IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
WINDY CITY INVESTMENTS ) HOLDINGS, LLC, ) ) Plaintiff, ) ) v. ) C.A. No. 2018-0419-MTZ ) TEACHERS INSURANCE AND ) ANNUITY ASSOCIATION OF ) AMERICA f/k/a TEACHERS ) INSURANCE AND ANNUITY ) ASSOCIATION-COLLEGE ) RETIREMENT EQUITIES FUND, ) ) Defendant. )
MEMORANDUM OPINION
Date Submitted: February 13, 2019 Date Decided: May 31, 2019 Date Revised: July 26, 2019
David E. Ross and Eric D. Selden, ROSS, ARONSTAM & MORITZ LLP, Wilmington, Delaware; K. Winn Allen, Kasdin M. Mitchell, Holly R. Trogdon, Rebecca W. Forrestal, KIRKLAND & ELLIS LLP, Washington, D.C.; Attorneys for Plaintiff
Michael A. Pittenger, Jennifer C. Wasson, Tyler J. Leavengood, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Mary Eaton, Zeh Ekono, Le-Ahn Bui, WILKIE FARR & GALLAGHER LLP, New York, New York; Attorneys for Defendant
ZURN, Vice Chancellor The parties to this case dispute the meaning of a complex earn-out provision.
The plaintiff and defendant, both in the financial services industry, agreed that the
defendant would buy one of the plaintiff’s independent mutual fund and advisory
firms. That firm held approximately $221 billion under management at the time.
The parties settled on an initial payment of $6.25 billion, along with an earn-out of
up to $278 million payable to the plaintiff.
The parties now dispute the earn-out amount due to the plaintiff. They have
not come to this Court for a final ruling on the amount itself. The purchase
agreement subjects that decision to an impartial referee process. Instead, they clash
on how to read the contractual variables in the earn-out calculation. The plaintiff
brought this case to obtain a declaratory judgment and specific performance on
contractual terms to guide the referee’s process, as well as specific performance on
a contractual books and records dispute.
The defendant moved to dismiss, claiming that it offers the only reasonable
understanding of the earn-out and records provisions, and that the plaintiff failed to
state its claims. I disagree with the defendant and deny the motion to dismiss. The
earn-out provision is susceptible to more than one interpretation at this early stage.
In addition, I find that the plaintiff has adequately pled its other claims. I. BACKGROUND I draw the relevant facts from the allegations in, and those documents
incorporated by reference into, the Verified Complaint (the “Complaint”).1 At the
motion to dismiss stage, I presume well-pled allegations to be true.
A. The Parties Agree To A Purchase Agreement With An Earn-Out Structure. Plaintiff Windy City Investments Holdings, LLC (“Windy City”) is a
Delaware limited liability company. Prior to April 2014, Windy City owned Nuveen
Investments, Inc. (“Nuveen”), an independent mutual fund and advisory firm with
approximately $221 billion under management at the time. “Nuveen’s core business
included managing, marketing, and distributing investment funds on behalf of
individual and institutional clients.”2 Defendant Teachers Insurance Annuity
Association of America (“TIAA”) is a New York financial services organization that
sells and markets financial products.
In late 2013, the parties began negotiating a sale of Nuveen to TIAA. The
negotiations culminated in a term sheet on February 10, 2014, and a purchase
1 Docket Item (“D.I.”) 1. I refer to briefing on the Motion to Dismiss as the Opening Brief, the Answering Brief, and the Reply Brief. See D.I. 11-12, 21, 29. I refer to the transcript of the February 13, 2019 hearing on the Motion to Dismiss as the Hearing Transcript. See D.I. 38. 2 Compl. ¶ 2.
2 agreement on April 13, 2014 (the “Purchase Agreement”).3 In addition to an initial
payment of $6.25 billion, the parties agreed to an earn-out plan (the “Earn-Out”).
Under that plan, Windy City could receive an additional cash payout based on
Nuveen’s profitability.
The Earn-Out period ran to January 31, 2018.4 The Earn-Out amount is based
on performance benchmarks derived from two variables: cumulative advisory
revenues (“Advisory Revenues”) and cumulative net flows (“Net Flows”). Section
1.8(b) of the Purchase Agreement defines those terms, respectively, as:
3 Windy City includes allegations of the drafting history behind the Purchase Agreement, but, at this stage, I decline to consider that history. See id. ¶¶ 29-37. 4 Purchase Agreement § 1.8.
3 “Cumulative Advisory Revenue” means the cumulative advisory revenues of the Subject Companies, from and including January 1, 2015 through and including December 31, 2017, derived from all assets managed or distributed by the Subject Companies,5 provided that “Cumulative Advisory Revenue” shall (i) include only 50% of the cumulative advisory revenues of the Subject Companies derived from assets that are advised by TIAA-CREF6 or products that are distributed through TIAA-CREF captive channels (except as otherwise provided in Section 1.8(c)) and (ii) exclude all cumulative advisory revenues of the Subject Companies derived from general account assets of TIAA- CREF.
....
