IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
MICHAEL COMRIE, IAN CHEONG,
EARLE COMRIE, KAY COMRIE,
LEROY DOUGHERTY, CYNTHIA A.
OTT, PETER OTT, STEPHANIE
SEBASTIANO, SALLY SETO, AFSHIN
SHAMS, and JULIE M. SHAMS,
C.A. No. 19254
ENTERASYS NETWORKS, INC., a
Delaware corporation, GNTS (CANADA)
INC., an Ontario corporation, and
SERVICES, INC., a Delaware
Submitted: January 29,2004
Decided: February 13,2004
Vernon R. Proctor, Esquire, Patricia Enerio, Esquire, THE BAYARD FIRM,
Wilmington, Delaware, Attorneys for the Plaintiffs.
William M. Lafferty, Esquire, Patricia Uhlenbrock, Esquire, MORRIS, NICHOLS,
ARSHT & TUNNELL, Wilmington, Delaware; Douglas H. Meal, Esquire, Emily C.
Shanahan, Esquire, ROPES & GRAY, Boston, Massachusetts, Attorneys for the
LAMB, Vice Chancellor.
In an earlier opinion, the court held that the defendants had breached a stock
purchase agreement by not providing an “equivalent substitute” for options granted in
accordance with that agreement. The defendants were under a duty to provide such a
substitute pursuant to certain performance obligations found in Exhibit 7.11 to that
agreement, which provides for the substitute if an IPO of GlobaWetwork
Services, Inc. was not undertaken.
Exhibit 7.11 also provides for a similar grant of options to certain employees who
are not signatories to the stock purchase agreement and were not, originally, plaintiffs in
this action. A majority of those employees now seek to recover against the defendants ’
based on the findings in the earlier opinion. The court concludes that those employees, as
donee beneficiaries, have standing to bring such a suit; however, certain of those
employees are barred from bringing suit because of releases signed by them as part of a
BIT Management, Inc. (“BIT”) was an Ontario corporation engaged in the
information technology consulting and software development industry. In 2000,
Cabletron Systems, Inc. (“Cabletron”),’ a Delaware corporation headquartered in
i Cabletron merged with its former wholly owned subsidiary, Enterasys Networks,
Inc. on August 6,200l. The surviving corporation, also called Enterasys Networks, Inc.,
along with GlobaWetwork Technology Services, Inc., both Delaware corporations, are
the defendants in this action.
Rochester, New Hampshire, engaged in a restructuring, through which it created four
subsidiaries: Aprisma Management Technologies, Inc., Enterasys Networks, Inc.
(“Enterasys”), Riverstone Networks, Inc., and GlobaWetwork Technology Services, Inc.
(“GNTS”). Under this restructuring, Cabletron planned to conduct an IPO for each
operating subsidiary by the end of 2001, followed by a spin-off of the subsidiaries’
remaining shares to Cabletron’s existing stockholders.
GNTS, in preparation for its IPO, sought to purchase small service companies
complementary to its existing business in order to diversify its revenue base. BIT was
identified as a potential target and negotiations between GNTS and BIT ensued in early
2000. The resultant Stock Purchase Agreement (the “Agreement”) among Cabletron,
GNTS, GNTS (Canada, Inc.),2 BIT, and the holders of all of the outstanding capital of the
stock of BIT (the “BIT Stockholders”) (collectively, the “Parties”) was signed on August
The Agreement provides for an exchange of BIT stock for a combination of cash
and options to purchase stock in GNTS. Specifically, section 7.11 of the Agreement
requires Cabltetron to cause GNTS to adopt an option plan pursuant to terms set forth in
Exhibit 7.11 attached to the Agreement. Exhibit 7.11 requires Cabletron to cause GNTS
to “allocate options for 466,605 shares of GNTS stock . . . to the employees of BIT.”
