Summary
holding that a notice that failed to comply with the LLC's operating agreement was "invalid and insufficient . . . and therefore [of] no force or effect"
Summary of this case from Ensing v. EnsingOpinion
Civil Action No. 3751-CC.
Decided November 21, 2008.
Submitted December 5, 2008.
[*1] Robert S. Saunders, T. Victor Clark, and Ronald N. Brown, III, of SKADDEN, ARPS, SLATE, MEAGHER FLOM LLP, Wilmington, Delaware, Attorneys for Plaintiff.
Kurt M. Heyman, Patricia L. Enerio, and Jill K. Agro, of PROCTOR HEYMAN LLP, Wilmington, Delaware, Attorneys for Defendants E2 Investment Partners LLC, Locksmith Value Opportunity Fund LP, and Pembridge Value Advisors LLC.
S. Mark Hurd and Amaryah K. Bocchino, of MORRIS, NICHOLS, ARSHT TUNNELL LLP, of Wilmington, Delaware, Attorneys for Defendants Timothy E. Brog and The Edward Andrews Group Inc.
MEMORANDUM OPINION
The issue before the Court is whether defendants, shareholders of a Delaware LLC, are contractually obligated to indemnify the company for costs related to an unsuccessful proposal to nominate two persons for election to the board of directors. Before the Court are two motions: a motion for judgment on the pleadings, filed by three of the defendants, and a motion for partial summary judgment, filed by plaintiff. For the reasons set forth below, I am granting judgment on the pleadings in favor of defendants. Accordingly, plaintiff is not entitled to the relief it seeks, and [*2] I need not reach the issues presented in the motion for partial summary judgment.
I. BACKGROUND
Plaintiff TravelCenters of America LLC ("TravelCenters") is a Delaware Limited Liability Company ("LLC") with its headquarters in Westlake, Ohio and is the largest full service travel center company in the United States. On May 8, 2008, plaintiff brought this action seeking indemnification from defendants Timothy E. Brog, E2 Investment Partners LLC ("E2"), Locksmith Value Opportunity Fund LP ("Locksmith"), The Edward Andrews Group Inc., and Pembridge Value Advisors LLC ("Pembridge"). Each of the defendants owned TravelCenters stock at the time of the alleged breaches for which indemnification is sought.
Compl. P 4. Unless otherwise noted, the facts are drawn from the complaint and presumed true for purposes of the motion for judgment on the pleadings.
On December 31, 2007, defendants submitted notice to TravelCenters purporting to nominate Timothy E. Brog and Jeffrey S. Wald for election to the TravelCenters Board of Directors at the 2008 annual meeting (the "Notice"). Section 9.7 of the TravelCenters Amended and Restated Limited Liability Company Agreement (the "LLC Agreement") details [*3] the notice procedures a shareholder must follow to nominate a person for election to the TravelCenters Board of Directors. On February 1, 2008, TravelCenters commenced an action in this Court seeking a declaration that the Notice violated the LLC Agreement and requesting attorneys' fees and costs (the "Declaratory Judgment Action"). On April 2, 2008, TravelCenters filed a Second Amended Complaint that deleted the request for attorneys' fees and costs.
Defendants argue that only E2 submitted the notice. Because of the resolution of the present motions, the Court need not reach the issue of which defendants are responsible for submission of the notice.
Following a one day trial on April 4, 2008, this Court found that the Notice violated § 9.7 in several respects. The Court found, for example, that the Notice violated § 9.7 because: (1) the Notice failed to identify Lawrence E. Golub as a participant in the Notice; (2) the Notice failed to identify Golub as a party to an understanding pursuant to which a nominee for election as a director of TravelCenters was proposed; (3) the Notice failed to disclose Golub's beneficial interest and that of his affiliates; (4) the Notice failed to [*4] disclose Brog's earlier violation of the federal securities laws; and (5) the Notice failed to adequately disclose the principal occupation and employment of Wald during the past five years. Additionally, as of the date of the notice, E2 did not hold a certificate for the shares it owned or attach a copy of such certificate to the Notice. Accordingly, I held that the Notice was "invalid and insufficient under Section 9.7 of the LLC [A]greement and therefore [of] no force or effect."
TravelCenters of Am. LLC v. Brog, C.A. No. 3516-CC, tr. at 255 (Del.Ch. Apr. 4, 2008).
Id. tr. at 256-61.
Id. tr. at 261-63.
Id. tr. at 256-57.
On May 8, 2008, TravelCenters commenced this action seeking indemnification of its costs and fees associated with the Declaratory Judgment Action and the present action pursuant to § 10.3 of the LLC Agreement. Section 10.3 provides that each shareholder, as defined, will indemnify TravelCenters from and against all costs and expenses, including reasonable attorneys' and other professional fees, arising from such shareholder's breach of any provision of the LLC Agreement. On September 9, 2008, E2, Locksmith, and Pembridge moved for judgment on the pleadings, [*5] and all defendants moved to stay discovery. On September 26, 2008, TravelCenters moved for partial summary judgment.
