Opinion
C.A. No. 16524.
Date Submitted: June 17, 1999.
Date Decided: November 2, 1999. Date Revised: November 4, 1999.
James L. Holzman and Ronald A. Brown, Jr., Esquires, of PRICKETT, JONES, ELLIOTT KRISTOL, Attorneys for Plaintiffs.
Lawrence C. Ashby and Richard D. Heins, Esquires, of ASHBY GEDDES, and Charles E. Bachman and Saul J. Stahl, Esquires, of O'SULLIVAN GRAEV KARABELL, LLP, Attorneys for Defendants.
CORRECTED OPINION
MEMORANDUM OPINION
The plaintiffs in this class action, who are the former owners of 58% of the outstanding common shares of Mobile Technology, Inc., a Delaware corporation ("MTI"), challenge the January 13, 1998 merger of MTI into MTI Acquisition Corp. ("Newco"), a shell corporation formed by Apollo Management, L.P. ("Apollo"). In that merger, MTI was the surviving corporation and the shareholders of MTI received $54.15 per share cash.
The plaintiffs allege in their complaint that the Merger Agreement, as drafted, did not reflect the contracting parties' true agreement and intent, which was that the merger price would be $56.85 per share. Accordingly, in their two count Amended Complaint the plaintiffs seek reformation of the Merger Agreement (Count I). Alternatively, they seek a declaratory judgment that the Merger Agreement, as actually written, calls for a merger price and payment of $61.45 per share and seek an award of damages that would yield a recovery of that larger amount (Count II).
The plaintiffs contend that if the Merger Agreement is not reformed, but is enforced as written, then the plaintiff shareholders class would be entitled to an even higher per share price than they would receive if reformation relief were granted.
The defendants have moved to dismiss portions of the Amended Complaint on two separate grounds. First, they contend that Apollo should be dismissed because it was not a party to the Merger Agreement, and is therefore not a proper party defendant. Second, the defendants argue that Count II (seeking declaratory and monetary relief) is insufficient as a matter of law, because the Amended Complaint alleges facts that concede the correctness of the $54.15 per share price actually paid in the merger.
At an earlier stage of this case the Court dismissed the original complaint with leave to replead. The result was the filing of the Amended Complaint.
This is the Opinion of the Court on the motion to dismiss. For the reasons next discussed, I grant the motion to dismiss as to Count II, but deny it in all other respects.
I. Is Apollo A Proper Party Defendant?
The defendants' argument that Apollo is not a proper defendant is easily stated and runs as follows: This action is one to either reform or enforce a contract (the Merger Agreement). In either case, the only proper parties to such a lawsuit are persons who were parties to the contract. Although Apollo's affiliate, Newco, was made a party to the Merger Agreement, Apollo was not. For that reason and because the Amended Complaint discloses no extra contractual basis (a noncontractual ground) that justifies retaining Apollo as a party defendant, Apollo must be dismissed from the action.
The plaintiffs argue that the defendants have employed the wrong standard. Plaintiffs concede that a party to a contract is always a proper party in a lawsuit to reform or enforce that contract, but they argue that the universe of proper parties is not so limited. That universe may also include any person who has a direct or indirect "interest" in the subject matter of the lawsuit and the relief granted, such that that person's rights or duties might be affected by the decree, even though no relief might be obtained for or against him. In essence, the plaintiffs appear to contend that any persons whose interest in the litigation would qualify them as a "person needed for a just adjudication" under Court of Chancery Rule 19, would be a proper defendant. In this case, the plaintiffs claim that Apollo clearly fits that description, because Apollo: (1) made the offer to acquire MTI, (2) negotiated the Merger Agreement, and (3) directly or indirectly controlled Newco, which was a signatory to the Merger Agreement and was Apollo's chosen vehicle to accomplish its acquisition of MTI. Finally, plaintiffs contend that Apollo is a proper defendant under Count II, because 10 Del. C. § 6511, which governs claims for declaratory relief, mandates that:
1 Pomeroy, Equity Jurisprudence § 114 at 153 (5th Ed. 1941).
When declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration, and no declaration shall prejudice the rights of persons not parties to the proceeding.
