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Black Horse Capital, LP v. Xstelos Holdings, Inc., C.A. No. 8642-VCP (Del. Ch. Sept. 30, 2014) (Parsons, V.C.)

September 30, 2014

In this decision, the Court of Chancery granted defendants’ motion to dismiss, finding that it could not enforce the plaintiffs’ alleged oral agreement where the related written agreements make no reference to any prior promise or agreement and where each written agreement contains an integration clause providing that such documents evidenced the entirety of the parties’ agreement and understanding with respect to the covered subject matter.

This dispute arose out of a joint acquisition by the plaintiffs and the defendants of a pharmaceutical company, CPEX Pharmaceuticals, Inc. (“CPEX”).  FCB I Holdings, Inc. (“FCB”) was created to acquire CPEX.  FCB, in turn, was held 80.5% by defendant Footstar Corp. (which later became Xstelos Corp) (“Xstelos”) and 19.5% by a plaintiff entity which is the successor in interest to Cheval Holdings, Ltd. (“Cheval”).  In order to complete the acquisition of CPEX, it was agreed that two private investment funds (together, “Black Horse” or “plaintiffs”) would contribute 80% of a bridge loan and Xstelos would contribute the remaining amount.  The plaintiffs alleged that during the course of the discussions regarding the bridge loan, an owner of Cheval agreed with the majority stockholder of Xstelos that if Black Horse put up 80% of the bridge loan, there would be an 80/20 split of certain CPEX assets that the parties referred to as “Serenity” in favor of Cheval.  The Court referred to this alleged oral agreement as the “Serenity Agreement.” 

In connection with the CPEX acquisition, plaintiff and the entity defendants executed multiple written agreements, including a Merger Agreement, Consulting Agreement, Stockholders’ Agreement and Bridge Loan Agreement.  None of these agreements made reference to the Serenity Agreement.  After CPEX was acquired, the parties attempted to document an agreement relating to the Serenity assets, but never reached an agreement as to its terms. 

The plaintiffs alleged that the defendants breached the alleged oral Serenity Agreement.  The Court first analyzed whether the Serenity Agreement was a valid contract.  The Court found it was not reasonably conceivable that the plaintiffs could prove that the parties shared an intent to be bound by the Serenity Agreement, particularly in light of the fact that the parties executed other written agreements with respect to the deal financing and none of those agreements discussed the terms of or referenced the Serenity Agreement.  The Court found it particularly persuasive that some of the terms of the written agreements directly conflicted with the plaintiffs’ description of the Serenity Agreement.  The Court reasoned that because Delaware adheres to the objective theory of contract law, the Court would only look to the outward manifestations of intent that were set forth in the written agreements, and not the subjective intent of the plaintiffs.  The Court also held that the parties’ attempt to document an agreement regarding the Serenity assets, which was ultimately unsuccessful, could not support a reasonable inference of defendants’ intent to be bound by the oral agreement.  

The Court also relied on the integration clauses contained in each of the written agreements to support its holding that the Serenity Agreement was not an enforceable contract.  The integration clauses provided that each agreement constituted the entire agreement among the parties thereto in respect of the subject matter therein and superseded all prior agreements and understandings, both oral and written, among the parties in respect of the subject matter therein.

Because the Court had held that plaintiff had not adequately alleged the existence of an enforceable contract, the Court also held that it could not specifically enforce the Serenity Agreement.

With respect to plaintiffs’ fraudulent inducement claim, the Court found that the plaintiffs failed to plead reasonable or justifiable reliance upon the defendants’ representations with respect to the Serenity Agreement, particularly because the oral promise directly conflicted with the plain language of a subsequent written agreement between the parties.  The Court also held that in order to allege fraud, the plaintiffs would need to show that the defendants had misrepresented facts and not merely that the defendants entered into an agreement on which they never intended to follow through.  Additionally, the Court held that the plaintiffs had failed to adequately plead that the defendants had been unjustly enriched because the written agreements specifically relating to the bridge loan explicitly contained the entire understanding of the parties.

The Court did not dismiss the plaintiffs’ claim of breach of contract relating to fees they were  allegedly owed under the Consulting Agreement, and stated that it was reasonably conceivable that the plaintiffs will be able to prove a breach of that agreement.  The Court similarly did not dismiss the plaintiffs’ claim of damages resulting from an alleged breach of the Stockholders’ Agreement.

Finally, plaintiffs alleged that, as the parties’ relationship worsened, the board of directors of FCB, controlled by the defendants, declared cash dividends in order to create a large tax burden for the plaintiffs.  The plaintiffs alleged that in connection with these dividends, the defendants had breached the implied covenant of good faith and fair dealing.  The Court granted in part the defendants’ motion to dismiss this claim, holding that the right of the defendants to cause the declaration of dividends was expressly provided for in the Stockholders’ Agreement, and if the parties had intended to give more protection to Cheval with respect to the timing of dividends, they could have added such limiting language to the terms of that agreement.  The Court, however, denied the motion to dismiss with respect to the plaintiffs’ claim alleging that the defendants had chosen the timing of the dividends out of a desire to harm Cheval.  The Court noted that “[w]hen exercising a discretionary right, a party to the contract must exercise its discretion reasonably,” and therefore held that it was not inconceivable based on the facts alleged that the plaintiffs may be able to show a breach of the implied covenant based on alleged bad faith conduct.

The full opinion is available here