On the same day, TravelCenters sent a letter to defendants demanding reimbursement of its costs, fees, and expenses associated with the Declaratory Judgment Action.
Section 10.3 provides in full:
To the fullest extent permitted by law, each Shareholder will indemnify and hold harmless the Company (and any Subsidiaries or Affiliates thereof), from and against all costs, expenses, penalties, fines or other amounts, including, without limitation, reasonable attorneys' and other professional fees, whether third party or internal, arising from such Shareholder's breach of any provision of this Agreement or any Bylaws, including without limitation, Sections 8.1 through 8.2 of Article VIII, and shall pay such indemnitee such amounts on demand, together with interest on such amounts, which interest will accrue at the lesser of 15% per annum compounded and the maximum amount permitted by law, from the date such costs or the like are incurred until the receipt or repayment by the indemnitee.
I granted the motion to stay discovery in a November 21, 2008 letter opinion.
II. [*6] Analysis A. Legal Standard for Judgment on the Pleadings
B. Interpretation of Section 9.7
Ct. Ch. R. 12(c).
See Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1205 (Del. 1993); [*7] In re Seneca Invs. LLC, C.A. No. 3624-CC, 2008 Del. Ch. LEXIS 141, 2008 WL 4329230, at *2 (Sept. 23, 2008); McMillan v. Intercargo Corp., 768 A.2d 492, 499-500 (Del.Ch. 2000).
Interactivecorp. v. Vivendi Univ., S.A., C.A. No. 20260, 2004 Del. Ch. LEXIS 90, 2004 WL 1572932, at *8 (Del.Ch. June 30, 2004) ( revised July 6, 2004) (quoting Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., 1992 Del. Ch. LEXIS 159, 1992 WL 181718, at *1 (Del.Ch. July 28, 1992), rev'd on other grounds, 624 A.2d 1199 (Del. 1993)).
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001).
In re Gen. Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del. 2006); Interactivecorp., 2004 Del. Ch. LEXIS 90, 2004 WL 1572932, at *8.
Malpiede, 780 A.2d at 1083 . See In re Tyson Foods, Inc., C.A. No. 1106-CC, 2007 Del. Ch. LEXIS 120, 2007 WL 2351071, at *2 (Del.Ch. Aug. 15, 2007).
TravelCenters of Am., LLC v. Brog, C.A. No. 3516-CC, 2008 WL 1746987, at *1 (Del.Ch. Apr. 3, 2008).
Section 9.7 details the notice procedures a shareholder must follow to nominate a person for election to the TravelCenters Board of Directors. Specifically, § 9.7(a) provides that:
(1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the Shareholders may be made at an annual meeting of Shareholders . . . (ii) by any Shareholder of the Company who was a Shareholder of record both at the time of giving of notice provided for in this Section 9.7 and at the time of the annual meeting, who is entitled to vote at the meeting and present in person or by proxy at the meeting to answer questions concerning the nomination or business, and who complies with the notice procedures set forth in this Section 9.7.
(2) For nominations [*9] or other business to be properly brought before an annual meeting by a Shareholder pursuant to clause (ii) of Section 9.7(a)(1), the Shareholder must have given timely notice thereof in writing to the Secretary of the Company. . . . To be timely, a Shareholder's notice shall. . . .
Section 9.7(a)(2) then describes the requirements that must be met for notice to be proper and timely. In the Declaratory Judgment Action, I held that the Notice did not comply with these requirements and was thus not effective in nominating Brog or Wald. The issue now before the Court is whether the failure to comply with § 9.7 constituted a "breach of any provision" of the LLC Agreement.
Under principles of contract law, there is a distinction between promises and conditions. Promises give rise to a duty to perform, and conditions are events that must occur before a party is obligated to perform. While the non-performance of a promise or covenant can result in a breach of contract, the non-occurrence of a condition is not considered a breach unless the party promised that the condition would occur. Thus, unless a party was under a duty for a condition to occur, the nonperformance of a condition is [*10] not a breach of the agreement.
See Summit Investors II, L.P. v. Sechrist Indus., Inc., C.A. No. 19400, 2002 Del. Ch. LEXIS 117, 2002 WL 31260989, at *7 (Del.Ch. Sept. 20, 2002); Weiss v. Nw. Broad. Inc., 140 F. Supp. 2d 336, 345-46 (D. Del. 2001); RESTATEMENT (SECOND) OF CONTRACTS § 224 (1981) ("A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.").
See Summit Investors, 2002 Del. Ch. LEXIS 117, 2002 WL 31260989, at *7 ("Non-occurrence of a condition is not considered a breach by a party unless he is under a duty for that condition to occur."); Weiss, 140 F. Supp. 2d at 346 ("The non-occurrence of a condition will prevent the existence of a duty in the other party; but it may not create any remedial rights and duties at all, and it will not unless someone has promised that it shall occur."); RESTATEMENT (SECOND) OF CONTRACTS § 225(3) (1981).
