Andrew Dolce v. WTS International, LLC

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
SHELDON K. RENNIE LEONARD L. WILLIAMS JUSTICE CENTER
JUDGE 500 NORTH KING STREET, SUITE 10400
WILMINGTON, DE 19801
Date Submitted: February 16, 2024
Date Decided: February 20, 2024
Kevin R. Shannon Christopher Viceconte
Christopher N. Kelly GIBBONS P.C.
Hayden J. Driscoll 300 Delaware Avenue
POTTER ANDERSON & CORROON LLP Suite 1015
Hercules Plaza, 6th Floor Wilmington, Delaware 19801
1313 N. Market Street
Wilmington, Delaware 19801
RE: Andrew Dolce v. WTS International, LLC,
C.A. No. 2023-0789-SKR
Defendant’s Motion to Dismiss
Dear Counsel:
This letter decision resolves Defendant’s Motion to Dismiss. For the reasons
explained below, this action is stayed pending completion of the Asset Purchase
Agreement’s alternative dispute resolution process.
I. FACTUAL BACKGROUND1
Sellers were engaged in the business of providing design, consulting and
outsourced management services (the “Meet Hospitality Business Unit” or
“Business”).2 On December 20, 2021, they sold the Business to WTS International,
LLC (“WTS” or “Defendant”) by entering into an Asset Purchase Agreement (the
“APA”).3 As consideration, Sellers received cash and potential earn-out payments.4
Andrew Dolce served as the Seller Representative (“Dolce” or “Plaintiff”).5
A. The APA
Section 1.6 of the APA provides for earn-out payments based on the Business’
2022 and 2023 EBITDA. Exhibit F to the APA defines “EBITDA” and sets out the
“methodology and rules” to calculate it.6 In relevant part, Exhibit F requires that
WTS maintain standalone Profit and Loss (“P&L”) statements for the Meet
1
The facts are drawn from the well-pleaded allegations in the Verified Amended Complaint, and
documents incorporated by reference. Verified Amended Complaint (“AC”) (D.I. 9). Additional
facts are drawn from documents outside the Amended Complaint in consideration of Defendant’s
Motion to Dismiss under Court of Chancery Rule 12(b)(1). See Wildfire Prods., L.P. v. Team
Lemieux LLC, 2022 WL 2342335, at *3 (Del. Ch. June 29, 2022).
2
AC ¶¶ 2, 14; Transmittal Affidavit of Hayden J. Driscoll to Defendant’s Opening Brief in Support
of its Motion to Dismiss Plaintiff’s Verified Amended Complaint (“Aff. Driscoll”) (D.I. 15), Ex.
1 Recitals (“APA”).
3
AC ¶ 2; see APA.
4
AC ¶¶ 16-17. Sellers are Meet Hospitality Services LLC (“Meet Hospitality”), Meet at Chrystie,
LLC (“Meet at Chrystie”), Dole Family Limited Partnership (“Dolce Family”), Sarah Schiller,
Paul Dolce and Andrew Dolce. APA Recitals.
5
APA Recitals.
6
Id. §§ 1.6(a)(i) and (b)(i); see id., Ex. F.
2
Hospitality Business Unit in accordance with generally accepted accounting
principles; identifies items constituting revenue; and prescribes the methodology for
calculating expenses.7 WTS and Dolce were also to prepare mutually agreeable
operating budgets for the Meet Hospitality Business Unit.8
Section 1.6(a) requires WTS to submit its EBITDA Calculation based on the
methodology and rules set forth in Exhibit F.9 Dolce may object to the calculation:
by notifying [WTS] in writing of each objection and a reasonably
detailed description of the basis therefor (but only on the basis that the
[…] EBITDA Calculation contained arithmetic errors or was not
prepared in accordance with [the APA] and the methodology and rules
set forth in Exhibit F).10
If the parties fail to resolve the disputes, “either [Dolce] or [WTS] may submit
any remaining disputes, and only such remaining disputes, to the Accountants for
review and resolution.”11 The resolution by the Accountants “shall be within the
range of dispute between [Dolce] and [WTS] and shall be set forth in a written
report.”12 The resolution shall “be final and binding upon the parties.”13
7
See id., Ex. F.
8
Id.
9
Id. §§ 1.6(a)(i) and (b)(i).
10
Id. §§ 1.6(a)(ii) and (b)(ii).
11
Id. “Accountants” is defined as “FTI Consulting Inc. or, if such firm is not available for such
assignment, such other firm upon which [WTS], on the one hand, and [Dolce], on the other hand,
shall reasonably agree.” Id. § 1.5(a)(ii).
12
Id. §§ 1.6(a)(ii) and (b)(ii).
13
Id.
