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holding that contractual provision established irreparable harm, but noting that " the facts plainly do not warrant a finding of irreparable harm, this Court is not required to ignore those facts"
Summary of this case from Hadeed v. Advanced Vascular Res. of Johnstown, LLCOpinion
C.A. No. 20518-NC.
Submitted: October 29, 2003.
Decided: November 4, 2003.
Bruce E. Jameson, Paul M. Lukoff, and Paul A. Fioravanti, of PRICKETT, JONES ELLIOTT, P.A., Wilmington, Delaware; OF COUNSEL: Allan Van Fleet, Kevin O'Gorman, Lauren Harrison, and Samina Quddos, of VINSON ELKINS L.L.P., Houston, Texas, Attorneys for Plaintiffs.
R. Judson Scaggs, Jr. and Brian J. McTear, of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware; OF COUNSEL: Michael H. Diamond and Felton T. Newell, of MILBANK, TWEED, HADLEY MCCLOY LLP, Los Angeles, California, Attorneys for Defendants.
MEMORANDUM OPINION
Grupo TMM, S.A. ("TMM") signed an agreement to sell approximately $400 million worth of its interests in certain rail transportation assets to Kansas City Southern ("KCS") on April 20, 2003 (the "Acquisition Agreement" or "Agreement"). TMM purported to terminate the Acquisition Agreement on August 22, 2003. This dispute arises out of KCS' attempt to contest TMM's purported termination and specifically enforce the Acquisition Agreement. KCS seeks to enjoin TMM from taking any action contrary to the terms of the Acquisition Agreement pending the outcome of an arbitration proceeding that will resolve the merits of the dispute. For the reasons set forth below, I grant KCS's request for a preliminary injunction.
The two other defendants are the subsidiaries of TMM which hold the assets at issue.
The other plaintiff is a subsidiary of KCS created to effectuate the transaction.
I. BACKGROUND
KCS is a Delaware corporation in the business of rail transportation. TMM is a Mexican corporation also in the business of rail transportation. In 1995, TMM sold KCS 49% of Mexrail, Inc., a Delaware corporation that wholly owns the Texas-Mexican Railway Company ("Tex-Mex"). Tex-Mex's rail lines run from the Mexican border to KCS's rail lines in east Texas. In 1995, TMM and KCS also formed a joint venture company to bid on concessions offered by the Mexican Government. The company formed by the joint venture is known today as Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("GTFM"). The joint venture successfully bid for the concession to operate a railway known currently as TFM, S.A. de C.V. ("TFM"). TFM's rail lines run throughout northeast Mexico and connect with Tex-Mex's rail lines at the border. Today, TFM also owns Mexrail, Inc. and Tex-Mex. TMM indirectly owns approximately 38.5% of the equity and 51% of the voting shares of GTFM. KCS indirectly owns approximately 37% of the equity and 49% of the voting shares of GTFM. The remaining equity of GTFM is owned by TFM. TFM, in turn, is 80% owned by GTFM. The remaining 20% is owned by the Mexican Government.
Although the Mexican Government owns 20% of the equity of TFM, it has limited voting rights.
On April 20, 2003, the parties signed an agreement in which TMM agreed to sell its stake in GTFM to KCS for $200 million in cash and approximately $200 million of KCS stock. TMM Chairman and controlling shareholder, Jose Serrano Segovia ("Serrano"), also negotiated a consulting agreement with KCS worth approximately $25 million. Through the consulting agreement, Serrano would become Vice Chairman of KCS and personally receive 2.1 million shares of KCS stock. KCS alleges that the consulting agreement was inducement for Serrano to personally support the Acquisition Agreement.
Serrano controls over 99% of the voting shares of TMM. See Deposition of Javier Segovia Serrano ("Segovia Dep.") 61-62; Affidavit of Larry M. Lawrence ("Lawrence Aff.") ¶ 14.