“Cumulative Net Flows” means the amount, if any, of the excess of all Additions to assets under management by the Subject Companies over Withdrawals from assets under management by the Subject Companies (excluding (a) in each case any increase or decrease in assets under management resulting from market appreciation or depreciation, and (b) dividends and distributions (as Withdrawals), but including reinvestments of dividends and distributions (as Additions)), from and including January 1, 2015 through and including December 31, 2017, provided that “Cumulative Net Flows” shall (i) include only 50% of assets added or withdrawn that are third-party assets advised by TIAA- CREF or third-party products distributed through TIAA-CREF captive channels and (ii) exclude all assets added or withdrawn that are general account assets of TIAA-CREF.
5 Although this decision refers to a purchase of Nuveen, Windy City technically sold TIAA another entity, Windy City Investments, Inc., which in turn owned Nuveen. The Purchase Agreement refers often to the “Subject Companies,” which it defined as Windy City Investments, Inc., its subsidiaries, and its successors or assigns. See Purchase Agreement 138. The parties agree that the “Subject Companies,” for purposes of this action, means Nuveen. See Compl. ¶ 8 n.8; Opening Br. 6 n.5. 6 “TIAA-CREF” refers to Teachers Insurance and Annuity Association - College Retirement Equities Fund. See Purchase Agreement 139. Windy City alleges that TIAA, the buyer in the Purchase Agreement, was formerly known as Teachers Insurance and Annuity Association – College Retirement Equities Fund. See Compl. 1; Answering Br. 1. The parties do not assert any meaningful distinction between TIAA-CREF and TIAA.
4 The Earn-Out amount is calculated based on Nuveen’s Advisory Revenues
and Net Flows relative to floor and cap performance targets. For Advisory
Revenues, the floor target was $3.15 billion and the cap target was $3.375 billion.7
For Net Flows, the floor target was $10 billion and the cap target was $22 billion.8
Windy City would receive a contribution under the Earn-Out if Nuveen’s Advisory
Revenues or Net Flows met the corresponding floor target. The amount of that
contribution increased until Nuveen hit the corresponding cap target.
The Purchase Agreement calculated the Earn-Out contributions using
formulas established in Section 1.8(b)’s definitions for the “Cumulative Advisory
Revenue Payment Amount” and “Cumulative Net Flows Payment Amount.” Under
those definitions, if Nuveen met or cleared the unadjusted floor targets for each
variable, Windy City was due (i) at least $20 million, and up to $125.1 million, for
the Advisory Revenues Payment Amount, and (ii) at least $25 million, and up to
$152.9 million, for the Net Flows Payment Amount.9 The maximum Earn-Out
payment equaled a total of $278 million.
The Purchase Agreement also defines a number of levers to raise or lower the
Earn-Out amount. The floor and cap targets could be adjusted “[i]n the event of
7 Purchase Agreement § 1.8(b). 8 Id. 9 Compl. ¶¶ 46, 51.
5 acquisitions or divestitures” from non-TIAA affiliated parties.10 Section 1.8(c)(iii)
explains that if Nuveen acquired or divested investment advisory businesses or
assets from or to a party not affiliated with TIAA, the targets should “be adjusted
upward (in the case of an acquisition) or downward (in the case of a divestiture).”11
And if TIAA sold, transferred, or disposed of all or substantially all of the businesses
or assets of Nuveen, Windy City would receive the maximum Earn-Out payment.12
On the other hand, the Purchase Agreement did not alter the Earn-Out
calculation based on acquisitions or divestitures between Nuveen and TIAA’s
affiliates or successors. The targets did not adjust if Nuveen acquired investments,
advisory businesses, or assets from a TIAA affiliate or successor that did not count
towards the Earn-Out amount prior to the acquisition.13 Nor would those acquired
businesses and assets begin counting towards the Earn-Out amount through either
Advisory Revenues or Net Flows. Similarly, if Nuveen divested investments,
advisory businesses, or assets to a TIAA affiliate or successor that counted towards
the Earn-Out amount prior to the divestiture, they continued to count towards
10 Purchase Agreement § 1.8(c)(iii). 11 Id. 12 Id. § 1.8(d). 13 Id. § 1.8(c)(i).
6 Advisory Revenues and Net Flows, and the floor and cap targets remained the
same.14
With that framework in place, the parties also agreed to protections against
intents to smother the Earn-Out. Section 1.8(f) prohibited TIAA from taking, or
causing the Subject Companies to take, “any action the intent of which is to reduce
the Earn-Out Amount.”
Section 1.8(h) lays out the structure for TIAA to provide Windy City with a
written statement “setting forth in reasonable detail its good faith calculation of the
Earn-Out Amount, including the calculation of Cumulative Net Flows Payment
Amount and Cumulative Advisory Revenue Payment Amount” (the “Preliminary
Earn-Out Statement”). Windy City could dispute the Preliminary Earn-Out
Statement within sixty days of receipt by “setting forth, in reasonable detail, the basis
for such dispute.” The Purchase Agreement also provided some rights of
cooperation between the parties and Windy City’s review of TIAA’s records:
14 Id. § 1.8(c)(ii).
7 Seller and Buyer shall assist and cooperate with the other in all commercially reasonable respects in Seller’s review of, and the resolution of any dispute with respect to, the Preliminary Earn-Out Statement and the calculations of the Earn-Out Amount, Cumulative Net Flows Payment Amount and Cumulative Advisory Revenue Payment Amount, including by providing the other party and its accountants and advisors with reasonable access to relevant personnel (including its accountants), work papers and books and records related to the Subject Companies that are in its possession or under its control. Seller and Buyer shall use their commercially reasonable efforts to cause their accountants and advisors to reasonably cooperate with and respond to the other party’s reasonable inquiries.
