Opinion
C. A. N22C-03-148 EMD CCLD
11-18-2022
THE JOHNSON REVOCABLE LIVING TRUST, ALLEN JOHNSON, and LINDA JOHNSON, Plaintiffs, v. DAVIES US, LLC, a Delaware Limited Liability Company, f/k/a DAVIES US, INC., a Delaware Corporation, and DAVIES GROUP LIMITED, an England and Wales Private Limited Company, Defendants.
Brett M. McCartney, Esquire, Elizabeth A. Powers, Esquire, Gabriel B. Ragsdale, Esquire, Bayard, P.A., Wilmington, Delaware, Robert J. Bartz, Esquire, Joe M. Fears, Esquire, Barber &Bartz, P.C., Tulsa, Oklahoma. Attorneys for Plaintiffs The Johnson Revocable Living Trust, Allen Johnson, and Linda Johnson. Eric Lopez Schnabel, Esquire, Alessandra Glorioso, Esquire, Dorsey &Whitney (Delaware) LLP, Wilmington, Delaware, Gregory S. Tamkin, Esquire, Dorsey & Whitney LLP, Denver, Colorado, Anthony Badaracco, Esquire, Dorsey &Whitney LLP, New York, New York. Attorneys for Defendants Davies US, LLC, Davies U.S. Inc., and Davies Group Limited.
Submitted: August 25, 2022
Upon Defendants' Motion for Judgment on the Pleadings DENIED
Brett M. McCartney, Esquire, Elizabeth A. Powers, Esquire, Gabriel B. Ragsdale, Esquire, Bayard, P.A., Wilmington, Delaware, Robert J. Bartz, Esquire, Joe M. Fears, Esquire, Barber &Bartz, P.C., Tulsa, Oklahoma. Attorneys for Plaintiffs The Johnson Revocable Living Trust, Allen Johnson, and Linda Johnson.
Eric Lopez Schnabel, Esquire, Alessandra Glorioso, Esquire, Dorsey &Whitney (Delaware) LLP, Wilmington, Delaware, Gregory S. Tamkin, Esquire, Dorsey & Whitney LLP, Denver, Colorado, Anthony Badaracco, Esquire, Dorsey &Whitney LLP, New York, New York. Attorneys for Defendants Davies US, LLC, Davies U.S. Inc., and Davies Group Limited.
ERIC M. DAVIS, JUDGE
I. INTRODUCTION
This is a civil breach of contract action assigned to the Complex Commercial Litigation Division of the Court. This is a declaratory judgment and breach of contract action against Defendants for refusal to pay Plaintiffs their pro rata shares of the Accelerated Deferred Consideration pursuant to their Stock Purchase Agreement.
In October 2020, Plaintiffs the Johnson Revocable Living Trust, Allen Johnson, and Linda Johnson (collectively "Sellers" or "Plaintiffs") sold their business, Johnson Claim Services, Inc. (the "Company"), to Defendant Davies U.S. LLC ("Davies US" or "Buyer") pursuant to a written Stock Purchase Agreement (the "SPA"). The SPA provides that a portion of the purchase price was not to be paid at closing but was designated as "Deferred Consideration." Additionally, Deferred Consideration would be "Accelerated" and immediately payable to Sellers by Davies U.S. upon the consummation of a "Change of Control Event" as defined in the SPA.
On March 23, 2022, the Johnson Revocable Living Trust filed a Complaint to recover its pro rata shares of the Accelerated Deferred Consideration. Plaintiffs allege that a Change of Control Event has occurred by means of a purchase of Davies US's indirect parent Davies Topco Limited. Now, Defendants move for Judgment on the Pleadings (the "Motion") pursuant to Superior Court Civil Rule 12(c).
For the reasons stated below, the Court DENIES the Motion.
II. RELEVANT FACTS
A. The Parties
Plaintiff the Johnson Revocable Living Trust (the "Trust") is an Oklahoma revocable living trust located in Oklahoma. Allen Johnson is its Trustee. Allen Johnson and Linda Johnson are beneficiaries of the Trust. Plaintiffs Allen Johnson and Linda Johnson are individual citizens and residents of the State of Oklahoma.
