Fortis Advisors Llc V Stillfront Midco Ab

Key Facts

Transaction Type

Issues

• The court addressed whether Stillfront's alleged failure to provide Fortis with information and access to personnel under the merger agreement was a procedural arbitrability matter for the arbitrator. The court concluded that such issues, being related to the information needed for earnout determination, were for the arbitrator to decide.
• The court evaluated if BDO's failure to disclose its relationship with Stillfront's counsel, DLA Piper, constituted evident partiality under the Federal Arbitration Act. The court found no sufficient evidence of a direct or intimate relationship that would cast doubt on BDO's impartiality.
• The court considered whether Fortis's allegations of bad faith in altering Kixeye's Adjusted EBITDA and breaches of operational covenants, which could trigger a presumption of maximum earnout payment, were within the scope of the arbitration agreement. The court held these claims were subsumed by the earnout calculation dispute, which was subject to arbitration.

Holdings

• The court concluded that the seller representative's information-rights claim—alleging failure to provide access to documents and personnel—was a procedural arbitrability issue. Under the merger agreement's ADR framework, the arbitrator is tasked with deciding what information must be considered in resolving the earnout dispute. The court rejected the seller's argument that the arbitrator could not address this claim after the Earnout Disagreement Notice deadline, emphasizing that procedural arbitrability is for the arbitrator to resolve.
• The court found no error in the Court of Chancery's refusal to vacate the arbitrator's award due to undisclosed relationships between BDO (the arbitrator's firm) and Stillfront's counsel (DLA Piper). The relationships cited by the seller—such as a proposed unrelated engagement and representation of a BDO affiliate—were deemed insufficient to demonstrate 'evident partiality.' The court emphasized that the parties, as sophisticated entities, knowingly accepted BDO's engagement terms, which explicitly reserved future engagements.
• The Supreme Court of Delaware affirmed that the seller representative's bad-faith breach claims fall within the scope of the arbitration provision. These claims, which alleged the buyer manipulated financial figures to reduce the earnout amount, were deemed contestable through arbitration as they directly relate to the accuracy of the earnout calculation. The court held that determining whether the buyer acted in bad faith to affect the earnout amount is a matter for the arbitrator, not the court.

Remedies

• The Court of Chancery confirmed the arbitration award issued by BDO's Jeffrey Katz, which concluded Fortis was not entitled to any recovery. The Delaware Supreme Court affirmed this confirmation, rejecting claims of arbitrator bias.
• The Court of Chancery granted Stillfront's motion to compel arbitration of Fortis's breach of contract and implied covenant claims, dismissing Fortis's complaint with prejudice. This decision was affirmed by the Delaware Supreme Court.

Contract Value

Legal Principles

• The court interpreted the arbitration clause's scope using a purposive approach, focusing on the intent of the parties. It held that §2.14's reference to an 'Arbitrator' to determine the 'actual Earnout Amount' encompassed not just calculations but also disputes about bad faith and information access, as these directly impacted the earnout determination. This aligns with the principle that arbitration clauses should be broadly construed to effectuate the parties' agreement.
• The court applied the distinction between substantive and procedural arbitrability. Substantive arbitrability, a gateway question for the court, determines whether a dispute falls within the arbitration clause's scope. Procedural arbitrability, concerning compliance with arbitration terms (e.g., information access, evidence consideration), is for the arbitrator to decide. The Court of Chancery and Supreme Court of Delaware held that Fortis's claims about bad faith and information access were procedural arbitrability issues, thus within the arbitrator's purview.

Precedent Name

• Sapp v. Indus. Action Servs., LLC
• ArchKey Intermediate Hldgs. Inc. v. Mona
• Terrell v. Kiromic Biopharma, Inc.
• Beebe Medical Center, Inc. v. InSight Health Servs. Corp.
• Viacom Int'l Inc. v. Winshall

Key Disputed Contract Clauses

• Section 2.14 of the merger agreement established a three-step process for calculating the earnout, including an arbitration clause referring disputes to a mutually agreed accounting firm. The court analyzed whether claims of bad faith and procedural arbitrability fell within this provision's scope.
• Section 2.12(g) granted Fortis 'reasonable access to information' and personnel to perform its duties. The court determined that disputes over this provision's compliance (e.g., denial of information access) were procedural arbitrability issues for the arbitrator to resolve.
• Section 2.14(e) prohibited Stillfront from acting in bad faith to reduce the earnout amount. The court held that claims alleging violations of this covenant were subsumed within the earnout calculation dispute and thus subject to arbitration.

Cited Statute

Judge Name

• Traynor
• Valihura
• Seitz

Passage Text

• In this opinion we conclude that the seller representative's bad-faith breach claims fall within the compass of the ADR provision... We therefore affirm the Court of Chancery's judgment.
• We conclude likewise that the Court of Chancery properly dismissed and referred to arbitration Fortis's breach claim under the merger agreement's information-access provisions... an issue of procedural arbitrability within the arbitrator's purview.
• Under Viacom, as we noted before, 'if the subject matter to be arbitrated is the calculation of an earn-out, ... all issues as to what financial or other information should be considered in performing the calculation are decided by the arbitrator.'