2 GNTS (Canada, Inc.) was an acquisition vehicle formed to aid the stock
Of those shares, 55,814 were to be issued to each of the partners of BIT (the “Partners”),3
with the balance of shares (up to 14,512 each) to be issued to 12 non-partner former
employees of BIT4 (the “Non-Partner Employees,” together with the Partners, the “BIT
To protect the BIT Group in the event the defendants decided not to go forward
with the GNTS IPO, the Parties agreed upon a substitution provision, which is included
in Exhibit 7.11. That provision states:
In the event that [Cabletron] determines not to pursue its current intention
to cause GNTS to undergo an initial public offering prior to December 3 1,
2001 or determines not to pursue its current intention to distribute the stock
of GNTS to the shareholders of [Cabletron] (each a “Trigger Event”),
within sixty (60) days of the Trigger Event, [Cabletron] shall either
(i) provide equivalent substitute or replacement awards on the same terms
’ and conditions to the former employees of [BIT]; or (ii) pay $4,620,000 in
the aggregate for all Options then held by the Partners and former
employees of [BIT].’
Within a few days ,of the closing of the Agreement, GNTS issued to the BIT
Group an aggregate of 466,605 GNTS stock options at an exercise price of $4.25.
3 The partners of BIT were Ian Cheong, Michael Comrie, Leroy Dougherty, Peter
Ott, and Afshin Shams. The Partners, together with Earle Comrie, Kay Comrie, Cynthia
A. Ott, Stephanie Sebastiano, Sally Seto, and Julie M. Shams are the plaintiffs in this
action (the “plaintiffs”).
4 The non-partner former employees are Carrie Brody, Wayne W. Cuervo, Peter
Forsythe, Glen Julien, Elizabeth Kapuscinski, Jennifer Knabenschuh, Ernie Lim, Paul
Matheson, Darwin Palma, Bonnie Planchart, Ramesh Rathnam, and Donald Swora.
5 Emphasis added.
A Trigger Event occurred on July 16, 2001,6 thus implicating the substitution provision.
On August 23,2001, Cabletron decided to provide the BIT Group with substitute or
options.’ Cabletron issued these options based on the theory that the
substitute or replacement options must be valued at the same amount as the original
GNTS options at the date of replacement.*
The plaintiffs tiled suit claiming that the substitute or replacement options were to
be valued as the same amount as the GNTS options at the date of issuance.g The court
found, in a September 4,2003 opinion (the “September 4 Opinion”), that the plaintiffs
were correct in their reading of the Agreement, and by not issuing options valued as the
same amount as the GNTS options at the date of issuance, Cabletron had breached the
The court found damages in the amount of $2,190,620.”
However, the plaintiffs
only held 58.8% of the GNTS options, and were thus only entitled to an award of
$1,309,991 .I2 Because the Non-Partner Employees held the remainder of GNTS options,
6 Comrie v. Enterasys Networkq Inc., 837 A.2d 1, 11 (Del. Ch. 2003). The
Intervenors and the defendants agreed by stipulation, for purposes of this action, to be
bound by the factual and legal findings and conclusions set forth in the opinion. Further,
they allowed reliance by both sides on all exhibits, trial testimony, and designated
deposition testimony admitted at the trial in the underlying litigation. Stipulation
Regarding Claims of Intervenors (Nov. 7,2003) (“Stipulation”).
’ Stipulation at fl D(2).
* Comrie, 837 A.2d at 14.
lo Id. at 17.
l1 See id. at 2 1 (calculating damages).
the court reserved final judgment, stating, “[i]t is entirely plausible . . . that the BIT
employees who were not plaintiffs in this action are third-party beneficiaries to the
Agreement, and are equally entitled to an award based on a breach of that Agreement.“i3
Pursuant to the September 4 Opinion, an order dated October 7, 2003,14 and Court
of Chancery Rule 24,15 ten of the Non-Partner Employees16 included in the BIT Group
(the “Intervenors”) moved to intervene on October 21,2003. A complaint in intervention
was filed contemporaneously with the motion. The defendants’ answer contains five
affirmative defenses, two of which are addressed in the briefs.
defendants contend that the Intervenors are not donee beneficiaries of the Agreement, and
thus do not have standing to bring suit. Alternatively, the defendants argue that even if
the Intervenors have standing, releases signed by certain of the Intervenors serve to bar
I4 This order provided that “any Potential Beneficiary who files a timely and
proper motion to intervene will be permitted to intervene pursuant to Chancery Court
Rule 24(b).” The implication of guaranteeing intervention is that the defendants would
not waive any potential defenses, including a standing defense.
