Douglas M Chertok V Onsolve Llc

Key Facts

Transaction Type

Issues

• The court found that SDTC lacked standing to assert a breach of contract claim because it was not a stockholder of SWN at the time of the merger. The warrant was assigned and divided between Schmitz and Chertok in 2007, and by the time of the merger, any additional shares associated with the warrant would have belonged to Chertok personally rather than SDTC.
• The court addressed whether OnSolve breached the Certificate of Incorporation by making execution of a Joinder Agreement containing a release of claims a condition precedent to paying merger consideration to stockholders who withdrew their appraisal demand. The court held that conditioning payment on the execution and delivery of the Joinder Agreement breached the Certificate under Delaware law, as the release requirement was not included in the merger agreement and lacked separate consideration.
• The court determined that prejudgment interest is awarded as a matter of right when a stockholder prevails on a breach of contract claim, and the court exercised discretion to set the rate at 6.75% rather than compound interest. The court awarded simple interest on the damages award from July 29, 2017, through the date of judgment at the legal rate in effect when payment became due.
• The court held that the stockholder is entitled only to merger consideration as calculated under the Merger Agreement, including pro-rata share of escrow amounts actually released, and cannot avoid deductions for management bonuses that applied to all stockholders. The court found that the Certificate does not give the stockholder the right to a higher, differently computed amount than what other common stockholders received.

Holdings

Remedies

Contract Value

Monetary Damages

Legal Principles

• The Delaware General Corporation Law's Section 262 provisions are written into every corporate charter, creating a binding contractual obligation between the corporation and stockholders. The Certificate of Incorporation functions as a contract among shareholders, and the corporation's reading of Section 262 was incorrect in requiring execution of a release agreement as a condition to receive merger consideration.
• The court held that the corporation breached the Certificate of Incorporation by conditioning payment of merger consideration on the execution of a release agreement, as the Certificate is a contract between the Delaware corporation and its stockholders. Under Section 262(e) of the DGCL, a stockholder who withdrew an appraisal demand is entitled to merger consideration without such conditions.
• Prejudgment interest is awarded as a matter of right, not by judicial discretion, when a plaintiff prevails on a breach of contract claim. The court awarded simple interest at 6.75% (the legal rate when payment became due) from July 29, 2017, through judgment date. Under the American Rule, each party pays their own attorneys' fees unless an exception applies, such as bad faith.
• The court held that the Joinder Agreement's release provision lacked consideration and was not included in the merger agreement, making it unenforceable as a condition precedent to payment. The stockholder is entitled to merger consideration governed by the Merger Agreement terms without deductions that applied to all other stockholders.

Precedent Name

• LG Elecs. Inc. v. Invention Inv. Fund I, L.P.
• Mehta v. Smurfit-Stone Container Corp.
• Airgas, Inc. v. Air Prods. & Chems., Inc.
• Cigna Health & Life Insurance Co. v. Audax Health Solutions, Inc.

Key Disputed Contract Clauses

• Article IV, Section 4.03(d) of the Certificate of Incorporation provided that upon a Liquidation Event, which includes transactions such as the Merger, the Company must first satisfy Preferred Stock liquidation preferences and provide for payment of debts and other liabilities before distributing remaining assets to Common Stock holders on a pro rata basis. The court found this provision consistent with the Merger Agreement structure, meaning the bonuses and transaction expenses were Company liabilities that reduced amounts available for distribution to common stockholders.
• Section 3.1 of the Merger Agreement governed the allocation of Merger Consideration among holders of Common Stock, Preferred Stock, and vested options. It provided that upon closing, stockholders' shares were automatically canceled and converted into the right to receive in cash the applicable portion of the Closing Merger Consideration. The agreement contemplated that the $250 million would be subject to adjustments for net working capital, funded debt, acquisition expenses, escrow amounts, and holder representative expenses. The court found this provision governed the amount Chertok was entitled to receive.
• The Joinder Agreement was a thirteen-page document annexed to the Merger Agreement that required stockholders to waive appraisal rights, covenant not to transfer shares, and provide a broad, general release of all claims against SWN, OnSolve, or Merger Sub from the beginning of time through the effective date of the Merger. The release carved out claims arising under the Merger Agreement, claims for compensation, bonuses, or employment benefits that accrued prior to the effective date. OnSolve conditioned payment of merger consideration on stockholders executing this agreement, which the court found breached the Certificate because the release lacked consideration and was not included in the merger agreement.
• Section 262 of the Delaware General Corporation Law governs stockholder appraisal rights. Under Section 262(e), a stockholder who has demanded appraisal but has not commenced or joined an appraisal proceeding may withdraw the demand within 60 days of the effective date of the merger and accept the terms offered in the merger. If no appraisal petition is filed within 120 days of the merger, all appraisal rights lapse and stockholders who previously demanded appraisal are entitled to the merger consideration. This provision was incorporated into the Certificate of Incorporation and was central to the dispute over whether OnSolve could condition payment on execution of a release agreement.

Cited Statute

• Delaware General Corporation Law
• Delaware Code Section 2301(a)

Judge Name

Passage Text

• Under these circumstances, an award of simple—rather than compound—interest is warranted. Therefore, in the exercise of the court's discretion, the court awards prejudgment interest at 6.75%, which was the legal rate on July 29, 2017, when Chertok was entitled to payment of the Merger consideration.
• Accordingly, the court concludes that OnSolve's conditioning payment of the Merger consideration upon Chertok's returning an executed Joinder Agreement breached the Certificate.
• Therefore, Chertok is entitled to damages in the amount of $498,558.02.

Damages / Relief Type

• Simple prejudgment interest at 6.75% from July 29, 2017 through date of judgment
• $498,558.02 in damages for breach of contract claim, including $469,513.19 in merger consideration and $29,044.83 in unpaid dividends