In two resolutions approved at TMM Board of Directors meetings held on April 2, 2003 and July 28, 2003, TMM's Board recommended that TMM's shareholders approve the agreement. Serrano voted in favor of both resolutions. Serrano, however, voted against the transaction at a shareholders meeting on August 18, 2003. The next day, TMM sent a letter to the Mexican Government which effectively shut down the Mexican Foreign Investment Commission's review of the acquisition. On August 22, 2003, TMM sent a letter to KCS purporting to terminate the Acquisition Agreement because the shareholders did not approve the transaction. Seven days later, on August 29th, KCS initiated the arbitration process set forth in the Acquisition Agreement and filed a motion for a preliminary injunction in this Court to preserve the status quo pending arbitration.
It is unclear exactly why Serrano voted against the transaction. It appears, however, that Serrano was displeased with KCS's efforts to intervene in on-going negotiations between TMM and the Mexican Government regarding obligations to purchase the Mexican Government's outstanding shares of TMF and certain tax refunds owed to TMM by the Mexican Government. Affidavit of Jose Serrano Segovia ¶¶ 11-14. TMM also alleges that some non-controlling stockholders expressed their displeasure with the transaction. Id. at ¶ 18.
II. ANALYSIS
The standard on a motion for preliminary injunction is well-settled. In order to prevail, KCS must establish: (1) a reasonable likelihood of success on the merits; (2) that irreparable harm will be suffered by KCS if the injunction is denied; and (3) that the harm that KCS will suffer if the injunction is not granted outweighs the harm that TMM will suffer if the injunction is granted. A. Reasonable Probability of Success on the Merits
In re Aquila Inc. S'holders Litig., 2002 WL 27815, at *5 (Del.Ch. Jan. 3, 2002); S.I. Mgmt. L.P. v. Wininger, 707 A.2d 37, 40 (Del. 1998).
The parties have committed the resolution of disputes arising from or in connection with the Acquisition Agreement to arbitration. The arbitration proceeding is in its preliminary stages. KCS seeks an injunction in aid of this arbitration. In such a situation, "`likelihood of success' must be examined at two levels: (1) the moving party's entitlement to arbitration; and (2) the merits of its arbitration claims." It is undisputed that KCS is entitled to arbitration. And "where the right to arbitrate is clear, the analysis of the merits of the underlying claims may be more limited." Nevertheless, but KCS must still "establish a reasonable probability that its arbitration position is sound."
Acquisition Agreement § 12.11(a). The Acquisition Agreement also contemplated the instant proceeding because Section 12.11(a) states that the arbitration procedure "shall not preclude equitable or other judicial relief to enforce the provisions hereof or to preserve the status quo pending resolution of Disputes hereunder" — precisely the relief KCS seeks before this Court. Section 12.11(b) provides that the agreement is governed by Delaware Law.
Price Org., Inc. v. Universal Computer Services, Inc., 1992 WL 356026, at *8, (Del.Ch. Dec. 2, 1992) (citing Eastman Kodak v. Cetus Corp., 1991 WL 225936, at *5 (Del.Ch. Dec. 3, 1991)).
Id.
Id. The parties agree that Price Org., Inc., 1992 WL 356026, and Eastman Kodak, 1991 WL 225936, hold that where there is a clear right to arbitration the inquiry into the underlying merits of the arbitrable claims is more limited than a situation where the merits of a dispute are non-arbitrable. The parties disagree, however, as to how much the Court should limit its inquiry. Ultimately, I need not resolve this dispute because KCS has met the typical "reasonable likelihood of success on the merits" standard.
KCS's primary claim is that TMM did not have the right to terminate the Acquisition Agreement because TMM shareholder approval is not a "condition" that must be fulfilled before TMM's performance under the Agreement becomes due. To determine whether TMM shareholder approval is a condition this Court will construe the Acquisition Agreement "to fulfill, to the extent possible, the reasonable shared expectations of the parties at the time they contracted." To ascertain the parties shared expectations the Court will first look to the Agreement itself. If the Agreement is ambiguous, the Court will examine the extrinsic evidence submitted by the parties.
The Restatement defines a condition as "an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due." RESTATEMENT (SECOND) OF CONTRACTS § 224.
U.S. West, Inc. v. Time Warner, Inc., 1996 WL 307445, at *9 (Del. Ch. June 6, 1996) (citation omitted).