I5 Court of Chancery Rule 24(b) permits the court, in its discretion, to allow one to
intervene in an action when a statute confers a conditional right to intervene, or when the
applicant’s claim and the main action have a question of law or fact in common. The
application must be made according to the procedure set out in Court of Chancery Rule
I6 Brody and Planchart did not join in the motion to intervene.
Parties to an agreement may enforce the contractual terms of that agreement-l7 As
a general rule, a nonparty to a contract has no legal right to enforce it.‘* This general rule
yields to the notion that intended third-party beneficiaries have an enforceable right under
contracts conferring a benefit to them, even though they are not parties to those
contracts.” The general rule does apply, however, to prevent mere incidental
beneficiaries from claiming enforceable rights under a contract.20
I7 See Triple C Railcar Serv. v. City of Wilmington, 630 A.2d 629,633 (Del. 1993)
(“It is axiomatic that either party to an agreement may enforce its terms for breach
thereof.“); Madison Realty Partners 7, LLC v. AG ISA, LLC, 2001 WL 406268, at *4
(Del. Ch. Apr. 17,200l) (“It is undisputed that Madison, as a signatory to the Partnership
Agreement, has standing to sue for a breach of that Agreement.“).
‘* See Insituform of N. Am., Inc. v. Chandler, 534 A.2d 257,268 (Del. Ch. 1987)
(“[T]he general rule [is] that strangers to a contract ordinarily acquire no rights under it
. . . “); Stuchen v. Duty Free Int ‘1, Inc., 1996 WL 33 167249, at *9 (Del. Super. Apr. 22,
1996) (“The general rule in this state is that a stranger or nonparty to a contract has no
legal right to enforce it.“); see also Guardian Constr. Co. v. Tetra Tech Richardson, Inc.,
583 A.2d 1378, 1386 (Del. Super. 1990) (“Ordinarily, a stranger to a contract acquires no
rights thereunder . . .“).
I9 See Insituform of N. Am., Inc., 534 A.2d at 268 (noting that the general rule
applies “unless it is the intention of the promisee to confer a benefit upon such third
party”); Stuchen, 1996 WL 33 167249, at *9 (“This principle holds sway unless the
parties to the contract intended to confer a benefit upon an unrelated party, making them
so-called third party beneficiaries.“). See generally 13 Richard A Lord, A Treatise on the
Law of Contracts by Samuel Williston 0 37:l (4th ed 2000) (“Williston on Contracts”)
(discussing the rights of intended third-party beneficiaries).
*’ See Insituform of N. Am., Inc., 534 A.2d at 269 (“If, however, it was not the
promisee’s intention to confer direct benefits upon a third person, but rather such third
party happens to benefit from the performance of the promise either coincidentally or
indirectly, then such third party beneficiary will be held to have no enforceable rights
under the contract.“); see also 9 Arthur Linton Corbin, Corbin on Contracts $ 779C, at 36
(Interim ed. 1979) (“Corbin on Contracts”) (“All others who may in some way be
benefited by performance have no rights and are called incidental beneficiaries.“).
In Insituform of North America, Inc. v. Chandler, this court set out a test for
whether or not one is an intended beneficiary under a contract:
In order for third party beneficiary rights to be created, not only is it
necessary that performance of the contract confer a benefit upon third
parties that was intended, but the conferring of a beneficial effect on such
third party-whether it be a creditor of the promisee or an object of his or
her generosity-should be a material part of the contract’s purpose.21
Former Vice Chancellor Jacobs, in Madison Realty Partners 7, LLC v. AG ISA, LLC,
summarized the elements included in this test:
To qualify as a third party beneficiary of a contract, (i) the contracting
parties must have intended that the third party beneficiary benefit from the
contract, (ii) the benefit must have been intended as a gift or in satisfaction
of a pre-existing obligation to that person, and (iii) the intent to benefit the
third party must be a material part of the parties’ purpose in entering into
Thus for the Intervenors to have standing to bring suit based on the Agreement, they must
show that the BIT Stockholders intended that the Non-Partner Employees benefit from
the Agreement (i.e., receive the options),23 that the benefit was intended as a gift from the
*’ 534 A.2d at 270.
