
Plaintiff and Counterclaim Defendant, Edinburgh, is a North Carolina
corporation headquartered in Cary, North Carolina.6 Edinburgh operated under the
4 More precisely, Edinburgh has moved to dismiss the counterclaims and Knier, Mantica and Beanland have moved to dismiss the third-party claims. For ease of reference, I describe their motions collectively as “Sellers’” motion. 5 Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d 609, 612–13 (Del. 1996). 6 Verified Compl. (“Compl”) ¶ 2.
3 name ASPE until the Transaction, whereby it sold “the branding associated with the
name ‘ASPE’” to RETS.7
ASPE (and now, the ASPE Business Unit) offers courses primarily to large
companies seeking to train their employees “in a particular technical skill such as
Project Management, Business Analysis, Agile Methods, Software Testing,
Microsoft SharePoint, and DevOps.”8 It derives its revenues primarily from tuition
payments.9
Defendant, JLL, is a Delaware limited partnership headquartered in
New York. JLL formed and funded EA in 2004 “to pursue a built-up strategy in the
post-secondary education industry focused primarily in the healthcare sector.”10
Defendant, Counterclaimant and Third-Party Plaintiff, EA, is a Delaware
corporation headquartered in Baltimore, Maryland. At the time of the Transaction,
“EA was a fifty-campus proprietary vocational education company.”11 Its students
are mainly professionals seeking career changes or advancement.12
7 Compl. ¶ 2. 8 Compl. ¶¶ 9–10. 9 Compl. ¶ 13. 10 Compl. ¶ 18. 11 Compl. ¶ 16; Answer, Affirmative Defenses, Countercl. & Third Party Compl. (“Answer”) ¶ 16. 12 Compl. ¶ 19.
4 Non-party, Fortis, is a wholly-owned subsidiary of EA that was formed to
serve as EA’s acquisition vehicle for the Transaction.13 Fortis is a party to the APA
and is referred to therein as “Buyer.”14 Following the Transaction’s consummation,
Fortis “assigned its rights and obligations under the APA” 15 to Defendant,
Counterclaimant and Third-Party Plaintiff, RETS, an Ohio corporation with
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
EDINBURGH HOLDINGS, INC., : : Plaintiff, : : v. : C.A. No. 2017-0500-JRS : EDUCATION AFFILIATES, INC., : RETS TECH CENTER INC., and : JLL PARTNERS FUND IV, L.P., : : Defendants. : ------------------------------------------------ : EDUCATION AFFILIATES INC. and : RETS TECH CENTER, INC., : : Counterclaim Plaintiffs, : : v. : : EDINBURGH HOLDINGS, INC., : : Counterclaim Defendant. : ------------------------------------------------ : EDUCATION AFFILIATES INC. and : RETS TECH CENTER, INC., : : Third-Party Plaintiffs, : : v. : : STEVEN J. KNIER, DAVID MANTICA, and : FRANK BEANLAND, : : Third-Party Defendants. : MEMORANDUM OPINION
Date Submitted: March 20, 2018 Date Decided: June 6, 2018
Ryan P. Newell, Esquire and Kyle Evans Gay, Esquire of Connolly Gallagher LLP, Wilmington, Delaware, and Lee M. Whitman, Esquire and Samuel A. Slater, Esquire of Wyrick Robbins Yates & Ponton LLP, Raleigh, North Carolina, Attorneys for Plaintiff and Counterclaim Defendant Edinburgh Holdings, Inc. and Third-Party Defendants Steven J. Knier, David Mantica and Frank Beanland.
Douglas D. Herrmann, Esquire and Christopher B. Chuff, Esquire of Pepper Hamilton LLP, Wilmington, Delaware, Attorneys for Defendants, Counterclaim Plaintiffs and Third-Party Plaintiffs Education Affiliates Inc. and RETS Tech Center, Inc.
SLIGHTS, Vice Chancellor In 2013, the American Society of Professional Education, Inc. (“ASPE”) sold
its proprietary education business to a subsidiary of Education Affiliates, Inc.
(“EA”) (the “Transaction”). The Transaction was memorialized in an Asset
Purchase Agreement dated August 14, 2013 (the “APA”). The APA provides that
the buyer would pay a set price upon closing and then make future payments
contingent upon the acquired business’ achieving certain revenue targets post-
closing. The contingent purchase price was payable in annual installments over four
years. After closing, ASPE’s management continued to operate ASPE’s former
business (the “ASPE Business Unit”), which became one of EA’s several
educational offerings.
EA and its wholly-owned subsidiary, RETS Tech Center, Inc. (“RETS”),1
made the contingent purchase price payments as provided in the APA for fiscal years
2013, 2014 and 2015. In 2017, however, Buyers refused to make the final payment
(for fiscal year 2016), alleging that the payment obligation was excused as a result
of Transaction-related misconduct on the part of ASPE’s former management—
Steven Knier, David Mantica and Frank Beanland.
1 The original buyer, EA’s subsidiary, Fortis ASPE, Inc. (“Fortis”), assigned its rights and obligations under the APA to RETS following the Transaction. While only Fortis is a party to the APA, for the sake of clarity, where appropriate, I refer to EA, RETS, Fortis and JLL Partners Fund IV, L.P. (“JLL”), another EA affiliate and party defendant, collectively as “Buyers.” The entities are distinguished where necessary.
1 ASPE, which changed its name to Edinburgh Holdings, Inc. (“Edinburgh”)2
post-closing, responded by filing a complaint in this Court on July 10, 2017, in which
it seeks to recover the remaining contingent purchase price payment due under
the APA. Edinburgh’s complaint alleges, among other things, that Buyers have
breached (1) the APA by failing to pay the remaining amounts; and (2) the covenant
of good faith and fair dealing inherent in the APA “by preventing, refusing, and
obstructing” the required payment.
Buyers answered Edinburgh’s complaint on September 8, 2017, and brought
counterclaims against Edinburgh and third-party claims against Knier, Mantica and
Beanland. 3 Specifically, Buyers allege that (1) ASPE and Knier fraudulently
induced Buyers to sign the APA by falsely promising revenue growth; (2) ASPE,
Knier, Mantica and Beanland breached the APA by mismanaging the ASPE
Business Unit after the Transaction’s closing; and (3) Knier, Mantica and Beanland
breached fiduciary duties owed to Buyers and the ASPE Business Unit by failing to
operate the ASPE Business Unit in compliance with the APA and in a manner that
would allow the business to achieve “promised” revenue targets.
2 Edinburgh and ASPE refer to the same company; I use both names throughout this opinion as appropriate depending upon the context. 3 Where appropriate, I refer to Edinburgh/ASPE and third-party defendants, Knier, Mantica and Beanland, in their capacity as officers of ASPE, as “Sellers.”
2 Buyers have moved to dismiss Count V of Edinburgh’s complaint
(for breach of the implied covenant of good faith and fair dealing) as duplicative of
Edinburgh’s breach of contract claim. Sellers have moved to dismiss all of Buyers’
counterclaims and the third-party complaint.4 For the reasons that follow, Buyers’
motion to dismiss Count V of Edinburgh’s complaint is GRANTED. Sellers’ motion
to dismiss is GRANTED as to the fraudulent inducement and breach of fiduciary
duty claims, and DENIED as to the breach of contract claim.
