IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
STX BUSINESS SOLUTIONS, LLC and ) JON THOMPSON, ) ) Plaintiffs, ) ) v. ) C.A. No. 2024-0038-JTL ) FINANCIAL-INFORMATION- ) TECHNOLOGIES, LLC and FINTECH ) HOLDCO, LLC, ) ) Defendants. )
MEMORANDUM OPINION GRANTING MOTION TO DISMISS
Date Submitted: October 11, 2024 Date Decided: October 31, 2024
Thad J. Bracegirdle, Justin C. Barrett, BAYARD, P.A., Wilmington, Delaware; Attorneys for Plaintiffs.
Ryan D. Stottmann, Taylor A. Christensen, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Jordan D. Weiss, Matthew Harrington White, Jacqueline R.D. Fielding, GOODWIN PROCTER LLP, New York, New York; Attorneys for Defendants.
LASTER, V.C. A limited liability company and its manager sued the buyer of the company’s
assets and its parent entity over an unpaid earnout. The plaintiffs assert claims for
breach of contract, breach of the implied covenant of good faith and fair dealing,
tortious interference with contract, and fraudulent inducement. The buyer and its
parent moved to dismiss.
This decision grants the motion. The earnout provision only prohibits the buyer
from taking action in bad faith, and the plaintiffs failed to plead facts supporting an
inference of bad faith. Both of their implied covenant theories conflict with the
express terms of the agreement. The tortious interference claim fails for lack of an
underlying breach of contract. And they failed to plead fraud through silence because
the complaint offers no reason to infer that the buyer had a duty to speak or engaged
in an affirmative act of fraudulent concealment.
I. FACTUAL BACKGROUND
Under an Asset Purchase Agreement dated as of July 1, 2021 (the
“Agreement”), Financial-Information-Technologies, LLC (“Fintech” or the “Buyer”)
agreed to purchase the assets of STX Business Solutions, LLC (“STX” or the “Seller”).
As consideration, the Buyer agreed to pay $5.3 million (subject to certain
adjustments), assume certain liabilities, and issue the Seller common units in the
Buyer’s parent entity (“Parent”) with an agreed value of $1.7 million. The Buyer also
committed to employ Jon Thompson, the Seller’s founder, as Vice President of
Business Development. The Agreement called for the Seller to receive additional consideration if the
purchased assets met specified revenue goals (the “Earnout”).1 The potential Earnout
topped out at $5.5 million (the “Maximum Earnout”). The Agreement contained the
following buyer-friendly clause addressing how the Buyer could operate the business
after closing:
Seller and each Seller Party acknowledges that Buyer is entitled, after the Closing, to use the Purchased Assets and operate the Business in a manner that is in the best interests of Buyer or its Affiliates and shall have the right to take any and all actions regardless of any impact whatsoever that such actions or inactions have on the earn-out contemplated by this Section 2.7; provided, that, prior to the Earn-Out Measurement Date, Buyer shall not take any action in bad faith with respect to Seller’s ability to earn the Earn-Out Consideration or with the specific intention of causing a reduction in the amount thereof.2
The Agreement thus did not obligate the Buyer to use best efforts, commercially
reasonable efforts, or even good faith efforts to achieve the Earnout. The Buyer only
had to refrain from “action in bad faith with respect to Seller’s ability to earn the
Earn-Out Consideration or with the specific intention of causing a reduction in the
amount thereof.”3
The Agreement also provided that “upon the closing of a Sale of the Company,”
any amounts necessary to satisfy the Maximum Earnout would become due and
payable.4 The Agreement defined “Sale of the Company” by incorporating a definition