3
Section 1.6(e)(i) also required WTS to provide Sellers with “unaudited
quarterly financial statements for the Meet Hospitality Business Unit, as and when
prepared in the ordinary course of business.”14
B. The Notice
On multiple occasions between April 2022 and October 2022, Sellers
requested preliminary Profit and Loss (“P&L”) statements.15 WTS provided them,
but according to Dolce, denied the meeting requests due to WTS’ lack of
availability.16 On April 17, 2023, WTS submitted an EBITDA calculation for 2022
that was below the required threshold to entitle Sellers to an earn-out payment.17 On
May 4, 2023, Dolce objected to the calculation (the “Notice”).18 In the Notice, Dolce
argued that WTS improperly allocated general charges of WTS to the Meet
Hospitality Business Unit.19 As support, WTS identified the absence of any
corporate allocations in WTS’ preliminary P&L statements.20 It also identified two
provisions in Section 5 of Exhibit F.21 Bullet point one of Section 5 requires that
14
Id. § 1.6(e)(i).
15
AC ¶ 33.
16
Id. ¶¶ 33, 34.
17
Id. ¶¶ 28, 29.
18
Id. ¶ 32.
19
Aff. Driscoll, Ex. 4 (“Notice”) at 1.
20
Id. at 2.
21
Id.
4
expenses include “expenses incurred by WTS that are directly attributable” to the
Meet Hospitality Business.22 Bullet point four provides that:
[e]xpenses related to any other employees or contractors shared
between the Meet Hospitality Business Unit and [WTS] will be
allocated between the Meet Hospitality Business Unit and [WTS] based
on the relative proportion of work done for each entity as reasonably
agreed between [WTS] and [Dolce] in good faith in writing (including
via email). Such allocations shall be subject to periodic review and may
be modified as reasonably agreed between [WTS] and [Dolce] in good
faith in writing (including via email).23
WTS argued that under bullet point one, the general charges of WTS are not
“directly attributable” to the Meet Hospitality Business Unit, and thus should have
been excluded.24 Likewise, under bullet point four, any expenses for general
corporate charges shared between the Meet Hospitality Business Unit should have
been reasonably agreed by the parties in good faith, in writing and subject to periodic
review – but allegedly were not.25 Dolce claimed that these “unilateral[]” cost
allocations that were done “in hindsight” by WTS caused an “artificial EBITDA
reduction” and prevented the “unit leader of the Meet Hospitality business” from
managing the business differently to reduce costs.26
22
APA, Ex. F § 5.
23
Id.
24
Notice at 2.
25
Id.
26
Id.; see also AC ¶ 36.
5
Dolce made two additional objections. It said that WTS failed to provide
quarterly financial statements, an operating budget and forecasts.27 It also identified
purported inconsistencies in the allocation items in WTS’ “Acquisition Income
Statement.”28 To resolve these disputes, Dolce advised that the parties engage in
discussions pursuant to Section 1.6(a)(ii)’s resolution process.29
Following discussions among the parties, on May 18, 2023, WTS submitted
a revised EBITDA calculation, concluding (again) that Sellers were entitled to no
earn-out payment.30 Dolce contends that WTS made its revisions for the improper
purpose of reducing the earn-out payments in breach of the APA.31 On June 2, 2023,
Dolce notified the designated Accountants that their services may be required.32
27
Notice at 1-2.
28
Id. at 2.
29
Id. at 3.
30
APA ¶ 39; Ex. 5 (Acquisition Income Statement from January 2022 to December 2022 –
05.15.2023 (Revised EBITDA Calculation)).
31
APA § 1.6(f)(ii) states that “[WTS] agrees that, except as required by Law or GAAP, as
otherwise permitted or contemplated by this Agreement or as consented to in writing by Seller,
during the EBITDA Period, it will not take any of the following actions: …
(ii) take any other action, the primary purpose of which is to reduce any of the
Contingent Payments.”
32
Transmittal Affidavit of Christopher Viceconte in Support of Plaintiff’s Answering Brief in
Opposition to Defendant’s Motion to Dismiss Plaintiff’s Verified Amended Complaint (D.I. 21),
Ex. A.
6
C. This Litigation
On June 22, 2023, WTS submitted its 2023 budget, which Dolce argues is
based on improper allocations.33 On August 2, 2023, Dolce initiated this action by
filing a Verified Complaint, which it amended on September 11, 2023. The
Amended Complaint raises breach of contract and implied covenant of good faith
and fair dealing claims. WTS moves to dismiss the complaint in favor of Section
1.6(a) of the APA. The Court held oral argument on February 16, 2024 and took the
motion under advisement.
II. STANDARD OF REVIEW34
A motion to dismiss based on an alternative dispute resolution provision goes
to the court’s subject matter jurisdiction and is properly reviewed under Court of
Chancery Rule 12(b)(1).35 The burden is on the non-movant to establish that
jurisdiction exists.36 “In deciding a 12(b)(1) motion to dismiss, the court may
consider documents outside the complaint.”37
33
AC ¶ 42.
