Ashish Chordia v. Edward Lee

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ASHISH CHORDIA, LAMPROS )
KALAMPOUKAS, RAGHU KODIGE, )
RAVI SARMA, RICHARD ANDRADES, )
ASHISH BALDUA, JOHN GEE, KAJAL )
VIBHAKAR, THE SHAOIE CHAN )
CHORDIA GST TRUST, THE SAMAY )
KODIGE GST TRUST, and THE VEVAAN )
KODIGE GST TRUST, )
)
Plaintiffs, )
)
v. ) C.A. No. 2023-0382-NAC
)
EDWARD LEE, MATTHEW DURGIN, )
JAEWOO HWANG, RONALD )
WASINGER, ADAM SEXTON, CHRIS JO, )
and ZENITH ELECTRONICS LLC, )
)
Defendants, )
)
and )
)
ALPHONSO INC., a Delaware corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: December 5, 2023
Date Decided: January 4, 2024
Bradley R. Aronstam, R. Garrett Rice, Holly E. Newell, ROSS ARONSTAM & MORITZ
LLP, Wilmington, Delaware; Brian M. Burnovski, Andrew Ditchfield, Pascale Bibi,
Nikolaus J. Williams, Marie Killmond, Danielle Mullery, DAVIS POLK & WARDWELL
LLP, New York, New York; Counsel for Plaintiffs Ashish Chordia, Lampros
Kalampoukas, Raghu Kodige, Ravi Sarma, Richard Andrades, Ashish Baldua, John Gee,
Kajal Vibhakar, The Shaoie Chan Chordia GST Trust, The Samay Kodige GST Trust, and
The Vevaan Kodige GST Trust.
William M. Lafferty, Ryan D. Stottmann, Lauren K. Neal, Alec Hoeschel, Grant E. Michl,
MORRIS, NICHOLS, ARSHT & TUNNEL LLP, Wilmington, Delaware; Hallie B. Levin,
WILMER CUTLER PICKERING HALE AND DORR LLP, New York, New York;
Timothy Perla, WILMER CUTLER PICKERING HALE AND DORR LLP, Boston,
Massachusetts; Counsel for Defendants Edward Lee, Mathew Durgin, Jaewoo Hwang,
Ronald Wasinger, Adam Sexton, and Chris Jo.
William M. Lafferty, Ryan D. Stottmann, Lauren K. Neal, Alec Hoeschel, Grant E. Michl,
MORRIS, NICHOLS, ARSHT & TUNNEL LLP, Wilmington, Delaware; William Savitt,
Jonathan M. Moses, Elaine Golin, Graham W. Meli, Ryan A. McLeod, WACHTELL,
LIPTON, ROSEN & KATZ, New York, New York; Eric Seiler, Lance J. Gotko, Jason
Rubinstein, David J. Ranzenhofer, Sofie Syed, FRIEDMAN KAPLAN SEILER,
ADELMAN & ROBBINS LLP, New York, New York; Counsel for Defendant Zenith
Electronics LLC.
Kurt M. Heyman, Elizabeth A. DeFelice, HEYMAN ENERIO GATTUSO & HIRZEL
LLP, Wilmington, Delaware; Counsel for Nominal Defendant Alphonso Inc.
COOK, V.C.
Silicon Valley tech startup founders sold a majority interest in their company to LG
Electronics. In exchange, the founders received cash and liquidity rights embodied in a
stockholders’ agreement. The liquidity rights were protected by the founders’ contractual
right to designate up to three of the company’s seven-person board of directors. But the
parties conditioned the designation right on at least one founder remaining at the company
as an officer or employee (the “Designation Condition”).
The stockholders’ agreement also granted the LG-controlled board the right to hire
and fire the company’s executive officers. But this right did not allow the board to
terminate non-executive-officer employees. Only the company could terminate the latter.
Unlike the board, the stockholders’ agreement obligated the company to use its “reasonable
efforts” to ensure that the rights conferred in the stockholders’ agreement remained
effective for the founders’ benefit.
After the sale, LG sought to remove the founders’ designation right by terminating
them to cause the non-occurrence of the Designation Condition. The LG-controlled board
effectuated this plan by terminating the executive-officer founders. But the board could
not terminate all the founders since two were non-executive-officer employees. Thus, the
board appointed an interim CEO to carry out the remaining terminations. LG then executed
the requisite consent to remove the founders from the board. The plaintiffs bring this action
under 8 Del. C. § 225 seeking a determination of the board’s proper composition.
I conclude that the interim CEO acted for the company in carrying out the
terminations. He was thus bound by and breached the “reasonable efforts” clause in the
stockholders’ agreement. The company’s acts, as a party to the stockholders’ agreement
1
and having materially contributed to the non-occurrence of the Designation Condition,
render the condition excused. Accordingly, the non-executive-officer employee founders
are entitled to designate directors under the terms of the stockholders’ agreement.
FACTUAL BACKGROUND
The evidence presented at trial supports the following findings of fact.1
A. The Parties And Relevant Non-Parties
In 2012, plaintiff Ashish Chordia co-founded nominal defendant Alphonso Inc.
(“Alphonso”),2 a Delaware corporation, along with plaintiffs Lampros Kalampoukas,
Raghu Kodige, Ravi Sarma, and Richard Andrades (collectively, the “Founders”).3 The
Founders, together with Ashish Baldua, The Shaoie Chan Chordia GST Trust, The Samay
Kodige GST Trust, The Vevaan Kodige GST Trust, and non-party Sandeep Beotra, are
referred to as the “Key Holders” (collectively, with John Gee and Kajal Vibhakar, and
excluding Beotra, “Plaintiffs”).
Alphonso is a Silicon Valley tech startup that developed automatic content
recognition (“ACR”) technology. ACR enhances advertising efforts by collecting data on
Joint trial exhibits are cited as “JX___” and trial testimony is cited as “TT ___
1
(Name).”
2
See TT 60:10–24 (Chordia).
3
Chordia v. Lee, C.A. No. 2023-0382-NAC, Docket (“Dkt.”) 170, Pre-Trial
Stipulation and [Proposed] Order (“Pre-Trial Stipulation”) ¶ 3; see also TT 7:1–6
(Chordia).
2
what smart TV users view in order to efficiently target advertisements.4 In the years that
followed its formation, Alphonso received roughly $6.2 million in funding from investors.5
It used these funds, in conjunction with stock options, to expand its workforce to over 130
employees.6 Between 2017 and 2019, a trend emerged of smart TV brands entering into
large acquisitions or strategic partnership deals with companies like Alphonso. Although
Alphonso participated in several discussions with potential smart TV brands, it remained
unsuccessful in closing any such deal of its own.7
Defendant Zenith Electronics LLC (“Zenith”) is a Delaware limited liability
company and a wholly owned subsidiary of non-party LG Electronics U.S.A. Inc. (“LG
US”).8 In turn, LG US is a wholly owned subsidiary of non-party LG Electronics, Inc.
(“LGE”), which is based in Seoul, South Korea.9 Among other things, LGE is a global
manufacturer of smart TVs. Like the many other smart TV brands at the time, LGE also
became interested in making a strategic investment in an ACR technology company.10
4
JX0653 62:13–63:7 (Chordia); TT 494:2–20 (Edward Lee).
5
TT 10:21–11:1 (Chordia).
6
JX0407 at 13; see also TT 212:22–213:10, 247:3–12 (Kodige).
7
TT 71:15–72:17 (Chordia).
8
Pre-Trial Stipulation ¶ 13.
9
Id.; see also TT 593:13–22 (Wasinger).
10
TT 494:2–20 (Edward Lee).
3
Defendants Ronald Wasinger, Edward Lee, Mathew Durgin, and Jaewoo Hwang
were members of Alphonso’s board (the “Board”) on December 16, 2022.11 These Board
members approved a resolution to terminate certain executive officers.12 After the Board
terminated the executives, it appointed defendant Adam Sexton as Alphonso’s Interim
CEO to carry out additional terminations.13 Defendant Chris Jo served on Alphonso’s
Board from March 2022 until June 2022 and “[c]hampion[ed]” the purported
reorganization.14
B. The Deal
In January 2020, Alphonso began discussions with LGE over the prospect of a deal
between the two.15 The almost year-long negotiation process culminated in LGE acquiring
a majority stake in Alphonso through Zenith. CEO Chordia, Chief Product Officer Kodige,
CFO Beotra, and General Counsel Tom Cushing negotiated on behalf of Alphonso and the
Key Holders.16 Tom Hahm served as LGE’s principal negotiator.17
11
Pre-Trial Stipulation ¶¶ 14–17.
12
See JX0515 (recording of Alphonso’s Board meeting on December 16, 2022).
13
JX0518 at 2; see also JX0515.
14
See Pre-Trial Stipulation ¶ 18; JX0435 at 18; TT 685:24–687:20 (Jo).
15
TT 494:21–495:4 (Edward Lee).
16
TT 12:18–13:15 (Chordia); see also TT 202:19–203:1 (Kodige).
17
See TT 13:9–15 (Chordia).
4
1. Negotiations
In March 2020, LGE sent Alphonso a letter of intent.18 The letter communicated
LGE’s “desire” to “take a 51% equity position in” Alphonso.19 In exchange, LGE “will
work together with [the equity holders] to come up with a scheme that makes sense for all
parties” and provide the equity holders with a “trigger-based method to allow for a slow
exit.”20 Throughout the negotiations, LGE maintained its interest in acquiring control over
Alphonso. And this issue took center stage during subsequent communications. For
example, in May 2020, Chordia, Kodige, and Beotra visited LGE in Seoul to meet with
Hahm, Edward Lee, and Hyoung-Saeyi Park.21 During that visit, Beotra “insiste[d]” that
the Key Holders would not sell more than 49% of Alphonso.22 But this approach proved
unsuccessful and led to the Alphonso team leaving “empty-handed.”23 Although talks
eventually picked back up, LGE’s message was clear. LGE was only interested in a
majority stake.24
18
JX0008 at 2.
19
Id.
20
Id.
21
TT 15:12–18 (Chordia).
22
TT 15:18–16:1 (Chordia).
23
TT 15:18–16:1 (Chordia).
24
TT 16:1–10 (Chordia).
5
The Key Holders’ hesitance to give up control was justified, as they understood the
gravity of the decision they were making.25 Indeed, LGE made no attempts to hide the ball
on this issue. LGE specifically stated that in these types of transactions, things “might not
work out well for the founders.”26 But this was not news to the Key Holders. In one of the
Key Holders’ June 2020 term sheet markups, they stated that their plans for business
development, external funding, and “IPO and M&A decisions will rest with LG.”27 The
markup also acknowledged that “[s]omething that makes sense for Alphonso may not make
sense for LG but we won’t have the right to decide.”28
As with any negotiation, the parties proposed and rejected numerous terms. Among
those LGE rejected lies a June 2020 term for employment contracts.29 If accepted, this
term contemplated providing “Key Employees” with three-year employment contracts.30
25
See JX0014 at 4; JX0022 at 1; JX0023 at 1; TT 15:1–4 (Chordia).
26
TT 84:13–21 (Chordia).
27
JX0014 at 4; see also JX0022 at 1; TT 75:14–79:18 (Chordia).
28
JX0014 at 4–5; see also JX0022 at 1.
29
Compare JX0012 at 2, and JX0014 at 6–7, with JX0050.
30
TT 98:2–99:13 (Chordia); see also JX0014 at 6–7; JX0012 at 2 (“Key Employees
(TBD list): [] Agree to 3-year employment contracts, inclusive of base salary and incentive
compensation [] If Key Employee leaves without Cause or Good Reason (each to be further
defined), they will continue to own existing illiquid stock, but will no longer be able to
participate in Employee Liquidity Option; unvested equity to be canceled. [] If Key
Employee is terminated without Cause or Good Reason, their equity stake will be cashed
out pursuant to the equity valuation at the time of termination (see Employee Liquidity
Option for details on valuation); all unvested equity of such Key Employee to be fully
accelerated[.]”).
6
Likewise, LGE also rejected an October 2020 term that would have made “hiring,
termination, or change of the compensation of the chief executive officer” subject to the
veto of certain Key Holders sitting on Alphonso’s Board.31
In the weeks following LGE’s rejection of this latter term, Beotra exchanged emails
with Hahm. These emails expressed concern over LGE’s ability to terminate Alphonso’s
CEO. In one of these emails, Beotra explained his understanding that LGE would have the
ability to “control[] the board and hence all the decisions that need simple board majority
- CEO hire/fire/comp, operating plan, LG funding, additional debt etc.”32 In response to
these concerns, Hahm did not deny LGE’s ability to terminate the CEO. But he explained
that firing “C-level officers and replac[ing] them with LGE staff . . . is only a nuclear
option that we have no incentive to do, unless you are running the company into the ground
and destroying value, which you also have no incentive to do.”33
The Key Holders’ hesitance to sell control was valid. Yet, giving up control came
with considerable upside. The Key Holders leveraged the significance of this control to
negotiate over a control premium and to bargain for favorable terms and protections.34
31
Compare JX0020 at 41, and JX0021 at 99, with JX0050 § 10.5(d).
32
JX0022 at 1; JX0023 at 2.
33
JX0023 at 4 (emphasis added).
34
See TT 98:2–99:13 (Chordia); JX0014 at 3 (June 2020 term sheet from Beotra to
LGE stating that “there is a critical difference between whether LGE acquires <=49.9% or
>=50.1% - it is the issue of control and hence controlling Alphonso’s destiny which entails
a control premium”).
7
Notwithstanding the protections LGE rejected, LGE and Alphonso agreed on a variety of
terms designed to afford certain rights to certain of Alphonso’s stockholders (i.e., the Key
Holders).35 The Key Holders, Zenith, and Alphonso gave effect to these terms by executing
a stockholders’ agreement (the “Stockholders’ Agreement”) on December 23, 2020.36
2. The Stockholders’ Agreement
The protections and rights bargained for in the Stockholders’ Agreement included
certain liquidity rights (the “Liquidity Rights”), a director-designation right (the “Director-
Designation Right”), and corresponding veto rights (the “Veto Rights”).37
The Liquidity Rights provide Key Holders the right to demand an IPO and the right
to scheduled tender offers. Section 9.1(a) sets forth the IPO demand right, which provides
that if, after December 30, 2023, Alphonso receives a request from Key Holders owning
fifty percent of the registerable securities held by the Key Holders in aggregate, then
Alphonso shall file a Form S-1 registration statement.
35
See JX0050.
36
Id.
37
Id.
8
Section 11.1 sets forth the scheduled tender offer right.38 This right provides that
Zenith shall commence scheduled tender offers at the greater of fair market value or $11.09
(i.e., the floor price) on (1) March 31, 2024, (2) March 31, 2025, and (3) March 31, 2026.39
Section 10 of the Stockholders’ Agreement sets forth the Director-Designation
Right. This right provides that the Board shall be comprised of seven directors.40 Of these
seven, LGE will designate four (the “LG-Affiliated Directors”).41 If certain conditions are
met, the “Employee Key Holder Majority” can designate, at most, the remaining three
directors (the “Common Directors”).42 There are two requirements the Key Holders must
satisfy to exercise this right.43 First, they must collectively hold a requisite percentage of
Alphonso’s outstanding Capital Stock. The percentage of ownership held corresponds to
the number of directors the Employee Key Holder Majority can designate.44 The Employee
38
Id.
39
See id. §§ 11, 1.42, 1.43, 1.29; JX0040 §§ 1.5(b), 1.5(j), 1.5(s), 1.5(kk) (December
18, 2020, Common Stock Purchase Agreement).
40
JX0050 § 10.1.
41
Id. § 10.2(a). The Stockholders’ Agreement defines “LGE” as “Zenith
Electronics LLC . . . and its affiliates.” Id. § 1.27.
42
Id. § 10.2(b). The Stockholders’ Agreement defines the “Employee Key Holder
Majority” as “the Key Holders who are directors, officers or employees of [Alphonso] at
such time (the ‘Employee Key Holders’) holding a majority of the shares of Capital Stock
then held by all Employee Key Holders.” Id. § 6.2.
43
See id. §§ 10.2(b), 6.2.
44
See id. § 10.2(b).
9
Key Holder Majority could designate three directors “during such time as Key Holders
hold at least twenty percent (20%) of the outstanding shares of Capital Stock.”45 But if the
Key Holders’ cumulative holdings fall between 10% and 15%, the Employee Key Holder
Majority could only designate one director.46
Second, to exercise the Director-Designation Right, at least one of the Key Holders
must be an Alphonso officer or employee (i.e., the Designation Condition).47 Section
10.2(b) concludes with the following: “For the avoidance of doubt, this director designation
right by the Employee Key Holder Majority under this Subsection 10.2(b) shall be null and
void if no Key Holder serves as an officer or employee of the Corporation at such time[.]”48
Under Section 10.3(a), no director may be removed unless “(i) such removal is
directed or approved by the affirmative vote of the Person(s), or of the holders entitled
under Subsection 10.2(a) or (b) to designate that director” or “(ii) the Person(s) originally
entitled to designate or approve such director or occupy such Board seat pursuant to
45
Id. § 10.2(b)(i).
46
Id. § 10.2(b)(iii).
47
Id. § 10.2(b).
48
Id. The bargaining history over this term is relevant. The parties designed the
Designation Condition to align the Key Holders’ interests with LGE’s. Hahm’s deposition
testimony explained that the purpose of the Designation Condition was to make sure the
Key Holders had “skin in the game.” JX0648 94:25–95:13 (Hahm); see also id. 79:21–
80:4 (Hahm). By which, he meant that he structured the Stockholders’ Agreement “for
employees to want to work at the company, to build value because by building value they’re
also benefiting from the value increase in their own pocket through stock options and other
programs and owning equity. So that was the intent.” Id. 94:25–95:13 (Hahm). And build
value they did. See infra Section I.D.
10
Subsection 10.2(a) or (b) is no longer so entitled to designate or approve such director.”49
This brings Section 10.2(c) into play. Where there is no Director-Designation Right, such
removals under Section 10.3(a)(ii) create vacancies that can be filled pursuant to Section
10.2(c). Section 10.2(c) provides that the vacant seats of the Common Directors shall be
filled through appointment “by the holders of Capital Stock entitled to vote in accordance
with applicable law and the Restated Certificate.”50
Additionally, Section 13.1(b)(iii) provides that the Stockholders’ Agreement “shall
terminate” upon:
The execution of a written instrument by (x) the Corporation, (y) LGE and (z) the
Employee Key Holder Majority. For the avoidance of doubt, such execution by the
Employee Key Holder Majority shall not be required if no Key Holder serves as an
officer or employee of the Corporation at such time.51
Given these mechanics, it might seem that the Director-Designation Right requires
protection of its own. Plaintiffs identify Section 12.1 as the express contractual safeguard
of this right. Section 12.1 provides the following:
[Alphonso] agrees to use its reasonable efforts, within the requirements of
applicable law, to ensure that the rights granted under this Agreement are
effective and that the Parties enjoy the benefits of this Agreement. Such
actions include, without limitation, the use of the Corporation’s reasonable
efforts to cause the nomination and election of the directors as provided in
this Agreement.52
49
JX0050.
50
See id.
51
Id.
52
Id. (emphasis added).
11
This protection aside, the Director-Designation Right does not, by itself, seem to
provide any meaningful degree of influence. But when considered in connection with the
Veto Right, its significance materializes. Specifically, Section 10.5(d) conditions the
Board’s ability to engage in certain actions on the “affirmative consent or vote of at least
one Common Director[.]”53 The actions subject to this Veto Right include (1) postponing
an IPO beyond December 2025, (2) postponing or modifying the tender offers, (3) entering
into related-party transactions between Alphonso and LGE, subject to certain exceptions,
and (4) determining fair market value for the scheduled tender offers.54
The Veto Right does not restrict the Board’s “exclusive right” to “hire or employ,
terminate employment, appoint position and determine the compensation and benefits of
executive officers of [Alphonso] and any employee” who receives annual compensation
equal to or exceeding $500,000.55
As these terms demonstrate, LGE got control, and, in exchange, the Key Holders
got cash upfront and the “slow exit”56 embodied in the Liquidity Rights. Until the exit, the
Key Holders would appoint directors to watch over and preserve the Liquidity Rights. At
the Board level, the Common Directors could not do anything on their own other than block
53
Id. § 10.5(d). Section 11.2(a) uses this same language to condition the Board’s
approval of the fair market value per share at the time of each scheduled tender offer.