1 Agr. § 2.5.
2 Id. at § 2.7(f).
3 Id.
4 Id. at § 2.7(c).
2 from Parent’s Amended and Restated Limited Liability Company Agreement (the
“Parent Agreement”). That document defined a Sale of the Company as
any transaction or series of transactions pursuant to which any Person or group of related Persons [other than current majority owners] in the aggregate acquire(s) (i) equity securities of [Parent] possessing the voting power (other than voting rights accruing only in the event of a default or breach) to elect Board members which, in the aggregate, control a majority of the votes on the Board (whether by merger, consolidation, reorganization, combination, sale or transfer of [Parent]’s equity securities, securityholder or voting agreement, proxy, power of attorney or otherwise), or (ii) all or substantially all of [Parent]’s assets determined on a consolidated basis.5
Before entering into the Agreement, the Seller had started pursuing a
“potentially lucrative” contract with Walmart for data management services.6 On
April 5, 2023, almost two years after the transaction closed, Walmart issued a request
for proposal for a five-year contract for data management services.7 Walmart told the
Buyer that its products appeared to be the only viable solution for Walmart’s needs
and invited the Buyer to submit a proposal by May 1.8
The Buyer obtained the information necessary to prepare and submit a
proposal.9 Then, at 9:35 p.m. on May 1—the final day for a response—the Buyer
5 Parent Agr. § 1.1.
6 Am. Compl. ¶ 18.
7 Id.
8 Id.
9 Id. ¶ 19.
3 notified Walmart by email that the Buyer would not be submitting a proposal.10 The
email cited “constraints” imposed by an “exclusive relationship” with Information
Resources, Inc. (“IRI”).11
Before the May 1 email, the Seller and Thompson knew nothing about the
Buyer’s “exclusive relationship” with IRI.12 The Buyer also had never mentioned that
any relationship would cause the Buyer not to respond to a request for proposal.13
After learning about the failure to respond to Walmart, Thompson asked Parent’s
CEO for additional information. He initially got no response.14
By agreement dated May 16, 2023, affiliates of General Atlantic, L.P. (the
“New Investor”) agreed to acquire a 48.1% membership interest in the Parent. Before
the transaction, non-party TA Associates Management (“TA”) owned virtually all of
the Parent’s equity. After the Transaction, both the New Investor and TA held an
equal 48.1% membership stake.15 Reflecting their equal ownership, TA and the New
Investor shared control over the Parent’s board of managers. TA and the New
Investor each had the right to appoint two managers. One seat would be held by the
10 Id. ¶ 20.
11 Id. ¶ 21.
12 Id. ¶ 23.
13 Id. ¶ 22.
14 Id.
15 Id. ¶ 24.
4 Buyer’s CEO, Tad Phelps, and the remaining two seats would be chosen jointly by TA
and the New Investor.16
On May 17, 2023, around two weeks after Thompson had reached out to
Parent’s CEO, Phelps told Thompson that Buyer declined to respond to Walmart
because Parent was negotiating with the New Investor and did not want the pursuit
of the Walmart contract to “muddy the waters” and threaten the transaction.17
The Seller and Thompson filed this action on January 17, 2024. The operative
complaint asserts claims for breach of express contractual provisions, breach of the
implied covenant of good faith and fair dealing, tortious interference with contract,
and fraudulent inducement. The defendants moved to dismiss the complaint for
failing to state a claim upon which relief can be granted.
II. LEGAL ANALYSIS
When reviewing a motion to dismiss under Court of Chancery Rule 12(b)(6):
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are “well-pleaded” if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.18
16 Id.
17 Id. § 25.
18 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–897 (Del. 2002).
5 The court must accept as true even vague allegations if they provide the opposing
party notice of the claim, but the court need not “accept as true conclusory allegations
without specific supporting factual allegations.”19
A. Count I: Breach Of Contract
Count I asserts a claim for breach of contract. The elements of a claim for
breach of contract are (i) a contractual obligation, (ii) a breach of that obligation by
the defendant, and (iii) a causally related injury that warrants a remedy, such as
compensatory damages, nominal damages, or in an appropriate case, specific
performance.20 Plaintiffs’ breach of contract claim advances two theories. Neither
works.
1. The First Theory: Failing To Respond To Walmart
The first theory contends that Buyer breached Section 2.7(f) of the Agreement
by failing to respond to Walmart’s request for proposal for the express purpose of
depriving the Seller of the Earnout. That theory fails to state a claim on which relief
can be granted.
The plain language of Section 2.7(f) authorized the Buyer to operate the
acquired business as it deemed fit, even if that would interfere with the Seller’s ability
to earn the Earnout, so long the Buyer did not take action in bad faith or with the
19 In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006)
(quoting In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 65–66 (Del. 1995)) (internal quotation marks omitted).
20 Trifecta Multimedia Hldgs. Inc. v. WCG Clinical Servs. LLC, 318 A.3d 450,
470 (Del. Ch. 2024).