True North Communications, Inc. v. Publicis, S.A., 711 A.2d 34, 38 (Del.Ch. 1997) (Chandler, C.), aff'd, 705 A.2d 244 (Del. 1997) (TABLE).
Id.
The first provision in the Acquisition Agreement of consequence is Section 9.1(a)(iv), which provides that the "Agreement may be terminated prior to the Closing . . . by TMM if any condition to the obligations of Sellers hereunder becomes incapable of fulfillment through no fault of Sellers." Section 9.1(a)(iv) does not define or list the "conditions to the obligations of Sellers," but this language is found elsewhere in the Agreement — most notably, Section 8.3. Section 8.3 is, in fact, entitled "Conditions to the Obligations of Sellers" and states that "[t]he obligation of Sellers to consummate the Acquisition shall be subject to satisfaction of" a list of ten conditions. One of the enumerated conditions is that TMM shall have received the consents of certain noteholders to the transaction, provided that TMM used commercially reasonable efforts to obtain such consents. Another listed condition is that relevant governmental authorities shall have consented to the transaction. What is not listed as a condition, however, is that TMM shall have received shareholder approval of the transaction.
Acquisition Agreement § 8.3(i).
Id. at § 8.3(h).
KCS argues that the exclusion of TMM shareholder approval from Section 8.3 evidences the parties' intent that TMM shareholder approval is not a condition to the Acquisition Agreement. To this end, KCS invokes the maxim inclusio unius est exclusio alterius, i.e., "the inclusion of one [condition in Section 8.3] is the exclusion of another [condition]." This Court has invoked this principle of interpretation to construe wills, statutes, and partnership agreements. Other courts have invoked the doctrine to find that provisions in an agreement are covenants, rather than conditions. In this context, the failure to include TMM shareholder approval within Section 8.3 "speaks volumes" and it is reasonable to conclude that the absence of TMM shareholder approval in Section 8.3 suggests that such approval is not a condition to the Agreement.
BLACK'S LAW DICTIONARY 906 (4th ed. 1968). See also 3 CORBIN ON CONTRACTS § 552 at 206 (1960) ("If one subject is specifically named, or if several subjects of a larger class are specifically enumerated, and there are no general words to show that other subjects of that class are included, it may reasonably be inferred that the subjects not specifically named were intended to be excluded").
In re Estate of Barrett, 1996 Del. Ch. LEXIS 34 (Del.Ch. Mar. 8, 1996) (Chandler, C.).
Makin v. Mack, 336 A.2d 230 (Del.Ch. 1975).
Active Asset Recovery, Inc. v. Real Estate Asset Recovery Services, Inc., 1999 WL 743479 (Del.Ch. Sept. 10, 1999).
Tuff `N' Rumble Management v. Livin' Large Records, 1995 U.S. Dist. LEXIS 6955 (S.D.N.Y. May 22, 1995).
Active Asset Recovery, Inc., 1999 WL 743479, at * 11 (citing 3 CORBIN ON CONTRACTS § 552 at 206 (1960)) (finding intent to exclude "media overhead" costs as chargeable to a partnership because other items such as "duplicating" and "telephone" charges were identified as chargeable to the partnership).
This conclusion is buttressed by the fact that TMM noteholder approval is found in Section 8.3 and that KCS shareholder approval is included in the enumerated list under Section 8.2 of the Agreement, entitled "Conditions to the Obligations of KCS." The parties, aided by able legal teams, knew how to make the non-occurrence of an event trigger the right to terminate the Agreement. The parties did so in the case of KCS shareholder approval and TMM noteholder approval by including them in Article 8 of the Agreement, conveniently entitled "CONDITIONS." It is unlikely that the parties intended to make TMM shareholder approval a condition, but decided not to include TMM shareholder approval under Article 8, especially since the very first section of the Agreement provides that "[u]pon the terms and subject to satisfaction or waiver of the conditions set forth in Article 8, at the Closing, KARA Sub shall purchase . . . from MM [wholly owned subsidiary of TMM] . . . all GTFM Shares . . . for the consideration described in Section 1.2" This provision, in my opinion, independently suggests that the parties intended Article 8 to contain the only conditions to the Agreement that would permit a termination.