D.I. No. 1, Complaint (hereinafter "Compl.) ¶ 4.
Id.
Id.
Id. ¶¶ 5-6.
Defendant Davies U.S. is a Delaware limited liability company. Davies U.S. is authorized to do business in the State of Delaware. Defendant Davies Group Limited ("Davies Group") is an England and Wales private limited company with its principal place of business in London, England. Davies Group does business in the State of Delaware. Davies Group wholly owns Davies US.
Id. ¶ 7.
Id.
Id. ¶ 8.
Id.
Id.
Non-party Davies Topco Limited ("Topco") is a Jersey private limited company."Topco is the ultimate parent company of Davies Group and owns a majority interest in Davies Group through several layers of parent companies."
Id. ¶ 9. Jersey is in reference to the Island of Jersey, which is part of the English Channel Islands.
Id.
Non-party BC Partners LLP ("BCP") is a private equity firm based in London, England.
Id. ¶ 10.
B. The Stock Purchase Agreement
Prior to the SPA, Plaintiffs owned 89.975% of the issued and outstanding shares of capital stock in the Company. On October 30, 2020, Sellers and Buyer entered into the SPA. The SPA was a formal agreement by which Sellers agreed to sell, and Davies U.S. agreed to purchase, 100% of the capital stock of the Company. The agreed Purchase Price was $10,400,000, "payable to Sellers according to their pro rata share ownership." Of this amount, the sum of "up to" $1,500,000 in "contingent consideration" was designated as "Deferred Consideration." On October 30, 2020, the transaction closed and Davies U.S. acquired the Company's stock pursuant to the terms of the SPA.
Id. ¶ 16.
Defined in the SPA as the Trust, Allen and Linda Johnson, and non-party Bryan Scott Johnson. See D.I. No. 10, Defendants Davies U.S. LLC and Davies Group Limited's Motion for Judgment on the Pleadings (hereinafter "Mot."), Ex. 1, Stock Purchase Agreement (hereinafter "SPA") at 1.
Defined in the SPA as Davies US. SPA at 1. Davies Group is defined as "Buyer Parent." Id.
See SPA.
Compl. ¶ 17.
SPA § 1.3(a).
Compl. ¶ 18.
Id.; SPA § 1.3(a)(iii).
Compl. ¶ 24.
Section 4.22 of the SPA provides the following about the Deferred Consideration:
In the event that, after the Closing and prior to the second anniversary of the Closing Date, . . . Company undergoes a Change of Control Event . . . Buyer shall pay to Sellers an amount equal to the Accelerated Deferred Consideration by wire transfer of immediately available funds to accounts designated in writing by Sellers .... In the event the Accelerated Deferred Consideration is due as a result of a Change of Control Event, such payment shall be due upon the consummation of such Change of Control Event.
SPA § 4.22.
"Accelerated Deferred Consideration" is defined in Section 1.1(c) of the SPA as $1,500,000. A "Change of Control Event" is defined in the SPA as:
SPA § 1.1(c).
"Change of Control Event" means any of the following, directly or indirectly: (i) a sale, lease, exchange or other transfer (in one transaction or a related series of transactions) of the Business or all or substantially all of the Company's assets; (ii) consummation of a merger or consolidation of the Company with or into any other Person (other than an Affiliate of Buyer, provided that such Affiliate assumes Buyer's obligations arising out of this Agreement); or (iii) the sale of 50% or more of the equity ownership or voting power of the then-outstanding capital stock of the Company (whether in a single transaction or a related series of transactions) to any single person or "group" (as defined the Securities Exchange Act of 1934) of Persons; provided, however, that a Change of Control Event shall not include any sale or transfer referenced in (i), (ii) or (iii) above made pursuant to a plan of liquidation, dissolution, merger, consolidation or other reorganization of Buyer under any provisions of federal or state bankruptcy or insolvency Law.
