Glidepath Limited v. Beumer Corporation

• Court: Court of Chancery of Delaware
• Decided: February 21, 2019
• Docket: CA 12220-VCL
• Status: Published

Opinion

EFiled: Feb 21 2019 08:00AM EST Transaction ID 62987268 Case No. 12220-VCL IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

GLIDEPATH LIMITED and SIR KEN ) STEVENS, KNZM, ) ) Plaintiffs, ) ) v. ) C.A. No. 12220-VCL ) BEUMER CORPORATION, GLIDEPATH ) LLC, THOMAS DALSTEIN, and FINN ) PEDERSEN, ) ) Defendants. )

MEMORANDUM OPINION

Date Submitted: November 26, 2018 Date Decided: February 21, 2019

Francis G.X. Pileggi, Gary W. Lipkin, Alexandra D. Rogin, ECKERT SEAMANS CHERIN & MELLOTT, LLC, Wilmington, Delaware; Attorneys for Plaintiffs.

Benjamin A. Smyth, McCARTER & ENGLISH, LLP, Wilmington, Delaware; William D. Wallach, McCARTER & ENGLISH, LLP, Newark, New Jersey; Attorneys for Defendants.

LASTER, V.C. Glidepath LLC (the “Company”) is a Delaware limited liability company. The

plaintiffs sold the Company to defendant Beumer Corporation (the “Buyer”) in a two-stage

transaction. In the first stage, the Buyer purchased a 60% member interest in the Company

from the plaintiffs and took over management of the Company’s operations. A period of

shared ownership followed. To complete the second stage, either party could exercise an

option under a reciprocal put-call mechanism. The Buyer exercised its call and acquired

the plaintiffs’ remaining 40% member interest.

The bulk of the purchase price took the form of contingent payments based on the

Company’s performance over a three-year period. When the Company’s performance did

not warrant any additional payment, the plaintiffs filed suit.

The plaintiffs claim that the Buyer and the two individual defendants breached

express provisions in the transaction documents and violated the implied covenant of good

faith and fair dealing, which the plaintiffs say should result in an award of damages equal

to the contingent consideration. This decision rejects those theories.

The plaintiffs also claim that the Buyer and its representatives breached their

fiduciary duties while managing the Company. The plaintiffs again seek damages equal to

the contingent consideration. This decision agrees that the Buyer and its representatives

owed fiduciary duties to the Company and its members, but holds that those duties did not

include any obligation to ensure that the plaintiffs received the contingent consideration.

Recognizing that the Buyer and its representatives faced a conflict of interest when

managing the Company because of the divergent incentives created by the Buyer’s

contractual obligations, this decision nevertheless holds that the Buyer and its representatives properly sought to maximize the long-term value of the Company. The

defendants’ actions were entirely fair.

In a pre-trial ruling on a motion for summary judgment, the plaintiffs obtained an

order finding that the Buyer breached the transaction agreements in three respects. The

plaintiffs seek damages for those breaches. Two warrant only nominal awards. The third

warrants damages of $377,282.57, plus pre- and post-judgment interest at the legal rate.

The plaintiffs’ final claim is for breach of an exclusive territory provision. This

provision binds the plaintiffs; it does not apply to the defendants.

I. FACTUAL BACKGROUND

Trial took place over four days. The parties submitted 354 exhibits and lodged

eighteen depositions. Eight fact witnesses and two experts testified live at trial. The parties

proved the following facts by a preponderance of the evidence.1

A. The Players

The Company designs, installs, and maintains baggage-handling systems at airports

in the United States. Before the events giving rise to this litigation, the Company was a

wholly owned subsidiary of Glidepath Ltd. (“Seller Parent”), which designs, installs, and

maintains baggage-handling systems at airports around the world. Plaintiff Ken Stevens

controls Seller Parent. This decision refers to Stevens and Seller Parent jointly as the

1 Citations in the form “[Name] Tr.” refer to witness testimony from the trial transcript. Citations in the form “[Name] Dep.” refer to witness testimony from a deposition transcript. Citations in the form “JX __ at __” refer to trial exhibits using the JX-based page numbers generated for trial.

2 “Sellers.”

The Buyer designs, installs, and maintains baggage-handling systems at airports in

the United States. The Buyer is a subsidiary of BEUMER Group GmbH & Co. KG (“Buyer

Parent”), which designs, installs, and maintains baggage-handling systems at airports

around the world. Dr. Christoph Beumer controls Buyer Parent.

At the risk of oversimplification, baggage-handling systems come in two types:

traditional systems and next-generation systems. Manufacturers build baggage-handling

systems using two measurement standards: the Imperial system and the metric system.

During the period relevant to the parties’ dispute, traditional systems using Imperial

measurements dominated the market for baggage-handling systems in the United States.

American airports were slow to embrace next-generation systems, which have a higher

upfront cost. Decision-makers at American airports also harbored skepticism about the

reliability of next-generation systems, recalling the problems at the Denver International

Airport when it attempted to implement one many years before.

Buyer Parent was a market leader in next-generation systems, but Buyer Parent had

enjoyed its principal success outside of the United States. The Buyer had limited

experience contracting in the United States and even less experience designing, supplying,

and maintaining traditional systems that used Imperial measurements. As a result, the

Buyer struggled to penetrate the American market.

The Company was skilled in designing, supplying, and maintaining traditional

systems that used Imperial measurements, and it had established itself as a significant

player in the US market. But the Company was struggling financially. To secure a job

3 installing or maintaining a baggage-handling system, a contractor typically must supply a

performance bond. The contractor’s financial strength determines the amount of bonding

capacity it can obtain. The Company lacked the financial strength necessary to support

significant bonding capacity, which limited the Company’s ability to win jobs.2

During the fiscal year that ended on March 31, 2012, the Company suffered a net

loss of approximately $4 million.3 Because of these poor results, Stevens wanted to sell the

Company.4

B. The Buyer Approaches The Company.

In summer 2012, the Buyer contacted Stevens about the Company. The Buyer saw

an acquisition as a means of expanding its American footprint.5 The Buyer also believed

that with its financial backing, the Company would be able to compete for larger jobs that

could incorporate next-generation components.6

2 See Stevens Tr. 14–15 (referring to bonding as “one of the big issues” and lamenting that the Company historically had “[f]ailed to realize the importance of securing the commensurate amount of bonding and the style of bonding that is unique to the U.S.”); see also Bryan Tr. 606 (agreeing that prior to the transaction the Company “didn’t have a lot of access to bonding”). 3 Hufnagel Tr. 768–69; see Barr Tr. 562–63. 4 Stevens Tr. 11–12; see JX 7 at 3 (“The company went through some difficult times over the last three years, with heavy losses and a comprehensive restructuring program.”). The Company faced other problems as well, such as going without a CEO from 2011 until 2013. See Stevens Tr. 129–31. 5 See Stevens Tr. 13, 64; Barr Tr. 563–67; see also JX 4 at 9; Pedersen Tr. 887–88. 6 See Dalstein Tr. 1096 (testifying that the “main reason” for the transaction was to take on American projects combining next-generation and traditional components); JX 4 at 9 (anticipating “strengthening of competitive position vis-à-vis current leaders in the

4 Stevens understood why the Buyer was interested in the Company, and he played

up the Company’s ability to help the Buyer meet its goals.7 In a July 2012 presentation to

the Buyer, Stevens argued that a post-acquisition Company could sell both traditional and

next-generation systems.8 His presentation identified thirteen large prospects that could

involve next-generation systems, including a “Favored Project” at Denver International

Airport worth $30 million and bigger projects in Boston and Newark.9 Stevens argued that

pursuing these projects had advantages, because “[c]ompetition is less intense at [the large-

projects] level and correspondingly, margins are higher.”10

market for >$20M BHS projects, together with jump-start of imperial format conveyor portfolio”); JX 6 at 2 (“Assume strategy in Airports is to win projects >$20m where we can offer ‘new’ technologies together with conveyors and, initially, only take 100% conveyor projects <$20M.”); JX 10 at 2. 7 See Stevens Tr. 141–46; JX 11 at 16, 22. 8 See JX 11 at 18 (touting the Company’s “plant and staff, complete product suite, effective sales force, essential contract and business licenses and market positioning to sustain a $40 million plus operation and extend Beumer’s competitive positioning at both ends of the market”); id. at 22 (“The arrival of Beumer into the USA brings truly world- class equipment to the market in the high technology arena.”); id. (“The ability to target the wider market and bid for higher scale projects will provide a distinct, appealing and valuable offering. It is in this area that synergies and benefits from consolidation can be sustained and will be realized which will enable the larger more capable organization to prosper.”); Stevens Tr. 140–42; JX 4 at 7. 9 See JX 11 at 24; see also id. at 26 (listing small and medium prospects). 10 Id. at 16; see id. at 22 (“[The Company], with its reputation for excellence in completing small to medium sized projects, is capable of contributing strategic and competitive advantages to a larger entity such as Beumer which primarily operates at the higher end of the market where there are less players and the margins are better.”); see also Pedersen Tr. 986–87.

5 But pursuing these projects would be a new frontier for the Company, which had a

policy of not attempting projects valued at over $12 million.11 Although the Company had

captured roughly one-third of the American market for mid-sized projects in the $5–$10

million range, it historically could not compete for larger projects valued at over $20

million and had only taken on three projects in the $25 million category in its entire

history.12

C. The Terms Of The Transaction

Stevens offered to sell the Company for $5.5 million in cash. The Buyer thought it

was worth much less. To bridge the valuation gap, the Buyer suggested an earn out.13

In January 2013, the parties reached an agreement in principle, memorialized in a

11 See JX 11 at 14 (“The board of [the Company] restricts it to medium sized airport projects in the $1 million to $12 million price band.”); Stevens Tr. 148–49 (“Q. It would have been difficult, if not impossible, to undertake more than one project greater than $12 million at the same time? A. Yes.”); see also Hufnagel Tr. 737. 12 JX 4 at 7–8; see JX 11 at 16. 13 See JX 7 at 6 (“[The Buyer] proposed an initial investment of $1 million for 60% of the shares, via a three year earn out [Stevens] could receive another max. [$2.5 million] out of the retained earnings, if the company makes a profit. After the three year period both parties have a call/put option. Via this methodology the total purchase price after three years is max. [$6 million] and Glidepath owner is participating in this risk.”); JX 6 at 2 (“What we know at this point $5.5m is much too high. $2.9m assets we also need to verify. Goodwill almost zero due to the losses.”); Hufnagel Tr. 805 (“[The Buyer’s and the Sellers’] evaluations and the expectations differed widely. This is why we came to the conclusion of doing an earnout.”); see also JX 6 at 2 (considering whether the Buyer would have to “fund[] losses in 2012/13 and 2013/14” and suggesting plan “to at least break even next year after integration costs”); Barr Tr. 575 (discussing need for Sellers “to have some skin in the game”).

6 term sheet, on a transaction that included a package of contingent consideration.14 They

hoped to close the transaction immediately after the Company’s 2013 fiscal year, which

ended in March.15 With that goal in mind, they moved quickly to negotiate binding

transaction documents.16

In a decision that would redound profoundly to their detriment, the Sellers did not

formally involve outside counsel and did not retain counsel in the United States.17 Stevens

consulted at times with a New Zealand solicitor, but the solicitor did not play a meaningful

role in the negotiations.18 In substance, Stevens and his colleague, Wayne Collins,

attempted to handle everything themselves, including both the business negotiations and

the legal documentation.

