Leaf Invenergy Co. v. Invenergy Renewables LLC , 210 A.3d 688 ( 2019 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
LEAF INVENERGY COMPANY, §
a Cayman Islands exempt limited §
liability company, § No. 308, 2018
§
Plaintiff Below-Appellant/ § Court Below—Court of Chancery
Cross-Appellee, § of the State of Delaware
§
v. §
§ C.A. No. 11830-VCL
INVENERGY RENEWABLES LLC, §
a Delaware limited liability company, §
§
Defendant Below-Appellee/ §
Cross-Appellant. §
Submitted: February 13, 2019
Decided: May 2, 2019
Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and
TRAYNOR, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery. REVERSED and REMANDED.
Bradley D. Sorrels, Shannon E. German, Andrew D. Berni, WILSON SONSINI
GOODRICH & ROSATI, P.C., Wilmington, Delaware; Keith E. Eggleton, Steven
D. Guggenheim (argued), David A. McCarthy; WILSON SONSINI GOODRICH &
ROSATI, P.C., Palo Alto, California; Attorneys for Appellant/Cross-Appellee Leaf
Invenergy Company.
Kenneth J. Nachbar (argued), Kevin M. Coen, Zi-Xiang Shen, Coleen W. Hill,
MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Bruce
S. Sperling, Harvey J. Barnett, Eamon P. Kelly, SPERLING & SLATER, P.C.,
Chicago, Illinois; Attorneys for Appellee/Cross-Appellant Invenergy Renewables
LLC.
TRAYNOR, Justice:
In 2008, Invenergy Wind LLC (“Invenergy”), a wind energy developer, was
raising money for a Series B investment round, and Leaf Clean Energy Company
(“Leaf Parent”), an investment fund, expressed interest. After extensive
negotiations, Leaf Parent invested $30 million in Invenergy Series B notes through
a vehicle called Leaf Invenergy Company (“Leaf”). The agreement governing the
Series B notes (“Series B Note Agreement”) gave noteholders such as Leaf the right
to convert to equity and incorporated an LLC agreement (“Series B LLCA”) that the
noteholders and Invenergy would execute upon conversion.
The Series B Note Agreement and the Series B LLCA also included provisions
that prohibited Invenergy from conducting a “Material Partial Sale”—a defined
term—without Leaf’s consent unless Invenergy paid Leaf a premium called a
“Target Multiple”—another defined term. Although the parties renegotiated several
aspects of their agreements with one another over the next few years, the consent
provisions persisted in substantially similar form into the Third Amended and
Restated LLC Agreement (the “LLC Agreement”), which is the operative agreement
in this dispute. Those consent provisions form the crux of this litigation.
Leaf filed suit after Invenergy closed a $1.8 billion asset sale—a transaction
that Invenergy concedes was a Material Partial Sale—without first obtaining Leaf’s
consent or redeeming Leaf’s interest for the Target Multiple. After a trial, the Court
2
of Chancery concluded that, although Invenergy had breached the Material Partial
Sale consent provisions, Leaf was not entitled to the Target Multiple. The court then
awarded only nominal damages because, according to the court, Invenergy had
engaged in an “efficient breach.” 1 The Court of Chancery directed the parties to
complete a buyout of Leaf’s interests pursuant to another LLC Agreement provision
that Invenergy had invoked after Leaf had filed suit.
We disagree with the Court of Chancery’s interpretation of the consent
provision and its award of nominal damages and therefore REVERSE.The consent
provisions unambiguously require Invenergy to pay Leaf the Target Multiple if it
conducts a Material Partial Sale without Leaf’s consent, and the concept of efficient
breach does not permit Invenergy to circumvent that requirement. Because
Invenergy conducted a Material Partial Sale without Leaf’s consent and without
paying Leaf the Target Multiple, Leaf is entitled to the Target Multiple as contractual
damages. We thus award Leaf the Target Multiple in damages on condition that it
surrenders its membership interests in Invenergy.
1
Leaf Invenergy Co. v. Invenergy Wind LLC (“Opinion Below” hereafter), 2018 WL 1882746
(Del. Ch. Apr. 19, 2018).
3
I. BACKGROUND2
Founded in 2001, Invenergy is a developer and operator of wind energy
facilities in North America and Europe. Leaf Parent is a publicly traded investment
fund specializing in renewable energy and sustainable technologies.
A. 2008: Leaf invests in Invenergy’s Series B notes
In the summer of 2008, Invenergy sought to raise additional capital by issuing
convertible debt. Several investors expressed interest including Leaf Parent and
Liberty Mutual Insurance Company (“Liberty Mutual”), the latter of which had
invested in Invenergy during Invenergy’s earlier Series A funding round. Ultimately,
Leaf invested $30 million in Invenergy Series B convertible notes in two closings in
December 2008 and February 2009.3
The Series B Note Agreement enumerated several items that required the
consent of the noteholders. Among other things, Invenergy could not conduct a
“Material Partial Sale” 4 without majority noteholder consent5 unless the noteholders
received the Target Multiple at the closing of such a sale. The Target Multiple, in
2
The Court of Chancery’s opinion provides a more detailed treatment of the factual background;
we have included the most significant and relevant facts here.
3
Bank of America Strategic Investments Corporation also invested $20 million in the Series B
round, but those notes were purchased by an investment vehicle controlled by Invenergy’s CEO
in December 2012.
4
The term “Material Partial Sale” is a contractually defined term, but it suffices to say here that it
refers to a sale of a significant portion of Invenergy’s assets.
5
The contractual definition of how this majority is determined in various cases is somewhat
complex, App. to Opening Br. A132 (“A__” hereafter), but those complexities are not of
consequence here.
4
turn, was defined as multiples of the noteholders’ initial investment that grew over
time. Essentially, Invenergy could conduct a large asset sale with or without the
noteholders’ consent. But in exchange for the right to conduct a sale without the
noteholders’ consent, the noteholders were afforded the ability to cash out with a
handsome agreed-upon return on their investment upon Invenergy’s exercise of that
right.