** 2001 WL 406268, at *5.
23 There is conflicting precedent as to whether the requisite intent must be of the
parties to the contract or of the promisee individually. Compare Triple C Railcar
Service, 630 A.2d at 633 (“Essential to a third party’s right of enforceability is the
intention of the contractingparties to view that party as either a donee or creditor
beneficiary.“) (emphasis added), and Madison Realty Partners 7, LLC, 2001 WL 406268,
at *5 (“[T]he contractingparties must have intended that the third party beneficiary
benefit from the contract) (emphasis added), with Insitujiorm of N. Am., Inc., 534 A.2d at
268 (“It is universally recognized that where it is the intention of thepromisee to secure
performance of the promised act for the benefit of another . . .“) (emphasis added), and
Guardian Constr. Co., 583 A.2d at 1386 (“[Wlhere it is the intention of thepromisee to
secure performance of the promised act for the benefit of another . . .“) (emphasis added).
BIT Stockholders to the Non-Partner Employees,24 and that the conferral of that benefit is
a material part of the Agreement’s purpose.25
In applying Delaware law, the United States District Court for the District of Delaware
addressed this conflict. The District Could held “that under Delaware law both parties
must in some manner express an intent to benefit the third-party before third-party
beneficiary status is found.” Am. Fin. Corp. v. Computer Sties. Corp., 558 F. Supp.
1182,1185 (D. Del. 1983).
Here, the defendants, as promisors, acknowledge that the intent element is
satisfied as to them. Ans. Br. of Def s. Enterasys Networks, Inc. and GlobaWetwork
Tech., Servs., Inc. to Intervenors’ Claim for Relief, at 11 (Dec. 5,2003) (“Ans. Br.“).
Thus regardless of which analysis is used, the only issue for the court to decide is the
intent of the promisees, here BIT and the BIT Stockholders.
24 No allegations have been made that the BIT Stockholders had a preexisting
obligation to the Interveners. As such, the Intervenors must show that they are donee
beneficiaries. See Guardian Constr. Co., 583 A.2d at 1387 (“The only third parties who
have legal rights are donees and creditors of the promisee.“).
25 The Restatement (Second) of Contracts eliminates the distinction between
creditor and donee beneficiaries. Instead, it tests only for whether one is an intended
beneficiary. Specifically, it states:
(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a
promise is an intended beneficiary if recognition of a right to performance in the
beneficiary is appropriate to effectuate the intention of the parties and either
(a) the performance of the promise will satisfy an obligation of the promisee to
pay money to the beneficiary; or
(b) the circumstances indicate the promisee intends to give the beneficiary the
benefit of the promised performance.
Restatement (Second) of Contracts $j 302 (2004). Further, the introductory note to
this chapter of the Restatement points to the “recognition of the power of promisor and
promisee to create rights in a beneficiary by manifesting an intention to do so.” While
this test has not yet been adopted by the Delaware courts, the ALI’s adoption of it is of
note, and the standing of the Non-Partner Employee’s under this test is even stronger.
The intent of the BIT Stockholders’ to bestow rights on the Non-Partner
Employees is plain from the face of the Agreement.26 When a promised performance is
rendered directly to the beneficiary, “it is presumed that the contract was for the
beneficiary’s benefit;“27 Here, Exhibit 7.11 directs the defendants to grant options
directly to the Non-Partner Employees. This differentiates the present facts from the
facts considered in Insituform, where members of a board of directors argued that a
stock-voting agreement, which none of the members had signed and which obligated the
signatories to either abstain from voting their stock or to vote their stock in unanimity for
existing members, created a right to “continued tenure” in the board members for the
entire term of the stock-voting agreement.28 Although the board members “surely were
potentially benefited by performance of the promises”2g contained in the stock-voting
agreement, that benefit was incidental to that agreement. Here, the Agreement directs the
defendants to issue performance directly to the Non-Partner Employees.
