In re P3 Health Group Holdings, LLC ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE P3 HEALTH GROUP ) Consol. C.A. No. 2021-0518-JTL
HOLDINGS, LLC )
ORDER DENYING MARY TOLAN AND GREG KAZARIAN’S
MOTIONS TO DISMISS COUNT VI
1. Hudson Vegas Investment SPV, LLC (“Hudson”) was a minority investor
in P3 Health Group Holdings, LLC (the “Company”). In this litigation, Hudson has
asserted various claims based on a transaction between the Company and a special
purpose acquisition company, commonly known as a SPAC.
2. The defendants filed a surfeit of motions to dismiss on various grounds,
including Rule 12(b)(6). The court has issued a decision addressing the breach of contract
claims that Hudson asserted. Dkt. 172 (the “Contract Opinion,” cited as “Op.”). This
order incorporates that decision by reference.
3. In Count VI of its complaint, Hudson has asserted a claim for bad faith
breach of contract against Tolan and Kazarian on the theory that they received the
equivalent of a bribe from Foresight. The Contract Opinion found that Hudson had plead
viable claims for breach of contract against the Company. In Count VI, Hudson asserts
that Tolan and Kazarian caused the Company to breach the LLC Agreement in bad faith,
thereby incurring liability for themselves personally. Hudson relies on the bribe to
support a pleading-stage inference that Tolan and Kazarian were pursuing their own
interests.
4. As described in the Contract Opinion, Chicago Pacific and the Company
pursued a de-SPAC merger with Foresight, but that transaction became less attractive to
the Company in April 2021. Op. at 11–12.
a. An important aspect of the de-SPAC merger was the Company’s
ability to raise additional financing through the PIPE. Chicago Pacific principals handled
nearly every aspect of the PIPE. The letter of intent contemplated a PIPE of $400 to $500
million. Id. at 11.
b. In April 2021, the SPAC market began to weaken. JPMorgan
warned Chicago Pacific that the PIPE would top out at $300 to $350 million, nearly one-
third less than the letter of intent contemplated. Id.
c. As April 2021 unfolded, the SPAC market declined further. By April
29, JPMorgan was telling Tolan that the maximum proceeds had fallen to $250 million.
No one provided the information to the Board. Tolan decided to continue moving forward
with the de-SPAC merger. Id. at 11–12.
d. To shore up Chicago Pacific’s commitment to the transaction,
Wasson gave Tolan and Kazarian the opportunity to invest personally in a follow-on
SPAC called Foresight Acquisition Corp. II. Tolan described the invitation as “an honor.”
Id. at 12. Without making any disclosure to the Board, Tolan and Kazarian accepted, and
on May 7, 2021, they invested $500,000 and $100,000 in the follow-on SPAC. Based on
historical rates of return to SPAC insiders, Tolan and Kazarian stood to reap nearly $9
million and $5 million, respectively, if the follow-on SPAC completed an acquisition. Id.
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5. The opportunity to invest in the follow-on SPAC looks like baksheesh.
More provocatively, it could be called a bribe.
6. It is reasonably conceivable that Tolan and Kazarian acted in bad faith in
pursuing the de-SPAC merger because they were motivated to secure personal financial
benefits.
7. It is reasonably conceivable that Tolan and Kazarian caused the Company
to breach its contractual obligations to Hudson because they were motivated to secure
personal financial benefits.
8. Tolan and Kazarian claim that they were entitled to accept the investment
opportunity because the LLC Agreement authorized managers who represented
significant investors, including the Chicago Pacific representatives, to consider whatever
interests they deemed fit. The language states:
Whenever in this Agreement . . . the Board . . . is permitted or required to
take any action or to make a decision or determination, each Class A
Manager and each Class D Manager shall be entitled to consider such
interests and factors as such Class A Manager or Class D Manager,
respectively, desires (including the interests of such Class A Manager’s or
Class D Manager’s, respectively, Affiliates (including in their capacity as
Members), employers, partners and their respective Affiliates) and,
consistent with the elimination of any and all fiduciary duties, shall have no
duty or obligation (whether express or implied) to take into consideration
any other interests or factors.
Ex. 1 § 5.6(b). This is a common provision designed to ensure that managers affiliated
with a specific fund need not focus solely on the best interests of the entity’s residual
claimants but rather can consider other interests, including the interests of their fund. See
Related Westpac LLC v. JER Snowmass LLC, 2010 WL 2929708, at *5–8 (Del. Ch. July
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23, 2010) (dismissing claims for breach of contract and breach of fiduciary duty where an
LLC agreement “preserved for [defendant] the freedom to withhold consent to Major
Decisions involving Material Action if that was in its self-interest.”). It does not say
anything about accepting a bribe-like side payment in connection with an ongoing
negotiation.
9. Tolan and Kazarian also claim that they were entitled to accept the
investment opportunity because the LLC Agreement authorized the significant members
and their affiliates to pursue other business interests, even if those interests competed
with the Company. The operative language states:
The Members expressly acknowledge and agree that . . .
(i) each of the [Chicago Pacific] Members, Leavitt, the Class D Members,
and each of their respective Affiliates are permitted to have, and may
presently or in the future have, investments or other business relationships
with entities engaged in the Business other than through the Company or
any of its Subsidiaries (an “Other Business”), . . .
(iii) none of the [Chicago Pacific] Members, Leavitt, the Class D Members,
nor any of their respective Affiliates will be prohibited by virtue of their
respective investments in the Company or its Subsidiaries or their service
as Managers or service on the Company’s or its Subsidiaries’ board of
managers or directors from pursuing and engaging in any such activities,
(iv) none of the [Chicago Pacific] Members, Leavitt, the Class D Members,
nor any of their respective Affiliates will be obligated to inform or present
the Company or its Subsidiaries or the Board of any such opportunity,
relationship or investment, . . . and
(vi) the involvement of any of the [Chicago Pacific] Members, Leavitt, the
Class D Members, and/or any of their respective Affiliates in any Other
Business will not constitute a conflict of interest by such Persons with
respect to the Company or its Members or any of the Company’s
Subsidiaries.
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Id. § 6.6(a). This is a standard provision designed to eliminate the entity opportunity
doctrine that otherwise could limit the ability of fund investors to own businesses or
pursue business opportunities that could compete with the company. See Martin I.
Lubaroff, Paul M. Altman, Srinivas M. Raju, & Joshua J. Novak, Delaware Limited
Partnerships § 14.05 at 14-114 (Supp. 2022) (discussing an analogous provision in a
limited partnership agreement allowing a partner the “ability to pursue business
opportunities for itself or otherwise compete with the business of the partnership”). It
does not say anything about accepting a bribe-like side payment in connection with an
ongoing negotiation.
10. Count VI states a claim on which relief can be granted. The motion to
dismiss Count VI is denied.
/s/ J. Travis Laster
Vice Chancellor Laster
November 2, 2022
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