The Series B notes matured on December 22, 2014, but Series B noteholders
could convert their Series B notes into equity before the conversion deadline, which
was initially set for December 22, 2011. As a practical matter, if Invenergy did
poorly, the Series B noteholders would stay in the notes and preserve their debt
covenant rights. On the other hand, if Invenergy did well, the Series B noteholders
would convert into equity and capture an upside on their investment.
To facilitate a conversion, the Series B Note Agreement incorporated an LLC
agreement (“the Series B LLCA”) that would come into effect upon conversion. The
Series B LLCA gave the converted noteholder-members many rights similar to what
they had as Series B noteholders. For example, like the Series B Note Agreement,
the Series B LLCA provided that Invenergy could not conduct a “Material Partial
5
Sale”6 without the consent of members unaffiliated with management or redeeming7
unaffiliated members for the Target Multiple. As the Court of Chancery found, Leaf
and Invenergy had contemporaneous understandings that these and similar clauses
guaranteed that the investors would receive the Target Multiple if Invenergy engaged
in Material Partial Sale without the investors’ consent.
The Series B LLCA also included reciprocal call and put rights that Invenergy
and the converted noteholders could exercise between December 22, 2013 and
December 22, 2014. Under Section 11.09 of the Series B LLCA, converted
noteholders could “require that [Invenergy] purchase all but not less than all” of its
interest.8 The same section provided that Invenergy could “redeem all but not less
than all” of the converted noteholders’ interests.9 These rights collectively ensured
that the Series B investors would either exit or renegotiate their investment by
December 22, 2014.
B. 2011–13: Invenergy and its investors make minor changes, but Leaf
preserves its Material Partial Sale consent right
In 2011, Invenergy sought to extend the maturity date of the Series B notes
by two years to facilitate other refinancing transactions. The Series B noteholders,
6
The term “Material Partial Sale” is defined differently in the Series B LLCA than in the Series B
Note Agreement, but again it suffices to say that it also means a sale of a significant portion of
Invenergy’s assets.
7
The parties agree that payment of the Target Multiple redeems Leaf’s interests. See Opening Br.
27–28; see also Answering Br. 51.
8
A192 (JX 38 at 59).
9
Id.
6
including Leaf, agreed to Invenergy’s modifications and received matching
extensions of two years on the conversion deadline and the put and call windows.
During this process, the parties also agreed to slight modifications to the calculation
of the Target Multiple.
In the summer of 2013, Liberty Mutual and Invenergy explored having
Liberty Mutual convert its Series A and Series B notes into equity, but Invenergy
was concerned that Leaf, as the primary remaining Series B noteholder, would then
possess outsize power to block transactions. For its part, Leaf wished to facilitate
the conversion because it believed that it would benefit Invenergy and consequently
benefit Leaf as an investor. Therefore, Leaf agreed to amendments to the Series B
Note Agreement that limited some of its former rights, but preserved its right to
consent to Material Partial Sales and change-of-control transactions. With the
amendments made, Liberty Mutual converted $12.5 million of its Series A notes and
all of its Series B notes into equity.
C. 2014: Leaf explores liquidation and the parties affirm that Leaf would
receive the Target Multiple if Invenergy conducts a Material Partial Sale
without Leaf’s consent
In 2014, Leaf Parent began an orderly liquidation of all of its assets to return
funds to investors, and it began to explore exit options for its Invenergy investment.
After reviewing the relevant documents, Leaf Parent concluded that the Series B
7
LLCA provided for a higher Target Multiple than the Series B Note Agreement.10
Fortuitously for Leaf Parent, Invenergy was also exploring recapitalization options
around the same time. One of the options Invenergy was exploring would have two
of Invenergy’s existing investors increase their equity stakes and required Leaf’s
consent.
Leaf eventually consented to the recapitalization though not before
negotiating some small modifications to the Series B Note Agreement and the Series
B LLCA, which contains the central operative language in this case. Section 8.04
now stated:
Without the prior written consent of . . . [Leaf],11 [Invenergy] shall not:
...
(b) participate in or permit a Material Partial Sale, unless the transaction
giving rise to the Material Partial Sale yields cash proceeds equal to or
greater than the amount that would provide [Leaf], as of the closing of
such Material Partial Sale, with cash proceeds equal to or more than
their applicable Target Multiple with such Target Multiple to be paid
upon such closing of the Material Partial Sale. 12
10
As the Court of Chancery found, Leaf Parent understood that the Series B LLCA, as amended,
provided for a guaranteed IRR of 23% while the Series B Note Agreement, as amended, provided
for a guaranteed IRR of only 20.5%.
11
The agreement reads “the Required Series B Non-Voting Investor Members” in place of “Leaf.”
No party disputes that Leaf is the “Required Series B Non-Voting Investor Member” of concern.
12
A420.
8
As the Court of Chancery found, all parties had contemporaneous understandings
that this clause would require Invenergy to pay the Target Multiple to Leaf if
Invenergy chose to conduct a Material Partial Sale without Leaf’s consent.
With Section 8.04 freshly reaffirmed, Leaf had a number of choices, including
selling its Series B notes to a third party, having Invenergy repurchase the notes, and
converting to equity and exercising the put right in the Series B LLCA. Leaf’s
exploration of those choices apparently annoyed Invenergy, but were not directly of
consequence.
D. 2014–2015: Invenergy conducts a Material Partial Sale and admits Leaf
as a member
In late 2014, Invenergy learned that wind assets were being highly valued by
potential buyers and concluded that the timing was right for an asset sale. For what
appears to be a mix of financial and non-financial reasons, Invenergy did not wish
to have to obtain Leaf’s consent or pay it the Target Multiple.
