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Ray Beyond Corp. v. Trimaran Fund Management, L.L.C., C.A. No. 2018-0497-KSJM (Del. Ch. Jan. 29, 2019) (McCormick, V.C.)

January 29, 2019

In this memorandum opinion, the Delaware Court of Chancery held that a merger agreement provision conferring dispute resolution authority upon an independent accounting firm designated an “expert, not an arbitrator” and therefore only encompassed “discrete, non-legal issues within the scope of an independent accounting firm’s authority.” Furthermore, the Court held that a tortious interference claim against a parent corporation cannot succeed without showing that the parent acted maliciously or in bad faith.

Plaintiff Ray Beyond Corporation (“Ray Beyond”) entered into a merger agreement to acquire ChanceLight, Inc. (“ChanceLight”) from its selling security holders, including Defendant Trimaran Fund management, L.L.C. (“Trimaran”). A portion of the purchase price was placed in escrow with payment contingent upon a ChanceLight subsidiary, Ombudsman Education Services, Ltd. (“Ombudsman”), entering into a qualifying post-closing contract with Chicago Public Schools (“CPS”). The parties disputed whether a one-year extension of the CPS contract constituted a qualifying contract and whether the merger agreement required the issue to be submitted to the independent accounting firm for resolution. Ray Beyond filed an action seeking judgment on the pleadings for specific performance of the dispute resolution provision which it described as the “exclusive mechanism” to settle the distribution of the escrow. Trimaran counterclaimed, seeking a declaration that the extension was a qualifying contract, and bringing other claims arising out of Ray Beyond’s failure to release the escrow. Trimaran also asserted a claim of tortious interference against Ray Beyond’s parent affiliate, The Halifax Group, Inc. (“Halifax”), for refusing to execute a joint instruction to release the escrow funds.

The dispute resolution provision that Ray Beyond sought to enforce provided that if the parties “are not able in good faith to agree upon an appropriate distribution of the CPS Escrow Amount, the matter shall be referred to the Settlement Accountant.” The Court noted that its task was to decide the “shared intentions of the contracting parties” by reading the specific provisions in light of the entire contract. Applying this canon of contract interpretation, and consistent with Delaware precedent, the Court held that an “expert, not an arbitrator” provision, while not conclusive in itself, indicated an intent to narrow the scope of the accounting firm’s authority to discreet factual issues within its expertise. Furthermore, the Court held that the imposition of a tight 20-day deadline, the absence of any procedural rules typically afforded to an arbitrator, and the common practice of having legal professionals arbitrate post-closing pricing disputes, all supported the same conclusion. Holding that the source of the parties’ dispute was a legal matter outside the expertise of the accounting firm, the Court denied Ray Beyond’s motion for judgment on the pleading on its claim for specific performance. Since Ray Beyond’s motion for judgment on the pleadings as to Trimaran’s counterclaims was predicated on the same arguments, that motion was also denied.

Finally, noting the strong economic interest of a parent corporation in consulting with its subsidiary, the Court held that a parent corporation could not be liable for tortious interference without evidence of bad faith or malicious conduct. Finding none present, nor any evidence that it was Halifax that denied Trimaran the escrow amount, the Court granted Halifax’s motion for judgment on the pleadings as to Trimaran’s tortious interference claims.

The full opinion is available here