IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
ELLIOT WOLFSON,
Plaintiff,
V.
SUPERMARKETS GENERAL
HOLDINGS CORPORATION, SMG-II
HOLDINGS CORPORATION,
AHOLD ACQUISITION, INC.,
MATTHIAS BOWMAN, JOHN W.
BOYLE, JAMES J. BURKE, JR.,
JAMES DONALD, U. PETER C.
GUMMESON, STEPHEN M.
MCLEAN, ROBERT G. MILLER,
ROBERT J. MYLOD, JERRY G.
RUBENSTEIN, JAMES B.
UPCHURCH, and STEVEN L.
VOLLA,
Defendants.
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C.A. No. 17047
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MEMORANDUM OPINION
Date Submitted:
Date Decided:
September 28, :l%?
January 23 T 2001
Michael Hanrahan, Elizabeth M. McGeever and Ronald A. Brown, Jr., Esquires, of
PRICKETT, JONES & ELLIOTT, Wilmington, Delaware; Attorneys for Plaintiff
Samuel A. Nolen and Gregory V. Varallo, Esquires, of RICHARDS, LAYTON &
FINGER, Wilmington, Delaware; and-Philip H. Schaeffer, Glenn M. Kurtz and Sheron
Korpus, Esquires, of WHITE & CASE LLP, New York, New York; Attorneys for
Defendant Ahold Acquisition, Inc.
‘
6.
,
Martin P. Tully, William M. Lafferty and Christopher F. Carlton, Esquires, of
MORRIS, NICHOLS, ARSHT & TUNNELL, Wilmington, Delaware; and Alan S.
Goudiss, Margaret A. Helen Macfarlane, Evan J. Mandexy and Laurelyn E. Douglas,
Esquires, of SHEARMAN & STERLING, New York, New York; Attorneys for
Defendants SMG-II Holdings, Corporation, SMG-II, Holdings Corporation, Ahold
Acquisition, Inc., Matthias Bowman, John W. Boyle, James J. Burke, Jr., James
Donald, U. Peter C. Gummeson, Stephen M. McLean, Robert G. Miller, Robert J.
Mylod, Jerry G. Rubenstein, James B. Upchurch and Steven L. Volla
JACOBS, VICE CHANCELLOR
I
.
Pending is a motion to enforce the settlement of this shareholder class
action challenging the fairness of a merger. After this lawsuit was filed, the
plaintiff, as the representative of a class of preferred shareholders, entered
into a settlement agreement with the constituent corporations. The
settlement reallocated the merger consideration between the preferred and
common shareholders, to increase by two dollars ($2) per share the
consideration payable to the preferred shareholders. After the settlement
agreement was approved by the Court, the acquirer terminated the merger by
exercising a “walk away” right under a provision of the underlying merger
agreement. Thereafter, the plaintiff moved for specific enforcement of the
settlement agreement, seeking an order directing the acquiring corporation to
consummate the “first step” tender offer. That motion, if granted, would
result in the preferred stockholders receiving the additional $2 per share.
The core issue presented is whether the settlement agreement requires the
consummation of the tender offer. I conclude that it does not, and that
therefore the motion must be denied.
I. FACTS
On March 23, 1999, the plaintiff, a preferred shareholder of
Supermarkets General Holdings Corporation (“SMG”), filed this class action
challenging the allocation, as between the two classes of SMG shareholders
of the consideration proposed to be paid in a tender offer. The tender offer
was the first step of a two-step transaction, and was to be followed by a
merger between (on the one hand) Ahold Acquisition, Inc. and its parent
company, Koninklijke Ahold N.V. (“Ahold”), and (on the other hand)
SMG’s parent company, SMG-II Holdings Corporation (“SMG II”). The
challenged transactions had been authorized by an Agreement and Plan of
Merger (the “Merger Agreement”) under which Ahold would commence a
tender offer to purchase the outstanding stock of SMG. Whatever stock was
not tendered would be acquired in the second-step merger.