One of the interested buyers was TerraForm Power, Inc. (“TerraForm”). Leaf
soon discovered that Invenergy was considering an asset sale to TerraForm and
began planning to take advantage of that asset sale. Among other things, Leaf’s
executives believed that Leaf would be most likely to receive the Target Multiple if
9
Leaf converted to equity after a deal was “fully baked” but before that deal actually
closed. 13
The TerraForm deal moved along quickly. On June 4, 2015, TerraForm
offered to purchase a number of Invenergy wind projects for an aggregate price of
$2.4 billion. On June 6, Invenergy and TerraForm entered into an exclusive
negotiation period.
Meanwhile, Invenergy tried to keep Leaf in the dark. On June 16, Invenergy
held a regularly scheduled noteholder meeting that Leaf attended. No one mentioned
the TerraForm deal. Leaf’s board, growing suspicious, voted on June 18 to convert
its notes and sent notice to Invenergy that same day. The Series B Note Agreement
required Invenergy to convert within three days. Invenergy, however, did not
complete the conversion within three days. Instead, it decided to seek regulatory
approval for the conversion.
On July 1, Invenergy and TerraForm executed a purchase agreement in which
TerraForm would buy a number of Invenergy’s assets for $1.2 billion in cash and
the assumption of $800 million in debt. Invenergy would use the majority of the
cash to pay investors, retaining only $107 million for working capital. According to
Invenergy, the deal represented a sale of 12.5% of its assets, implying a firm value
of approximately $16 billion. On July 6, Invenergy publicly announced the deal.
13
App. to Answering Br. B156 (JX 223).
10
Although Invenergy rushed to finalize the TerraForm deal, it dragged its feet
when it came to completing Leaf’s conversion from debt to equity. It was not until
July 10 that Invenergy filed for regulatory approval, which it received on September
23. On September 24, Invenergy’s equity holders admitted Leaf as a member of
Invenergy. Finally, on December 15, 2015, Invenergy and TerraForm entered into
an amended and restated purchase agreement and closed the deal the next day
without having ever received Leaf’s consent or paying Leaf the Target Multiple.
The final $1.8 billion deal left Invenergy with $85 million in working capital.
E. The litigation in the Court of Chancery
Things did not settle down after the TerraForm deal closed, and Leaf filed this
suit on December 21, 2015. One week later, Invenergy exercised its call right,
proposing a price of $42.4 million for Leaf’s 2.3% stake, implying a firm value of
just $1.8 billion. In turn, Leaf exercised its put right the same day and proposed a
price of $214 million for its stake. The LLC Agreement provided for a dispute
resolution process that would eventually result in a valuation of $50.7 million.
While the put-call dispute resolution was ongoing, Leaf moved for partial
judgment on the pleadings, arguing that Invenergy breached the LLC Agreement by
closing the TerraForm transaction without Leaf’s consent and without paying Leaf
its Target Multiple. For its part, Invenergy claimed that the proper time to determine
Leaf’s membership status was at the time of signing, not closing and that Leaf was
11
not a member when it signed the initial TerraForm transaction agreement. And once
the put-call dispute resolution process was complete, Invenergy also challenged a
portion of that process—an appraisal conducted by XMS Capital Partners, LLC—
as improperly influenced by Leaf.
In what the Court of Chancery and this opinion calls the Liability Order, the
Court of Chancery granted Leaf’s motion, finding that Invenergy breached Section
8.04 of the LLC Agreement by not obtaining Leaf’s consent or paying the Target
Multiple.14 It held that the operative time for determining Leaf’s status as a member
was at closing. It further determined that, even if the operative time was at signing
and not at closing, then Leaf had still become an equity holder before signing
because TerraForm and Invenergy had executed an amended deal agreement just
before closing. The Court of Chancery, however, reserved judgment on damages.
Shortly after the Court of Chancery entered the Liability Order, Leaf moved
for the entry of an order and final judgment in its favor in the amount of the Target
Multiple, which Leaf had determined was $126,110,576. At this point, Invenergy
modified its argument to also claim that, despite the breach, Leaf was not entitled to
14
Order Granting Pl’s Mot. for Partial J. on the Pleadings (“Liability Order” hereafter) ¶ 12, Leaf
Invenergy Co. v. Invenergy Wind LLC, No. 11830 (Del. Ch. June 30, 2016) Dkt. No. 39 (“Because
[Invenergy] did not follow either the Consent Path or the Payout Path, it breached the plain
language of [Section 8.04].”).
12
damages because the TerraForm transaction had not harmed Leaf. 15 Although the
Court of Chancery found that Leaf correctly calculated the Target Multiple, it denied
Leaf’s motion and held a trial on damages.16
In its post-trial decision, the Court of Chancery agreed with Invenergy and
held that Leaf had failed to prove actual damages despite overwhelming evidence
that “until midway through this case, all of the parties to the LLC Agreement
understood that Leaf would receive its Target Multiple if Invenergy engaged in a
Material Partial Sale without Leaf’s consent.”17 The Court of Chancery then
awarded Leaf one dollar in nominal damages and ordered the parties to complete the
put-call sale process.
15
See Invenergy’s Answering Br. to Leaf’s Mot. for Entry of an Order and Final J. 21, Leaf
Invenergy Co. v. Invenergy Wind LLC, No. 11830 (Del. Ch. Aug. 12, 2016) Dkt. No. 62.
16
The Court also rejected Invenergy’s argument that, because Leaf did not seek injunctive relief
before the closing of the TerraForm transaction, Leaf was precluded from recovering damages. In
a passage that presaged the dispute now before us, the Court of Chancery wrote:
[Invenergy] was free to proceed with the TerraForm Transaction as long as
[Invenergy] paid Leaf its Target Multiple. [Invenergy] could also choose to engage
in the transaction if it regarded the payment of damages as a form of efficient
breach. See E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d 436, 445–46
(Del. 1996). Leaf clearly communicated to [Invenergy] that it believed the
TerraForm Transaction required its consent and that if the deal closed, then Leaf
would be entitled to its Target Multiple. [Invenergy] chose to proceed [without
Leaf’s consent]. Under the circumstances, Leaf was not required to seek pre-closing
relief. Rather, it was [Invenergy] that assumed the risk of a post-closing remedy.