If, following a dispute, the parties could not agree on the Earn-Out Amount,
Section 1.8(h) called for them to submit the issues to a referee (the “Referee”) for
final resolution.15 However, the Referee “shall be bound by the provisions of []
Section 1.8,” which the parties agree means, at least in this instance, that the Referee
may not determine the meaning of disputed contract terms. To interpret those terms,
the parties would have to seek judicial review first, and then take the Court’s
interpretations to the Referee for use in determining “disputed items” or
“calculations” under the Purchase Agreement.16
15 The Purchase Agreement designates Houlihan Lokey as the Referee. See id. § 1.6(b)(ii). 16 See id. §§ 10.15, 10.16 (agreeing to Delaware choices of law and forum).
8 B. TIAA Provides, And Windy City Disputes, The Preliminary Earn- Out Statement. The sale closed in October 2014. Following that, TIAA began marketing its
funds through Nuveen’s brand and distribution networks. Nuveen started offering
not only funds it advised, but also TIAA-advised funds. Through Nuveen’s sales
force and distribution, TIAA was able to generate “substantial advisory revenues
and net flows.”17
In January 2018, TIAA delivered its Preliminary Earn-Out Statement to
Windy City. TIAA’s calculations put Advisory Revenues at $3.141 billion and Net
Flows at approximately $17.915 billion.18 The Preliminary Earn-Out Statement
included nearly 100 pages of data supporting the calculation.19 TIAA contends its
data shows that the Earn-Out was based on 100% credit for Nuveen’s advisory
revenues and net flows generated from providing investment advisory services, 50%
credit for revenues and flows on which TIAA or Nuveen served as sub-advisor to
the other, and 50% credit for revenues and flows that were advised by Nuveen and
distributed through TIAA’s captive channel.20
17 Compl. ¶ 62. 18 Id. ¶ 63. 19 Compl. Ex. 3. 20 Opening Br. 18-19.
9 A month later, TIAA made an unprompted revision based on an error it found,
increasing Net Flows to $18.189 billion, but decreasing Advisory Revenues to
approximately $3.140 billion. Both the original and revised Statements pegged
Advisory Revenues under its floor target of $3.15 billion, and Net Flows over its
floor target of $10 billion. Based on the revised Statement, TIAA set the Earn-Out
amount due to Windy City at approximately $112.283 million, well below the
maximum potential payout of $278 million.21 TIAA paid Windy City on January 31
and February 27, 2018.
Windy City exercised its contractual rights to review the books and records
underlying TIAA’s Earn-Out calculations. The Complaint acknowledges that TIAA
provided Windy City with a series of documents and a one-hour conference call with
TIAA personnel. But it also alleges that TIAA failed to provide:
Documents relating to “the responsibilities of TIAA’s Joint Sales Force;”22
Documents relating to “the extent to which Nuveen employees distributed TIAA Products;”23
21 Compl. ¶ 65. 22 Id. ¶ 68. 23 Id.
10 Documents relating to “how Nuveen employees were compensated for such sales (for example, through Nuveen’s Long Term Performance Program or otherwise);”24
Documents relating to “how Nuveen employees’ sales activity for TIAA Products was tracked by TIAA for accounting purposes;”25
“[A]n organizational chart for Nuveen Finance, LLC;”26
“[T]he amount of total advisory revenues and net flows derived from Nuveen’s management or distribution of TIAA Products during the relevant three-year period;”27 and
“[T]he underlying documents relating to valuation analyses performed by TIAA’s outside accounting firm, Ernst & Young (“EY”), including a February 22, 2017 analysis in which EY projected that the cap and floor targets for both Cumulative Advisory Revenue and Cumulative Net Flows would have to be adjusted downward under the terms of the Purchase Agreement.”28
On March 22, 2018, Windy City disputed the Preliminary Earn-Out
Statement. On June 7, 2018, it filed suit in this Court. The primary dispute concerns
how to treat TIAA financial products that Nuveen distributed, but did not advise.
Windy City seeks a declaratory judgment to settle those rights (Count I), and two
counts of specific performance ordering TIAA to comply with Windy City’s
interpretation of the Purchase Agreement (Counts II and III). The Complaint also
24 Id. 25 Id. 26 Id. ¶ 69. 27 Id. 28 Id.
11 alleges TIAA used four specific corporate arrangements to divert money from the
Earn-Out in a manner that intentionally depressed the Earn-Out under Section 1.8(f),
and seeks an equitable adjustment to the Earn-Out amount in light of those acts
(Count IV). Finally, Windy City seeks an order compelling access to TIAA
personnel, books, and other records under Section 1.8(h) (Count V).
TIAA moved to dismiss on August 13, 2018 (the “Motion”). The parties
completed briefing on October 18. I heard argument on February 13, 2019 (the
“Hearing”).