Further, even if one were to look beyond the face of the Agreement, an intent to
benefit the Non-Partner Employees is clear. The Partners and Non-Partner Employees
had set an expectation that “in the event of a sale or IPO [the Non-Partner Employees]
26 Since the BIT Stockholders owned all of the outstanding shares of the capital
stock of BIT, the opinion addresses the intent of BIT and the BIT Stockholders simply as
the intent of the BIT Stockholders.
27 Williston on Contracts, $ 37:7, at 55. See also id. 3 378, at 70 (“In the typical
case, where the promisor has undertaken to render performance directly to the
beneficiary, the intent to benefit the third party will be clearly manifested.“).
28 534 A.2d at 268-70.
2g Id. at 269.
would receive in the range of 10% to 15% of the value in cash and stock.‘73o In
deposition testimony designated by the defendants at trial, Mr. Comrie, the former
managing partner of BIT, explained how this expectation was set:
There was nothing particular that had occurred other than when we
were hiring them, we had indicated to them that at some point down the
road they may be able to share in the company. We had a profit sharingan informal profit sharing plan and we had actually looked at ways in
which we could make our employees, quote unquote, owners or part
owners in the organization and we looked at employee-looked at devising
some way that they could have some ownership in the company in the field
that they were working in for themselves3’
Exhibit 7.11 is a manifestation of intent to fulfill this expectation. Contrary to the
defendants’ assertion, “[a]ny benefit that accrued to the BIT employees as a result of the
performance of the Stock Purchase Agreement” was not simply the product of the
The Intervenors have shown intention to benefit the Non-Partner
Employees, thus meeting the first prong of the Insituform test.
Moreover, the Intervenors have clearly shown the BIT Stockholders’ intent as
donative. In order to show donative intent, one must show that the promisee intended to
make a gift of the promisor’s performance to a third party.33 The defendants claim that
the options granted to the Non-Partner Employees were not the BIT Stockholders’ to
3o DX 6.
3’ Comrie Dep. at 95-96.
32 Am. Br. at 15.
33 Williston on Contracts 6 37:8, at 73; see also Corbin on Contracts 6 774, at 5-6
(“The third person is a donee beneficiary if the promisee who buys the promise expresses
an intention and purpose to confer a benefit upon him as a gift in the shape of the
give-that the drafting of the option requirement into the Agreement did not cut into the
consideration the BIT Stockholders would otherwise have been paid for their stock in
BIT.34 Findings in the September 4 Opinion, as the defendants’ own brief points out,
clearly prevent this argument. “GNTS had always represented to BIT that it was willing
to pay at least 6 times and up to 7 times BIT’s revenues, which resulted in a valuation
between $8.8 million and $10.23 million, of which approximately $5.6 million was paid
in cash.“35 As the defendants acknowledge, the remainder of the consideration was to be
paid in options.36 The options granted pursuant to Exhibit 7.11 represent the remainder
of consideration to be paid. Exhibit 7.11, then, grants 40.2% of the options, which
represents approximately 19% of the total consideration (i.e., the negotiated
performance), to the Non-Partner Employees. This requirement is in line with the “set
expectations” of the BIT Stockholders and Non-Partner Employees described in Mr.
This is clear evidence of donative intent.38
34 The defendants argue that the absence of a provision calling for a reversion to
the Partners of that portion of options not exhausted by the grants to the Non-Partner
Employees evidences lack of donative intent. While such a provision would evidence an
intent, lack of such a provision does not suggest lack of such intent. Similarly, the
Intervenors’ argument that the lack of a “no third-party beneficiary” clause indicates an
understanding that there were beneficiaries does not hold water.