Order Denying Mot. for Entry of an Order and Final J. (“Order Denying Final Judgment”) ¶ 13,
Leaf Invenergy Co. v. Invenergy Wind LLC, No. 11830 (Del. Ch. Oct. 10, 2016) Dkt. No. 81.
17
Opinion Below, supra note 1, at *26.
13
How did the court transform Leaf’s expectation—shared by Invenergy—that,
based upon the bargained-for consent and payment rights in Section 8.04, it would
receive $126 million under the circumstances that occurred here into a single dollar?
A brief summary of the Court of Chancery’s analysis should suffice to set the stage
for our review.
The Court of Chancery’s damages discussion recognized the well-settled
rule18 that damages for breach of contract are based on the non-breaching party’s—
here Leaf’s—expectation interest. As the Court of Chancery correctly noted,
“expectation” is a term of art. 19 When determining expectation damages, courts
determine an amount that will give the injured party “the benefit of its bargain by
putting that party in the position it would have been but for the breach.” 20 The
primary element of expectation damages is the “the value that the performance
would have had to the injured party,” or the “loss in value” caused by the deficient
performance compared to what had been expected. 21
And on this point, the Court of Chancery laid out the extensive evidence
showing beyond any shadow of a doubt that Leaf and Invenergy both harbored the
belief—one that persisted until after the court entered its Liability Order—that Leaf
18
Restatement (Second) of Contracts § 347 (1981).
19
Opinion Below, supra note 1, at *30.
20
Genecor Int’l, Inc. v. Novo Nordisk A/S, 766 A.2d 8, 11 (Del. 2000) (quoted by Opinion Below,
supra note 1, at *30).
21
Restatement (Second) of Contracts § 347 cmt. b (1981).
14
was entitled to payment of the Target Multiple if Invenergy engaged in Material
Partial Sale without Leaf’s consent, as it did here. The Court of Chancery, however,
without citing any specific authority, disregarded the parties’ subjective expectations
apparently finding that they were not sufficiently reasonable to form the basis of a
damages award. Instead, the court relied on a pair of its earlier opinions that
addressed consent-right provisions in other contexts and the principle of efficient
breach in support of its conclusion that Leaf could not recover damages unless it
demonstrated “actual damages by showing that it suffered harm as a result of the
TerraForm Transaction or that it would have secured additional consideration given
the opportunity to negotiate for its consent.”22 The court found that Leaf could show
neither—hence, the nominal damages award.
Leaf now appeals to this Court, arguing that (1) the Court of Chancery
misinterpreted the LLC Agreement when it made its damages determination; (2)
Section 8.04 of the LLC Agreement unambiguously gave it a payment right; (3) even
if Section 8.04 was ambiguous, the Court of Chancery erred by not adopting Leaf’s
reasonable interpretation; and (4) the Court of Chancery misapplied the law
regarding contractual damages. In turn, Invenergy contests each of Leaf’s
contentions on appeal and cross-appeals the Court of Chancery’s denial of its motion
to strike the XMS appraisal.
22
Opinion Below, supra note 1, at *31.
15
II. STANDARD AND SCOPE OF REVIEW
We review questions of contract interpretation and questions of law de novo.23
III. ANALYSIS
The parties agree that the controlling contract is the Third Amended and
Restated LLC Agreement, which this opinion calls the “LLC Agreement” for short.
The parties—and the Court of Chancery—also agree that Invenergy breached
Section 8.04 of the LLC Agreement by conducting a Material Partial Sale without
Leaf’s consent.
A. Principles of contract interpretation
Because the Court of Chancery’s award of only nominal damages instead of
the Target Multiple hinged upon its interpretation of Section 8.04, our analysis starts
there. When we interpret contracts, our task is to fulfill the “parties’ shared
expectations at the time they contracted.”24 “[B]ut because Delaware adheres to an
objective theory of contracts, the contract’s construction should be that which would
be understood by an objective, reasonable third party.” 25 Accordingly, we “interpret
clear and unambiguous terms according to their ordinary meaning. Contract terms
themselves will be controlling when they establish the parties’ common meaning so
23
Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 145 (Del. 2009).
24
Exelon Generation Acquisitions, LLC v. Deere & Co., 176 A.3d 1262, 1267 (Del. 2017).
25
Id. (internal quotations omitted).
16
that a reasonable person in the position of either party would have no expectations
inconsistent with the contract language.” 26
B. Interpretation of Section 8.04
Both sides contend that Section 8.04 unambiguously supports their respective
positions. As mentioned above, Section 8.04 states that:
Without the prior written consent of . . . [Leaf], [Invenergy] shall not:
...
(b) participate in or permit a Material Partial Sale, unless the transaction
giving rise to the Material Partial Sale yields cash proceeds equal to or
greater than the amount that would provide [Leaf], as of the closing of
such Material Partial Sale, with cash proceeds equal to or more than
their applicable Target Multiple with such Target Multiple to be paid
upon such closing of the Material Partial Sale. 27
i. The parties’ and the Court of Chancery’s interpretations
Leaf argues that Section 8.04 is an express and unambiguous agreement that,
“[i]f Invenergy wanted to proceed with a Material Partial Sale and Leaf did not
consent, Invenergy had to buy Leaf out.” 28 The Court of Chancery found—and,
indeed the evidence conclusively showed—that Invenergy read Section 8.04 in the
same way deep into this litigation.
But Invenergy pivoted after the Court of Chancery entered its Liability Order
in which the Court found that Invenergy had breached Section 8.04 by closing the
26
GMG Capital Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012).