II. ANALYSIS TIAA moved to dismiss under Court of Chancery Rules 12(b)(1) and 12(b)(6).
Rule 12(b)(1) tests the Court’s subject matter jurisdiction. “Plaintiff[] bear[s] the
burden of establishing subject matter jurisdiction.”29 “There is a strong public policy
in favor of arbitration in Delaware; thus, a motion to dismiss for lack of subject
matter jurisdiction will be granted if the ‘dispute is one that, on its face, falls within
the arbitration clause of the contract.’”30 Rule 12(b)(6) tests whether plaintiffs have
stated a claim. “The standards governing a motion to dismiss for failure to state a
claim are well settled: (i) all well-pleaded factual allegations are accepted as true;
29 HBMA Hldgs., LLC v. LSF9 Stardust Hldgs. LLC, 2017 WL 6209594, at *3 (Del. Ch. Dec. 8, 2017). 30 Id. at *3 (quoting SBC Interactive, Inc. v. Corp. Media Partners, 714 A.2d 758, 761 (Del. 1998)).
12 (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.’”31
A. Count I Is Not Dismissed Because The Definitions Of Advisory Revenues And Net Flows Are Ambiguous. The parties dispute the interpretations of Advisory Revenues and, less
vigorously, Net Flows. The core disagreement is whether revenues or flows advised
or managed solely by TIAA, but distributed through Nuveen, generate credit in the
Earn-Out calculations.32 Windy City believes it gets 50% credit for all such gains,
while TIAA believes that Windy City only receives credit where Nuveen advised on
the financial products.
31 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (quoting Kofron v. Amoco Chemicals Corp., 441 A.2d 226, 227 (Del. 1982)). 32 See Compl. 57 (seeking in prayer for relief declaratory judgment that “under Section 1.8(b) of the Purchase Agreement, in calculating Cumulative Advisory Revenue [and Net Flows], TIAA must include 50% of the advisory revenues [and net flows] derived from Nuveen’s distribution of TIAA Products”); see also id. ¶ 108 (“Windy City is entitled to a judgment declaring that TIAA must include in its calculation of the Earn-Out Amount (1) 50% of cumulative advisory revenues derived from Nuveen’s distribution of TIAA Products; and (2) 50% of cumulative net flows derived from Nuveen’s distribution of TIAA Products.”).
13 “To determine what contractual parties intended, Delaware courts start with
the text.”33 “[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.”34 “When the contract is clear and
unambiguous,” Delaware courts “will give effect to the [plain meaning] of the
contract’s terms and provisions.”35 But when the Court “may reasonably ascribe
multiple and different interpretations to a contract, [it] will find that the contract is
ambiguous.”36 “To be ambiguous, a disputed contract term must be fairly or
reasonably susceptible to more than one meaning.”37 “The court may grant a motion
to dismiss based on contractual language, however, only if the contractual language
is unambiguous—meaning, the language is susceptible of only one reasonable
interpretation.”38
To prevail on its Motion, TIAA must demonstrate that its interpretations of
Advisory Revenues and Net Flows are the only reasonable readings. I find that
33 Sunline Commercial Carriers, Inc. v. CITGO Petroleum Corp., 2019 WL 1068183, at *8 (Del. Mar. 7, 2019). 34 Alta Berkeley VI C.V., 41 A.3d at 385 (quoting Elliott Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del. 1998)). 35 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010). 36 Id. at 1160. 37 Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012). 38 Fortis Advisors LLC v. Stora Enso AB, 2018 WL 3814929, at *3 (Del. Ch. Aug. 10, 2018).
14 TIAA has failed to meet that burden. But Windy City’s interpretations are likewise
not the only reasonable readings. Each party’s constructions leave something to be
desired and would require the Court to minimize deliberately placed language or, in
some cases, import extra-contractual concepts to reconcile that language.
1. Advisory Revenues As the parties’ dispute requires a granular reading of the definition of
Advisory Revenues, I restate it here for reference:
“Cumulative Advisory Revenue” means the cumulative advisory revenues of the Subject Companies, from and including January 1, 2015 through and including December 31, 2017, derived from all assets managed or distributed by the Subject Companies, provided that “Cumulative Advisory Revenue” shall (i) include only 50% of the cumulative advisory revenues of the Subject Companies derived from assets that are advised by TIAA-CREF or products that are distributed through TIAA-CREF captive channels (except as otherwise provided in Section 1.8(c)) and (ii) exclude all cumulative advisory revenues of the Subject Companies derived from general account assets of TIAA- CREF.39
TIAA believes that the parties intended to give Windy City credit only where
Nuveen helped advise or manage, and not where Nuveen merely distributed TIAA-
advised or TIAA-managed financial products. In shorthand form, TIAA reads the
disputed portions of Advisory Revenues to provide Earn-Out credit for:
39 Purchase Agreement § 1.8(b) (emphases added).
15 1. 100% of revenues from products that are advised by Nuveen; except only 2. 50% of revenues from products that are: (a) jointly advised by Nuveen and TIAA; or (b) advised by Nuveen and distributed by TIAA.