54
See id. §§ 10.5(d), 11.2(a).
55
See id. § 10.5(c).
56
See JX0008 at 2.
12
certain attempts to interfere with the Key Holders’ Liquidity Rights. This was the bargain.
And indeed, this bargain mirrored LGE’s earlier promise that it would “work together with
[the Founders] to come up with a scheme that makes sense for all parties involved to allow
some trigger-based method to allow for a slow exit.”57
3. Closing
The deal closed in December 2020.58 LGE, through Zenith, invested roughly $78
million in total in exchange for over 55% of Alphonso’s stock at $11.09 per share based
on a $110 million valuation.59 Following the sale, Zenith contributed to the creation of
Alphonso’s stock option pool, which reduced its holdings to 50.1% on a fully diluted
basis.60 In conjunction with these transactions and in addition to the protections provided
in the Stockholders’ Agreement, the Key Holders received considerable upfront payments
from Zenith.61 As Defendants point out, Kalampoukas received over $5.5 million, Chordia
received over $3.5 million, Kodige received over $2.4 million, and both Andrades and
Sarma received over $1 million each in these upfront payments.62
57
Id.
58
See JX0050; JX0040; TT 68:1–4 (Chordia).
59
See JX0250 at 12; JX0040 § 1.5(j); JX0407 at 286.
60
See JX0407 at 286; TT 163:8–14 (Chordia); Pre-Trial Stipulation ¶¶ 13, 32.
61
See JX0041 at 56–57.
62
Id.
13
After the deal closed, the Employee Key Holder Majority exercised the Director-
Designation Right and appointed Chordia, Kodige, and Kalampoukas to the Board as the
Common Directors.63 Pursuant to Zenith’s right to appoint LG-Affiliated Directors, it also
named four members to the Board.64
C. Post-Closing Conflict
The parties’ relationship started off well. But friction soon developed. Chordia and
Kodige did not get along well with the LG-Affiliated Directors and the other LGE
employees with whom they interacted.
Chordia and Kodige’s unwillingness to abide by the established chain of command
proved a consistent point of tension. This is perhaps one of the clearest illustrations of the
overarching clash between LGE’s relatively buttoned-down, hierarchical culture and
Alphonso’s horizontal startup culture. LGE had an established team that managed its
relationship with Alphonso: this included primary contacts, Edward Lee and Jo.
The record is littered with emails from Chordia and Kodige to LGE’s higher-ups,
including Sangwoo Lee and Hyoung-Saeyi Park (Edward Lee and Jo’s bosses), William
Cho (LGE’s CEO), and Doo-Yong Bae (LGE’s CFO). These emails were seldom pleasant
and often denigrating toward Jo and Edward Lee. In a frustrated email to Chordia, Edward
63
Pre-Trial Stipulation ¶ 34.
64
Pre-Trial Stipulation ¶ 35.
14
Lee explained that “your counter partner of LGE is not Sangwoo but me. So [s]top
contact[ing] him directly with my business matter.”65
This was not the only area of tension between Alphonso and LGE. Among other
things, disputes arose over Alphonso’s use of LG’s brand name, executive officer hiring
without Board approval, refusal to comply with LGE’s data-privacy audit requests,
depletion of Alphonso’s stock option pool, and transfer pricing for ad inventory, as well as
a variety of other professional and interpersonal conflicts.
In addition to the companies’ cultural differences, some of this friction derived from
differences in Chordia’s and LGE’s objectives. LGE had long-term goals that required
cautious integration of Alphonso’s ACR technology into its smart TVs.66 By contrast,
Chordia and many of the Key Holders were focused on getting to an IPO.67 Although LGE
was on board with the idea at the beginning, it soon became less accommodating and sought
strategic flexibility in that area.68
65
JX0128 at 1.
66
TT 493:8–19 (Edward Lee).
67
JX0067 (forwarded Slack message from Chordia to Edward Lee on March 3,
2021, explaining that “[f]rom now to March 2024 is about 1000 days. That’s all we have!”
to get to IPO, and outlining items for Alphonso to do to achieve that goal).
See JX0105 at 2 (May 17, 2021 email to Chordia: “LGE would fully support
68
Alphonso going public with revenue goal stated above and valuation above $1B . . . .”);
JX0148 at 2 (August 21, 2021 email from Hyoung-Saeyi Park), 3 (August 19, 2021 email
from Chordia providing notes from August 17, 2021 WebEx meeting with Sangwoo Lee,
Edward Lee, and Hyoung-Saeyi Park); JX0182 at 2 (December 7, 2021 email from Edward
Lee).
15
1. LG Ads
In March 2021, Chordia decided to “rebrand” Alphonso as “LG Ads” without
receiving authorization to do so from LGE.69 Chordia explained that this move was
inspired by the need to be recognized in the market as being affiliated with LGE and
Chordia’s belief that the market was already beginning to call Alphonso “LG Ads.”70 In
an email to Edward Lee, Chordia revealed that the rebranding was one part of his
overarching plan to get to an IPO by March 2024.71 As part of this rebranding, Chordia
went so far as to launch an LG Ads website, which, after domain issues arose, redirected
viewers to an online gambling website.72
69
TT 110:18–112:17 (Chordia); see also JX0653 255:9–14 (Chordia).
70
See TT 196:6–197:13 (Chordia). As a practical matter, Chordia’s use of the name
“LG Ads” was not wholly unfounded since similarly situated companies had rebranded
themselves as “Roku Ads,” “Samsung Ads,” and “Vizio Ads.” TT 196:6–197:13
(Chordia); see also JX0096 at 1; TT 211:2–19 (Kodige). Chordia’s correspondence on this
subject, however, illustrates his unfortunate penchant for being provocative and offensive
with LGE team members and senior executives. Chordia asserted in an email to Sangwoo
Lee that Alphonso might as well be “rebranding to dominate the ballsy advertising
business” and “calling itself Large Gonads Advertising” with “LG Ads” being simply a
“short form” version of that title. JX0096 at 3.
71
JX0067.
72
TT 111:4–10, 113:14–115:1 (Chordia); JX0067 at 1.
16
After learning of this, LGE asked Chordia to take the website down.73 While
Chordia agreed and did take the website down, he put it back up shortly thereafter—again
without LGE’s permission.74
In what would be just one of many communications sent to Edward Lee’s boss,
Chordia explained in a May 2, 2021 email to Sangwoo Lee that “[a]sking our team to take
down our website — a request we entertained for over two weeks at the cost of business
and hiring — or change to some other branding instead of LG Ads just does not work.”75
This issue continued as an ongoing fight between Alphonso and LGE until well after
Kodige replaced Chordia as Alphonso’s CEO in July 2021.76 But it was not the last time
Chordia would cause conflict.
73
JX0653 255:5–257:13 (Chordia).
74
Id. 256:8–17 (Chordia); TT 116:4–10 (Chordia). In an email to Sangwoo Lee,
Chordia acknowledged the cultural disconnect between LGE and Alphonso. JX0096 at 1–
2. Chordia wrote that in contrast to what he saw as LGE’s rigid hierarchical structure, “we
work [based] on reason. We solve problems. No real reason has been presented, nor a
problem that cannot be solved, for us to be called LG Ads. I had gifted our team ‘No rules
rules’ which describes the Netflix culture and ours is similar.” Id. at 1–2.
75
JX0096 at 2.
76
See TT 202:21–24, 211:2–212:10 (Kodige).
17
2. Serge Matta
Chordia hired a new President, Serge Matta in April 2021.77 And he did so without
the Board’s required approval.78 Matta had been an advisor to Alphonso since 2017, during
which time he was also the CEO of Comscore Inc.79 Chordia had disclosed to Edward Lee,
who at this time was an LG-Affiliated Director, that Matta had some run-ins with the
SEC.80 But Chordia did not disclose the full extent of those issues, which included Matta
settling accounting and disclosure fraud charges and Comscore paying over $5 million in
penalties.81 Additionally, the settlement terms prohibited Matta from serving as an officer
or director of a public company for ten years.82
After these issues came to light, controversy ensued. Although based partially on
Chordia’s choice of hire, the controversy also centered around Chordia’s ability to hire a
President for Alphonso. Section 10.5(c) of the Stockholders’ Agreement gave the Board
the “exclusive right” to hire executives and those compensated $500,000 or greater—of
which Matta was both.83 Responsive to these issues, Chordia prepared a timeline of the
77
TT 138:2–7 (Chordia); JX0082.
78
TT 138:2–7 (Chordia); see also JX0082 (Matta Offer Letter); JX0050 § 10.5(c).
79
See JX0007 (Matta Press Release).
80
JX0007; TT 138:2–147:2 (Chordia).
81
JX0007; TT 138:2–147:2 (Chordia).
82
JX0007.
83
TT 150:24–151:5 (Chordia); see also JX0082. Section 10.5(c) permits the Board
to hire executive officers with a simple majority. With the Common Directors occupying
18
events leading to Matta’s hire, which purports to involve discussions of the Comscore SEC
issues with Alphonso’s General Counsel Cushing, who was also previously employed by
Comscore and worked in its legal department at the time of the events giving rise to the
SEC’s fraud investigation.84
At trial, Chordia testified that he understood that Board approval was required to
hire Matta.85 But the evidence at trial demonstrated that notwithstanding this belief,
Chordia also asked Steve Wheeler, Chordia’s “long-term” personal lawyer, for an opinion
that the role of president is not an executive office—an opinion which Wheeler declined to
provide.86
Although the Board later removed Matta from his role as President, he stayed on in
a senior management role where he remains.87
three of the Board’s seven seats, I acknowledge that LG-Affiliated Director Edward Lee’s
favorable response to Chordia’s proposal to hire Matta might have led Chordia to believe—
as he testified at trial—that he had the necessary Board majority to hire Matta under Section
10.5(c), assuming approval by the other Common Directors. See TT 151:17–22 (Chordia).
84
See JX0157 at 10; TT 150:6–9, 148:8–16 (Chordia).
85
TT 150:14–16 (Chordia).
86
TT 151:3–10 (Chordia).
87
TT 151:23–152:4 (Chordia). Matta is now Alphonso’s head of advertising and
sales. See TT 414:3–6 (Durgin).
19
3. Data Privacy
Disputes also arose from data privacy and compliance concerns. A 2017 New York
Times article lent weight to these concerns.88 The article specifically named Alphonso and
quoted Chordia while purporting to detail “questionable [data privacy] practices” by
companies like Alphonso.89 Before joining Alphonso’s Board and acting as Vice President
and General Counsel of LG US, Wasinger requested that Alphonso undergo a privacy audit
by a law firm.90 Wasinger was clear that LGE wanted the audit to be conducted by a law
firm and went so far as to invite Alphonso to propose the law firm that should conduct the
audit.91
In response, Chordia insisted that, instead of a law firm audit, Alphonso would only
be willing to conduct a standards-based review.92 Amidst the numerous emails sent on this
88
See JX0630.
89
Id.
90
JX0101 at 2.
91
Id. at 1–2 (May 6, 2021 email from Wasinger to Cushing: “It is very important
that the audit report and related audit communications be privileged, so it should be a law
firm that manages.”); see also JX0128 at 4 (email from Edward Lee to Chordia on June 8,
2021, stating that “we need LG Ads to proactively participate in the privacy audit le[]d by
LGEUS[’s] legal team. This action item is not optional but mandate[d] for all LGE
subsidiaries.”); JX0168 at 1–2 (October 21, 2021 email from Wasinger to Cushing: “As I
have repeatedly stated since May, this review is merely reasonable due diligence on privacy
and security standards before Alphonso ACR technology is integrated in LG televisions
and other LG Pll is shared with Alphonso for its business.” “I am concerned that Alphonso
management has been delaying and throwing up roadblocks for months. The review should
have been completed this summer, and now the timeline is extremely compressed.”).
92
See, e.g., JX0128 at 4.
20
topic is a May 9, 2021 email that Chordia sent to Sangwoo Lee. 93 Therein, he referred to
Wasinger’s attempts to move forward with a law firm-based audit as “overreaching and
totally unnecessary” as LG US had “no authority over Alphonso and they can go fish.”94
Despite recognizing the obligations, procedures, and even abundance of caution with which
large corporations like LGE operate,95 Chordia premised his resistance to a law firm audit
on his belief that there was limited up-side for Alphonso.96
Like with the LG Ads issue, this was a repeated point of tension that the parties did
not resolve until the end of 2021, several months after Kodige replaced Chordia as
Alphonso’s CEO.97
4. Depletion Of The Stock Option Pool
The depletion of the stock option pool generated more conflict. The pool was
created after LGE’s investment and had the effect of diluting LGE’s holdings from over
55% to 50.1%. But in March 2022, Alphonso ran out of available stock options.98 Chordia
93
See JX0101 at 1.
94
Id.
95
See TT 121:13–17 (Chordia).
96
JX0128 at 2–3 (June 2021 emails from Chordia and Cushing to Edward Lee and
Wasinger, explaining that “[t]he problem with an outside audit being performed by a law
firm is that while it may provide LGE with some degree of comfort, it otherwise provides
no benefit upon Alphonso or LG”).
97
See TT 213:21–216:13 (Kodige).
98
TT 163:15–17 (Chordia).
21
explained that “[g]rowth led to hiring and hiring led to a depletion of the stock option
pool.”99 After running out of stock options, Chordia asked LGE to replenish the pool.100
This was an option that Chordia understood would likely require LGE to dilute its
ownership and leave LGE with less than 50% of Alphonso.101
Despite several exchanges and attempts to formulate a solution, Alphonso and LGE
were unable to resolve this issue.102 In response to these unsuccessful attempts, Kodige,
who by this time had taken over as CEO, sought to escalate the issue to LGE executives.
In December 2022, Kodige emailed LGE’s CEO and CFO (Cho and Bae, respectively) to
describe the pool depletion issue and what he viewed as LGE’s “egregious” approach to
“expanding the Options pool” and Jo’s inability to resolve the challenges Alphonso
faced.103
5. The Inventory Agreement
In April 2021, Alphonso and LGE entered into an agreement related to LGE’s sale
of ad inventory to Alphonso.104 The price term for the inventory was left open and the ad
99
TT 164:1–2 (Chordia).
100
TT 164:24–166:1 (Chordia); see also JX0246.
101
TT 164:24–166:1 (Chordia).
102
See, e.g., TT 174:7–176:22 (Chordia).
103
JX0510 at 1–2.
104
Pre-Trial Stipulation ¶¶ 38–39; JX0196 at 7–14 (original agreement).
22
inventory LGE provided to Alphonso during 2021 was considered a “free trial.” 105 After
negotiating pricing terms for 2022, the parties amended the agreement in January 2022 (the
“Inventory Agreement”).106 This amendment included the insertion of transfer price
terms.107 The parties set pricing terms that were favorable to Alphonso and lower than the
price Alphonso paid for inventory from third parties.108 But shortly after the amendment,
LGE tried to change the “mutually agreed upon” transfer price.109 It also tried to apply the
change retroactively.110 Durgin believed this to be a “terrible” and “dumb idea” since, as
he confirmed, “no leader of Alphonso should agree to amend the transfer price in the
inventory agreement to raise the transfer price to benefit LG at the expense of
105
See JX0212 at 26 (“All LG Ad Inventory provided by LG to Alphonso prior to
January 1, 2022 shall be provided as a free trial; no fees shall be payable by Alphonso for
any LG Ad Inventory provided prior to January 1, 2022.”).
106
Pre-Trial Stipulation ¶¶ 38–39; JX0212 at 25–30; JX0347 at 1–8. The Inventory
Agreement was structured so that Alphonso agreed to buy LGE’s global ad inventory at
fixed prices. Accordingly, the Inventory Agreement itself stated that, “[f]or the avoidance
of doubt, Alphonso bears all economic benefits and burdens associated with any LG Ad
Inventory purchased by Alphonso, regardless of whether the same is sold or otherwise
monetized.” JX0212 at 25. Either side could unilaterally terminate the Inventory
Agreement “for convenience upon 60 days prior written notice to the other party.” JX0196
at 8; see also TT 177:10–17 (Chordia).
107
TT 178:4–10 (Chordia); JX0212 at 25–30; JX0347 at 1–8.
108
TT 179:3–15 (Chordia).
109
JX0386 at 14.
110
TT 486:3–21 (Durgin).
23
Alphonso[.]”111 LGE’s internal documents noted the LG-Affiliated Directors’ fiduciary
obligations in addressing this issue.112 It directed them to “[a]pproach the matter as a
compliance risk issue” specifically “to prevent fiduciary duty issue pertinent to LG
Directors (fiduciary duty, decision-making from Alphonso’s stance), approach the matter
with focus on tax risk.”113 This was indeed the rationale LGE put forth.114
Alphonso took the tax compliance concerns seriously and conducted its own
investigation into the matter and had PwC conduct its a review of KPMG’s original
study.115 In September 2022, PwC concluded that, “[b]ased on our review, the arm’s length
prices for LG Ads Inventory identified in the KPMG Transfer Pricing Analysis appear
reasonable and consistent with the arm’s length standard outlined in the Section 482
Regulations.”116 PwC further concluded that the Inventory “Agreement is ‘commercial
grade’ in substance and appearance, including the length of its term which is consistent
111
TT 486:3–21 (Durgin); see also JX0397 at 1 (October 28, 2022 email from
Durgin to the LGE team, expressing concern over “the idea that LG will put a new leader
who would negotiate from the POV of the other party in the agreement, then take an
existing price and raise it not in the best interests of his/her company, but in the best interest
of LG” since this “is not what I’d expect out of any new business leader”).
112
See JX0312 at 20.
113
Id.
114
See TT 179:15–21 (Chordia).
115
JX0386 at 13; see also JX0358 at 1.
116
JX0358 at 12.
24
with similar independent contractual agreements.”117 Notwithstanding these conclusions,
LGE was not satisfied and the parties continued to dispute the sufficiency of the transfer
price into late fall 2022 with no meaningful resolution.118
6. The Divided Board Of Alphonso
Interwoven with the foregoing is an undercurrent of conflict and accusations of
unprofessional behavior. For example, the Board often failed to approve meeting minutes
promptly. This led Chordia, over the objection of his colleagues and against Wheeler’s
advice, to insist that he record Board meetings.119 Kodige, in an October 10, 2022, email
to Hyoung-Saeyi Park and Cho, addressed this issue and used it to illustrate “how
incompetent” the Board purportedly was.120
On another occasion, in response to an inquiry by Edward Lee over a competing
product that he believed Alphonso was developing, Kodige sought Edward Lee’s removal
from the Board.121 In his December 6, 2021, email to Hyoung-Saeyi Park and Sangwoo
Lee, he asserted that “Edward and team have very badly managed Alphonso investment
and relationship over the past year[]” and describes what he asserted was “Edward’s erratic
117
Id.
See Dkt. 194 Defendants’ Post-Trial Answering Br. (“Defendants’ Post-Trial
118
Answering Br.”) at 26–27.
119
See, e.g., JX0328 at 1–6.
120
JX0376 at 1.
121
JX0180 at 2.
25
[and] disrespectful behavior.”122 This email concluded with the following: “We need to
urgently address Edward’s behavior. We request that Edward be removed from working
with Alphonso team [sic] right away and also be removed from our board.”123
In addition to the numerous attempts to escalate issues to LGE’s senior executives,
there is also some evidence that Chordia and Kodige were disruptive during Board
meetings.124 Moreover, the type of language that Chordia and Kodige used also served as
a source of conflict. Chordia was not hesitant to use profane or crass language in his regular
communications with LGE executives and employees and the LG-Affiliated Directors.
