Opinion
C.A. No. 19254
Submitted: June 20, 2002
Decided: June 27, 2002
Vernon R. Proctor, Esquire, Kurt M. Heyman, Esquire, The Bayard Firm, Wilmington, DE.
William M. Lafferty, Esquire, Yvette C. Fitzgerald, Esquire, Morris, Nichols, Arsht Tunnell, Wilmington, DE.
Dear Counsel:
Pending before the court is the defendants' motion to dismiss. By agreement of the parties, the complaint will be dismissed, without prejudice, as to defendant GNTS (Canada), Inc. For the following reasons, the balance of the motion to dismiss is denied.
The facts recited in this opinion are taken from the well-pleaded allegations of the complaint and will be accepted as true for the purposes of this motion to dismiss. Grobow v. Perot, 539 A.2d 180, 187 n. 6 (Del. 1988).
A.
The plaintiffs are all of the former owners of Bit Management, Inc. ("BIT"), an Ontario, Canada corporation. BIT was purchased by defendant GNTS (Canada), Inc. ("GNTS Canada"), an Ontario, Canada corporation formed expressly for the purpose of the acquisition, pursuant to a stock purchase agreement dated as of August 23, 2000 (the "Agreement"). GNTS Canada is wholly owned by defendant Global Network Technologies, Inc. ("GNTS"), a Delaware corporation, which is in turn a wholly owned subsidiary of Cabletron Systems, Inc. ("Cabletron"), also a Delaware corporation. Cabletron has since changed its name to Enterasys Networks, Inc. ("Enterasys") and is named as a defendant in this litigation. For purposes of clarity, this opinion will refer to Cabletron as Enterasys.The Agreement was among all of the parties to this litigation except GNTS. In return for their BIT shares, the plaintiffs were to receive approximately $5.61 million in cash in three equal annual installments, plus 466,605 options to purchase GNTS common shares with an exercise price of $4.25 share. According to the complaint, it was the parties' expectation that BIT would become part of GNTS and that Enterasys would spin off GNTS in an IPO shortly thereafter. Allegedly, Enterasys and GNTS representatives "outlined plans for an imminent initial public offering (`IPO') of GNTS common stock and told [plaintiffs] that the acquisition of BIT was strategic to a successful IPO."
The purpose of the options was both to compensate the plaintiffs for their ownership of BIT shares and to create an incentive for them "to remain with [GNTS] for years to come." "Accordingly, [Enterasys] proposed that such incentive compensation take the form of GNTS `in the money' stock options that were expected to provide the BIT personnel with a total of $4.62 million (U.S.) over a four-year retention period, with the further expectation that stock appreciation over that retention period would provide significant additional value for the BIT employees and the [BIT] Partners."
Apparently because the IPO of GNTS was not a sure thing, the Agreement provided that (notwithstanding the four year vesting schedule in the Agreement) none of those stock options should vest "until after such time as GNTS is no longer a wholly owned subsidiary of [Enterasys]." Similarly, the Agreement obligated Enterasys either to replace or pay for the GNTS options in the event no public offering occurred before December 31, 2001. The language of this latter provision is found in the final paragraph of Schedule 7.11 to the Agreement and forms the heart of the present dispute. It reads, as follows:
In the event that [Enterasys] determines not to pursue its current intention to cause GNTS to undergo an initial public offering prior to December 31, 2001 or determines not to pursue its current intention to distribute the stock of GNTS to the shareholders of [Enterasys] (each a "Trigger Event"), within sixty (60) days of the Trigger Event, [Enterasys] shall either (i) provide equivalent substitute or replacement awards on the same terms and conditions to the former employees of [BIT]; or (ii) pay $4,620,000 in the aggregate for all Options then held by the Partners and former employees of [BIT].
Immediately after the Agreement was executed, Enterasys caused GNTS to issue common stock options sufficient to satisfy the requirements of the Agreement at an exercise price of $4.25 per share. These options never vested. On July 16, 2001, Enterasys announced the sale of GNTS and, under the terms of the Agreement, this constituted a "Trigger Event" which required Enterasys to provide "equivalent substitute or replacement [stock] awards on the same terms and conditions" to the plaintiffs, or pay them $4.62 million in cash for the GNTS options held by them.
Enterasys subsequently notified the plaintiffs that it had granted them "replacement" stock options covering Enterasys common stock on August 24, 2001. The exercise price on these options was set at $49.40 per share. Enterasys shares were trading between $7.20 and $10.20 when these options were granted and have decreased substantially in value since then. Thus, the "replacement" options were and are of little real value.
B.
The plaintiffs brought this suit in November 2001, alleging that Enterasys breached the Agreement, in particular Section 7.11 and Schedule 7.11 thereof, by failing either to replace their GNTS options with new options having a similar value as measured by the expectations of the parties at the time of the Agreement, or to pay them $4.62 million in cash. Their complaint seeks specific performance of the Agreement, an injunction against the alleged threatened breach of contract, as well as compensatory damages for breach of contract and breach of the covenant of good faith and fair dealing. After the defendants moved to dismiss, the plaintiffs filed an amended complaint on February 22, 2002.
