Opinion
Civil Action No. 17843.
Date Submitted: September 7, 2000.
Date Decided: December 15, 2000.
Charles F. Richards, Jr. and Srinivas M. Raju, Esquires, of RICHARDS, LAYTON FINGER, P.A., Wilmington, Delaware; and Edward Brodsky, Peter J.W. Sherwin and Amy F. Sandgrund, Esquires of PROSKAUER ROSE LLP, New York, New York; Attorneys for Plaintiff.
David C. McBride and Matthew P. Denn, Esquires, of YOUNG, CONAWAY, STARGATT TAYLOR, Wilmington, Delaware; and Douglas M. Heal, Rachel E. Hershfang and Mark C. Fleming, Esquires, of ROPES GRAY, Boston, Massachusetts; Attorneys for Defendants.
MEMORANDUM OPINION
This action is brought to enforce the terms of a stock purchase warrant that entitles the plaintiff, who is the warrant-holder, to purchase a specific number of shares of the issuer upon exercising the warrant. Importantly, the warrant also requires two different kinds of adjustments of the type and number of shares the warrant-holder is entitled to purchase. The first type of adjustment occurs if the issuer of the warrant merges with another corporation. In that event, the exercising warrant-holder becomes entitled to purchase the same securities it would have received in the merger if it were a shareholder. The second type of adjustment occurs if the company engages in specified transactions that dilute its shares. In that event, an adjustment is made to offset the effect of the dilution.
Both types of adjustments are implicated in this case. After the warrant was issued, the issuer merged with another corporation and as a result, the stock of the issuer was canceled and exchanged for stock of the acquiring corporation. It is undisputed that the merger triggered the first type of adjustment, thereby entitling the plaintiff warrant-holder to purchase stock of the acquiring corporation when the warrant is exercised.
What is disputed is the number of shares that the plaintiff, upon exercising the warrant, would be entitled to purchase. That dispute arises because after the merger, the acquiror entered into various dilutive transactions in its own stock. The plaintiff claims that those transactions triggered its right to the second type of adjustment, under the "anti-dilution" provision of the warrant. The defendant acquiror contends that in these circumstances the anti-dilution adjustment provision is not applicable. That dispute led to the filing of this action to enforce the warrant's anti-dilution provision. The defendants have moved to dismiss the complaint for failure to state a claim, and the plaintiff has cross-moved for partial judgment on the pleadings. This Opinion decides both motions.
I. FACTUAL BACKGROUND
All facts are derived from the well-pled allegations of the complaint, including documents incorporated therein by reference.
A. The Warrant
CL Investments, L.P. (the "plaintiff") is the holder of a warrant (the "Warrant") issued by defendant ART Licensing Corp. ("Telecom") on March 8, 1996. The Warrant granted its holder the right to purchase 110,000 shares of Telecom Common Stock at an exercise price of $6.25 per share. The Warrant also provided that "the number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein."
At the time the Warrant was issued, Telecom was named Advanced Radio Telecom Corp.
Warrant, at Preamble.
Sections 5, 6 and 7 of the Warrant govern whether and when those adjustments will occur. Section 5 provides for adjustments in the event that Telecom's stockholders become eligible to receive (i) a stock dividend; (ii) a cash payment; or (iii) other stock or securities or property by way of spinoff, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement. The Section 5 adjustment is intended to place the warrant-holder in the same position, at the date of exercise, as a shareholder on the Effective Date of the Warrant. Section 6 of the Warrant provides that in the event of a reorganization, consolidation, merger or other similar event, the warrant-holder will receive, upon exercising the Warrant, whatever consideration the shareholders would have received in the merger or reorganization. Finally, Section 7 provides for an adjustment in the event of dilutive transactions, such as the issuance or sale of shares for no consideration or for consideration below the exercise price of the Warrant, the sale of convertible securities, or the grant of rights or options for the purchase of stock.
Warrant, at 31 Del. C. § 7.
