Which Associates Are Certain by Restrictive Covenants Hinges on the Language the Events Selected, Current Rulings Stress – JD Supra

Skadden, Arps, Slate, Meagher & Flom LLP
[co-author: Dakota Eckenrode]
In 2021, the Delaware Court docket of Chancery issued two choices addressing when a contractual occasion’s associates are sure to restrictive covenants in an settlement. Within the first case, Sixth Road Companions Administration Firm, L.P. v. Dyal Capital Companions III (A) LP,1 the plaintiff alleged {that a} switch restriction in an funding settlement was breached when an investor’s upstream affiliate agreed to promote a enterprise division that included the investor’s common companion. Within the second, Symbiont.io, Inc. v. Ipreo Holdings, LLC,2 the plaintiff alleged {that a} noncompetition provision in a three way partnership settlement was breached when the opposite occasion to the three way partnership was acquired by a competitor of the plaintiff.
The Sixth Road resolution held that the restriction did to not apply to the upstream affiliate, whereas in Symbiont, the restriction was enforced towards a nonparty to the unique contract. Nonetheless, each choices turned on a detailed studying of the language of the events’ agreements, and each present useful steerage to drafters, highlighting why business entities and their attorneys ought to take care in defining what’s encompassed by the time period “affiliate.”
The Dyal Capital Companions division (Dyal) of Neuberger Berman Group, LLC (Neuberger) managed funds that acquired passive minority fairness stakes in different non-public funding corporations. In 2017, a restricted partnership that Dyal managed (Dyal III) invested in Sixth Road Companions (Sixth Road), another asset supervisor. Dyal III’s relationship with Sixth Road was ruled by an funding settlement that included sure restrictions on the switch of Dyal’s curiosity in Sixth Road, and, particularly, that “no Subscriber [i.e., Dyal III] could Switch its Pursuits in any Issuer [i.e., Sixth Street]” with out prior consent.
In December 2020, Neuberger introduced that it had entered right into a enterprise mixture settlement (BCA) to merge Dyal with Owl Rock Capital Group (Owl Rock) and a particular goal acquisition firm referred to as Altimar Acquisition Company. Importantly, the transaction was structured so the deal was completely between “upstairs’ entities” – i.e., Neuberger and Owl Rock – and “[t]he authorized and financial relationships between Sixth Road and Dyal III … is not going to change.”
Sixth Road sued, in search of to enjoin the transaction, alleging that the transactions contemplated beneath the BCA between Neuberger and Owl Rock constituted a prohibited switch beneath Dyal III and Sixth Road’s funding settlement. Sixth Road argued that, though Dyal III was the one outlined “Subscriber” within the funding settlement, the definition of the verb “Switch,” which included “some other comparable transaction involving an Affiliate,” was meant to stop any switch of an curiosity in Sixth Road by any affiliate of Dyal III up the company ladder.
In April 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court docket of Chancery denied Sixth Road’s request for a preliminary injunction and held that the plaintiffs did not exhibit a chance of success in establishing that there was a breach of the funding settlement, and likewise did not exhibit a chance of success that Neuberger tortiously interfered with the funding settlement.
The court docket emphasised that “the Subscriber, Dyal III, is transferring nothing within the Transaction, so the Switch Restriction will not be triggered.” The court docket famous that “Sixth Road’s interpretation would have the Court docket enjoin a transaction at any stage of Dyal’s company pyramid, no matter whether or not that entity was explicitly sure by the Switch Restriction. This runs afoul of Delaware’s well-settled respect for and adherence to rules of company separateness and freedom of contract, particularly within the palms of refined events that might have expressly sure Dyal III’s upstairs entities if doing so mirrored their meant settlement.”
The court docket relied on two latest Delaware opinions that declined to increase contract provisions to nonparty upstream entities. The primary was the Delaware Supreme Court docket’s holding in Borealis Energy Holdings Inc. v. Hunt Strategic Utility Funding L.L.C.,3 the place the court docket refused to bind an upstream proprietor to “a proper of first refusal” provision in its subsidiary’s contract. In doing so, the Supreme Court docket held that the “evaluation was ruled by the ‘topic’ of the correct of first refusal,” and the topic was solely the subsidiary, not the proprietor.
Equally, in Sheehan v. Assured Companions, Inc.4 the Court docket of Chancery discovered {that a} tag-along proper was not triggered, as a result of the topic of the supply was not doing any transferring or promoting of its items within the challenged transaction.
Making use of these precedents, the court docket in Sixth Road concluded that “the Switch Restriction is triggered solely by the Subscriber’s Switch of its Pursuits in Sixth Road, which is not going to happen within the Transaction. Dyal III will not be transferring any Pursuits. The Switch Restriction applies solely when Dyal III is doing the transferring, so an upstairs sale of management over Dyal III GP can not set off it. Dyal III, the Subscriber, will not be a celebration to the Transaction and its funding in Sixth Road is unchanged. The Transaction doesn’t set off the Switch Restriction.”5
As well as, the court docket discovered that there was no irreparable hurt and the stability of the equities favored the defendants.
The Delaware Supreme Court docket later summarily affirmed the Court docket of Chancery’s resolution after judgment was entered towards Sixth Road.
In 2016, Symbiont.io, Inc. (Symbiont) and Ipreo LTS, LLC (Ipreo) joined forces with a plan “to revolutionize the secondary marketplace for syndicated loans.” They fashioned a three way partnership, which concerned the creation of a brand new restricted legal responsibility firm, Synaps (JV). Symbiont dedicated to supply the JV a distributed ledger and sensible contract expertise, and Ipreo dedicated to supply, amongst different issues, a administration group with experience within the syndicated mortgage trade. Symbiont and Ipreo entered into a number of agreements, together with a three way partnership settlement (JV Settlement).