35 Comrie, 837 A.2d at 38 n.91, reprinted in Ans. Br. at 13.
36 Am. Br. at 14.
37 Comrie Dep. at 95-96. The defendants argue that there can be no donative
intent because Mr. Comrie pressed for an all-cash deal during negotiations. See Comrie
Dep. at 77-79. However, there is no evidence that should Mr. Comrie have succeeded in
obtaining an all-cash deal, he would not have passed on a similar percentage of
compensation to the Non-Partner Employees. The only definitive evidence presented is
that the Non-Partner Employees received a percentage of the expected value of the deal.
Finally, the grant of options to the Non-Partner Employees is a material part of the
purpose of the Agreement. Where the effect on a third party, “while a benefit to [that
party] and intended, [is] merely a means through which the benefit that motivated the
contract was sought to be achieved for the signatories,” even if that third party is not
merely incidental to the contract, that third party takes no rights under the contract.3g
Thus in order to gain rights under a contract, the beneficial effect to the third party must
be material to the purpose of the contract.
The defendants assert that the granting of options to the Non-Partner Employees
was merely instrumental to achieving the BIT Shareholder’s purpose of maximizing
shareholder value. The e-mail relied upon by the defendants to show maximization of
value.as the sole purpose of the contract, however, does not lead to this conclusion.
defendants point to an e-mail sent by Mr. Shams to the BIT Partners in which Mr. Shams
comments on a draft term sheet circulated among those partners4’ In that e-mail, Mr.
Shams states that he had “two intentions” when forming the company: being able to help
run a company and financial reward. Based on this, the defendants assert that donating to
38 The defendants argue that because the non-partner BIT Stockholders did not
receive options, the logical route of this conclusion, in the absence of an agreement
among the BIT Stockholders to share the value of options, is that the non-partner BIT
Stockholders intended to donate a disproportionate percentage of consideration to the
Non-Partner Employees. How the BIT Stockholders intended to divide that portion of
consideration provided to the Partners, but not the non-partner BIT Stockholders, is
outside the scope of this analysis. The analysis only requires a showing of intent that the
Intervenors made a gift of the promisors’ performance. Exhibit 7.11 clearly shows this.
3g Insituform, 534 A.2d at 270.
4o DX 17.
the Non-Partner Employees a portion of the consideration would be at odds with the BIT
Stockholders’ purpose for entering into the Agreement. The conclusion simply does not
flow from the premise. One cannot conclude the purpose of entering into the Agreement
from a stated purpose of starting BIT in the first place.
Further, in the e-mail, Mr. Shams
implores the other Partners not to lose sight of the “effect that [the deal] would have on
everyone involved, including the employees.7’41
The record shows, as discussed above, the purpose of the BIT Stockholders in
entering into the contract included conferring a benefit to the employees. The option
grant is material to that purpose and thus the third prong of the Insitujbrm test is met.
The Intervenors, having met the test set out in Insituform, are donee beneficiaries
of the’ Agreement and thus have standing to bring suit to enforce their rights under
Exhibit 7.11 of that Agreement.
Although the Intervenors have standing to enforce rights under the Agreement, the
defendants allege several of the Intervenors signed, in conjunction with severance
packages, releases preventing them from bringing claims they might otherwise have had.
In construing the releases, the court looks to the overall language of the releases to
determine the parties’ intent, which is controlling.42 If the language of a release is clear,
41 Id. (emphasis added).
42 See Corporate Prop. Assoc. v. Hallwood Group, 817 A.2d 777,779 (Del. 2003);
Adams v. Jankouskas, 452 A.2d 148,156 (Del. 1982).
the court will give effect to that language. If the language is ambiguous, “‘it must be
construed most strongly against the party who’drafted it.“‘43
Forsvthe and Lim
There is no evidence that either intervenors Forsythe or Lim signed any release.
They are thus entitled to damages in accordance with the calculations used in the
September 4 Opinion to determine the plaintiffs’ rights. Damages are to be calculated,
however, on the basis of the October terminations of Forsythe and Lim and the effects of
those terminations on the vesting schedule.