Because (as later discussed) the Court determines that Count II of the Amended Complaint must be dismissed in its entirety, the issue of whether Apollo is a proper party defendant to that Count is moot. Thus, the only issue to be decided is whether Apollo is a proper party defendant to Count I (seeking reformation). Apparently believing the applicable standard for joinder to be decisive on this point, the parties frame their arguments in terms of whether that standard is narrow — that is, limited to the actual contracting parties — or broad — that is, inclusive of persons whose interest in the subject matter of the lawsuit would be substantially affected by the outcome.
On this motion I find it unnecessary to decide that question, because under either standard Apollo would qualify, at least for purposes of this motion. If the broader ("interested person") standard is the test, then Apollo would be a proper party, because the Complaint alleges (at ¶ 6) that Apollo acquired MTI through Newco, a shell corporation newly formed by Apollo for that purpose. Thus, the Amended Complaint may fairly be read to claim that Apollo is the true owner of MTI, and as such was the real purchaser in interest.
Even if the narrower standard were applicable Apollo would be a proper defendant, because the Amended Complaint alleges facts from which an extra contractual basis for Apollo's joinder can be inferred, namely, that Newco — the nominal purchaser and Merger Agreement signatory — was the agent and/or alter ego of Apollo and acted solely on Apollo's behalf. That is a reasonable inference from the allegations that Apollo (i) made the offer to acquire MTI and (ii) in fact acquired MTI, through a shell subsidiary (Newco) that was formed at the direction of, and was either directly or indirectly controlled by, Apollo.
Amended Complaint ¶¶ 5, 6, 7, 8.
Accordingly, in these circumstances and at this stage, I find that Apollo is a proper party defendant. For that reason, the motion to dismiss Apollo from this action will be denied.
Upon a proper showing on a motion for summary judgment that the alter ego/agent inference is factually unsupported, Apollo could become entitled to dismissal at a later stage.
II. Is Count II Insufficient As A Matter of Law?
The plaintiffs next argue that Count II — the defendants' alternative claim for declaratory and monetary damages relief — is insufficient as a matter of law.
Count II alleges, in essence, that even if the Merger Agreement is not reformed, as actually written it must be construed to require a higher price per share than what the Agreement actually provided and what the shareholder class actually received. The dispute is over the meaning of the defined contractual term "Merger Consideration," which under § 5.8 of the Merger Agreement is calculated by dividing the "Maximum Closing Consideration" by the "aggregate number of shares outstanding, assuming that all shares issuable upon the exercise or conversion of any company Stock Option, Warrant or convertible security . . . have been converted into Shares."
Merger Agreement § 5.8 (emphasis added). The parties appear to agree that the Merger Agreement is properly incorporated into the Amended Complaint by reference.
It is undisputed that the "Maximum Closing Consideration" was $62,575,101. Accordingly, the only issue is what were the "aggregate number of shares outstanding" that would be divided into the $62,575,101 maximum closing consideration to arrive at the per share merger price? The answer to that question depends upon whether (in the language of § 5.8) any shares of MTI were "issuable" upon the conversion of stock options, warrants or convertible securities. Obviously, the larger the number of shares "issuable" on that basis, the smaller would be the Merger price share, and vice versa.
The defendants contend that the "aggregate number of outstanding shares" was 1,155,501, which resulted in the $54.15 per share merger price actually paid to MTI shareholders. The plaintiffs challenge the correctness of that 1,155,501 "outstanding share" figure, because (i) it includes the shares that would have been issued if all stock options, warrants and convertible securities had been exercised or converted, and (ii) the parties explicitly contracted that no such shares would be issued.