I. BACKGROUND
In accordance with Court of Chancery Rule 12(b)(6), the facts are drawn from
the pleadings, documents incorporated into the pleadings by reference and matters
of which the Court may take judicial notice.5
A. Parties and Relevant Non-Parties
Plaintiff and Counterclaim Defendant, Edinburgh, is a North Carolina
corporation headquartered in Cary, North Carolina.6 Edinburgh operated under the
4 More precisely, Edinburgh has moved to dismiss the counterclaims and Knier, Mantica and Beanland have moved to dismiss the third-party claims. For ease of reference, I describe their motions collectively as “Sellers’” motion. 5 Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d 609, 612–13 (Del. 1996). 6 Verified Compl. (“Compl”) ¶ 2.
3 name ASPE until the Transaction, whereby it sold “the branding associated with the
name ‘ASPE’” to RETS.7
ASPE (and now, the ASPE Business Unit) offers courses primarily to large
companies seeking to train their employees “in a particular technical skill such as
Project Management, Business Analysis, Agile Methods, Software Testing,
Microsoft SharePoint, and DevOps.”8 It derives its revenues primarily from tuition
payments.9
Defendant, JLL, is a Delaware limited partnership headquartered in
New York. JLL formed and funded EA in 2004 “to pursue a built-up strategy in the
post-secondary education industry focused primarily in the healthcare sector.”10
Defendant, Counterclaimant and Third-Party Plaintiff, EA, is a Delaware
corporation headquartered in Baltimore, Maryland. At the time of the Transaction,
“EA was a fifty-campus proprietary vocational education company.”11 Its students
are mainly professionals seeking career changes or advancement.12
7 Compl. ¶ 2. 8 Compl. ¶¶ 9–10. 9 Compl. ¶ 13. 10 Compl. ¶ 18. 11 Compl. ¶ 16; Answer, Affirmative Defenses, Countercl. & Third Party Compl. (“Answer”) ¶ 16. 12 Compl. ¶ 19.
4 Non-party, Fortis, is a wholly-owned subsidiary of EA that was formed to
serve as EA’s acquisition vehicle for the Transaction.13 Fortis is a party to the APA
and is referred to therein as “Buyer.”14 Following the Transaction’s consummation,
Fortis “assigned its rights and obligations under the APA” 15 to Defendant,
Counterclaimant and Third-Party Plaintiff, RETS, an Ohio corporation with
operations throughout the United States.16 RETS is also a wholly-owned subsidiary
of EA.17
Third-Party Defendant, Steven J. Knier, founded ASPE in 2002. Prior to the
Transaction, he was ASPE’s CEO and one of its stockholders.18 He subsequently
became an officer of the ASPE Business Unit pursuant to an employment agreement
dated September 11, 2013, and executed in connection with the Transaction.19
Third-Party Defendant, David Mantica, was ASPE’s president and an ASPE
stockholder prior to the Transaction. He subsequently became the president of the
13 Compl. ¶¶ 1, 33. 14 Compl., Ex. A (“APA”), pmbl. 15 Countercl. & Third Party Compl. (“Countercl.”) ¶ 2; see also Compl., Ex. B (Assignment Ltr.). 16 Compl. ¶ 4; Answer ¶ 4. 17 Compl. ¶ 4; Answer ¶ 4. 18 Compl. ¶ 14. 19 Countercl. ¶ 4.
5 ASPE Business Unit pursuant to his own employment agreement dated
September 11, 2013.20
Third-Party Defendant, Frank Beanland, was the CFO and a stockholder of
ASPE prior to the Transaction. 21 He became the vice-president of the ASPE
Business Unit following the Transaction, again pursuant to an employment
agreement dated September 11, 2013.22
B. Regulatory Requirements Applicable to Proprietary Schools
Under federal law, proprietary schools such as EA and ASPE may not derive
more than 90% of their revenues from Department of Education (“DOE”) Title IV
federal student aid funds, meaning that at least 10% of revenues must come from
non-governmental (i.e., private) sources.23 In the proprietary school industry, this
“revenue mix” requirement is known as the “90-10 Rule,” and revenues derived
from private sources are referred to as “10-Money.”24 According to Sellers, EA’s
pre-Transaction revenue mix violated the 90-10 Rule, or at least came very close to
20 Compl. ¶ 26; Countercl. ¶ 5. 21 Compl. ¶ 59; Countercl. ¶ 6. 22 Countercl. ¶ 6. 23 20 U.S.C. § 1094(a)(24) (“In the case of a proprietary institution of higher education [], such institution will derive not less than ten percent of such institution’s revenues from sources other than funds provided under this subchapter . . . or will be subject to [] sanctions . . . .”). 24 Compl. ¶ 21.
6 doing so. Thus, Sellers contend, EA’s “primary interest in the [T]ransaction was
satisfying the 90-10 Rule revenue requirements,” given that ASPE was in solid
compliance with the rule.25
C. The Transaction Negotiations
In early 2013, EA retained a broker to contact ASPE about a possible
transaction. 26 The parties met shortly after this initial contact, although their
accounts of the first meeting differ. According to Buyers, Knier and Mantica visited
EA’s offices in Baltimore in January 2013 and “provided a presentation to Duncan
Anderson, EA’s CEO.”27 According to Sellers, Knier and Mantica first “presented
an overview of ASPE’s business in a PowerPoint slide presentation” during a
May 15, 2013 meeting at ASPE’s offices in North Carolina.28 Although the parties
disagree regarding the timing and location of the initial meeting, they do agree that
Knier and Mantica at some point presented to EA information regarding ASPE’s
business and the strengths and capabilities of its management.29 The presentation
included revenue projections for fiscal years 2014–2016 as well as an explanation
25 See Compl. ¶ 28. 26 Countercl. ¶ 21; Compl. ¶¶ 14–16. 27 Countercl. ¶ 23. 28 Compl. ¶ 26. 29 Compl. ¶ 26; Countercl. ¶ 23.
7 of contingencies and assumptions with regard to those estimates.30 The projected
revenues were $15.9 million for 2014, $18.5 million for 2015 and $20.5 million for
2016.31
According to Buyers, following the initial presentation in January 2013,
during a May 15, 2013 meeting at ASPE’s offices in Cary, North Carolina
(the parties’ first meeting according to Sellers), Knier and Mantica “again[] made
representations as to the revenue and profit growth that the ASPE Business Unit
would achieve after the [Transaction].”32 At this May 15 meeting, Anderson and
EA’s CFO, Steve Budosh, toured ASPE’s offices, met ASPE’s management and got
a sense of ASPE’s business.33
The parties thereafter began conducting due diligence in anticipation of a
potential ASPE-EA transaction. 34 In connection with the due diligence process,
30 Compl. ¶¶ 23, 26. 31 Compl. ¶ 26; Countercl. ¶ 23. The presentation also indicated “ASPE would earn approximately $1.4 million, $1.7 million, and $2.1 million in Net Profits in 2014, 2015, and 2016, respectively.” Countercl. ¶ 23. 32 Countercl. ¶ 25; Countercl. ¶ 24. 33 Compl. ¶ 25; Countercl. ¶ 24. 34 Compl. ¶ 27; Countercl. ¶ 26.
8 EA retained a Washington, DC-based law firm specializing in DOE Title IV
compliance to evaluate ASPE’s revenue qualification and revenue mix.35
Buyers allege that their “initial offer to purchase the ASPE Business Unit was
a lump sum . . . [to be] paid at closing [and that] . . . [their] initial offer was based
off of ASPE’s historical performance, mainly its recent EBITDA and revenue
figures.”36 According to Buyers, “Sellers forcefully rejected that offer, and took the
position that such an offer did not properly value the ASPE Business Unit given the
revenue and profit growth . . . that the Unit would achieve.”37 Consequently, the
parties “began negotiating earn-out provisions” based on Sellers’ revenue
representations—which Buyers define as “Promised Revenues and Profits.”38
D. The APA
On August 14, 2013, following due diligence, Edinburgh (then ASPE),
ASPE’s stockholders (including Knier, Mantica and Beanland) and Fortis executed
the APA.39 Here, the APA’s purchase price and contingent payment provisions are
most relevant and each is discussed below.