The JV’s main competitor, IHS Markit Ltd. (Markit), had a 99% share of the marketplace for middleman providers for syndicated loans by its expertise ClearPar. Symbiont and Ipreo thought that they’d a superior expertise that might take market share from Markit.
In 2018, because the JV was struggling to realize traction, rumors unfold that Markit was in talks to accumulate Ipreo. Finally, Markit acquired Ipreo in its entirety, together with its pursuits within the JV, for $1.86 billion. After the acquisition closed, Markit determined towards persevering with the JV, and Markit continued to function its ClearPar enterprise.
In Could 2019, Symbiont filed go well with towards Ipreo and Markit, bringing breach of contract and tortious interference claims. In its headline declare, Symbiont asserted that Ipreo breached the noncompetition provision within the JV Settlement. That provision prohibited Ipreo and any of its “associates” from partaking in any joint ventures besides by the Synaps JV. Symbiont argued that Ipreo breached the noncompetition provision as quickly because the acquisition closed as a result of “(i) Markit grew to become an Affiliate of Ipreo on account of the Acquisition, (ii) Markit engaged within the Joint Enterprise Enterprise by providing its ClearPar product, and (iii) Markit didn’t run its ClearPar enterprise by [Synaps].”
In a post-trial opinion, the Court docket of Chancery discovered that Symbiont proved that Ipreo breached the noncompetition provision beneath this idea. The one disputed concern was whether or not Markit certified as an affiliate of Ipreo after the acquisition.
The JV Settlement outlined “affiliate” to imply embody any entity that “straight or not directly, controls, is managed by, or is beneath frequent management with” a celebration. The time period was utilized in a number of locations all through the JV Settlement along with the noncompetition provision, even within the definition of “Ipreo” firstly of the settlement, which was outlined to incorporate “its Associates.”
Symbiont argued that the definition of affiliate referred to as for “figuring out whether or not a celebration qualifies as an Affiliate on the time when contractual compliance with the JV Settlement is measured.” In different phrases, in line with Symbiont, the court docket wanted to find out whether or not a celebration certified as an affiliate on the time that the prohibited competitors passed off. Underneath this reasoning, as soon as an entity certified as an affiliate, that entity couldn’t interact in a “Joint Enterprise Enterprise” with out inflicting a breach of the noncompetition provision.
Ipreo countered, arguing that the definition of affiliate solely encompassed events that certified as associates on the date the JV Settlement grew to become efficient.
The court docket sided with Symbiont, saying that, “[f]or functions of the Non-Competitors Provision, there are different textual indications that compliance with the Affiliate Definition is decided when contractual compliance is measured.” These “textual indications” included, amongst different issues, language in one other restrictive covenant that confirmed that the events knew how you can restrict the scope to occasions that occurred as of a particular date, whereas the noncompetition provision and the definition of affiliate failed to make use of comparable language, thus indicating an intent that the associates needs to be decided as of the date contractual compliance is measured.
The court docket discovered that Common Studios Inc. v. Viacom Inc.6 was straight on level. That court docket didn’t restrict the affiliate definition to firms that certified as associates when the three way partnership settlement was signed. The Symbiont court docket held, “[w]hen Symbiont and Ipreo entered into the JV Settlement in 2016, the Viacom case was settled precedent. It had been on the books for nineteen years. The choice not solely illuminates the plain language of the JV Settlement, however it additionally reveals that if the drafters needed to realize a distinct outcome, resembling limiting the protection of the Affiliate Definition to these Individuals that certified as associates on the efficient date, then they wanted to incorporate further language to realize that outcome.”
The court docket went on to conclude that, along with the plain language of the settlement and case regulation, the “real-world” business context additionally favored Symbiont’s interpretation of the noncompetition provision and definition of affiliate. The court docket discovered that “[i]t wouldn’t make sense for the Non-Competitors Provision to acknowledge that the members’ relationships with the Firm might change over time, but for the Affiliate Definition to deal with these relationships as ceaselessly fastened on the time of signing.” If that have been the case, “both Symbiont or Ipreo might kind a brand new entity instantly after executing the JV Settlement, then conduct Joint Enterprise Enterprise by that entity. That consequence is absurd.”
“Ipreo’s interpretation of the Affiliate Definition looks like one thing dreamed up after the very fact, for functions of litigation,” the court docket mentioned. “It isn’t an interpretation that Ipreo held in actual time, when negotiating and agreeing to the Transaction Agreements.”
The court docket subsequently held that Ipreo was responsible for breach of the noncompetition provision within the JV Settlement when Markit grew to become Ipreo’s affiliate and operated its ClearPar enterprise exterior the JV.7
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1 Sixth Road Companions Mgmt. Co., L.P. v. Dyal Capital Companions III (A) LP, 2021 WL 1553944 (Del. Ch. Apr. 20, 2021), aff’d, 253 A.3d 92 (Desk) (Del. 2021).
2 Symbiont.io, Inc. v. Ipreo Holdings, LLC, 2021 WL 3575709 (Del. Ch. Aug. 13, 2021).
3 233 A.3d 1 (Del. 2020).
4 2020 WL 2838575 (Del. Ch. Could 29, 2020).
5 2021 WL 1553944.
6 705 A.2nd 579 (Del. Ch. 1997).
7 Symbiont is presently on attraction to the Delaware Supreme Court docket.
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