The Buyer took a different approach. The Buyer’s CEO, Dr. Thomas Dalstein, led

the business negotiations. Buyer Parent’s CFO, Norbert Hufnagel, assisted him. The

Buyer’s outside counsel took primary responsibility for drafting the deal documents.19

14 JX 12. 15 See id. at 3; Stevens Tr. 20; Barr Tr. 570. 16 See JX 14 at 2–3 (email exchanges negotiating provisions and memorializing the Buyer’s intention “to have the first drafts of the various agreements to you [the Sellers] around the 12th feb”). 17 See Stevens Tr. 119–20; Collins Tr. 221; Hufnagel Tr. 805. 18 See Stevens Tr. 119. 19 See JX 351 (draft agreements received from Buyer Parent’s German counsel).

7 By the end of March 2013, the transaction documents were substantially complete.20

The two principal documents were a Membership Interest Acquisition Agreement (the

“Acquisition Agreement”) and an Amended and Restated Operating Agreement (the

“Operating Agreement”). The Acquisition Agreement governed the first-stage transaction

in which the Buyer acquired a 60% member interest in the Company from Seller Parent.

The Operating Agreement governed the internal affairs of the Company during a period of

shared ownership, culminating in a second-stage transaction in which the Buyer completed

the acquisition. The mechanism for the Buyer to acquire Seller Parent’s remaining 40%

member interest was a reciprocal put-call mechanism (the “Put-Call Option”). As between

the parties, it was virtually inevitable that one side or the other would exercise the Put-Call

Option. If the option price undervalued the remaining 40% member interest in the

Company, then the Buyer would exercise its call. If the option price overvalued the

remaining 40% member interest in the Company, then Seller Parent would exercise its put.

The Acquisition Agreement specified that in exchange for its 60% member interest,

the Buyer would pay Seller Parent $1 million in cash at closing, plus two forms of

contingent consideration. The first was an earn-out payment of up to $1.56 million (the

“Earn Out”) based on the Company’s performance during “fiscal years 2014, 2015 and

2016” (the “Earn Out Period”).21 The second was a distribution equal to 40% of the

20 See JX 19 at 2; Stevens Tr. 125. 21 JX 61 §§ 3.1.1, 3.2.1, 3.2.2.

8 Company’s net profit during the Earn Out Period, up to a maximum of $1.04 million (the

“Profit Distribution”).22 In combination, the Earn Out and the Profit Distribution entitled

Seller Parent to an amount equal to the Net Profit during the Earn Out Period, capped at

$2.6 million, with 60% of the Net Profit paid by the Buyer under the Earn Out and 40%

paid by the Company through the Profit Distribution.

Through the Put-Call Option, the Operating Agreement provided for the balance of

the contingent consideration. Regardless of which side exercised the option, the

consideration consisted of a fixed payment of $400,000, plus a variable portion of up to $2

million tied to the Company’s performance during the Earn Out Period.23 In the aggregate,

the consideration received by Seller Parent from the $1 million at closing, the Earn Out,

the Profit Distribution, and the Put-Call Option could not exceed $6 million.24 The

Acquisition Agreement also provided that Seller Parent would receive payments pegged to

the size of the Company’s bank balance on two specified dates.25

This decision refers to the Earn Out, the Profit Distribution, and the Put-Call Option

as the “Contingent Consideration.” The parties typically referred to these components

colloquially as the “earn out.”

Id. § 3.4.1. The Acquisition Agreement defined the “Net Profit” as “the profit of 22

the Company remaining after taxes have been paid for the Company and its members.” Id. at 6. 23 See JX 65 § 8.3.3. 24 JX 61 § 3.4.3. 25 Id. §§ 3.1.3, 3.1.4.

9 During the period of joint ownership, the Operating Agreement established a

manager-managed governance structure in which a single Manager would exercise “the

powers of the Company,” manage its “business and affairs,” and “make all decisions and

take all actions for the Company . . . .”26 The Buyer had the right to appoint the Manager.27

The Operating Agreement did not modify or eliminate the Manager’s fiduciary duties. It

did contain two internally inconsistent exculpatory provisions, one of which granted

exculpation for breaches of the duty of care, while the other retained liability for gross

negligence.28

Consistent with the manager-managed structure, the Operating Agreement provided

that no individual member would have the right, power, or authority to act for or on behalf

26 JX 65 § 5.1.3. 27 Id. § 5.1.2. 28 Compare id. § 5.4 (“The Manager of the Company shall not be personally liable to the Company or its Members for monetary damages for breach of the duty of care or other duty as a Manager; provided, however, that to the extent required by applicable law, this Section shall not eliminate or limit the liability or the Manager (i) for any appropriation in violation of his or her duties, of any business opportunity of the Company, (ii) for acts or omissions which involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the Manager derived a personal benefit in violation or breach of any provision of any written agreement of the Company.”), with id. § 6 (“Neither the Manager, nor any Member, nor any other officer of the Company shall have any liability to the Company or to any Member for any loss suffered by the Company which arises out of any action or inaction of any such Manager, Member or officer if such Manager, Member or officer, in good faith, determined that such course of conduct was in the best interest of the Company and such course of conduct did not constitute gross negligence or willful misconduct of such Manager, Member or officer.”).

10 of the Company, or to take any action that would bind the Company. 29 Notwithstanding

the otherwise plenary grant of authority to the Manager, two sections of the Operating

Agreement specified lists of actions that the Manager could not take without member

approval. The first section identified major actions that the Manager could not take without

the affirmative vote of members holding a 75% member interest in the Company. These

actions included matters such as dissolving the Company, amending its certificate of

formation, changing the legal form of the company, and admitting new members.30

More importantly for the present case, a second section specified a list of operational

activities that the Manager could not take without the prior written consent of members

holding a majority interest.31 The list identified the following items:

(i) The appointment and/or removal of the next management level

29 Id. § 5.1.1 (“No individual Member has the right, power, or authority to act for or on behalf of the Company, to do any act that would be binding on the Company, or to incur any expenditures on behalf of the Company.”); id. § 5.1.3 (“No individual Member (other than in the capacity of the Manager or an officer acting pursuant to this Section 5) shall have the right, power, or authority to act for or on behalf of the Company, to do any act that would be binding on the Company, or to incur any expenditures on behalf of the Company.”). 30 Id. § 5.2.2. 31 Id. § 5.2.3. The provision states that these actions require “the prior, written consent of the Members . . . .” Id. The Operating Agreement stated that unless another section provided otherwise, “all decisions of the Members of the Company shall be decided by a majority of the votes cast (or by such greater percentage as may be required by the Act or other applicable laws).” Id. § 5.2.4; see 6 Del. C. § 18-402 (establishing default standard for member action requiring approval from holders of a majority of the interests in profits); Obeid v. Hogan, 2016 WL 3356851, at *18–20 (Del. Ch. June 10, 2016) (rejecting argument that comparable language required unanimous approval by the members).

11 below the Manager;

(ii) Any single capital expenditure or disposition above $10,000.00;

(iii) Any single contract above $3,000,000.00;

(iv) Entry into any project contract as to which the aggregate liability of the Company is not capped at an amount of 50% or less of the contract value;

(v) Any bid bond above $200,000.00 and any performance bond above $2,000,000.00;

(vi) Any cash-negative project with an aggregate negative cash position of $1,000,000.00 at any point in the contract;

(vii) Any project with a gross profit level below 10%;

(viii) Any material deviation from the Business Plan; and

(ix) Entering any agency or representative agreements.32

Notably, the Operating Agreement provided that for purposes of this list of actions, the

members had delegated their voting rights to Dalstein, who had “the power to act on their

behalf . . . and . . . shall take on their behalf any action otherwise required to be taken by

the Members . . . .”33 As a result, Dalstein had the ability to veto any of the identified

actions by blocking them at the member level. Equally important, Dalstein had the ability

to authorize the Manager to take any of these actions, because the Operating Agreement

provided that once the necessary member vote had been obtained, “then any such decision

or consent shall constitute a decision or action by the Manager . . . and shall be binding on

32 JX 65 § 5.2.3 (formatting added). 33 Id. § 5.2.5.

12 each Manager, Member, officer and employee of the Company . . . .”34 This decision refers

to the members’ ability to veto or authorize material operational activities, with Dalstein

controlling the outcome, as the “Member Authorization Provision.”

Dalstein’s ability to veto or authorize operational matters under the Member

Authorization Provision diminished the protection afforded to the Sellers by the only other

limitation in the Operating Agreement on the Manager’s authority: compliance with the

Company’s business plan (the “Business Plan”). The Operating Agreement provided that

[t]he Manager shall prepare an updated Business Plan for the Company on a calendar year or fiscal year basis. Such Business Plan (the “Business Plan”) shall set forth all material activities of the Company in reasonable detail, provide a budget and specify strategic plans of the Company for the ensuing year. The Manager shall at all times act within the Business Plan and within the Manager’s limits of authority set forth therein.35

But by exercising his delegated authority under the Member Authorization Provision,

Dalstein could authorize a “material deviation from the Business Plan.”36

The Operating Agreement only called for the members to meet once per year,

although any member holding at least a 10% member interest (viz., either of them) could

call a special meeting on not less than 10 days’ nor more than 60 days’ notice. The

Operating Agreement specified that at any meeting of members, the Buyer would be

represented by Dalstein, Hufnagel, and Beumer. The Sellers would be represented by

34 Id. § 5.2.1. 35 Id. § 5.1.3. 36 Id. § 5.2.3(viii).

13 Stevens and Collins.37 The parties have referred to this group as the “Advisory Board.”

The Operating Agreement imposed only one affirmative obligation on the Buyer:

“[The Buyer] shall support the Company with the realization of the Business Plan by way

of its bonding line.”38 Otherwise, neither the Operating Agreement nor the Acquisition

Agreement identified any actions that the Buyer or Buyer Parent had to take to enhance the

likelihood that the Sellers would receive the Contingent Consideration.

D. The Buyer Postpones The Closing.

In spring 2013, the Buyer postponed the closing. Buyer Parent wanted the Buyer to

be able to fund the $1 million payment due at closing out of cash on hand, which the Buyer

was not yet able to do. Buyer Parent also wanted the Buyer to have an individual ready to

take over as Manager, but the Buyer had not yet identified a suitable candidate.39

Stevens recognized that the postponement could affect the Contingent

Consideration, particularly because the Company continued to struggle financially. 40 After

two years during which the Company’s CEO position had gone unfilled, Collins took over

37 Id. § 7.6.5. 38 Id. § 2.5. 39 Hufnagel Tr. 765–66; see also Hufnagel Dep. 105–09. 40 See JX 21 at 2 (Stevens writing in May 2013: “[C]racks are appearing in the structure, staff are looking to us to make decisions and we need to increase our sales effort.”); id. at 3 (“I am worried about time drifting on, staff in Dallas looking to me for leadership. And I need to protect my earn out.”); see also JX 47 at 4 (Stevens discussing delayed closing’s implications for purchase price); JX 50 at 5 (Stevens discussing “very soft” 2013 sales performance).

14 as acting CEO in June 2013, but he had no prior experience running an American baggage-

handling company.41 On his watch, the Company experienced significant cost overruns.42

Ultimately, 2013 fell short of expectations.