This action was brought against SMG, SMG II and Ahold. The
complaint alleges that the per share tender offer price was the result of an
unfair allocation, made by the SMG II board of directors, of the merger
consideration as between SMG’s preferred stockholders and SMG’s sole
common stockholder. Ahold, which was a nominal party to the action, was
accused of aiding and abetting the directors’ alleged breach of fiduciary duty
by “permitting” SMG II to determine the allocation of consideration
between the two classes of SMG shareholders.
Three months later, on June 9, 1999, the parties entered a Stipulation
and Agreement of Compromise, Settlement and Release (the “Settlement
Agreement”), under which the merger consideration would be reallocated by
2
I
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revising the tender offer price made payable to the preferred. In the revised
tender offer, the SMG preferred shareholders would,receive $2 per share
more, and SMG’s sole common shareholder (SMG II) would receive $2 per
share less, than the original tender offer price. That was the only revision
made to the tender offer accomplished by the Settlement -Agreement. After
notice and a hearing, this Court approved the settlement on July 22, 1999.
Ahold then commenced the tender offer contemplated by the
Settlement and Merger Agreements. Unfortunately, however, Ahold was
unable to gain United States Federal Trade Commission (“FTC”) approval
of the merger. As a result and for that reason, Ahold exercised a “walk
away” right under Section 8.1 (c) of the Merger Agreement, on December
16, 1999, and thereby terminated both the tender offer and the contemplated
second step merger.’ One of the “covenants” the existence of which
triggered the termination provisions, was Section 5.8(b) of the Merger
Agreement, which required the parties to use their “best efforts” to gain
regulatory approval of the merger. Contending that Ahold had violated the
covenant to use its “best efforts” to gain regulatory approval of the
‘Section 8.1(c) provided that either party may terminate the transaction “if the Closing
shall not have occurred by December 15,1999 unless the Closing shall not have occurred
because of a material breach of any. . . covenant. . . on the part of the party seeking to
terminate” the Merger Agreement. In addition, fi 14(l) of the tender offer allowed for
termination of the tender offer if “the SMG II Merger Agreement shall have been
terminated in accordance with its terms.”
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transaction, and thus had not validly terminated the tender offer, the plaintiff
filed the pending Motion to Enforce the Settlement on Behalf of the Class on
January 5,200O.’ That same claim-that Ahold did not use its “best efforts”
to gain FTC approval-is the subject of pending litigation in a New York
court between Ahold and SMG II concerning the validity of Ahold’s
termination of the Merger Agreement (the ‘Wew York action”).
II. THE CONTENTIONS
The plaintiff claims that it is entitled to an Order requiring Ahold (i)
to purchase the SMG preferred shares that had been tendered into the revised
tender offer under the Settlement Agreement, and also (ii) to pay plaintiffs’
counsel fees that the Court had awarded in connection with the settlement.
The plaintiff advances five alternative arguments in support of its motion.
2 This decision was delayed by one year for the following reasons: at the oral argument
on the motion, the Court requested that the parties file supplemental briefs on the issue of
whether the settlement enlarged the obligations that existed before the settlement to close
the tender offer. (Oral Arg’t Tr. at 76.) After the supplemental briefing was completed,
but before the Court could decide the matter, SMG II and SMG filed for Federal
bankruptcy protection on July 12,200O. All parties agreed that, in light of the bankruptcy
filing, the Court should take the matter off its calendar. On September 7,200O a plan of
reorganization was approved by the Bankruptcy Court and became effective on
September 19,200O. As part of the plan, SMG and SMG II merged with and into their
former subsidiary, Pathmark Stores, Inc. which emerged from bankruptcy as the
surviving public company. Only then did the parties request this Court to decide the
pending motion to enforce the Settlement Agreement.
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First, the plaintiff claims that Ahold breached the express terms of the
Settlement Agreement by refusing to consummate the tender offer. Second,
the plaintiff claims that Ahold’s refusal to consummate the tender offer
violated the implied terms of the Settlement Agreement. Third, the plaintiff
argues that Ahold breached the Settlement Agreement because by
terminating the tender offer, Ahold violated the termination provisions of the
Merger Agreement which had been incorporated by reference into the
Settlement Agreement. Fourth, the plaintiff claims that the revised tender
offer and the SMG shareholders’ tendering of their shares into that offer
created an independent contract; and that by terminating the offer, Ahold
breached the express provisions of that revised “tender offer contract.”
