Ruffalo v. TransTech Service Partners, Inc., C.A. No. 5039-VCP (Del. Ch. Aug. 23, 2010) (Vice Chancellor Parsons)
In this memorandum opinion, the Court of Chancery applied the objective theory of contracts to claims by plaintiff stockholders of a special purpose acquisition “blank check” company that defendant TransTech Services Partners, Inc. (“TransTech” or the “Company”) and its directors violated the Company’s charter, as well as a related trust agreement and Form S-1 registration statement, by making payments in connection with the Company’s dissolution above and beyond an $800,000 limit on working capital expenses imposed by the trust agreement.
TransTech was formed in 2006, and filed a Form S-1 registration statement with the SEC (the “Form S-1”) in anticipation of its IPO. Contemporaneous with such filing, TransTech entered into a trust agreement (the “Trust Agreement”), stating that the trust would hold the proceeds of the Company’s IPO on behalf of TransTech IPO stockholders (the “IPO Stockholders”) in a trust fund (the “Trust Fund”). TransTech completed its IPO in May 2007,generating net proceeds of $7.88 per share. Under the terms of the charter, proceeds held in the Trust Fund were only available for distribution upon the consummation of a business combination, or, if the Company failed to enter into a business combination within 18 months of the IPO (24 months if the Company signed a letter of intent to enter into a business combination within 18 months), upon the Trust Fund’s liquidation. The charter also provided that the Company’s right to withdraw interest monies from the Trust Fund was governed by the Form S-1, while the Trust Agreement delineated the rights of the IPO Stockholders to receive distributions from the Trust Fund. Section 2(b) of the Trust Agreement authorized the Company to make distributions from the Trust Fund of up to $800,000 for working capital expenses, while Section 2(c) of the Trust Agreement outlined the Company’s right to withdraw funds from the Trust Fund in the event the Company was dissolved.
TransTech failed to enter into a business combination within the required timeframe, and in July 2009, the IPO Stockholders voted to dissolve TransTech, and later received a distribution of $7.88 per share from the Company. Plaintiffs’ complaint, which was filed after such distribution, alleged that defendants’ withdrawal of monies in excess of the $800,000 working capital expense cap contained in the Trust Agreement, for purposes of dissolving and liquidating the Company, violated the terms of the Company’s formation documents, and asserted claims against defendants for (i) breach of the corporate charter, (ii) breach of constructive trust, (iii) fraud, and (iv) conversion. Defendants argued that the $800,000 cap for working capital expenses contained in Section 2(b) of the Trust Agreement was inapplicable in the context of a dissolution and liquidation of the Company, the terms of which were defined in Section 2(c) of the Trust Agreement.
Applying the objective theory of contracts to counts (i), (ii) and (iv) of the complaint, the court first stated that language contained in the charter and the Form S-1 suggested that the Trust Agreement controlled the Company’s right to withdraw interest monies from the Trust Fund. The court then determined, based upon language contained in both the Trust Agreement and the Form S-1, that Section 2(b) and 2(c) should be read independent of one another, and that the $800,000 cap on working capital expenses defined in Section 2(b) therefore did not apply in the context of a dissolution and liquidation of the Company. Although the court granted defendants’ motion to dismiss counts (i), (ii) and (iv) with regard to payments to third-party creditors, the court denied a similar motion to dismiss such counts for payments made by the Company to certain sponsors and affiliates, finding that plaintiffs pled facts sufficient to suggest that such payments were improper under the terms of the Form S-1. Finally, the court granted defendants’ motion to dismiss count (iii) of plaintiffs’ claim for failure to plead fraud with the required particularity.