To elaborate, the plaintiffs claim that the inclusion of those latter shares in the pricing formula was incorrect, because as a matter of law there were zero (0) "shares issuable" pursuant to warrants and options. The reason, plaintiffs argue, is that under § 5.8 of the Merger Agreement, all holders of warrants and options would be entitled only to the "spread" between the exercise price and the "Merger Consideration." That is, all options and warrants would be converted into the right to receive a specified cash payment, but no warrant or option holders "shall have any right thereunder to acquire any stock of the Company . . ." in the merger. Therefore, plaintiffs conclude, the term "aggregate shares outstanding" must be read and understood to mean the number of shares actually outstanding, exclusive of any existing but unexercised warrants, options and convertible securities. On that basis the resulting number, plaintiffs conclude, was 1,018,200 shares.
Merger Agreement § 5.8.
The pending dismissal motion challenges the legal sufficiency of this claim. The defendants' argument, simply stated, is that the 1,155,501 share denominator is conceded in the very facts the plaintiffs have alleged in their Amended Complaint.
I agree that Count II should be dismissed, not only for that reason but also because the structure and relevant provisions of the Merger Agreement itself are consistent on their face with the defendants' interpretation of the pricing formula, and do not support the plaintiffs' proffered interpretations.
Am. Compl. ¶ 11 (plaintiffs allege what they contend constituted the "agreed-upon formula," and the denominator in that formula is 1,155,501[sic]); Am. Compl. ¶ 11 fn.2 ("The total outstanding shares at that time included 1,018,200 outstanding shares of common stock plus there were 30,000 Series A warrants, plus 70,000 Series B warrants, plus 37,300 Equity Plan Shares."); Am. Compl. Ex. B at 2 (the Consent Solicitation Statement asserts that the denominator of the equation is 1,155,500[sic]).
There is no inconsistency between (i) a contract provision which mandates that options and warrant holders shall receive only the "spread" between the exercise price and the "Merger Consideration" and (ii) a contract provision that defines "Merger Consideration" in a manner that assumes all options and warrants have been exercised and converted. On its face the Agreement plainly discloses the contracting parties' intent that the shareholders receive the dollar amount to which they would have been entitled assuming (hypothetically but not actually) that the options and warrants had been exercised and their resulting stock had then been "cashed out" in the merger. The requirements in § 5.8 that the option and warrant holders shall receive the "spread" in cash, and that the pricing formula assumes that all options and warrants were exercised and converted into common shares before the merger, are both consistent and are necessary to effectuate that contractual intent.
A contract must be construed, where possible, so that all of its provisions may be read together and harmonized. Here that can be done only by adopting the defendants' interpretation of the pricing formula, as that is the only reasonable interpretation of the contract as written. The plaintiffs' contrary interpretation is unreasonable, because it assumes — incorrectly — that the pricing provisions are internally inconsistent, and because it would not give effect to all of the Merger Agreement's relevant provisions.
Sonitrol Holding Co. v. Marceau Investissements, Del. Supr., 607 A.2d 1177, 1184 (1992) ("The cardinal rule of contract construction is that, where possible, a court should give effect to all contract provisions.") (citing E.I. du Pont de Nemours Co. v. Shell Oil Co., Del. Supr., 498 A.2d 1108, 1114 (1985)).
A Rule 12(b)(6) motion to dismiss will be granted where it is clear from the allegations of the complaint that the defendants would not be entitled to relief under any set of facts that could be proven to support the claim. Here, the complaint discloses no set of facts that, if proven, would entitle the plaintiff shareholders to the declaratory and damage relief sought by Count II. Therefore, that Count must be dismissed.
In re Tri-Star Pictures. Inc. Litig., Del. Supr., 634 A.2d 319, 326 (1993); see also Loudon v. Archer-Daniels-Midland Co., Del. Supr., 700 A.2d 135, 140 (1997).
III. CONCLUSION
For the foregoing reasons, the Motion to Dismiss is granted as to Count II, but is denied in all other respects. IT IS SO ORDERED.