Shareholder Representative Services LLC v. HPI Holdings, LLC

CourtCourt of Chancery of Delaware
DecidedApril 26, 2023
DocketC.A. No. 2022-0166-PAF
StatusPublished

This text of Shareholder Representative Services LLC v. HPI Holdings, LLC (Shareholder Representative Services LLC v. HPI Holdings, LLC) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Shareholder Representative Services LLC v. HPI Holdings, LLC, (Del. Ct. App. 2023).

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

SHAREHOLDER ) REPRESENTATIVE SERVICES LLC, ) solely in its capacity as Representative ) of the former stockholders of ) ADVANTAGE HEALTHCARE ) HOLDINGS, INC., ) ) Plaintiff, ) v. ) C.A. No. 2022-0166-PAF ) HPI HOLDINGS, LLC, ) ) Defendant. )

MEMORANDUM OPINION

Date Submitted: January 9, 2023 Date Decided: April 26, 2023

Richard L. Renck, Michael B. Gonen, DUANE MORRIS, LLP, Wilmington, Delaware; Michael P. Gallagher, DUANE MORRIS, LLP, Philadelphia, Pennsylvania; Attorneys for Plaintiff Shareholder Representative Services LLC.

Lisa A. Schmidt, Matthew W. Murphy, Nicole M. Henry, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; David P. Whittlesey, Jacob Fields, SHEARMAN & STERLING LLP, Austin, Texas; Attorneys for Defendant HPI Holdings, LLC.

FIORAVANTI, Vice Chancellor This is a breach of contract case involving a dispute over whether the

purchaser of a business must make post-closing payments to the selling stockholders.

This opinion addresses one aspect of the dispute—whether the selling stockholders

are entitled to a $6 million earn-out payment. That payment is conditioned upon the

surviving company entering into an agreement to make up for the potential loss of

one of its major customers. The surviving company entered into an agreement that

maintained the relationship with that customer. Thereafter, the selling stockholders

demanded payment of the earn-out. The buyer refused, contending that the

agreement did not meet the specific criteria necessary to trigger the earn-out

payment. Plaintiff, representing the former stockholders of the seller, has alleged

that the buyer’s refusal to pay the earn-out is a breach of the purchase agreement.

The buyer has moved to dismiss that claim. Applying well-established canons of

contract construction, the court concludes that the language of the earn-out provision

is not ambiguous and that the buyer’s motion must be granted. I. BACKGROUND Unless otherwise specified, the facts recited in this Memorandum Opinion are

drawn from the Verified Amended Complaint (the “Complaint”) and documents

integral thereto. 1

A. The Parties On September 30, 2021, HPI Holdings, LLC (“HPI” or “Defendant”) entered

into a merger agreement (the “Merger Agreement”)2 to acquire AdvantEdge

Healthcare Holdings, Inc. (the “Company”), a Delaware corporation engaged in the

medical billing business. The Company was the surviving entity in a merger with a

wholly owned subsidiary of HPI. Among the Company’s operating subsidiaries is

AdvantEdge Healthcare Solutions, Inc. (“AHS”). 3 Plaintiff, Shareholder

Representative Services LLC (“Plaintiff”), is a party to the Merger Agreement and

is the representative of the former stockholders of the Company, each of whom sold

their shares of the Company to HPI in the transaction. 4

1 Dkt. 15 (“Compl.”). The Complaint incorporates by reference exhibits attached to the first-filed complaint. Dkt. 1. These exhibits will be cited as “Ex.” References to the parties’ briefs refer to the briefs filed in support of or opposition to the motion to dismiss the Complaint. See Dkts. 23, 27, 30. 2 Ex. A (“Merger Agreement”). 3 The Complaint alleges that the Company did business as AdvantEdge Healthcare Solutions or “AHS.” Compl. at 1. 4 Merger Agreement § 10.1.