(emphasis added). As noted, Article 8 of the Acquisition Agreement is entitled "CONDITIONS" and includes mutual conditions, § 8.1, conditions to KCS' obligations, § 8.2, and conditions to TMM's obligations, § 8.3.
TMM argues that provisions of the Acquisition Agreement found outside Article 8 establish that TMM shareholder approval is a condition. First, TMM points to Article 5, the "REPRESENTATIONS AND WARRANTIES OF SELLERS." In particular, Section 5.4(a) provides that "[t]he execution and delivery of this Agreement and the Ancillary Agreements . . . have been duly and validly authorized . . . and no other corporate action on the part of TMM . . . is necessary . . . other than approvals from the shareholders of TMM and MM." TMM asserts that because Section 5.4(a) states that shareholder approval is "necessary" it must be a condition. The more reasonable interpretation, however, is that this provision does not create a condition.
TMM's representation that it had all necessary corporate approvals to close the transaction, other than shareholder approval, does not ipso facto make TMM shareholder approval a condition. There is a distinction between the warranties and representations of TMM and an act or event that, unless excused, must occur before TMM's duty to perform arises, i.e., a condition. Therefore, I must assess whether the parties intended for Section 5.4 to constitute a condition. Initially, I note that this provision is not within Article 8 — favoring a conclusion that it is not a condition. Additionally, there is no language in Section 5.4 purporting to create a condition. The words "on condition that" or "provided that" or even the two-letter word "if" phrases typically used by parties to create conditions, are not present. Moreover, to the extent that the Court considers extrinsic evidence, Section 5.4 is wholly consistent with what KCS's representatives were told by TMM's chief negotiator (and Serrano's nephew): that a stockholder vote was necessary but a mere formality because of Serrano's over 99% control of the voting shares.
See Summit Investors II, L.P. v. Sechrist Indus., Inc., 2002 WL 31260989, at *7 (Del.Ch. Sept. 20, 2002) (noting distinction between conditions and covenants); Weiss v. Northwest Broadcasting, Inc., 140 F. Supp.2d 336, 343-44 (D. Del. 2001) (same; applying Delaware law).
RESTATEMENT (SECOND) OF CONTRACTS § 226 cmt. a (1981).
Lawrence Aff. ¶ 14; Segovia Dep. at 61-62.
TMM also points to Section 12.13, governing the "Termination Fee." This provision provides, in part, as follows:
In the event of . . . a termination pursuant to Section . . . 9.1(a)(iv) as a result of the failure of the stockholders of . . . TMM to approve the Acquisition if at or prior to the meeting of such stockholders to approve the Acquisition . . . the Board of Directors of TMM . . . shall have failed to recommend or shall have withdrawn and not reinstated its recommendation of, the Acquisition, then [TMM shall remit to KCS] the sum of $18 million.
TMM argues that this provision, by implication, allowed for termination if TMM's shareholders did not approve the transaction. Section 12.13, however, is simply not relevant because the Board has not withdrawn its recommendation. Also, Section 12.13 does not define what is a condition or what permits termination. Section 12.13 only refers to Section 9.1(a)(iv), which allows termination if "a condition to the obligations of Seller hereunder becomes incapable of fulfillment through no fault of Sellers." As noted, Section 8.3, conveniently entitled "Conditions to the Obligations of Sellers," does not mention TMM shareholder approval.
I say "by implication" because by its terms, this provision does not purport to establish when termination is allowed and only sets forth that a termination fee is payable if TMM's shareholders do not approve the transaction and the Board did not recommend the transaction.
To the extent that there is some doubt as to whether Section 12.13, or Section 5.4, creates a condition, this Court resolves those doubts so as to reduce KCS's risk of forfeiture from the non-occurrence of an event that is within TMM's control. See RESTATEMENT (SECOND) OF CONTRACTS § 227(1).