27
A420.
28
Opening Br. 30.
17
TerraForm transaction without having secured Leaf’s consent or paying the Target
Multiple. According to Invenergy’s belatedly gained understanding of “the plain
structure”29 of Section 8.04, payment of the Target Multiple in the absence of Leaf’s
consent was not a contractual obligation but merely an “exception” to Invenergy’s
need to obtain Leaf’s consent. Although neither Invenergy nor the Court of
Chancery offer a particularly satisfying explanation of how this exception to the
consent right—a right that apparently vanishes upon Invenergy’s election to ignore
it—operates, we understand their understanding to work like this:
If Invenergy chooses to engage in a Material Partial Sale:
It may do so by securing Leaf’s consent. If it does not wish to or cannot
secure Leaf’s consent, it may—but is not required to— invoke the
payment “exception” by delivering the Target Multiple to Leaf at
closing.
OR
It may do so by ignoring Leaf’s consent right and without invoking the
payment exception. (This option is also characterized as a “bypass” to
the consent right.) If this is Invenergy’s choice, Leaf’s remedy will
only account for Invenergy’s failure to obtain Leaf’s consent and not
Invenergy’s failure to pay the Target Multiple.
Under the latter scenario, which is what occurred here, Invenergy contends that the
only contractual obligation breached is the obligation to secure Leaf’s consent
because Section 8.04 imposes no obligation on Invenergy to pay the Target Multiple
29
Answering Br. 31.
18
upon conducting a Material Partial Sale. In Invenergy’s view, the payment provision
is Invenergy’s way around Leaf’s consent right and does not entitle Leaf to payment
when Invenergy ignores that right altogether.
In its damages analysis, the Court of Chancery adopted Invenergy’s
interpretation:
[T]he evidentiary record developed at trial showed that the parties
believed subjectively that there were only two possibilities under the
Series B Consent Right: Either Leaf would consent, or Leaf would not
consent and receive its Target Multiple. Their expectation regarding
Leaf’s receipt of its Target Multiple stemmed from the exception to the
Series B Consent Right and the misimpression that it created a right to
receive the Target Multiple in the event of breach . . . . Properly
understood, the exception was only an exception.30
Accordingly, despite its determination in the Liability Order that the plain language
of Section 8.04 obligated Invenergy to follow one of two paths (secure Leaf’s
consent or pay the Target Multiple) if it engaged in a Material Partial Sale, the Court
of Chancery used this “exception theory” to support the clearing of a new path that
imposed no obligation on Invenergy to pay the Target Multiple and consequently
awarded only nominal damages in this suit.
ii. Our analysis
Our reading of Section 8.04 leads us to conclude that Section 8.04
unambiguously requires Invenergy to pay Leaf the Target Multiple if it conducts a
30
Opinion Below, supra note 1, at *31 (emphasis added).
19
Material Partial Sale without Leaf’s consent. As Section 8.04 is written, it is
logically equivalent to a clause that provides that, if Invenergy conducted a Material
Partial Sale without Leaf’s consent, then Invenergy must pay Leaf the Target
Multiple. And such a clause warrants an award of damages in the amount of the
Target Multiple in the event of a nonconsensual Material Partial Sale without
payment. This plain and logical reading is consistent with the parties’ shared
understanding of Section 8.04 until Invenergy saw a new light after the Court of
Chancery’s pre-trial breach ruling.
The Court of Chancery appears to have originally adopted the view we are
expressing when it concluded in its Liability Order that “[t]o engage in a Material
Partial Sale in compliance with the plain language of [Section 8.04, Invenergy] was
obligated to follow one of two paths” 31—secure Leaf’s consent or redeem its interest
for the Target Multiple.32 But the Court of Chancery erred when it—contrary to the
plain meaning of Section 8.04—adopted Invenergy’s “exception” theory and then
decided that the doctrine of efficient breach (more about that later) allowed
Invenergy to neither obtain consent nor pay Leaf the Target Multiple.
31
Liability Order, supra note 14, at ¶ 9.
32
See infra note 41 and accompanying text.
20
iii. Ford Holdings/GoodCents Holdings
To support its interpretation that Section 8.04 does not give Leaf a right to the
Target Multiple when Invenergy conducts a Material Partial Sale without Leaf’s
consent, the Court of Chancery cited two previous Court of Chancery opinions: In
re Appraisal of Ford Holdings, Inc. Preferred Stock33 and In re Appraisal of
GoodCents Holdings, Inc.34 In our view, neither of these opinions justify the Court
of Chancery’s departure from the plain meaning of Section 8.04, as mutually
understood by the parties at the time of contracting and thereafter.
In Ford Holdings, the Court of Chancery interpreted the rights of two groups
of preferred shareholders in a cash-out merger under the following clause:
Without the affirmative vote of the holders of a majority of the
[preferred] shares . . . , [the company] may not . . . merge with or into
any other corporation unless . . . each holder of [preferred] shares . . .
shall receive, upon such . . . merger, an amount in cash equal to the
liquid [sic] preference, Merger Premium, if any, and accumulated and
unpaid dividends.35
Chancellor Allen concluded that this clause—which, like Section 8.04, conditions a
transaction upon shareholder consent—did not waive the shareholders’ statutory
appraisal rights under 8 Del. C. § 262.
33
698 A.2d 973 (Del. Ch. 1997).
34
2017 WL 2463665 (Del. Ch. June 7, 2017).
35
Ford Holdings, 698 A.2d at 978–79.
21
We agree with that conclusion. The preferred shareholders were entitled to
either (1) a vote on the merger or (2) a certain amount of cash proceeds. The
company decided to bypass the shareholder vote by offering shareholders the cash
proceeds. We agree that the clause in question and the company’s decision to offer
a liquidation preference in lieu of a vote in accordance with the shareholder
agreement had no apparent impact on the shareholders’ statutory appraisal rights.