2 During the merger negotiations, one of AHS’s customers, Brevard Physician

Associates (“BPA”), notified AHS that BPA intended to terminate its “Service

Agreement” with AHS. 5 The Service Agreement contained a provision that

permitted termination for convenience after a 90-day notice period, or a 180-day

period for the anesthesia division.6

Following the consummation of the merger, $375,000 was deposited into an

escrow account for adjustments to the purchase price resulting from a post-closing

computation of working capital. Another $16,800,000 was placed into escrow for

potential earn-out payments.7 The parties’ disputes in this case are based on the

release of funds from these escrow accounts. This opinion addresses only the dispute

over the earn-out payment.

B. The Earn-Out

The conditions to payment of the earn-out and the calculations of the earn-out

amounts are contained in Exhibit D to the Merger Agreement. Under the agreement,

Plaintiff would receive the full $16.8 million earn-out payment if the Company

5 Id. ¶ 13. BPA followed up in writing on October 7, 2021, specifying that the termination would become effective on December 31, 2021. Id. ¶ 32. See also Def.’s Opening Br. Ex. 1 (“Service Agreement”). 6 Id. ¶ 13. 7 Id. ¶ 21.

3 entered into qualifying agreements with Indiana University Health, Inc. (“Indiana”)

and BPA after the merger closed.8

Following the closing of the merger, the Company signed an agreement with

Indiana, and Plaintiff received a $10.8 million payment from the escrowed funds.9

Payment of the remaining $6 million in the earn-out escrow was contingent on the

signing of a new or amended agreement with BPA that met specific criteria.10 Those

terms are explained in Section 2(c) of Exhibit D to the Merger Agreement, which

states, in pertinent part, that Plaintiff would be paid $6 million:

If BPA (A) signs a new agreement with any Group Company or an Affiliate of [HPI] with substantially the same economic terms as the Company’s existing agreement with BPA but without the early termination clause contained therein, (B) signs an amendment to the Company’s existing agreement with BPA that removes the early termination clause contained therein or (C) signs a new agreement with any Group Company or an Affiliate of [HPI] satisfactory to [HPI] in its sole discretion after the Closing. 11

On December 22, 2021, BPA and AHS executed a document titled:

“Agreement to Amend Service Agreement” (the “December Agreement”). 12 This

8 Exhibit D also provides for partial earn-out payments based on certain financial metrics in the event that qualifying agreements were not reached with both Indiana and BPA. That provision is not pertinent to the disposition of this motion. 9 Compl. ¶ 27. 10 Merger Agreement § 2.9(a)(iii). Id. Ex. D § 2(c). Group Company means any subsidiary of the Company, including 11

AHS. Merger Agreement at 8; id. sched. 3.1. 12 Compl. ¶ 35; Ex. C at 5 (“December Agreement”).

4 one-page document was negotiated by AHS employee J. Paul O’Haro in consultation

with HPI’s CFO Lori Llewllyn and CEO Pranil Vadgama. 13 The December

Agreement incorporated the existing 36-page Service Agreement except as

“affected, modified or changed” by the December Agreement. 14 The December

Agreement: (1) specifies that it would last no less than one year, with automatic

annual renewals, (2) provides for a new fee schedule, (3) eliminates fee-related

penalties and quarterly performance incentives, and (4) suspends BPA’s prior right

to terminate at any time with 90 days’ notice until September 30, 2022, thus pushing

the early termination option out for a year.15

On December 23, 2021, David H. Langsam, AHS’s CEO, sent a letter to HPI

which attached a copy of the December Agreement and stated that it satisfied Section

2(c)(C), triggering the $6 million earn-out payment. The letter stated that the

contract was a “new agreement” that was “satisfactory” to HPI, as evidenced by the

countersignature of HPI’s wholly owned subsidiary, AHS.16 On January 17, 2022,

HPI responded with a letter denying that the December Agreement satisfied the

13 Compl. ¶ 34.

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Shareholder Representative Services LLC v. HPI Holdings, LLC, Counsel Stack Legal Research, https://law.counselstack.com/opinion/shareholder-representative-services-llc-v-hpi-holdings-llc-delch-2023.