35 Compl. ¶ 29. 36 Countercl. ¶ 29. 37 Countercl. ¶ 30. 38 Countercl. ¶¶ 23, 31. 39 APA, pmbl.
9 1. The Purchase Price
The APA, at Section 2.1, divides the “Purchase Price” into two parts: (1) the
Initial Purchase Price of $6 million less certain enumerated amounts due at closing,40
and (2) the Contingent Purchase Price. 41 According to Section 2.1(b), the
Contingent Purchase Price is calculated pursuant to a three-step formula:
1. 50% of the Pre-Tax Profits42 for fiscal years 2013, 2014 and 2015 if the Total Revenue43 for the relevant fiscal year was less than $13 million,
40 Specifically, the Initial Purchase Price is equal to “(i) $6,000,000, minus (ii) $100,000 (the ‘Holdback Amount’), which Holdback Amount shall be deposited by Buyer into the Escrow Account to be held in escrow by the Escrow Agent pursuant to the terms of the Escrow Agreement . . . ; minus (iii) the amount of the Assumed Debt assumed by Buyer at the Closing . . . ; minus (iv) [t]he amount, if any, by which the Estimated Net Asset Value [] of [ASPE] is less than $0.00 (the ‘Reference NAV’); plus (v) [t]he amount, if any, by which the Estimated Net Asset Value is greater than the Reference NAV as of the Closing Date ([] as adjusted pursuant to Section 2.4 . . . .).” APA § 2.1(a). 41 The APA defines the Initial Purchase Price and the Contingent Purchase Price together as the “Purchase Price.” APA § 2.1(b). 42 The APA defines “Pre-Tax Profits” as “an amount equal to (a) the income [] of Buyer relating to the Business [defined as ‘all of the property and assets of the business of owning and operating a for-profit training company for specialized business and professional markets currently conducted by [ASPE].’ APA, pmbl.] before income taxes for reporting purposes (after deducting all service and direct costs, salaries and employee benefits and indirect costs directly identifiable to the Business and selling, general and administrative expenses in a manner consistent with GAAP), less (b) all depreciation and amortization expense and all interest expense deducted in calculating income for reporting purposes (except as modified below), in accordance with GAAP, and in a manner materially consistent with [ASPE’s] historical financial reporting [excluding a list of specific items].” APA § 10.12(oo) (Pre-Tax Profit definition). 43 “Total Revenue” is defined as “the total net revenue recognized by Buyer with respect to the Business for services provided by Buyer after the Closing determined in accordance with GAAP applied consistently with [ASPE’s] historical financial reporting, provided that in the event of any conflict between GAAP and [ASPE’s] historical financial reporting, GAAP shall govern.” APA § 10.12(uu) (Total Revenue definition).
10 or 65 % of the Pre-Tax Profits if Total Revenue was equal to or greater than $13 million44;
2. If the aggregate amount paid under the formula set forth above, as of December 31, 2016, is less than $2 million, then Buyer will pay an additional sum of $2 million less any amounts already paid towards the Contingent Purchase Price45; and
3. If revenues for the fiscal year ending December 31, 2016 are $8 million or more, then buyer will pay 25% of the 2016 revenues (the “Total Revenue Earnout”) plus cumulative losses over the period from the closing date through December 31, 2016.
Both parties maintain that the Contingent Purchase Price formula is unambiguous
on its face and as applied.
2. Management of the ASPE Business Unit During the Contingent Payment Period Per Section 2.1(f) of the APA, following the Transaction’s closing, ASPE’s
business would become “part of a larger, integrated educational institution”
(namely, EA) and thereafter would be referred to as the “ASPE Business Unit.”46
The ASPE Business Unit was to “(i) [be] manage[d] using the current
management . . . subject to the terms of their employment agreements, and conduct
44 “Pre-Tax Profits and Total Revenue shall be calculated solely with respect to the Business and shall not reflect the profits or revenues attributable to Buyer or any of its Affiliates.” APA § 2.1(b)(i). 45 The APA defines this amount less any indemnification amounts offset pursuant to Section 8.6 of the APA as the “Fixed EO Obligation.” APA § 2.1(b)(iii). 46 APA § 2.1(f).
11 its activities in a reasonable manner consistent with its past practices . . . and
(ii) report, budget and forecast . . . its educational and financial status to the Buyer
and/or the integrated educational institution, if applicable.”47 Section 2.1(f) further
provides that the ASPE Business Unit would “be afforded the ability to make and
execute strategies and plans to grow [the] business with full cooperation from Buyer
provided that those plans are: (sic) fully compliant with all applicable laws, enable
revenue growth consistent with the approximate current mix of Program Revenues
and non-Program Revenues, and do not result in fiscal year losses or requests for
additional capital over the contingent payment period.”48
E. The Related Agreements
As noted, at the time of closing of the Transaction, Knier, Mantica and
Beanland, along with ASPE’s remaining management, entered into employment
agreements with Buyers providing for their post-closing employment with the
ASPE Business Unit (the “Employment Agreements”). 49 Buyers allege that, in
47 Id. 48 Id. The APA defines “Program Revenues” as “those revenues generated by programs offered by [ASPE] that lead to an industry-recognized credential or certificate, or prepare students to take an examination for an industry-recognized credential or certification issued by an independent third party . . . .” APA § 10.12(pp) (Program Revenues definition). 49 Countercl. ¶ 41; see also Memo. of Law in Supp. of Countercl. Def. & Third Party Defs.’ Mot. to Dismiss (“Sellers’ Opening Br.”), Ex. A (Knier Emp’t Agmt.). While I reference the Employment Agreements here for context, my decision does not turn on their construction or enforcement.
12 seeking post-closing employment, “Knier assured [Buyers] that he and his
management team [were] strategic, focused, and nimble, and more than capable of
identifying and capturing future profitable [] growth opportunities, regardless of any
changing market dynamics.”50 In that spirit, Knier, Mantica and Beanland were able
to negotiate for significant autonomy in running the ASPE Business Unit as reflected
in their Employment Agreements.
On August 14, 2013, JLL and Fortis also entered into a letter agreement
(the “JLL Letter Agreement”) pursuant to which JLL committed to make the
Contingent Purchase Price payments when due “if and to the extent that [Fortis] (or
Transferee, as applicable) is unable to make such payment.”51 Two months later, on
October 10, 2013, Fortis assigned all its “rights and obligations” under the APA to
RETS.52
F. ASPE Business Unit Operations After the Transaction
Following the closing, EA placed James Herbst, EA’s Regional Vice
President, in ASPE’s headquarters in Cary, North Carolina.53 Herbst met weekly
with ASPE Business Unit management to oversee the unit’s revenues and
50 Countercl. ¶ 42. 51 Compl., Ex. C (JLL Ltr. Agmt.), at 2. 52 Compl., Ex. B (Assignment Ltr.). 53 Compl. ¶ 58; Answer ¶ 58.
13 operations.54 He also held monthly financial and operations calls with Anderson,
Budosh and other EA executives to update them on the unit’s progress.