E. The Transaction Closes.

By November 2013, the Buyer had accumulated the cash necessary to fund the

closing payment. The Buyer also had identified defendant Finn Pedersen, an individual

affiliated with Buyer Parent, as the Manager.43 With these requirements met, the parties

targeted a closing in January 2014.44

On January 10, Collins sent signature pages to Stevens to be signed and held in

escrow pending closing.45 When the Buyer’s counsel continued to make minor comments

on the agreements, Collins complained to Dalstein: “Enough is enough, we have our

commercial agreement based on the mutual trust between us, let’s get on with it.”46

On January 16, 2014, Collins released the signature pages from escrow, and the

41 Stevens Tr. 129–31. 42 JX 29 at 2. 43 See JX 37 at 2; Hufnagel Tr. 810–12. 44 See JX 39 at 2. 45 JX 52 at 2. 46 JX 60 at 2.

15 transaction closed.47 Neither Stevens nor Collins reviewed the documents again.48 Stevens

was on vacation and relied on Collins.49

F. Early Indications Regarding The Buyer’s Strategy

Soon after the deal closed, the Sellers received indications that the Buyer intended

to reorient the Company towards larger projects that offered higher profit margins, the

ability to negotiate terms and conditions, and the potential inclusion of next-generation

components. That should have come as no surprise to the Sellers, because the Buyer had

made clear during the deal negotiations that it wanted to pursue these goals, and Stevens

had pitched the Company to the Buyer as a means of achieving them.

The first indication involved a project for a traditional baggage-handling system at

John Wayne Airport in Orange County, California.50 When the deal closed, the Company

was preparing its bid and needed a performance bond. The Buyer tried to obtain a bond

through the Company’s broker, but could not secure enough capacity without a guarantee

from Buyer Parent.51 Buyer Parent decided that “a parent-company guarantee should be

47 JX 62–63. 48 Stevens Tr. 28–29; Collins Tr. 221–23, 261. 49 Stevens Tr. 29–30. 50 Barr. Tr. 710. 51 JX 56 at 3–4; see JX 67.

16 avoided”52 and asked the Buyer to look at international options for bonding.53

After analyzing the terms of the John Wayne bid, the Buyer concluded that the

project was too risky. The terms and conditions were non-negotiable, and the key to success

was making the lowest bid, which squeezed the profit margin.54 Dalstein decided that the

Company would not bid on the project—which he had the power to do under the Member

Authorization Provision.55 Collins became upset, because historically the Company had

bid on projects like the John Wayne opportunity.56 Collins objected that if the Company

changed its strategy, then “it could have serious repercussions [for the] Earn Out.”57

On January 29, 2014, after meeting with the bid team, Dalstein reversed course.58

The Company obtained bonding from Buyer Parent and ultimately won the bid.59

The second indication involved Denver International Airport. When the deal closed,

52 JX 56 at 3; see JX 70.

See JX 56 at 4 (“In the future aim should be to keep the liability for US business 53

in USA.”); see also JX 77 at 4. 54 See JX 69; JX 75 at 2–3. 55 JX 75 at 2–3. 56 See id. at 2. 57 Id. 58 JX 78; JX 81; see Dalstein Tr. 1127–29. 59 JX 140 at 3; JX 299 at 27; see JX 348; see also Graviet Tr. 361 (“Q. This is an instance where the buyer listened to the specific recommendation, deferred to the people in Dallas [i.e., management], and the bid was successfully submitted; right? A. Yes.”).

17 Denver was preparing to solicit bids for the major baggage-handling project that Stevens

had identified as a “Favored Project” when pitching the Buyer on the Company.60 Collins

did not believe the Company should bid, and he omitted the Denver opportunity from a

spreadsheet that identified the Company’s pipeline and backlog.61 The Buyer proposed

adding Denver and a similar project at San Francisco International Airport, noting that each

would include both a next-generation component and a traditional component.62

G. Pedersen Takes Over.

In mid-February 2014, Pedersen took over from Collins and assumed the position

of Manager under the Operating Agreement.63 By early March, Stevens and Collins felt

left in the dark. They were accustomed to total control over the Company, but now

Pedersen was running the show.64

Pedersen encouraged Dalstein to meet with Collins and reach agreement on how the

Company would be operated. Dalstein pointed out that the Buyer owned 60% of the

member interests and had the authority to operate the business. He recognized that

“important decisions” would require “a common understanding” between the Sellers and

60 See JX 81 at 3. 61 JX 93; see also JX 97 (discussing which prospects required bid bonds). 62 JX 94. 63 Stevens Tr. 130–31. 64 See JX 101.

18 the Buyer, but stressed that it was the Buyer and Pedersen who managed the business.65

One of Pedersen’s first tasks was to update the Business Plan that was incorporated

by reference in the Acquisition Agreement (the “Acquisition Plan”). 66 The Buyer and the

Sellers had jointly developed the Acquisition Plan during their negotiations in early 2012,

before the closing was delayed. It consisted of a one-page spreadsheet, with columns for

each fiscal year from 2013 through 2016, and rows labeled order intake, secured sales,

revenue, contribution margin, indirect expense, gross margin, SG&A, and EBIT. 67 The

plan divided the projected sales figures into four categories: “BHS Large projects

(>$15M),” “BHS Small projects (<$15M),” “BHS Manufacturing,” and “CSS Service &

Support.” For FY 2014, the plan anticipated an order intake of $25 million from large

projects and $16 million from small projects. For FY 2015, the plan anticipated an order

intake of $35 million from large projects and $12 million from small projects. Four

explanatory bullet points appeared the bottom of the page:

 “Revenue figures are [Company] stand-alone and do not include revenue from tote, DCV, or tilt tray systems” (i.e., next-generation systems);

 “Revenue growth driven by complementary applications with BEUMER Group Logistics—Airports technologies and after-market (customer support/service) / base load development”;

 “Margin quality improvement driven by prize realization (i.e., market selectivity), cost-savings and process synergies, and mix development (i.e., after-market / base

65 JX 111. 66 See JX 61, Schedule 4.2(v). 67 JX 61 § 4.2(v); see id. at Schedule 4.2(v); id. § 1.2.5 (“The Schedules form an integral part of this Agreement and are incorporated by reference.”).

19 load development)”; and

 “EBIT growth driven by margin quality improvement and BEP (break-even point) development).”68

Dalstein wanted Pedersen to prepare a new plan that took into account the delayed

closing and observed that “[b]asically we can move all numbers by almost one year.”69

Pedersen worked on the new plan with Eddie Perez, the Company’s CFO, and Christopher

Bryan, the Buyer’s CFO. They initially developed a plan that called for growth in EBIT of

1.2% in 2014 with accelerated growth in 2015 and beyond,70 but they worried that Stevens

and Collins would object to the plan because the projected results would not generate the

maximum Contingent Consideration.71 Perez modified the plan to contemplate more

aggressive results in 2015, but the plan still would not achieve the near-term results

required to maximize the Contingent Consideration.72

Pedersen presented the new Business Plan at the first meeting of the Advisory

Board, which took place on March 25, 2014. The plan projected Net Profit of $290,096 in

2014, and $2,083,737 in 2015.73 Compared to the Acquisition Plan, the new Business Plan

68 Id. at Schedule 4.2(v). 69 JX 113 at 2. 70 JX 116 at 5. 71 Id. at 4. 72 See id. at 2–3. 73 JX 117 at 26.

20 emphasized the Company’s long-term prospects.74 Stevens and Collins expressed concerns

about the plan, including the inclusion of integration costs. They objected that the Buyer

was treating the Company as if it was “suddenly 100% BEUMER.”75

The Advisory Board held another meeting on May 22–23, 2014. The year-to-date

financial results were poor.76 Stevens and Collins felt that the Company was turning down

jobs that it historically would have pursued. The Buyer felt the Company was making

sound business decisions by emphasizing larger projects with the potential for higher

margins and negotiable terms and conditions.77

H. The Chicago Project

An opportunity at O’Hare International Airport in Chicago suited the Company’s

new strategy: It was valued at $20–30 million, offered higher margins, and the terms and

74 See id. at 11, 13, 17, 31, 33. 75 JX 125 at 4; see also JX 101 (Collins complaining that “the integration has all the feel of the integration of a 100% owned Beumer subsidiary when of course it is a 50/50 joint venture for the next three years.”); Stevens Tr. 175 (testifying that the Company was “intended to be all along for the full three years of the earn-out a 50-50 . . . joint venture, maybe not financially but 50-50 in control”). Collins and Stevens misunderstood the deal they had agreed to in the Operating Agreement. The Company was a 60/40 joint venture in which the Buyer had control, both by virtue of its right to appoint the Manager and through the Member Authorization Provision. 76 JX 147 at 7; JX 148 at 5. 77 See JX 153.

21 conditions were negotiable.78 But in June 2014, after Pedersen and the Company had been

working on the Chicago bid for a month, problems emerged.79 The work needed to be

completed on a faster schedule, and to meet it, the Company would have to preorder parts

before the bid was awarded. The pre-award purchases would set up the Company for a loss

if its bid failed.80

After these problems emerged, Pedersen decided not to bid on the project. 81 Collins

objected and asserted that declining to bid the job required Advisory Board consent.82 That

was not correct. The Advisory Board had no authority over whether or not to decline a bid.

Instead, because of the size of the project, the Member Authorization Provision gave

Dalstein authority to either veto or authorize the bid. Pedersen correctly informed Collins

that he only had to report to Dalstein on these matters.83

I. Disagreements Over Strategy

In July 2014, the Company’s Vice President of Sales, Michael Baggett, complained

privately to Collins that the Company “had been forced to decline to bid over $100 million

See id. (Dalstein: “With Chicago we have the chance to kill many birds with one 78

stone: low risk, high margins, T & C negotiable, relaxed schedule, a subcontractor . . . doctors the union at the airport and we can create volume, utilization and reputation.”). 79 See JX 142; JX 143; JX 146; see also JX 158. 80 JX 160; JX 166; see Pedersen Tr. 951. 81 JX 166. 82 See JX 165 at 3–4; see also JX 136 at 4. 83 See JX 165 at 2; see also JX 136 at 3.

22 in business over the past 30 days because [Buyer Parent] didn’t want to waste their bonding

capacity on us.”84 But as the Sellers’ witnesses conceded at trial, the Company could not

bid on all of its prospects.85 The Company had to select the most promising opportunities,

and Pedersen and Dalstein preferred different types of opportunities than what the

Company traditionally had pursued.86

In August 2014, Baggett griped to members of management that the Company was

not working hard enough to pursue an opportunity involving traditional systems at Palm

Beach International Airport.87 The Company pursued and won the project, which became

the largest pure-play traditional project in the Company’s history.88

Internally, some members of the Buyer’s team empathized with the Sellers

regarding the changes in the Company’s management and direction.89 But they also

described the serious problems with the Company’s historical approach, including a lack

84 JX 190 at 2. 85 Stevens Tr. 149; Graviet Tr. 288. 86 JX 136 at 2–3. 87 See JX 205 at 2. 88 See JX 205 at 2. But see JX 169 at 4 (Stevens identifying three older projects valued at roughly $25 million “in today’s value”). 89 See JX 210 at 4; JX 216.