After careful consideration of the LLC Agreement, I conclude that the provisions of § 9.7 with which the Notice did not comply are conditions to TravelCenters performance and are not promises by shareholders. Section 9.7 establishes prerequisites that must be met in order for a shareholder to [*11] properly nominate a person for election as a director. Subsection (a)(1) states that "[n]ominations of persons for election to the Board of Directors . . . may be made . . . by any Shareholder . . . who complies with the notice procedures set forth in this Section 9.7." Immediately following this paragraph, and just before the detailed requirements for proper notice, subsection (a)(2) states that "[f]or nominations or other business to be properly brought . . . the Shareholder must have given timely notice thereof. . . ." Proper notice is thus a condition to nominating a person for election as a director. The Notice did not comply with these requirements; accordingly, I held that it was "invalid and of no force and effect."
TravelCenters, C.A. No. 3516-CC, tr. at 263 (Del.Ch. Apr. 4, 2008).
While acknowledging that it is a condition, plaintiff argues that § 9.7 is also a promise by Shareholders not to submit non-compliant notices. TravelCenters relies on "mandatory" language in § 9.7 to support this argument. For example, § 9.7 specifies that (1) "the proponent Shareholder or Shareholders must submit to the Secretary" a plan for repayment of indebtedness; (2) "such Shareholder's [*12] notice shall set forth" certain categories of information; and (3) "[n]o Shareholder may give notice to the Secretary described in this Section 9.7(a)(2) unless such Shareholder holds a Certificate for all shares. . . ." While plaintiff is correct that mandatory words, such as "must" and "shall," appear in § 9.7, their presence does not compel a finding that the notice requirements are promises by shareholders not to submit non-compliant notices. The consequences of not complying with § 9.7 are made clear in the opening paragraph: subsection (a)(1) specifies that a shareholder cannot nominate a person for election as a director without complying with the notice requirements of § 9.7. The detailed notice requirements that follow are conditions to nomination of a person for election as a director, and notwithstanding the presence of mandatory words, they are not independent promises by shareholders to TravelCenters. The words "must" and "shall" are used to define the notice required to nominate a person for election; that certain requirements "must" or "shall" be satisfied before notice is effective does not mean that shareholders promised that they would fulfill these requirements. [*13]
LLC Agreement § 9.7(a)-(b). Section 9.7(e)(2) also specifies that "[o]nly such persons who are nominated in accordance with the procedures set for in this Section 9.7 shall be eligible to serve as directors. . . ."
Indeed, other provisions in the LLC Agreement expressly labeled as conditions use these mandatory words in defining the events that must occur before the condition is satisfied.
Summit Investors II, L.P. v. Sechrist Industries, Inc. supports this result. In Summit the Court held that notice provisions in the agreement at issue were conditions and not covenants. As evidence, the Court relied on the fact that the counterclaim defendant was under no obligation to exercise its put rights and thus had no obligation to provide any notice whatsoever. The notice provisions at issue in this case are also conditions and not promises or covenants. As in Summit Investors, defendants were not under an obligation to provide any notice whatsoever, and TravelCenters did not bargain to receive proper notice "as an end in itself." Rather, the submission of proper notice is simply a condition that must occur before TravelCenters is obligated to allow a shareholder to nominate [*14] a person for election as a director.
C.A. No. 19400, 2002 Del. Ch. LEXIS 117, 2002 WL 31260989 (Del. Ch. Sept 20, 2002).
2002 Del. Ch. LEXIS 117, [WL] at *7.
Id.
Id.
TravelCenters argues that § 9.7 is not a condition because, unlike other provisions in the LLC Agreement, it is not expressly labeled as such. No particular words, however, are required for the existence of a condition; moreover, the absence of an express label as a condition does not mean the provision is a promise.
III. CONCLUSION
For example, § 9.7(a)(2) describes the requirements for notice to be considered timely:
To be timely, a Shareholder's [*15] notice shall be delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the date of mailing of the notice for the preceding year's annual meeting; provided that for any nominations or other business to be properly brought before the annual meeting to occur during 2008 (the "Initial Annual Meeting") the Shareholder's notice shall be delivered to the Secretary at the principal executive offices of the Company not later than December 31, 2007 not earlier than December 1, 2007; provided, further, however, that in the event that the date of mailing of the notice for the annual meeting is more than thirty (30) days before or after such anniversary date (or, in the case of the Initial Annual Meeting, before or after April 1, 2008), notice by the Shareholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to the date of mailing of the notice for such annual meeting and not later than the close of business on the later of the [*16] ninetieth (90th) day prior to the date of mailing of the notice for such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of mailing of the notice for such meeting is first made by the Company."
Along with these detailed timing requirements, § 9.7 requires extensive disclosure regarding the proposed nominee and the shareholder attempting to give notice. Not surprisingly, the Notice submitted by defendants failed to comply with all of these requirements.
TravelCenters is seeking in excess of $ 1.5 million from defendants.
LLC Agreement § 10.3.