Among some of his emails, Chordia used phrases like “[f]**k you sangwoo,”125 “don’t
f**king try to sugar coat the mess,”126 “we don’t know f**king LG English,”127 and
“get[ing] sh*t” done.”128 At another point, Chordia asked the LGE team to “please respect
122
JX0180 at 1–2.
123
Id. at 2.
124
TT 576:17–577:19 (Wasinger); TT 672:8–15, 678:4–18 (Jo); see also JX0278
(Wasinger’s email).
125
JX0143 at 3 (profanity edited).
126
Id. at 2 (profanity edited).
127
Id. (profanity edited).
128
JX0128 at 1 (profanity edited).
26
the [LG Ads] team you have here like they are sent from God” because “[t]hat’s your only
hope to make this company work.”129
Despite what by all accounts was a divided board, there remained no meaningful
gridlock because the LG-Affiliated Directors controlled a majority of the Board seats.130
As time would show, the LG-Affiliated Directors even terminated the executive-officer
Key Holders without gridlock because, with four seats on the Board, they controlled
Alphonso’s trajectory.131 The LG-Affiliated Directors only needed a Common Director’s
approval to interfere with the Key Holders’ Liquidity Rights, or to enter related-party
transactions between Alphonso and LGE.132 At bottom, this is what the parties had
bargained for.
129
JX0143 at 2.
130
At trial, Wasinger testified to the contrary. TT 586:18–587:1 (Wasinger) (“It
was just a litany of problems” and “gridlock had developed.”). Although I agree that
Chordia and Kodige’s conduct was decidedly unpleasant, I also like to think (or at least
hope) that I am not naïve. As I discuss later in this decision, Chordia and Kodige seemed
to turn invariably to the least diplomatic of approaches when given a choice. But they are
by no means the first entrepreneurs who have sought to “move fast and break things” and
to be quite successful in doing so. In summary, I found Defendants’ drumbeat evidentiary
presentation on Chordia and Kodige’s rough manner, and Wasinger’s testimony in
particular, overreaching and intended more to “poison the well” than anything else.
Although it is not disputed that the Board was divided, the record belies the notion that the
Board was gridlocked in any meaningful way.
131
See JX0536 at 3.
132
See JX0050 §§ 10.5(d), 11.2(a).
27
D. Alphonso’s Continued Success
Notwithstanding the division and disputes, Alphonso thrived. Alphonso exceeded
the high revenue targets that LGE set and grew to a 300-person work-force.133 In the two
years that followed closing, Alphonso produced $78 million and $270 million in
revenue.134 This greatly exceeded LGE’s initial targets for Alphonso.135 By December
2022, Alphonso was valued at over a $1 billion—nearly ten times its valuation at closing.136
And around that time, LGE’s own internal correspondence confirms that Alphonso’s value
had risen to upwards of $1.4 billion.137
On the technical side, Alphonso also out-performed LGE’s expectations. In this
regard, Alphonso brought the ACR technology to the point that it could be integrated into
LGE’s smart TVs far ahead of schedule.138 Both sides contributed meaningfully to this
success, but LGE wanted a better deal than the one it had bargained for.
133
TT 247:3–12 (Kodige).
134
TT 247:13–248:20 (Kodige); TT 42:16–44:7 (Chordia).
135
TT 247:13–248:20 (Kodige); TT 42:16–44:7 (Chordia).
136
TT 247:13–248:20 (Kodige).
137
JX0463 at 5.
138
TT 247:13–248:20 (Kodige); see also JX0183 at 5 (“The teams have taken what
was a 2 year roadmap and shrunk it down to 2 months.”).
28
E. Project Wall-E: War
Project Wall-E was developed for the purpose of taking control from the Key
Holders. While Project Wall-E was developed more explicitly in late-2022, the lead-up to
its execution began several months earlier.
1. Genesis
In March 2022, Jo began working for LGE.139 That same month, Jo took a seat on
Alphonso’s Board as an LG-Affiliated Director.140 In April 2022, Jo met with Kodige and
communicated to Kodige that LGE was wavering on the idea of an IPO. 141 This was
opposite the commitment to an IPO that LGE had communicated to the Key Holders the
year prior.142 Shortly after joining the Board, Jo tried to have Kodige hire Sexton, whom
Jo believed was a “market industry veteran, that . . . could help the Alphonso business.”143
In conjunction with his request, Jo set up a call with Sexton in early May 2022.144
Sexton took contemporaneous notes during the meeting, which he then emailed to
himself after the meeting ended.145 Among other things, Sexton’s email draws attention to
139
TT 685:10–12 (Jo).
140
TT 685:24–686:5 (Jo).
141
See JX0247 at 1.
142
See JX0105 at 2; JX0148 at 2; JX0182 at 2.
143
TT 690:2–691:7 (Jo); see, e.g., JX0267 at 8.
144
JX0640 26:15–18 (Sexton).
145
See JX0253; TT 693:17–694:12 (Jo) (affirming in relevant part that “these notes
reflect the substance of a call that [Jo] had with Mr. Sexton on or about May 6[,]” 2022).
29
the details surrounding the deal LGE had struck with the Key Holders and LGE’s desire to
get “a return on their investment.”146 Although noting that LGE initially “wanted to see if
they can IPO,” the email states that things may have changed and LGE “may have bigger
plans.”147 Sexton’s email also draws attention to Alphonso’s culture, which the email
described as a “[m]ixture between Indian Culture [and] SV culture” and repeatedly
explained that “LG has a lot of difficulty managing this organization[.]”148
Sexton’s email also describes a version of the blueprints for what would later
become “Project Wall-E,”—the project that Jo would go on to “[c]hampion.”149 The email,
while recognizing that the Board “made [Chordia] step down [from CEO] to Board
Member [and] Chief HR Officer,” further describes a “[g]oal to remove him from whatever
role” and “[b]ring in new upper management.”150 Sexton’s email also includes a clear
motivation for carrying out this strategy—Jo viewed Alphonso as “1 of 3 pillars” in Jo’s
overarching goal to bring together “Adv, content, WebOS.”151 Kodige, however, rejected
146
JX0253 at 1–2.
147
Id. at 1.
148
Id. at 1–2.
149
See JX0435 at 18; TT 687:14–688:10 (Jo).
150
JX0253 at 1–2; see TT 692:8–698:6 (Jo).
151
JX0253 at 1. Jo’s trial testimony confirmed this general sentiment. TT 687:4–
13 (Jo) (affirming that he “want[ed] Alphonso to stay, to play the same role that it does
today in the business”).
30
Jo’s recommendation to hire Sexton, so nothing came of this initial attempt to seize full
control.152
On May 16, 2022, after Jo’s call with Sexton, Jo and Hyoung-Saeyi Park attended
a meeting with Chordia and Kodige during which disagreement arose over Alphonso’s
strategic future.153 At this meeting, Kodige and Chordia proposed two options for moving
forward. The first option would make Alphonso a combined entity that included LGE’s
“Content + Advertising”154 and “[i]inventory ownership.”155 Beotra explained a similar
idea at his deposition. There, he noted that “[y]ou cannot take an entity public where it has
one contract, which, if the contract is snapped, kills the investor story.”156 Thus, he had
previously proposed a similar idea—that “instead of having an inventory agreement and
transfer pricing, that LG transfer the inventory to [Alphonso] outright[.]”157
The second option, should LGE refuse the first, asked LGE to buy out the Key
Holders.158 While at trial, Defendants made much of the May 16 meeting, it proved little
more than the Key Holders’ request that LGE back them in their pursuit of an IPO or buy
152
TT 691:16–18 (Jo); JX0267 at 7.
153
TT 688:18–689:15 (Jo).
154
JX0261 at 21.
155
JX0259 at 2.
156
JX0647 179:2–22 (Beotra).
157
Id.
158
See JX0259 at 2; JX0261 at 21.
31
them out. But, as Sexton’s email showed, Jo and LGE had already begun to develop an
alternative plan for Alphonso’s strategic future.
In June 2022, Jo stepped down as an Alphonso Board member. He asserted that this
was “to avoid a potential conflict” given his continuing role as an LGE employee.159
Wasinger replaced Jo as an LG-Affiliated Director on Alphonso’s Board.160 But at all
relevant times Wasinger also served as Vice President and General Counsel of LG US.161
Even before officially starting his additional role as a Board member, Wasinger
began to paper the record. For example, after Wasinger attended a Board meeting on June
20, 2022, as an observer, he sent an email to LGE executives and the LG-Affiliated
Directors recounting Chordia and Kodige’s “incredibly disrespectful, outrageous, and
159
See TT 686:6–12 (Jo).
160
See TT 574:7–9, 594:15–17 (Wasinger); TT 351:2–17 (Kalampoukas).
161
TT 593:10–15 (Wasinger).
32
unproductive” behavior.162 Wasinger explained Chordia and Kodige’s “abusive tactics” in
which they would “gang up”163 on other Board members and launch “personal attacks.”164
Around the same time, LGE began looking for ways to terminate the Stockholders’
Agreement to create strategic flexibility and avoid their obligations to the Key Holders.
Specifically, LGE began looking for the “Nuclear Bomb option” in the Stockholders’
Agreement.165 In response to this inquiry, Hahm explained:
In the Shareholders Agreement, clause 6.2, it defines Employee Key Holder
as a person who is listed as a Key Holder AND who is also employed by the
Company. In clause l0.2(b), only Employee Key Holders can place a person
on the Board. Therefore, if we fire all the Key Holders, they have no ability
to place a person on the Board. And, remember that we can fire anyone at
anytime. After we fire the Key Holders, the new Board (filled with LGE
people) can alter or change . . . and terminate the Shareholders Agreement.
162
JX0278 at 1. But see TT 656:17–657:8 (Kalampoukas) (“I never experienced
any behavior like that. They never ganged up, they never abused, they never used foul
language. They never personally attacked any of the other board members. In fact, I don’t
recall even ever raising their voice in the meeting. As I testified, there were disagreements,
there were discussions, but that was the extent of it.”). I acknowledge Chordia and
Kodige’s impatience, lack of decorum, written profanity, and “in your face” interpersonal
style. Certainly, Chordia and Kodige did not adhere to the adage that you catch more flies
with honey than vinegar. Having observed his testimony, however, I also found
Kalampoukas to be a credible witness at trial. Ultimately, I conclude that Chordia and
Kodige were extremely confident in their opinions and uninhibited in sharing them, often
coming across as discourteous and direct to a fault in doing so. This was all likely
unpleasant and annoying for LGE, but, frankly, little more than that in terms of impeding
the work of the Board. See also JX0515 (video recording of December 16, 2022 Board
meeting).
163
JX0278 at 1.
164
TT 576:10–577:1 (Wasinger).
165
See JX0275 at 3 (“What is the Nuclear Bomb option in the provisions?”).
33
Termination of the Shareholders Agreement removes all obligation in the
Shareholders Agreement, which includes IPO, tender offer, etc.166
Hahm recounted this same idea in a September 9, 2022 email.167 This time, he drew
attention to the corresponding relationship between the Key Holders’ ownership of certain
percentages of Alphonso’s stock and the number of Common Directors the Key Holders
can designate under Section 10.2(b).168 Hahm connects this to the fact that the “Board
protections stay in place with just one Board seat.”169 Hahm concludes this idea with the
following:
Remember our nuclear option: if you want to alter or remove the Stockholder
Agreement, you need to fire them all. But if you do this, it will shock all the
employees and cause havoc . . . . Please also note, that once you fire Ashish,
and they read the agreement and realize the careful wording of section 10.2b
of the Stockholders Agreement, they will understand the nuclear option, and
they will have more fear and freak out more than now.170
166
Id. at 6.
167
JX0336 at 3.
168
Id. at 3. In the email, Hahm asserted that “[o]nce you fire Ashish, his shares will
not be counted to calculate the threshold as to how many board seats the Key Holders can
fill.” Id. As I explain below, Hahm’s interpretation of the provision in this manner is
incorrect. See infra Section II.B.
169
JX0336 at 3.
170
Id. at 3–4.
34
2. Preparing For “D-Day”
By the end of September 2022, LGE’s plans to terminate the Stockholders’
Agreement began to materialize. Justin Kim (a Wall-E team member)171 sent meeting
minutes to LGE executives and LG-Affiliated Directors from a September 29, 2022 LGE
team meeting.172 Even the meeting’s purpose is telling—to “change the management team
of Alphonso” and “secure our company’s ownership ratio (Super Majority).”173 But, LGE
only pursued these objectives “under the assumption that our company’s top management
approved aborting the plan for Alphonso’s IPO.”174 And indeed, expounding on the latter
purpose, the minutes state: “Considering the JV, Alphonso is a key asset of our company.
The IPO should be aborted and control must be maintained.” 175 At trial, Edward Lee
interpreted these minutes to mean that “LG no longer wanted Alphonso to IPO because of
the JV.”176
171
TT 547:18–548:2 (Edward Lee); see also JX0365 at 5 (identifying Justin Kim’s
role as a member of LGE’s Business Development Team).
172
See JX0365 at 3.
173
Id. at 3–4.
174
Id.
175
Id.
176
TT 549:3–13 (Edward Lee).
35
With Jo at the helm, LGE convened a Project Wall-E “task force” by October
2022.177 Project Wall-E was designed to evaluate the avenues available for replacing
Alphonso’s leadership.178 But the plan did not end there.
The task force evaluated at least two primary options: terminating three executives
(Chordia, Kodige, and Beotra) and terminating all Key Holders.179 The task force
highlighted certain disadvantages associated with the former, which include that “[t]he rest
of key holders [sic] can still appoint Alphonso-friendly person to a Board members [sic],
and key holders can still exercise their right to request for S-1 filing, and a veto right.”180
The advantages identified for the latter “nuclear option”181 included “[n]o IPO and tender
offer obligation” and would mean that LGE “[c]an terminate the Shareholders Agreement
and the Board can run with only LGE-designated board members[.]”182 Wasinger also
explained that this nuclear option might resolve the outstanding dispute over transfer
177
See TT 587:6–20 (Wasinger); JX0400 at 19; JX0435 at 18; TT 687:21–688:14
(Jo).
178
See JX0400 at 19.
179
See JX0402 at 18 (“[Option 1] Terminating only 3 Executives (CEO, CFO,
CHRO) [Option 2] Terminating all of [sic] Human Key Share Holder (9 in total)”) (first
and second alterations in original).
180
JX0402 at 19 (emphasis added).
181
JX0336 at 6.
182
JX0402 at 19.
36
pricing for the Inventory Agreement since “it will be much easier to negotiate pricing and
an amendment” with “new Alphonso management.”183
LGE executives and the LG-Affiliated Directors discussed these options in an LGE
team meeting on October 26, 2022.184 After the meeting, Kim sent an email summary to
the group in which he stated: “I believe the key decision we made today was who we will
be terminating, and we need to back up our rationale for such termination.”185 “[W]e must
prepare good rational [sic] (almost, individual level).”186 Kim “[s]et [their] direction
toward termination of all key share holders.”187
In preparation for the day Wasinger dubbed “D-Day,”188 the task force compiled a
“playbook.” Among other things, the playbook identified backfilled “business
justification[s]” for Key Holder terminations.189 Additionally, LGE prepared a document
183
JX0397 at 4; see also JX0398 at 3–4 (October 31, 2022 email from Edward Lee
in which he explained that so long as they execute “Alphonso’s restructuring as soon as
possible,” it will “resolve the TP issue.”).
184
See JX0402 1–3.
185
Id. at 2.
186
Id.
187
Id.
188
TT 596:15–19 (Wasinger).
189
See JX0487 at “Impacted Employee List” sheet (columns P and Q). Some of the
justifications were compiled with a clear lack of specificity and detail. For example, a
justification provided for terminating Ashish Baldua was that the “CHRO & Executive
Chairman role is no longer needed in the company.” Id. at P8. But Ashish Baldua never
held these roles. Instead, Ashish Chordia did. Indeed, this was not the last time that
Chordia would be mistaken for another Key Holder. A recording of the December 16,
37
the parties identify as “Exhibit A.” Much like the playbook, this document also included
a list of backfilled, and what I find to be largely pretextual, reasons to justify the
terminations.190
As other internal documents demonstrate, LGE also sought to capitalize on the Key
Holders’ terminations by acquiring a larger stake in Alphonso for the “[p]urpose” of
“[m]itigating the risk of potential litigation from KSH dismissal and SHA
termination[.]”191 LGE planned to acquire this additional ownership by providing the
terminated Key Holders with buyout offers. As of November 29, 2022, LGE’s internal
valuation of Alphonso placed its value between $700 million and $1.4 billion. 192 Using
the $700 million valuation, LGE believed Alphonso’s share price to be “around $50 per
share.”193 Notwithstanding these numbers, Wasinger’s December 1, 2022, email reflects
his intention “to buy them out at the lowest possible price.”194
LGE faced few challenges during the planning phase. But one problem did surface.
The problem LGE perceived was the Board’s inability to fire two non-executive Key
2022 Board meeting, in which the LG-Affiliated Directors terminated Chordia, reveals that
even while actively firing Chordia, Wasinger repeatedly referred to Chordia as “Raghu”
despite Raghu Kodige’s absence from the meeting. JX0515.
190
See JX0518 at 4.
191
JX0463 at 7.
192
Id. at 5.
193
Id.
194
JX0461.
38
Holders.195 Section 10.5(c) of the Stockholders’ Agreement provided the Board with the
“exclusive right” to terminate “executive officers,” and employees compensated $500,000
or more per year.196 But not all Key Holders fell within these categories (i.e., employee
Key Holders Andrades and Sarma). Hence, LGE’s “[n]eed” for a “new CEO’s cooperation
to fire non-executive key holders.”197
LGE thus set out to find an interim CEO to appoint for the purpose of terminating
Andrades and Sarma. After LGE reviewed several candidates, it settled on Aman
Sareen.198 Sareen agreed to serve as Alphonso’s interim CEO but backed out shortly
thereafter.199 He explained his reason for doing so in an email to the LGE team: “I will not
be able to sleep at night . . . . I just can[’]t move forward.”200 Hyoung-Saeyi Park’s
November 30, 2022 email corroborates this reasoning.201 Therein, he recounted a phone
JX0487 at 53 (“New CEO terminates the remainder of 2 Key Holders as
195
employees that Board does not have the power to do itself.”).
196
See JX0050.
197
JX0402 at 19; see also JX0487 at 53.
198
From the time it made the decision to terminate the Key Holders, LGE began
reviewing potential CEO candidates. See JX0402 at 27 (referencing another candidate
LGE identified as being “LG-friendly”).
199
See JX0465 at 2–3; JX0456.
200
JX0465 at 2.
201
Id.
39
conversation with Sareen, in which Sareen “said he won’t sleep well being a person who
stabs their back, and he can’t really do this.”202
The next day, LGE “shift[ed] to plan B with Adam Sexton.”203 Sexton had one
primary job duty: “Remove two key holders (Ravi Narayan Sarma and Richard
Andrades).”204 Believing itself to have resolved the Board’s inability to terminate all Key
Holders, LGE continued to plan for the terminations and the subsequent termination of the
Stockholders’ Agreement.
At trial, the parties disputed whether LGE planned to terminate the Stockholders’
Agreement in its entirety. The evidence compels two conclusions. First, LGE planned to
terminate all Key Holders for the specific purpose of causing the failure of the Designation
Condition in Section 10.2(b) to terminate the Director-Designation Right. Indeed, the LG-
202
Id.
203
See JX0458.
204
JX0445 at 8; see also JX0640 175:10–13 (Sexton).