23 of meaningful financial oversight.90

On September 10, 2014, the Advisory Board held its third meeting. Pedersen

reported on the Company’s activities, projecting a worst-case scenario for the year of $24

million in sales with a best-case scenario of $80 million.91 One lowlight of the year was

that the Company had been forced to decline several bidding opportunities due to its efforts

to win the Denver project.92 The Company invested heavily in the Denver opportunity,

both because Pedersen understood from meetings with stakeholders that it was “ours to

lose,”93 and because the Denver project would involve a traditional component valued at

$60–70 million and a next-generation component valued at $30–40 million.94 Stevens

understood the significance of the Denver project and was excited about the opportunity.95

J. The Sellers Learn That An Earn Out Payment Is Unlikely.

By November 2014, the Buyer and Pedersen had determined that the Company was

unlikely to produce enough Net Profit for the Sellers to receive any Contingent

See JX 204 at 2 (observing that the Company had not “ever had a strong financial 90

manager that demanded a significant presence in the business”); JX 194 at 3 (noting problem of “pay[ing] too much for the value we receive for labor or materials or both”). 91 JX 212 at 31. 92 See JX 219 at 7–8. 93 JX 119; see Pedersen Tr. 1003–05. 94 JX 157 at 3; see JX 130 at 3; JX 137; JX 138; JX 150. 95 See JX 227.

24 Consideration.96 They decided that they needed to inform the Sellers.

The next meeting of the Advisory Board meeting was scheduled for November 19,

2014. Pedersen prepared a presentation that explained “the earn out, the situation and the

different scenarios.”97 The presentation showed that the Company had incurred a net

operating loss of $1.56 million for the fiscal year that ended on March 31, 2014. 98 It

forecasted continuing losses for the fiscal year ending March 31, 2015. The presentation

forecasted modest gains in 2016, but projected they would be inadequate to generate a

cumulative Net Profit since the closing of the acquisition.99 Anticipating that the

presentation would not be well received, the Buyer had counsel review the deck.100

During the November 2014 meeting, the Sellers learned for the first time that they

were unlikely to receive any Contingent Consideration. Stevens was “shocked,”101 and his

demeanor was “icy.”102 He did not raise any objections to the analysis.103

Four months later, in March 2015, Stevens asked to meet with Beumer. In his email,

96 See Hufnagel Tr. 830–31, 839–40. 97 JX 226 at 2. 98 JX 239 at 33. 99 Id. 100 See JX 238 at 2; JX 241 at 2. 101 Hufnagel Tr. 845–46. 102 Id. at 833. 103 Id. at 833–41.

25 Stevens emphasized that he needed to “achieve the earn out” and had “relied heavily on

the strength and reputation of Beumer Corporation.”104 Beumer responded that

in all fairness, [the Company] was definitely not in the shape [Collins] always communicated and made us [] believe. The earn out based on the 2014 numbers will not be achievable anymore as planned. . . . I definitely want to find a fair solution but we both also have to acknowledge that the numbers turned out to be different at the end as we all wanted them to be.105

Beumer’s answer infuriated Stevens, and he sent back an angry email filled with criticisms

of the Buyer.106

After exchanging several heated emails, Beumer and Stevens agreed it was best to

meet in person.107 They met in Dallas on April 29, 2015.108 The meeting was short and

unsuccessful.

K. This Litigation

On September 18, 2015, the Sellers commenced an arbitration against the Buyer.

On April 1, 2016, while the arbitration remained pending, the Buyer exercised its call

option. On April 15, the Sellers filed their complaint in this action and a motion seeking to

104 JX 268 at 3. 105 JX 280 at 9. 106 See id. at 8 (“In any case . . . you are running an international company having acquired several companies, you had [the Company] under scrutiny for 16 months while due diligence went on.”). 107 Id. at 2. 108 Dalstein Tr. 1120.

26 enjoin the exercise of the call. On April 22, I denied the motion.109

The parties agreed to forego the arbitration and litigate in this court.110 The Sellers

filed an amended complaint that asserted claims against the Buyer for breach of the

Acquisition Agreement, breach of the Operating Agreement, and breach of the implied

covenant of good faith and fair dealing. It asserted claims for breach of fiduciary duty and

civil conspiracy. The complaint also sought reformation of the dates governing the Earn

Out Period.

In November 2017, the Sellers moved for partial summary judgment. By order dated

January 5, 2018, I granted the motion as to specific claims for breach of contract (the

“Summary Judgment Order”).111

After trial, I directed the parties to present the reformation issue first, because the

outcome of that issue determined the relevant time periods for the other contractual claims.

In a memorandum opinion dated June 4, 2018, I rejected the Sellers’ claim for

reformation.112 That decision directed the parties to brief the remaining post-trial issues,

including the quantum of damages for the claims addressed on summary judgment.

While this litigation was pending, the Company achieved success in Denver and

San Francisco. If either project had come through earlier, it singlehandedly could have

109 See Dkt. 18 at 43–54. 110 See Dkt. 2 at 2 n.2. 111 Dkt. 147. 112 Glidepath Ltd. v. Beumer Corp., 2018 WL 2670724 (Del. Ch. June 4, 2018).

27 resulted in full payment of the Contingent Consideration. Instead, due to events beyond the

parties’ control, both arrived after the Earn Out Period.

II. LEGAL ANALYSIS

The Sellers raise a series of claims. They first contend that the defendants operated

the Company in a manner that deprived the Sellers of the Contingent Consideration. The

Sellers assert that the Buyer and its representatives operated the Company in a manner that

(i) breached the express terms of the Operating Agreement, (ii) violated the implied

covenant of good faith and fair dealing, and (iii) constituted a breach of fiduciary duty. As

damages, the Sellers seek the full value of the Contingent Consideration. This decision

rejects those theories.

The Sellers also seek remedies for three breaches of contract that they established

through a motion for summary judgment. Two of the breaches warrant awards of only

nominal damages. The third warrants damages of $377,282.57, plus pre- and post-

judgment interest at the legal rate.

Finally, the Sellers claim that the Buyer breached an exclusive territory provision.

This claim fails because the provision binds the Sellers, not the Buyer.

A. Breach of Contract

In their first theory, the Sellers contend that the Buyer and its representatives

operated the Company in a manner that deprived the Sellers of the Contingent

Consideration. The Sellers assert that the defendants’ business decisions constituted a

breach of the express terms of the Operating Agreement and the implied covenant of good

faith and fair dealing.

28 1. The Express Terms Of The Operating Agreement

“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.”113 When interpreting a contract, the court “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.114 “Contract terms themselves will be

controlling when they establish the parties’ common meaning so that a reasonable person

in the position of either party would have no expectations inconsistent with the contract

language.”115 “The meaning inferred from a particular provision cannot control the

meaning of the entire agreement if such an inference conflicts with the agreement’s overall

scheme or plan.”116

The Sellers contend that the Buyer breached the express terms of the Operating

Agreement in three ways. First, the Sellers claim that the Buyer failed to support the

113 Salamone v. Gorman, 106 A.3d 354, 367–68 (Del. 2014).

GMG Capital Invs., LLC v. Athenian Venture P’rs I, 36 A.3d 776, 779 (Del. 114

2012); see Elliot Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del. 1998) (“It is well established that a court interpreting any contractual provision . . . must give effect to all terms of the instrument, must read the instrument as a whole, and, if possible, reconcile all the provisions of the instrument.”); City Inv. Co. Liquid. Tr. v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del. 1993) (“If a writing is plain and clear on its face, i.e., its language conveys an unmistakable meaning, the writing itself is the sole source for gaining an understanding of intent.”). 115 Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997). 116 GMG Capital, 36 A.3d at 779.

29 Company with its bonding line. Second, the Sellers claim that the Buyer breached a recital

that required the Buyer to contribute its “skills, expertise, collateral and interests” to the

Company. Third, the Sellers contend that Pedersen breached the Operating Agreement by

failing to manage the Company in conformity with the Acquisition Plan.

a. Bonding

Section 2.5 of the Operating Agreement states: “[The Buyer] shall support the

Company with the realization of the Business Plan by way of its bonding line.”117 The

Sellers contend that the Buyer breached this provision by failing to provide sufficient

bonding capacity for the Company to win jobs. The Sellers maintain that with more

bonding capacity, the Company could have won more jobs and generated financial results

that would have supported a full payment of the Contingent Consideration.

The Buyer did not have its own bonding line until well into the Earn Out Period.118

Until it secured its own line, the Buyer obtained bonds through Buyer Parent.119 The Sellers

117 JX 65 § 2.5. 118 See Bryan Tr. 635–36 (testifying that the Buyer acquired a bonding line in 2015); Dalstein Tr. 1117–18 (explaining that the Buyer obtained a $30 million bonding line in 2016). 119 See JX 91 (February 2014 email discussing ACE and other Buyer Parent bonding lines for the Buyer to use); JX 133 at 2 (Baggett in April 2014: “[The Company] currently [has] a 5/20 bonding line with Capitol Indemnity ($5M single project/$20M aggregate), but aside from that we rely on the BEUMER line to pursue future works.”); JX 189 (Bryan in July 2014: “[The bond producer] strongly feels [the Buyer] will not get an offer for a bonding program without the parent indemnity.”); see also JX 208 at 3 (September 2014 letter denying the Buyer prequalification to bid on Denver contracts because of the Buyer’s inadequate financial capacity); JX 225.

30 contend that Buyer Parent refused to provide bonding for traditional projects because it

wanted to save its bonding capacity for next-generation projects. The Sellers also argue

that the Buyer should have done more to obtain guarantees from Buyer Parent.

The Sellers’ argument about bonding capacity fails because the Operating

Agreement did not impose an obligation on Buyer Parent. It only imposed an obligation on

the Buyer. The obligation that the Buyer undertook did not include any commitment to

cause Buyer Parent to take affirmative actions to provide bonding. Because of the structure

of the Operating Agreement, Buyer Parent’s refusals to provide bonding for particular jobs

could not give rise to breach.120 The plaintiffs proved that Buyer Parent was risk averse

when making bonding decisions.121 But the Operating Agreement did not obligate Buyer

Parent to provide bonding, nor did it obligate the Buyer to cause Buyer Parent to provide

120 See Alliance Data Sys. Corp. v. Blackstone Capital P’rs V, 963 A.2d 746, 765– 69 (Del. Ch.) (Strine, V.C.), aff’d, 976 A.2d 170 (Del. 2009) (TABLE). 121 See Graviet Tr. 297–315; see also Baggett Dep. 24–29 (identifying disputed no- bid decisions); Collins Tr. 225 (“You can overbid a job simply by overestimating the risk. And I don’t think Beumer had a good grasp particularly of consequential damages. They hated them.”); Graviet Tr. 307–08 (explaining attempts to explain to the Buyer that terms and conditions regarding “consequential damages, liquidated damages for delay” are “common,” “you don’t have to worry about it,” and “if you have a good relationship with the [project] owner, they’ll generally work with you if things happen”); JX 179 at 2 (Graviet in June 2014: “[R]egarding the T&C’s that are not negotiable, I will write down my thoughts about how likely (how risky) those T&Cs really are.”). Compare JX 169 at 2 (Stevens explaining to Pedersen that “most contractual disagreements don’t get to court and are generally settled amicably by [the Company’s] own staff and the owner/general contractor on the other side. Foreigners don’t understand this and appear scared of it.”), with JX 174 at 3 (Pedersen opining that Stevens is “a ‘bigger risk taker’ than BEUMER and probably also bigger than me”).

31 bonding. The Buyer only had to support the Company with its own line.

The Sellers’ argument also depends on the premise that Section 2.5 of the Operating

Agreement obligated the Buyer to support the Acquisition Plan and achieve the results it

projected. Section 2.5 in fact refers to the “Business Plan,” which the Manager was

obligated to update every year. Through that process, the Company shifted its strategy

away from its historical focus on smaller-sized jobs involving exclusively traditional

technology in which the lowest-cost provider won the bid and towards larger jobs involving

both traditional and next-generation components that offered higher profit margins.

