DealLawyers.com Blog

In Jhaveri v. K1 Investment Management LLC, (Del. Ch.; 6/25), the Delaware Chancery Court declined to dismiss tortious interference claims brought by a former target stockholder against affiliates of the buyer and breach of contract claims against the target’s equityholder representative. These claims arose out of alleged misconduct associated with the representative’s decision not to pursue a lawsuit against the buyer for actions resulting in its failure to achieve an earnout milestone set forth the agreement.

The plaintiff brought breach of fiduciary duty and fraud claims against the buyer and various other defendants, but Vice Chancellor Will dismissed these claims on the grounds that they were covered by a broad release executed by the plaintiff in connection with the merger. However, she refused to dismiss claims that the equityholder representative Raj Goyle, who was the target’s former CEO, breached his obligations under the merger agreement.

Those breach of contract claims were premised on allegations that the representative was aware of active “interference” by certain affiliates of the buyer and its controlling stockholder in the achievement of the earnout but withheld written notice of their improper actions based on assurances of what the Vice Chancellor referred to as a “lucrative soft landing” from those affiliates.

Because the plaintiff’s breach of contract claim survived the motion to dismiss, Vice Chancellor Will turned to tortious interference claims brought against the buyer and the various affiliates. She noted that to prove a tortious interference claim, the plaintiff: “must show “(1) a contract, (2) about which [the] defendant[s] knew, and (3) an intentional act that is a significant factor in causing the breach of such contract, (4) without justification, (5) which causes injury.”  At the outset, she dismissed the plaintiff’s claim against the buyer, because under Delaware law, a party to a contract can not tortiously interfere with that contract.

She then turned to the claims against the various affiliates.  The Vice Chancellor acknowledged that tortious interference claims against a buyer’s affiliates must overcome the “affiliates exception,” which creates “a limited ‘privilege among affiliates to discuss and recommend action’ given their ‘shared economic interests.’” However, she said that this privilege only came into play when the affiliated party engaged in “lawful action in the good faith pursuit of its profit making activities.” In this case, she concluded that the plaintiff had adequately pled that the defendants’ conduct put them outside of the privilege:

He alleges that the K1 Defendants undertook “extraordinary steps to hide payments to Goyle”—including making “material misstatements” to Jhaveri and other [target] stockholders and taking other “bad faith acts”—to persuade Goyle not to challenge the earnout. Based on these facts, Jhaveri adequately pleads a “malicious or other bad faith purpose” allowing his tortious interference claim to proceed against [buyer’s] affiliates—provided that the elements of the claim are met.

Vice Chancellor Will also held that the plaintiff had adequately pled each of the other elements of a tortious interference claim against the buyer and controlling stockholders’ affiliates, and declined to dismiss those claims.

– John Jenkins