We do not see, however, how Ford Holdings—where there was no breach of
contract and where the final holding related to appraisal rights—can be read to
support a decision that a party injured by a contractual breach cannot recover a
contractually specified premium. By choosing one of two contractually permissible
options, the company in Ford Holdings did not breach its contract with the preferred
shareholders. In this case, Leaf and Invenergy agreed at the time of contracting that
there would be two contractually permissible alternative paths to a Material Partial
Sale: either Invenergy would secure Leaf’s consent or Invenergy would pay the
Target Multiple. Invenergy took neither road, however, and that has made all the
difference.
In the 2017 GoodCents case, the Court of Chancery examined a provision
similar to Section 8.04 but in a different context. In GoodCents, the preferred
shareholders of GoodCents Holdings controlled over 80% of the voting power of the
corporation. In 2015, in what was seemingly a surprise to the common
22
shareholders,36 GoodCents was sold for less than the liquidation preference of the
preferred shares. Under GoodCents’ certificate of incorporation, the preferred
shareholders ordinarily could not receive a larger per-share payout than the common
shareholders on an as-converted basis. There were a few exceptions, however, and
the Court of Chancery was asked to interpret the following clause:
Without the affirmative vote of the holders of a majority of the . . .
Preferred Stock, the corporation shall not . . . effect any merger or
consolidation . . . unless the agreement or plan of merger . . . shall
provide that the consideration payable to the stockholders of the
corporation . . . shall be distributed to the holders of capital stock of the
corporation in accordance with [the preference clauses, which gave
preferred shareholders additional rights over common shareholders].
According to the preferred shareholders, they were entitled to senior claims
equal to the liquidation preference on the merger consideration because they had not
waived the preference clauses.37 But because the merger consideration was less than
the amount of the liquidation preference, this would have left the common
shareholders with nothing. The Court of Chancery disagreed with the preferred
shareholders’ interpretation. Relying upon Ford Holdings, it held instead that the
voting clause “grants the Preferred Stockholders the right to a class vote but not a
right to the Liquidation Preference in the case of a merger.” 38 Consequently, Court
36
See GoodCents, 2017 WL 2463665, at *2, Pet’r Opening Br. in Support of Mot. for Partial
Summ. J. 4, GoodCents, No. 11723 (Del. Ch. Jan. 19, 2017) Dkt. No. 47, Montejo Aff., Exhibit 6
at 2, GoodCents, No. 11723 (Del. Ch. Jan. 19, 2017) Dkt. No. 49.
37
See Respondent’s Opening Br. in Support of Mot. for Partial Summ. J. 23, GoodCents, No.
11723 (Del. Ch. Jan. 19, 2017) Dkt. No. 44.
38
GoodCents, 2017 WL 2463665, at *6.
23
of Chancery ordered the merger consideration to be distributed pro rata to all
common and preferred shareholders.
While we think GoodCents reached the right result, we are not persuaded by
its logic. As mentioned above, Ford Holdings did not pass on whether the
shareholders in question had a right to a liquidation premium in the absence of an
affirmative vote. Moreover, the preferred shareholders in GoodCents held 80% of
the voting power and appear to have voted to approve the merger. 39 By the terms of
the consent-right clause in question and by virtue of the preferred shareholders’
“affirmative vote,” the corporation could conduct a merger without making a
preferential distribution to the preferred shareholders.40 Thus, the result—if not the
reasoning—in GoodCents is supported by the facts in that case. But in this case,
Invenergy’s failure to obtain Leaf’s “affirmative vote,” i.e., Leaf’s consent, is among
the fundamental causes of its breach. To the extent that GoodCents turns on an
interpretation that the above-quoted provision cannot yield damages in the amount
of the liquidation preference even in the absence of consent, we reject it.
39
Montejo Aff., Exhibit 6 at 2, GoodCents, No. 11723 (Del. Ch. Jan. 19, 2017) Dkt. No. 49
(“certain stockholders holding less than all of the outstanding shares . . . of GoodCents . . . entitled
to vote on such matters acted by written consent pursuant to Section 228(a) of the DGCL to
authorize and approve the [attached merger agreement]”).
40
The preferred shareholders’ contention that the “affirmative vote” required them to approve not
only the merger but a waiver of the preference clauses, see supra note 37 and accompanying text,
is not a reasonable reading of the contract clause in question. Their selective omissions when
paraphrasing the contract clause in their brief substantively changed the meaning of the clause.
Compare Respondent’s Opening Br., supra note 37, at 14 with id. at 23.
24
C. Damages
Because we have concluded that the text of Section 8.04 unambiguously
requires Invenergy to pay Leaf the Target Multiple if it conducts a Material Partial
Sale without Leaf’s consent, and because Invenergy conducted just such a
nonconsensual sale, the calculation of Leaf’s damages is simple: it is entitled to the
Target Multiple.
The Court of Chancery, however, took a different logical tack and came to a
different result. As previously mentioned, the Court of Chancery determined in its
Liability Order that “[t]o engage in a Material Partial Sale . . . , [Invenergy] was
obligated to follow one of two paths.”41 The two paths were: (1) obtain Leaf’s
written consent before closing or (2) pay Leaf the Target Multiple at closing. It also
found that, because Invenergy engaged in a Material Partial Sale without following
either path, Invenergy had breached the plain language of Section 8.04. But in its
ultimate damages decision, the Court of Chancery concluded that although
Invenergy breached Section 8.04, nominal damages of $1 sufficed to put Leaf in as
good of a position as it would have been in had Invenergy not breached.
The Court of Chancery reasoned that Invenergy likely would not have agreed
to undertake a TerraForm deal structured to pay Leaf the Target Multiple at closing
and that the TerraForm deal as it was actually structured did not make Leaf worse
41
Liability Order, supra note 14, at ¶ 9.