In addition to placing Herbst in ASPE’s North Carolina headquarters,
EA facilitated information flow by requiring the ASPE Business Unit to participate
in yearly budget reviews and financial audits.55 EA also asked Knier, Mantica and
Beanland to send weekly reports to EA with the week’s cash reports, sales receipts
and qualified 10-Money receipts. 56 Finally, it is alleged that EA reviewed and
approved the ASPE Business Unit’s annual budgets prior to each fiscal year with
guidance from Herbst.57
The approved budgets for fiscal years 2014–2016 forecast approximately
$13 million in revenue each year. 58 The ASPE Business Unit reported actual
revenues of $12,022,519 in 2013, $12,194,480 in 2014, $12,461,993 in 2015 and
54 Compl. ¶ 58; Answer ¶ 58. 55 Compl. ¶¶ 58, 63; Answer ¶ 58. 56 Compl. ¶¶ 61–62; Answer ¶¶ 61–62. 57 Compl. ¶ 63. Buyers admit that “ASPE presented [EA] with annual budgets” but deny that “EA reviewed and approved these budgets prior to each fiscal year.” Instead, they state they “are without sufficient knowledge” to admit or deny whether Herbst provided guidance to ASPE management on EA’s annual budget expectations. Answer ¶ 63. 58 Compl. ¶ 63; Answer ¶ 63.
14 $12,635,899 in 2016.59 These revenue results triggered Contingent Purchase Price
payments for fiscal years 2013, 2014 and 2015 in keeping with the APA’s
Contingent Purchase Price requirements.60
On April 13, 2017, Anderson sent a letter to Knier claiming that Knier and his
team had breached the APA, the covenant of good faith and fair dealing inherent in
the APA and their fiduciary duties to Buyers and the ASPE Business Unit by failing
to achieve the revenues “promised” by ASPE and Knier during the APA
negotiations. Anderson declared that, as a result of these breaches, Buyers would
not pay the remaining Contingent Purchase Price installment of approximately
$4,736,000 for fiscal year 2016.61
G. Procedural Posture
Edinburgh filed its Verified Complaint (the “Complaint”) on July 10, 2017.62
The Complaint sets forth five counts:
59 Compl. ¶ 64. Buyers admit the revenue numbers for 2014 through 2016 but deny the alleged 2013 revenue number. Answer ¶ 64. 60 Compl. ¶¶ 71–73 & Exs. F, G, H (Notices of Contingent Purchase Price Payment Earnout Statement 2014, 2015, 2016). 61 Compl. ¶¶ 74, 76. 62 Prior to filing this action, Sellers “engaged counsel to proceed through the dispute resolution provisions in the APA, which called for [sic] certain time period for good faith negotiation and appointment of an Independent Auditor to resolve the dispute over the Contingent Purchase Price.” Compl. ¶ 78. According to Sellers, “Defendants refused to participate in the APA-defined dispute resolution process in the [required] time frame . . . .” 15 Count I seeks a declaratory judgment that ASPE and Knier did not fraudulently induce EA to execute the APA and that ASPE and Knier’s team did not breach any contractual, fiduciary or implied duties.63
Count II alleges that RETS breached “the APA by failing to pay the remaining portion of the Contingent Purchase Price” that was due and payable to Edinburgh.64
Count III alleges that EA breached “the APA by failing to pay the remaining portion of the Contingent Purchase Price” that was due and payable to Edinburgh, but that RETS refused to pay.65
Count IV alleges that JLL breached the JLL Letter Agreement by failing to pay Edinburgh the Fixed EO Obligation.66 Count V alleges that EA, RETS and JLL breached the implied covenant of good faith and fair dealing by “act[ing] in bad faith and with the sole purpose of preventing, refusing, and obstructing [Edinburgh’s] 2016 Contingent Purchase Price payment so as to deprive [Edinburgh] of the fruits of its bargain.”67
Id. ¶ 79. Buyers deny that allegation and assert, “the parties’ dispute is not the type resolvable by the APA-defined dispute resolution process.” Answer ¶ 79. 63 Compl. ¶ 87. 64 Compl. ¶ 93. 65 Compl. ¶ 99. 66 Compl. ¶¶ 110–11. 67 Compl. ¶ 112. Edinburgh’s implied covenant claim is mistakenly designated as Count IV in the Complaint. Following Buyers’ lead in the briefing, I will refer to this claim as Count V for the sake of clarity.
16 Buyers answered Edinburgh’s Complaint on September 8, 2017, and brought
counterclaims against Edinburgh and a third-party complaint against Knier, Mantica
and Beanland.68 Specifically, the responsive pleading sets forth three counts:
Count 1 alleges that Edinburgh and Knier fraudulently induced Buyers to execute the APA.
Count 2 alleges that Sellers breached the APA by “fail[ing] to act in a reasonable manner consistent with ASPE’s past practices, fail[ing] to make and execute strategies and plans that enabled the ASPE Business Unit to achieve the promised revenue growth, and fail[ing] to report, budget, and forecast in line with the budgets and forecasts provided . . . prior to Closing.”69 Count 3 alleges that the third-party defendants breached their fiduciary duties to Buyers and the ASPE Business Unit “by acting with reckless indifference and deliberate disregard to [Buyers], and failing to act in good faith to maximize the value [for Buyers] and the ASPE Business Unit over the long term.”70 On December 20, 2017, Buyers filed a motion to dismiss Edinburgh’s
Count V (the implied covenant claim) pursuant to Court of Chancery Rule 12(b)(6).
That same day, Sellers filed a motion to dismiss all of Buyers’ counterclaims and
third-party claims under Court of Chancery Rules 12(b)(6) and 9(b). For the reasons
explained below, Buyers’ motion to dismiss is granted, and Sellers’ motion to
dismiss is granted in part (as to Counts 1 and 3) and denied in part (as to Count 2).
68 More precisely, only EA and RETS brought the counterclaims and third-party complaint. 69 Countercl. ¶ 72. 70 Countercl. ¶ 77.
17 II. ANALYSIS
On a motion to dismiss under Chancery Rule 12(b)(6),71 the court accepts the
complaint’s well-pled allegations as true and draws all reasonable inferences
therefrom in favor of the party opposing the motion.72 The court will grant a motion
to dismiss only if it determines “with reasonable certainty that a plaintiff could
prevail on no set of facts that can be inferred from the pleadings.”73
A. Buyers’ Motion to Dismiss the Implied Covenant Claim Under Delaware law, “the implied covenant of good faith and fair dealing
attaches to every contract by operation of law.”74 In essence, the implied covenant
71 Buyers have brought their motion under Rule 12(b)(6) even though they have answered the Complaint and, therefore, should have brought a motion for judgment on the pleadings. Under Chancery Rule 12(c), the “court will grant a motion for judgment on the pleadings only where there are no material issues of fact and the movant is entitled to judgment as a matter of law.” NBC Universal, Inc. v. Paxson Commc’ns Corp., 2005 WL 1038997, at *4 (Del. Ch. Apr. 29, 2005). “On a Rule 12(c) motion, the court takes the well-pleaded facts alleged in the complaint as true, and views those facts and any inferences drawn therefrom in the light most favorable to the nonmoving party.” Id. A trial court must not, however, “‘blindly accept as true all allegations, nor must it draw all inferences from them in plaintiffs’ favor unless they are reasonable inferences.’” McMillan v. Intercargo Corp., 768 A.2d 492, 500 (Del. Ch. 2000) (quoting In re Lukens Inc. S’holders Litig., 757 A.2d 720, 727 (Del. Ch. 1999)). Because I have determined that Count V of the Complaint fails to state a claim as a matter of law, the standard by which I review the allegations in the Complaint (Rule 12(b)(6) or Rule 12(c)) ultimately does not matter. 72 Solomon v. Pathe Commc’ns Corp., 672 A.2d 35, 38 (Del. 1996). 73 Id. 74 Metro. Life Ins. Co. v. Tremont Gp. Hldgs., Inc., 2012 WL 6632681, at *15 (Del. Ch. Dec. 20, 2012).
