Shareholder Representative Services LLC v. HPI Holdings, LLC

Citation: Not availableDocket: C.A. No. 2022-0166-PAF

Court: Court of Chancery of Delaware; April 26, 2023; Delaware; State Appellate Court

Original Court Document: View Document

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A breach of contract case has arisen involving Shareholder Representative Services LLC, representing former stockholders of Advantage Healthcare Holdings, Inc., against HPI Holdings, LLC regarding a $6 million earn-out payment. This payment is contingent upon the surviving company securing an agreement to offset the potential loss of a major customer, Brevard Physician Associates (BPA). The surviving company did maintain its relationship with BPA, leading the former stockholders to demand the earn-out payment. However, HPI Holdings contends that the agreement did not satisfy the specific conditions required to trigger the payment. 

The court analyzed the language of the earn-out provision, applying established contract interpretation principles, and determined it was not ambiguous. Consequently, HPI's motion to dismiss the claim for the earn-out payment was granted. 

The background reveals that HPI entered a merger agreement on September 30, 2021, to acquire Advantage Healthcare Holdings, with the latter being the surviving entity post-merger. An escrow account was established for possible adjustments, including $16.8 million for earn-out payments. The earn-out provisions, detailed in Exhibit D of the Merger Agreement, stipulated that the entire amount would be payable if the Company entered qualifying agreements with Indiana University Health and BPA. After the merger, the Company successfully signed with Indiana, resulting in a $10.8 million payment to the Plaintiff, while the remaining $6 million was contingent on a new or amended agreement with BPA.

Section 2(c) of Exhibit D of the Merger Agreement outlines conditions under which Plaintiff would receive a $6 million payment, specifically if BPA engages in a new agreement or amendment that eliminates an early termination clause. On December 22, 2021, BPA and AHS signed the “Agreement to Amend Service Agreement,” negotiated by AHS's J. Paul O’Haro with HPI's executives. This one-page document amended the existing Service Agreement, extending its term, introducing a new fee schedule, and suspending BPA’s early termination rights until September 30, 2022. On December 23, 2021, AHS’s CEO claimed in a letter to HPI that this December Agreement met the criteria for the earn-out payment. However, HPI denied this claim in a subsequent letter on January 17, 2022. Plaintiff responded on January 25, arguing that the December Agreement was a new agreement and satisfied the conditions for payment. Plaintiff also contended, as an alternative, that the December Agreement was an amendment that met the requirements for payment under Section 2(c)(B). HPI continues to dispute the validity of the December Agreement in relation to the earn-out payment and has not released the funds held in escrow. 

On February 18, 2022, Plaintiff filed this action, which includes three counts: Count I claims a breach of contract for failing to release the earn-out payment; Count II asserts a breach related to a working capital adjustment; and Count III seeks a declaratory judgment for entitlement to escrow distributions. HPI moved to dismiss the Complaint on June 13, 2022, citing lack of subject matter jurisdiction and improper venue, as well as failure to state a claim in Count I. The court heard the motion on November 7, 2022, and subsequently denied it without prejudice on November 22, 2022, directing the parties to discuss a discovery schedule regarding the dispute resolution mechanism.

On January 9, 2023, the parties notified the court of the Defendant's withdrawal of its motion to dismiss the Complaint based on Court of Chancery Rules 12(b)(1) and 12(b)(3). The letter indicated a disagreement regarding whether the court's prior denial of the motion to dismiss also applied to the merits of Count I. The court had previously focused on the jurisdictional motions, postponing its decision on the 12(b)(6) motion until subject matter jurisdiction was established. With the Defendant's withdrawal of its jurisdictional and venue defenses, the 12(b)(6) motion is now ready for consideration.

Count I alleges that HPI breached the Merger Agreement by failing to release a $6 million earn-out payment after BPA and AHS signed the December Agreement. The Plaintiff asserts that this Agreement either constitutes a new contract triggering the earn-out under Section 2(c)(C) or acts as an amendment removing an early termination clause, thereby triggering the payment under Section 2(c)(B). The Defendant disputes that the December Agreement meets the criteria for either provision.