Finally, the plaintiff contends that Ahold breached implied obligations of the
revised tender offer contract by terminating the offer in bad faith.
Ahold responds that the Settlement Agreement did not contain any
provisions expressly and unconditionally requiring it to consummate the
tender offer, and that no such obligation can be implied as a part of the
covenant of good faith and fair dealing. Nor, Ahold argues, were the
termination provisions of the Merger Agreement and the tender offer
incorporated by reference into the Settlement Agreement. Finally, Ahold
contends that even if a duty to consummate the tender offer could be implied
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into the Merger Agreement, that contractual claim is currently being litigated
in New York, and cannot be entertained in this proceeding.
I turn to these contentions.
III. ANALYSIS
A. The Claim that Ahold Breached the Settlement Agreement
1. The “Breach of-Exnress-Terms” Argument
The plaintiff argues that by failing to consummate the revised tender
offer, Ahold breached the express terms of the Settlement Agreement. In
support, the plaintiff contends that the Court must read the Settlement
Agreement as a whole to determine the contracting parties’ intent,3 which
was that the revised tender offer must in all events be consummated. The
argument runs as follows: the term “Class period” in the Settlement
Agreement is defined as continuing “through and including the
consummation of the Transaction.” This definition suggests that the parties
must have intended for Ahold to make and then consummate the revised
tender offer. Otherwise, if all the parties intended was that Ahold be
required to make (but not consummate) the revised tender offer, the Class
period would have been defined to conclude by a date earlier than “the
consummation.” Therefore, plaintiff urges, it must be concluded that the
3 See Kaiser Aluminum Corp. v. Matheson, Del. Supr., 68 1 A.2d 392,395 (1996).
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intent of the parties was to obligate Ahold to commence, and then
consummate, the revised tender offer.
Ahold responds that the Settlement Agreement nowhere expressly
requires that the revised tender offer be consummated unconditionally. An
argument based on the “Class period” definition, Ahold insists, cannot
override the critical, operative and express terms of the Settlement
Agreement. Under those express terms, Ahold’s sole relevant obligation
was to revise the tender offer by reallocating the merger consideration in
favor of the preferred shareholders. Ahold maintains that it makes no sense
to argue that the parties intended to obligate Ahold unconditionally to close
the tender offer, yet rather than draft a provision that clearly and
straightforwardly expressed that intent, the parties instead chose to express
their intent obliquely, by defining the “Class period” to extend through “the
consummation” of the transaction. In short, Ahold argues, “[a]n obligation
undertaken by one of the parties that is intended as a promise or agreement
should be expressed as such, and not left to implication.“4
Ahold’s argument, in my view, is meritorious. Under Delaware law,
where a contract is clear on its face, the court must apply the meaning a
4 Schmidt v. Mametic Head Corporation, 97 A.D.2d 15 1, 157,468 N.Y.S.2d 649, 654
(N.Y. App. Div. 1983).
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reasonable third party would ascribe to the contract language.’ The
plaintiffs proffered construction is not reasonable because if the parties
truly intended to obligate Ahold unconditionally to consummate the tender
offer, they could have expressed that intent in clear, explicit language in the
relevant substantive provision of the Settlement Agreement, rather than
relying obliquely on the definition of “Class period.” That the parties did
not draft such an explicit provision leads to the reasonable-and oppositeconclusion that they did not intend to require Ahold unconditionally to
consummate the tender offer.
That conclusion is the only sensible one for another reason: the tender
offer was but one step of a larger merger transaction that was governed by
the Merger Agreement. Under that Agreement, Ahold was not
unconditionally required to close the transaction, because the contracting
parties expressly provided for several conditions under which the merger
could be lawfully terminated. After the FTC declined to approve the
merger, Ahold took the position that one of those conditions had occurred,
and it terminated the merger on that basis. It is not reasonable to conclude
that Ahold negotiated conditions that permitted it to terminate the merger,
5 True North Communications, Inc. v. Publicis, S.A., Del. Ch., 7 11 A.2d 34, m, Del.
Supr., 705 A.2d 244 (1997).