25
off. Rather than examine the issue of damages in terms of whether Invenergy was
contractually obligated—as the Court said in its Liability Order—to pay Leaf the
Target Multiple, the Court of Chancery approached the issue of damages by focusing
on the loss of value to Leaf from Invenergy’s participation in a Material Partial Sale
without Leaf’s consent. In our view, the Court of Chancery’s application of that
approach—like its interpretation of Section 8.04 in which it adopted Invenergy’s
“exception theory” to excuse Invenergy from paying the Target Multiple—also
missed the mark.
i. Expectations and the proper frame of reference
After finding that Invenergy breached Section 8.04, the Court of Chancery
correctly observed that the proper measure of damages should give Leaf the benefit
of the bargain it struck with Invenergy and should be based on Leaf’s expected
position but for Invenergy’s breach. But then the Court of Chancery examined the
wrong “but-for-the-breach” position—or frame of reference—when conducting that
damages analysis.
Before trial, the Court of Chancery correctly observed:
A more developed record may show that although the Payment Path
was drafted as an exception to the requirement to obtain Leaf’s consent,
and although it was not drafted as a liquidated damages provision, it
nevertheless operated to create a clear set of contractual obligations for
Leaf. Those expectations envisioned two possible outcomes. One
resulted from the Consent Path, where Leaf either would consent to the
Material Partial Sale, or the transaction would not happen. The other
resulted from the Payment Path, where the Company could proceed
26
with a Material Partial Sale and Leaf would receive its Target
Multiple. . . . If Leaf proved [sic] that its expectancy was that it would
receive its Target Multiple, th[e]n the Target Multiple could provide the
proper measure of damages.42
Yet despite the Court of Chancery’s explicit and numerous findings that Leaf
and Invenergy both read Section 8.04 to give Leaf an expectation upon a Material
Partial Sale without its consent that it would receive the Target Multiple, the court
ignored that expectation. Instead of examining the frame of reference in which
Invenergy paid the Target Multiple as both parties expected in a nonconsensual
Material Partial Sale, the Court of Chancery decided that a proper analysis of
expectancy required—and only required—the construction of a hypothetical
negotiation in which Invenergy sought and obtained Leaf’s consent43 and an
assessment of whether the TerraForm transaction reduced the value of Leaf’s
investment in Invenergy.
That analysis failed to consider the entirety of Invenergy’s breach. The
correct “but-for-the-breach” frame of reference is not what might have happened had
Invenergy asked Leaf for its consent because Invenergy’s contractual obligations
and the means of performing them were not so narrowly drawn. Invenergy’s breach
was only complete when it failed to obtain Leaf’s consent and when it failed to pay
42
Order Denying Final Judgment, supra note 16, at ¶ 11.
43
Under that hypothetical, it is not unlikely that Leaf would have consented perhaps after seeking
to extract some consideration from Invenergy.
27
the Target Multiple at closing. After all, if Invenergy had structured the TerraForm
deal to redeem Leaf for the Target Multiple, there would have been no breach.
Because it is only the combination of the TerraForm deal plus the failure to
obtain consent plus the failure to pay the Target Multiple that constituted the breach,
the Court of Chancery should have considered the combination of all of those things
when assessing what injury Leaf suffered from Invenergy’s breach and thus what
amount of damages will return Leaf to the position it would have been in had
Invenergy not breached Section 8.04. That objective of returning Leaf to a but-for-
the-breach position is not met when Leaf’s damages are limited to what it might have
obtained through a hypothetical negotiation for consent or the financial impact of
the TerraForm transaction on Leaf’s investment. Instead, when considering the
breach as a whole, what would most aptly repair that breach is Invenergy’s
payment—now in satisfaction of a damages award—of the amount it agreed it would
pay for the right to engage in a Material Partial Sale without Leaf’s consent. The
Court of Chancery’s conclusion to the contrary was erroneous.
Finally, contrary to the Court of Chancery’s apparent assertion, 44 remedial
provisions and liquidated damages clauses are not the only ways for a contract to
44
Opinion Below, supra note 1, at *30 (“[T]he parties’ subjective beliefs about the likely remedy
are not controlling unless memorialized in a remedial provision . . . such as a liquidated damages
clause.”).
28
specify the damages flowing from a breach. For example, in a sales contract in
which the seller fully performs and the buyer does not pay at all, the seller is entitled
to the sales price specified in the contract. 45 Although the sales price might not be
under a liquidated damages section or clause, it nonetheless acts as a contractually
specified—and controlling—index for damages.46 Likewise, a liquidated damages
clause in this instance would be superfluous given Invenergy’s contractual
obligation to pay the Target Multiple. Simply put, having agreed that Invenergy
would have to pay Leaf the Target Multiple if it engaged in a Material Partial Sale
without Leaf’s consent, the parties need not have stipulated that the Target Multiple
would be recoverable as damages if Invenergy engaged in just such a sale.
ii. Efficient breach and the Court of Chancery’s hypothetical negotiation
exercise
The Court of Chancery invoked the principle of efficient breach to relieve
Invenergy from paying the Target Multiple. In particular, having found that Section
8.04 gave Invenergy two options to consummate a Material Partial Sale (securing
Leaf’s consent or paying it the Target Multiple), the Court of Chancery devised a
third option—efficient breach—which it found Invenergy elected, albeit
unwittingly. This election, according to the court, leads to “[t]he result . . . that Leaf
45
See 6 Del. C. § 2-709.
46
Id.
29
must demonstrate actual damages”47 outside of the injury it suffered as a result of
Invenergy’s failure to redeem it for the Target Multiple as contractually mandated.