18 “requires a party in a contractual relationship to refrain from arbitrary or
unreasonable conduct which has the effect of preventing the other party to the
contract from receiving the fruits of the bargain.”75
The gravamen of Count V is that Knier, Mantica and Beanland operated the
ASPE Business Unit “in a manner sufficient to secure [payment of] the Contingent
Purchase Price for [fiscal] year 2016,” but Buyers (wrongfully) refused to make that
payment.76 According to Edinburgh, if the Court reads Section 2.1(f) of the APA to
require the ASPE Business Unit (under Knier’s leadership) to achieve revenue
growth as alleged by Buyers, or allows a claim that Sellers made binding extra-
contractual representations that Knier and his team would achieve such growth, then
the “[t]he implied covenant operates to ensure that . . . [Buyers] would not deprive
[Sellers] of the fruits of [the] bargain by actively preventing [Knier’s team] from
achieving those revenues.”77 Edinburgh maintains that Buyers prevented the ASPE
Business Unit from achieving the alleged revenue thresholds by “remain[ing]
singularly focused on securing 10-Money . . . [and] den[ying] [Sellers’] business
75 Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005) (citation and internal quotation marks omitted). 76 Compl. ¶ 112. 77 Pl.’s Resp. in Opp’n to Defs.’ Mot. to Dismiss Count V of Pl.’s Verified Compl. (“Edinburgh’s Answering Br.”) 9.
19 acquisition requests [as specifically alleged] that would have helped grow ASPE and
increase its revenue.”78
Buyers move to dismiss Edinburgh’s implied covenant claim as “wholly
duplicative of Edinburgh’s Contract Claims.” 79 Specifically, they argue that
Count V “(i) [is] based upon the same conduct as [Edinburgh’s] Contract Claims;
(ii) sets forth the same purportedly wrongful conduct that is alleged in the Contract
Claims—non-payment of a portion of the Contingent Purchase Price; and (iii) seeks
the same relief sought in connection with the Contract Claims—payment of the non-
paid portion of the Contingent Purchase Price.”80 Buyers submit that even if the
claim is not duplicative, Count V still must be dismissed because Edinburgh has
failed to allege a contractual gap that the Court could fill by implying a covenant of
good faith.
Before addressing the viability of Count V, I note that Edinburgh has pled its
implied covenant claim more as an anticipatory defense to Buyers’ extra-contractual
claims than as an affirmative claim for relief. Specifically, Edinburgh invokes the
implied covenant in response to Buyers’ claim that, even though not mentioned in
78 Id. 79 Opening Br. in Supp. of Defs.’ Mot. to Dismiss Count V of Pl.’s Verified Compl. (“Buyers’ Opening Br.”) 2. 80 Buyers’ Opening Br. 2–3.
20 the APA, Sellers made binding commitments that the ASPE Business Unit would
reach certain revenue targets and have breached those commitments. According to
Edinburgh, Buyers acted in bad faith to prevent Knier’s team from reaching any
revenue targets that may have been promised and cannot, therefore, recover for any
breach of those promises. Our law recognizes that the implied covenant may be
employed in this manner as a means to defend against claims of breach.81 Thus,
Sellers will be entitled to develop and present evidence that Buyers acted in bad faith
to prevent Sellers’ performance of any contractual obligations that might have been
owed to Buyers (under the APA or otherwise).
Insofar as Count V asserts an implied covenant claim, however, it is
improperly duplicative of Edinburgh’s contract claims. The implied covenant is
available only where the terms to be implied are missing from the contract 82 ; it
“cannot be invoked to override the express terms of a contract.” 83 Thus, if the
contract at issue expressly addresses a particular matter, an implied covenant claim
respecting that matter is duplicative and not viable.84
81 Daystar Const. Mgmt., Inc. v. Mitchell, 2006 WL 2053649, at *6 (Del. Super. Ct. July 12, 2006) (“[T]he covenant can be raised as a defense to a breach of contract claim . . . .”). 82 Fitzgerald v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998). 83 Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 888 (Del. Ch. Apr. 15, 2009). 84 Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *12 (Del. Ch. Dec. 22, 2010); see also Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 539 (Del. 2011) (“A party may maintain a claim for breach of the implied covenant of 21 Edinburgh’s Count V is based on Buyers’ “preventing, refusing, or
obstructing [Edinburgh’s] achievement of the Contingent Purchase Price
payment.” 85 The APA, however, expressly addresses Edinburgh’s right to the
Contingent Purchase Price, and Edinburgh has asserted claims against Buyers for
(allegedly) violating that contractual right (in Counts II, III and IV of the
Complaint). 86 That being so, Count V fails as a matter of law and must be
dismissed.87
B. Sellers’ Motion to Dismiss Sellers seek to dismiss all of Buyers’ counterclaims and third-party claims
pursuant to Court of Chancery Rules 12(b)(6) and 9(b). As noted, Buyers have
asserted three counts: Count 1, against Edinburgh and Knier, for fraudulent
inducement; Count 2, against Edinburgh and the third-party defendants, for breach
of contract (with regard to the APA); and Count 3, against the third-party defendants,
for breach of fiduciary duty. In support of their motion, Sellers argue that Count 1
good faith and fair dealing only if the factual allegations underlying the implied covenant claim differ from those underlying an accompanying breach of contract claim”). 85 Compl. ¶ 109. 86 Count IV seeks recovery from JLL for breach of the JLL Letter Agreement based on RETS’ failure to pay the Fixed EO Obligation to Edinburgh under the terms of the APA. 87 See Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, 2014 WL 2457515, at *19 (Del. Ch. May 30, 2014).
22 does not plead a fraudulent inducement claim with the requisite particularity;
Count 2 is not viable because Buyers have not well pled a breach of the APA; and
Count 3, the breach of fiduciary duty claim, is not viable because it is duplicative of
Count 2. I address each Count in turn.
1. Count 1 - Fraudulent Inducement
Count 1 alleges that ASPE and Knier (i) “falsely represented to [Buyers] that
any Contingent Purchase Price payment would come from and be satisfied by
ASPE’s new growth and additional profitability”88; and (ii) made representations in
Section 2.1(f) of the APA that they “would conduct business in a reasonable manner
consistent with past practices, report, budget, and forecast in line with the budgets
and forecasts provided . . . prior to Closing . . . and achieve revenue and profit growth
that ASPE and Mr. Knier promised and represented the Unit would achieve.” 89
Count 1 further alleges that ASPE and Knier knew these representations were false
or were recklessly indifferent to their truth when made, that they made the
representations to induce Buyers to execute the APA and that Buyers “reasonably
and justifiably relied” on the representations “in agreeing to the Contingent Purchase
Price and entering into the APA.”90
88 Countercl. ¶ 62. 89 Countercl. ¶ 63. 90 Countercl. ¶¶ 65–67.
23 Edinburgh and Knier counter that the fraudulent inducement claim should be
dismissed because (i) Buyers fail to plead fraud with particularity as required under
Court of Chancery Rule 9(b); (ii) the alleged fraudulent statements concern
predictions about the future, which are not actionable as a matter of Delaware law;
and (iii) Buyers fail adequately to plead justifiable reliance on the alleged
misrepresentations.