This framework relies on the opening words of the definition: that Advisory
Revenues “means the cumulative advisory revenues of the Subject Companies.”
TIAA reads these words to limit Advisory Revenues to revenues derived from the
Subject Companies’ advisory work, not mere distribution.40 Under this
interpretation, products solely advised by TIAA cannot generate “advisory revenues
of the Subject Companies.” Accordingly, TIAA construes “assets that are advised
by [TIAA],” which generate 50% Earn-Out credit, to refer to the industry practice
of sub-advising arrangements, or joint advising by primary and secondary advisors,
between TIAA and Nuveen.41
TIAA’s insistence that earning Advisory Revenues requires Nuveen to advise
or sub-advise carries through to its interpretation of Earn-Out credit from Nuveen’s
distribution. The definition of Advisory Revenues provides 100% credit for
revenues “derived from all assets managed or distributed by the Subject
40 Opening Br. 27-28; see also Reply Br. 6 (“One does not earn ‘advisory revenues’ through the distribution of investment products.”). 41 Opening Br. 28.
16 Companies.”42 TIAA relies on securities law sources43 to interpret this language as
referring to “wrap fee” financial products that include both advisory and distribution
activities.44 It also argues that the parties must have intended Advisory Revenues to
only count services where Nuveen at least partly advised, because, otherwise, the
addition of even 50% credit for products advised solely by TIAA would render the
floor and cap targets for both Advisory Revenues and Net Flows too low to serve as
Earn-Out benchmarks.45 In other words, TIAA claims that the Purchase
Agreement’s default floor and cap targets must be based on Nuveen advisory
services, not TIAA services distributed through Nuveen. Finally, TIAA contends its
interpretation avoids an unintuitive result of giving Windy City 100% credit where
Nuveen solely distributes a financial product advised by a third party, but only 50%
credit where Nuveen distributes the same product advised by TIAA.46
42 Purchase Agreement § 1.8(b) (emphasis added). 43 Opening Br. 31-32. 44 TIAA asserts that any other reading would render the phrase “investment advisory revenues” meaningless. See id. at 31-32. “Investment advisory revenues” does not appear in the definition of Advisory Revenues, or anywhere else in TIAA’s brief, and TIAA does not indicate where it comes from. I assume that TIAA instead meant the phrase “cumulative advisory revenues of the Subject Companies” from the Advisory Revenues definition. 45 Id. at 34; Hearing Tr. 12:7-20. TIAA applies this same argument to Net Flows. 46 Hearing Tr. 70:3-12; accord Osborn, 991 A.2d at 1160 (“An unreasonable interpretation produces an absurd result or one that no reasonable person would have accepted when entering the contract.”).
17 For its part, Windy City reads the definition of Advisory Revenues to
“include[] not only the assets that Nuveen itself managed, but also those assets that
Nuveen had no role in managing but nonetheless ‘distributed’ through its extensive
salesforce.”47 Windy City points to the language that Advisory Revenues are
“derived from all assets managed or distributed by the Subject Companies” and to
the 50% credit given for Advisory Revenues “derived from assets that are advised
by TIAA-CREF or products that are distributed through TIAA-CREF captive
channels.”48 According to Windy City, these two phrases are rendered meaningless
if the prefatory phrase of “cumulative advisory revenues of the Subject Companies”
limits the definition to revenues from Nuveen’s own advising. Put another way,
Windy City argues Advisory Revenues cannot be limited to revenues Nuveen
generated by advising because they must be able to be “derived from all assets . . .
distributed” by Nuveen and “derived from assets that are advised by [TIAA].”
Finally, Windy City derides TIAA’s construction of the “derived from” phrases
based on “sub-advisement” and “wrap fee” concepts, as improperly modifying
Section 1.8(b) and reading out the plain language.49
47 Answering Br. 13-14. 48 Purchase Agreement § 1.8(b) (emphases added). 49 Answering Br. 16-20. Moreover, other areas of the Purchase Agreement refer to sub- advising arrangements, and so its absence in Section 1.8(b) weighs against TIAA’s attempt to import the concept into the text. See, e.g., Purchase Agreement §§ 1.8(c)(ii), 1.8(c)(iv), 2.18(e); 2.19(a)(v); Purchase Agreement 138.
18 The parties’ dispute hinges on the interpretation of “cumulative advisory
revenues of the Subject Companies,” which appears twice in the relevant portions of
the definition. TIAA reads that term strictly to include only revenues earned by the
Subject Companies from their advising. This is intuitive for that particular phrase,
but requires a strained reading of nearly everything else in the definition. For
instance, TIAA’s construction demands extrinsic evidence and divergence from the
plain meaning to read language giving Earn-Out credit for Nuveen’s distributions as
actually referring to a niche class of “wrap fee” products. It also inserts the concept
of sub-advising into the definition’s reference to assets advised by TIAA. That is
problematic because the Purchase Agreement uses that same term elsewhere,50
which suggests the parties chose not to use it in Section 1.8(b).