6 specific intention of causing a reduction in the Earnout.21 To state a claim for breach,
the complaint must allege facts supporting a reasonable inference that the Buyer
acted in bad faith.
Although the defendants prevail on this issue, they start with an unpersuasive
distinction between action and inaction. They say the Earnout only addresses action,
not inaction.
The defendants have found some cases that attempt to draw this distinction,22
but there is no difference between the concepts when a conscious decision is involved.
“Delaware law recognizes that conscious inaction represents as much of a decision as
conscious action.”23 “From a semantic and even legal viewpoint, ‘inaction’ and ‘action’
may be substantive equivalents, different only in form.”24 Virtually any conscious
decision can be framed either in terms of action or inaction. If I consciously chose not
to do something, I have consciously acted.25 If I consciously choose to act in one way,
21 It is not clear what the difference is between the two clauses. To act in bad
faith with respect to an earnout means to take action intentionally for the purpose of preventing the earnout from being met. The second clause says that expressly.
22 MTD OB at 17–18.
23 Garfield v. Allen, 277 A.3d 296, 336 (Del. Ch. 2022) (citations omitted).
24 Hubbard v. Hollywood Park Realty Enters., Inc., 1991 WL 3151, at *10 (Del.
Ch. Jan. 14, 1991).
25 See Aronson v. Lewis, 473 A.2d 805, 813 (Del. 1984) (subsequent history
omitted) (“[A] conscious decision to refrain from acting may nonetheless be a valid exercise of business judgment and enjoy the protections of the rule.”); Quadrant Structured Prods. Co. v. Vertin, 102 A.3d 155, 183 (Del. Ch. 2014) (“The Complaint alleges that the Board had the ability to defer interest payments on the Junior Notes, that the Junior Notes would not receive anything in an orderly liquidation, that [Defendant] owned all of the Junior Notes, and that the Board decided not to defer 7 I have also consciously chosen not to act in another way. The reference to “action” in
the earnout provision encompasses both.
In this case, the distinction between action and nonaction is particularly
dubious because only bad faith conduct can breach the earnout provision. A scienter
based standard like bad faith means that any breach will involve a conscious decision.
If the Buyer intentionally failed to respond to Walmart for the purpose of impairing
the earnout, then the Buyer made a knowing decision not to act. That itself is knowing
action.26
The real question is whether the complaint’s allegations support an inference
of bad faith. The Seller argues that if the Buyer had secured a contract with Walmart,
paying interest on the Junior Notes to benefit [Defendant]. A conscious decision not to take action is just as much of a decision as a decision to act.”); In re China Agritech, Inc. S’holder Deriv. Litig., 2013 WL 2181514, at *23 (Del. Ch. May 21, 2013) (“The Special Committee decided not to take any action with respect to the Audit Committee’s termination of two successive outside auditors and the allegations made by Ernst & Young. The conscious decision not to take action was itself a decision.”); Krieger v. Wesco Fin. Corp., 30 A.3d 54, 58 (Del. Ch. 2011) (“Wesco stockholders had a choice: they could make an election and select a form of consideration, or they could choose not to make an election and accept the default cash consideration.”); All. Data Sys. Corp. v. Blackstone Cap. P’rs V L.P., 963 A.2d 746, 766 (Del. Ch. 2009) (“‘Rejecting’ the OCC Proposal is the same thing as not agreeing to that Proposal.”), aff’d 976 A.2d 170 (Del. 2009); Hubbard v. Hollywood Park Realty Enters., Inc., 1991 WL 3151, at *10 (Del. Ch. Jan. 14, 1991) (“From a semantic and even legal viewpoint, ‘inaction’ and ‘action’ may be substantive equivalents, different only in form.”); Jean- Paul Sartre, Existentialism Is a Humanism 44 (Carol Macomber trans., Yale Univ. Press 2007) (“[W]hat is impossible is not to choose. I can always choose, but I must also realize that, if I decide not to choose, that still constitutes a choice.”).
26 That does not render the action requirement meaningless. Envision a scenario in which a buyer fails to meet an earnout because a hurricane destroys a key part of the business. That sad outcome would not flow from any action by the buyer, so it would not trigger an accelerated earnout payment that turned on the buyer taking action to impair the earnout.
