Delaware Court of Chancery Addresses Claims of Breach of Contractual and Fiduciary Duties Following Alleged Diverting of New Deals Depriving Rollover Equity Holders of Their Economic Rights
By Nastassia Merlino, NYU School of Law
The Delaware Court of Chancery recently refused to dismiss a rollover equity seller’s claim for breach of contract on the basis that the defendant’s act of operating a competing business may have constituted a breach of the implied covenant of good faith and fair dealing even though there was technically no breach of the underlying agreement. In MALT Family Trust v. 777 Partners LLC (Del. Ch. Nov. 13, 2023), the Court addressed several claims regarding a buyer’s alleged breach of contractual and fiduciary duties following its failure to provide rollover equity holders with the agreed-upon equity that was to be granted upon the achievement of specific milestones. According to the rollover equity holders, the buyer’s improper operation of a competing business impeded seller’s performance, which prevented seller from earning additional rollover equity.
The principal plaintiff is MALT, a discretionary trust, and the principal defendant is 777 Partners, a private investment firm. After ten months of negotiations, the parties entered into a stock purchase agreement (SPA) whereby the plaintiff was to sell all of its outstanding equity from two entities in the aviation industry to an affiliate of the defendant. In exchange, the plaintiff would receive cash and a 3% vested equity interest in a newly formed company named Phoenicia. The parties also entered into an operating agreement for Phoenicia and an employment agreement, under which MALT would forfeit 1% of its vested interest in Phoenicia if the employment agreement was terminated within four years. The remaining 2% vested interest was given as restricted warrants that MALT could convert into 0.5% interest for each of four milestones met within four years, under the Employment Agreement.
The plaintiff claims that during the ten-month negotiation, the defendant represented that its aviation-related businesses would operate through Phoenicia exclusively. A few years later, the plaintiff discovered that the defendant was operating an aircraft-leasing business separate from Phoenicia, despite the defendant’s representation that such business would be conducted through Phoenicia exclusively. The plaintiff argued that the third and fourth milestones would have been met if the aircraft-leasing business had been operated through Phoenicia exclusively, and thus the plaintiff would have reached its 2% vested interest.
The Court concluded that the Phoenicia operating agreement did not require the defendant to operate the aircraft-leasing business through Phoenicia exclusively. The Court further concluded that Plaintiffs failed to identify any provision in the stock purchase agreement that was breached by the defendant. However, the Court stopped short short of dismissing the plaintiff’s claim that the defendant breached the SPA by failing to provide MALT with its interest in Phoenicia on the basis that the plaintiff may be successful in its claim that the defendant breached the operating agreement’s implied covenant and its fiduciary duties by operating the aircraft-leasing business outside of Phoenicia, which may in turn lead the plaintiff to a successful claim for the defendant’s failure to provide MALT with its remaining interest in Phoenicia.