Windy City’s construction, on the other hand, brings more intuitive readings
of the phrases “derived from all assets managed or distributed by the Subject
Companies” and “derived from assets that are advised by TIAA-CREF or products
that are distributed through TIAA-CREF captive channels.” But Windy City
stretches the “cumulative advisory revenues of the Subject Companies” language to
mean something more like revenues that involve advising and some participation
50 See, e.g., id. §§ 1.8(c)(ii), 1.8(c)(iv), 2.18(e); 2.19(a)(v); id. at 138.
19 from the Subject Companies. Neither reading is perfect, and neither reading
provides the “only reasonable” way to understand Section 1.8(b).51
2. Net Flows The parties’ disagreements on Net Flows are similar to those on Advisory
Revenues. For reference, the definition of Net Flows reads:
“Cumulative Net Flows” means the amount, if any, of the excess of all Additions to assets under management by the Subject Companies over Withdrawals from assets under management by the Subject Companies (excluding (a) in each case any increase or decrease in assets under management resulting from market appreciation or depreciation, and (b) dividends and distributions (as Withdrawals), but including reinvestments of dividends and distributions (as Additions)), from and including January 1, 2015 through and including December 31, 2017, provided that “Cumulative Net Flows” shall (i) include only 50% of assets added or withdrawn that are third-party assets advised by TIAA-CREF or third-party products distributed through TIAA- CREF captive channels and (ii) exclude all assets added or withdrawn that are general account assets of TIAA-CREF.52
Net Flows’ definition is built on “assets under management by the Subject
Companies.”53 From that language, TIAA asserts Section 1.8(b) makes “plain that
it is net flows generated by Nuveen’s success in retaining and attracting assets under
its management that matters.”54 Because Net Flows’ definition does not explicitly
51 Caspian Alpha Long Credit Fund, L.P. v. GS Mezzanine Partners 2006, L.P., 93 A.3d 1203, 1205 (Del. 2014) (quoting Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del. 1996)). 52 Id. § 1.8(b) (emphases added). 53 Id. 54 Opening Br. 28-29.
20 reference distribution by Nuveen, TIAA also argues that Windy City cannot seek
credit for distribution via its Advisory Revenues arguments.
In response, Windy City points to romanette (i) in the Net Flows definition,
which provides Earn-Out credit for “only 50% of assets added or withdrawn that are
third-party assets advised by TIAA-CREF or third-party products distributed
through TIAA-CREF captive channels.” Windy City reads this phrase to provide
credit for products that are advised by TIAA, but distributed by Nuveen.55
TIAA’s interpretation, that the Earn-Out should get credit only for flows
Nuveen managed or partly managed, matches well with the opening lines of the
definition. But it clashes with romanette (i), which requires that the Earn-Out
include 50% credit for third-party assets that TIAA advised. TIAA’s reading here
again requires importing some concept of sub-advising to harmonize the
interpretation.56 But the plain text does not invoke that concept.
Windy City’s reading has a similar outcome, if in reverse. It fits more
comfortably with the mechanics of the Earn-Out receiving 50% credit for third-party
assets advised by TIAA and distributed by Nuveen.57 But the definition’s language
tying Net Flows to “assets under management by the Subject Companies” does not
55 Answering Br. 14 n.3. 56 Opening Br. 29. 57 The parties have not argued that the “third-party assets” language in the Net Flows definition favors one party’s interpretation or the other.
21 neatly support Windy City’s distribution theory. Neither party provides the only
reasonable interpretation.
* * *
At the motion to dismiss stage, no party has offered the only reasonable
construction. “If, after applying [] canons of contract interpretation, the contract is
nonetheless reasonably susceptible to two or more interpretations or may have two
or more different meanings, then the contract is ambiguous and courts must resort to
extrinsic evidence to determine the parties’ contractual intent.”58 Extrinsic evidence
will be necessary here to find what the parties truly meant. That will allow the Court
to decide which reading prevails, and which language to minimize in line with the
parties’ drafting intentions.
B. The Court Has Jurisdiction Over Counts II And III, And Counts II And III State Claims. Counts II and III seek specific performance ordering TIAA to calculate the
Earn-Out amount in accordance with Windy City’s interpretation of Section 1.8.
Specifically, they ask for an order “requiring TIAA to include in its calculation of
Cumulative Advisory Revenue advisory revenues derived from Nuveen’s
distribution of TIAA Products . . . . [and] requiring TIAA to include in its calculation