8 then the Buyer easily would have exceeded the revenue targets for the earnout.27 It
follows, says the Seller, that the court can infer bad faith.
That inference is not a reasonable one. The Buyer was in the midst of
negotiating a major transaction with the New Investor. Phelps told Thompson that
Buyer did not want to pursue the Walmart contract because that could cause
complications for the transaction.28 Deciding whether to pursue the Walmart contract
required a business judgment that the Buyer was empowered to make. Section 2.7(f)
of the Agreement authorized the Buyer “to use the Purchased Assets and operate the
Business in a manner that is in the best interests of Buyer or its Affiliates and shall
have the right to take any and all actions regardless of any impact whatsoever that
such actions or inactions have on the earn-out” as long as the Buyer did not act in
bad faith to defeat the earnout.29
“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.”30 It
is not possible to infer that the Buyer failed to pursue the Walmart opportunity in
bad faith. The first breach of contract theory therefore fails.
27 Am. Compl. ¶ 18.
28 Am. Compl. ¶ 25.
29 Agr. § 2.7(f).
30 Nemec v. Shrader, 991 A.2d 1120, 1128 (Del. 2010).
9 2. The Second Theory: Structuring The Transaction With The New Investor
The plaintiffs’ second theory asserts that the Buyer acted in bad faith by
structuring the transaction with the New Investor to evade the definition of a Sale of
the Company, thereby preventing the transaction from triggering the Maximum
Earnout. The plaintiffs assert that TA intended to sell control over the Buyer to the
New Investor, but only sold a 48% interest so as to avoid triggering the Maximum
Earnout.
That is not a reasonably conceivable inference. The transaction with the New
Investor established a joint-control regime at both the manager level and member
level. Shared control differs from unilateral control, making it impossible to infer bad
faith from a decision to establish shared control. If TA had sold control to the New
Investor, then TA would have been in the vulnerable position of a minority investor.
Yes, TA might have bargained for contractual protections, but TA still would have
been at risk. The only reasonable inference from the structure of the transaction is
that TA did not want to sell control; TA was only willing to accept shared control.
Given the obvious business purpose for insisting on shared control, it is not
reasonable to infer that TA decided to cap the New Investor’s ownership stake at
48.1% to avoid triggering the Maximum Earnout.
B. Count II: Breach Of The Implied Covenant Of Good Faith And Fair Dealing
Count II asserts a claim for breach of the implied covenant of good faith and
fair dealing.
10 When presented with an implied covenant claim, a court first must engage in the process of contract construction to determine whether there is a gap that needs to be filled. During this phase, the court decides whether the language of the contract expressly covers a particular issue, in which case the implied covenant will not apply, or whether the contract is silent on the subject, revealing a gap that the implied covenant might fill.31
In this case, the plaintiffs advance two theories. Neither identifies a gap to be filled.
Both conflict with the Agreement. Neither states a claim on which relief can be
granted.
1. The First Theory: Intentionally Discontinuing The Walmart Negotiations
The plaintiffs first claim that the Buyer breached the implied covenant by
intentionally discontinuing the negotiations with Walmart for the express purposes
of depriving Seller of the Earnout and facilitating the transaction with the New
Investor. That claim cannot survive because it conflicts with the Agreement.
“[I]f the contract at issue expressly addresses a particular matter, an implied
covenant claim respecting that matter is duplicative and not viable.”32 Here, Section
2.7(f) of the Agreement establishes an express standard for conduct that violates the
Earnout. The plaintiffs asserted a claim for breach of Section 2.7(f), contending that
31 Allen v. El Paso Pipeline GP Co., L.L.C., 113 A.3d 167, 183 (Del. Ch. 2014),
aff’d 2015 WL 803053 (Del. Feb. 26, 2015).
32 Edinburgh Hldgs., Inc. v. Educ. Affiliates, Inc., 2018 WL 2727542, at *9 (Del.
Ch. June 6, 2018) (citing Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *12 (Del. Ch. Dec. 22, 2010)); see also Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 888–889 (Del. Ch. 2009) (dismissing claim for breach of the implied covenant of good faith and fair dealing when the claim was premised on the defendants’ failure to pay money due under the contract, since the contract would control such a claim).
