Chancery Defers to Liquidating Trustee in Approving a Sale of LLC Assets
Acela Invs. LLC v. DiFalco, C.A. No. 2018-0558-AGB (Del. Ch. Apr. 27, 2020).
This case affirms that, absent an abuse of discretion, the Court of Chancery will defer to a sale agreement proffered and negotiated by a Court-appointed liquidating trustee. In this case, the Court had appointed the liquidating trustee (the “Trustee”) after granting judicial dissolution of a Delaware LLC due to member deadlock. At the last minute, and following a six-month sale process, a bidder that was owned by two of the LLC’s members made an offer that the Trustee rejected as untimely and inadequate. The bidder challenged the Trustee’s judgment in rejecting its bid. The Court upheld the Trustee’s decision to reject the bid, finding no evidence of an abuse of discretion.
The Sale Order at issue provided that the “the Liquidating Trustee shall have full control and dominion over the dissolution and liquidation of IDS” and that the Court would only reverse the trustee’s decisions for an abuse of discretion. Because the business of the dissolved company, Inspirion Delivery Services, LLC (“IDS”), was to develop abuse-deterrent opioids, the Trustee retained a life sciences investment advisor who assisted in conducting the sale process. That process resulted in the Trustee causing IDS to enter into an agreement with OHEMO LIFE SCIENCES INC (“OHEMO”) (“the OHEMO Agreement”) on March 31, 2020. Pursuant to the OHEMO Agreement, OHEMO promised to pay $4 million in cash at closing for substantially all of the IDS assets and make royalty payments of 10% of the net sales generated from IDS products capped at $10 million. OHEMO also had the right to terminate the agreement if IDS did not request the Court’s approval before April 3, 2020, creating a 48-hour window for the Trustee to solicit better offers. Under the OHEMO Agreement, a better offer had to include a deposit equal to OHEMO’s deposit.
A competing bidder, Cerovene, Inc. (“Cerovene”), made a last minute bid to acquire IDS. Although Cerovene’s owners were two members of the dissolved LLC who were aware of the ongoing process, and although the Trustee had sent Cerovene and its agents (the “Objectors”) clear instructions on how to submit an offer, the Objectors only submitted an unsigned agreement (the “Cerovene Agreement”) and did not make the required deposit within the 48-hour window. The Cerovene Agreement provided that Cerovene would pay (i) $2.25 million in cash at closing, and (ii) offset $1.85 million of IDS’s debt to Cerovene for a total payment of $4.1 million. Cerovene also agreed to make royalty payments of 10% of net sales capped at $15 million. The Trustee rejected the Objectors’ bid and moved the Court of Chancery to approve the sale to OHEMO. The Objectors opposed the Trustee’s motion, claiming, “(i) the Liquidating Trustee’s rejection of their bid for failing to comply with the bidding requirements was unwarranted and (ii) Cerovene’s offer provides more value to IDS’s stakeholders than the OHEMO Agreement.”
The Court of Chancery held that the Trustee did not abuse his discretion and, therefore, upheld the Sale. The Court reasoned that the Objectors disengaged from the six-month sale process by failing to attend the Trustee’s bid meetings, sign a confidentiality agreement, or heed the Trustee’s nudges to submit a bid. The Court also found that the Trustee did not abuse his discretion in choosing to honor the terms of the OHEMO Agreement, including a condition to sell certain assets to OHEMO unless a competing bidder offered better terms within the 48-window. The Court upheld the Trustee’s judgment that the OHEMO Agreement provided more value to IDS because IDS was in a precarious financial position and OHEMO’s all-cash offer allowed IDS to continue to wind up the company and pursue claims. Additionally, Cerovene’s $15 million cap on royalty payments did not confer more value than OHEMO’s $10 million cap because neither party had ever sold IDS products and there was a significant probability that neither party would pay any royalties to IDS. Finally, the Cerovene Agreement conferred less value because it allowed Cerovene to assign its obligations under the contract to a third party, whose ability to sell IDS products was unknown. The Court thus found that the Trustee did not abuse his discretion in rejecting the Cerovene bid as untimely and inadequate and approved the OHEMO Agreement.Share