The Operating Agreement allowed that shift. Indeed, Stevens convinced the Buyer

to buy the Company by arguing that the Company could help the Buyer secure larger, more

complex jobs. Even the Acquisition Plan had contemplated that the Company would pursue

projects that combined next-generation and traditional technology.122 There was no

mandate to pursue projects involving exclusively traditional systems.

The Sellers contend that the Company’s lack of bonding capacity forced it to turn

down opportunities. There is some evidence that supports their position.123 But the

122 See JX 61, Schedule 4.2(v). 123 See, e.g., JX 270 (Bryan remarks on Cleveland opportunity in 2015: “WHAT??? IS??? GOING??? ON??? How can we not get a bid bond?”); JX 285 at 2 (Pedersen discussing problems arising from lack of American bonding line); see also JX 223 at 2 (Baggett opining that the Company failed to bid multiple projects in 2014 because of “limited bonding capacity,” “schedule conflicts, lack of engineering resources, [and] overall risk assessment from [the Buyer]”); JX 174 at 2 (Buyer officer posing “a basic question: do we have sufficient resources/staffing to go after profitable projects for the [Company’s] ‘core business’ (i.e., Acquisition Business Plan projects) and to support projects that complement/support development of the BEUMER group portfolio (e.g.,

32 evidence does not show that the Buyer failed to support the Company with its bonding

capacity, such as it was. The Buyer sought in good faith to obtain greater bonding capacity

from Buyer Parent,124 and Buyer Parent did provide bonding on multiple occasions,

including for strictly traditional projects. Examples include the traditional projects at John

Wayne and Palm Beach, which collectively had a value of $35 million.125

The Buyer did not breach its contractual obligation to support the Company with its

bonding capacity. The Buyer did not support every bid that some at the Company wanted

to make, but the Buyer had legitimate reasons for doing so.

b. The Efforts Claim Against The Buyer

The recitals to the Operating Agreement contain language in which the parties

described their intent to made the Company a success. Preamble E states:

It is the intention of the Members that, through the Company, the Members will apply their joint skills, expertise, collateral and interests in building a single baggage handling systems operation in the territories of the United States, Mexico and the Bahamas, with the joint aim of becoming a dominant force in baggage handling systems in such territories.126

The Sellers argue that the Buyer failed to contribute its “skills, expertise, collateral and

Denver, SFO, Seattle, …)? Both are critically important.”; Pedersen responding that “[t]he answer to resources is NO”); Pedersen Tr. 1022–23 (explaining that the Company lacked the resources to pursue Palm Beach and Chicago simultaneously). 124 JX 274 (Bryan requesting “a larger, more substantial bonding facility in the US”); JX 56 at 4; see JX 70; JX 133 at 2; see also JX 91; JX 106 (“Now with the [Company’s] bonding capacity increased we are [pursuing] a large amount of work again.”). 125 See JX 348. 126 JX 65 at 2.

33 interests” to the Company. The Sellers effectively seek to convert the recital into an efforts

clause that required the Buyer to strive to achieve the results necessary to trigger the

Contingent Consideration. The Sellers claim that the Buyer breached this obligation by

focusing on projects involving next-generation components, where the Company could not

take a leading role.

“Generally, recitals are not a necessary part of a contract and can only be used to

explain some apparent doubt with respect to the intended meaning of the operative or

granting part of the instrument. If the recitals are inconsistent with the operative or granting

part, the latter controls.”127 Preamble E is a recital. It does not establish a substantive

obligation.

Regardless, the Buyer would not have breached an obligation to devote its “skills,

expertise, collateral and interests” by focusing on large next-generation projects. These

projects had large traditional components. The traditional component in the Denver project,

for example, was larger than any project in the Company’s history. The traditional

component in the San Francisco project more than twice the size of Denver’s. If the

Company had landed either project, then the resulting business could have been sufficient

to trigger all of the Contingent Consideration.128

127 New Castle Cty. v. Crescenzo, 1985 WL 21130, at *3 (Del. Ch. Feb. 11, 1985) (citation omitted); accord Creel v. Ecolab, Inc., 2018 WL 5778130, at *4 (Del. Ch. Oct. 31, 2018); UtiliSave, LLC v. Miele, 2015 WL 5458960, at *7 (Del. Ch. Sept. 17, 2015). 128 See Dalstein Tr. 1080–82 (discussing San Francisco project’s $66 million conventional aspect, with a “gross margin . . . by far higher than all the planned gross margin the acquisition business plan”); Pedersen Tr. 1013 (discussing allocation of $30

34 The Buyer properly devoted its “skills, expertise, collateral and interests” to the

Company by focusing on these projects. The Company eventually achieved success in

Denver and San Francisco, but only after the Earn Out Period. If the timing had worked

out better, the decision to focus on those projects would not have caused a dispute. It is

only with the benefit of hindsight that the Sellers can now attempt to challenge the business

decisions that the Company made. But the fact that those decisions did not pan out does

not mean that the Buyer failed to devote its “skills, expertise, collateral and interests” to

the Company. The evidence shows that it did.

c. Failure To Comply With The Business Plan

Section 5.1.3 of the Operating Agreement provides that “[t]he Manager shall at all

times act within the Business Plan and within the Manager’s limits of authority set forth

[in the Operating Agreement].”129 The Sellers claim that Pedersen failed to cause the

Company to adhere to the Acquisition Plan, resulting in a breach of this provision that led

to the failure to generate the financial results necessary to yield the Contingent

Consideration.

As noted, Section 5.1.3 does not require compliance with the Acquisition Plan. It

million of Denver project’s value to the Buyer); JX 207 (September 2014 memorandum anticipating Q2 2015 start to Denver work with monthly progress payments and an 18% gross margin); see also Collins Tr. 255 (“If the first year had been like the second and third year, we wouldn’t be sitting here right now, I don’t think.”); Dalstein Tr. 1123; Pedersen Tr. 1005–1012 (describing protracted Denver bidding process and the Buyer’s eventual success after it made a joint bid with an electrical company); JX 341 at 24; JX 322. 129 JX 65 § 5.1.3.

35 requires compliance with the Business Plan, which Pedersen updated. The Sellers have not

challenged Pedersen’s compliance with the updated Business Plan. Moreover, under the

Member Authorization Provision, Dalstein had sole authority to authorize departures from

the Business Plan.130 Pedersen consistently sought Dalstein’s consent before he did

anything that even resembled a deviation from the Business Plan. 131 The Sellers have not

pointed to action that Pedersen took that failed to comply with the Business Plan and which

Dalstein failed to authorize.

2. The Implied Covenant

In addition to their arguments that invoke the express language of the Operating

Agreement, the Sellers contend that the Buyer violated the implied covenant of good faith

and fair dealing by failing “to use best efforts to reach an earn out provision.”132 According

to the Sellers, the Buyer breached the implied covenant by instead taking action designed

to frustrate the Sellers’ ability to receive the Contingent Consideration.

Invoking the implied covenant “is a ‘cautious enterprise’ that ‘is best understood as

a way of implying terms in the agreement, whether employed to analyze unanticipated

developments or to fill gaps in the contract’s provisions.’”133 “Delaware’s implied duty of

130 See JX 65 §§ 5.2.3(viii), 5.2.5. 131 See JX 104 at 3; JX 132; JX 146 at 2; JX 314 at 2; see also JX 164. 132 Dkt. 197 at 52. 133 Oxbow Carbon & Minerals Hldgs. v. Crestview-Oxbow Acq., LLC, --- A.3d ---, 2019 WL 237360, at *19 (Del. Jan. 17, 2019) (footnote omitted).

36 good faith and fair dealing is not an equitable remedy for rebalancing economic interests

after events that could have been anticipated, but were not, that later adversely affected one

party to a contract.”134

“[B]ecause the implied covenant is, by definition, implied, and because it protects

the spirit of the agreement rather than the form, it cannot be invoked where the contract

itself expressly covers the subject at issue.”135 “Even where the contract is silent, ‘[a]n

interpreting court cannot use an implied covenant to re-write the agreement between the

parties, and should be most chary about implying a contractual protection when the contract

could easily have been drafted to expressly provide for it.’”136 “Parties have a right to enter

into good and bad contracts, the law enforces both.”137

The Sellers have not identified a gap in the governing documents. The Operating

Agreement grants the Buyer expansive rights over the Company. The Buyer appoints the

Manager, who oversees the business and affairs of the Company and makes the operational

decisions relating to its business.138 Although the members held some consent rights over

operational matters, the Member Authorization Provision gave Dalstein the ability to veto

134 Nemec v. Shrader, 991 A.2d 1120, 1128 (Del. 2010). 135 Fisk Ventures, LLC v. Segal, 2008 WL 1961156, at *10 (Del. Ch. May 7, 2008), aff’d, 984 A.2d 124 (Del. 2009) (TABLE). 136 Oxbow, 2019 WL 237360, at *19 (alteration in original). 137 Nemec, 991 A.2d at 1126. 138 See JX 65 §§ 5.1.2, 5.1.3.

37 or authorize those actions.139 In Section 5.2.2 of the Operating Agreement, the Sellers

retained their ability to vote on extraordinary matters, but the Sellers have not alleged a

violation of that provision.

Given these provisions, there is no gap for the implied covenant to fill. The Manager

had authority under the Operating Agreement to implement the strategy that he considered

best for the Company’s overall success.140 Likewise, Dalstein had authority to authorize or

veto specific operating decisions that he favored or disfavored. “A party does not act in

bad faith by relying on contract provisions for which that party bargained where doing so

simply limits advantages to another party.”141

B. Breach Of Fiduciary Duty

Separate from their contractual theory, the Sellers argue that the defendants

breached their fiduciary duties by engaging in a “bad-faith scheme to raise costs, lower

profitability, divert opportunities, and to employ Company resources to pursue [next-

generation] projects for the primary benefit of the Buyer (and to the detriment of the

Company).”142

139 Id. §§ 5.2.3, 5.2.5. 140 During negotiations, Collins wondered what might happen if the Buyer failed to provide bonding. He suggested that if the failure to bond caused the Company to lose a project, the Sellers should be made whole by an adjustment to the Net Profit calculation. JX 19 at 2. The final transaction documents did not implement Collins’s suggestion. 141 Nemec, 991 A.2d at 1128. 142 Dkt. 197 at 42.