34
The Court is resolving the motion under Court of Chancery Rule 12(b)(1), and therefore does
not address Count II under the 12(b)(6) standard.
35
Rummel Klepper & Kahl, LLP v. Delaware River & Bay Auth., 2022 WL 29831, at *4 (Del. Ch.
Jan. 3, 2022); see also Gandhi-Kapoor v. Hone Cap. LLC, 2023 WL 8480970, at *5 (Del. Ch.
Nov. 22, 2023), as corrected (Dec. 4, 2023), motion to certify appeal granted sub nom. Gandhi-
kapoor v. Hone Cap. LLC & Csc Upshot Ventures I, L.P (Del. Ch. 2023) (“By agreeing to litigate
a dispute in a particular forum, parties can commit among themselves not to ask a court to exercise
the subject matter jurisdiction it possesses.”).
36
Wildfire Prods., L.P. v. Team Lemieux LLC, 2022 WL 2342335, at *3 (Del. Ch. June 29, 2022).
37
Id. (citation omitted).
7
III. DISCUSSION
Dolce’s objections relate to issues the parties delegated to a third-party
accounting firm for resolution. Dolce’s allegations, however, suggest that WTS has
not provided it with the required information under the APA. Dolce will have the
opportunity to submit revised objections to the Accountants after WTS provides the
required information. The Court will revisit the claims in this action after the
Accountants’ determination.
As an initial matter, the APA limits the grounds upon which Dolce may object
to the calculation of EBITDA. Section 1.6(a) provides that any objections as to the
EBITDA calculation must be limited on the basis of either (a) “arithmetic errors” or
(b) that the calculation “was not prepared in accordance with [the APA] and the
methodology and rules set forth in Exhibit F.”38 If any component of the EBITDA
calculation is “not subject to an objection,” i.e., not subject to the grounds listed
above, that component of the calculation is final and binding. 39 Only then may the
parties “submit any remaining disputes, and only such remaining disputes, to the
Accountants for review and resolution.”40 The Accountants, therefore, have a
38
APA §§ 1.6(a)(ii) and (b)(ii).
39
Id.
40
Id.
8
limited role. The grounds upon which WTS may dispute the calculation is also
narrow.
On that limited basis, Dolce objected to (1) the allocation of general charges
of WTS to the Business; (2) apparent inconsistencies in the Acquisition Income
Statement and (3) missing information WTS was required to produce.41 Under
category (1), whether the general charges of WTS was proper or not falls under the
provisions of Exhibit F, and thus, is a question for the Accountants.42 Similarly, the
line-item objections to the entries in the Acquisition Income Statement, which WTS
responded to on May 18, 2023, is a question for resolution by the Accountants. Both
categories of objections are the sort of fact-intensive and technical questions that fall
within the ambit of the expertise of an accounting expert, and the parties agreed to
delegate under Section 1.6(a).43
41
See Notice.
42
To the extent Dolce argues that the allocation of general charges can be resolved on no other
provision but bullet point four of Section 5, the Accountants can and should be able to use their
accounting discretion to recognize that allocation or not based on WTS’ alleged failure to allocate
the relative proportion of work for each entity. Other provisions of Exhibit F may also moot this
question, and so weeding into the factual details of whether or not the general charges were due to
work by a shared employee or contractor, and what, if any, efforts WTS took to agree to the
proportion of work by the employee or contractor for each entity may be unnecessary depending
on the Accountants’ application of other provisions in Exhibit F. If this is ultimately beyond the
scope of the Accountants’ expertise, the parties’ should include those arguments before the
Accountants in their submissions.
43
See Stone v. Nationstar Mortg. LLC, 2020 WL 4037337, at *8 (Del. Ch. July 6, 2020) (finding
that disputes involving accounting methodology issues fall squarely within an accounting firm's
expertise); LDC Parent, LLC v. Essential Utilities, Inc., 2021 WL 1884847, at *5 (Del. Super.
Apr. 28, 2021) (finding question of what is a “Capital Expenditure” in purchase agreement to be
dispute for accountant to resolve); ArchKey Intermediate Holdings Inc. v. Mona, 302 A.3d 975,
9
In a letter to the Court, and at oral argument, Dolce raised AQSR India Priv.,
Ltd. v. Bureau Veritas Holdings, Inc. to the Court’s attention.44 In AQSR, the parties
re-negotiated the acquisition of a company in India, and through an asset purchase
agreement, they structured a process for the transfer and acquisition of certain
customer contracts (the “Review Process”).45 The Review Process entailed a back-
and-forth, in which the sellers and buyers reviewed the company’s customer
contracts for the buyers to purchase based on certain technical criteria; the buyers
were required to submit notices on a weekly basis and a final closing statement that
provided an accounting of the purchased contracts and final purchase price.46 Any
disputes as to the qualifying criteria for, or purchase price of, a contract went to a
“referee,” who was an expert from the relevant industrial board (the “Referee
Procedure”).47
The asset purchase agreement, however, never closed because of the buyers’
non-cooperation with the Review Process.48 The buyers did not cooperate in
transferring the contracts, nor did they submit the weekly notices or final closing
997 (Del. Ch. 2023) (providing that accountant must resolve disputes regarding adjusted post-
closing balance sheet’s accounting methodology).