Whenever an adjustment is triggered under Sections 5, 6 or 7, Section 9 of the Warrant directs the preparation and delivery to the warrant-holder of an Accountants' Certificate which sets forth the adjustments being made. The Accountants' Certificate informs the warrant-holder of the identity and number of shares it will be entitled to purchase when the Warrant is exercised.
B. The Merger
On October 28, 1996, seven months after the Warrant was issued, Telecom entered into a Merger Agreement and Plan of Reorganization (the "Merger Agreement") with the co-defendant, Advanced Radio Telecom Corp. ("ART"). Under the Merger Agreement, ART acquired Telecom in a transaction in which (i) a wholly owned shell subsidiary of ART (the "merger-subsidiary") was merged into Telecom, (ii) Telecom became the surviving corporation, (iii) all of Telecom's shares were exchanged for ART shares, and (iv) the Telecom shares were canceled.
The plaintiff purchased the Warrant as part of bridge financing to help defendants ART and combine their businesses and then offer common stock to the public. At that time, ART was named Advanced Radio Technologies Corporation.
ART and Telecom are collectively "the defendants."
C. Subsequent Dilutive Transactions
ART acknowledges that as a result of the Merger, the plaintiff, upon exercising the Warrant, would be entitled to purchase ART common stock instead of Telecom stock. After the Merger took place, however, ART issued to third parties, in various transactions, ART common stock, securities convertible into ART common stock, and warrants and options to purchase ART common stock. These transactions diluted the ART stock to which the plaintiff would be entitled upon exercising the Warrant. The plaintiff claims that unless it receives an adjustment under the Warrant's anti-dilution provision (Section 7), those dilutive ART stock transactions will have improperly diminished the value of its Warrant. The defendants took the position, however, that the Warrant, by its own terms, does not entitle the plaintiff to any Section 7 adjustment to offset the dilutive effect of these transactions.
A11 of Telecom's stock is now owned by ART.
In its amended complaint, (the "Complaint"), the plaintiff alleges two Causes of Action that embody three separate claims: (1) breach of contract (i.e., the Warrant) for refusing to acknowledge the plaintiffs entitlement to the Section 7 adjustments, (2) breach of the Warrant for refusing to produce an Accountants' Certificate, and (3) unjust enrichment.
As denominated in the Complaint, the First Cause of Action is for Breach of the Warrant, and the Second Cause of Action is for Unjust Enrichment.
II. THE APPLICABLE STANDARDS AND THE PARTIES' CONTENTIONS
A. The Procedural StandardsThe defendants have moved to dismiss the Complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted. The plaintiff, in response, has cross-moved under Rule 12 (c) for partial judgment on the pleadings on its claim that the defendants have breached the Warrant.
Court of Chancery Rule 12(b)(6) requires that a complaint be dismissed if it appears that under any reasonable construction of the facts alleged the plaintiff would not be entitled to relief. Under Court of Chancery Rule 12(c), this Court will grant a motion for judgment on the pleadings only where it appears from the pleadings that there are no material issues of fact and the movant is entitled to judgment as a matter of law. On motions brought under Rule 12(b)(6) and Rule 12(c), the Court takes the well-pled facts in the complaint as true and views those facts and any inferences drawn therefrom in the light most favorable to the non-moving party. The plaintiffs three claims are evaluated in accordance with these standards.
Vanderbilt Income Growth Assocs. v. Arvida/JMB Managers, Inc., Del. Supr., 691 A.2d 609, 612 (1996).
Weiss v. Samsonite Corp., Del. Ch., 741 A.2d 366, 371 (1999) (citations omitted).
B. The Contentions
The plaintiff contends that it is entitled to judgment on the pleadings on its claim the defendants breached the Warrant. The alleged contractual breaches consist of the defendants' (i) failure to acknowledge the plaintiffs right to an anti-dilution adjustment under Section 7, and (ii) refusal to deliver an Accountants' Certificate. The bases for the claim are that as a result of the Merger the plaintiff became entitled to purchase ART common stock upon exercising the Warrant, and that ART's dilutive stock transactions after the Merger entitle the plaintiff to a dilution-offsetting adjustment under Section 7 of the Warrant.