In reply, Buyers contend that their pleading satisfies Rule 9(b)’s requirements
because they “have alleged, with specificity, the content of the fraudulent
representations, who made those representations, when those representations were
made, and what ASPE and Knier stood to gain from making them.”91 They further
submit that they have “adequately allege[d] that the representations were false and
that ASPE and Knier knew they were false [because], [c]ontrary to Knier’s and
ASPE’s representations and promises, the ASPE Business Unit earned only
$892,000 in Pre-Tax Profit from 2014–2016—just 17% of the Pre-Tax Profits that
ASPE and Knier promised the Unit would make during that timeframe.”92
Additionally, Buyers contend that each of the alleged misrepresentations is
actionable because (1) part of the fraud claim “is premised upon knowing false
Answering Br. in Opp’n to Mot. to Dismiss Countercl. & Third Party Compl. (“Buyers’ 91
Answering Br.”) 24. 92 Buyers’ Answering Br. 25.
24 statements within the APA itself”; and (2) the “extra contractual fraudulent
statements are actionable because they relate to past or present fact and/or were
knowingly false when made.”93 Finally, Buyers posit that whether they reasonably
relied on the alleged misrepresentations is a question of fact not suitable for
resolution on a motion to dismiss.94 Even if the question were ripe for resolution,
however, Buyers argue they have adequately pled reasonable reliance because they
“are undoubtedly able to rely on . . . contractual representations,” and have alleged
they “would never have agreed to the Contingent Purchase Price construct absent
ASPE and Knier’s promises and representations.”95 Since the APA does not contain
an anti-reliance clause, “the APA reflects the parties’ intention that [Buyers] could
reasonably and justifiably rely upon extra-contractual representations . . . .”96
To plead fraud (or fraudulent inducement), a plaintiff
must plead facts supporting an inference that: (1) the defendants falsely represented or omitted facts that the defendant had a duty to disclose; (2) the defendants knew or believed that the representation was false or made the representation with a reckless indifference to the truth; (3) the defendants intended to induce the plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable reliance on the representation; and (5) the plaintiff was injured by its reliance.97 93 Buyers’ Answering Br. 28. 94 Buyers’ Answering Br. 33. 95 Buyers’ Answering Br. 34. 96 Buyers’ Answering Br. 35. 97 Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 208 (Del. Ch. 2006).
25 “[T]o satisfy Rule 9(b), a complaint must allege,” with particularity, “the time, place,
and contents of the false representation; . . . the identity of the person making the
representation; and . . . what the person intended to gain by making the
representation[].” 98 While Rule 9(b) allows a plaintiff to allege knowledge
generally, “where pleading a claim of fraud has at its core the charge that the
defendant knew something, there must, at least, be sufficient well-pled facts from
which it can reasonably be inferred that this ‘something’ was knowable and that the
defendant was in a position to know it.”99
“Delaware law holds that a plaintiff cannot ‘bootstrap’ a claim of breach of
contract into a claim of fraud merely by alleging that a contracting party never
intended to perform its obligations. In other words, a plaintiff cannot state
a claim for fraud simply by adding the term ‘fraudulently induced’ to a complaint or
alleging that the defendant never intended to comply with the agreement at issue
when the parties entered into it.” 100 In Narrowstep, this court observed that
“couching an alleged failure to comply with a contract as a failure to disclose an
98 Narrowstep, 2010 WL 5422405, at *12. 99 Trenwick, 906 A.2d at 208. 100 Narrowstep, 2010 WL 5422405, at *15.
26 intention to take certain actions arguably inconsistent with that contract is exactly
the type of bootstrapping this Court will not entertain.”101
Here, Buyers allege that: “ASPE and Knier falsely represented and warranted in the APA that the ASPE Business Unit would conduct business in a ‘reasonable manner consistent with past practices’ and make and execute strategies and plans’ that ‘enable revenue growth’”102;
ASPE and Knier represented to EA in January 2013, and then again in May 2013, that ASPE would achieve certain revenues after the acquisition103;
“Throughout the negotiation process, ASPE and Mr. Knier continued to represent that the ASPE Business Unit would achieve substantial revenue and profit growth, and that Mr. Knier, Mr. Mantica, Mr. Beanland, and the rest of their management team would capitalize on that growth”104;
“ASPE and Mr. Knier continually referred to the ‘Promised Revenues and Profits’ as evidence of such growth”105;
ASPE and Knier “assured [Buyers] that Mr. Knier, Mr. Mantica, and their team had the knowledge, experience, and ability to achieve the promised growth”106 and were “strategic, focused, and nimble, and more capable of identifying and capturing future profitable [] growth opportunities”107;
101 Id. 102 Buyers’ Answering Br. 24. 103 Countercl. ¶ 23. 104 Countercl. ¶ 27. 105 Id. 106 Countercl. ¶ 28. 107 Countercl. ¶ 42.
27 “[B]ased upon ASPE’s and Mr. Knier’s representations regarding the ASPE Business Unit’s future growth, [Buyers] and ASPE began negotiating earn-out provisions”108;
“ASPE and Mr. Knier assured [Buyers], time and time again, that any Contingent Purchase Price payment would come from and be satisfied by the ASPE Business Unit’s growth and additional profitability”109; and
ASPE and Knier “repeatedly represented . . . that, in effect, there would be no payment required by [Buyers] under the [earn-out provision]” because the ASPE Business Unit would far exceed the required amounts.110
With regard to ASPE and Knier’s knowledge, Buyers allege “ASPE and
Mr. Knier knew that [their] representations were false when they were made”111 and
that “[t]he extent of the ‘misses’ demonstrates that ASPE and Mr. Knier never
believed that the ASPE Business Unit could achieve the[] [promised] figures.”112
And finally, Buyers allege ASPE and Knier “made [] knowingly false statements to
induce [Buyers]” to enter into the APA and that Buyers justifiably relied on those
statements.113
108 Countercl. ¶ 31. 109 Countercl. ¶ 33. 110 Countercl. ¶ 34. 111 Countercl. ¶ 28. 112 Countercl. ¶ 54. 113 Id.
28 Even assuming that Buyers have alleged fraud with particularity, which is
questionable, 114 Buyers’ allegations fall short of a viable fraudulent inducement
claim for two distinct reasons. First, insofar as the fraudulent inducement claim is
based on the fact that the Sellers never intended to perform the APA, that claim
constitutes impermissible bootstrapping.115 Buyers have asserted that same claim in
Count 2 packaged as a breach of contract claim.
Second, Buyers fail to plead a viable fraud claim with respect to the alleged
extra-contractual representations regarding revenue projections and future
management performance. Those representations are neither false representations
of fact nor are they accompanied by well-pled allegations that ASPE or Knier knew
or believed the representations were false or that Buyers justifiably relied on those
representations. Generally, “[p]redictions about the future cannot give rise to
114 Buyers allege that Sellers made the fraudulent statements “continually” and “throughout” the nine months the parties negotiated the Transaction. See, e.g., Countercl. ¶¶ 27, 33 and 34. That lack of precision with respect to timing arguably falls short of the particularity requirement as set forth in Rule 9(b). See Trusa v. Nepo, 2017 WL 1379594, at *9 (Del. Ch. Apr. 13, 2017) (“All of the alleged misrepresentations lack the particularity required by Rule 9(b) to state a claim for fraud. First, the Complaint does not allege with particularity when the alleged misrepresentations were made—no specific dates or times [sic] frames are given.”); MHS Capital, LLC v. Goggin, 2018 WL 2149718, at *9 n.122 (Del. Ch. May 10, 2018) (noting that “Federal courts . . . have held that alleging a time frame of six or more months is insufficient to satisfy the particularity requirement.”) (citing cases). 115 See Narrowstep, 2010 WL 5422405, at *15.