40
Affiliated Directors say as much.205 Jo’s deposition testimony is in accord.206 Second,
after terminating all Key Holders, LGE intended to terminate the Stockholders’
Agreement.207
205
TT 443:5–23 (Durgin) (“Q. . . . . The reason that those seven individuals were
fired was so that the common directors on the board could be removed; correct? A. That’s
right. . . . Q. Sure. You believed that if the key holders were fired, their director-designation
right in the stockholders agreement would be null and void; correct? A. That’s correct.”);
JX0657 150:14–20 (Hwang) (“Q. So the answer to my question were the seven key
shareholders terminated in order to remove the common directors is yes? . . . . THE
WITNESS: Yes, I think so.”); TT 602:4–8 (Wasinger) (“Q. The reason that all of the key
holders employed by Alphonso needed to be fired was because that cleared the way for the
common directors to be removed; right? A. From the board, yes.”); TT 520:19–23 (Edward
Lee) (“Q. And why was the termination of the key holders a mission of Project Wall-E?
A. Because we needed new board leadership. So in order to have a new board, we need to
remove all the key shareholder.”).
206
JX0656 169:7–12 (Jo) (“Q. Do you understand that some of the individuals
terminated on D-Day were terminated in order to remove the key holders right to appoint
directors to the Alphonso board? A[.] Yes.”).
207
See, e.g., JX0402 at 19 (October 26, 2022 meeting slide deck: “Pros” of
terminating all Key Holders include that LGE “[c]an terminate the Shareholders’
Agreement”); JX0435 at 4 (Scope of Work for Project Wall-E: “Dismissal of Alphonso’s
Directors and Termination of the Shareholders Agreement Extinguishment of our
company’s obligations for IPO S-Filing and tender offer, etc.”); JX0418 at 1 (November
10, 2022 email discussing “D-Day procedures” and identifying step 6: “Board approves
termination of SHA”); JX0441 (November 21, 2022 Wall-E Task Governance Review:
“After removing 3 BOD seats held by the Key Holders, the restrictive clauses, such as IPO,
Scheduled Tender Offer, Co-Sales, etc. should be removed through speedy termination of
the SHA.”); JX0466 at 18 (“Based on the pros/cons document, no need to terminate
stockholder’s agreement on D-Day, but need to decide roughly when would be best time
to terminate it.”); JX0499 at 3–4 (December 14, 2022: “[D]etailed agenda for the Wall-E
D-Day and what you are expected to do.” After dismissing three directors, “[o]ur company
and Alphonso can terminate the SHA contract.”); JX0505 at 1 (Online meeting invitation
for December 15, 2022, to discuss “when” to terminate the Stockholders’ Agreement);
JX0558 at 3 (December 20, 2022 (four days after D-Day): “Additional Question: When do
41
Indeed, just two days before D-Day, Wasinger sent an online meeting invitation to
Edward Lee, Durgin, and Hyoung-Saeyi Park scheduled for December 15, 2022.208 The
invitation included a description of the meeting’s purpose: “[S]etting up this call for final
plans on when to terminate the stockholders’ agreement as part of Project Wall[-]e.”209
Three days before D-Day, December 13, 2022, LGE’s public affairs team floated
several so-called “dreadlines” (i.e., potential negative headlines) to LGE executives.210
These dreadlines characterized LGE’s efforts to seize greater control from the Key Holders
as an “LG-led coup,” an “LG takeover,” and a “hasty Board takeover.”211
The next day, Wasinger called a special meeting of the Board to be held on
December 16, 2022—a meeting which Kodige would be unable to attend.212 And, despite
Chordia’s repeated requests for the LG-Affiliated Directors to circulate an agenda, they did
not provide one.213
These events set the stage for December 16, 2022.
you plan to terminate the [Stockholders’] Agreement? . . . . [T]here will not be any issue
for as long as the SHA Agreement is terminated within 2023.”).
208
JX0505 at 1.
209
Id. (emphasis added).
210
See JX0500 at 16.
211
Id.
212
JX0546 at 21; see also JX0515.
213
See JX0546 at 18, 19, 20; JX0515.
42
3. Invasion
On December 16, 2022 (i.e., D-Day), the Board initiated the “nuclear option.”214 It
did so by holding a special meeting in which Wasinger proposed a management
reorganization resolution (the “Resolution”) to terminate the five executive-officer Key
Holders: Kodige, Chordia, Kalampoukas, Beotra, and Baldua.215 Among other things, the
resolution also proposed appointing Sexton as Chief Operating Officer and Interim CEO.216
All four LG-Affiliated Directors217 approved the Resolution.218 During this meeting,
Wasinger assured the now-terminated Key Holders that LGE planned to give them buyout
offers for their Alphonso shares—offers that he “believed” to be “fair.”219 The price LGE
soon thereafter proposed: $16.64 per share.220
214
This “nuclear option” was different, and indeed substantially more severe, than
the one the parties had discussed during negotiations. Compare JX0336 at 3, 6, and
JX0275 3, 6, with JX0023 at 4.
215
JX0536 at 2–3; see also JX0515; Pre-Trial Stipulation ¶ 42.
216
JX0536 at 2–3; see also JX0515; Pre-Trial Stipulation ¶ 43.
217
On D-Day, the LG-Affiliated Directors were Wasinger, Durgin, Edward Lee, and
Hwang. Pre-Trial Stipulation ¶ 35; see also JX0515.
218
JX0515; see also Pre-Trial Stipulation ¶ 42. Hwang signed the Resolution the
day prior to the Board meeting. See JX0530 at 11.
219
JX0515; JX0528 at 4.
220
See JX0544 § 2.1.
43
Immediately following the Board’s meeting, Sexton, as Interim CEO, terminated
non-executive-officer Key Holders Andrades and Sarma.221 But notwithstanding the
contentious manner in which Alphonso, acting through Sexton, terminated Andrades and
Sarma, they both demonstrated a highly cooperative spirit and were clearly valued
members of their respective teams at Alphonso. For example, before Sareen withdrew his
acceptance of the CEO role, he expressed his clear desire to keep Sarma on his team after
D-Day.222 Hyoung-Saeyi Park also sought to bring Sarma back to Alphonso as a
consultant.223
Even after being terminated, both Andrades and Sarma continued to help their
respective Alphonso teams.224 Credible trial testimony demonstrates that each was
involved extensively in the knowledge transfer process—a knowledge transfer process that
Alphonso only became aware it needed when Andrades (while still in his termination
meeting with Sexton) voluntarily raised the question of how he could pass-off certain
projects that only he had worked on and understood.225
221
Pre-Trial Stipulation ¶ 44; TT 523:19–524:2 (Edward Lee); see also TT 380:3–
384:12 (Andrades).
222
See JX0455 at 1; TT 638:18–639:19 (Wasinger).
223
TT 396:13–398:20 (Sarma).
224
See TT 396:13–398:20 (Sarma); TT 381:19–383:11 (Andrades).
225
TT 381:19–383:11 (Andrades); TT 396:24–398:3 (Sarma).
44
Defendants argue that once all Key Holders had been terminated the Director-
Designation Right fell away pursuant to the Designation Condition in Section 10.2(b).
Then, later that same day, Zenith executed a written consent (the “December Consent”)
pursuant to its purported rights under Sections 10.2(c) and 10.3(a)(ii) of the Stockholders’
Agreement to remove the Common Directors from the Board.226 The disputed effect of the
December Consent gave rise to the present litigation. Defendants argue that the December
Consent validly removed Chordia and the other Common Directors from the Board.
Plaintiffs argue the December Consent was not valid. No party disputes that the
Stockholders’ Agreement is still in effect and no party has argued that, since December 16,
2022, LGE, Zenith, or Alphonso have acted to terminate the Stockholders’ Agreement.227
Accordingly, as things stand, all Liquidity Rights remain in effect.
F. Procedural History
These events led Plaintiffs to file the complaint in this action on March 30, 2023.
The complaint set forth two counts. These claims were bifurcated for separate
resolution.228 This action deals with Count I, in which Plaintiffs seek an order, pursuant to
8 Del. C. § 225, that the December Consent is invalid and that the Common Directors prior
to D-Day remain members of the Board.
226
JX0563 2–3.
227
On April 21, 2023, I granted a Status Quo Order prohibiting Defendants from
terminating or amending the Stockholders’ Agreement during the pendency of this action.
See Dkt. 29 Status Quo Order.
228
Pre-Trial Stipulation ¶ 1.
45
The parties’ litigated this matter at an arguably leisurely pace, at least relative to
other actions brought pursuant to 8 Del. C. § 225. Trial was held on September 20 and 21,
2023, and, following briefing, post-trial argument was held on December 5, 2023.
II. LEGAL ANALYSIS
Plaintiffs seek a determination of the Board’s proper composition pursuant to 8 Del.
C. § 225. The primary dispute here is whether the December Consent is valid. I conclude
that it is not.
Alphonso agreed to be bound by the “reasonable efforts” obligation in Section 12.1.
Alphonso acted through Sexton when, as interim CEO and at LGE’s request, he terminated
Andrades and Sarma. Alphonso failed to comply with its obligation arising under Section
12.1, and thus, Sexton’s acts caused Alphonso to breach the Stockholders’ Agreement.
Generally, when a promisor’s non-performance of a contractual duty materially contributes
to the non-occurrence of a condition, the condition is excused. Although the December
Consent’s validity is predicated on no Key Holder serving as an Alphonso employee or
officer, Alphonso’s non-performance of its duty under Section 12.1 caused the non-
occurrence of the condition. This non-performance compels me to find Alphonso’s breach
to excuse the Designation Condition. Accordingly, the December Consent is invalid.
I begin by noting that it is proper for the Court to consider this issue in a Section
225 action.
“The purpose of a Section 225 action ‘is to provide a quick method for review of
the corporate election process to prevent a Delaware corporation from being immobilized
46
by controversies about whether a given officer or director is properly holding office.’”229
But the scope of a Section 225 action is narrow and is “limited to determining those issues
that pertain to the validity of actions to elect or remove a director or officer.”230
That notwithstanding,
Delaware courts reject the notion that “rigid, inflexible rules preclude this
court from hearing anything but the narrowest arguments in Section 225
cases.” Instead, “the question [of] whether an issue is properly litigable in a
Section 225 action turns . . . upon a determination of whether it is necessary
to decide in order to determine the validity of the election or designation by
which the defendant claims to hold office.”231
Thus, it is appropriate to consider whether the removal of a director was invalid as a result
of some “breach of contract” but only for the “limited purpose of determining the
corporation’s de jure directors and officers.”232
In a Section 225 action, “[t]he . . . plaintiff, bears the burden of proving by a
preponderance of the evidence that it is entitled to relief.”233 When considering a plaintiff’s
claims, “the relative weight given to any particular piece of evidence, and particularly
229
Genger v. TR Inv’rs., LLC, 26 A.3d 180, 199 (Del. 2011).
230
Id.; see also Hockessin Cmty. Ctr., Inc. v. Swift, 59 A.3d 437, 453 (Del. Ch.
2012); Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice
in the Delaware Court of Chancery § 909[b], at 9-214 (2022).
231
Brown v. Kellar, 2018 WL 6721263, at *6 (Del. Ch. Dec. 21, 2018) (alteration
and omission in original) (footnote omitted).
232
Id. at *5 (Del. Ch. Dec. 21, 2018) (quoting Genger, 26 A.3d at 200).
233
Swift, 59 A.3d at 453 (internal quotation marks omitted); see also Robert S.
Saunders et al., Folk on the Delaware General Corporation Law § 225.03 (7th ed. 2021)
(“[A] party challenging the validity of a vote carries the burden in a section 225 action.”).
47
witness testimony, is a matter for the court to determine as the trier of fact.”234 Thus, I find
it proper to address the arguments Plaintiffs raise to determine the Board’s proper
composition. My analysis begins and ends with the “reasonable efforts” provision in the
Stockholders’ Agreement.
This case turns on a simple breach of contract. “When parties have ordered their
affairs voluntarily through a binding contract, Delaware law is strongly inclined to respect
their agreement, and will only interfere upon a strong showing that dishonoring the contract
is required to vindicate a public policy interest even stronger than freedom of contract.”235
But “[s]uch public policy interests are not to be lightly found, as the wealth-creating and
peace-inducing effects of civil contracts are undercut if citizens cannot rely on the law to
enforce their voluntarily-undertaken mutual obligations.”236
“Under Delaware law, the elements of a breach of contract claim are: (1) a
contractual obligation; (2) a breach of that obligation by the defendant; and (3) a resulting
234
Swift, 59 A.3d at 453.
235
GRT, Inc. v. Marathon GTF Tech., Ltd., 2011 WL 2682898, at *12 n.60 (Del.
Ch. July 11, 2011) (quoting Libeau v. Fox, 880 A.2d 1049, 1056–57 (Del. Ch. 2005), aff’d
in pertinent part, 892 A.2d 1068 (Del. 2006)).
236
Id.; see also Snow Phipps Grp., LLC v. Kcake Acq., Inc., 2021 WL 1714202, at
*51 n.566 (Del. Ch. Apr. 30, 2021) (“Delaware courts do not lightly trump the freedom to
contract and, in the absence of some countervailing public policy interest, courts should
respect the parties’ bargain.”) (quoting Gildor v. Optical Sols., Inc., 2006 WL 4782348, at
*11 (Del. Ch. June 5, 2006)).
48
damage to the plaintiff.”237 “When determining the scope of a contractual obligation and
measuring the parties’ conduct against that obligation to determine breach, ‘the role of a
court is to effectuate the parties’ intent.’”238 Thus, “[a]bsent ambiguity, the court ‘will give
priority to the parties’ intentions as reflected in the four corners of the agreement,
construing the agreement as a whole and giving effect to all its provisions.’”239 That is,
“[u]nless there is ambiguity, Delaware courts interpret contract terms according to their
plain, ordinary meaning.”240 This comports with the notion that a “contract’s construction
should be that which would be understood by an objective, reasonable third party.”241
Here, Plaintiffs argue that Defendants breached Section 12.1 of the Stockholders’
Agreement. Section 12.1 provides:
The Corporation [(“Alphonso”)] agrees to use its reasonable efforts, within
the requirements of applicable law, to ensure that the rights granted under
this Agreement are effective and that the Parties enjoy the benefits of this
Agreement. Such actions include, without limitation, the use of the
237
VH5 Cap., LLC v. Rabe, 2023 WL 4305827, at *13 (Del. Ch. June 30, 2023)
(quoting H–M Wexford, LLC v. Encorp, Inc., 832 A.2d 129, 140 (Del. Ch. 2003)).
238
In re Anthem-Cigna Merger Litig., 2020 WL 5106556, at *90 (Del. Ch. Aug. 31,
2020), aff’d sub nom. Cigna Corp. v. Anthem, Inc., 251 A.3d 1015 (Del. 2021); see also
Weinberg v. Waystar, Inc., 294 A.3d 1039, 1044 (Del. 2023).
239
In re Anthem-Cigna Merger Litig., 2020 WL 5106556, at *90.
240
Id.241
Thermo Fisher Sci. PSG Corp. v. Arranta Bio MA, LLC, 2023 WL 2771509, at
*17 (Del. Ch. Apr. 4, 2023) (quoting Salamone v. Gorman, 106 A.3d 354, 367–68 (Del.
2014)).
49
Corporation’s reasonable efforts to cause the nomination and election of the
directors as provided in this Agreement.242
Plaintiffs argue that Defendants breached the obligation imposed by this “efforts
clause” by “pursu[ing] Wall-E for the express purpose of eliminating [the Key Holders’]
rights.”243 Given this decision’s focus on Defendants’ specific argument in response, I set
it out below (omitting citations for ease of reading) rather than simply summarizing it:
[Plaintiffs’] argument fails on two grounds. First, Section 12.1 imposes
obligations only on “the Corporation,” which the contract defines as
“Alphonso Inc.” It imposes no obligation on the board or LG/Zenith—both
of which are themselves individually defined under the contract. The
Stockholders’ Agreement takes care to specify the precise persons or entities
to whom each of its provisions applies. Some provisions even assign
different roles to “the Corporation” and “the Board” within the same
sentence.
The obligations imposed on the “Corporation” by Section 12.1 therefore do
not apply to the “Board” or to “LGE,” because where a contract specifically
imposes duties on one defined entity and does not name another, there is a
“negative implication” that the exclusion was “intentional.” Plaintiffs,
however, have sued only the Alphonso board and LG. They cannot have
breached Section 12.1 because that section does not apply to them, and the
conduct plaintiffs complain of was undertaken solely by or at the direction
of the board and LG/Zenith.[244]
Moreover, to the extent Section 12.1 is implicated here at all, the evidence
shows that Alphonso complied with it. Plaintiffs omit from their discussion
the key limiting language at the end of the provision, which confines the
Corporation’s “reasonable efforts” obligation “to caus[ing] the nomination
242
JX0050 (emphases added).
243
Dkt. 182 Plaintiffs’ Post-Trial Opening Br. (“Plaintiffs’ Post-Trial Opening Br.”)
at 42.
Defendants include the following footnote: “Alphonso is named as a nominal
244
defendant only for purposes of the derivative claim in Count II, which is not being tried
now.” Defendants’ Post-Trial Answering Br. at 38 n.161.
50
and election of the directors as provided in this Agreement.” Alphonso’s
role was to use reasonable efforts to ensure all “the rights granted under [the]
Agreement.” Those “rights” included the board’s exclusive and unfettered
right to terminate the Key Holders. They also included Zenith’s right to
remove the Common Directors if no Key Holder is employed at Alphonso.
The board and Zenith each exercised their “rights granted under [the]
Agreement,” resulting (as the contract permitted) in no remaining Key
Holder employees. Because the Stockholders’ Agreement provided for “the
nomination and election of the [Common] directors,” only for so long as Key
Holders remained employed at Alphonso, the reasonable-efforts obligation
necessarily fell away as to the nomination of directors once the Key Holders
had been terminated.
Plaintiffs’ contrary view seems to assume that the “reasonable efforts”
provision required the parties to refrain from contractually permitted actions
that altered the parties’ contractual rights—and that the parties remained
bound to use efforts to maintain contractual rights even after the contract no
longer required them. Neither proposition makes sense, and neither is
supported in the cases.245
Four questions guide my analysis of Plaintiffs’ breach of contract argument arising
from Section 12.1. The Court must determine (1) which parties are required to use
reasonable efforts, (2) toward whom reasonable efforts must be used, (3) the scope of the
obligation imposed by the words “reasonable efforts,” and (4) whether the party that must
use reasonable efforts acted in the manner required by the obligation toward those to whom
reasonable efforts must be used.
245
Defendants’ Post-Trial Answering Br. at 37–40.
51
A. Alphonso Was Obligated By Section 12.1’s “Efforts Clause”
Defendants’ first argument is that Section 12.1 imposes an obligation only on
Alphonso, but not on Alphonso’s Board.246 In ordinary circumstances, I might have some
reservations about this argument.247 It is a truism that a corporation acts through
individuals, as I discuss further below. In support of their argument, however, Defendants
point out that the Stockholders’ Agreement itself distinguishes in various instances
between Alphonso and the Board.248 In some instances the Stockholders’ Agreement refers
separately to the Board and Alphonso in the same provision.249 For purposes of resolving
this matter, then, I have determined to apply Defendants’ requested approach and,
246
In the course of three sentences and a footnote, Defendants attempt to skirt
further examination of Alphonso’s actions by asserting that its breach is beyond the ken of
this summary proceeding. Not so. In the very next paragraph, Defendants go on to argue
that “Alphonso complied with” Section 12.1. Id. Indeed, breach of the efforts clause is
Plaintiffs’ lead argument for the December Consent’s invalidity. And, for purposes of
resolving this dispute, I am accepting Defendants’ argument that I should distinguish
between Alphonso and its board of directors for purposes of analyzing the breach. The
parties briefed the matter, and two of the nine witnesses at trial (Andrades and Sarma)
testified about their terminations by Alphonso. This is a special summary proceeding to
determine the Board’s proper composition, not a proceeding to determine damages or other
remedies. Defendants’ suggestion that I cannot consider defendant Sexton’s actions and
nominal defendant Alphonso’s resulting breach of the efforts clause is perhaps
understandable given the nature of Sexton’s conduct. It is also, however, an unduly
restricted view of this special summary proceeding, particularly in light of the arguments
and evidence presented at trial.
