TMIP Participants LLC v. DWS Group Holdings, LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
TMIP PARTICIPANTS LLC, )
)
Plaintiff, )
) C.A. No. 11328-ML
)
DSW GROUP HOLDINGS LLC, )
)
Defendant. )
MASTER‟S REPORT
Date Submitted: November 20, 2015
Final Report: February 4, 2016
Brett D. Fallon, Esquire and Albert J. Carroll, Esquire, of MORRIS JAMES LLP,
Wilmington, Delaware; OF COUNSEL: Michael Starr, Esquire, of HOLLAND &
KNIGHT LLP, New York, New York; Attorneys for Plaintiff.
John D. Demmy, Esquire, of STEVENS & LEE, P.C., Wilmington, Delaware; OF
COUNSEL: Peter J.W. Sherwin, Esquire and Massiel Pedreira-Bethencourt,
Esquire, of PROSKAUER ROSE LLP, New York, New York; Attorneys for
Defendants.
LEGROW, Master
TMIP Participants LLC (“Participants”) filed this action to compel
arbitration of a dispute between Participants and Defendant DSW Group Holdings
LLC (“Seller”). The parties‟ dispute involves an incentive plan entered into
between Seller and its executive employees at a time when Seller actively was
seeking a buyer for its business. The incentive plan entitled the executive
employees to a bonus upon successful completion of a qualifying sale, with the
percentage of the bonus increasing in intervals based upon the purchase price.
Those executive employees‟ interests now are represented by Participants.
The basis for the parties‟ disagreement is Seller‟s calculation of the bonus
owed to the executive employees. To simplify, Seller contends that the proceeds
received from the transaction fell within a range entitling the executive employees
to 4.5% of the net equity value of the business; Participants contends that the
proceeds received from the transaction fell within a range entitling the executive
employees to 6.75% of the net equity value. The funds at issue are in escrow and
the calculation that is the subject of the parties‟ disagreement is governed by both
the merger agreement and the escrow agreement. The escrow agreement
establishes a procedure for the buyer to dispute various calculations made by Seller
and requires the parties to arbitrate disputes that they do not resolve after good
faith negotiations. This is the arbitration clause Participants seeks to enforce by
this action. Seller contends that the arbitration clause does not apply for a variety
1
of reasons. The parties have filed cross-motions for summary judgment, in
addition to a motion to dismiss that Seller filed challenging Participants‟ standing
to enforce the arbitration clause. For the reasons that follow, I believe the parties‟
dispute is arbitrable and therefore recommend that the Court grant Participants‟
motion for summary judgment. This is my final report.
FACTUAL BACKGROUND
A. The Merger
This action stems from the sale of a company, DS Services of America, Inc.,
previously known as DS Waters of America, Inc. (the “Company”), and a deferred
compensation plan instituted to incentivize executive employees of the Company
to help maximize the Company‟s sale price. The compensation plan was called the
“DS Waters of America, Inc. Transaction Management Incentive Plan” (the
“Incentive Plan”). At the time the Incentive Plan was adopted, the Company was
Seller‟s sole asset. Under an Agreement and Plan of Merger dated July 23, 2013
(the “Merger Agreement”), Seller sold the Company to Crestview DSW Investors,
L.P. (“Buyer”).
Under Article IV of the Incentive Plan, the Plan is to be administered by the
Incentive Plan Administrator (the “Plan Administrator”).1 Although the record is
somewhat unclear, it appears Seller‟s board of directors was the Plan
1
Incentive Plan, Ex. A to Verified Compl., DSW Group Holdings, LLC v. Crestview DSW
Investors, L.P., C.A. 11168-ML (hereinafter cited as the “Seller‟s Action”).
2
Administrator. Under both the Incentive Plan and the Merger Agreement, the Plan
Administrator has exclusive authority to interpret the Incentive Plan, decide
controversies arising out of the Plan, and determine the amount of bonuses paid
thereunder.
B. The merger consideration and the escrowed funds
The merger closed on August 30, 2013. Under Section 2.1 of the Merger
Agreement, Buyer was to pay $900 million at closing (the “Estimated Merger
Consideration”), subject to certain post-closing adjustments. The parties agreed to
escrow $50 million of Estimated Merger Consideration until various Transaction
Expenses were determined and paid.2 Seller, Buyer, and Bank of America, N.A.
(the “Escrow Agent”) executed an Escrow Agreement dated August 30, 2013,
which contained detailed provisions concerning, among other things, how and
when the escrowed funds would be disbursed.3 The bonuses owed under the
Incentive Plan were to be paid from escrow and were included in the definition of
“Transaction Expenses” in the Merger Agreement.4 The Escrow Agreement
specifies three dates on which Transaction Expenses would be released (a “Release
2
“Transaction Expenses” is defined in Section 1.1 of the Merger Agreement. Verified Compl.
Ex. B.
3
Escrow Agreement, Ex. A to Verified Compl.
4
Merger Agreement at §1.1, Ex. B to Verified Compl. in Seller‟s Action.
3
Date”).5 The money in the escrow account that is not used for Transaction
Expenses is to be released to Seller after the final disbursement.6
The amount of the incentive bonus was tied to the “Transaction Proceeds”7
from the merger, with a higher percentage paid if the Transaction Proceeds reached
designated levels. To simplify slightly, Participants‟ bonus was calculated as a
percentage of the Company‟s net equity value.8 The applicable percentage
depended on the amount of Transaction Proceeds (relevantly, 4.5% if the
Transaction Proceeds met or exceeded $825 million, and 6.75% if the Transaction
Proceeds met or exceeded $900 million).9
C. The third disbursement and the present dispute
Before each scheduled Release Date, Seller was to calculate the
disbursement amount, including monies due to Participants under the Incentive
Plan. In order to calculate the executive employees‟ bonus, Seller was required to
adjust the Transaction Proceeds, thereby altering the amount due to Participants
under the Incentive Plan. Put differently, under the Merger Agreement, the
5
Escrow Agreement at § 3.5, Ex. A to Verified Compl.
6
Merger Agreement at § 3.2(b), Ex. B to Verified Compl. in Seller‟s Action.
7
The parties appear to use the terms “Merger Consideration” and “Transaction Proceeds”
interchangeably.