29 actionable common law fraud.”116 In limited circumstances, however, a promise of
future conduct can be actionable in fraud if the plaintiff “plead[s] specific facts that
lead to a reasonable inference that the promisor had no intention of performing at
the time the promise was made.”117 And, to reiterate, if such an inference is to be
premised on the defendant’s knowledge of a particular matter, the plaintiff must
allege “sufficient facts from which it can reasonably be inferred that this ‘something’
was knowable and that the defendants were in a position to know it.”118
Here, the alleged misrepresentations concern the future profitability of the
ASPE Business Unit and the future performance of its management team. The
revenue projections (even if characterized as “promises” as alleged by Buyers)
concerned results ASPE and Knier hoped the ASPE Business Unit could achieve in
the following four years. Whether those revenues would, in fact, be achieved was
not knowable at the time ASPE and Knier made the representations.119
116 Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 554 (Del. Ch. 2001). 117 Hopkins v. Concorde Career Colleges, Inc., 2016 WL 1238775, at *3 (D. Del. Mar. 29, 2016). 118 Arbry Pr’s V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1051 (Del. Ch. 2006). 119 See Great Lakes, 788 A.2d at 554; Trenwick, 906 A.2d at 209 (“They are simply statements of expectation or opinion about the future of the company and the hoped for results of business strategies. Such opinions and predictions are generally not actionable under Delaware law.”).
30 Buyers’ conclusory allegation that ASPE and Knier knew the statements were
false when made because the ASPE Business Unit significantly missed its targeted
revenues is legally insufficient to support a fraudulent inducement claim. The fact
that actual performance falls short of forecasted performance “does not buttress a
fraud claim.”120 Moreover, Buyers fail to “set forth particularized facts regarding
the precise estimates in question [and] the circumstances suggesting they were
unsound from the inception . . . .” 121 The alleged representations about
management’s abilities and future performance are similarly insufficient; such
representations “are mere puffery and cannot form the basis for a fraud claim.”122
Even if Buyers had pled sufficient facts to satisfy the remaining fraud
elements, they have failed to plead facts from which the Court can reasonably infer
justifiable reliance. “‘Justifiable reliance requires that the representation relied upon
involve a matter which a reasonable person would consider important in determining
120 Trenwick, 906 A.2d at 208. 121 Id. (emphasis supplied); see also id. (“What is necessary is the pleading of facts suggesting that the original estimates were fraudulently conceived, from the get-go. This does not require a plaintiff to probe the mindset of the defendants, what it does require is that the plaintiff set forth particularized facts regarding the precise estimates in question, the circumstances suggesting they were unsound from the inception, and why the defendants had an incentive to intentionally low-ball them.”). 122 Solow v. Aspect Res., LLC, 2004 WL 2694916, at *2 (Del. Ch. Oct. 19, 2004) (finding statements that a person has “skills, experience, and resources to successfully and quickly capitalize on [an] opportunity” were “mere puffery” unable to support a fraud claim).
31 his choice of action in the transaction in question,’ i.e., that the matter misrepresented
is material.”123 “To establish justifiable reliance, [a plaintiff] must demonstrate he
did not have either the awareness or opportunity to discover the accurate
information.”124
Here, Buyers were not justified in relying on ASPE and Knier’s alleged extra-
contractual representations regarding future performance of the business and
management capabilities. Buyers were represented by counsel and were able to
conduct due diligence without interference by Sellers. Following this process,
Buyers entered into a highly-negotiated agreement that does not contain the
allegedly “promised” revenue thresholds and does not say anything at all about the
capabilities of the ASPE team that would continue to manage the ASPE Business
Unit. Tellingly, however, the APA does contain revenue thresholds required to
trigger the Contingent Purchase Price payments. Under these circumstances, the
pled facts do not allow a reasonable inference that Buyers could have reasonably
relied upon the alleged extra-contractual representations made prior to their due
123 Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 813–14 (Del. Ch. Feb. 18, 2014) (quoting Lock v. Schreppler, 426 A.2d 856, 863 (Del. Super. Ct. 1981)). 124 Tekstrom, Inc. v. Savla, 2006 WL 2338050, at *11 (Del. Super. Ct. July 31, 2006).
32 diligence that were not included in the final agreement—even if the APA does not
contain an anti-reliance clause.125 Thus, Buyers’ fraud claim must be dismissed.
2. Count 2 - Breach of Contract
According to Buyers, Section 2.1(f) of the APA “affirmatively obligate[s] the
Sellers to develop business plans that enable[] revenue growth.”126 Buyers contend
that Sellers breached Section 2.1(f) by “failing to act in a reasonable manner
consistent with ASPE’s past practices, fail[ing] to make and execute strategies and
plans that enabled the ASPE Business Unit to achieve the promised revenue growth,
and fail[ing] to report, budget, and forecast in line with the budgets and forecasts
provided by [ASPE] to [Buyers] prior to Closing.”127 According to Buyers, the
APA’s requirement that ASPE management conduct “activities in a reasonable
manner consistent with its past practices,” coupled with Section 2.1(f)’s
125 See, e.g., Am. Capital Acq. P’rs, LLC v. LPL Hldgs., Inc., 2014 WL 354496, at *9 (Del. Ch. Feb. 3, 2014) (finding that, although the contract did not include an anti-reliance clause, “[p]laintiffs could not have reasonably relied on public statements describing LPL’s business in non-specific terms and on statements by an LPL executive” where neither made specific promises about the company’s abilities); Great Lakes, 788 A.2d at 554–55 (finding that plaintiffs were not justified in relying on projected sales regardless of whether they were covered by disclaimers in the agreement). 126 Buyers’ Answering Br. 36 & n.3. 127 Countercl. ¶ 72. Buyers further allege that Sellers failed “to adjust sales or marketing strategies”; failed to “find new opportunities to offset the losses in the maturing parts [of] the ASPE Business Unit”; failed to “change or upgrade key leadership personnel”; and “missed on three consecutive operating plans, and demonstrated no ability to make the changes needed to reverse the serious declines.” Countercl. ¶ 56.
33 “requirement” that management provide a plan that “enable[s] revenue growth,”
reflect that the parties intended Sellers to continue growing the business post-
close.128
Sellers contend that Count 2 fails to state a breach of contract claim because
nothing in the APA requires the ASPE Business Unit to achieve any specific revenue
levels or to grow revenues. Specifically, Sellers argue that (1) Section 2.1(f) of the
APA merely permits (or encourages)—but does not require—the ASPE Business
Unit to grow its revenues after the Transaction; and (2) Count 2 asks the Court to
define acting “in a reasonable manner” as meeting non-contractual revenue goals—
an unreasonable construction of that contractual provision. Sellers contend that in
negotiating Section 2.1(f), the parties merely intended that Sellers would maintain
ASPE’s pre-Transaction revenue mix and its 10-Money receipts.129
To plead a breach of contract claim, a plaintiff must allege (1) the existence
of a contract; (2) the breach of an obligation imposed by that contract; and
(3) resulting damage to the plaintiff.130 There is no dispute that the APA is a valid,
enforceable contract. The dispute boils down, instead, to whether the Complaint
well pleads that Sellers breached the APA’s provisions.
128 Buyers’ Answering Br. 36 n.3. 129 Tr. of H’rg Mar. 20, 2018, at 22:4–19. 130 Air Prod. & Chems., Inc. v. Wiesemann, 237 F.Supp.3d 192, 213 (D. Del. 2017).