Cuervo, Julien. Knabenschuh. Swora
Intervenors Cuervo, Julien, Knabenschuh, and Swora (the “Release Signatories”)
each signed identical releases. The pertinent language of the releases state:
FOR AND IN CONSIDERATION OF the special payments and benefits to
be provided to me in connection with my separation of employment, as set
forth in a Memorandum dated April 11,2002 from Enterasys Networks,
Inc., I . . . hereby release and forever discharge Enterasys Networks, Inc.
(“Enterasys”) and its Affiliates . . . and Cabletron Systems, Inc.
(“Cabletron”) and its subsidiaries and other affiliates and all of the
respective past and present officers, directors, shareholders, members,
managers, employees, agents, general and limited partners, joint venturers
and representatives of any of the foregoing, the successors and assigns of
Enterasys and its Affiliates and Cabletron and its subsidiaries and other
affiliates, and all others connected with any of them (all collectively, the
“Released”), both individually and in their official capacities, jointly and
severally from any and all actions, causes of action, contracts, covenants,
whether express or implied, claims, demands for damages, including
disability, life or other insurance claims, indemnity benefits, costs, interest,
loss or injury of every nature and kind whatsoever and howsoever arising
whether statutory or otherwise, which I may have had, may now have or
43 Corporate Property Assoc., 817 A.2d at 779 (quoting Adams, 452 A.2d at 156).
may hereinafter have, in any way relating to the hiring OJ the em loyment
by and the cessation of my employment by the Releasedpartiesa4
The Release Signatories argue that because the releases initially refer to an April 11,
2002 memorandum, which provides terms for termination of employment, the language
releasing claims relating to the “hiring of, and the employment by” should be construed
narrowly. They base this argument on the premise that “Delaware law is clear that words
of general application used in a release ‘which generally follow a specific recital of the
subject matter concerned are not to be given their broadest significance but will be
restricted to the particular matter referenced to in the recital.“‘45
The releases here are different from previous releases considered by Delaware
courts. In E.I.
DuPont de Nemours & Co. v. Florida Evergreen Foliage, for example, the
Delaware Supreme Court considered whether a general release of all claims, whether
known or unknown, in a settlement agreement, following a preamble alluding to the
action being settled, prevented a future claim for fraudulent inducement. The Supreme
Court focused on whether a releasee should be held to “release a claim for fraud in the
execution of the release itself,” and decided it should not.46 In Adams v. Kankouskas, the
Delaware Supreme Court interpreted a general release narrowly. That court’s opinion,
44 Emphasis added. The releases are in the Affidavit submitted to this court by
Douglas H. Meal on December 5,2003.
45 E.I. DuPont de Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457,460
(Del. 1999) (quoting Adams, 452 A.2d at 156).
46 Id. at 461.
however, was based on the fact that the general release followed a specific release, not a
specific recital. The releases in this case contain no such bifurcation.
Here, although stating that the releases are given in consideration of payments and
benefits provided in the termination memorandum, the language of the releases
specifically limits them to any action relating to the hiring of, employment by, and
cessation of employment of the signatory. In seeking standing to assert their rights, the
Intervenors linked their right to the options directly to their employee relationship with
the defendants. Further, the options vested according to a schedule that depended on the
Intervenors’ continued employment with Cabletron, GNTS, or “any of their Affiliates.”
Under the clear, unambiguous language of the releases, the Release Signatories released
their rights to bring a claim under Exhibit 7.11 .47
Further, the intention of the parties, which is controlling, is manifested by what
each of the Release Signatories agreed to have removed from the releases.