8
Net Equity Value is defined in the Incentive Plan and is a formula that includes Transaction
Proceeds as one of the inputs. See Incentive Plan § 3.3, Ex. A to Verified Compl. in Seller‟s
Action.
9
Incentive Plan at Ex. A, Ex. A to Verified Compl. in Seller‟s Action.
4
Company was to estimate Transaction Proceeds at closing.10 The Transaction
Proceeds would then be adjusted to account for post-closing Transaction
Expenses.11 At the time of each disbursement, the Transaction Proceeds figure was
to be adjusted by adding to the previously estimated Transaction Proceeds the
amount currently being disbursed to Seller.12 The increase in Transaction Proceeds
at the time of each Release Date resulted in additional amounts payable under the
Incentive Plan.
On May 1, 2015, Seller delivered its calculation of the third and final
disbursement amount, including the third payout under the Incentive Plan, which
Seller calculated as $453,239.92.13 Seller‟s calculation was predicated on
Transaction Proceeds totaling less than $900 million, which entitled Participants to
4.5% of the Company‟s net equity value.14 On May 14, 2015, Buyer delivered to
Seller its Notice of Disagreements with the calculation. Buyer‟s calculation of the
third Incentive Plan payout, $4,192,154.65, was predicated on the Transaction
Proceeds exceeding $900 million. Buyer contends that Participants are entitled to
6.75% of the net equity value.15 Which party is correct is not the question before
10
Merger Agreement at § 3.1(b)(vi), Ex. B to Verified Compl. in Seller‟s Action.
11
Id. at §3.1(a)(i).
12
Def.‟s Br. in Further Supp. of its Mot. to Dismiss, in Opp‟n to Pl.‟s Mot. for Summ. J., and in
Supp. of Cross-Mot. for Summ J. at 32 (hereinafter cited as “Def.‟s Br. in Opp.”).
13
DSW Letter at 1, Ex. B to Verified Compl.
14
DSW Letter at Schedule A, Ex. B to Verified Compl.
15
Crestview Letter, Ex. C to Verified Compl.
5
the Court, at least at this time. Rather, the issue to be resolved is whether the
disputed calculation must be submitted to arbitration.
D. Arbitration provisions
There are three places where the merger documents discussed the
submission of disagreements concerning Transaction Proceeds or Transaction
Expenses to an arbitrator16 — two in the Merger Agreement and one in the Escrow
Agreement. Section 3.1 of the Merger Agreement discussed post-closing
adjustments to the merger consideration calculation.17 Section 3.1(b) provided that
Buyer would prepare, or order prepared, calculations of Net Working Capital, Net
Indebtedness, and Transaction Expenses within 90 days after the closing date.
Those calculations, in turn, could increase or decrease the merger consideration as
provided in Sections 3.1(b)(iii), 3.1(b)(iv), and 3.1(b)(v). Seller was given 45 days
to object to these calculations. If Seller objected, the parties were given 30 days to
resolve the dispute, after which the dispute was to be submitted to the arbitrator,
KPMG LLP.18
Under Section 3.2 of the Merger Agreement, Seller was required to submit
calculations representing how specific Transaction Expenses, namely the amounts
payable under the Incentive Plan and under an engagement letter with Evercore
16
The parties use the terms “arbitrator” and “independent auditor” interchangeably to refer to the
party charged with resolving the dispute. For consistency, I use the term arbitrator.
17
Merger Agreement at § 3.1(b), Ex. B to Verified Compl. in Seller‟s Action.
18
Id. at §3.1(b)(ii).
6
Group LLC, were affected, if at all, by specified events. Specifically, Seller was to
provide calculations in the event that either (a) the Company recovered any
insurance proceeds in accordance with Section 8.7 of the Merger Agreement after
the closing, or (b) the Estimated Merger Consideration paid at closing was
determined to be less than the final adjusted Merger Consideration, in which case
Buyer was to remit the difference to Seller.19 After delivery of the calculation,
Buyer had 3 days to submit disagreements.20 If the parties could not resolve any
such disagreements within 30 days, the dispute was to be referred to the
arbitrator.21
Finally, Sections 3.6(a) and 3.6(b) of the Escrow Agreement required Seller
to deliver written notice of its calculation of the Transaction Expenses to be paid in
connection with each of the three Release Dates and for Buyer to notify Seller of
any disagreements with each calculation. Section 3.6(c) of the Escrow Agreement
provided that “disagreements with respect to a Transaction Expense Calculation
delivered by Seller under Section 3.6(a) or (b)” that were not resolved within 30
days of the applicable release date would be submitted to the arbitrator.22 The
provision in its entirety reads as follows:
19
Merger Agreement at §3.2(a)(i) (referencing §3.1(b)(vi)), Ex. B to Verified Compl. in Seller‟s
Action. The remitted money is to be distributed back to the pre-merger stockholders of the
Company.
20
Id. at §3.2(a)(i).
21
Id. at §3.2(a)(ii).
22
Escrow Agreement at § 3.6(c), Ex. A to Verified Compl.
7
(c) If [Buyer] and Seller are unable to resolve all of their
disagreements with respect to a Transaction Expense Calculation
delivered by Seller under 3.6(a) or (b) within thirty (30) days of the
applicable release date, [Buyer] and Seller shall refer their remaining
disagreements to the [arbitrator] (as defined in the Merger
Agreement), selected in accordance with Section 3.1(b)(ii) of the
Merger Agreement, whose decision shall be final and binding on
[Buyer] and Seller.23
As noted previously, Buyer objected only to Seller‟s calculation of the final
disbursement amount. The parties do not dispute that the objection was timely
under Section 3.6, although Seller contends Buyer‟s objection in fact functions as
an untimely objection to previous calculations that are now “final and binding.”
E. The assignment of rights
On June 9, 2015, Buyer and Participants entered into an Assignment and
Assumption Agreement (“Assignment Agreement”) whereby Buyer assigned to
Participants certain of Buyer‟s rights and obligations under the Escrow Agreement,
including: (1) Buyer‟s disagreements with respect to the calculation of the
amounts payable under the Incentive Plan, and (2) Buyer‟s right to refer and
resolve any remaining disagreements with the arbitrator.24 The assignment was
approved by the Escrow Agent.25
Participants maintains that its efforts to resolve with Seller the
disagreements regarding the Transaction Expense Calculation have failed to
23
Id.
24
Assignment Agreement at ¶ 1, Ex. D to Verified Compl.