SPA § 1.1(1).
C. Change of Control
On March 15, 2021, "an agreement was signed for the acquisition of a controlling majority interest in" Topco by BCP (the "BCP Purchase"). "Pursuant to the BCP Purchase, [BCP] obtained control of [Topco], and through [Topco], obtained control of Davies Group, Davies US, and the Company." The BCP Purchase closed on August 3, 2021.
Compl. ¶ 25.
Id.
Id. ¶ 26.
Davies U.S. did not pay the Accelerated Deferred Consideration. Plaintiffs made a demand upon Davies US, and upon Davies Group as guarantor, for the payment of the Accelerated Deferred Consideration. Davies U.S. and Davies Group responded and denied that a 'Change of Control Event' had occurred because of the BCP Purchase and refused to pay Plaintiffs the Accelerated Deferred Consideration.
Id. ¶ 29.
Id.
Id. ¶ 30.
D. Current Litigation
On March 23, 2022, Plaintiffs filed the Complaint against Defendants Davies U.S. and Davies Group (collectively "Davies"). The Complaint contains two counts: Count I-Declaratory Judgment Against All Defendants and Count II- Breach of Contract Against Davies US. On May 25, 2022, Davies filed an Answer to Plaintiffs' Complaint.
D.I. No. 1.
Id.
D.I. No. 9.
On May 25, 2022, Davies filed the present Motion. On June 24, 2022, Plaintiffs filed an Answering Brief in Opposition to the Motion (the "Opposition"). On July 15, 2022, Davies filed a Reply Brief in Support of the Motion (the "Reply"). The Court held a hearing on the Motion, the Opposition and the Reply on August 25, 2022. At the conclusion of the hearing, the Court took the Motion under advisement. In addition, the Court stay discovery pending additional review of the Motion, promising to contact the parties within two weeks. I failed to meet this deadline and I have no real excuse for failing to follow up with the parties. I apologize for this oversight.
D.I. Nos. 10-18.
D.I. No. 27, Plaintiffs' Answering Brief in Opposition to the Motion (hereinafter "Opp.").
D.I. No. 38, Defendants Davies U.S. LLC and Davies Group Limited's Reply in Support of the Motion (hereinafter "Reply").
III. PARTIES' CONTENTIONS
A. Motion
Davies contends that the Complaint must be dismissed because BCP's acquisition of a majority stake in Topco is not a "sale of the Company" constituting a Change of Control Event as defined by the SPA. Davies argues that there has been no breach of the SPA, no Change of Control of Event, and that Davies U.S. owned the Company before March 2021 and still owns it now. Davies' arguments rest on the contention that Davies U.S. did not indirectly sell the Company and that Plaintiffs' interpretation of the SPA is unreasonable.
Mot. at 3.
B. Opposition
Plaintiffs argue that Davies do not satisfy the legal standard under Rule 12(c) and as such the Motion should be denied. Plaintiffs contend that the term indirect sale in the SPA includes a transaction involving an upstream entity. Further, Plaintiffs argue that the cases which Davies relies on are distinguishable from the case at bar and as such are not controlling.
IV. STANDARD OF REVIEW
A party may move for judgment on the pleadings pursuant to Civil Rule 12(c). The Court, in determining a motion under Civil Rule 12(c) for judgment on the pleadings, must view the facts pleaded and the inferences to be drawn from such facts in a light most favorable to the non-moving party. "The Court must take the well-pleaded facts alleged in the complaint as admitted." When considering a motion under Civil Rule 12(c), the Court also assumes the truthfulness of all well-pled allegations of fact in the complaint. Therefore, the Court shall give plaintiffs opposing a Rule 12(c) motion the same benefits as a plaintiff defending a motion under Civil Rule 12(b)(6). The Court may grant a motion for judgment on the pleadings only when no material issue of fact exists and the movant is entitled to judgment as a matter of law.
