Which Associates Are Sure 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 Courtroom of Chancery issued two selections addressing when a contractual celebration’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 normal 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 celebration to the three way partnership was acquired by a competitor of the plaintiff.
The Sixth Road choice 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. Nevertheless, each selections turned on an in depth studying of the language of the events’ agreements, and each present useful steering 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 personal funding corporations. In 2017, a restricted partnership that Dyal managed (Dyal III) invested in Sixth Road Companions (Sixth Road), an alternate 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 known 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 … won’t change.”
Sixth Road sued, looking for 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 related transaction involving an Affiliate,” was meant to forestall 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 Courtroom of Chancery denied Sixth Road’s request for a preliminary injunction and held that the plaintiffs did not show a probability of success in establishing that there was a breach of the funding settlement, and in addition did not show a probability 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 is just not triggered.” The court docket famous that “Sixth Road’s interpretation would have the Courtroom enjoin a transaction at any degree 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 fingers of subtle events that would 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 Courtroom’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 Courtroom held that the “evaluation was ruled by the ‘topic’ of the proper of first refusal,” and the topic was solely the subsidiary, not the proprietor.
Equally, in Sheehan v. Assured Companions, Inc.4 the Courtroom of Chancery discovered {that a} tag-along proper was not triggered, as a result of the topic of the availability was not doing any transferring or promoting of its models 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 won’t happen within the Transaction. Dyal III is just not 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, is just not 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 Courtroom later summarily affirmed the Courtroom of Chancery’s choice 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 good contract expertise, and Ipreo dedicated to supply, amongst different issues, a administration staff with experience within the syndicated mortgage business. Symbiont and Ipreo entered into a number of agreements, together with a three way partnership settlement (JV Settlement).
The JV’s major competitor, IHS Markit Ltd. (Markit), had a 99% share of the marketplace for middleman companies for syndicated loans by means of its expertise ClearPar. Symbiont and Ipreo thought that they’d a superior expertise that would take market share from Markit.
In 2018, because the JV was struggling to achieve traction, rumors unfold that Markit was in talks to amass Ipreo. In the end, 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 swimsuit 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 participating in any joint ventures besides by means of the Synaps JV. Symbiont argued that Ipreo breached the noncompetition provision as quickly because the acquisition closed as a result of “(i) Markit turned 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 means of [Synaps].”
In a post-trial opinion, the Courtroom of Chancery discovered that Symbiont proved that Ipreo breached the noncompetition provision beneath this idea. The one disputed problem 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” in the beginning of the settlement, which was outlined to incorporate “its Associates.”
Symbiont argued that the definition of affiliate known 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 response to Symbiont, the court docket wanted to find out whether or not a celebration certified as an affiliate on the time that the prohibited competitors occurred. Below 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 turned 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 set when contractual compliance is measured.” These “textual indications” included, amongst different issues, language in one other restrictive covenant that confirmed that the events knew the best way to 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 related language, thus indicating an intent that the associates must 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, but it surely additionally exhibits that if the drafters wished to attain a unique consequence, comparable to limiting the protection of the Affiliate Definition to these Individuals that certified as associates on the efficient date, then they wanted to incorporate extra language to attain that consequence.”
The court docket went on to conclude that, along with the plain language of the settlement and case legislation, 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 endlessly mounted 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 means of that entity. That final result 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 stated. “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 turned Ipreo’s affiliate and operated its ClearPar enterprise outdoors 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.second 579 (Del. Ch. 1997).
7 Symbiont is presently on attraction to the Delaware Supreme Courtroom.
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