of Cumulative Net Flows flows derived from Nuveen’s distribution of TIAA
58 Sunline Commercial Carriers, 2019 WL 1068183, at *8 (quotation omitted).
22 Products.”59 TIAA opposes these orders on the same substantive grounds as Count
I,60 but also asserts that the Court lacks jurisdiction to decide Counts II and III
because they compel a particular calculation and therefore invade the Referee’s
province under Section 1.8(h).61 Windy City responds that Counts II and III seek
only to determine and enforce the same legal right as Count I, not a particular
monetary calculation, and thus the Court, rather than the Referee, has jurisdiction.62
The parties agree that the Referee must answer questions on calculating the
Earn-Out amount, but that this Court has jurisdiction to answer interpretative
questions under Section 1.8.63 At the Hearing, Windy City’s counsel conceded that
59 Compl. ¶¶ 120, 132. 60 To the extent TIAA seeks dismissal on 12(b)(6) grounds, the analysis from Count I applies and prevents dismissal at this stage. Counts II and III reasonably plead a breach of Section 1.8 on Windy City’s theory of interpretation. 61 Opening Br. 37-38. Section 1.8(h) requires that the parties submit disputes to the neutral Referee to determine “disputed items or calculations” in a “final, binding and conclusive” report that “shall be bound by the provisions of [] Section 1.8.” 62 Answering Br. 30. 63 Opening Br. 37, 52 n.32 (“While the Referee is not called upon to resolve legal disputes as to the meaning of the Purchase Agreement—which is the subject of Count I of the Complaint—the Referee is more than capable and specifically tasked with performing the calculations necessary to determine the Earn-Out Amount” . . . . “Once the Court construes the terms of Section 1.8(h) as outlined here, it should dismiss this claim because the calculation of the Earn-Out Amount is a task for the Referee pursuant to the process outlined in Section 1.8(h).”); Answering Br. 30-31 (“It thus appears that the Parties are in full agreement about the only jurisdictional issue that matters in this case: This Court can and should decide the issues of contract interpretation currently before it. Once those legal disputes are resolved, the Parties will return to the Referee to resolve any remaining
23 there is “not a whole lot” of daylight between Count I, on the one hand, and Counts
II and III, on the other.64 Because all three Counts depend on a determination
favoring Windy City’s interpretation of Section 1.8, Windy City believes that it
“would have the exact same remedies under Counts I, II, or III.”65
If Counts II and III requested an order compelling TIAA to include a specific
calculated amount or figure in the Earn-Out amount, they would infringe on the
Referee’s jurisdiction to determine the “disputed items or calculations,” “bound by
the provisions of [] Section 1.8.” But Windy City has shown that it, instead, seeks
only a different remedy to enforce the same outcome and legal question at issue in
Count I: which party has the right interpretation. While Counts II and III seem
duplicative of the ultimate relief in Count I, they do not fail for lack of jurisdiction
or failure to state a claim. I deny the Motion on this ground, but note that I do not
view Counts II or III to provide for any greater relief or scope of contractual
interpretation than Count I, other than the form of the remedy.
questions about the calculations of the Earn-Out Amount, with the benefit of this Court’s ruling on the contact interpretation questions.”). 64 Hearing Tr. 69:13-15. 65 Id.
24 C. Count IV States A Claim. Count IV seeks an equitable adjustment to the Earn-Out amount to rectify
TIAA’s allegedly improper actions that intentionally depressed the Earn-Out
amount, including by failing to adjust the targets for Advisory Revenues and Net
Flows.66 Windy City bases Count IV on a series of four corporate actions. Windy
City failed to press one of these corporate actions, a rebranding of Nuveen’s parent
entity under TIAA, in its answering papers opposing the Motion and at the Hearing.
TIAA pointed out Windy City’s silence in both its reply papers and at the Hearing.67
I agree that Windy City abandoned what the parties have described as the
“rebranding” claim, and therefore do not address it.68 But I find that the Complaint
pleads each of the remaining bases for Count IV in reasonable detail and adequately
alleges breaches of Section 1.8.
TIAA challenges Count IV on two main grounds: first, that the Purchase
Agreement did not give Windy City the right to prevent TIAA from undertaking any
of the actions Windy City references; and second, that Windy City has failed to
66 Compl. ¶¶ 133-139. 67 See Reply Br. 23-24; Hearing Tr. 35:22-36:9. 68 See Compl. ¶¶ 81-85; In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *7 (Del. Ch. Jan. 11, 2010) (“Plaintiffs quietly abandoned this claim in their brief in opposition to defendants’ motion to dismiss, by failing to address or respond to defendants’ arguments in their motion to dismiss.”).
25 allege a breach of Section 1.8(f)’s intent requirement and damages. I reject both
arguments. The Complaint pled that TIAA conceivably took each of the actions at
issue in Count IV with an intent to depress the Earn-Out amount.69 TIAA’s efforts
to refute Windy City’s version of the facts are not appropriate at the motion to
dismiss stage, where Windy City has pled its allegations adequately.70 The more
pertinent challenges at this stage are to the sufficiency of Windy City’s pleadings.
TIAA contends that Windy City failed to plead damages, or a breach of the Purchase
Agreement, with respect to any of the alleged actions.71 I disagree.
First, Windy City alleges that TIAA consolidated and liquidated certain funds
from NWQ Investment Management Company, LLC (“NWQ”), an affiliate operated
by Nuveen prior to the transaction, in a manner that failed to give Windy City
appropriate Earn-Out credit. Windy City supports its theory by noting that EY
prepared a valuation report anticipating a reduction in the Earn-Out targets.
Although the report did not specify the cause of that reduction, it stated that the
targets were “subject to adjustments as discussed in Section 1.8 of the [Purchase
69 See id. ¶¶ 86-95, 133-139. 70 “Long standing Delaware case law holds that a complaint will survive a motion to dismiss if it states a cognizable claim under any ‘reasonably conceivable’ set of circumstances inferable from the alleged facts.” Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 813 n.12 (Del. 2013), as corrected (Oct. 8, 2013). 71 Opening Br. 40-50.