34 At this stage, the Court’s breach analysis is confined to the contract language
and the allegations of breach viewed through a notice pleading lens:
Under Delaware law, the proper interpretation of language in a contract is a question of law. Accordingly, a motion to dismiss is a proper framework for determining the meaning of contract language. When the language of a contract is plain and unambiguous, binding effect should be given to its evident meaning. Only where the contract’s language is susceptible of more than one reasonable interpretation may a court look to parol evidence; otherwise, only the language of the contract itself is considered in determining the intentions of the parties.131 Under Section 2.1(f) of the APA, the ASPE Business Unit was obliged to (i) manage . . . and conduct its activities in a reasonable manner consistent with its past practices . . . and (ii) report, budget and forecast (as requested in line with the budgets and forecasts provided by the Seller to Buyer prior to Closing, where applicable), its educational and financial status to the Buyer and/or the integrated educational institution, if applicable. Notwithstanding the above, the ASPE Business Unit will be afforded the ability to make and execute strategies and plans to grow their business with full cooperation from Buyer provided that those plan are: (sic) fully compliant with all applicable laws, enable revenue growth consistent with the approximate current mix of Program Revenues and non-Program Revenues, and do not result in fiscal year losses or requests for additional capital over the contingent payment period.
The first sentence of Section 2.1(f) clearly requires the ASPE Business Unit
to be operated in a particular manner—namely, “in a reasonable manner consistent
with its past practices.” “Notwithstanding” this requirement, the next sentence
“afford[s] [Sellers] the ability to make and execute strategies and plans to grow the[]
131 Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006).
35 business” (even if not “consistent with its past practices”) so long as Sellers’ new
initiatives “enable revenue growth consistent with the approximate current mix of
Program Revenues and non-Program Revenues.” Nothing in Section 2.1(f) requires
that Sellers grow revenue, however. Buyers’ contrary construction twists the words
of the provision to create a mandate where none exists.
Although the provision is not ambiguous, the Court is unable to resolve the
breach of contract claim as a matter of law on a motion to dismiss. As mentioned,
Buyers have also alleged that Sellers breached Section 2.1(f) by operating the ASPE
Business Unit in a manner inconsistent with past practices and that Buyers have
“been damaged as a result.” 132 The question of whether ASPE’s post-closing
management conducted the ASPE Business Unit “in a reasonable manner consistent
with its past practices” is fact intensive.133 To answer it dispositively, the Court must
consider evidence of ASPE’s past practices and compare those practices to the
practices employed after the Transaction was consummated. Such evidence is not
before the Court and, in any event, could not be considered on a motion to dismiss.
132 Countercl. ¶¶ 70–73. Specifically, it is alleged that Knier and his team did nothing but “manag[e] the potential payout of the Total Revenue Payout” (Countercl. ¶ 48) and that the ASPE Business Unit’s performance declined as a result (Countercl. ¶¶ 57, 59). 133 See, e.g., Victaulic Co. v. Tieman, 499 F.3d 227, 227 (3d Cir. 2007) (“Because reasonableness is a fact-intensive inquiry, we hold that it should not have been determined on the pleadings.”).
36 Thus, the breach of contract claim (Count 2) is not susceptible to resolution on a
motion to dismiss and must proceed to discovery.
3. Count 3 - Breach of Fiduciary Duty As previously noted, Count 3 of the third-party complaint alleges that Knier,
Mantica, and Beanland breached their fiduciary duties to Buyers and the ASPE
Business Unit “by acting with reckless indifference and deliberate disregard to
[Buyers], and failing to act in good faith to maximize the value [for Buyers] and the
ASPE Business Unit over the long term.”134 The third-party defendants argue that
Count 3 must be dismissed because (i) it is duplicative of Buyers’ breach of contract
claim; (ii) Buyers fail to plead facts sufficient to support a breach of fiduciary duty
claim (assuming such a duty was owed); and (iii) Knier, Mantica and Beanland were
not independent officers but were instead employees subject to Buyers’ full
oversight and control and, thus, did not owe Buyers and the ASPE Business Unit
any fiduciary duties.
I will assume, for purposes of this motion, that the third-party defendants
owed fiduciary duties to Buyers and the ASPE Business Unit.135 Even so, Count 3
134 Countercl. ¶ 77. 135 The third-party defendants were officers of the ASPE Business Unit, a part of EA’s operations, following the Transaction. Officers generally owe the same fiduciary duties as directors. In re Wayport, Inc. Litig., 76 A.3d 296, 322 (Del. Ch. 2013) (citing Gantler v. Stephens, 965 A.2d 695, 708–09 (Del. 2009)). With that said, because I find the breach of fiduciary duty claim duplicative, I need not, and do not, determine whether the Employment Agreements alter the third-party defendants’ relationship to the ASPE 37 fails because the fiduciary duty claim advanced therein is duplicative of the breach
of contract claim advanced in Count 2.
Generally, Delaware “[c]ourts will dismiss [a] breach of fiduciary duty claim
where [it] overlap[s] completely [with a breach of contract claim] and arise[s] from
the same underlying conduct or nucleus of operative facts” as the breach of contract
claim.136 “To determine whether there is an independent basis for fiduciary claims
arising from the same general events, the Court inquires whether the fiduciary duty
claims depend on additional facts as well, are broader in scope, and involve different
considerations in terms of a potential remedy.”137
Count 3 alleges that the third-party defendants breached their fiduciary duties
by “merely do[ing] enough to secure the potential payout of the Total Revenue
Earnout” rather than “maximizing [] value [for Buyers], and the ASPE Business
Unit.”138 Count 2 (the contract claim) alleges “ASPE, Knier, Mantica, and Beanland
breached their obligations by, among other things: failing to make adjustments or
corrections to the ASPE Business Unit’s sales or marketing”; “failing to find new
Business Unit and EA in such a manner as to eliminate or circumscribe their otherwise extant fiduciary duties. 136 Grunstein v. Silva, 2009 WL 4698541, at *6 (Del. Ch. Dec. 8, 2009). 137 Renco Gp., Inc. v. MacAndrews AMG Hldgs. LLC, 2015 WL 394011, at *7 (Del. Ch. Jan. 29, 2015) (internal quotation omitted). 138 Countercl. ¶ 77.
38 opportunities to offset the losses in the maturing parts [of] the ASPE Business Unit;
and missing on three consecutive operating plans” and “fail[ing] to hit the Promised
Revenues and Profits provided to [Buyers] . . . [and] hit each of the ‘get-well,
recovery’ plans.”139 Even a cursory reading of these pled facts reveals that Count 2
and Count 3 are based on the same conduct—failure to meet projections, failure to
increase revenues and failure to operate the business consistent with Pre-Transaction
practices—and seek the same recovery—damages. Thus, Count 3 is duplicative of
Count 2 and, as such, not viable as a matter of law.140
III. CONCLUSION
Based on the foregoing, Buyers’ motion to dismiss Count V of Edinburgh’s
Complaint is GRANTED. Sellers’ motion to dismiss is GRANTED in part, as to
Counts 1 and 3 of the Counterclaim and Third-Party Complaint, and DENIED in
part, as to Count 2 of the Counterclaim and Third Party Complaint.
IT IS SO ORDERED.
139 Buyers’ Answering Br. 36–37. 140 Grayson v. Imagination Station, Inc., 2010 WL 3221951, at *7 (Del. Ch. Aug. 16, 2010) (“The breach of fiduciary duty claim will consequently only be allowed ‘where it may be maintained independently of the breach of contract claim.’ The relevant inquiry then is whether the obligation sought to be enforced arises from the parties’ contractual relationship or from a fiduciary duty owed to the shareholders.” (citation omitted)).
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Cite This Page — Counsel Stack
Edinburgh Holdings, Inc. v. Education Affiliates, Inc., Counsel Stack Legal Research, https://law.counselstack.com/opinion/edinburgh-holdings-inc-v-education-affiliates-inc-delch-2018.