8
yet at the same time and in the same document agreed to bind itself
unconditionally to close the tender offer-a predicate transaction that
without the merger would not have been commenced. It is even less
reasonable to argue that the Settlement Agreement, which nowhere
explicitly so provides, must be read to compel that result.
2. The “Breach-of-Imnlied-Dutv” Argument
The plaintiff next argues, in the alternative, that Ahold breached the
implied covenant of good faith and fair dealing in the Settlement Agreement.
The breach is said to consist of Ahold terminating the revised tender offer in
bad faith, by purporting to rely upon a condition that was created by its own
wrongdoing.
Ahold responds, first, that the obligation upon which the plaintiff
relies cannot be implied because none is expressed; and second, that if any
implied obligation exists, its source would in the Merger Agreement, which
is separate and apart from the Settlement Agreement. Lastly, the claim that
the termination of the tender offer violated the Merger Agreement is
currently being litigated in the New York action.
I find no basis in the Settlement Agreement to imply that Ahold was
unconditionally obligated to consummate the tender offer. To imply such an
obligation, the Court must find that it was “clear from what was expressly
9
agreed upon that the parties who negotiated the express terms of the contract
would have agreed to proscribe the act later complained of as a breach of the
implied covenant of good faith-had they thought to negotiate with respect
to that matter.“6 Here, the parties agreed that Ahold would revise its tender
offer solely to reallocate the merger consideration to benefit the preferred
shareholder class, in return for the plaintiffs release of its claims against the
defendants. Had the plaintiff sought to inject into the Settlement Agreement
a term that would require Ahold to consummate the tender offer
unconditionally, it strains credulity to argue that Ahold would have acceded
to it. The plaintiff makes no convincing argument that Ahold would have.
To say it differently, under the Merger Agreement Ahold had
conditional rights to terminate the entire transaction. Should it become
necessary to exercise those rights, the first step of that transaction-the
tender offer-would no longer have any economic utility for Ahold.
Therefore, the parties to the Merger Agreement contemplated that the tender
offer would close only if they could be assured that the merger to which the
tender offer was inextricably linked could go forward. To imply an
6 Cincinnati SMSA Ltd. Partnershin v. Cincinnati Bell Cellular SW. Co., Del. Supr., 708
A.2d 989,992 (1998); see also Moore Business Forms. Inc. v. Cordant Holdings Corn.,
Del. Ch., C.A. No. 13911, Jacobs, V.C., Mem. Op. at 17 (November 2, 1995) (“by parity
of reasoning, ‘courts will not readily imply a contractual obligation where the contract
expressly addresses the subject of the alleged wrong,’ yet does not provide for the
obligation that is claimed to arise by implication.).
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unconditional duty to consummate the tender offer under the rubric of the
duty of good faith and fair dealing would defeat-not further-the
contracting parties’ intent.
B. The Claim that the Merger Agreement was Incorporated
Into the Settlement Agreement By Reference.
The plaintiff next argues that even if the Settlement Agreement,
standing alone, contained no express or implied requirement that the tender
offer must close, Ahold nonetheless breached that Agreement, because: (i)
Ahold violated the termination provisions of the Merger Agreement and (ii)
those Merger Agreement provisions had been incorporated by reference into
the Settlement Agreement. This incorporation-by-reference occurred,
plaintiff contends, because the preferred shareholder class was a party to
both the tender offer provisions and the Settlement Agreement, and because
those two contracts were so interrelated that a breach of the tender offer
would necessarily constitute a breach of the Settlement Agreement as well.
Ahold responds that as a matter of law, neither the Merger Agreement
nor its tender offer termination provisions were incorporated by reference
into the Settlement Agreement. Moreover, even if they were, the predicate
issue-whether Ahold violated the tender offer termination provisions of the
Merger Agreement-is being litigated in the New York action and cannot be
litigated in this Court.
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t
I agree, and conclude that the termination provisions of the Merger
Agreement were not incorporated by reference into the Settlement
Agreement. That latter Agreement contains no express language that clearly
effects such an incorporation. A mere reference in one agreement to another
agreement, without more, does not incorporate the latter agreement into the
former by reference. To incorporate one document into another, an explicit
manifestation of intent is required.7 Here there is no such manifestation.