The defendants again moved to dismiss the complaint for failure to state a claim upon which relief can be granted, pursuant to Court of Chancery Rule 12(b)(6). Such a motion cannot be granted unless "it appears with a reasonable certainty that a plaintiff would not be entitled to the relief sought under any set of facts that could be proven to support the action."
Kohls v. Kenetech Corp., 791 A.2d 763, 767 (Del.Ch. 2000).
C.
The defendants first argue for a dismissal of the action as against GNTS and GNTS Canada because (i) GNTS is not a party to the Agreement, and (ii) neither GNTS nor GNTS Canada made any promises under Section 7.11 or Schedule 7.11 thereof. The plaintiffs do not object to the dismissal without prejudice of their claims against GNTS Canada. The defendants make no objection to this form of dismissal, and an order is entered below to that effect. While it is true that GNTS is not a party to the Agreement, I am not persuaded that this fact alone justifies dismissal of the complaint as to it at this time. GNTS was the issuer of the options here at issue, and it is at least possible that a final order might entail relief directed at GNTS. Thus, while the court is uncertain that GNTS as the issuing company of the original options is, in fact, a necessary party to the litigation, the motion to dismiss will be denied pending further development of the record. If it ultimately appears that no form of relief could reasonably require its presence in the litigation, GNTS may renew its motion.D.
When contractual language is unambiguous, it is certainly true that this court will not look beyond the four corners of the agreement to determine its meaning. Enterasys contends that the language of Schedule 7.11 describing its duty to issue replacement options is unambiguous and that the complaint fails to allege that it has breached that duty. This argument focuses on the requirement that Enterasys either "provide equivalent substitute or replacement awards" if a Trigger Event occurs, or pay the plaintiffs $4.62 million. Enterasys argues that the term "equivalent" refers to the value of the original GNTS stock option awards and, further, that a natural reading of the clause requires that such equivalence be measured as of the time of issuance of their replacement options. Thus, it says, the complaint does not state a claim for relief because it does not allege that the replacement awards were not equivalent in value to the GNTS options as of the time the replacement awards were issued.
Supermex Trading Co. v. Strategic Solutions Group, 1998 Del. Ch. LEXIS 66, *8 (Del.Ch.).
Although the plaintiffs resist meeting Enterasys's argument head on, it is apparent that their complaint rests on a radically different reading of the language at issue. In their view, Enterasys undertook either to replace the GNTS options with others (issued by Enterasys or some other member of its corporate family) structured so as to replicate the originally contemplated value of the GNTS options when they were first issued, or to pay $4.62 million. They argue that this interpretation is supported by a reading of Schedule 7.11, as a whole, since its structure and language demonstrate the parties' understanding that, should a Trigger Event occur, the original GNTS options would always be of little or no value to the plaintiffs.
The court is satisfied that the defendants' interpretation of the Agreement is not obviously correct. Indeed, viewing the contract as a whole, the plaintiffs' interpretation of the contract is more plausible than the defendants'. Tellingly, the defendants' interpretation would tend to place on the plaintiffs the entire risk of loss associated with the defendants' own decision to abandon the contemplated GNTS initial public offering. The plaintiffs' interpretation, by contrast, merely guarantees them (at Enterasys's option) either another shot at an IPO or similar opportunity or the receipt in cash of the balance of the consideration for their BIT shares. This interpretation would appear to be consistent with the vesting terms of the GNTS options and places the risk of non-completion of the IPO on the party with the power to control the corporate decision-making.
The defendants' interpretation also transforms the cash option in Schedule 7.11 into either a nullity (when, as here, the value of the options to be replaced is substantially lower than $4.62 million as a result of a Trigger Event) or a cap on the BIT purchase price (if, in some unusual circumstance, GNTS had grown so in value that the options were actually worth more than $4.62 million notwithstanding the occurrence of a Trigger Event). Under the plaintiffs' interpretation, by contrast, the cash option will always approximate the value of the replacement options and, thus, always provide Enterasys with a realistic alternative to issuing those options.
Of course, the court has no occasion, at this time, to adopt the contract interpretation advanced by the plaintiffs. Rather, this opinion serves only to resolve the defendants' claim that the language at issue unambiguously supports their position. It does not.
D.
For the foregoing reasons, (i) the motion to dismiss made by defendant GNTS (Canada), Inc. is GRANTED and all claims asserted against it in the Amended Complaint are DISMISSED without prejudice, and (ii) the motion to dismiss made by defendants Enterasys Networks, Inc. and Global Network Technology Services, Inc. is DENIED. IT IS SO ORDERED.