247
See Dkt. 200 Plaintiffs’ Post-Trial Reply Br. (“Plaintiffs’ Post-Trial Reply Br.”)
at 10 n.9.
248
See Defendants’ Post-Trial Answering Br. at 37–38.
249
Id.52
accordingly, analyze Section 12.1’s efforts clause as imposing a “reasonable efforts”
obligation on Alphonso but not the Board.
Unbound by the obligation in Section 12.1, the Board was then free to exercise its
express and “exclusive right” to terminate the “executive officers,” and employees
compensated $500,000 or more per year, as provided in Section 10.5(c).250 The Board did
just that. It exercised this bargained-for contract right on December 16, 2022, when it
terminated the five executive-officer Key Holders and when it appointed Sexton as interim
CEO.251
250
See JX0050. Section 10.5(c) provides in relevant part:
Subject to any additional approvals required by law, the Restated Certificate,
or pursuant to Section 10.5(d), the Stockholders agree that the Board of
Directors shall have the exclusive right to, upon approval at a meeting of the
Board of Directors, (i) hire or employ, terminate employment, appoint
position and determine the compensation and benefits of executive officers
of the Corporation and any employee of the Corporation who receives an
annual compensation (inclusive of salary, benefits and other compensation,
including stock options and stock awards) equal to $500,000 or more[.]
Id.251
The preponderance of the evidence supports the conclusion that the parties
contemplated LGE’s exercise of control as including the unilateral termination of
Alphonso’s C-level officers. But even LGE characterized this exercise as reflecting an
outer limit—a “nuclear option”—that would only be triggered in very specific
circumstances. JX0023 at 4 (November 2020 email from Hahm to Beotra: “You mention
that we could fire the C-level officers and replace them with LGE staff, but we both know
this is only a nuclear option that we have no incentive to do, unless you are running the
company into the ground and destroying value, which you also have no incentive to do.”).
53
Within this framework, if Plaintiffs are going to demonstrate a breach of the
Stockholders’ Agreement’s express terms, it must arise from Alphonso’s breach of Section
12.1. Plaintiffs demonstrate just such a breach. While Alphonso is subject to the clear
burden provided in Section 12.1, it is also a corporation. As a corporation, “lack[ing] . . .
body and mind,” Alphonso “only can act through human agents.”252 In this case, Alphonso
acted through Sexton. Following his appointment as interim CEO, Sexton could well be
seen as Alphonso’s primary actor on D-Day. At LGE’s and the LG-Affiliated Directors’
behest, Sexton acted for Alphonso and as CEO when he terminated Key Holder employees
Andrades and Sarma.253
252
In re Dole Food Co., Inc. S’holder Litig., 110 A.3d 1257, 1261 (Del. Ch. 2015).
Separately, the acts of an agent may be imputed to a corporation. Thus, in the context of
the present dispute, this imputation provides an alternative analytical approach. It leads to
the same conclusion as the notion that Alphonso acted through Sexton. That is, Alphonso
is liable for Sexton’s acts. ChyronHego Corp. v. Wight, 2018 WL 3642132, at *10 n.100
(Del. Ch. July 31, 2018) (“For multitudinous purposes the knowledge and actions of a
corporation’s human decision-makers and agents may be imputed to it.”) (quoting In re
Dole Food Co., Inc. S’holder Litig., 110 A.3d at 1262.); Stewart v. Wilmington Tr. SP
Servs., Inc., 112 A.3d 271, 302–03 (Del. Ch. 2015) (“A basic tenet of corporate law,
derived from principles of agency law, is that the knowledge and actions of the
corporation’s officers and directors, acting within the scope of their authority, are imputed
to the corporation itself.” Delaware courts follow the “general rule of imputation” and
“hold[] a corporation liable for the acts and knowledge of its agents.”), aff’d, 126 A.3d
1115 (Del. 2015).
253
Defendants argue that the Board is not bound by Section 12.1 and thus was within
its rights to terminate the executive-officer Key Holders. But they do not argue that Sexton
did not act for Alphonso when he carried out the terminations or that his acts were not
otherwise imputed to Alphonso. See Defendants’ Post-Trial Answering Br. at 37–40.
54
Unlike the Board, in acting for Alphonso, Sexton’s acts were subject to the
obligation contained in Section 12.1. Sexton exercised a power that he believed to be
within the scope of the authority held by Alphonso’s CEO.254 But he overlooked the
express bargained-for contractual efforts obligation that Alphonso agreed to as a party to
the Stockholders’ Agreement. Alphonso’s contractual undertaking infused Andrades and
Sarma’s employment status with certain protections since it was a precondition to their
rights under the Stockholders’ Agreement.255
Alphonso acted through Sexton when he terminated Andrades and Samra for LGE’s
purpose of depriving them of their bargained-for and protected contract rights—contract
rights that Alphonso was obligated to use “reasonable efforts” to “ensure” their enjoyment
of.
B. Alphonso Owed Andrades And Sarma The Use Of Its “Reasonable Efforts”
The obligation imposed on Alphonso in Section 12.1 required it to use reasonable
efforts “to ensure that the rights granted under this Agreement are effective and that the
Parties enjoy the benefits of this Agreement.”256
254
JX0640 123:3–14 (Sexton).
255
This was particularly true on D-Day since, at the time Sexton fired Andrades and
Sarma, the Board had already terminated all other Key Holders. This meant that Andrades
and Sarma’s continued employment was all that stood between their Director-Designation
Right and the failure of the Designation Condition.
256
JX0050.
55
As explained above, the express terms of the Stockholders’ Agreement permitted
the Board to terminate the executive-officer Key Holders.257 But that right had limits.
Defendants overlook these limits. Instead, they make the brazen assertion that the Board
has an “exclusive and unfettered right to terminate the Key Holders.”258 Next, Defendants
suggest that by combining the Board’s termination right with Zenith’s director removal
right their respective actions “result[ed] (as the contract permitted) in no remaining Key
Holder employees.”259
This argument is wrong. The lynchpin of Defendants’ entire argument on this point
is that the Board had a contractual right to terminate “the Key Holders.” This
mischaracterizes Section 10.5(c). Section 10.5(c) provides the Board with the “exclusive
right” to terminate “executive officers” and employees whose annual compensation is
$500,000 or more.260 This distinction is the difference between the Board being able to
terminate all Key Holders and its ability to terminate only a select group of them. As
LGE’s own internal D-Day documents demonstrate, Andrades and Sarma fit neither
category—they were not subject to termination by the Board under Section 10.5(c). 261 This
is why the Board appointed Sexton as interim CEO. Section 10.5(c) did not provide the
257
See id. § 10.5(c).
258
Defendants’ Post-Trial Answering Br. at 39.
259
Id.
260
JX0050.
261
See JX0487 at 53; JX0402 at 19.
56
Board with the “power”262 to “fire the non-executive key holders.”263 Hence the “[n]eed”
for the “new CEO’s cooperation.”264
As Key Holders, the Stockholders’ Agreement granted Andrades and Sarma express
personal rights to designate directors so long as the Key Holders retained a certain
percentage of Alphonso’s outstanding Capital Stock.265 Section 10.2(b) provides in its
entirety:
(i) Three (3) members of the Board shall be designated by the Employee Key
Holder Majority (the “Common Directors”) during such time as Key Holders
hold at least twenty percent (20%) of the outstanding shares of Capital Stock;
(ii) two (2) members of the Board shall be designated by the Employee Key
Holder Majority during such time as Key Holders hold at least fifteen percent
(15%) of the outstanding shares of Capital Stock and (iii) one ( 1) member
of the Board shall be designated by the Employee Key Holder Majority
during such time as Key Holders hold at least ten percent (10%) of the
outstanding shares of Capital Stock. For the avoidance of doubt, this director
designation right by the Employee Key Holder Majority under this
Subsection 10.2(b) shall be null and void if no Key Holder serves as an
officer or employee of the Corporation at such time[.]266
This provision grants a right. Indeed, the Designation Condition itself refers to the
preceding sentence as the “director designation right[.]”267
262
JX0487 at 53.
263
JX0402 at 19.
264
Id.
265
See JX0050 § 10.2(b).
266
JX0050.
267
Id. (emphasis added).
57
But the first sentence of Section 10.2(b) does not confer some broad or general right.
It grants a personal right—a right that is capable of being held even by a single Key Holder.
By its plain and unambiguous terms, there are two requirements to a Key Holder exercising
the Director-Designation Right. First, all existing Key Holders must together hold the
requisite percentage of Alphonso’s outstanding stock. At a minimum, this requires
cumulative holdings of 10% of Alphonso’s outstanding Capital Stock.268 Second, at least
one Key Holder must be an Alphonso officer or employee. If only one Key Holder is an
Alphonso officer or employee, then that sole Key Holder would necessarily make up the
“Employee Key Holder Majority.”269 This means the sole Key Holder serving as an
Alphonso employee or officer individually would hold the entire designation right and can
decide whom to designate without any input from the other Key Holders.
Consider how this played out in the minutes before Sexton terminated Andrades and
Sarma on D-Day. LGE’s internal documents on Project Wall-E demonstrate that D-Day
was a carefully sequenced operation.270 First, the Board, acting pursuant to its express
bargained-for contractual right in Section 10.5(c) and not bound by the obligations arising
from Section 12.1, terminated the executive-officer Key Holders at the Board meeting. At
268
Id. § 10.2(b).
JX0050 § 6.2 (defining the Employee Key Holder Majority as “the Key Holders
269
who are directors, officers or employees of the Corporation at such time (‘the Employee
Key Holders’) holding a majority of the shares of Capital Stock then held by all Employee
Key Holders”).
270
See, e.g., JX0487 at 53 (D-Day Schedule).
58
the same time, the Board also appointed Sexton as interim CEO.271 Immediately following
the terminations, the majority holder of Alphonso’s Capital Stock then held by Andrades
and Sarma constituted the entirety of the Employee Key Holder Majority.272 Andrades and
Sarma—and only Andrades and Sarma—held the right to designate all Common Directors.
At this point—after the Board terminated the executive-officer Key Holders but before
Sexton terminated Andrades and Sarma—Alphonso or Sexton could have asked Andrades
and/or Sarma to designate new Common Directors.273 We can never know what their
answer would have been because Andrades and Sarma were denied even this basic and
reasonable courtesy.274
Defendants’ arguments further compel the conclusion that the Stockholders’
Agreement granted Andrades and Sarma a right that Alphonso was required to exercise
reasonable efforts to “ensure” their enjoyment of. Defendants’ briefing modifies the text
of the second sentence of Section 12.1 to refer specifically to Common Directors—i.e., the
directors identified in Section 10.2(b)—writing that “the Stockholders’ Agreement
271
See id.
272
At this time, the Key Holders’ collective holdings still exceeded the thresholds
required by Section 10.2(b), which satisfied the first requirement. See Pre-Trial Stipulation
¶ 33. Andrades and Sarma satisfied the second requirement because they had not yet been
terminated and, were at that time, Alphonso employees.
273
See TT 632:7–12 (Wasinger).
274
See TT 632:7–12 (Wasinger).
59
provided for ‘the nomination and election of the [Common] directors[.]’”275 Defendants’
omit, however, the first half of Section 12.1’s second sentence, which provides that “[s]uch
actions include, without limitation . . . .”276 Section 12.1’s first sentence thus includes the
obligation identified in the second sentence, which Defendants interpret as unequivocally
referring to the Common Directors.277 But, by its own terms, the second sentence of
Section 12.1 does not limit Alphonso’s obligations under the first sentence to solely the
“nomination and election” of Common Directors. Instead, it expressly imposes a broader
obligation on Alphonso to ensure that the “rights” (plural) granted under the Stockholders’
Agreement are effective.278
Building off the foregoing and in this context, Section 12.1 obligated Alphonso to
use reasonable efforts to ensure the rights “granted under this Agreement” are effective as
275
Defendants’ Post-Trial Answering Br. at 39 (citing JX0050 § 12.1) (first
alteration in original). But see Dkt. 205 Transcript of 12-5-2023 Post-Trial Oral Argument
(“Post-Trial Oral Argument Tr.”) 131:9–15 (“[DEFENDANTS’ COUNSEL]: Well, we
haven’t seen that contention from the other side, as the Court[] just noted. And I think
that’s because [the second sentence of Section 12.1] doesn’t really apply. It goes, we would
argue, to nomination and election. We aren’t dealing with directors who are nominated or
elected. We’re dealing with a designation right.”).
276
JX0050.
277
See Include, BLACK’S LAW DICTIONARY (11th ed. 2019) [hereinafter BLACK’S
LAW] (defining “include” as “[t]o contain as part of something. . . . [S]ome drafters use
phrases such as including without limitation and including but not limited to—which mean
the same thing [as including]”) (emphases in original); see generally, KENNETH A. ADAMS,
A MANUAL OF STYLE FOR CONTRACT DRAFTING 356 (4th ed. 2017); J. Travis Laster &
Kenneth A. Adams, When Contracts Seek To Preempt Judicial Discretion, 101
JUDICATURE 32, 35 (2017).
278
See JX0050 § 12.1.
60
to those Key Holders whose employment it controlled (i.e., Andrades and Sarma’s
employment). Put another way, Andrades and Sarma struck a heartier deal than the other
Key Holders. The executive-officer Key Holders’ rights to designate directors were subject
to a condition the Board could trigger at any time and pursuant to its own express
contractual right to do so. Accepting Defendants’ argument regarding the proper
construction of Section 12.1, the Board owed no obligation to those Key Holders under
Section 12.1. By contrast, only Alphonso could terminate Andrades and Sarma’s
employment and thus cause the failure of the Designation Condition on which their right
to designate directors was predicated. And, accepting Defendants’ construction of Section
12.1, Alphonso had an obligation under Section 12.1 to use its “reasonable efforts” to
“ensure” the rights granted in the Stockholders’ Agreement were effective, with the plain
text of the Stockholders’ Agreement and Defendants’ own arguments compelling the
conclusion that such rights included Andrades and Sarma’s Director-Designation Right.
In one of Defendants’ primary arguments on this issue, they assert that the
reasonable efforts obligation fell away once Alphonso and the Board had terminated all of
the Key Holders.279 But Defendants miss the point entirely—Alphonso had an obligation
to use “reasonable efforts” to “ensure” the “effective[ness]” of Andrades and Sarma’s
rights in the first place, irrespective of whether that right could, after the use of reasonable
efforts, be effectively terminated by firing them as a result of the Designation Condition.
279
Defendants’ Post-Trial Answering Br. at 39.
61
Indeed, such an argument would require me to conclude that Alphonso’s “reasonable
efforts” obligation under Section 12.1 only commenced after Alphonso terminated
Andrades and Sarma, which is contrary to the plain text of Section 12.1.
C. Alphonso’s Reasonable Efforts Obligation
Although this analysis has already included considerable discussion of efforts
clauses, it is time to give actual meaning to the words “reasonable efforts.”
1. Definition: Adding Color
As noted previously, the “reasonable efforts” language in Section 12.1 is “known as
an ‘efforts’ clause.”280 “Efforts clauses generally replace ‘the rule of strict liability for
contractual non-performance that otherwise governs’ with ‘obligations to take all
reasonable steps to solve problems and consummate the’ contractual promise.” 281 There
are a variety of these “clauses.”282 But in Delaware, courts interpret them as having the
same general meaning.283 “[W]here the parties fail[] to contractually set [a meaning for
280
Menn v. ConMed Corp., 2022 WL 2387802, at 34 (Del. Ch. June 30, 2022)
(referring to “commercially reasonable efforts”); see also Akorn, Inc. v. Fresenius Kabi
AG, 2018 WL 4719347, at *86–87 (Del. Ch. Oct. 1, 2018) (identifying “reasonable efforts”
as an efforts clause), aff’d, 198 A.3d 724 (Del. 2018).
281
ConMed, 2022 WL 2387802 at *34.
282
See Akorn, Inc., 2018 WL 4719347, at *86–88 (discussing the meaning of the
various efforts clauses, i.e., “reasonable best efforts,” “reasonable efforts,” and
“commercially reasonable efforts”).
283
Id. at *87; see also ConMed, 2022 WL 2387802 at *35 (“Although deal
practitioners have some sense of the hierarchy among efforts clauses, courts applying the
standards have struggled to discern daylight between them.” “This decision, therefore,
interprets ‘commercially best efforts’ as imparting the same meaning as ‘best efforts.’”);
Neurvana Med., LLC v. Balt USA, LLC, 2020 WL 949917, at *15 n.128 (Del. Ch. Feb. 27,
62
the efforts clause,]” Delaware courts ascribe a default meaning.284 Such “provisions place[]
an affirmative obligation on the parties to take all reasonable steps.”285
2020) (“[T]here is no basis for suggesting that reasonable efforts should be given a meaning
different from best efforts or reasonable best efforts. Most courts use the terms best efforts
and reasonable efforts interchangeably.”) (quoting Kenneth A. Adams, Understanding
“Best Efforts” and Its Variants (Including Drafting Recommendations), 50 PRAC. L. 11,
14 (2004)); 2 Lou R. Kling & Eileen T. Nugent, Negotiated Acquisitions of Companies,
Subsidiaries and Divisions § 13.06, at 13-46 n.7 (2023 ed.) (compiling cases that use
“reasonable efforts,” “reasonable best efforts,” and “commercially reasonable efforts” and
explaining that these standards are “often, without comment, used . . . somewhat
interchangeably with ‘best efforts’”); 2 Farnsworth on Contracts § 7.17c, at 405 n.13 (3d
ed. 2004).
284
Neurvana Med., 2020 WL 949917, at *15; see also ConMed, 2022 WL 2387802,
at *34 (explaining that Neurvana Med., 2020 WL 949917 and Himawan v. Cephalon, Inc.,
2018 WL 6822708 (Del. Ch. Dec. 28, 2018) both include a contractual definition of the
obligation the efforts clause imposes and “are thus of little help”).
285
Williams Companies, Inc. v. Energy Transfer Equity, L.P., 159 A.3d 264, 273
(Del. 2017); see also ConMed, 2022 WL 2387802 at *34 (interpreting efforts clause as
requiring “all reasonable steps”); Williams Field Servs. Grp., LLC v. Caiman Energy II,
LLC, 2019 WL 4668350, at *34 (Del. Ch. Sept. 25, 2019) (“More generally, an obligation
to take reasonable actions or use commercially reasonable efforts obligates a party ‘to take
all reasonable steps to solve problems and consummate the transaction’ on the terms set
forth in the governing agreement.”). Irrespective of whether Delaware courts would treat
the various efforts clauses interchangeably, Delaware case law supports the conclusion that
the “reasonable efforts” provision contained in Section 12.1 of the Stockholders’
Agreement, should be interpreted as requiring “all reasonable steps.” Compare ABA
MERGERS AND ACQUISITIONS COMMITTEE, MODEL STOCK PURCHASE AGREEMENT WITH
COMMENTARY 212 (2d ed. 2010) (identifying a deal practitioner ascribed hierarchy of
efforts clauses as placing “reasonable efforts” below “reasonable best efforts” and above
“commercially reasonable efforts”), and Akorn, Inc., 2018 WL 4719347, at *87–88
(quoting same), with Akorn, Inc., 2018 WL 4719347, at *87–88 (interpreting a
“commercially reasonable efforts” clause and a “reasonable best efforts” clause as each
requiring that the obligor “take all reasonable steps” based on the high court’s interpretation
in a similar context: “Referring to [two different efforts clauses], the high court stated that
‘covenants like the ones involved here impose obligations to take all reasonable steps to
63
As applied here, Section 12.1 requires Alphonso to take “all reasonable steps” “to
ensure that the rights granted under this Agreement are effective and that the Parties enjoy
the benefits of this Agreement.”286 No party has argued that there is ambiguity about what
these words mean. Nonetheless, it is appropriate to take a deeper dive into the meaning of
these words as they are used in this context as “[t]his Court often looks to dictionaries to
ascertain a term’s plain meaning.”287 Here, the terms “ensure,” “effective,” “enjoy,” and
“benefits” are relevant.