Under Rule 12(b)(6), the court accepts all well-pleaded factual allegations as true, allows vague allegations to give notice of claims, and draws reasonable inferences in favor of the non-moving party. Dismissal is only warranted if the plaintiff cannot recover under any conceivable circumstances. A breach of contract claim requires showing the existence of a contract, a breach of its terms, and resultant damages. The court's task involves interpreting the contracts based on Delaware's objective theory of contracts, which dictates that a contract should be understood as it would be by a reasonable third party. Clear and unambiguous contract language is interpreted according to its plain meaning, ensuring all terms are given effect without rendering any part superfluous.

Ambiguity in contractual interpretation must be resolved in favor of the nonmoving party, meaning the defendant cannot achieve dismissal under Rule 12(b)(6) unless their interpretation of the contract is the only reasonable one. Ambiguity occurs when a contractual provision can be interpreted in multiple ways, and disagreement between parties does not inherently create ambiguity. 

The court's initial inquiry is whether the December Agreement constitutes a new agreement or an amendment per Section 2(c) of Exhibit D to the Merger Agreement. The court emphasizes the importance of the contract's language as evidence of the parties' intent. The plaintiff's claim of ambiguity relies on two arguments: the title "Agreement to Amend Service Agreement" and the assertion that it replaces certain provisions of the Service Agreement. However, these arguments lack merit. The title does not create ambiguity as the intent of the parties and the document's language are clear. The Service Agreement requires that amendments be in writing and signed, and the December Agreement is explicitly referred to as an amendment.

The December Agreement is labeled “THIS SECOND AMENDMENT OF SERVICE AGREEMENT” and modifies the existing Service Agreement. The language throughout the December Agreement reinforces its nature as an amendment, stating that it will be incorporated into the Service Agreement and that all existing terms not altered by this amendment remain effective. An amendment is defined as a formal revision or addition to an existing agreement, which confirms that the original contract must remain in existence. Thus, the structure and language of the December Agreement indicate that it was intended as an amendment, not a new contract.

A new agreement is defined as one that is not contingent on an existing agreement, allowing parties to establish a contractual relationship from the beginning. The December Agreement, which amends the Service Agreement between Brevard Physician Associates, Client, and AdvantEdge Healthcare Solutions, Inc., is characterized as an amendment rather than a new agreement. It incorporates its terms into the existing Service Agreement without displacing it, confirming its role as an amendment.

The December Agreement consists of one page and modifies certain provisions of the Service Agreement, including fee rates, term, and responsibilities, while expressly revoking a previous termination notice. It maintains that all terms of the 36-page Service Agreement not altered by the December Agreement remain in effect, contradicting the notion that it constitutes a new agreement. 

The plaintiff's claim that the changes create a new agreement lacks supporting authority and fails to recognize the explicit language indicating the parties' intent to modify the existing agreement. Moreover, the Merger Agreement distinguishes between "new agreement" and "amendment," suggesting they have different meanings. As such, the December Agreement does not qualify as a new agreement under the terms of the Merger Agreement.

The court next considers whether the December Agreement eliminates the early termination clause of the Service Agreement. The Service Agreement included a "Term" section detailing an initial three-year term with automatic renewal and provisions for termination with ninety days' notice after July 1, 2017.

The December Agreement modifies the "Term" section to extend the term until December 31, 2022, with automatic annual renewals thereafter. After September 2022, either party can terminate the Agreement with at least ninety days' written notice. Plaintiff contends this modification replaces the previous termination provision, effectively extending the term until September 30, 2022. Defendant argues that the early termination clause from the Service Agreement remains valid and does not trigger the earn-out under Section 2(c)(B). The December Agreement does not delete the prior term provision but supplements it, suspending BPA’s early termination right until December 31, 2022, while still allowing termination thereafter under the original terms. The term "remove" is clarified as meaning to eliminate, which the December Agreement does not do regarding the early termination provision; it only delays its exercise. Consequently, the December Agreement does not fulfill Section 2(c), and Defendant's obligation to release the earn-out payment is not triggered. As a result, the court grants Defendant’s motion to dismiss Count I for failure to state a claim, with prejudice.