38 The Company was a manager-managed LLC. The Operating Agreement did not

eliminate or modify the principles of equity that impose fiduciary duties on whose who

control an enterprise. Consequently, Pedersen owed fiduciary duties in his capacity as

Manager.143 The Buyer owed fiduciary duties as a controlling member.144 Because Dalstein

had the power to cause the Buyer to act and personally wielded the powers granted by the

Member Authorization Provision, he owed fiduciary duties as well.145

143 See 6 Del C. § 18-1104 (“In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.”); CSH Theatres, LLC v. Nederlander of San Francisco Assocs., 2018 WL 3646817, at *21 (Del. Ch. July 31, 2018); Wenske v. Blue Bell Creameries, Inc., 2018 WL 3337531, at *1 n.3 (Del. Ch. July 6, 2018); Ross Hldg. & Mgmt. Co. v. Advance Realty Gp., LLC, 2014 WL 4374261, at *12 (Del. Ch. Sept. 4, 2014); Feeley v. NHAOCG, LLC, 62 A.3d 649, 660–63 (Del. Ch. 2012). See generally CSH Theatres, LLC v. Nederlander of San Francisco Assocs., 2015 WL 1839684, at *11 & n.54 (Del. Ch. Apr. 21, 2015). 144 See CMS Inv. Hldgs. v. Castle, 2015 WL 3894021, at *18 (Del. Ch. June 23, 2015); Feeley, 62 A.3d at 662 (“Managers and managing members owe default fiduciary duties; passive members do not.”); Kelly v. Blum, 2010 WL 629850, at *1 (Del. Ch. Feb. 24, 2010) (“[E]ven though contracting parties to an LLC agreement have the freedom to expand, restrict, or eliminate fiduciary duties owed by managers to the LLC and its members and by members to each other, in the absence of a provision explicitly altering such duties, an LLC’s managers and controlling members in a manager-managed LLC owe the traditional fiduciary duties that directors and controlling shareholders in a corporation would.”); see also 2009 Caiola Family Tr. v. PWA, LLC, 2015 WL 6007596, at *26 (Del. Ch. Oct. 14, 2015). 145 See Renco Gp., Inc. v. MacAndrews AMG Hldgs., 2015 WL 394011, at *7 (Del. Ch. Jan. 29, 2015); Feeley, 62 A.3d at 670–72 (explaining that the “human controllers of an entity fiduciary” owe at least a duty of loyalty to a managed entity with respect to transactions involving its property); In re USACafes, L.P. Litig., 600 A.2d 43, 48 (Del. Ch. 1991) (Allen, C.) (“[O]ne who controls property of another may not, without implied or express agreement, intentionally use that property in a way that benefits the holder of the

39 When determining whether a fiduciary has breached its duties, Delaware law

distinguishes between the standard of conduct and the standard of review.146 The standard

of conduct describes what the fiduciary is expected to do and is defined by the content of

the duties of loyalty and care. The standard of review is the test that a court applies when

evaluating whether a fiduciary has met the standard of conduct.147

In terms of the standard of conduct, the duty of loyalty requires that fiduciaries act

in the best interests of their beneficiaries.148 To satisfy the standard of conduct, fiduciaries

must act in good faith, meaning they must subjectively believe that they are advancing the

control to the detriment of the property or its beneficial owner.”); see also 2009 Caiola Family Tr. v. PWA, LLC, 2014 WL 7232276, at *9 n.57 (Del. Ch. Dec. 18, 2014). 146 See Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014); William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and Its Progeny as a Standard of Review Problem, 96 Nw. U.L. Rev. 449, 451–52 (2002); William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Function Over Form: A Reassessment of the Standards of Review in Delaware Corporation Law, 56 Bus. Law. 1287, 1295–99 (2001); see also E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance from 1992–2004? A Retrospective on Some Key Developments, 153 U. Pa. L. Rev. 1399, 1416–25 (2005) (distinguishing between the standards of fiduciary conduct and standards of review). See generally Julian Velasco, The Role of Aspiration in Corporate Fiduciary Duties, 54 Wm. & Mary L. Rev. 519, 553–58 (2012); Melvin Aron Eisenberg, The Divergence of Standards of Conduct and Standards of Review in Corporate Law, 62 Fordham L. Rev. 437, 461–67 (1993). 147 In re Trados Inc. S’holder Litig., 73 A.3d 17, 35–36 (Del. Ch. 2013). 148 See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (“[T]he duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally.”).

40 interests of their beneficiaries.149 And fiduciaries must in fact pursue the interests of their

beneficiaries, rather than succumbing to conflicting or divergent interests. Fiduciaries who

make decisions based on their private interests violate the standard of conduct.150

Fiduciaries also must make decisions prudently and carefully, in compliance with the duty

of care.

By default, a Delaware LLC exists perpetually—from formation until

cancellation.151 Consequently, unless their fiduciary duties are eliminated or modified, the

fiduciaries who control a Delaware LLC must strive to maximize the value of the LLC over

a long-term horizon, as warranted for an entity with a presumptively perpetual life. This

duty is not the same thing as acting to ensure the LLC’s perpetual existence. A fiduciary

149 See Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006) (“A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation . . . .”) (quoting In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006)); Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1051 n.2 (Del. Ch. 1996) (Allen, C.) (defining a “bad faith” transaction as one “that is authorized for some purpose other than a genuine attempt to advance corporate welfare or is known to constitute a violation of applicable positive law”); In re RJR Nabisco, Inc. S’holders Litig., 1989 WL 7036, at *15 (Del. Ch. Jan. 31, 1989) (Allen, C.) (explaining that the business judgment rule would not protect “a fiduciary who could be shown to have caused a transaction to be effectuated (even one in which he had no financial interest) for a reason unrelated to a pursuit of the corporation’s best interests”). 150 Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). 151 6 Del. C. § 18-201(b).

41 might readily determine that a near-term sale or other shorter-horizon initiative is value-

maximizing even when judged over the long term.152

The fiduciary principle does not require that fiduciaries maximize the value of a

beneficiary’s contractual claim against the firm. A holder of a contract claims must rely on

its contractual rights. When making a decision, fiduciaries can and should consider its

implications for contractual claimants and evaluate what actions those claimants may take

in response. Based on this analysis, fiduciaries may decide not to pursue a particular course

of action because of the resulting implications for the firm and its residual claimants.153

But fiduciaries do not owe duties to contractual claimants.154 To the contrary, a fiduciary

152 See Prod. Res. Gp., L.L.C. v. NCT Gp., Inc., 863 A.2d 772, 791 n.60 (Del. Ch. 2004) (Strine, V.C.) (explaining that sometimes fiduciaries must take action in a context where preserving the firm as an independent entity would not be value-maximizing). 153 See, e.g., Orban v. Field, 1997 WL 153831, at *9 (Del. Ch. Apr. 1, 1997) (Allen, C.) (“Certainly in some circumstances a board may elect (subject to the corporation’s answering in contract damages) to repudiate a contractual obligation where to do so provides a net benefit to the corporation.”). See generally Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *23–24 (Del. Ch. Apr. 14, 2017), as corrected (Apr. 24, 2017). 154 See, e.g., Simons v. Cogan, 549 A.2d 300, 303 (Del. 1988) (“[A] convertible debenture represents a contractual entitlement to the repayment of a debt and does not represent an equitable interest in the issuing corporation necessary for the imposition of a trust relationship with concomitant fiduciary duties.”); Wolfensohn v. Madison Fund, Inc., 253 A.2d 72, 75 (Del. 1969) (holding that former preferred stockholders who received debentures and a share of common stock were not owed fiduciary duties in their capacity as debenture holders and had only their contractual rights as creditors); Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2010 WL 2173838, at *7 (Del. Ch. May 28, 2010) (“[R]ights arising from documents governing a preferred class of stock, such as the Certificates, that are enjoyed solely by the preferred class, do not give rise to fiduciary duties because such rights are purely contractual in nature.”); MCG Capital Corp. v. Maginn, 2010 WL

42 violates the standard of conduct if the fiduciary seeks to maximize the value of a contractual

claim at the expense of the fiduciary’s beneficiaries.155

In this case, the Company’s fiduciaries had a duty to act in good faith to maximize

the value of the Company over the long term. The Company’s fiduciaries did not have a

duty to maximize the value of the contract claim to the Contingent Consideration. The

Sellers’ argument that the Company’s fiduciaries had a duty to maximize the value of the

Contingent Consideration fails for want of a valid premise. In their capacity as holders of

a contractual claim to the Contingent Consideration, the Sellers had to rely on their contract

rights. They were not entitled to fiduciary protection.

Although this straightforward version of the Sellers’ claim fails as a matter of law,

a subtler version requires further analysis. The structure of the Contingent Consideration

1782271, at *15 (Del. Ch. May 5, 2010) (“[D]irectors do not owe preferred shareholders any fiduciary duties with respect to [their contractual] rights.”). 155 See Revlon, Inc. v. MacAndrews & Forbes Hldgs., 506 A.2d 173, 182 (Del. 1986) (“[T]he Revlon board could not make the requisite showing of [fiduciary] good faith by preferring the noteholders and ignoring its duty of loyalty to the shareholders. The rights of the former already were fixed by contract.”); Blackmore P’rs v. Link Energy LLC, 864 A.2d 80, 85–86 (Del. Ch. 2004) (“[T]he allegation that the Defendant Directors approved a sale of substantially all of [the company’s] assets and a resultant distribution of proceeds that went exclusively to the company’s creditors raises a reasonable inference of disloyalty or intentional misconduct. Of course, it is also possible to infer (and the record at a later stage may well show) that the Director Defendants made a good faith judgment, after reasonable investigation, that there was no future for the business and no better alternative . . . . [I]t would appear that no transaction could have been worse for the unit holders and reasonable to infer . . . that a properly motivated board of directors would not have agreed to a proposal that wiped out the value of the common equity and surrendered all of that value to the company’s creditors.”).

43 caused the Buyer’s incentives to diverge from the interests of the Company. The Buyer

was obligated to pay the Earn Out and the consideration for the Put Option. Although the

Profit Distribution nominally came from the Company, it was part of the package of

consideration paid to eliminate the Sellers from the Company. These payment obligations

created a conflict of interest for the Buyer as a fiduciary, because by depressing the

Company’s performance during the Earn Out Period, the Buyer could minimize the

Contingent Consideration and benefit itself. Dalstein was a fiduciary for the Buyer, so he

shared the conflict. Because Pedersen managed a firm controlled by the Buyer and could

be removed by the Buyer at will, he was beholden to the Buyer, and the conflict affected

him as well.

The resulting conflict did not arise because the defendant fiduciaries owed duties to

the Sellers. The defendant fiduciaries owed duties to the Company and all of its equity

holders. But when making decisions about how to maximize the value of the Company for

the benefit of all of its equity holders, the defendant fiduciaries faced a conflict because of

the Buyer’s competing contractual obligations.

To determine whether fiduciaries have breached their duties, a court applying

Delaware law deploys a standard of review. Delaware’s default standard of review is the

business judgment rule.156 But when the firm’s fiduciaries face a conflict of interest that

undermines their ability to make disinterested and independent decisions, the applicable

156 Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).

44 standard of review is the entire fairness test. When entire fairness governs, the fiduciaries

must establish “to the court’s satisfaction” that their actions were “the product of both fair

dealing and fair price.”157 An honest belief that the action was fair is necessary but not

sufficient. The course of action “must be objectively fair, independent of the [fiduciaries’]

beliefs.”158

Consistent with the fiduciary principle, the entire fairness standard measures the

course of action by its success in promoting the value of the firm. The question in this case

is whether the Buyer, Dalstein, and Pedersen acted to maximize the value of the firm over

the long run. They did not have a duty to maximize the Contingent Consideration, nor did

they have a duty to maximize the returns to the Sellers. They had a duty to maximize the

long-term value of the firm.

The Sellers contend that the Buyer, Dalstein, and Pedersen breached their fiduciary

duty to maximize the long-term value of the firm by “disloyally engaging in a scheme to

depress revenues, increase expenses and divert business opportunities for their own

benefit.”159 The defendants proved that they acted fairly. They subjectively believed that

they were promoting the long-term value of the firm, and they proved at trial that their

actions had that effect.

157 Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995). 158 Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del. Ch. 2006). 159 Dkt. 197 at 2.