“Ensure” means:
● Merriam-Webster Dictionary: To “guarantee.”288
● American Heritage Dictionary: “To make sure or certain[.]”289
solve problems and consummate the transaction.’”) (quoting Williams Companies, Inc.,
159 A.3d at 272).
286
JX0050. Section 12.1 also includes language that limits the “reasonable efforts”
obligation to those actions which fall “within the requirements of applicable law.” I
interpret this unambiguous language to mean that the efforts requirement is specifically
bounded by what is lawful to do. In other words, the efforts clause does not require
Alphonso to carry out any acts that would have the effect of breaking the law. This
language is designed to be a ceiling—used to define the outer limits of the obligation—not
a floor. Compare id. § 12.1, with ADAMS, supra note 277, at 431.
287
In re Solera Ins. Coverage Appeals, 240 A.3d 1121, 1132 (Del. 2020); Thermo
Fisher Sci. PSG Corp., 2023 WL 2771509, at *17 (“Under well-settled case law, Delaware
courts look to dictionaries for assistance in determining the plain meaning of terms which
are not defined in a contract.”) (quoting Lorillard Tobacco Co. v. Am. Legacy Found., 903
A.2d 728, 738 (Del. 2006)).
288
Ensure, The MERRIAM-WEBSTER DICTIONARY (2022) [hereinafter MERRIAM-
WEBSTER].
289
Ensure, AM. HERITAGE COLLEGE DICTIONARY (3d ed. 1993) [hereinafter AM.
HERITAGE].
64
● Oxford American Dictionary: To “make certain that (something) shall occur or be
the case[.]”290
“Effective” means:
● Black’s Law Dictionary: “[I]n operation at a given time[,]” and “[p]roductive;
achieving a result[.]”291
● Merriam-Webster Dictionary: “[P]roducing a decisive or desired effect[,]” “being
in effect[,]” and “ready for service or action.”292
● American Heritage Dictionary: “Having an intended or expected effect[,]”
“[o]perative; in effect[,]” “[e]xisting in fact; actual[,]” and “[p]repared for use or
action[.]”293
● Oxford American Dictionary: “[S]uccessful in producing a desired or intended
result” or “operative[.]”294
“Enjoy” means:
● Black’s Law Dictionary: “To have, possess, and use (something) with satisfaction;
to occupy or have the benefit of (property).”295
● Merriam-Webster Dictionary: “[T]o have for one’s benefit or use.”296
● American Heritage Dictionary: “To have the use or benefit of[.]”297
● Oxford American Dictionary: To “possess and benefit from[.]”298
290
Ensure, NEW OXFORD AM. DICTIONARY (3d ed. 2010) [hereinafter OXFORD
AM.].
291
Effective, BLACK’S LAW.
292
Effective, MERRIAM-WEBSTER.
293
Effective, AM. HERITAGE.
294
Effective, OXFORD AM.
295
Enjoy, BLACK’S LAW.
296
Enjoy, MERRIAM-WEBSTER.
297
Enjoy, AM. HERITAGE.
298
Enjoy, OXFORD AM.
65
“Benefit” means:
● Black’s Law Dictionary: “The advantage or privilege something gives; the helpful
or useful effect something has[,]” and “the profit that moves to the promisee[.]”299
● Merriam-Webster Dictionary: “[A]dvantage” or a “useful aid[.]”300
● American Heritage Dictionary: “Something that promotes or enhances well-being;
an advantage[,]” or a “[h]elp; aid[.]”301
● Oxford American Dictionary: “[A]n advantage or profit gained from
something[.]”302
Together, these definitions add color to the obligation Alphonso undertook when it
entered the Stockholders’ Agreement. Alphonso undertook the obligation to “take all
reasonable steps” to “make certain” Andrades and Sarma’s Director-Designation Right
granted in Section 10.2(b) is “operative; in effect” and “productive,” such that Andrades
and Sarma “possess” or “have for [their] . . . use” a right that is “helpful,” “useful,” and
“advantage[ous].”303 But that is not the end. The picture gets even clearer when
considering how Delaware courts have applied the “all reasonable steps” obligation when
addressing efforts clauses.
299
Benefit, BLACK’S LAW.
300
Benefit, MERRIAM-WEBSTER.
301
Benefit, AM. HERITAGE.
302
Benefit, OXFORD AM.
303
Supra nn.288–302.
66
2. Application: Clarity
While the requirement to take “all reasonable steps” does not “mean everything
possible under the sun[,]”304 it does include certain basic requirements. Plaintiffs quote
Hexion Specialty Chemicals, Inc. v. Huntsman Corp. for the proposition that, at bottom,
“[a] party breaches a ‘reasonable best efforts’ provision when it ‘pursue[s] another path
designed to avoid’ an outcome.”305 And indeed, this is encompassed by the notion that one
might even breach an efforts clause by his passive acts which fail to satisfy the affirmative
obligation contained in the efforts clause. Prior “decisions of this court have found that a
party breached an efforts provision [by] making no effort to sell or market the product
[which he was obligated to do under an efforts clause].”306
In recent years, Delaware courts have begun to examine two specific factors. To
determine “whether a party has breached an efforts clause in a transaction agreement, ‘this
court has looked to whether the party subject to the clause (i) had reasonable grounds to
take the action it did and (ii) sought to address problems with its counterparty.’”307
304
See Akorn, Inc., 2018 WL 4719347, at *87 (quoting Alliance Data Sys. Corp. v.
Blackstone Cap. P’r V L.P., 963 A.2d 746, 763 n.60 (Del. Ch. 2009), aff’d, 976 A.2d 170(Del. 2009)).
305
Plaintiffs’ Post-Trial Opening Br. at 43 (citing 965 A.2d 715, 749 (Del. Ch.
2008)).
306
ConMed, 2022 WL 2387802, at *36 (citing Pegasystems, Inc. v. Carreker Corp.,
2001 WL 1192208, at *9 (Del. Ch. Oct. 3, 2001)).
307
Id. at *35; see also Snow Phipps Grp., LLC, 2021 WL 1714202, at *42; Akorn,
Inc., 2018 WL 4719347, at 91.
67
In Williams Companies, Inc. v. Energy Transfer Equity, L.P., the Delaware Supreme
Court recounted the Hexion court’s observation that when facing solvency concerns, “a
reasonable response to such concerns might have been to approach the [seller’s]
management to discuss the issue and potential resolutions of it.”308 And when the solvency
concern grew, “the court observed that the buyer ‘was then clearly obligated to approach
[the seller’s] management to discuss the appropriate course to take to mitigate’ the solvency
concerns.”309
This interpretation of Hexion is broader than the trial court read it to be.310 The trial
court in Williams explained that in Hexion, a buyer had undertaken an obligation to use
“reasonable best efforts” to secure financing.311 The trial court in Williams sought to
distinguish Hexion on the grounds that in Hexion the buyer “actively and affirmatively
torpedoed its ability to finance.”312 But in Williams, the trial court found there to be an
“absence of any evidence to show that [the obligor] caused [the non-occurrence of a
308
159 A.3d at 272 (alteration in original).
309
Id. (alteration in original).
310
Id.311
Williams Companies, Inc. v. Energy Transfer Equity, L.P., 2016 WL 3576682,
at *18 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 264 (Del. 2017).
312
Williams Companies, Inc., 159 A.3d at 272.
68
condition necessary for closing].”313 The high court found this focus improperly narrow
because the efforts clauses imposed affirmative obligations, not a negative obligation that
can be satisfied merely by not sabotaging a contractual condition. Certainly, “actively
torpedo[ing]” a condition is one way to determine that a party has breached an efforts
clause, but it is not the only way.314 The threshold is not so high. Instead, even the failure
to take actions a party is contractually obligated to use its efforts to take can give rise to a
breach.315
3. Reasonable Efforts In The Face Of An Express Contract Right
In Defendants’ Pretrial Brief, they assert in passing in a single sentence that Section
10.5(c) provides the CEO the right to terminate non-executive-officer employees.316
Defendants have also argued that a party need not give up its contract rights in the face of
a competing obligation arising from an efforts clause.317 Although Defendants made this
313
See id. at 273; Williams Companies, Inc., 2016 WL 3576682, at *5 (“[T]he
Merger Agreement includes a condition to closing that Latham provide ETC and Williams
a written opinion” referred to as “the 721 Opinion.”).
314
Compare Williams Companies, Inc., 159 A.3d at 267, 272–273 (finding the trial
court’s reading of Hexion and efforts clauses was not wrong per se and was erroneous only
because it was “unduly narrow” since the trial court focused on whether the obligor had
acted to cause the non-occurrence of a condition and did not also consider whether it
breached by failing to take steps to cause the condition to occur), with Williams Companies,
Inc., 2016 WL 3576682, at *5.
315
Williams Companies, Inc., 159 A.3d at 272–63.
316
Dkt. 167 Defendants’ Pretrial Br. at 40.
317
The argument Defendants raise suggests the actual harm to such an interpretation
is that it would alter the parties’ contractual rights by requiring the parties to use reasonable
efforts to preserve a right even after the contract no longer required them to. Here, I again
69
argument as to the Board, one might expect such an argument also to apply to a right that
Defendants assert Section 10.5(c) grants the CEO.
I need not reach this issue as to the Board since this analysis assumes Defendants’
starting point—that Section 12.1 does not apply to the Board. It is questionable as to
whether I even need to address the issue here as to Sexton since Defendants also do not
raise this argument as to any perceived right of the CEO to terminate employees. 318
Nonetheless, I address it briefly.
In making their argument as to the Board, Defendants cite Akorn, Inc. v. Fresenius
Kabi AG for the proposition that efforts clauses “d[o] not require either side of the deal to
sacrifice its own contractual rights for the benefit of its counterparty.”319 Defendants’ also
quote Vintage Rodeo Parent, LLC v. Rent-a-Center, Inc.:
A party’s obligation to use commercially reasonable efforts must be cabined
by its bargained-for contractual rights. If an agreement to use commercially
reasonable efforts to comply with obligations in a contract means that a party
cannot exercise its bargained-for right to terminate that contract, that
bargained-for right would be illusory.320
note that Defendants have the sequence backwards. Alphonso was obligated to use
reasonable efforts in the first instance to maintain the right in an effective and operative
state. It does not alter the contract. It is quite literally a requirement provided in the
contract’s express terms.
318
See Defendants’ Post-Trial Answering Br. at 37–40.
319
2018 WL 4719347, at *91.
320
2019 WL 1223026, at *22 (Del. Ch. Mar. 14, 2019) (footnote omitted).
70
At first glance, these passages might seem supportive of Defendants’ argument.
Closer examination, however, shows this not to be so. In Akorn and Vintage Rodeo, the
Court’s concern was whether a party’s contract rights are rendered illusory. 321 It is, of
course, the most basic of principles that “Delaware adheres to the ‘objective’ theory of
contracts, i.e. a contract’s construction should be that which would be understood by an
objective, reasonable third party.”322 “Delaware courts read contracts as a whole, and
interpretations that are commercially unreasonable or that produce absurd results must be
rejected.”323 When “read[ing] a contract as a whole . . . we will give each provision and
term effect, so as not to render any part of the contract mere surplusage.” 324 This means
321
The Court in the cited cases focuses on the effectiveness of contract
termination rights. Such rights can presumably only be used one time. Thus, by
saying that the right cannot be used, one would in effect be rejecting the only use
the right provides—to terminate. This is why preventing the exercise of the right
would mean to “sacrifice” the right in a manner that would render it, in effect,
illusory.
322
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010).
323
Manti Hldgs., LLC v. Authentix Acq. Co., Inc., 261 A.3d 1199, 1211 (Del. 2021);
see also Merck & Co. v. Bayer AG, 2023 WL 2751590, at *6 (Del. Ch. Apr. 3, 2023)
(quoting Manti Hldgs., LLC, 261 A.3d at 1211), aff’d, 2023 WL 7777218 (Del. Nov. 16,
2023); IMO Ronald J. Mount 2012 Irrevocable Dynasty Tr. U/A/D Dec. 5, 2012, 2017 WL
4082886, at *4 (Del. Ch. Sept. 7, 2017) (stating that the Court’s “task is to construe the
contract according to the plain meaning of its terms, remaining mindful that [its]
construction of each term must make sense when considering the contract as a whole”).
324
Osborn, 991 A.2d at 1159.
71
that “[w]e will not read a contract to render a provision or term ‘meaningless or
illusory.’”325
Neither Zenith nor Alphonso, however, hold any express right to terminate the
Director-Designation Right. Indeed, Section 10.2(b) sets forth no right at all for LGE or
Alphonso. Instead, it references a condition on the Director-Designation Right.326
Elsewhere, I note that Section 10.5(c) of the Stockholders’ Agreement addresses the right
of the CEO to “implement and effect” the “termination of employment” of “non-executive
officer employees of the Corporation in accordance with [a] human resources and labor
policy[.]”327 That is fine as far as it goes, but it is a basic tenet of contract law that I must
give meaning to contracts by interpreting them as a whole. 328 Section 12.1 imposes a
frankly small obligation on Alphonso, and that limited obligation, which Alphonso
voluntarily undertook, can hardly be said to have rendered the right to terminate employees
“illusory.” Indeed, the CEO could terminate any Alphonso employee. Only when seeking
to terminate Andrades and/or Sarma, however, was the CEO required to use reasonable
efforts first under Section 12.1.
325
Id.326
Although I need not consider any evidence beyond the plain text of the agreement
here, I nonetheless note that the record suggests the Designation Condition was inserted to
serve an entirely different purpose than the one Defendants now assert. See supra n.48.
327
JX0050.
328
Osborn, 991 A.2d at 1159.
72
Although tempering the CEO’s employee termination “right” comes nowhere near
rendering the “right” ineffective or illusory, the same cannot be said for Defendants’
reading of Plaintiffs’ rights under the Stockholders’ Agreement. Defendants seek to read
the Director-Designation Right as, in essence, an illusory right. Or, at least, a right that
LGE and Alphonso could terminate at their election.329 But that is not what the parties
bargained for.330
The Stockholders’ Agreement’s plain terms also belie Defendants’ reading. In
applying Section 12.1 to temper the CEO’s use of his termination “right,” I must read the
contract as a whole. Perhaps the CEO did hold some express employee termination right
conferred by Section 10.5(c). Even were it so, Alphonso agreed to be bound by a specific
standard of conduct regarding the treatment of Andrades and Sarma’s Director-Designation
Right. Defendants’ own argument reads the second sentence of Section 12.1 as referring
to rights related to the Common Directors, the effectiveness of which necessarily requires
the operational existence of the Director-Designation Right.331 Reading the Stockholders’
Defendants’ reading also would appear to render the entire Stockholders’
329
Agreement terminable at LGE’s option. Compare JX0050 § 13.8, and JX0050 § 13.1, with
JX0050 § 10.2(b). See infra nn.361–62.
330
It is also appropriate to consider commercial reasonableness and a document’s
logic when interpreting a contract. See Osborn, 991 A.2d at 1159, 1160-61 (addressing
request “to interpret the contract, contrary to both the plain meaning of the document and
logic, and to reach an absurd, unfounded result”); Manti Hldgs., LLC, 261 A.3d at 1211;
Merck & Co., 2023 WL 2751590, at *6; IMO Ronald J. Mount 2012 Irrevocable Dynasty
Tr. U/A/D Dec. 5, 2012, 2017 WL 4082886, at *4.
331
Defendants modify the text of that sentence to make this point: “[T]he
Stockholders’ Agreement provided for ‘the nomination and election of the [Common]
73
Agreement so as to render no provision surplusage and no rights to be illusory or
meaningless requires rejecting Defendants’ reading of the Stockholders’ Agreement.
Here, unlike in Akorn, Inc. and Vintage Rodeo Parent, LLC, the CEO’s employee
termination “right” is not rendered illusory, nor is Alphonso asked to “sacrifice” the
contract “right” to terminate employees. Instead, it is Defendants’ reading that would
render the Director-Designation Right an illusory or meaningless right—a reading which I
must reject.332
D. Alphonso Breached Its Obligation To Use “Reasonable Efforts” To Ensure
That Andrades And Sarma’s Director-Designation Right Remained Effective
As noted above, Sexton acted for Alphonso when he terminated Andrades and
Sarma. In so doing, he caused Alphonso to breach its obligation under Section 12.1. In
the face of Alphonso’s affirmative obligation to take “all reasonable steps,” Sexton failed
to take any steps toward this obligation. Worse, and much like in Hexion, Sexton took
steps in the opposite direction.
As noted above, Sexton was brought in as an eleventh-hour substitute for Sareen.
Sareen previously agreed to serve as Alphonso’s interim CEO but backed out on November
directors[.]’” Defendants’ Post-Trial Answering Br. at 39 (citing JX0050 § 12.1) (second
alteration in original).
332
See Osborn, 991 A.2d at 1159–61; O’Brien v. Progressive N. Ins. Co., 785 A.2d
281, 287 (Del. 2001) (“Contracts are to be interpreted in a way that does not render any
provisions ‘illusory or meaningless.’”); Dermatology Assocs. of San Antonio v. Oliver St.
Dermatology Mgmt. LLC, 2020 WL 4581674, at *29 n.284 (Del. Ch. Aug. 10, 2020) (“The
cardinal rule of contract construction is that, where possible, a court should give effect to
all contract provisions.”) (quoting Sonitrol Hldg. Co. v. Marceau Investissements, 607
A.2d 1177, 1184 (Del. 1992)).
74
30, 2022.333 Sareen explained to Hyoung-Saeyi Park that “he won’t sleep well being a
person who stabs their back, and he can’t really do this.”334
On December 1, 2022, LGE “shift[ed] to plan B”—offering Sexton the interim CEO
position.335 After a vetting process that consisted of a one-hour conversation with
Wasinger, the job was his.336 Sexton’s role in all of this was simple and, indeed, plainly
set forth in LGE’s draft offer letter.337 Sexton’s job duties required him to “[r]emove two
key holders (Ravi Narayan Sarma and Richard Andrades).”338 Contrary to Jo’s trial
testimony that Sexton was a “market industry veteran[] that . . . could help the Alphonso
business,”339 the preponderance of the evidence compels the unfortunate conclusion that
LGE executives selected, and the LG-Affiliated Directors appointed, Sexton for the interim
CEO role because LGE viewed him as fully tractable.340
The record demonstrates that Sexton also had significant personal issues that
interfered tremendously with his ability to perform the role of interim CEO. Even on his
333
See JX0465 at 2; JX0456.
334
JX0465 at 2.
335
See JX0458.
336
TT 643:4–11, 649:14–23 (Wasinger).
337
See JX0445 at 8.
338
JX0445 at 8; see also JX0640 175:10–13 (Sexton).
339
TT 690:2–691:7 (Jo).
340
See, e.g., JX0548 at 9 (“dumb and easy to control”).
75
first day (i.e., D-Day), for reasons I need not get into here, Sexton was “unable to speak in
meetings and dozed off several times. He was a zombie.”341 And after two days, Sexton
was “already a bomb.”342
The unrefuted contemporaneous evidence demonstrates that the Board appointed
Sexton as a warm body to do the dirty work that it could not. Sexton’s own testimony at
his deposition suggests that he had no basis for terminating Andrades and Sarma other than
blindly following the LG-Affiliated Directors’ instructions.343
The preponderance of the evidence compels the conclusion that Sexton gave little
or no regard to Alphonso’s obligation to take “all reasonable steps” to ensure that Andrades
and Sarma enjoy the benefit of the rights granted to them in the Stockholders’
Agreement.344 Despite being aware of the Stockholders’ Agreement, Sexton appears never
even to have considered whether Alphonso had obligations to Andrades or Sarma before
terminating them. But that does not mean that the obligation was not owed.