Each of the
Release Signatories attempted to add handwritten language to his or her own release,
stating “[elxception to the above limited to Delaware litigation between sellers and
47 The reliance of the Release Signatories on Fischer v. Fischer, 1999 WL
1032768 (Del. Ch. Nov. 4 1999), is misplaced. Fischer looked at the parties’ intent to
determine whether a separation agreement between former spouses served to bar one
former spouse’s breach of fiduciary suit against the other former spouse. The court held
that a release designed to cover the division of marital property could not foreclose a
derivative suit by one spouse as shareholder against another spouse as director. The court
determined “the parties never intended the release to discharge a claim arising outside the
marriage relationship.” Id. at *4. The claim in the current case is directly related to the
subject matter of the release.
buyers of BIT Management Inc initiated on or about Nov. 13, 2001.‘48 The Release
Signatories all authorized the removal of this language at the request of BIT.
explicit removal further shows that the parties’ intent was not to include the Delaware
The Release Signatories, because they have signed the releases, are estopped from
bringing suit against the defendants under Exhibit 7.11 of the Agreement.
Intervenor Rathnam’s release is substantially similar to those of the Release
Signatories. It states:
IN CONSIDERATION of the payment to me of the amounts specified [in a
separate letter] . . . I, Ramesh Rathnam . . . hereby release and forever
discharge Global Network Technology Services, a subsidiary of
Cabletron Systems, Inc. along with all parents, subsidiaries, affiliates and
associated companies, and together with all respective officers, directors,
employees, servants and agents and their successors and assigns
48 One of the releases contained the abbreviation “Inc.,” and three did not.
Swora’s additional handwritten language did not contain the words “limited to.”
49 The Release Signatories seem to imply that their agreement to the removal of
the additional language should not be valid because of estoppel, or alternatively because
it was achieved as a result of duress. The Intervenor’s Reply Brief, states that
“Enterasys’ own human resources consultant, Robert McCormack . . . expressly advised
Cuervo, Julien, Knabenschuh, and Swora to include the handwritten language in the
releases.” Intervenors Reply Br. In Support of Their Claims for Relief 11-12 n.3 (Dec.
19,2003) (“Reply Br.“). Other than a statement being made, the brief does not set forth
other elements of estoppel.
Further, the Release Signatories argue that, should they not have agreed to the
removal of language, they would have only been entitled to the “paltry two weeks pay
required by applicable Ontario law.” Reply Br. at 13. They essentially argue that there is
duress because, had they not signed, they would not be entitled to the additional
severance offered on top of what the Ontario legislature deemed appropriate. This is not
a valid argument for duress.
(hereinafter collectively referred to as the “Releasee”) jointly and severally
from any and all actions, causes of action, contracts, covenants, whether
express or implied, claims, demands for damages, including disability, life
or other insurance claims, indemnity benefits, costs, interest, loss or injury
of every nature and kind whatsoever and howsoever arising whether
statutory or otherwise, which I may heretofore have had, may now have, or
may hereinafter have, in any way relating to the hiring ox the employment
by and the cessation of the employment of the Releaser by the Releasee.”
Although there is no attempted insertion and subsequent removal of additional
language, as there is in the cases of the Release Signatories, the clear language of this
release, for the same reasons discussed above, prevents Rathnam from bringing a claim
against the defendants under the Agreement.
Matheson. Palma, Kapuscinski
Although releases from intervenors Kapuscinski and Palma were submitted to the
court, it is not clear from the record whether they signed those releases.
Similarly, it is
not clear whether intervenor Matheson, whose release mirrored that of Cuervo, Julien,
Knabenschuh and Sworai agreed to accept the terms of the release without the proposed
handwritten carve-out. Further factual development is required before the court can
determine whether any of these intervenors released any claims they might otherwise
5o Emphasis added. This release is also included in the Meal Affidavit.
51 In a February 9,2004, letter to the court, counsel to the defendants indicated that
it has initiated steps toward developing this record.
For the foregoing reason, judgment will be entered for intervenors Forsythe and
Lim, and against the Release Signatories. The parties are instructed to present an order in
conformity with the calculations used in the September 4 Opinion (while keeping in mind
the terrnination dates of Forsythe and Lim and the resultant effect on the vesting
schedule) within 30 days. The parties are further instructed to update this court within 30
days as to the status of the Matheson, Palma, and Kapuscinski claims.