Delaware Law Updates
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MetCap Securities LLC v. Pearl Senior Care, Inc., C.A. No. 2129-VCN (February 27, 2009) (Noble, V.C.)

February 27, 2009

In this dispute relating to the payment of advisory fees in connection with a merger, the Court of Chancery refused to reform an amended merger agreement and granted summary judgment in favor of the defendants.

At issue in this case was a merger transaction involving the acquisition of Beverly Enterprises, Inc. (“Beverly”). Two partners at a law firm (the “Principals”), who were also principals of MetCap Securities LLC (“MetCap”), incorporated North American Senior Care Inc. (“NASC”), a shell entity formed solely for the purpose of acquiring Beverly. In connection with the acquisition, MetCap and NASC entered into an advisory agreement pursuant to which MetCap would receive $20 million for serving as NASC’s financial advisor in connection with the acquisition. NASC and Beverly entered into a merger agreement, which contained a "no brokers’ fee” clause that prohibited the payment of fees to financial advisors other than those expressly excepted therein, including MetCap. Following the execution of the original merger agreement and in connection with a search for financing, the parties decided that the structure of the transaction would change and that, in lieu of NASC, Pearl Senior Care, Inc. would acquire Beverly. As a result, it was necessary to amend the merger agreement to reflect that change. In the process of negotiating the amendment, a law firm partner (the “Partner”) of the Principals agreed to remove the language excepting MetCap from the “no-brokers’ fee”clause. After the execution of the amendment and before consummation of the merger, MetCap continued work in furtherance of the transaction.

Following dismissal of certain claims on a previous motion to dismiss, defendants sought summary judgment on claims that NASC was entitled to reformation of the amendment to revert to the previous version of the “no-brokers’ fee” clause and that the defendants were unjustly enriched by the work performed between the execution of the amendment and the summation of the transaction.

The Court granted summary judgment in favor of the defendants and refused to reform the amended merger agreement. The Court noted that the Partner was an agent of NASC with the authority to bind NASC unless the Partner was conflicted by an interest adverse to NASC. The Court rejected plaintiffs’ argument that the Partner was conflicted in his representation of NASC based on his law firm’s interest in closing the transaction. The Court noted that, even if a conflict existed, the Principal understood and accepted the purported conflict. The Court found that the Partner had the authority to bind NASC when he accepted the modified clause and, therefore, the negotiations regarding the fee were not final until after the execution ofthe amendment. Consequently, defendants were entitled to summary judgment because plaintiffs could not establish a prior specific agreement regarding the fees, which is a necessary element for reformation.

The Court also granted summary judgment on the unjust enrichment claim. The Court refused to find that MetCap had an adequate remedy at law because the available remedy, if any, was against NASC rather than the defendants before the Court as is required under principles of equity. The Court also refused to hinge its grant of summary judgment on the doctrine of unclean hands based on defendants’ allegations that the $20 million fee was “grotesquely unreasonable.” Instead the Court found that the benefit MetCap conferred on defendants was done unconditionally and without mistake, coercion, or request, therefore precluding recovery for unjust enrichment under the Restatement of Restitution and entitling defendants to judgment as a matter of law.

The full opinion is available here