45 The Sellers contend that the Buyer, Dalstein, and Pedersen focused the Company

on large-scale projects to ensure that the Company would not achieve the results necessary

to trigger the Contingent Consideration. The evidence showed that the Buyer, Dalstein, and

Pedersen focused the Company on large-scale projects because it was a sound business

strategy. These projects offered higher profit margins and the potential to mitigate liability

risk by negotiating terms and conditions. The Company also faced less competition and

could compete across dimensions other than lowest price. These projects included large

traditional components. The defendants convinced me that focusing on these projects

would maximize the value of the Company over the long run.

The Sellers also argue that the Buyer diverted opportunities from the Company by

making it a subcontractor for certain projects, instead of placing the Company in the more

lucrative general contractor role. Their sole example is Denver, where Collins conceded

that the Company “would not near have qualified to be the main contract.”160 Because next-

generation technology anchored the Denver project, the Company could not act as the

general contractor. It is true that for a brief period, the Buyer and Dalstein considered hiring

one of the Company’s competitors as a subcontractor for the Denver job, and Dalstein

joked that he would “fill out the divestment form for [the Company].”161 They evaluated

this option because Buyer Parent wanted the Buyer to pick the subcontractor that was best

160 Collins Tr. 253. 161 JX 231 at 2.

46 for the Buyer’s bottom line, even if that meant using a competitor.162 If Dalstein had

followed through, that likely would have resulted in a breach, but the issue became moot

when the Buyer subcontracted the work to the Company.

The Sellers contend that Pedersen breached his duties by causing the Company to

incur costs for integration. In particular, they object to $700,000 for training the Company’s

employees in next-generation technology. The Business Plan contemplated these costs. As

fiduciaries, the Buyer, Dalstein, and Pedersen were not obligated to maintain the

Company’s historical business practices during the Earn Out Period; they were obligated

to take steps to maximize the long-term value of the firm. Engaging in employee training

promoted long-term value, as did the broader efforts to integrate the Company’s business

with the Buyer’s.163

The Buyer, Dalstein, and Pedersen proved that they acted at all times to promote the

long-term value of the Company. Although their course of conduct did not maximize the

value of the Contingent Consideration, they had no fiduciary obligation to protect the value

of a contractual claim. The Buyer, Dalstein, and Pedersen proved that for purposes of

fiduciary duty analysis, their conduct was entirely fair.

162 See Dalstein Tr. 1091–1101. 163 See JX 117 at 11, 17, 33, 40–41.

47 C. The Claims Addressed On Summary Judgment

In addition to their principal claims for the Contingent Consideration, the Sellers

sought at trial to address three other breaches of contract: (i) the Buyer’s unauthorized loans

to the Company, (ii) the Buyer’s failure to prepare draft audited financial statements, and

(iii) the Buyer’s failure to pay amounts equal to the Company’s bank balance at specified

dates. In each case, the Sellers previously moved for summary judgment, and the Summary

Judgment Order ruled in favor of the Sellers on the issue of breach. The questions

remaining for trial included the Buyer’s affirmative defenses (principally waiver and

acquiescence) and the quantum of damages. In post-trial briefing, the Buyer recast its

affirmative defenses as reasons why the Sellers failed to prove damages, so this decision

focuses on that issue.

1. Unauthorized Loans

The Summary Judgment Order ruled that the Buyer breached the Operating

Agreement by making loans to the Company without Seller Parent’s consent. Section 2.2

of the Operating Agreement states:

Additional capital contributions to the Company (each, an “Additional Capital Contribution”) shall be made only by [the Buyer]. [Seller Parent] shall not be required to make additional capital contributions to the Company. If the Manager determines that the Company needs additional funding and obtains the prior written consent of both Members thereto, then such funds shall be provided by [the Buyer] either (as [the Buyer] and the Company may agree) (i) in the form of an Additional Capital Contribution to be reflected by an increase in the Capital Account of [the Buyer], or (ii) as a loan documented by a note (for which the Company shall execute a separate

48 security agreement, the form of which shall be approved by the Members).164

In February 2014, the Buyer began making informal loans to the Company. 165 No one

formally notified the Sellers or sought the members’ consent, but Stevens discovered the

loans in May 2014. The loans continued for years, totaling over $5.7 million by the end of

the Earn Out Period.166

To recover damages, Sellers had to prove at trial that they suffered actual harm from

the breach. The Sellers did not try to meet this burden. Instead, they argued that they could

have extracted management concessions in return for their consent.167

The evidence did not support this assertion. Stevens identified the loans in May

2014, but he did not ask the Buyer to stop.168 By September 2014, Stevens knew that the

Buyer had loaned the Company roughly $2.5 million. He still did not ask the Buyer to

stop.169 Stevens “knew [the Company] needed the cash because [they were] burning it

164 JX 65 § 2.2. 165 JX 338 (chart of loans). 166 Id. By January 2015, the cumulative principal on the loans was $3,785,000. Under an agreement dated January 1, 2015, the Company formalized a $6 million credit facility with the Buyer. JX 253; Bryan Tr. 661–62. The 5% interest rate was consistent with the Acquisition Agreement’s requirement that “any cash injection made as a loan to the Company made by either [of the members] will bear interest at the rate of five percent per annum.” JX 61 § 3.1.6. Seller Parent did not approve the loan agreement either. 167 See Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2013 WL 6327997 (Del. Ch. Dec. 4, 2013) (Strine, C.) (using hypothetical negotiation to measure damages). 168 Stevens Tr. 190–91. 169 Id. at 192; see Bryan Tr. 646–48.

49 fast.”170 If the Buyer had not made the loans, the Company “would have ground to a

halt.”171 Stevens testified that he finally objected to the loans at the November 2014

Advisory Board meeting—the same meeting where Stevens learned that the Earn Out was

unlikely to be paid.172 Stevens does not appear to have objected again after November 2014.

Stevens’s conduct undermines the Sellers’ assertion that if they had known about

the loans, they could have extracted concessions. Stevens knew about the loans, and he did

not attempt to extract concessions. He understood that the loans benefitted the Company

by keeping it afloat.

“Even if compensatory damages cannot be or have not been demonstrated, the

breach of a contractual obligation often warrants an award of nominal damages.”173

“Nominal damages are not given as an equivalent for the wrong, but rather merely in

recognition of a technical injury and by way of declaring the rights of the plaintiff.”174 They

“are usually assessed in a trivial amount, selected simply for the purpose of declaring an

170 Stevens Tr. 196. 171 Id. at 199; see id. at 200 (confirming that “payroll would not have been met and the rent [at the Company’s office] would not have been paid”); Bryan Tr. 649 (“Do you know what would have happened to the [Company] if the loans were not made? A. It would not have been able to pay the current payables or payrolls or other financial obligations as they arose? Q. What does that lead to? A. Failure. Bankruptcy.”); Pedersen Dep. 168–69. 172 Stevens Tr. 197. 173 Ivize of Milwaukee, LLC v. Compex Litig. Support, LLC, 2009 WL 1111179, at *12 (Del. Ch. Apr. 27, 2009). 174 Id. (internal quotation marks omitted).

50 infraction of the Plaintiff’s rights and the commission of a wrong.”175 This decision awards

one dollar to Seller Parent as nominal damages for the Buyer’s breach of Section 2.2.

2. Draft Annual Financials

The Summary Judgment Order ruled that the Buyer breached the Operating

Agreement because the Company’s accountants failed to provide Seller Parent with “Draft

Annual Financials,” a term defined in the Operating Agreement. Section 11.1(b) of the

Operating Agreement states:

As soon as practicable, but in any event within ninety (90) calendar days following March 31st of any applicable calendar year, an independent accounting firm appointed by [the Buyer] and approved by [Seller Parent], which approval shall not be unreasonably withheld (the “Independent Accountants”) shall prepare and deliver to the Company and the Members a copy of draft audited balance sheets and related statements of income and retained earnings and cash flows of the Company for fiscal year of the Company then ended (“Draft Annual Financials”). Each of the Members shall have forty-five (45) calendar days following receipt of such Draft Annual Financials to provide written notice to the other Members and the Company of its acceptance of, or disagreement with, the Draft Annual Financials, setting forth in reasonable detail the basis for such disagreement, if any.176

Seller Parent never received any Draft Annual Financials.177 The Company’s accountants

instead created final financial statements without Seller Parent’s input, and Seller Parent

175 Penn Mart Supermarkets, Inc. v. New Castle Shopping LLC, 2005 WL 3502054, at *15 (Del. Ch. Dec. 15, 2005). 176 JX 65 § 11.1(b). 177 Glidepath Ltd. v. Beumer Corp., 2018 WL 321788, at *1–3 (Del. Ch. Jan. 5, 2018) (ORDER).

51 received final statements for the years 2014, 2015, and 2016.178

As with the unauthorized loans, the Sellers do not argue that the failure to provide

Draft Annual Financials resulted in actual, compensatory damages. They instead argue that

if the Company had complied with the Operating Agreement, then Seller Parent could have

withheld its approval of the Draft Annual Financials unless the Company followed the

Acquisition Plan.

As with the unauthorized loans, the Sellers’ conduct shows that they did not care

about the lack of Draft Financial Statements. James Webber, an accountant who sat on

Seller Parent’s advisory board, testified that Seller Parent received “monthly board profit

and loss accounts, and there would be no cause for [Seller Parent] to ask for draft audited

financial statements. [Seller Parent] would have known the picture.”179 There also is no

reason to think that the Sellers would have gained any leverage through Seller Parent’s

approval right. The Sellers bore the burden of proof on this point, but they tried to sidestep

the issue by arguing that “doubts about the extent of damages are generally resolved against

the breaching party.”180 That is a correct statement of law, but a plaintiff still must “prove

the fact of damages with reasonable certainty.”181 The Sellers did not prove that they could

178 Webber Dep. 70. 179 Id.; accord id. at 71 (“[W]e didn’t ask for draft financials. And we didn’t discuss it.”). 180 SIGA Techs., Inc. v. PharmAthene, Inc., 132 A.3d 1108, 1131 (Del. 2015).

Id. at 1111; see Fletcher, 2013 WL 6327997, at *17 (“To prevail in a claim for 181

damages for breach of contract, a plaintiff ‘must show both the existence of damages

52 have extracted any business concessions by objecting to the Draft Annual Financials.

The Sellers take the view that if the court resolves doubts about the extent of

damages against the Buyer, then they should receive as damages the full amount of the

Contingent Consideration. There is no causal connection between the failure to provide

Draft Annual Financial Statements and the underperformance of the Company’s business.

Instead, a larger causation problem looms: In November 2015, Stevens conceded that it

was “an impossible mission” to achieve the Earn Out in three years.182 In hindsight, he

would have sought a five-year Earn Out Period.183 The evidence showed that Stevens

accurately diagnosed the problem. The Company achieved success at Denver and San

Francisco after the Earn Out Period. If the period had been longer, then the Sellers might

have received the Contingent Consideration.

In support of their contention that the Sellers would have received the Contingent

provable to a reasonable certainty, and that these damages flowed from defendant’s violation of the contract.’ In other words, a plaintiff ‘must show that the injuries suffered are not speculative or uncertain and that the Court may make a reasonable estimate as to an amount of damages.’” (footnote omitted)). 182 JX 316 at 2. 183 Id. There is some evidence that the parties discussed a five-year earn-out period when they negotiated the transaction. The parties modeled the transaction documents on Buyer Parent’s acquisition of a Belgian company. That deal involved a five-year earn out. Hufnagel Dep. 96–97; Hufnagel Tr. 805–06. Hufnagel testified that he offered a five-year earn-out but that Stevens insisted on three years. Hufnagel Tr. 764, 805–08, 848–49; see also JX 316 at 2 (Stevens referring to the “wisdom in [his] flippant 5 year earn-out”). Stevens denied receiving a five-year proposal from Hufnagel, and there is no contemporaneous documentary evidence regarding a five-year proposal. See Stevens Tr. 117–18.