44
2009 WL 1707910, at *1 (Del. Ch. June 16, 2009).
45
Id. at *5.
46
Id.
47
Id.
48
Id. at *6.
10
statement.49 They also changed the criteria for the contracts halfway through the
Review Process.50 Because the transaction did not close and due to the resulting
uncertainty, the company lost nearly all its key employees and customers.51
The court denied buyers’ motion for judgment on the pleadings to require the
sellers to participate in the Referee Procedure. It found that before the referee could
resolve the technical issues under its expertise, the referree would “first need to wade
through a mire of procedural and general factual issues,” and that the referee was not
“well-positioned” to do so.52 The court reserved the right to award a form of
modified Referee Procedure as an ultimate remedy, but believed that before it could
do so, a development of the factual record before the court was necessary to
determine whether and how to “equitably salvage” the process.53
The instant case bears similarities to AQSR, but they are superficial and do not
warrant the factual development Dolce seeks before submission of the accounting
disputes can go to the Accountants. To be clear, Dolce raises allegations that WTS
did not fully cooperate in the process outlined in Exhibit F of the APA, nor provide
the information Dolce should have received under the APA. WTS has not provided
49
Id. at *5.
50
Id.
51
Id. at *6.
52
Id. at *7.
53
Id. at *8.
11
a 2022 budget, unaudited quarterly financial statements, or timely profit and loss
statements.
Nonetheless, failure to provide that information does not require a bypass of
the parties’ agreement to submit disputes as to the EBITDA calculation for expert
resolution. The Court is not convinced that the failure to provide this information in
real-time had an adverse effect that cannot now be cured by allowing Dolce to submit
a revised objection based on the new information it receives, and for which the
Accountants can resolve. Dolce’s objections, as explained above, primarily relate
to whether WTS improperly allocated general charges of WTS to the Meet
Hospitality Business Unit, as well as line-item objections to the Acquisition Income
Statement.
Dolce argues that the failure of WTS to engage in good faith in the process
outlined in Exhibit F resulted in an “artificial EBITDA reduction.”54 But any
information rights or access to personnel that the APA provided Sellers did not come
in parallel with the right to manage the Business.55 Based on Dolce’s allegations,
and in contrast to those in AQSR, the Court finds that, with production of the missing
54
Notice at 2; AC ¶ 36.
55
See APA § 2(f)(e)(i); id., Ex. F §§ 1 and 3; APA § 2(e)(ii) (WTS agreed to provide Sellers “with
reasonable access during normal business hours to the responsible personnel of the Meet
Hospitality Business Unit for a discussion regarding the financial condition of the Meet Hospitality
Business Unit and [WTS], it being understood that Seller Equityholders will not interfere in any
regard with the day to day operation of the Meet Hospitality Business Unit.”) (emphasis added).
12
information and opportunity to submit revised objections, the parties may be able to
“tee[] up a narrow, technical question” under the purview of the Accountants.56
Allowing the contractually designated resolution process to proceed after
Dolce has the opportunity to submit a revised objection with the information that
was purportedly missing will thus help to resolve the accounting issues first. The
accounting determination will better inform the determination of this Court as to
whether Dolce states a valid claim for breach of Section 1.6(f)(ii) and breach of the
implied covenant of good faith and fair dealing for WTS’ alleged refusal to meet
with Sellers and engage in good faith negotiations.
56
AQSR India Priv., Ltd., 2009 WL 1707910, at *2.
13
IV. CONCLUSION
To the extent that WTS has failed to provide a 2022 budget, standalone profit
and loss statements, and unaudited quarterly financial statements, WTS must either
produce those documents or show that they are not necessary for Dolce to submit its
objections to the Accountants. Dolce will then have the opportunity to submit
revised objections to the Accountants for final and binding resolution of the
EBITDA calculation.
Upon these conditions, this action is stayed in favor of the APA’s alternative
resolution process. Once the Accountants have made their determination, the Court
will revisit the claims in this action.
IT IS SO ORDERED.
_______________________
Sheldon K. Rennie, Judge57
57
Sitting as a Vice Chancellor of the Court of Chancery of the State of Delaware by designation of the
Chief Justice of the Supreme Court of Delaware pursuant to In re Designation of Actions Filed
Pursuant to 8 Del. C. § 111 (Del. Feb. 23, 2023) (ORDER).
14