In its Second Cause of Action, the plaintiff claims that the defendants will be unjustly enriched at the plaintiffs expense, if the defendants are allowed to enjoy the benefits of diluting the value of the Warrant without having to make adjustments that are designed to compensate the plaintiff warrant-holder for any such dilution.
The defendants respond that all of the plaintiffs claims must be dismissed as a matter of law, for three reasons. First, to the extent the breach of contract claim is based upon Section 7 of the Warrant, that claim is legally deficient because under the terms of the Warrant itself, the ART stock transactions in question could not, and did not, implicate Section 7. Second, to the extent the breach of contract claim rests on ART's alleged failure to deliver an Accountants' Certificate, that claim is invalid on its face and is also time-barred. Third, the Second Cause of Action must be dismissed because (i) enforcing the Warrant's plain language cannot create "unjust" enrichment, and, (ii) under New York law, which the parties agree applies here, the plaintiff cannot simultaneously maintain claims for breach of contract and unjust enrichment.
The Warrant provides that it is to be governed by New York law. Warrant 31 Del. C. § 19.
These contentions are next addressed.
III. ANALYSIS
A. The Unjust Enrichment Claim
I start with the plaintiffs Second Cause of Action, for unjust enrichment. The claim is that the defendants were unjustly enriched by refusing to permit any anti-dilutive adjustments under the Warrant, and by failing to furnish the plaintiff with the Accountants' Certificate that would evidence and explain those adjustments. The defendants contend that it cannot be "unjust enrichment" for the defendants to refuse to make an adjustment to which the plaintiff is not contractually entitled. The defendants also argue that under New York law the plaintiff cannot simultaneously maintain a suit for both breach of contract and unjust enrichment, because the claims are fatally inconsistent: a claim for unjust enrichment presupposes the absence of a contract, whereas a claim for breach of contract presupposes a valid and enforceable contract.
The plaintiff responds that it may maintain both claims, because it is not legally required to elect its remedies and may proceed under alternative theories of breach of contract and unjust enrichment.
Regal Custom Clothiers, Ltd. v. Mohan's Custom Tailors, Inc., No. 96 CIV. 6320, 1997 WL 370595 at *8 (S.D.N.Y. July 1, 1997); Rule v. Brine, Inc., 85 F.3d 1002, 1011 (2d Cir. 1996).
On this issue the defendants' position is correct. Under New York law, a quasi-contractual claim for unjust enrichment can be maintained in the same action with a claim for breach of contract, only if the parties dispute the validity of the contract or the applicability of the contract to the dispute. Here, neither the validity nor the applicability of the Warrant is
Eagle Comtronics. Inc. v. Pico Prods., Inc., 682 N.Y.S.2d 505, 506 (N.Y.App. 1998); Clark-Fitzpatrick. Inc. v. Lone Island R.R. Co., 516 N.E.2d 190, 193 (N.Y. 1987).
disputed. All parties concede that the Warrant is a valid contract, and no one contends that the Warrant does not govern the issues presented on these motions. Indeed, the plaintiffs entire unjust enrichment claim rests on the Warrant's language. Because the plaintiffs unjust enrichment claim fails as a matter of New York law, it must be dismissed.
The dismissal of this claim on inconsistency grounds makes it unnecessary to address the defendants' alternative argument that giving effect to the plain language of the Warrant cannot constitute unjust enrichment.
B. The Breach of Contract Claim
1. The Issues
The Court next considers the plaintiffs first Cause of Action for breach of contract. The defendants seek to have that claim dismissed under Rule 12(b)(6). The plaintiff seeks the entry of a Rule 12(c) judgment on the pleadings on those same claims. Thus, by the very nature of their motions, all parties agree that the issues presented are legal. To determine what those issues are, some preliminary analysis is needed.