11 the Buyer acted in bad faith by failing to pursue the Walmart opportunity. A claim
under the implied covenant would conflict with the express standard. Put differently,
there is no gap to fill.
2. The Second Theory: Structuring The Transaction To Prevent The Maximum Earnout
The plaintiffs next claim that although the transaction with the New Investor
did not meet the definition of a Sale of the Company, the parties intended to trigger
the Maximum Earnout if TA gave up sole control over the Company. The plaintiffs
argue that they contracted with TA, not anyone else, so if TA no longer had sole
control of the Company, then the Seller would face increased risk of a change in
operations that would impair the earnout. The plaintiffs contend that the parties
would have agreed that a shift to shared control would trigger the Maximum Earnout.
The Agreement addresses that exact point. It contemplates paying out the
Maximum Earnout if there is a change in control that results in a new controller. The
Agreement does not contemplate paying out the Maximum Earnout if there is a
transition to shared control. That is rational, because with shared control, TA could
block changes in the Company’s direction, meaning the New Investor’s purchase of
shared control did not increase the plaintiffs’ risk.
The parties could have drafted a trigger based on TA’s loss of sole control, but
they did not do that. The Agreement clearly states that the Maximum Earnout will
become due and payable upon a Sale of the Company. The necessary implication is
that other types of transactions do not trigger the Maximum Earnout. Once again,
there is no gap for the implied covenant to fill.
12 C. Count III: Tortious Interference With Contract
Count III asserts a claim for tortious interference with contract. To sufficiently
plead a claim for tortious interference with contract, a plaintiff must plead (1) the
existence of a contract, (2) about which defendant knew, (3) an intentional act that is
a significant factor in causing breach, (4) without justification, (5) that causes
injury.33 Without an underlying breach of contract, the claim cannot go forward. 34
The plaintiffs argue that the Parent caused the Buyer to breach the express
and implied terms of the Agreement in the manner addressed above. Because the
Buyer’s actions did not breach the Agreement, the claim for tortious interference fails.
D. Count IV: Fraudulent Inducement
Last, Count IV asserts a claim for fraudulent inducement. The required
elements are identical to a claim for common-law fraud: (1) a false representation,
usually one of fact, made by the defendant; (2) the defendant’s knowledge or belief
that the representation was false, or was made with reckless indifference to the truth;
(3) an intent to induce the plaintiff to act or to refrain from acting; (4) the plaintiff’s
action or inaction taken in justifiable reliance upon the representation; and (5)
damage to the plaintiff as a result.35
33 Bhole, Inc. v. Shore Invs., Inc., 67 A.3d 444, 453 (Del. 2013).
34 NAMA Hldgs., LLC v. Related WMC LLC, 2014 WL 6436647, at *25 (Del.
Ch. Nov. 17, 2014).
35 E.I. DuPont de Nemours & Co. v. Florida Evergreen Foliage, 744 A.2d 457,
461–462 (Del. 1999); Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983).
13 A fraud claim does not require an affirmative misrepresentation. Fraud can
result from the “deliberate concealment of material facts, or silence in the face of a
duty to speak.”36
The plaintiffs contend that the Buyer failed to disclose the relationship with
IRI that ultimately led to the Buyer’s refusal to pursue the Walmart contract. But
the plaintiffs have not identified any reason why the Buyer would have had a duty to
speak. The plaintiffs also have not alleged any act of intentional concealment.
The plaintiffs cite Brightstar Corp. v. PCS Wireless, LLC, 2019 WL 3714917
(Del. Super. Ct. Aug. 7, 2019), for the proposition that “[w]hen the necessary facts are
typically within the opposing party’s control, less particularity is required and the
claim can prevail so long as the claimant describes the circumstances of fraud with
‘detail sufficient to apprise the defendant of the basis for the claim.’”37 That is true,
but a plaintiff who asserts an omission-based fraud claim still must allege facts giving
rise to a duty to speak or that support an inference of intentional concealment.
Because the Sellers have done neither, their fraud claim is dismissed.
III. CONCLUSION
The complaint fails to state any viable claims. The defendants’ motion to
dismiss is therefore granted.
36 Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2018 WL
6311829, at *32 (Del. Ch. Dec. 3, 2018) (cleaned up) (citations omitted).
37 Id. at *9.