This application of the concept of efficient breach finds no support in our case law. 48
Efficient breach is a concept that recognizes that “properly calculated
expectation damages increase economic efficiency by giving the other party an
incentive to break the contract if, but only if, he gains enough from the breach that
he can compensate the injured party for his losses and still retain some of the benefits
from the breach.” 49 In other words, efficient breach is based on the idea that a party
might find it economically worthwhile to breach a contract because that breach
yields economic benefits that exceed the value of the damages it must pay to the
non-breaching party.
47
Opinion Below, supra note 1, at *31.
48
Neither of the opinions cited by the Court of Chancery in its discussion of efficient breach
touches upon the relationship of an efficient breach to the non-breaching party’s expectation
damages. In Bhole, Inc. v. Shore Invs., Inc., 67 A.3d 444, 446 (Del. 2013), in which we reversed
a tortious-interference determination and an award of punitive—not compensatory—damages, we
merely recognized that the underlying breach was a “so-called ‘efficient breach,’” a
characterization that was not integral to our decision. And in E.I. DuPont de Nemours and Co. v.
Pressman, 679 A.2d 436, 445–46 (Del. 1996), our reference to the “theory of efficient breach”
was confined to our discussion of the unavailability of punitive damages for breach of the
employment contract in issue. See also NACCO Indus. v. Applica, Inc. 997 A.2d 1, 35 (Del. Ch.
2009) (noting that “Delaware also recognizes the concept of efficient breach” and observing that
allowing “[a] claim for conspiracy to commit tortious interference against a party to the contract
would undercut [the concept and other principles] and preplace the predictability of the parties’
agreement with a far less certain, after-the-fact, judicially-fashioned tort remedy.” (citing Allied
Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020 (Del. Ch. 2006)).
49
Bhole, 67 A.3d at 453 (emphasis added) (quoting DuPont v. Pressman, 679 A.2d at 445–46).
30
The Court of Chancery misapplied the efficient breach concept by
reconsidering its damages calculation in response to perceived “efficiency.” Courts
award contract damages corresponding to the degree of the injury suffered and do
not increase or decrease those damages because of “efficiency” or lack thereof. 50
Contrary to the Court of Chancery’s application of the principle, efficient breach
does not bar recovery51 or modify damages calculations in any way. Rather,
efficient-breach theory recognizes that “a party may find it advantageous to refuse
to perform a contract if he will still have a net gain after he has fully compensated
the injured party for the resulting loss.”52 To use the Court of Chancery’s parlance,
efficient breach provides two “paths” for a contractual promisor: perform the
contract or fully compensate the promisee for non-performance. But efficient breach
does not allow the breaching party to bypass the usual method of calculating
damages. The Court of Chancery’s statement that efficient breach itself results in
an alternative method for the determination of damages thus was error.
The Court of Chancery’s rejection of the binary options presented by Section
8.04 (secure consent or pay the Target Multiple) in favor of a “third option”
(“efficient breach” without payment of the Target Multiple) was followed by a
hypothetical negotiation exercise in which Leaf was required to show that it would
50
See DuPont v. Pressman, 679 A.2d at 446 (quoting Farnsworth on Contracts § 12.3).
51
Supra note 49.
52
Restatement (Second) of Contracts, Chapter 16 Introductory Note (1981) (emphasis added).
31
have secured additional consideration given the opportunity to negotiate for its
consent. The Court claimed to find support for this in its prior decision in Fletcher
International, Ltd. v. ION Geophysical Corp.53 In that case, the Court of Chancery
faced the question of how to calculate damages where the injured party held a
consent right that the breaching party had ignored, but there was no contractually
provided workaround to the consent right. Fletcher then imagined a hypothetical
negotiation between the parties for consent to determine the appropriate amount of
contractual damages.
But Fletcher—and its hypothetical negotiation—is inapposite here. In
Fletcher, there was no practical, contractually specified way for the breaching party
to cure its breach. Unlike in this case, the only way Fletcher’s breaching party could
close the transaction in substantial conformity with the contract was by obtaining the
injured party’s consent, which was impractical given the fact of litigation. But
Section 8.04 does specify how Invenergy can avoid obtaining Leaf’s consent to a
Material Partial Sale and yet perform the contract: Invenergy must simply arrange a
Material Partial Sale that redeems Leaf’s interest for the Target Multiple. Except
for the relatively small matter of timing (Section 8.04 requires the Target Multiple
to be distributed at the time of closing), it is still possible for Invenergy to
substantially perform the contract as written by redeeming Leaf for the Target
53
2013 WL 6327997, at *14, *18, (Del. Ch. Dec. 4, 2013).
32
Multiple. Thus, in order to examine what substantial performance would look like—
and thus calculate damages—there is no need for the court to imagine a negotiation
as the Court of Chancery needed to do in Fletcher.
IV. CONCLUSION
The Court of Chancery erred in its interpretation of Section 8.04, its award of
only nominal damages, and in its application of the concept of efficient breach. Leaf
is entitled to damages in the amount of the Target Multiple on the condition that Leaf
surrenders its membership interest in Invenergy.54 We accordingly REVERSE and
REMAND for proceedings consistent with this opinion. 55
54
We agree with the Court of Chancery’s conclusion that the fact that Section 15.11 of the LLC
Agreement gave Leaf injunctive relief rights does not preclude Leaf from seeking damages.
Nothing in Section 15.11 provides that it was the sole or exclusive remedy. In fact, Section 15.12
of the LLC Agreement expressly provides that the remedies in the contract are nonexclusive. A596
(“Remedies Cumulative. All remedies hereunder are cumulative and are not exclusive of any other
remedies provided by law.”).
55
We need not pass upon the merits of Invenergy’s cross-appeal, which argued that the Court of
Chancery erred by declining to strike XMS’s appraisal. Because we conclude that Leaf was
entitled to be redeemed for the Target Multiple and award damages for Invenergy’s failure to do
so, any issues relating to the put-call dispute resolution process are moot. Finally, we conclude that
Invenergy’s post-oral-argument motion to correct the record is without merit, and we therefore
deny it.
33