It is undisputed that as a result of the Merger and the operation of Section 5 and/or Section 6 of the Warrant, the plaintiff, upon exercising the Warrant, is entitled to receive ART shares, rather than Telecom shares. It is also undisputed that the plaintiff, in that event, would be entitled to purchase at least 40, 000 ART shares. The plaintiff claims, however, that it would be entitled to purchase more than 40,000 shares. There is no dispute that the plaintiff is correct if Section 7 of the Warrant applies, since Section 7 would require an upwards adjustment of the 40,000 shares to offset the dilutive effect of the post-Merger transactions in ART shares.
The parties agree that the dispute is governed by Sections 6 and 7 of the Warrant. Section 6 provides:
In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merger into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 3 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution as the case may be, if such holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 5 and 7 hereof.
Warrant, at § 6 (emphasis added).
And Section 7 provides:
[W]here the Company shall issue or sell shares of its Common Stock after the Original Issue Date without consideration or for a consideration per share less than the Purchase Price in effect pursuant to the terms of this Warrant at the time of the issuance or sale of such additional shares . . . then the Purchase Price in effect hereunder shall simultaneously with such issuance or sale be reduced to a price determined by [a formula specified in the Warrant].
Warrant, at § 7.1 (emphasis added).
Section 7 is (to repeat) an "anti-dilution" provision designed to offset any dilution of the issuer's stock caused by stock issuances made for consideration less than the stipulated "Purchase Price." Section 7 accomplishes that by lowering the purchase price per share that an exercising warrant-holder would pay, which would thereby increase the number of shares to be purchased. But, because in this case the dilutive transactions involved stock issued by ART, Section 7 would not apply to those transactions unless ART is "the Company" referred to in the above quoted first line of Section 7. That is the key question upon which the pending motions turn.
"The Company" is a defined term in the Warrant. The definition, Z found in the Warrant's preamble, states:
As used herein the following terms, unless the context otherwise requires, have the following respective meanings:
(a) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company [Telecom] hereunder.
Warrant, at preamble (emphasis added).
As earlier stated, the applicability of Section 7 turns on whether ART is "the Company" within the meaning of that Section. As that term is defined, there are only two ways that ART could be deemed "the Company." The first is if ART "succeed[ed] to or assume[d]" the obligations of Telecom under the Warrant in the Merger. The second is if the "context" of the term "the Company" in Section 7 "otherwise requires" that ART be deemed "the Company." The plaintiff contends that under either prong of the definition ART must be deemed "the Company." The defendants argue that the pled facts alleged in the Complaint implicate neither prong. Because both prongs of the definition are in issue, each must be separately analyzed.
2. Did ART Succeed to or Assume Telecom's Warrant Obligations?
The defendants argue that ART neither succeeded to nor assumed any obligations of Telecom, including its obligations under the Warrant, because nothing in the Merger Agreement provides for an assumption of those obligations. Indeed, the defendants urge, under Section 3(f) of the Merger Agreement Telecom is the surviving corporation. Nor, defendants say, did ART assume Telecom's liabilities by operation of law, because the Merger Agreement states that "the corporate existence, franchises and rights of Telecom . . . shall continue unaffected and unimpaired by the Merger."
In response, the plaintiff urges that ART "succeed[ed] to or assume[d]" Telecom's obligations under the Warrant by agreeing to a merger involving the exchange of Telecom's stock for ART stock and the cancellation of all Telecom stock. As support, the plaintiff points to Section 4(c) of the Merger Agreement, which provides that: "At the Effective Time . . . each 2.75 issued shares of Telecom Common Stock . . . shall be converted into the right to receive one share of ART Common Stock." The plaintiff also relies upon the language of Section 6(b), that: "after the Effective Time each certificate which represented outstanding shares of Telecom Common Stock . . . prior to the Effective Time shall be deemed for all corporate purposes to evidence the ownership of the shares of ART Common Stock . . . provided in Section 4." By virtue of the exchange of Telecom stock for ART stock and the cancellation of Telecom stock, the plaintiff concludes that ART must necessarily (albeit implicitly) have assumed Telecom's obligations in the Merger.