25
Id.
8
achieve resolution.26 For this reason, Participants delivered to Seller a Notice of
Intent to Arbitrate, dated July 20, 2015.27 Seller has refused to arbitrate, arguing
that the dispute does not fall within the “narrow scope” of Section 3.6 of the
Escrow Agreement.28 Instead, Seller argues that, under provisions in the Incentive
Plan, Merger Agreement, and Escrow Agreement, the Plan Administrator is vested
with the authority to interpret the plan and resolve disputes such as the present
disagreement.29 Seller argues that this Court‟s jurisdiction is limited to review of
the Plan Administrator‟s decision for “manifest error.”30
F. The Seller’s Action
On June 18, 2015, Seller filed in this Court an action styled DSW Group
Holdings, LLC v. Crestview DSW Investors, L.P., C.A. 11168-ML (the “Seller‟s
Action”), seeking a declaratory judgment that the Plan Administrator‟s
determination of the bonus due under the Incentive Plan is binding on all persons.31
In support of its contention, Seller cited provisions of the Incentive Plan and
Merger Agreement that, according to Seller, establish that the Plan Administrator
was charged with calculating bonuses.32
26
Pl.‟s Br. in Supp. of its Mot. for Summ. J. and in Opp‟n to Def.‟s Mot. to Dismiss at 8
(hereinafter cited as “Pl.‟s Opening Br.”).
27
Participants‟ Notice, Ex. E to Verified Compl.
28
Def.‟s Br. in Opp. at 3.
29
Id. at 24.
30
Id. at 24-25.
31
Verified Compl. ¶ 1 in Seller‟s Action.
32
Id. at ¶¶ 8-10.
9
Buyer answered the Seller‟s Action on August 5, 2015.33 Buyer‟s answer
was filed after Participants initiated this action. In its answer, Buyer disagreed
with Seller‟s interpretation of the Incentive Plan and the Merger Agreement and
invoked Section 3.6(c) of the Escrow Agreement, which provides that disputes
concerning the Transaction Expenses Calculation are to be referred to the
Independent Auditor.34
G. This action
On June 23, 2015, Participants filed this action to compel arbitration under
the Federal Arbitration Act, 9 U.S.C. §1 et seq. (the “FAA”), and Section 3.6(c) of
the Escrow Agreement and to stay the Seller‟s Action pending the outcome of this
action.35 Participants argues that, pursuant to Section 3.6(c) of the Escrow
Agreement, the parties are required to arbitrate disagreements concerning the
Transaction Expense Calculation before KPMG LLP.36 Seller moved to dismiss
this action on the basis that Participants lacks standing to enforce the Escrow
Agreement. The parties also filed cross-motions for summary judgment on the
issue of whether they are required to arbitrate the Transaction Expense Calculation
dispute.
33
Ans. in Seller‟s Action.
34
Id. at ¶ 21. Buyer raises several affirmative defenses in the Seller‟s Action, but they are not
relevant to the pending motions.
35
Verified Compl. at 1.
36
Id. at ¶ 16.
10
On November 6, 2015, after oral argument on the pending motions,
Participants filed a motion for leave to file an amended complaint. In the
Amended Complaint, Participants averred that in October 2015, Buyer appointed
Participants as its agent for the limited purpose of enforcing against Seller “any
and all of [Buyer‟s] rights under the Escrow Agreement as had been assigned by
[Buyer] to Participants pursuant to the Assignment Agreement.”37 Participants
also alleged that on October 27, 2015, it delivered to Seller a “Restated Notice of
Intent to Arbitrate,” indicating that Participants was demanding arbitration in its
capacity as agent as well as in its capacity as assignee.38 Seller objected to the
Motion to Amend on the basis that the amendment was untimely and would be
futile because the Escrow Agreement limits enforcement solely to executing
parties and that limitation extends with equal force to both assignees and agents. I
granted the Motion to Amend on November 18, 2015 but invited Seller to submit
an additional letter explaining the effect, if any, of the Amended Complaint on
Participants‟ standing. Seller declined to submit additional materials.39
37
Pl.‟s Am. Compl. ¶ 23.
38
Id. ¶ 24.
39
Letter to the Court from John Demmy, Esq., dated Nov. 20, 2015.
11
ANALYSIS
I. Participants has standing to enforce the arbitration clause in the
Escrow Agreement.
Seller argues that this action should be dismissed because Participants lacks
standing since it is not a party to the Escrow Agreement but merely an assignee of
Buyer‟s rights.40 Seller‟s argument is grounded in Section 10.8 of the Escrow
Agreement, which provides that the agreement “is enforceable solely by the parties
by which it has been executed and no other persons.” 41 Section 10.8 indicates that
it is the “intention of the parties hereto that this Agreement may not be enforced on
a third party beneficiary or any similar basis.”42
Participants‟ response to the standing argument takes three main forms:
Participants first argues that this action is governed by the federal “substantive law
of arbitrability” and Seller therefore is “equitably estopped from avoiding its duty
… to arbitrate” under the Escrow Agreement.43 Second, Participants argues that
Section 10.10 of the Escrow Agreement unambiguously permits assignment and
that the right to enforce a contract transfers to the assignee under settled Delaware
40
Def.‟s Mot. to Dismiss at ¶ 1.
41
Escrow Agreement, Ex. A to Verified Compl. at § 10.8.
42
Id.
43
Pl.‟s Opening Br. at 25 (citing Ragone v. Atl. Video at Manhattan Ctr., 595 F.3d 115, 121 (2d
Cir. 2010)).
12
law.44 Finally, Participants argues that it has standing as Buyer‟s agent under the
agency agreement between Participants and Buyer that formed the basis for the
Amended Complaint.
Seller acknowledges that, whether in this action or in the Seller‟s Action, the
issue of arbitrability of the Transaction Expense Calculation dispute must be
decided. At oral argument, Seller therefore conceded that “there is a certain
amount of mootness that is hovering over the motion to dismiss,” and urged me to
decide the arbitrability issue now, notwithstanding the motion to dismiss. 45 Seller
nevertheless argues that, although Section 10.10 permits Buyer to assign its
benefits under the Escrow Agreement, Buyer is not permitted to assign its right to
enforce the agreement.