53 Consideration if the Company had continued to focus on pure-play traditional projects, the

Sellers relied on an expert witness who opined that the Company would have earned an

additional $47.2 million in revenue during the Earn Out Period if it had bid on ten more

projects.184 The expert assumed a 25% win rate with an average contract value of $18.9

million.185 The assumed contract value was more than 50% higher than the typical

maximum value the Company historically had obtained ($12 million). Moreover, as the

Sellers’ witnesses conceded at trial, the Company did not have the resources to bid on or

complete another ten projects.186 To handle the hypothetical projects, the Company would

have been forced to reallocate resources from the work it actually won, sacrificing its real-

world projects.187 The Sellers did not make a persuasive case that the Company could have

184 JX 342 at 15. For context, the Company’s 2014 revenue was $13,863,869. JX 252 at 16. In 2014, the Company took on $45,934,631 in new contracts, purchase orders, and approved change orders. After adjusting for the 2014 revenue, the Company’s backlog at the end of 2014 was $37,825,923. “Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted projects in progress . . . and from contractual agreements on which work has not begun.” Id. By contrast, at the end of 2013, the backlog was only $4,317,646. Given the gap between what the Buyer bought and what it achieved, it is a stretch to think a different strategy would have radically improved results. 185 JX 342 at 15. 186 Stevens Tr. 149–51; Graviet Tr. 288. 187 See JX 346 at 22–24; Cowhey Tr. 455–57, 462; see also Stevens Tr. 168 (“Q. Please tell the Court how the [Company] could have performed both in Chicago and West Palm Beach on an overlapping schedule. A. I can’t because Chicago wasn’t contemplated on the acquisition business plan.”). The Company’s resource limitations were not confined to bonding; they included problems with personnel, logistics, and engineering. See JX 7 at 5; JX 106; JX 114 at 2; see also JX 2 at 2–3; JX 297 at 2.

54 achieved the results necessary to trigger the Contingent Consideration by following a

different strategy.

Finally, the Sellers make the technical point that because they did not receive the

Draft Annual Financials, it is impossible to determine Net Profit for purposes of calculating

the Contingent Consideration, because the relevant formulas in the transaction documents

use defined terms based on the financial statements. Thus, Section 3.2.2 of the Acquisition

Agreement provides that the “Net Profit shall be calculated on the basis of the respective

Final Audited Annual Accounts for the respective fiscal year.”188 Under Section 11.1(b) of

the Operating Agreement, the Final Audited Annual Accounts are the Draft Annual

Financials once Seller Parent has the opportunity to review them and resolve any objections

through a dispute resolution process.189 The Sellers argue that without Draft Annual

Financials, there cannot be Final Audited Annual Accounts, and hence there can be no

calculation of the Net Profit.

As a strictly logical matter, this reasoning is correct, which is why the Summary

Judgment Order ruled in favor of the Sellers on their claim of breach. But it does not follow

that any actual damages resulted from the failure to prepare the Draft Financial Statements.

It remained possible to calculate the Net Profit based on the Company’s books and records,

and the parties litigated over whether the Company could have generated sufficient Net

188 JX 61 § 3.2.2. 189 JX 65 §§ 11.1(b), 12.13.

55 Profit to trigger the Contingent Consideration. As with the unapproved loans, the Sellers

proved a breach of contract without proving compensable damages. They are again entitled

to nominal damages of one dollar.

3. The Bank Balances

The Summary Judgment Order held that the Buyer failed to pay Seller Parent a

component of the purchase price based on the Company’s bank balance at specified dates.

Section 3.1.3 of the Acquisition Payment required the Buyer to pay Seller Parent

“$500,000, provided that [the Company’s] bank balance is $500,000 or greater on March

31, 2014, and further provided that at the request of [the Buyer] (based on [the Buyer’s]

cash position) that payment may be delayed until 30 June.”190 Section 3.1.4 of the

Acquisition Agreement required

a further payment in the amount equal to the Company’s bank balance at June 30, 2014, not to exceed $1,000,000, less any payment made pursuant to Section 3.1.3, and further provided that such payment may be delayed until the earliest date (a) the Purchaser has resolved its legal issue in Canada, or (b) September 30, 2014.191

As of June 30, 2014, the Company’s bank balance was $377,282.57, but the Buyer failed

to pay Seller Parent this amount.192 Seller Parent remains entitled to this amount as part of

its damages award.

Seller Parent is also entitled to pre-judgment interest. In Delaware, pre-judgment

190 JX 61 § 3.1.3. 191 Id. § 3.1.4. 192 Glidepath, 2018 WL 321788, at *4–5.

56 interest is awarded as a matter of right.193 Subject to the court’s discretion, a party may also

receive post-judgment interest until the date of payment.194 Unless the parties have

specified another rate by contract or the court determines that a different rate is warranted

by the equities, the statutory rate serves as a guide.195 Because the parties have not specified

a different rate, this decision award pre- and post-judgment interest at the legal rate, which

will fluctuate with changes in the underlying reference rate.196

The parties dispute whether the interest award should be simple or compound.

“[C]ompanies neither borrow nor lend at simple interest rates.”197 The court has discretion

to award compound interest, which is warranted here.198 The court also has discretion to

193 Brandywine Smyrna, Inc. v. Millennium Builders, LLC, 34 A.3d 482, 485–87 (Del. 2011). 194 See Beard Research, Inc. v. Kates, 8 A.3d 573, 620–21 (Del. Ch. 2010). 195 See 6 Del. C. § 2301(a) (establishing legal rate); Summa Corp. v. Trans World Airlines, Inc., 540 A.2d 403, 409 (Del. 1988) (“While the legal rate of interest has historically been the benchmark for pre-judgment interest, a court of equity has broad discretion, subject to principles of fairness, in fixing the rate to be applied. In the Court of Chancery the legal rate is a mere guide, not an inflexible rule.” (citations omitted)). 196 See Levey v. Brownstone Asset Mgmt., LP, 2014 WL 4290192, at *1 (Del. Ch. Aug. 29, 2014) (explaining rationale for fluctuating rate). 197 Henke v. Trilithic Inc., 2005 WL 2899677, at *13 (Del. Ch. Oct. 28, 2005). 198 See Brandin v. Gottlieb, 2000 WL 1005954, at *28–30 (Del. Ch. July 13, 2000) (Strine, V.C.) (explaining rationale for awarding compound interest instead of simple interest); accord ONTI, Inc. v. Integra Bank, 751 A.2d 904, 929 (Del. Ch. 1999); see also Smith v. Nu-West Indus., 2001 WL 50206, at *1 (Del. Ch. Jan. 12, 2001) (following Brandin). But see Branin v. Stein Roe Inv. Counsel, LLC, 2015 WL 4710321, at *8 (Del. Ch. July 31, 2015) (adhering to precedent construing 6 Del. C. § 2301 as permitting only simple interest).

57 select a compounding interval, which in this case will be quarterly. 199

In a breach of contract case, interest runs from the date “when the effects of the

breach would have first manifested themselves.”200 For purposes of calculating pre-

judgment interest on the $377,282.57 judgment, the applicable date is September 30, 2014.

D. The Exclusive Territory Provision

Finally, the Sellers contend that the Buyer breached a non-competition provision in

the Operating Agreement by doing business in Canada. The Operating Agreement

contained a non-competition provision, but it applied to the Sellers, not the Buyer.

Section 12.20.2 of the Operating Agreement states:

[Seller Parent] and Sir Stevens acknowledges and agrees [sic] that . . . the Company may and/or will engage in the business of designing, manufacturing and selling airport baggage handling system solutions (the “Exclusive Business”) throughout the United States, the Bahamas and Mexico (the “Exclusive Territory”) and that engagement by [Seller Parent], Sir Stevens or any of their respective Affiliates in the Exclusive Business or provision of products or services competitive with the Exclusive Business by any of them anywhere in the Exclusive Territory other than through the Company could cause irreparable damage to the Company and each of them. For so long as [Seller Parent] and Sir Stevens are parties to this Agreement and for a time period of two (2) calendar years thereafter (provided, that the obligations hereunder of the parties shall be extended by adding to such term

199 See Taylor v. Am. Specialty Retailing Gp., Inc., 2003 WL 21753752, at *13 (Del. Ch. July 25, 2003) (applying quarterly compounding interval when awarding interest based on the legal rate “due to the fact that the legal rate of interest most nearly resembles a return on a bond, which typically compounds quarterly”); accord One Va. Ave. Condo. Ass’n of Owners v. Reed, 2005 WL 1924195, at *15 (Del. Ch. Aug. 8, 2005). But see Charles K. Korsmo & Minor Myers, Interest in Appraisal, 42 J. Corp. L. 109, 129–30 (2016) (questioning validity of comparison between legal rate and bonds). 200 BTG Int’l Inc. v. Wellstat Therapeutics Corp., 188 A.3d 824, 2018 WL 2966941, at *1 (Del. June 11, 2018) (TABLE).

58 the length of time, if any, during which any of them and/or their respective Affiliates shall be or remain in violation of their obligations under this Section 12.20 as finally determined by a court of competent jurisdiction), neither [Seller Parent] (whether directly or through an Affiliate), Sir Stevens, nor any of their respective Affiliates shall, without the prior written consent of a Majority in Interest of the Members, (i) engage anywhere within the Exclusive Territory, directly or indirectly, alone or as a stockholder (other than as a holder of less than 5% of the capital stock of any publicly-traded corporation), partner, officer, director, employee, consultant, independent contractor, agent or otherwise in or with any business organization other than the Company that is engaged in or becomes engaged in the Exclusive Business or otherwise competes with the Company in the Exclusive Business, (ii) solicit, divert, or in any way attempt to solicit, or divert, to any potential, current, past or prospective competitor of the Company in the Exclusive Business any customer of the Company or any of its affiliates that is located within the Exclusive territory, or (iii) solicit or encourage any officer, employee or consultant of the Company with substantial responsibilities for the Exclusive Business of the Company to leave their employ for employment by or with any of them or any of their respective Affiliate(s) or any competitor of the Company.201

The Acquisition Agreement contains a similar provision.202 These provisions

prohibited the Sellers from competing in the Exclusive Territory, defined as the United

States, the Bahamas, and Mexico. The Exclusive Territory restrictions did not apply to the

defendants. At most, the transaction documents suggest that the Company would operate

chiefly in the Exclusive Territory, but they did not prevent the Company or the Buyer from

operating in other regions.

201 JX 65 § 12.20.2 (emphasis added). 202 JX 61 § 7.4.1.

59 III. CONCLUSION

The Buyer is liable to Seller Parent for damages of $377,284.57, with pre- and post-

judgment interest compounded quarterly. As part of a final order, judgment will be entered

in favor of Seller Parent and against the Buyer in this amount, and otherwise against the

plaintiffs and in favor of the defendants. Within ten business days, the parties shall submit

a joint letter identifying any other issues that need to be resolved to bring this matter to a

close at the trial level.