Having considered the arguments raised by both sides, I determine that in the Merger, ART did not succeed to or assume Telecom's Warrant obligations. Section 3(f) of the Merger Agreement explicitly provides that Telecom will continue as a functioning entity after the Merger. Nowhere does the Merger Agreement expressly provide for any assumption by ART of the liabilities and obligations of Telecom. Nor, given the structure of the Merger, did ART assume the obligations of Telecom by operation of law. As a purely structural matter, had Telecom merged into the merger-subsidiary so that the latter became the surviving corporation, then Telecom would no longer exist. In that case, ART would necessarily have "succeed[ed] to or assume[d]" the obligations of Telecom by virtue of 8 Del. C.. 31 Del. C. § 259. Here, however, Telecom was the surviving corporation in the Merger, and therefore ART did not by operation of law "succeed to or assume" Telecom's Warrant obligations under 31 Del. C. § 259.
Because ART did not "succeed to or assume" the obligations of Telecom under the Warrant, the only way that ART could be deemed "the Company" under Section 7 of the Warrant is if the "context otherwise requires." I turn to that issue.
3. Does "the Context Otherwise Require" That ART Be Deemed "the Company" For Purposes of Section 7 of the Warrant?a. The Contentions
The plaintiff urges that this Court must find as a matter of law that ART is "the Company" under the Warrant, as provided in the second prong of the definition of "the Company." The Court must so conclude (the plaintiff argues) for three reasons.
First, plaintiff contends, the context of "the Company" as used in Section 7 requires that "the Company" be read to mean ART. The argument runs as follows: By application of Section 6 of the Warrant and as a result of the Merger, the plaintiff, upon exercising the Warrant, can purchase only ART stock. But Section 6 does more than merely substitute ART stock for Telecom stock as the security the Warrant-holder is entitled to purchase. Section 6 also expressly makes that stock subject to "further adjustment . . . as provided in . . . Section 7." Because ART common stock is the only stock the plaintiff may now purchase upon exercising the Warrant, and because the Warrant defines Common Stock as "the common stock of the Company and its successors," the term "Common Stock" as used in Section 7, must mean ART common stock. Otherwise, the provision of Section 6 that (i) entitles the exercising Warrant-holder to purchase the stock or other securities received in a merger, and then (ii) makes that stock subject to adjustment under Section 7, would become meaningless and effectively be read out of the Warrant contract.
Warrant, at § 2.
Second, the plaintiff argues that to read that Warrant in any different way would be inequitable. Because of the Merger, Telecom can no longer discharge its original obligation under the Warrant to deliver Telecom shares — adjusted for any dilutive transactions — to exercising warrant-holders. Now those warrant-holders can receive only ART shares. Unless ART is "the Company" under Section 7 of the Warrant, those ART shares could be diluted with impunity — a result that would be legally prohibited if the shares being purchased were the Telecom shares for which the ART shares were substituted. Under the defendants' interpretation, the plaintiff Warrant-holder, will be deprived of the anti-dilution protections that it bargained for.
To express the argument differently, the plaintiff bargained for the right to buy 110,000 shares of Telecom. That number of shares was explicitly made subject to adjustment under Section 7 if Telecom chose to enter into specified dilutive post-issuance transactions. The plaintiff bargained for that anti-dilution protection so that its ownership position in Telecom at the time it exercised the Warrant would be protected. The plaintiff also bargained for provisions in Section 6 of the Warrant to protect the plaintiff in the event of a merger, so that upon exercise, the Warrant-holder would receive the securities being offered in the merger — here, the stock of ART. The defendants do not dispute that the plaintiff is entitled, by reason of the Merger and Section 6, to buy ART shares upon exercising the Warrant. But, if there is a merger, both the Section 6 and the Section 7 adjustments are inseparable parts of the same bargain. Yet the defendants would deny the plaintiffs entitlement to the Section 7 anti-dilution adjustments that Section 6 expressly makes applicable to the acquiror's securities.