Civil Rule 12(c) provides:
Motion for judgment on the pleadings - After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings. If, on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the Court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.Del. Super. Civ. R. 12(c).
See Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1205 (Del. 1993); see also Warner Commc'ns, Inc. v. Chris-Craft Indus., Inc., 583 A.2d 962, 965 (Del. Super.), aff'd without opinion, 567 A.2d 419 (Del. 1989).
See Desert Equities, Inc., 624 A.2d at 1205; Warner Commc'ns, Inc., 583 A.2d at 965.
See McMillan v. Intercargo Corp., 768 A.2d 492, 499-500 (Del. Ch. 2000).
See id. at 500.
See Desert Equities, Inc., 624 A.2d at 1205; Warner Commc'ns, Inc., 583 A.2d at 965.
V. DISCUSSION
This dispute concerns whether a certain provision of the SPA has been triggered such that Plaintiffs are entitled to Deferred Consideration. Plaintiffs assert an interpretation that if correct would entitle them to compensation. Davies counters by asserting that such a reading is unreasonable and should be rejected by the Court on a motion for judgment on the pleadings. The decision is governed upon the legal standard of Rule 12(c). As set out below, Davies fails to satisfy this legal standard.
The definition in question is found in Section 1.1(1) of the SPA, which defines a Change of Control Event, to
mean[] any of the following, directly or indirectly: (i) a sale, lease, exchange or other transfer (in one transaction or a related series of transactions) of the Business or all or substantially all of the Company's assets; (ii) consummation of a merger or consolidation of the Company with or into any other Person (other than an Affiliate of Buyer, provided that such Affiliate assumes Buyer's obligations arising out of this Agreement); or (iii) the sale of 50% or more of the equity ownership or voting power of the then-outstanding capital stock of the Company (whether in a
single transaction or a related series of transactions) to any single person or "group" (as defined in the Securities Exchange Act of 1934) of Persons; provided, however, that a Change of Control Event shall not include any sale or transfer referenced in (i), (ii) or (iii) above made pursuant to a plan of liquidation, dissolution, merger, consolidation or other reorganization of Buyer under any provisions of federal or state bankruptcy or insolvency Law.
SPA § 1.1(1).
The root of the parties' dispute is over the word "indirectly," and whether "indirectly" in the context of the SPA refers solely to a sale of the company itself, through direct or indirect means, or whether it can also refer to an upstream transaction that indirectly affects the control of the Company.
A. Defendants must preclude Plaintiffs' interpretation of the SPA.
For this Motion, the Court need not decide between Plaintiffs' and Davies' interpretation of the SPA. Rather the Court must decide whether Plaintiffs' interpretation of the SPA is a reasonable one, or inversely that Davies' interpretation is the only reasonable interpretation of the provision. Davies have the burden of establishing that the Plaintiffs' interpretation is not reasonable.
AT&T Corp. v. Lillis, 953 A.2d 241, 253 (Del. 2008) ("[i]f there is more than one reasonable interpretation of a disputed contract term, consideration of extrinsic evidence is required to determine the meanings the parties intended.") quoting Appriva S'holder Litig. Co., LLC v. ev3, Inc., 937 A.2d 1275, 1291 (Del. 2007)); see Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 925 (Del. 2017) ("[J]udgment on the pleadings . . . is a proper framework for enforcing unambiguous contracts because there is no need to resolve material disputes of fact." (citation omitted)).
Cooper Tire & Rubber Co. Apollo (Mauritius) Hldgs. Pvt. Ltd., 2013 WL 5787958, at *4 (Del. Ch. Oct. 25, 2013) ("[T]he moving party . . . has the burden of establishing that its interpretation . . . is the only reasonable interpretation." (citation omitted)); see id. ("In other words, if both . . . interpretations . . . are reasonable, then [the moving party's] Motion for Judgment on the Pleadings must be denied, and the Court must determine the intent of the parties at trial.")