Although the parties spilled substantial ink briefing the motion to dismiss, in
my view any lingering doubt about Participants‟ standing is resolved by the
amendment to the Complaint and Buyer‟s appointment of Participants as Buyer‟s
agent. It is well-settled that a business organization, or a private party for that
44
Pl.‟s Opening Br. at 25, 27-28 (citing USH Ventures v. Global Telesystems Grp., Inc., 796
A.2d 7, 16 (Del. Super. 2000); Amber Res. Co. v. United States, 538 F.3d 1358, 1379 (Fed. Cir.
2008); Hall v. State, 655 A.2d 827, 831 (Del. Super. 1994)).
45
TMIP Participants LLC v. DSW Grp. Holdings, LLC, C.A. No. 11328-ML, at 18 (Del. Ch.
Oct. 28, 2015) (TRANSCRIPT) (hereinafter cited as “Tr.”) (“I do acknowledge that there is a
certain amount of mootness that is hovering over the motion to dismiss. And part of that is
because we do acknowledge that, now, the way things have panned out as we stand here today,
the issue of substantive arbitrability of the specific dispute at issue has to be resolved and has to
be resolved by Your Honor, by this Court.”).
13
matter, may act through an agent in litigation.46 As a practical matter, it is
necessary for corporations and other business entities to act through agents. This
principle extends to litigation.47 Taken to its logical conclusion, Seller‟s argument
would mean that the clause prohibiting third party enforcement prohibits corporate
parties from enforcing the agreement at all, since a corporation necessarily must
act through its agent.48 That is not Seller‟s contention, of course, but Seller offers
no principled reason why this Court should allow some agents to enforce the
agreement, but not others.
Just as business entities may act through natural persons, a business entity
also may act through another business entity as intermediary. 49 Because it is
undisputed that Participants properly has been designated as Buyer‟s agent for the
purpose of enforcing, on Buyer‟s behalf, Buyer‟s rights under the Escrow
Agreement,50 I find that Participants has standing to enforce the Escrow Agreement
46
See, e.g., Appriva S’holder Litig. Co., LLC v. EV3, Inc., 937 A.2d 1275 (Del. 2007)
(discussing both natural persons and business organizations as permissible potential agents to
represent stockholders in litigation); Sussex Cty. v. Sisk, 2014 WL 3954929, at *3 (Del. Ch. Aug.
13, 2014) (discussing a daughter acting as her mother‟s agent in litigation).
47
Jay M. Zitter, J.D., Annotation, Propriety and Effect of Corporations Appearance Pro Se
Through an Agent Who is Not an Attorney, 8 A.L.R. 5th 653 (1992).
48
In re Dole Food Co., Inc. S’holder Litig., 110 A.3d 1257, 1261 (Del. Ch. 2015) (quoting N.
Assur. Co. v. Rachlin Clothes Shop, 125 A. 184, 188 (Del. 1924)) (“[B]eing a purely
metaphysical creature, having no mind with which to think, no will with which to determine[,]
and no voice with which to speak, [a corporation] must depend upon the faculties of natural
persons to determine for it its policies and direct the agencies through which they are to be
effectuated.”).
49
See, e.g. Appriva, 937 A.2d at 1290-91.
50
Pl.‟s Am. Compl. ¶ 23.
14
as Buyer‟s agent. I therefore need not reach the issue of whether Participants
might also have standing as an assignee or under equitable principles.
II. The Court should grant summary judgment in favor of Participants
on the question of substantive arbitrability.
Participants argues that it is entitled to summary judgment on the question of
whether the Transaction Expense Calculation dispute is subject to arbitration under
Section 3.6 of the Escrow Agreement. Participants argues that the parties
unambiguously agreed to arbitrate disagreements “with respect to” the Transaction
Expense Calculation and that the present dispute qualifies as such because it
concerns whether Seller properly made certain post-closing adjustments to the
calculation of Transaction Proceeds. Participants cites Viacom International, Inc.
v. Winshall for the proposition that “If the subject matter to be arbitrated is the
calculation of an earn-out, or the amount of working capital, or the company‟s net
worth at closing, all issues as to what financial or other information should be
considered in performing the calculation are decided by the arbitrator.” In the
alternative, Participants argues that, even if Section 3.6 does not unambiguously
encompass this dispute, Delaware‟s public policy favoring arbitration requires a
reviewing court to compel arbitration as long as the contract “may reasonably be
interpreted to require arbitration.”
Seller asserts two primary arguments in support of its own motion for
summary judgment: (1) the scope of Section 3.6 of the Escrow Agreement does
15
not encompass the parties‟ current dispute; and (2) the parties‟ dispute actually
relates to decisions the parties agreed would fall within the Plan Administrator‟s
sole discretion. As to the first argument, Seller contends that Section 3.6 of the
Escrow Agreement is a narrow provision that does not encompass the parties‟
present dispute. Seller argues that, although Delaware‟s public policy favors
arbitration, there nonetheless must be a clear expression of the intent to arbitrate
contained in a valid agreement. Seller further reasons that questions regarding the
scope of an arbitration provision are questions for the Court, absent a clear
delegation of such determination to the arbitrator. Seller cites Tandy Brands
Accessories, Inc. v. Chambers Belt Co. and Avnet, Inc. v. H.I.G. Source, Inc., as
analogous cases in which this Court has determined that the parties‟ dispute was
not arbitrable.51
Seller examines each of the three arbitration provisions potentially
implicated by post-closing adjustments and the Transaction Expense Calculation
and argues that each provision is narrow and refers only to disagreements with
particular calculations referenced in that provision. In Seller‟s view, the parties did
not agree to arbitrate any broader disagreements that extended beyond the specific
subject matter laid out in each arbitration provision. The only provision implicated
51
Def.‟s Br. in Opp. at 21-22 (citing Tandy Brands Accessories, Inc. v. Chambers Belt Co., C.A.
No. 6342 at 33, 42 (Del. Ch. Sept. 2, 2011) (TRANSCRIPT) (described in Chambers Belt Co. v.
Tandy Brands Accessories, Inc., 2012 WL 3104396, at *2 (Del. Super. Ct. July 31, 2012));
Avnet, Inc. v. H.I.G. Source, Inc., 2010 WL 3787581, at *6 (Del. Ch. Sept. 29, 2010)).