When Sexton terminated Andrades and Sarma, he acted for Alphonso to deprive
them of their Director-Designation Rights.345 Acting for Alphonso and as CEO, Sexton
341
JX0594; JX0548 at 6–7.
342
JX0548 at 7.
343
JX0640 169:10–16 (Sexton).
344
See id.It is of no significance that this action was taken based on the Board’s direction
345
because Sexton acted for Alphonso in breaching a corporate obligation. Defendants’
76
acted at the LGE-controlled Board’s bidding for the benefit of another party under the
Stockholders’ Agreement (i.e., Zenith/LGE) because they “want[ed] a return on their
investment.”346 At a minimum, this thoughtless termination breached Alphonso’s
contractual obligation under Section 12.1 to “take all reasonable steps” to “make certain”
Andrades and Sarma’s Director-Designation Right remained “operative; in effect” and
“productive,” such that Andrades and Sarma “possess” or “have for [their] . . . use” a right
that is “helpful,” “useful,” and “advantage[ous].”347
But Alphonso not only failed to take “all reasonable steps,” the overwhelming
weight of the evidence, and certainly a preponderance, compels the conclusion that
Alphonso took no steps and made no efforts to maintain Andrades and Sarma’s bargained-
for right. Worse than taking no steps to ensure the right, Alphonso triggered the
Designation Condition and deprived them of the right entirely.
In contexts like this, Delaware courts have previously examined two factors to
determine whether an efforts clause has been breached.348 Logic might dictate that where
one undertakes an affirmative contractual duty to protect and give effect to a counterparty’s
arguments make abundantly clear their view that the efforts clause was a separate and
independent obligation binding Alphonso specifically.
346
JX0235.
347
Supra nn.288–302.
348
ConMed, 2022 WL 2387802, at *35 (applying test to efforts clause related to a
buyer’s post-acquisition obligations under a stock purchase agreement).
77
right, the failure to take any steps or use any efforts to do so necessarily requires a finding
of breach. But I need not leave it to logic.
1. Reasonable Grounds
The first factor requires courts to consider “whether the party subject to the [efforts]
clause (i) had reasonable grounds to take the action it did.”349 This question is not about
whether the Board had a right or justification to terminate the executive officers. The Board
was not bound by Section 12.1. Instead, this question is about whether Alphonso had
reasonable grounds to terminate Andrades and Sarma. I conclude that it did not. To reach
this conclusion, I must consider the action taken and the context in which it was taken.
Here, the action is obvious. Alphonso—owing Andrades and Sarma a specific and
affirmative obligation to undertake reasonable efforts to ensure the effectiveness of the
Director-Designation Right—terminated them and caused the failure of the Designation
Condition. The preponderance of the evidence suggests that Sexton was well aware of the
effect the terminations would have on Andrades and Sarma’s contractual rights. Starting
in May 2022, Jo told Sexton of his plan to take control of Alphonso, “remove [Chordia]
from whatever role,” and “[b]ring in new upper management.”350 In addition to credible
trial testimony regarding Sexton’s involvement, Sexton’s own deposition is telling. 351
349
Id.; see also Snow Phipps Grp., LLC, 2021 WL 1714202, at *42; Akorn, Inc.,
2018 WL 4719347, at *91.
350
JX0253; JX0640 50:3–12 (Sexton).
351
See JX0640.
78
After accepting the job offer in December 2022, Sexton was “brought under the cloak . . .
and told that . . . they were going to remove the top management.”352 Even from the express
terms of his offer letter, Sexton understood that he was being brought in to “[m]ake staffing
decisions for the company that are not within the exclusive right of the Board.” 353 Sexton
also understood that he was being asked to terminate Andrades and Sarma—whose
employment “was not within the rights of the board, but were within the rights of the
CEO.”354 And, the week before D-Day, Sexton met in person with the LGE team at LGE’s
office.355 There, the LGE team showed Sexton documents and explained Project Wall-E
and the events that would transpire on D-Day.356
The preponderance of evidence demonstrates that Sexton understood his role in D-
Day, the plan to oust the founders, and that firing Andrades and Sarma was a part of that
plan.357 Sexton was also aware of the Stockholders’ Agreement and the Board’s
deliberation as to whether it would terminate the agreement.358 But even if Sexton did not
352
Id. 82:1–7 (Sexton).
353
Id. 119:4–121:14 (Sexton).
354
Id. 123:3–14 (Sexton).
355
Id. 81:23–84:22 (Sexton).
356
Id.357
See, e.g., id. 169:10–21 (Sexton).
Id. 142:2–4 (Sexton) (Sexton was told about it “[b]ecause [he] was joining as
358
interim CEO”).
79
actually know that terminating the two remaining Key Holders would terminate their
Director-Designation Right, Alphonso would be no less responsible for breaching its
corporate obligation. As Defendants argue, Alphonso is the party that owed the obligation
under Section 12.1.359
By terminating Andrades and Sarma, Alphonso picked winners and losers under the
Stockholders’ Agreement. The terminations triggered the Designation Condition, which
terminated their Director-Designation Right. Opposite its obligation under Section 12.1,
Alphonso joined the invasion—“actively and affirmatively torpedo[ing]”360 the right that
it explicitly promised to “ensure” the operability of for Andrade and Sarma’s benefit. But
the damage to Andrades and Sarma’s rights does not end there. Without the Director-
Designation Right, LGE-controlled actors can unilaterally modify or amend the
Stockholders’ Agreement to postpone the Key Holders’ realization of economic value from
their Liquidity Rights.361 And they can unilaterally terminate the Stockholders’ Agreement
359
Defendants’ Post-Trial Answering Br. at 37–38.
360
Williams Companies, Inc., 159 A.3d at 272 (quoting Williams Companies, Inc.,
2016 WL 3576682, at *18).
361
See JX0050 §§ 13.8 (“This Agreement may be amended, modified or terminated
(other than pursuant to Subsection 13.l above) and the observance of any term hereof may
be waived (either generally or in a particular instance and either retroactively or
prospectively) only by a written instrument executed by (a) [Alphonso], (b) the Investor,
and (c) the Employee Key Holder Majority (for the avoidance of doubt, such execution by
the Employee Key Holder Majority shall not be required if no Key Holder serves as an
officer or employee of [Alphonso] at such time).”) (emphasis added), 1.23 (“‘Investor(s)’
means the Persons named on Exhibit A hereto, each Person to whom the rights of an
Investor are assigned pursuant to Subsection 13.9, each Person who hereafter becomes a
80
at their option.362 Alphonso destroyed the rights Andrades and Sarma bargained for and
gave LGE rights it had not.
This charts onto the Williams Court’s description of Hexion. On D-Day, Sexton, as
interim CEO, exceeded what the parties had discussed pre-signing as the “nuclear
option”—i.e., terminating C-level officers—and instead pushed the button to detonate an
even more severe “nuclear option”—i.e., terminating the Director-Designation Right.363 In
doing so, Alphonso did not just fail to act to ensure Andrades and Sarma’s continued
enjoyment of rights under the Stockholders’ Agreement.364 Instead, like the Williams
Court’s description of Hexion, Alphonso “actively and affirmatively torpedoed”365 the
Director-Designation Right, in unequivocal breach of its obligations under Section 12.1.
signatory to this Agreement pursuant to Subsection 13.9 and any one of them, as the context
may require.”), Exhibit A (identifying Zenith as the sole “Investor[]”).
362
See JX0050 § 13.1 (“Term and Termination. (a) Term. This Agreement shall
continue in force so long as [Alphonso] shall exist, unless terminated earlier pursuant to
Subsection 13.l(b) (the ‘Term’). (b) Termination. This Agreement and all restrictions on
the Transfer of Shares created hereby shall terminate on the occurrence of any of the
following events: (i) The bankruptcy or dissolution of [Alphonso]; (ii) Any one
Stockholder becomes the owner of all of the Shares which are then subject to this
Agreement; or (iii) The execution of a written instrument by (x) [Alphonso], (y) LGE and
(z) the Employee Key Holder Majority. For the avoidance of doubt, such execution by the
Employee Key Holder Majority shall not be required if no Key Holder serves as an officer
or employee of [Alphonso] at such time.”) (emphasis added).
363
JX0023 at 4.
364
I note that such a failure could be sufficient grounds on its own to constitute a
breach of an affirmative obligation under an efforts clause. Williams Companies, Inc., 159
A.3d at 273.
365
Id. at 272.
81
And it did so at the behest of an interested counterparty to the Stockholders’ Agreement—
LGE, acting through Zenith.
To be clear, the Board had the right to terminate the executive-officer Key
Holders.366 And Chordia and Kodige certainly gave the Board many good reasons to do
so. I have considered their conduct and the effect it should have on the Board’s ability to
terminate the executive-officer Key Holders. There is an extensive record of their
unprofessional behavior, including a host of denigrating emails to LGE executives, blatant
failure to observe the Board’s exclusive authority to hire executive officers like Matta, use
of the “LG” name, and conflicts involving the data privacy audit and stock option issues.367
I need not recount those events here.
The Board had reason, and an express bargained-for contract right, to terminate the
executive-officer Key Holders. But the Board also had no obligation to use reasonable
efforts to ensure the Key Holders’ enjoyment of the rights granted under the Stockholders’
Agreement. Alphonso, on the other hand, had this exact obligation. And instead of even
considering its obligations or any alternative paths forward, Sexton pulled the trigger.
The context surrounding Andrades and Sarma’s employment is also relevant. When
Andrades and Sarma first began working for Alphonso, they were at-will employees.368
366
As the argument goes, the Board was not bound by the obligation in Section 12.1.
367
See supra Section I.C.
368
TT 388:12–389:9 (Andrades); TT 399:18–21 (Sarma).
82
But subsequent to the establishment of the at-will employment relationship, the parties
entered into the Stockholders’ Agreement.369 Andrades and Sarma bargained for certain
rights under that agreement—including the Director-Designation Right and Alphonso’s
promise to use reasonable efforts to ensure their rights are effective and that Andrades and
Sarma are able to enjoy the benefits of the agreement.370 Given that the rights were
conditioned on employment, which was a condition within Alphonso’s control, Alphonso
committed itself to use reasonable efforts in that regard to ensure the rights were effective.
Part of considering whether an obligor had reasonable grounds to take the action it
did, requires considering the alternative courses of action available to it and whether it
attempted to resolve the issues. This is the second factor that courts look to when
determining whether a party breached an obligation arising from an efforts clause.371
2. Active Attempts To Resolve
The second factor requires courts to consider “whether the party subject to the
[efforts] clause . . . (ii) sought to address problems with its counterparty.”372
Here, there were many less drastic alternatives to terminating the remaining Key
Holders. After the Board had terminated the executive-officer Key Holders, the Employee
369
JX0050.
370
See id. §§ 10.2(b), 12.1.
371
See ConMed, 2022 WL 2387802, at *35; see also Snow Phipps Grp., LLC, 2021
WL 1714202, at *42; Akorn, Inc., 2018 WL 4719347, at *91.
372
ConMed, 2022 WL 2387802, at *35; Snow Phipps Grp., LLC, 2021 WL
1714202, at *42 (Del. Ch. Apr. 30, 2021); Akorn, Inc., 2018 WL 4719347, at *91.
83
Key Holder Majority consisted of the holder of the majority of Alphonso shares then held
by Andrades and Sarma.373 They alone held the entire right to designate all Common
Directors.374 This left Sexton and Alphonso with many different options—none of which
were considered. For example, Sexton could have asked Andrades and Sarma to appoint
new Common Directors. Sexton could have even explained LGE’s perceived problems
with Chordia and Kodige. Or, instead of firing them and depriving them of their rights,
Sexton could have waited to see if Andrades and Sarma would designate different Common
Directors once they could wield the right on their own and the prior Common Directors
were no longer Alphonso employees. Sexton also could have negotiated with them or
investigated any other alternative.
As noted previously, the credible evidence and trial testimony demonstrate that
Andrades and Sarma were open to working with Alphonso and LGE. Both Andrades and
Sarma were highly cooperative as individuals and as valued employees. Indeed, before
Sareen withdrew his acceptance of the CEO role, he was adamant about keeping Sarma on
his team after D-Day.375 Hyoung-Saeyi Park similarly sought to bring Sarma back to
Alphonso and discussed his return as a consultant.376 Even after being terminated, both
373
JX0050 §§ 10.2(b), 6.2.
374
See id.
375
See JX0455 at 1; TT 638:18–639:19 (Wasinger).
376
TT 396:13–398:20 (Sarma).
84
Sarma and Andrades continued to help the teams they had worked with during their
employment.377
Credible trial testimony also demonstrates that each participated extensively in the
knowledge transfer process and were cooperative far in excess of what one might have
anticipated given the circumstances under which they had just been terminated.378 In fact,
Alphonso only became aware of the need for a knowledge transfer process when
Andrades—while still in his termination meeting with Sexton—voluntarily raised the
question of how he should pass-off software modules and code that only he had worked on
and understood.379
Terminating these remaining Key Holders to remove Chordia and Kodige from the
Board without exploring any less drastic alternatives was a manifestly unreasonable course
of action. In Williams, the high court noted that in Hexion, when concerns began to arise,
“a reasonable response to such concerns might have been to approach [those toward whom
efforts were owed] to discuss the issue and potential resolutions of it.”380 And that is how
reasonable actors tend to do things. But here, there is not a shred of evidence demonstrating
that Alphonso or Sexton gave any consideration to Andrades or Sarma’s rights, much less
interacted with them in any meaningful way prior to their terminations. On the contrary,
377
See TT 396:13–398:20 (Sarma); TT 381:19–383:11 (Andrades).
378
See TT 396:13–398:20 (Sarma); TT 381:19–383:11 (Andrades).
379
TT 381:19–383:11 (Andrades).
380
Williams Companies, Inc., 159 A.3d at 272.
85
the record suggests that Sexton hardly knew who Andrades or Sarma were when he fired
them. He only knew about them because LGE had tasked him with their terminations and
only knew their roles at Alphonso because he had reviewed an organization chart in
advance.381 The evidence overwhelmingly supports the conclusion that Sexton terminated
Andrades and Sarma at LGE’s behest to terminate the Director-Designation Right.382
The Court’s conclusion based on the facts and arguments at issue in Williams also
compels a similar finding. There, the Court highlighted the trial court’s recognition of
evidence that an obligor:
[D]id not direct [its law firm] to engage earlier or more fully with [the
counterparty]’s counsel, failed itself to negotiate the issue directly with [the
counterparty], failed to coordinate a response among the various players,
went public with the information that [its counsel] had declined to issue the
721 Opinion, and generally did not act like an enthusiastic partner in pursuit
of consummation of the [transaction].383
Based on this evidence, the Court found the trial court to have erred in analyzing whether
the obligor had breached the obligations arising from the efforts clauses.384
Here too, the preponderance of evidence demonstrates numerous alternative and less
drastic measures that Alphonso and/or Sexton could have attempted but gave no
381
See, e.g., JX0640 171:1–24, 179:1–23 (Sexton).
382
TT 538:17–539:9 (Edward Lee).
383
Williams Companies, Inc., 159 A.3d at 273.
384
Id.86
consideration to. By beginning with the most drastic option, Defendants forewent any hope
of addressing the issues in proportional and measured increments.
Furthermore, when reviewing the second factor, Delaware courts refer to “the party
subject to the clause” as the one that must seek “to address problems with its
counterparty.”385 But here, Defendants do not argue that Alphonso sought to address any
issues with Andrades and/or Sarma. At best, Alphonso’s LGE-controlled Board sought to
address some of the issues with other Key Holders. There are two reasons why these
“efforts” fail to satisfy the efforts clause. First, these actions were only taken with regard
to persons to whom reasonable efforts were not owed (i.e., Chordia and Kodige). Second,
Defendants’ own argument is that for the purpose of interpreting the obligations in the
Stockholders’ Agreement, the Board and Alphonso are distinct actors. But the reciprocal
follows. That is, if Alphonso’s obligations under the Stockholders’ Agreement do not
obligate the Board, then the acts taken by the Board should not be read as satisfying
Alphonso’s obligations under the Stockholders’ Agreement.
In sum, I conclude that Alphonso did not have reasonable grounds to carry out its
terminations of Andrades and Sarma in the way that it did, and Alphonso undeniably failed
to take any steps or make any attempts to resolve the issues with Andrades and/or Sarma.
Thus, Alphonso breached its obligation to use reasonable efforts and take all reasonable
steps “to ensure that the rights granted under this Agreement are effective” and Andrades
385
ConMed, 2022 WL 2387802, at *35; accord Akorn, Inc., 2018 WL 4719347, at
*91.
87
and Sarma “enjoy the benefits” of the rights provided in the Stockholders’ Agreement.
Accordingly, and as explained below, I find the Designation Condition excused and that
Andrades and Sarma step into the shoes of Employee Key Holders under the Stockholders’
Agreement.
***
Given the analysis above, I do not need to reach the implied covenant or Schnell. I
acknowledge, however, the significant issues raised under those arguments and facts
relevant thereto. For example, Plaintiffs proved by a preponderance of the evidence that
Project Wall-E was undertaken for the purpose of eviscerating the Key Holders’ liquidity
rights and the limited protections they had negotiated of those rights. Plaintiffs proved that
throughout LGE’s planning for D-Day, its intention was to fire all Key Holders for the
express purpose of terminating the Director-Designation Right and then terminating the
Stockholders’ Agreement altogether. Although the question of termination was disputed
at trial, the evidence overwhelmingly demonstrates that it was only a question of “when”
Zenith and LGE would terminate the Stockholders’ Agreement and not “if” they would.386
Having sat through the trial and assessed the credibility of each witness carefully, I
conclude that at the time the LG-Affiliated Directors initiated D-Day, they had decided to
terminate the Stockholders’ Agreement sometime thereafter.387 And, after having
386
JX0505 at 1; see also supra n.207.
387
See supra n.207.
88
determined to launch D-Day (i.e., the “nuclear option”), LGE attempted to backfill
justifications for many of its termination decisions.388 The evidence demonstrates that
many of those justifications were pretextual and, indeed, did not apply to several of the
terminated executive-officer Key Holders. None of the reasons provided applied to
Andrades or Sarma.389
These facts are certainly uncomfortable. But they are also insufficient to find a
breach of the implied covenant, at least as it relates to the executive-officer Key Holders.
I have already found a breach of the Stockholders’ Agreement’s express terms as to
Andrades and Sarma. Thus, I need not address the implied covenant as to them. For the
sake of completeness, however, I briefly address the implied covenant arguments to the
extent they concern the Board’s terminations of the executive-officer Key Holders.
When applying the implied covenant, in its “gap filler” capacity, Delaware courts
“first must engage in the process of contract construction to determine whether there is a
gap that needs to be filled.”390 Indeed “the implied covenant of good faith and fair dealing
is recognized only where a contract is silent as to the issue in dispute.”391 In making this
388
See, e.g., JX0402 at 2 (“I believe the key decision we made today was who we
will be terminating, and we need to back up our rationale for such termination.” “Set our
direction toward termination of all key share holders.”).
389
See JX0651 331:20–332:9 (Edward Lee).
390
Allen v. El Paso Pipeline GP Co., 113 A.3d 167, 183 (Del. Ch. 2014) (citations
omitted), aff’d, 2015 WL 803053 (Del. Feb. 26, 2015).
391
AQSR India Priv., Ltd. v. Bureau Veritas Hldg., Inc., 2009 WL 1707910, at *11
(Del. Ch. June 16, 2009).