The Settlement Agreement is narrowly tailored to require only that Ahold
reallocate the merger consideration by increasing the consideration flowing
to the preferred shareholders. Although the hettlement Agreement does
make references to the Merger Agreement and to the tender offer, it does not
incorporate the Merger Agreement into itself.
But, even if the Merger Agreement’s termination provisions were
incorporated by reference into the Settlement Agreement, the plaintiffs
motion to Enforce the Settlement Agreement would not be granted, because
the issue presented would be whether Ahold properly exercised its right to
7 Realtv Growth Investors v. Council of Unit Owners, Del. Supr., 453 A.2d 450 (1982)
(“a contract can be created by reference to the terms of another instrument if a reading of
all documents together gives evidence of the parties’ intention and the other terms are
clearly identified”); Paulev Petroleum, Inc. v. Continental Oil Co., Del. Ch., 23 1 A.2d
450 (1967), afrd, Del. Supr., 239 A.2d 629 (1968) (earlier agreement not incorporated by
reference where terms of later agreement did not show an intent to so incorporate the
earlier agreement).
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terminate the Merger Agreement. Because that issue is being litigated in the
New York action, the parties to this lawsuit would have to await the
outcome of the New York action in all events, to ascertain whether any legal
basis remains to proceed with the pending motion.
C. The Claim that the Revised Tender
Offer “Contract” Terms Were Breached
1. The “Breach-of-Exnress-Dutv” Argument
Penultimately, the plaintiff argues that by refusing to consummate the
transaction, Ahold breached the express terms of a separate contract that
arose as a result of the revised tender offer. The argument runs as follows:
the revised tender offer created a separate, independent contract between
SMG’s shareholders and Ahold, which came into effect when the
shareholders “accepted” the offer by tendering their shares. Once that
contract arose, absent a condition that permitted Ahold to terminate the
tender offer, Ahold’s failure to consummate operated as a breach.
Ahold responds that even if that argument were valid, no relief can
flow from it, because only one agreement-the Settlement Agreement-is
the subject of, and can be enforced, in this lawsuit. Because the plaintiffs
theory is predicated on a contract that is unrelated to and distinct from the
Settlement Agreement, that claim is not cognizable in this proceeding.
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That argument is valid. The plaintiff has moved to enforce the
Settlement Agreement. A claim that Ahold breached a separate contract is
irrelevant to that motion. Moreover, the plaintiff cannot be permitted to sue
for a breach of contract (the tender offer) using the vehicle of a motion to
enforce the Settlement Agreement, because as part of that settlement, a final
judgment was entered in this action. In those circumstances, the only
cognizable claim the Court can entertain is a claim to enforce that
judgment.* Because the plaintiff has not shown that the Settlement
Agreement that embodies the terms of the judgment unconditionally
required Ahold to consummate the tender offer, the motion must fail.
2. The Breach-of-Imnlied-Dutv Argument
The plaintiffs final argument is that even if Ahold was technically
permitted to terminate the tender offer, the implied covenant of good faith
and fair dealing prevented that termination in this case, because Ahold’s
reason for the termination was self-created. That is, the plaintiff contends
that Ahold, by not using its “best efforts” to gain regulatory approval of the
merger, intentionally and in bad faith created a situation that would enable it
to claim that it had validly terminated the tender offer.
8 John Hancock Mutual Life Ins. Co. v. Olick, 151 F.3d 132, 135 (3d Cir. 1998) (a final
judgment “ends the litigation on the merits and leaves nothing for the court to do but
execute the judgment”).
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The infirmity in the argument is (to repeat) that the issue of whether
Ahold did or did not act in bad faith in terminating the transaction, is the
subject of the New York action. No principled basis has been shown for this
Court entertaining a controversy that another court of competent jurisdiction
has already undertaken to decide. For that reason as well, this Court
declines to entertain this motion.
IV. CONCLUSION
For the reasons set forth above, the motion to enforce the Settlement
Agreement to require Ahold to consummate the revised tender offer is
denied.g IT IS SO ORDERED.
’ Because no controversy remains to be decided in this action, the Court does not reach
the argument that it should stay these proceedings pending the outcome of the New York
action.
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