16
in this action is Section 3.6 of the Escrow Agreement. For purposes of the present
dispute, Seller argues that Section 3.6 applies only to “disagreements with respect
to a Transaction Expense Calculation” in connection with the current (and final)
release date, and that Buyer‟s pending objections to the Transaction Expenses
Calculation actually challenge earlier calculations that Buyer did not dispute in a
timely manner.52
To support this first argument, Seller contends that the parties‟ agreement to
arbitrate “disagreements with respect to a Transaction Expense Calculation” refers
only to disagreements concerning either mathematical computation (i.e., arithmetic
errors),53 or the addition of the amount disbursed at the time of the third
disbursement to the previous Transaction Proceeds calculation (thereby increasing
the Transaction Proceeds and triggering additional payments under the Incentive
Plan).54 According to Seller, Participants‟ exception relates not to computation,
but rather to whether other amounts should have been included in the calculation of
the Transaction Proceeds at closing and at the time of the post-closing adjustment
52
Def.‟s Br. in Opp. at 28. For example, Section 3.2 of the Merger Agreement, which discusses
the calculation of specific Transaction Expenses, provides that Buyer only has three days after
delivery to challenge Seller‟s calculation. Merger Agreement at § 3.2(a)(i), Ex. B. to Verified
Compl. in Seller‟s Action. Similarly, Section 3.6 of the Escrow Agreement provides that
challenges to the calculations of each of the three disbursements must be made within ten days
after delivery of each calculation. Escrow Agreement at § 3.6(c), Ex. A. to Verified Compl.
53
Def.‟s Br. in Opp. at 34 (arguing that the disagreement is not limited to “calculations,” as
neither Buyer nor Participants is “asserting that Seller has incorrectly added, multiplied, or
otherwise calculated anything. Indeed there is no error in Seller‟s calculation, and they identify
none”).
54
Id. at 35.
17
— issues that implicate interpretation of the Incentive Plan and the Merger
Agreement and fall outside the scope of Section 3.6.
Seller‟s second argument in support of its motion for summary judgment
relates to the power of the Plan Administrator to “interpret, construe and
administer the Plan in its sole discretion” and to “decide any questions and settle
all controversies in connection with the Plan.”55 The Plan provides that the Plan
Administrator‟s interpretation and construction of the Incentive Plan is “final,
binding and conclusive.”56 That includes all calculations required under the Plan,
including the calculation of Transaction Proceeds.57
Seller points out that, at the time of closing, the Plan Administrator
calculated the Transaction Proceeds as $850 million, which entitled Participants to
4.5% of the net equity value of the Company.58 Buyer did not object to this
determination.59 The Plan Administrator also calculated the first and second
disbursements from the escrow account without objection from Buyer. 60 It was not
until the third Release Date that Buyer objected to the Plan Administrator‟s
Transaction Proceeds calculation. Seller argues that the Plan Administrator‟s
exclusive authority to make determinations regarding the calculation of
55
Incentive Plan at Art. IV, Ex. A to Verified Compl. in Seller‟s Action.
56
Id.
57
Id. at Section 6.13.
58
Verified Compl. at ¶ 14 in Seller‟s Action.
59
Id. at ¶ 15.
60
Id. at ¶¶ 16-17.
18
Transaction Proceeds precludes Buyer from challenging those calculations in an
arbitration proceeding. Seller resists framing its objection as a timing issue.
Instead, Seller has characterized the dispute as over what amounts to “calculations”
and whether it is permissible for the arbitrator to adjudicate a dispute over
calculations of the third disbursement amount if doing so would necessitate
reconsidering earlier calculations of Transaction Proceeds, which were supposed to
be “final and binding” after the dispute period passed.61
In response to Seller‟s arguments, Participants returns to its emphasis on the
low standard necessary to compel arbitration, pointing out that the presumption is
in favor of arbitration unless it can be said “with positive assurance that the
arbitration clause is not susceptible of an interpretation that covers the asserted
dispute.”62 Similarly, Participants argues that “ambiguities as to the scope of the
arbitration clause itself [are] resolved in favor of arbitration.”63 Participants further
argues that its interpretation of the arbitration provision is not only reasonable, but
in fact more plausible than Seller‟s, pointing out that it is implausible that the
parties would have contemplated hiring a “Big Four” auditor to check
computational errors and that the parties‟ dispute is well-suited for resolution by an
61
Def.‟s Br. in Opp. at 36.
62
SBC Interactive, Inc. v. Corp. Media Partners, 1997 WL 810008, at *3 (Del. Ch. Dec. 29,
1997).
63
Pl.‟s Br. in Further Supp. of its Mot. for Summ. J. and in Opp‟n to Def.‟s Mot. to Dismiss and
Mot. for Summ. J. at 8 (hereinafter cited as “Pl.‟s Reply Br.”) (quoting Mastrobuono v. Shearson
Lehman Hutton, Inc., 514 U.S. 52, 62 (1995)).
19
accountant because it concerns whether particular items, such as excess working
capital, qualify as Transaction Proceeds.
A. Settled law favors enforcing the parties’ agreement to arbitrate.
It is well-settled that both federal and state law favor arbitration.64 The
parties agree that the FAA applies to this dispute.65 Participants correctly points
out that the standard for enforcing arbitration is low. As this Court explained in
SBC Interactive, Inc. v. Corporate Media Partners, the presumption in favor of
arbitration is “[o]f such force … that the United States Supreme Court and our
Delaware [c]ourts have held that the presumption of arbitrability can be overcome
only if it may be said with positive assurance that the arbitration clause is not
susceptible of an interpretation that covers the asserted dispute.”66
Seller acknowledges this presumption, but argues it only applies to “broad”
arbitration clauses, and therefore does not apply here, because Section 3.6 is
narrow.67 Seller misunderstands the law. Although the SBC Interactive Court did
describe the presumption as particularly powerful when the arbitration clause is
“broad,” as was the clause in that case, the Court went on to explain that the
presence of a broad clause meant that the presumption in favor of arbitrability only
64
SBC Interactive, 1997 WL 81008, at *3.
65
Verified Compl. at 1 (invoking the FAA); Tr. at 24 (explaining that the FAA governs in the
instant case). See also, Viacom Int’l, Inc. v. Winshall, 2012 WL 3249620, at *10 (Del. Ch. Aug.
9, 2012).
66
SBC Interactive, 1997 WL 81008, at *3 (internal quotation and citation omitted).