26 Agreement],” and Windy City alleges that “TIAA appears to have been considering
. . . a divestiture or transfer at or around the time EY prepared its valuation report.”72
Windy City has asked for more information about EY’s valuation, and TIAA has
allegedly refused to provide further access.73 When prodded about the report, TIAA
contended that “Nuveen management ultimately made different decisions with
respect to the way it structured its reorganization of NWQ and associated liquidation
of funds that obviated the need for an adjustment to the Floor and Cap Targets.”74
Windy City alleges that those decisions, in light of EY’s report, indicate “that
TIAA’s decisions about how to dispose of NWQ funds was made, at least in part,
with the purpose and intent of reducing the Earn-Out Amount.”75 According to the
Complaint, EY’s suggested target reductions “would have [] entitled [Windy City]
to approximately $27 million dollars more in its earn-out payment from TIAA.”76
Second and third, Windy City alleges that TIAA wound down another Nuveen
affiliate, Tradewinds Global Investors, LLC (“Tradewinds”), and a series of other
Nuveen funds (the “Nuveen Funds”), without attempting to sell or transfer portions
72 Compl. ¶¶ 86-91. Windy City received the valuation report from TIAA in early 2018. See id. ¶ 87. 73 Id. ¶ 91. 74 Id. 75 Id. 76 Id. ¶ 90.
27 of those funds and preserve value.77 Under Section 1.8(c)(iii) of the Purchase
Agreement, Advisory Revenues and Net Flows targets are adjusted when portions
of a Nuveen fund are divested to third parties not affiliated with TIAA. Accordingly,
Windy City asserts that TIAA disposed of Tradewinds and the Nuveen Funds in a
manner that avoided a target adjustment, and thus “adversely affected Nuveen’s
advisory revenues and net flows.” Windy City also alleges that TIAA did so
intentionally.78
Drawing all inferences in Windy City’s favor and recognizing the low
standard of reasonable conceivability, Windy City has pled that these three
transactions implicate a potential breach of Section 1.8(f) that intentionally
depressed the Earn-Out and harmed Windy City. To the extent TIAA disagrees with
the specificity of damages pled, it seeks a pleading standard higher than is required.79
Windy City has also credibly explained that its ability to allege damages was
weakened by the subject of Count V—TIAA’s alleged failure to provide contractual
access to books and records supporting the Preliminary Earn-Out Statement. I deny
the Motion against Count IV.
77 Id. ¶¶ 92-95. 78 Id. ¶¶ 93, 95. 79 “Proof of [alleged] damages and of their certainty need not be offered in the complaint in order to state a claim.” IAC Search, LLC v. Conversant LLC, 2016 WL 6995363, at *8 (Del. Ch. Nov. 30, 2016) (quoting Anglo Am. Sec. Fund, L.P. v. S.R. Glob. Int’l Fund, L.P., 829 A.2d 143, 156 (Del. Ch. 2003)).
28 D. Count V States A Claim. Count V seeks an order of specific performance permitting greater access to
personnel, work papers, books, and records under Section 1.8(h). The relevant
language of Section 1.8(h) provides that the parties “shall assist and cooperate with
the other in all commercially reasonable respects” for Windy City to review and
resolve disputes relating to the Preliminary Earn-Out Statement and calculations of
the Earn-Out amount, Advisory Revenues Payment Amount, and Net Flows
Payment Amount, “including by providing the other party and its accountants and
advisors with reasonable access to relevant personnel (including its accountants),
work papers and books and records related to the Subject Companies that are in its
possession or under its control.” The parties also agreed to “use their commercially
reasonable efforts to cause their accountants and advisors to reasonably cooperate
with and respond to the other party’s reasonable inquiries.” Windy City alleges that
TIAA has improperly resisted certain of its demands under Section 1.8(h).
TIAA hinges its argument here on a contention that Section 1.8(h) provides
access to information in response to Windy City’s demands only to the extent they
“relate[] to the Subject Companies.”80 TIAA contends it is only refusing Windy
80 Opening Br. 52.
29 City’s requests that improperly “demand information on other topics, including other
aspects of TIAA’s business.”81
Section 1.8(h) grants Windy City broad access rights to review and attempt to
resolve “any dispute with respect to [] the Preliminary Earn-Out Statement and the
calculations of the Earn-Out Amount, Cumulative Net Flows Payment Amount and
Cumulative Advisory Revenue Payment Amount.”82 Those rights “include[] . . .
reasonable access” to certain materials “related to the Subject Companies that are in
[TIAA’s] possession or under its control.”83 But that access right does not limit
Windy City’s broader, bargained-for right of commercially reasonable
cooperation.84 And even if it did, Windy City’s requests with respect to Section
1.8(h) and how TIAA has calculated the Earn-Out amount and statements “relate[]
to the Subject Companies” under the plain language of Section 1.8(h) by seeking
information about whether funds were diverted away from those companies under
the Earn-Out provisions. I deny the Motion as to Count V.
III. CONCLUSION For these reasons, I deny TIAA’s Motion to Dismiss.
IT IS SO ORDERED.
81 Id. 82 Purchase Agreement § 1.8(h) (emphasis added). 83 Id. 84 Id.