Delaware Business Litigation Report

Enforcing a “Draconian” Bargain, Chancery Grants Motion to Dismiss Claims Arising from Right to Repurchase Interest Upon Termination

Moscowitz v. Theory Entertainment LLC, C.A. No. 2019-0780-MTZ (Del. Ch. Oct. 28, 2020)
This case illustrates that the Court will enforce parties’ agreements even if they reflect a bad bargain for one party. Plaintiff Todd Moscowitz, a co-founder of Theory Entertainment LLC (“Theory” or the “Company”), resigned from Theory without giving prior notice, which triggered a “for cause” termination provision under agreements he had entered into with the Company. The termination provision allowed Theory to repurchase Moscowitz’s entire equity stake for a fraction of its value. To avoid that potential outcome, Plaintiff’s resignation notice contained language purporting to preserve his membership interest in Theory and to render his resignation void ab initio if a court were later to determine otherwise.

The Court of Chancery held that Moscowitz was bound by the terms of the agreements with Theory and rejected his claim that they were invalid for lack of consideration. The Court stated that “Delaware law presumes the plaintiff is bound by the language of the agreements he signed, no matter how draconian.” In rejecting Moscowitz’s arguments, the Court found that the parties had exchanged consideration and that the Court would not weigh the sufficiency of the consideration or the consequences to Moscowitz of his decision to resign without the required notice. The Court ruled that the agreements at issue were  unambiguous and evinced the parties’ intent that Theory’s managers be able to repurchase shares in their sole discretion at the discounted price. The Court emphasized that Theory and Moscowitz were sophisticated parties. And because the agreements covered the matters in dispute, there were no terms to imply and the Court thus also dismissed plaintiff’s claim of breach of the implied covenant of good faith and fair dealing. The Court denied defendant’s motion seeking to dismiss claims to the extent they related to the propriety or effect of plaintiff’s resignation; the Court reasoned that addressing the validity of the plaintiff’s conditional resignation would turn on factual issues and issues of Delaware corporate law and general contract law that the parties had not briefed.

Share