67
Tr. at 57-59.
20
can be overcome by “an „express provision‟ excluding the dispute from the
coverage of the arbitration clause.”68 As I read SBC Interactive, the Court‟s
statements regarding the weight given to the presumption when the arbitration
clause is broad do not alter the Court‟s statements indicating that the presumption
applies to all arbitration clauses, whether narrow or broad. Rather, the
presumption becomes even more difficult to overcome in cases involving a broad
clause, such that explicit exclusion of the dispute from the clause is necessary to
avoid arbitration.
B. The parties’ dispute regarding the Transaction Expense
Calculation is arbitrable, subject to various procedural defenses
to be resolved by the arbitrator.
It is well-established, and the parties agree, that the question of whether the
subject matter of a given dispute is arbitrable generally is one for a court.69
Conversely, if a court determines that a dispute is arbitrable, questions about how
the dispute is to be resolved are left to the arbitrator. This is the distinction
between so-called “substantive arbitrability” and “procedural arbitrability.”70
Substantive arbitrability is characterized as the “threshold question of whether the
parties agreed to arbitrate” disputes concerning a certain subject matter.71
Procedural arbitrability, on the other hand, involves “whether the parties have
68
SBC Interactive, 1997 WL 81008, at *3.
69
Id.
70
Viacom, 2012 WL 3249620, at *12.
71
Weiner v. Milliken Design, Inc., 2015 WL 401705, at *8 (Del. Ch. Jan. 30, 2015).
21
complied with the terms of [the] arbitration provision,” as well as how an
arbitration is to be conducted.72 Matters of procedural arbitrability include
“whether prerequisites such as time limits, notice, laches, estoppel, and other
conditions precedent to an obligation to arbitrate have been met, as well as
allegations of waiver, delay, or a like defense to arbitrability.”73 In other words, an
arbitrator can decide that a dispute is not arbitrable due to procedural failures, but it
is not for a court to do so preemptively.74
The Delaware Supreme Court has made clear that procedural arbitrability
also includes questions about what evidence the arbitrator should consider in
deciding the dispute, mentioning specifically the context of calculating payments
of an incentive plan.75 In Viacom International, Inc. v. Winshall, the Supreme
Court rejected the reasoning of two previous decisions of this Court, HDS
Investment Holdings, Inc. v. Home Depot, Inc. and Nash v. Dayton Superior Corp.,
for misconstruing the distinction between procedural arbitrability and substantive
arbitrability.76 The Supreme Court explained:
72
Viacom, 2012 WL 3249620, at *12.
73
Id.
74
The result is that, even if the court determines that the dispute is over arbitrable subject matter
and hence should be submitted to arbitration, the arbitrator himself then can decide that the
dispute is not arbitrable due to a procedural failing. Therefore, there are two points at which the
dispute may be adjudicated non-arbitrable: one due to substantive arbitrability issues decided by
a court, and one due to procedural arbitrability issues decided by an arbitrator.
75
Viacom Int’l, Inc. v. Winshall, 72 A.3d 78, 83-84 (Del. 2013).
76
Id. (citing HDS Inv. Holdings, Inc. v. Home Depot, Inc., 2008 WL 4606262 (Del. Ch. Oct. 17,
2008); Nash v. Dayton Superior Corp., 728 A.2d 59 (Del. Ch. 1998)).
22
If the subject matter to be arbitrated is the calculation of an earn-out,
or the amount of working capital, or the company‟s net worth at
closing, all issues as to what financial or other information should be
considered in performing the calculation are decided by the arbitrator.
In resolving those issues, the arbitrator may well rely on the terms of
the underlying agreement, and the arbitrator‟s interpretation of the
contract is likely to affect the scope of the arbitration. Nonetheless,
those decisions fall within the category of procedural arbitrability.
They are not “gateway” issues about whether the particular dispute
should be arbitrated at all. Rather, they are questions about how the
subject of the arbitration should be decided.77
Although not identical procedurally or factually, the two decisions criticized
in Viacom are significant in light of Seller‟s argument that the dispute is not
arbitrable because the calculations that Participants challenges became final and
binding at an earlier date. In HDS, the Court was asked to interpret the scope of
the parties‟ agreement to arbitrate disagreements about post-closing price
adjustments.78 The issue was whether the arbitrator could consider a document
containing a revised calculation of the purchase price adjustment when the
document was submitted after the deadline contained in the parties‟ agreement.79
The Court of Chancery determined that this was a question of contract
interpretation to be decided by the court.80 The Supreme Court in Viacom rejected
77
Viacom, 72 A.3d at 83-84. Admittedly, the procedural posture of Viacom was different from
this case, because it involved an action to vacate an arbitrator‟s decision. Viacom, 2012 WL
3249620, at *11. That distinction does not, however, alter the strength of the Viacom court‟s
stance regarding the breadth of procedural arbitrability, nor does it alter that Court‟s rejection of
the reasoning in HDS or Nash.
78
HDS Inv. Holdings, 2008 WL 4606262.
79
Id. at *8.
80
Id.
23
that conclusion, finding that it was up to the arbitrator to decide whether the
document should be excluded on the basis that it was not timely submitted.81
In Nash, the dispute concerned a closing balance sheet, which set forth post-
closing adjustments to the net worth of the company that was sold. 82 The parties‟
agreement established set periods for the parties to object to the calculations after
the delivery of the balance sheet and to negotiate in good faith over any dispute.83
Failing a negotiated resolution, the parties agreed to arbitrate their disagreement.84
The plaintiffs filed suit, alleging that, during their negotiations, the defendant
attempted to raise new issues that appeared in neither the closing balance sheet nor
the notice of disagreement. In denying the defendant‟s motion to dismiss, this
Court found that there was, “at least potentially, a factual question as to whether
the parties intended the arbitration process to permit [the defendant] to revise the
[c]losing [b]alance [s]heet in response to objections raised by the [n]otice of
[d]isagreement,” and that this factual question was within the purview of this
Court.85 The Supreme Court in Viacom rejected that reasoning, finding that it was
up to the arbitrator to decide whether the agreement between the parties permitted
consideration of later adjustments to the closing balance sheet.86
81
Viacom, 72 A.3d at 83-84.
82
Nash, 728 A.2d at 60.
83
Id.
84
Id.
85
Id. at 61.