89
determination, courts must assess “whether the language of the contract expressly covers a
particular issue, in which case the implied covenant will not apply, or whether the contract
is silent on the subject, revealing a gap that the implied covenant might fill.”392
Even “[w]here the contract is silent, ‘[a]n interpreting court cannot use an implied
covenant to re-write the agreement between the parties, and should be most chary about
implying a contractual protection when the contract could easily have been drafted to
expressly provide for it.’”393 “[T]he implied covenant will not serve as a means to provide
contractual protections that parties ‘failed to secure for themselves at the bargaining
table.’”394 It “only applies to developments that could not be anticipated, not developments
that the parties simply failed to consider.”395
In some instances, a contract may indeed be silent as to a term, but only because the
parties negotiated over the matter and determined to reject the relevant term or otherwise
not address the matter in the agreement. “The most obvious reason a term would not appear
in the parties’ express agreement is that the parties simply rejected that term ex ante when
392
Allen, 113 A.3d at 183.
393
Oxbow Carbon & Mins. Hldg., Inc. v. Crestview-Oxbow Acq., LLC, 202 A.3d
507 (Del. 2019).
S’holder Representative Serv. LLC v. Albertsons Companies, Inc., 2021 WL
3942311455, at *8 (Del. Ch. June 7, 2021).
395
Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010).
90
they articulated their contractual rights and obligations.”396 This might arise where “the
parties . . . considered the term, and perhaps [after] some give-and-take dickering, the
parties agreed the term should not be made part of their agreement. They thus rejected the
term by purposefully omitting the term.”397
This is the case here, at least as to the executive-officer Key Holders. The parties
bargaining history on this point is telling.398 The bargaining history indicates that the
parties considered employment contract terms and sought a CEO termination veto right.399
And, after LGE rejected the CEO termination veto right, Beotra exchanged emails with
Hahm. One such email explained Beotra’s understanding that “LG controls the board and
hence all the decisions that need simple board majority - CEO hire/fire/comp, operating
plan, LG funding, additional debt etc.”400 Beotra reiterated this understanding in a
subsequent email and expressly identified that LGE might seek to terminate the CEO for a
variety of reasons. Beotra stated that LGE may seek to terminate C-level officers if there
396
Allen v. El Paso Pipeline GP Co., L.L.C., 2014 WL 2819005, at *11 (Del. Ch.
June 20, 2014).
397
Id. (alteration and omission in original).
398
Nationwide Emerging Managers, LLC v. Northpointe Hldg., LLC, 112 A.3d 878,
897–98 (Del. 2015) (“By necessity, any argument by a party that another party breached
an implied term invites consideration of evidence of the parties’ bargaining history.”).
399
See JX0012 at 2; JX0014 at 6; JX0020 at 41.
400
JX0022.
91
is a “[f]alling out on strategy with key employees - In case of any disagreement with
CEO/key employees LG has the right to prevail.”401
This Court is “most chary” about implying terms in an agreement, and doubly-so
when the concept was raised and discarded in the course of negotiations. It cannot be said
that this is a circumstance in which no party contemplated the potential need for
employment contracts or the possibility that the LG-dominated Board could terminate the
executive-officer Key Holders to further LGE’s interests in the absence of such contracts.
Indeed, the record shows that this concept was specifically raised during the course of
negotiations, including during the course of negotiations over the right of the LG-
dominated Board to effectuate such terminations unilaterally. Having anticipated these
points and having determined not to secure terms at the bargaining table to address them,
the executive-officer Key Holders can find no refuge now in the implied covenant’s gap-
filling function.
“Beyond its gap filling function, the implied covenant applies ‘when a party to the
contract is given discretion to act as to a certain subject and it is argued that the discretion
has been used in a way that is impliedly proscribed by the contract’s express terms.’” 402
Here, contrary to being impliedly proscribed by the Stockholders’ Agreement’s express
401
JX0023 at 1–3. Read in the context of the Beotra’s ongoing conversation with
Hahm, it is evident that the parties were referring to “C-level officers” and Beotra’s
references to the CEO were illustrative. See id. at 4.
402
SerVaas v. Ford Smart Mobility LLC, 2021 WL 3779559, at *10 (Del. Ch. Aug.
25, 2021) (quoting Oxbow Carbon, 202 A.3d at 504 n.93).
92
terms, the Board terminated the executive-officer Key Holders pursuant to an express
contract term. “The Supreme Court has maintained that a contractual gap is not necessary
to state a claim for breach of the implied warranty where one party acted arbitrarily or
unreasonably, thereby frustrating the fruits of the bargain[.]”403 But “[w]hen determining
the parties’ reasonable expectations, the court analyzes ‘whether the parties would have
bargained for a contractual term proscribing the conduct that allegedly violated the implied
covenant had they foreseen the circumstances under which the conduct arose.’”404
Here, again, the analysis is rerouted to the parties’ understanding at the time of
contracting. As the above analysis of the “gap-filling” function demonstrates, the Key
Holders understood that the Board could unilaterally terminate the executive-officer Key
Holders. Given this understanding, Plaintiffs fail to show by a preponderance of the
evidence that the parties would have agreed to meaningful limitations on the Board’s ability
to terminate the executive-officer Key Holders.405
403
Haney v. Blackhawk Network Hldg., Inc., 2016 WL 769595, at *8 (Del. Ch. Feb.
26, 2016) (internal quotation marks omitted). Delaware courts interpret the “fruits of the
bargain” language as based on the parties’ reasonable expectations. Baldwin v. New Wood
Res. LLC, 283 A.3d 1099, 1118 (Del. 2022) (“The party asserting the implied covenant has
the burden of proving ‘that the other party has acted arbitrarily or unreasonably, thereby
frustrating the fruits of the bargain that the asserting party reasonably expected.’”).
404
Baldwin, 283 A.3d at 1118.
405
The parties spilled significant ink on Plaintiffs’ arguments concerning asserted
limitations on termination of at-will employment. The Stockholders’ Agreement, however,
is a separate agreement and subject to implied covenant analysis under its unique terms
and negotiating history. Even setting this aside, I note that Plaintiffs’ arguments here focus
largely on the asserted pretextual nature of Exhibit A (i.e., the purported rationale for the
executive-officer Key Holders’ terminations). Unlike the cases Plaintiffs cite, this is not a
93
Schnell is also unavailing. Plaintiffs raise this argument “counterfactually” if there
“were no breach of contract.”406 Given this, I note only that “our ‘case law is indicative of
a healthy inclination on the part of the judiciary to employ the Schnell principle of legal
but inequitable’ only sparingly[.]”407 And indeed, “[a]lmost all of the post-Schnell
decisions involved situations where boards of directors deliberately employed various legal
strategies either to frustrate or completely disenfranchise a shareholder vote.”408
Defendants argue that the situations described in the foregoing sentence from Coster are
very different from circumstances presented in this case. Having concluded that Alphonso
breached the Stockholders’ Agreement, I need not delve into this complex area of our law
further in what would likely be dicta, at best, given the counterfactual posture in which
Plaintiffs raise their argument.
circumstance in which an employer is claimed to have denied compensation by pretextually
designating the at-will employee’s termination as “for cause.” See Plaintiffs’ Post-Trial
Opening Br. at 53 (citing Sheehan v. AssuredPartners, Inc., 2020 WL 2838575 (Del. Ch.
May 29, 2020); Smith v. Scott, 2021 WL 1592463 (Del. Ch. Apr. 23, 2021)). Indeed, I
question whether the Board needed to state a reason for terminating the executive Key
Holders at all. The pretextual nature of much of Exhibit A unquestionably impairs my
credibility assessment of the LGE witnesses, but I do not conclude that it triggers any of
the very limited at-will employment termination exceptions identified in Pressman. See
Lord v. Souder, 748 A.2d 393, 400 (Del. 2000) (discussing E.I. DuPont de Nemours & Co.
v. Pressman, 679 A.2d 436 (Del. 1996)).
406
Plaintiffs’ Post-Trial Opening Br. at 54.
407
In re WeWork Litig., 250 A.3d 976, 996 (Del. Ch. 2020).
408
Coster v. UIP Companies, Inc., 300 A.3d 656, 666–67 (Del. 2023) (quoting
Stroud v. Grace, 606 A.2d 75, 91 (Del. 1992)).
94
E. Remedy
Alphonso breached the reasonable efforts obligation in Section 12.1. This breach
by non-performance excuses the Designation Condition. With the Designation Condition
excused, the December Consent is rendered invalid.
1. The Designation Condition Is Excused
When considering the appropriate remedy in circumstances of breach like this,
“Delaware has adopted the framework set forth in the Restatement (Second) of
Contracts.”409 The Restatement provides that “[w]here a party’s breach by non-
performance contributes materially to the non-occurrence of a condition of one of his
duties, the non-occurrence is excused.”410 This is sometimes referred to as the Prevention
Doctrine.411 But “the prevention doctrine ‘only applies . . . where the lack of cooperation
constitutes a breach . . . of a duty imposed by the terms of the agreement itself or of a duty
imposed by a term supplied by the court.’”412
Plaintiffs have demonstrated by a preponderance of the evidence that the obligation
imposed on Alphonso by Section 12.1 is the sort requiring some affirmative action and
409
In re Anthem-Cigna Merger Litig., 2020 WL 5106556, at *90; see also Williams
Companies, Inc., 159 A.3d at 273 (citing Restatement (Second) of Contracts § 245 cmt. b
(1981)).
410
Restatement (Second) of Contracts § 245 (1981).
411
See Snow Phipps Grp., LLC, 2021 WL 1714202, at *52.
412
Id. at *53 n.576 (omissions in original) (quoting Restatement (Second) of
Contracts § 245 cmt. a (1981)).
95
cooperation, the failure of which can give rise to a breach of contract. Plaintiffs also
showed that Alphonso breached its contract obligation under Section 12.1. Specifically,
Alphonso breached by failing to use reasonable efforts to ensure the effectiveness, and
Andrades and Sarma’s continued enjoyment of, the benefit of the Director-Designation
Right. This is a breach by non-performance.
The question turns to whether the breach “materially contributed” to the non-
occurrence of what Defendants serially characterize as a “condition precedent.” 413 “A
breach ‘contributed materially’ to the non-occurrence of a condition if the conduct made
satisfaction of the condition less likely.”414
Here, the condition required that at least one Key Holder remain an Alphonso officer
or employee.415 It is not disputed that Sexton, acting for Alphonso and thus owing
Andrades and Sarma the obligation to use reasonable efforts, terminated them. In doing
so, Sexton also terminated the Director-Designation Right.416 At the very least, this made
413
See, e.g., Post-Trial Oral Argument Tr. 167:16, 169:23–170:5.
414
Snow Phipps Grp., LLC, 2021 WL 1714202, at *52 (quoting In re Anthem-Cigna
Merger Litig., 2020 WL 5106556, at *91).
415
JX0050 § 10.2(b).
416
To the extent it is relevant, I recognize the “one of his duties” language in the
Restatement’s articulation of the Prevention Doctrine. Here, Alphonso has an affirmative
duty under Section 12.1 to use reasonable efforts to ensure that the rights granted in the
Stockholders’ Agreement are effective. This includes Andrades and Sarma’s Director-
Designation Right. And indeed, Defendants have expressly asserted that Section 12.1’s
second sentence relates to the Common Directors and rights related thereto. By
implication, their argument required Alphonso to use its reasonable efforts to “ensure” the
effectiveness of the Director-Designation Right. But the Director-Designation Right is
96
the satisfaction of the condition “less likely,” but, practically speaking, it eliminated the
right in its entirety. Although Sexton and Alphonso breached their obligations, neither has
argued that Sexton’s acts for Alphonso did not materially contribute to the non-occurrence
of the condition.417 And indeed, Sexton’s acts were the foreseeable and the “but for” cause
of the Designation Condition’s non-occurrence. Deliberate acts to sink a ship, while not
necessary, can be “sufficient to warrant application of the prevention doctrine.”418
Here, it is probable that Sexton acted with the deliberate intention of “sinking the
ship.” But even if he did not, “the relevant question is limited to whether a party’s breach
‘contribute[d] materially to the non-occurrence of a condition.’”419 Thus, it does not
require “the court to analyze the subjective intent of the breaching party when conducting
conditioned on the non-occurrence of Andrades and Sarma’s employment termination. It
follows that the contractual duty to use reasonable efforts to ensure the Director-
Designation Right is also conditioned on the non-occurrence of the employment
terminations. Thus, by failing to use reasonable efforts, Alphonso materially contributed
to the non-occurrence of the condition on which one of its duties is predicated.
417
Once the breach has been shown, the burden shifts to the breaching party to show
that the breach did not “materially contribute” to the failure or non-occurrence of the
condition. Here, this is a burden that neither Alphonso nor Sexton have carried. See
Williams Companies, Inc., 159 A.3d at 273 (“[O]nce a breach of a covenant is established,
the burden is on the breaching party to show that the breach did not materially contribute
to the failure of the transaction.”) (citing Restatement (Second) of Contracts § 245 cmt. b
(1981)); Snow Phipps Grp., LLC, 2021 WL 1714202, at *52 (quoting In re Anthem-Cigna
Merger Litig., 2020 WL 5106556, at *91).
418
Snow Phipps Grp., LLC, 2021 WL 1714202, at *54.
419
Id. at *53 (quoting Restatement (Second) of Contracts § 245 (1981)).
97
this inquiry. Nor have cases applying th[e prevention] doctrine required the court to
undertake such an analysis.”420
Defendants argued this issue at the post-trial hearing.421 Contrary to the relevant
standard, Defendants asserted that by terminating the Key Holders, “[i]t’s not as though
anything that defendants have done make that condition incapable of being satisfied.” 422
Thus, “this isn’t a circumstance which the prevention doctrine contemplates where
satisfaction of a condition has been rendered impossible by the defendants’ contract.”423
But as I have already noted, neither Delaware nor the Restatement look to whether a party’s
acts caused the impossibility of the condition. Instead, they look to whether the party’s
non-performance made the satisfaction of a condition “less likely.”424
Here, Plaintiffs have satisfied this requirement and Defendants have not shown
otherwise. These findings excuse the Designation Condition. Accordingly, I read the
Director-Designation Right in Section 10.2(b) of the Stockholders’ Agreement as no longer
subject to the Designation Condition. As it would have been had Alphonso performed its
Section 12.1 obligation, Andrades and Sarma step back into the shoes of Employee Key
420
Id.
421
Post-Trial Oral Argument Tr. 169:23–170:14.
422
Id.
423
Id.
424
Snow Phipps Grp., LLC, 2021 WL 1714202, at *52 (quoting In re Anthem-Cigna
Merger Litig., 2020 WL 5106556, at *91).
98
Holders, and the Employee Key Holder Majority is thus the majority holder of Alphonso’s
Capital Stock held by Andrades and Sarma.
Although neither party has raised the issue, I acknowledge that there is an exception
to the prevention doctrine where a party assumed the risk of prevention. That is, “‘[t]here
is no prevention claim where the contract, in effect, authorizes prevention’ by allocating
the risk of the condition’s nonoccurrence.”425 This exception “generally applies in two
situations. The first is when a contract ‘uses explicit language to authorize prevention.’
Courts have recognized explicit authorizing language including ‘for any reasons
whatsoever,’ ‘regardless of the circumstances giving rise to such condition,’ or ‘nothing
[therein] requires’ the agreed-upon condition precedent be consummated.”426 This
application is not relevant here. “The second [application arises] ‘when contract terms
condition the consummation of a transaction upon the approval of the other party, or subject
one party to the discretion, satisfaction, or decision of the other party or a third-party.”427
Although this latter application might seem more apt for the present facts, it is also
unavailing. As noted above,428 the extent to which the Stockholders’ Agreement can be
read as conferring any right on Alphonso’s CEO to terminate employees is tempered by
425
Murphy Marine Servs. of Delaware, Inc. v. GT USA Wilmington, LLC, 2022 WL
4296495, at *13 (Del. Ch. Sept. 19, 2022) (footnote omitted).
426
Id. (alteration in original) (footnotes omitted) (quotation marks omitted).
427
Id.428
Supra Section II.C.3.
99
the requirement to use reasonable efforts to ensure the rights granted therein. In other
words, the Stockholders’ Agreement never gave the CEO unfettered discretion. It included
an express limit on the exercise of the termination discretion to the extent such exercise
could be seen to interfere with the other rights granted to the parties in the Stockholder
Agreement. Accordingly, neither Andrades nor Sarma can be seen to have assumed the
risk of prevention.
2. The December Consent Is Invalid
After Zenith believed the Key Holders to be properly terminated on December 16,
2022, it executed the December Consent.429 The December Consent stated the following:
“pursuant to Section 10.2(c) and Section 10.3(a)(ii) of the Stockholders’ Agreement,
Directors Ashish Chordia, Raghu Kodige, and Lampros Kalampoukas are removed from
the Board.”430
Section 10.2(c) provides: “Any vacant director seats not subject to designation in
accordance with Subsection 10.2(a) or Subsection 10.2(b) above shall be appointed by the
holders of Capital Stock entitled to vote in accordance with applicable law and the Restated
Certificate.”431
Section 10.3(a)(ii) provides:
Each director shall serve until his or her successor is elected and qualified or
until his or her earlier resignation or removal. Each Stockholder also agrees
429
See JX0563.
430
Id. at 2.
431
JX0050.
100
to vote, or cause to be voted, all Shares owned by such Stockholder, or over
which such Stockholder has voting control, from time to time and at all times,
in whatever manner as shall be necessary to ensure that: (a) no director
elected pursuant to Subsection 10.2(a) or (b) of this Agreement may be
removed from office unless . . . (ii) the Person(s) originally entitled to
designate or approve such director or occupy such Board seat pursuant to
Subsection 10.2(a) or (b) is no longer so entitled to designate or approve
such director[.]432
The validity of the December Consent thus depends on those entitled to appoint the
Common Directors under Section 10.2(b), being “no longer so entitled to designate or
approve such director[.]”433 Since I have found that the Designation Condition was
excused and Andrades and Sarma stepped into the shoes of acting Employee Key Holders,
it follows that the requirements of Section 10.3(a)(ii) were not satisfied and the December
Consent must be deemed invalid.
I recognize the impracticality of returning Chordia, Kodige, and Kalampoukas to
the Board since their terms have already expired.434 But the Director-Designation Right is
a continuing right under the Stockholders’ Agreement. Accordingly, I find it appropriate
for the majority holder of Alphonso’s Capital Stock presently held by Andrades and Sarma
to select the directors to fill the seats properly allocable to the Common Directors.
Defendants have argued that it would be improper to return certain Key Holders to
the Board since they now work for a competitor. But even if this were true, it is not clear
432
Id. (emphasis added).
433
JX0050 § 10.3(a)(ii).
434
Indeed, the parties debated at significant length the question of appropriate and
practical remedies in the event of a finding of breach.
101
why this requires precluding their membership on the Board, should Andrades and Sarma
so choose. Our high court has explained that there is “‘no dilution’ of the duty of loyalty
when a director ‘holds dual or multiple’ fiduciary obligations.”435 If they were to act
inconsistent with their fiduciary duties, they would expose themselves to fairly obvious
civil liability consequences.
That being said, I strongly encourage Andrades and Sarma to give consideration to
whom they will select as Common Directors—taking into account the events described
herein.
III. CONCLUSION
The foregoing compels judgment in Plaintiffs’ favor. Andrades and Sarma step into
the shoes of Employee Key Holders under the Stockholders’ Agreement, the Director-
Designation Right remains operative, and the Designation Condition is excused. The
parties are directed to confer on a form of implementing order that includes a process for
Andrades and Sarma to designate Common Directors and to file such proposed form of
order within three business days.
435
See Frederick Hsu Living Tr. v. ODN Holding Corp., 2017 WL 1437308, at *28
(Del. Ch. Apr. 14, 2017), as corrected (Apr. 24, 2017). (“‘If the interests of the
beneficiaries to whom the dual fiduciary owes duties are aligned, then there is no conflict.’
But if the interests of the beneficiaries diverge, the fiduciary faces an inherent conflict of
interest. ‘There is no ‘safe harbor’ for such divided loyalties in Delaware.’”) (citations
omitted).
102