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Delaware Superior Court CCLD Dismisses Breach of Contract Action for Failure to State a Claim

P&TI Acquisition Co. v. Morgenthaler Partners VII, LP, C.A. No. N18C-08-059 AML CCLD (Del. Super. May 9, 2019).

Plaintiff P&TI Acquisition Co. brought a breach of contract action asserting that Defendants violated a 2012 stock purchase agreement (“SPA”). The SPA governed various assets Defendants, including PhilTem Holdings, Inc. and a PhilTem subsidiary (collectively “PhilTem”), sold to the Plaintiff. It prohibited Defendants and their “Affiliates” from soliciting or employing any PhilTem employees before February 2017. The SPA defined “Affiliate” as a party that controls, is controlled by, or is under common control with any defendant, and “Control” was defined as the power to direct or cause the direction of the management and policies of an Affiliate.  Plaintiff alleged that the Defendants caused an affiliate to solicit for employment a PhilTem CEO and a CFO as early as 2014.

After drawing all reasonable factual inferences in favor of the Plaintiff, the Court found that Plaintiff failed to establish that the entity responsible for the alleged solicitation was an Affiliate of the Defendants as the SPA defined that term. According to the Court, the “Plaintiff’s breach of contract claim [turned] on whether some individual or entity commonly controls Defendants and [Affiliate].” The Court determined that no Defendant had greater than 50% control of the shares of the alleged Affiliate, and no Defendant otherwise dominated or controlled that entity, as required by the SPA and Delaware law. Drawing comparisons to recent decisions such as In re Tesla Motors (in which Elon Musk was found to dominate and control the board despite having only 22% of the corporation’s voting shares), the Court found that Plaintiff did not establish a sufficient level of influence by any Defendant over the alleged Affiliate. This decision re-affirms that Delaware courts likely will not find that a party with less than majority share ownership is a controller absent specific facts that show actual dominance and control, which Plaintiff failed to allege here.