86
Viacom, 72 A.3d at 83-84.
24
Two other decisions on which Seller relies, Avnet, Inc. v. H.I.G. Source, Inc.
and Tandy Brands Accessories, Inc. v. Chambers Belt Co., both predate Viacom
and rely on HDS and Nash, which Viacom expressly rejected.87 Although those
cases might otherwise support Buyer‟s position in this action, they are no longer
good law after Viacom, at least on the issue of whether Seller‟s arguments raise
issues of procedural arbitrability or substantive arbitrability.
Most notably, this Court‟s recent decision in Weiner v. Milliken Design
interprets and applies the post-Viacom standard to a case very similar to this
dispute.88 Weiner concerned an earn-out in connection with a merger.89 As in this
case, the payments were to be made in three stages (for fiscal years 2010, 2011,
and 2012), at which times the amount of the earn-out would be calculated based on
various inputs.90 The inputs in each stage included figures previously calculated,
particularly for fiscal years 2011 and 2012, where the earn-out amount directly
depended on the earn-out amount from the previous year.
87
Avnet, 2010 WL 3787581, at *6 (Del. Ch. Sept. 29, 2010); Tandy Brands, C.A. No. 6342 at 36
(Del. Ch. Sept. 2, 2011) (TRANSCRIPT). This Court expressly held that Avnet no longer is
good law after the Delaware Supreme Court‟s decision in Viacom. See Weiner v. Milliken
Design, Inc., 2015 WL 401705, at *11 (Del. Ch. Jan. 30, 2015).
88
Weiner, 2015 WL 401705.
89
Although the dispute between Participants and Seller concerns a plan to incentivize executive
employees to help obtain the best merger price rather than an earn-out to incentivize executive
employees to continue adding value to the target company after the merger, the cases are similar
as both concern incentive plans for executive employees where the bonuses were disbursed in
multiple stages with the calculation of each disbursement dependent on the calculation at the
previous stage.
90
Weiner, 2015 WL 401705 at *2-3.
25
In Weiner, the parties‟ agreement established target revenue figures for each
fiscal year. For fiscal year 2010, the amount of the earn-out was to be calculated
by determining whether the actual 2010 fiscal year revenue met, exceeded, or fell
below target.91 If the actual revenue at least met the target, the earn-out would be a
specified amount. If not, the earn-out would be a number between zero and the
specified amount (calculated using a formula set out in the agreement).92 For fiscal
years 2011 and 2012, there would be the same base earn-out payment, calculated
according to the procedure for 2010 (but with updated target and actual revenue
figures to reflect the year in question), but there could also be additional amounts
added to the base earn-out.93 The additional payments for 2011 would be triggered
if the sum of the previous years‟ earn-outs was less than a certain threshold.94
In Weiner, the buyer was to submit its earn-out calculations to the sellers‟
representative, after which the sellers‟ representative had a period in which to
object formally.95 If no objection was made within that time, the earn-out
calculation for that year became “final and binding.”96 The parties agreed to
arbitrate timely objections to an earn-out calculation.97 The sellers‟ representative
91
Id. at *2.
92
Id.
93
Id. at *3.
94
Id.
95
Id.
96
Id.
97
Id. at *4.
26
made no objection to the 2010 earn-out.98 Although the sellers‟ representative
complained about the 2011 earn-out calculation, he did not file the dispute
certification required to object to that calculation. The parties agreed that the
sellers‟ representative properly objected to the 2012 earn-out.99
The parties in Weiner agreed that the dispute was arbitrable, but disagreed
about the scope of the issues before the arbitrator. The sellers‟ representative
argued that the arbitrator should consider alleged breaches of the agreement during
2010 and 2011.100 The buyer sought a court order enjoining the arbitrator from
arbitrating any claim related to the 2010 and 2011 earn-out calculations, arguing
that these calculations had become “final and binding” when the set time period to
dispute them expired.101 In response, the sellers‟ representative argued that
whether the 2010 and 2011 calculations were in fact “final and binding” was an
issue of procedural arbitrability to be determined by the arbitrator and not by the
Court.102
Citing Viacom, this Court held that the issue of whether the claims regarding
fiscal years 2010 and 2011 were time-barred was procedural in nature and
therefore should be left to the arbitrator.103 The Court reasoned that the parties
98
Id.
99
Id. at *5.
100
Id.
101
Id.
102
Id.
103
Id. at *10.
27
unambiguously agreed to arbitrate disputes regarding the calculation and payment
of earn-outs, and “[t]he fact that [the applicable section of the agreement]
delineates the procedural mechanism for perfecting such a „dispute‟ and presenting
it to the arbitrator does not transform the procedural and formal requirements of
that provision into „gateway questions‟ of substantive arbitrability.” 104 The Court
found the Buyer‟s position particularly unreasonable because the Buyer effectively
was asking the Court to send the dispute over the 2012 earn-out to arbitration “but
preemptively curtail the scope of the arbitrator‟s analysis by limiting what financial
metrics and inputs he may consider in rendering his arbitral decision. In so doing,
[the Buyer] invites a needlessly bifurcated adjudication of the issues in this
dispute.”105
In attempting to minimize the application of Weiner to this action, Seller
attempts to frame its argument as one regarding the scope of arbitration, rather than
a question of whether Participants‟ disagreements were timely. Seller objects to
arbitration of the dispute because Seller argues that the particular issues that
Participants wants adjudicated in connection with the third Transaction Expense
Calculation fall outside the scope of the arbitration provision. Seller concedes that
certain sorts of disputes over the third Transaction Expense Calculation would be
104
Id. The Court further reasoned that there is an even stronger reason to include the 2010 and
2011 earn-out calculation as potentially arbitrable subject matter given that the 2012 calculation
is dependent on the 2010 and 2011 calculations and the parties agreed that the 2012 calculation
should be submitted to arbitration. Id.
105
Id. at *11.
28
arbitrable — namely disputes concerning the mathematical computations
performed to arrive at the third disbursement number.106 Participants‟
disagreement, however, is more than merely computational, and instead concerns a
substantive accounting issue: deciding between two alternative methods of
calculating Transaction Proceeds. For example, one concrete area of disagreement
concerns whether “excess” working capital — the difference between net working
capital as estimated for determining an estimated closing purchase price and net
working capital as determined in a post-closing accounting — should be included
as Transaction Proceeds.107 This accounting decision would have been made, if
not at the time of the post-closing adjustment, at least before the first Release Date.