TMM also argues that even if it did not validly terminate the Agreement, the remedy of specific performance is, as a matter of law, unavailable to KCS. TMM's argument is that this Court is unable to require TMM to close on the transaction in light of Serrano's vote against the deal. I need not reflect on the validity of this argument, however, because the relief sought here is much more limited. Ultimately, the arbitration proceeding will determine what ultimate remedy, if any, KCS is entitled to receive. In the instant proceeding, however, KCS only seeks to require TMM to abide by provisions of the Agreement which require that TMM carry on the business GTFM and its subsidiaries "in the ordinary course consistent with past practices." TMM was required to abide by these provisions before Serrano's no vote, and can be required to do the same until the arbitration proceedings have reached their termination. In fact, the form of order entered in this proceeding was contemplated by the parties in the Acquisition Agreement. Section 12.10 provides that KCS is "entitled . . . to enforce specifically the terms and provisions of" the Agreement. In addition, Section 12.11 provides that the initiation of arbitration does "not preclude equitable or other judicial relief to enforce the provisions [of the Agreement] or to preserve the status quo pending" the outcome of arbitration. KCS does not seek, and this Court does not grant, an order requiring TMM to close on the deal regardless of Serrano's vote to reject the transaction.
Acquisition Agreement § 7.1.
Requiring TMM to carry on the business of GFTM in the ordinary course does not infringe on the TMM shareholder franchise since TMM has a single shareholder, Serrano, who serves as Chairman of the Board and controls over 99% of the shareholder vote. In Northern Assur. Co. v. Rachlin Clothes Shop, Inc., 125 A. 184, 188-90 (Del. 1924), Chancellor Wolcott stated:
A corporation being a purely metaphysical creature, having no mind with which to think, no will with which to determine and no mind with which to speak, must depend upon faculties of natural persons to determine for it its policies and direct the agencies through which they are to be effectuated. The individuals within its organization who perform for it these functions are generally its directors.
The argument that Serrano, as Chairman of TMM, could sign the Acquisition Agreement, promising to recommend the transaction to shareholders, i.e., himself, and use his best efforts to get shareholders (again, himself) to approve the transaction, but yet could vote against the transaction without implicating TMM's covenants under the Acquisition Agreement is an exercise in sophistry.
* * *
In my opinion, KCS has demonstrated to a reasonable probability that its arbitration position, namely, that TMM did not validly terminate the Acquisition Agreement, is sound.
Independently, KCS argued that TMM breached its covenant to use all commercially reasonable efforts to obtain shareholder approval. I do not evaluate this claim because KCS only needs to demonstrate the soundness of one claim in order to obtain a preliminary injunction. In re Pure Res. S'Holders Litig., 808 A.2d 421, 432 (Del.Ch. 2002).
B. Irreparable Harm
The parties agreed "that irreparable damage would occur in the event that any of the provisions of [the] Agreement were not performed in accordance with their specific terms or were otherwise breached." KCS argues that this stipulation by the parties is sufficient to establish the irreparable harm element of the preliminary injunction standard. Several decisions of this Court support KCS's position. TMM argues that in the cases cited by KCS the relevant contractual provisions were "accompanied by the actual presence of demonstrable harm of a sort that would have been deemed irreparable even in the absence of the contractual provision." TMM then argues that because prior courts have relied on the contractual stipulation and since the underlying facts independently support such a stipulation, this Court is required to do likewise. I reject this proposition.
Acquisition Agreement § 12.10.
True North Communications, Inc., 711 A.2d at 44 (Chandler, C.); Vitalink Pharmacy Services, Inc. v. Grancare, Inc., 1997 WL 458494, at *9 (Del.Ch. Aug. 7, 1997); SLC Beverages, Inc. v. Burnup Sims, Inc., 1987 WL 16035, at *2 (Del.Ch. Aug. 20, 1987).
Donald J. Wolfe, Jr. Michael A. Pittenger, CORPORATE AND COMMERCIAL PRACTICE IN THE DELAWARE COURT OF CHANCERY § 10-2(b) at 10-36 (2001).