Thus, the question here is whether Davies have shown that BCP's purchase of Topco was not "directly or indirectly: . . . (iii) the sale of 50% or more of the equity ownership or voting power of the then-outstanding capital stock of the Company . . ." such that the Change of Control provision was triggered.
B. Davies have not precluded Plaintiffs' interpretation of the SPA as necessary under Rule 12(c).
Davies' argument rests on the fact that the Company's "management has not changed" and that the same management, Davies US, "still owns and controls" the Company. Davies acknowledge that BCP acquired a majority interest in Topco which Davies refers to as "an indirect distant parent of Davies US." Davies downplay the relationship between Topco and Davies US. Specifically, Davies states that Topco is "an indirect distant parent" of Davies US, but the SPA states that Davies U.S. "is an indirectly owned subsidiary of Topco."
Mot. at 1.
Id. at 2 (citing Compl. ¶¶ 9-10, 25-26).
Id. at 2; SPA Preamble.
Davies are steadfast in their position that "BCP's acquisition of a majority interest in Topco does not change the fact that Davies U.S. continues to own 100% of the Company." To Davies, "an indirect sale must still be an actual sale of some sort, and Davies U.S. still owns" the Company. Thus, "a sale by Davies US, directly or indirectly, of its interest in the Company" has not occurred, and therefore the provision has not been triggered.
Mot. at 3.
Id.
Id. (italics omitted).
Davies assert that Plaintiffs could have included the language they now press, but chose not to, and Davies urge the Court to not rewrite the SPA. Davies argues that the Court should follow Am. Bottling Co. v. BA Sports Nutrition, LLC and grant judgment on the pleadings.Davies assert that Am. Bottling Co. stands for the position that "a change in ownership of an upstream related company does not constitute a downstream 'change of control' pursuant to contracts containing provisions that are substantially similar to the one in the SPA." At this stage, the Court does not agree with Davies' argument as to Am. Bottling Co.
Id. at 5-6.
2021 WL 6068705 (Del. Super. Dec. 22, 2021)
Mot. at 7.
In Am. Bottling Co., the Court found that under the plain language of the contract, "there must be a transfer of the Distribution Agreement or ABC's duties and privileges thereunder to trigger BodyArmor's right to terminate 'With Cause.'" Further, the Court found that a "change in management or change in control occur[ing] at ABC or its parent or grandparent levels is not enough to indicate a 'transfer' occurred." This case does not concern the transferring of a distribution agreement; rather, it concerns whether an indirect sale in the context of the SPA refers only to a sale of the Company, or whether it can also mean an upstream change of control.
Am. Bottling Co., 2021 WL 6068705, at *9.
Id.
Additionally, Davies contend the placement of the operative verb in the contract underlying the dispute in Am. Bottling Co. should guide the Court here. Despite Davies argument, the language of the two contracts is different and it is unclear how the Court's opinion in Am. Bottling Co. is of any assistance to interpretation of the SPA.
Mot. at 8.
Davies assert next that Veloric v. J.G. Wentworth, Inc. is instructive for the proposition that "the merger of [an] indirect subsidiary d[oes] not effect a change in control of any assets actually owned directly by the parent, [and therefore] there [is] no change of control."However, the Court does not find Veloric helpful here.
2014 WL 4639217, at *13 (Del. Ch. Sept. 18, 2014).
Mot.. at 8-9 (citing Veloric, 2014 WL 4639217, at *13).
The issue in Veloric was not the general conclusion that a change of control of a parent does not affect a subsidiary, it was that the specific contractual language at issue in Veloric meant that change of control occurred (under the fourth scenario) by "sale or other disposition, directly or indirectly, by [Wenworth] of all or substantially all of [Wentworth's] assets."Further, the Court of Chancery found that the "Wentworth's assets" referred only to its assets, and not the assets of its subsidiaries because (1) the contractual language specified Wentworth's assets and (2) because in the preceding paragraph the term "subsidiaries" was used such that "when the parties to the [Agreement] intended to include subsidiaries, they did so expressly."That is not the case here. Additionally, even if it were applicable, it does not assist the Court's analysis because the Plaintiffs are arguing that SPA Section 1.1(1)(iii), not SPA Section 1.1(1)(i), was triggered. SPA Section 1.1. (1)(i) ("sale, lease, or exchange . . . of the Business or all or substantially all of the Company's assets") would be the section most similar to the provision at issue in Veloric.