Seller‟s clever framing notwithstanding, the issues Seller characterizes as
questions of “scope” are in fact issues of timeliness and, under Viacom, “issues as
to what financial or other information should be considered in performing the
calculation.”108 Seller‟s issues concern whether Buyer or Participants observed the
necessary time limits to dispute the calculations Participants now seeks to
challenge.109 Prerequisites for arbitrability such as time limits and other issues
concerning whether a party followed the proper procedure for seeking arbitration
106
Def.‟s Br. in Opp. at 34.
107
Pl.‟s Reply Br. at 12.
108
72 A.3d at 83-84.
109
For example, the procedure for disputing the calculation made at the time of the post-closing
adjustment is set out in §3.1 of the Merger Agreement. The procedure for disputing calculations
at the time of each of the three disbursements is set out in §3.6 of the Escrow Agreement, with
separate time limits for disputing each disbursement.
29
are questions of procedural arbitrability to be decided by the arbitrator.110 Once the
dispute is submitted to arbitration, the arbitrator may well decide that the issues
Participants seeks to resolve cannot be challenged because Participants did not
raise them in a timely manner. I express no position on the proper resolution of
that question.
Seller also argues that the instant dispute is not arbitrable because it is a not
a calculation dispute but a dispute over the interpretation of contract terms,
specifically concerning which amounts should be included as “Transaction
Proceeds.”111 Seller argues that this issue of interpreting the term “Transaction
Proceeds” must be determined by the Plan Administrator, who is vested with the
full power “to interpret, construe[,] and administer the Plan in its sole discretion
based on the provisions of the Plan” and whose determinations “shall be final,
binding and conclusive on all persons (absent manifest error).”112 Seller further
suggests that because both the Merger Agreement and the Escrow Agreement grant
jurisdiction to the Court of Chancery to resolve general disputes related to the
agreements, review of the Plan Administrator‟s interpretation is a matter for this
Court.113
110
Viacom, 2012 WL 3249620, at *12.
111
Def.‟s Br. in Opp. at 34.
112
Incentive Plan at Art. IV, Ex. A to Verified Compl. in Seller‟s Action.
113
Def.‟s Br. in Opp. at 22-23.
30
The mere fact that the parties‟ dispute may require interpretation of
contractual terms does not mean the dispute is not arbitrable; Delaware courts
repeatedly have recognized that arbitrators, even those without legal training, may
be called upon to interpret the parties‟ agreement in order to render a decision in
the arbitration.114 To the extent Seller is arguing that the parties‟ agreement to
submit to the jurisdiction of this Court to resolve disputes regarding the merger
agreement, along with the parties‟ agreement to be bound by the decisions of the
Plan Administrator, trumps the arbitration clause in the Escrow Agreement, that
argument contradicts the basic principle that specific language controls over
general language in a contract.115 In other words, notwithstanding the parties‟
general agreement regarding the discretion afforded the Plan Administrator, they
also expressly agreed to a specific procedure to challenge and arbitrate certain
calculations over which the Plan Administrator was given discretion. That clear
and specific arbitration provision trumps the general forum selection clause in the
Merger Agreement, as well as the language giving the Plan Administrator broad
discretion to make calculations.
Presented with a similar issue in Bayless v. Davox Corp., this Court held that
the parties‟ post-merger dispute regarding the release of escrowed shares was
114
See, e.g. SPX Corp. v. Garda USA, Inc., 94 A.3d 745, 751 (Del. 2014); Bayless v. Davox
Corp., 2000 WL 268310, at *2-4 (Del. Ch. Mar. 1, 2000).
115
DCV Holdings, Inc. v. ConAgra, Inc., 889 A.2d 954, 961(Del. 2005) (“Specific language in a
contract controls over general language, and where specific and general provisions conflict, the
specific provision ordinarily qualifies the meaning of the general one.”).
31
subject to the arbitration clause in the escrow agreement, even though the parties‟
dispute necessarily involved interpretation of the merger agreement, which did not
116
contain an arbitration clause. The Court reasoned that the arbitration clause,
which specifically referred to disputes connected to the escrow agreement, should
control over the generally-worded dispute resolution provision in the merger
agreement.117 Emphasizing the specificity of the arbitration provision in the
escrow agreement, the Court reasoned that it was “much more specifically focused
on the precise type of claims pled in the Class complaint than is the merger
agreement‟s dispute resolution clause.”118 The Court therefore concluded that the
arbitration clause was “a more reliable expression of the parties‟ intent as to how
they wished to resolve disputes regarding the [e]scrowed [s]hares.”119
Here, even if the parties contemplated that the Plan Administrator would
generally interpret contractual terms, subject to review by this Court, the
specificity of the arbitration provision in the Escrow Agreement indicates that
disputes concerning the subject matter specifically delineated therein would be
carved out and submitted to arbitration. The provisions in the Incentive Plan
granting broad interpretive powers to the Plan Administrator do not suggest that
the present dispute should not be submitted to arbitration. At most, Seller has a
116
Bayless, 2000 WL 268310, at *2-4.
117
Id. at *5.
118
Id.
119
Id.
32
contract-based argument to make to the arbitrator that, under the agreement
between the parties, the arbitrator should defer to the Plan Administrator‟s
interpretation of certain contract terms where the Plan Administrator has made
such determinations.
Finally, my conclusion regarding substantive arbitrability is bolstered by the
general presumption of arbitrability and the “reasonableness” standard articulated
in SBC Interactive.120 That is, the role of a Delaware court is to submit a dispute to
arbitration unless “it can be said with positive assurance that the arbitration clause
is not susceptible of an interpretation that covers the asserted dispute.”121 I find
that not only is it plausible that the instant dispute is covered by the arbitration
clause in question, but that the alternative interpretations offered by Seller are not
plausible.
CONCLUSION
For the foregoing reasons, I recommend that the Court deny Seller‟s Motion
to Dismiss and Motion for Summary Judgment and grant Participants‟ Motion for
Summary Judgment. This is my final report and exceptions may be taken in
accordance with Court of Chancery Rule 144.
/s/ Abigail M. LeGrow
Master in Chancery
120
SBC Interactive, 1997 WL 81008, at *3.
121
Id.
33