In Vitalink Pharmacy Services, Vice Chancellor (now Justice) Jacobs held that such a contractual stipulation "alone suffice[d] to establish the element of irreparable harm" a holding reaffirmed in True North Communications. Although a contractual stipulation as to the irreparable nature of the harm that would result from a breach cannot limit this Court's discretion to decline to order injunctive relief, such a stipulation does allow the Court to make a finding of irreparable harm provided the agreement containing the stipulation is otherwise enforceable. If the facts plainly do not warrant a finding of irreparable harm, this Court is not required to ignore those facts, especially since the "parties cannot confer subject matter jurisdiction upon a court." But where there is no concern that the parties are attempting to improperly confer equitable jurisdiction upon this Court, a defendant cannot successfully argue that there is no irreparable harm. C. Balance of the Equities
1997 WL 458494, at *9.
Signal Cap. Corp. v. Signal One, LLC, Del. Ch., C.A. No. 18011, bench ruling at 88-89, Jacobs, V.C. (May 15, 2000).
Butler v. Grant, 714 A.2d 747, 749-50 (Del. 1998).
Signal Cap. Corp., C.A. No. 18011, bench ruling at 88-89.
Under this prong, KCS must demonstrate that the harm to it if relief is denied outweighs the harm to TMM if the injunction is granted. I am convinced that if I deny KCS the preliminary injunction to preserve the status quo pending arbitration, KCS would suffer a harm greater than any harm TMM could suffer if I were to grant the injunction. Because there is a reasonable probability that TMM did not validly terminate the Agreement with KCS, TMM cannot invoke general equity principles to save it from an injunction enforcing the Agreement. Under the terms of the Agreement, TMM contracted away its right to undertake actions outside the ordinary course of business, including its right to solicit other offers for GTFM. Accordingly, TMM cannot now assert that it will be harmed due to the Court's enforcement of the rights and obligations for which it specifically bargained, and which were reduced to writing in the terms of the Acquisition Agreement.
True North Communications, 711 A.2d at 45.
Section 7.1 of the Agreement provides that TMM "shall use commercially reasonable efforts to cause GTFM and each of its subsidiaries to (i) carry on its business in the ordinary course consistent with past practices . . ." Section 7.1(a) through (q) specifies what GTFM cannot do, so as to preserve GTFM for acquisition by KCS. Section 7.10 contains standard no-shop provisions.
True North Communications, 711 A.2d at 45.
The harm TMM alleges that it will suffer if required to abide by the Agreement until the arbitration process reaches an outcome is that TMM will become insolvent. In the present circumstances, I find this alleged harm insufficient to tip the equities in TMM's favor. First, this consideration works in favor of KCS. TMM's precarious financial situation demonstrates that KCS will suffer irreparable harm if the injunction does not issue, as TMM may be unable to satisfy a money judgment. Second, TMM has not identified any specific actions it intends to take that would avert insolvency, but are inconsistent with the Acquisition Agreement. As it stands now, there are only vague and unsubstantiated allegations of harm — allegations insufficient to overcome the clear right to specific performance contained in the Agreement. Lastly, TMM's claim of financial ruin if it is forced to abide by the Agreement is undermined by the terms of the Agreement itself. TMM negotiated to have the Agreement terminate on December 31, 2004, in order to give it ample time to obtain the consents of its noteholders. The fact that TMM anticipated it might have to abide by the terms of the Agreement, including the provisions limiting TMM's freedom of action, until the end of 2004, means that its present assertion that it will be harmed if required to abide by those provisions until resolution of the arbitration process (which will be prompt) rings hollow.
Bayard v. Martin, 101 A.2d 329 (Del. 1953), cert. denied, 347 U.S. 944 (1954).
TMM is free to petition this Court for relief from abiding by specific provisions in the Agreement if there are specific actions it wishes to undertake to avoid insolvency that contravene that Agreement.
Deposition of Larry A. Lawrence at 32-33.
III. CONCLUSION
For the reasons stated above, KCS's motion for a preliminary injunction to prevent TMM from taking any action contrary to the terms of the Acquisition Agreement pending the outcome of the arbitration proceeding that will resolve the merits of the dispute is GRANTED. I have entered an Order consistent with this decision.