Veloric, 2014 WL 4639217, at *4 (brackets in original).
Id. at *13.
"(iii) the sale of 50% or more of the equity ownership or voting power of the then-outstanding capital stock of the Company. . ." SPA § 1.1(c).
"(i) a sale, lease, exchange or other transfer (in one transaction or a related series of transactions) of the Business or all or substantially all of the Company's assets. . ." SPA §1.1(c).
As the Court reads Veloric and Am. Bottling Co., Davies' argument lacks support that the SPA cannot be read in the way that Plaintiffs have proffered, or that Davies' interpretation is the only reasonable interpretation of the SPA.
Next, Davies contend that the grammatical canon of contract interpretation supports its interpretation. Specifically, Davies maintain that that "[t]he adverb 'indirectly' does not apply to 'the Company'; [rather] it applies to the required action-a sale." Davies cite to the Chicago Manual of Style to argue that adverbs do not modify nouns. However, this argument is equally unpersuasive because the word Company is not being modified, if anything the word sale is being modified, or selling, which is its operative verbal form, which can be modified by an adverb.
Mot. at 9.
Id.
Davies expand on the grammatic canon in the Reply. Specifically, Davies claim that the word "'indirectly' modifies 'sale, lease, exchange or other transfer.'" But Plaintiffs are arguing that the third scenario was triggered, not the first. And while it is true that the word indirectly modifies SPA Section 1.1(1)(i), the word indirectly must also modify both SPA Section 1.1(1)(ii) and SPA Section 1.1(1)(iii). Additionally, while SPA Section 1.1(1)(i) refers to an indirect sale, SPA Section 1.1. (1)(iii) states "directly or indirectly . . . (iii) the sale of 50% or more of the equity ownership or voting power of the then-outstanding capital stock of the Company." If the only scenario imagined was an indirect sale of the Company, then SPA Section 1.1(1)(iii) could have removed the language: "the equity ownership or voting power of." It did not. Contracts should be read to give meaning to every word. That does not mean, at this stage of the proceedings, Plaintiffs' interpretation is correct, rather it means Davies have failed to preclude Plaintiffs' interpretation.
Reply at 5.
Compl. ¶ 26.
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) ("Courts will read a contract as a whole and . . . will give each provision and term effect, so as not to render any part of the contract mere surplusage" (citation omitted)).
Last, Davies argue that the intent of the SPA makes clear that the triggering event did not occur. Specifically, Davies contend that the purpose of the deferred consideration provision was "to protect Sellers from Davies U.S. ceasing to own, operate, and control the Company."While, intent can be determined at the motions stage, Davies have not demonstrated that the parties' clearly intended to preclude any action related to Topco from affecting the change in control provision. Davies argue that because the entire SPA concerns the relationship between Davies U.S. and the Company, it would be unreasonable to conclude that any action by Topco could impact what is, primarily, a contract between Davies U.S. and the Company. This argument seems to ignore the fact that the relationship between Topco and Davies U.S. is specified on the first page of the SPA and throughout the document. Davies, therefore, have failed to demonstrate that its interpretation of the SPA with respect to upstream control is correct and failed to preclude other possibilities proffered by Plaintiffs.
Mot. at 10.
Id. at 11.
Vinton v. Grayson, 189 A.3d 695, 704 (Del. Super. 2018) ("In deciding a contract interpretation dispute, the court will first examine the entire agreement to determine whether the parties' intent can be discerned from the express words used or, alternatively, whether its terms are ambiguous." (citations and internal quotation marks omitted)).
VI. CONCLUSION
For the reasons stated above, the Court DENIES the Motion.
IT IS SO ORDERED.