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Sparton Corporation v. Joseph F. O’Neil, et al., C.A. No. 12403-VCMR (Del. Ch. June 18, 2018) (Montgomery-Reeves, V.C.)

June 18, 2018

In this letter opinion, the Court of Chancery granted Defendants’ motion for partial judgment on the pleadings and entered a mandatory injunction ordering Plaintiff to instruct an escrow agent to release certain funds to Defendants.  The Court also awarded Defendants an interim attorneys’ fee award of approximately $448,000 pursuant to a contractual fee-shifting provision. 

This lawsuit arose from Plaintiff Sparton Corporation’s acquisition of Hunter Technology Corporation.  In the complaint, Sparton alleged that Defendants, Hunter stockholders and optionholders, fraudulently induced Sparton to enter into the merger agreement by presenting false financial statements during negotiations and that Defendants also breached various provisions of the merger agreement.  The Court dismissed all of those claims, except for one breach of contract claim, for failure to state a claim under Rule 12(b)(6).

Defendants brought counterclaims against Sparton, alleging that Sparton breached the merger agreement and a contemporaneously executed escrow agreement by refusing to release $838,000 held in escrow.  Defendants moved for partial judgment on the pleadings seeking release of the escrow funds.  The Court found the pertinent contractual provisions to be unambiguous and, based on that contractual language, held that Defendants were entitled to the release of the escrow funds. 

As a remedy, Defendants sought a mandatory injunction ordering Sparton to instruct the escrow agent to release the escrow funds.  In granting Defendants’ request for a mandatory injunction, the Court determined that Defendants proved actual success on the merits of their breach of contract claim, demonstrated irreparable harm, and showed that the balance of the equities favored Defendants because Sparton never had the right to withhold the escrow funds.  With respect to irreparable harm, the Court relied heavily on a provision in the merger agreement by which the parties stipulated that irreparable harm would occur if any of the contract’s provisions were breached and that specific enforcement and injunctive relief were appropriate remedies for any such breaches.  Although the Court stated that a contractual stipulation is typically sufficient by itself to demonstrate irreparable harm, it also noted that an order requiring immediate release of escrow funds is “the most certain, prompt, complete, and efficient form of relief,” such that any legal remedies, including an award of damages, would be inadequate. 

The Court also granted Defendants’ request for an interim award of attorneys’ fees and expenses incurred in defending against certain of Sparton’s dismissed claims.  The merger agreement provided that the prevailing party was entitled to recover from the non-prevailing party all reasonable costs and attorneys’ fees from any litigation arising from certain specified claims, including the fraud claim and one of Sparton’s breach of contract claims.  The Court rejected Sparton’s numerous arguments that the requested fees, totaling approximately $448,000, were unreasonable.

Notably, Sparton argued that the requested fees were unreasonable because the only activity in the litigation related to Defendants’ motion to dismiss.  The Court stated that Sparton ignored the fact that its decision to file two lengthy complaints with numerous claims required Defendants to move to dismiss each complaint, file opening briefs in support of each motion, and fully brief and argue the second motion.  Sparton also argued that Defendants’ decision to retain three law firms, including Delaware counsel, to defend Sparton’s claims was unreasonable.  The Court disagreed, stating that “each of Defendants’ counsel performed important and distinct functions in defending against Sparton’s claims” and, specifically, that retaining Delaware counsel “does not suggest duplicative or excessive resources; it rather suggests the efficient and prudent allocation of resources.”  Sparton further argued that Defendants could not recover fees incurred during the four months before Sparton filed its first complaint.  However, the Court held that, absent a clear restriction to the contrary, a fee-shifting provision encompasses fees incurred in anticipation of litigation. 

The full opinion is available here