Third, the plaintiff urges that its reading of "the Company" is the only interpretation that is faithful to "[t]he rules of construction of contracts [which] require us to adopt an interpretation which gives meaning to every provision of a contract or, in the negative, no provision of a contract should be left without force and effect." Section 6 entitles the plaintiff to receive ART stock, and also expressly makes that stock "subject to further adjustment thereafter as provided in Sections 5 and 7 hereof." Only if "the Company" in Section 7 means ART, can a Section 7 adjustment occur. Any different construction would render the "further adjustment" provision in Section 6 meaningless. For these three reasons, the plaintiff concludes, it is entitled to judgment on the pleadings on its breach of contract claim.
Muzak Corp. v. Hotel Taft Corp., 150 N.Y.S.2d 171, 174 (N.Y. 1956).
The defendants respond by arguing, also as a matter of law, that ART is not "the Company." Therefore, the plaintiffs contractual claim of entitlement to an adjustment under Section 7 is not legally cognizable and must be dismissed, for two reasons.
The defendants first argue that it cannot be implied either from the Merger or from the context of Section 6 of the Warrant, that ART succeeded to or assumed the Warrant obligations of Telecom, which still exists as a wholly-owned subsidiary of ART. To find that ART implicitly assumed Telecom's obligations as a matter of "context" would contravene the established principle that a parent-subsidiary relationship, without more, cannot render a parent corporation liable for the obligations of its subsidiary even where the subsidiary is wholly owned. Nothing in the Merger Agreement alters this basic principle. On the contrary, defendants say, that Agreement provides that "the corporate existence, franchises and rights of Telecom, with its purposes, powers and objects, shall continue unaffected and unimpaired by the Merger."
TNS Holdings, Inc. v. MKI Sec. Corp., 703 N.E.2d 749, 752 (N.Y. 1998); Morris v. New York State Dep't of Taxation Fin., 623 N.E.2d 1157, 1160 (N.Y. 1993). (stating the "accepted principles" that "a corporation exists independently of its owners, as a separate legal entity" and that "the owners are normally not liable for the debts of the corporation").
Merger Agreement at 3(f).
Second, the defendants contend that the context in which the term "Company" appears does not "otherwise require" that "the Company" be read to mean ART. Rather, the definition of that term means that "the Company" is (i) Telecom, and that (ii) unless the context otherwise requires, "the Company" also means an entity that succeeds to or assumes Telecom's obligations under the Warrant. To put it differently, the defendants contend that the definitional language "unless the context otherwise requires," operates to limit, not expand, the universe of entities that could be "the Company." Accordingly, defendants conclude, nothing in the "context" of the Warrant justifies reading the term "the Company" broadly to include any other entity except one that expressly succeeds to or assumes liabilities of Telecom under the Warrant. Because ART did not succeed to or assume Telecom's Warrant liabilities, it cannot be "the Company."
Transcript at 30.
Transcript at 34.
b. Discussion
Having considered the parties' colliding views, I conclude as a matter of contract construction that ART must be deemed "the Company," as that term is used in Section 7 of the Warrant. Both legally and equitably, the "context" requires that result. The defendants rely essentially upon the technical structure they chose for the Merger as their reason for not recognizing a Section 7 adjustment that Sections 6 and 7 on their face expressly require.
Assume (counterfactually) that the Merger had resulted in ART's merger-subsidiary swallowing up Telecom and becoming the surviving corporation. In that case, the subsidiary would have, "succeeded to or assumed" the obligations of Telecom by operation of law under 8 Del. C.. 31 Del. C. § 259, and a Section 7 adjustment would be required. Here, however, the merger-subsidiary was merged into Telecom, leaving Telecom as the surviving corporation. Under that structure, no obligations of Telecom were assumed by operation of law. But that does not end the analysis, because the definition of "the Company" also permits the Court to consider the "context." The definition of "the Company" is not narrowly confined to entities that succeed to or assume Telecom's liabilities under the Warrant. Indeed, that reading impermissibly conflates both prongs of the definition into only one prong. Nor does Section 6 (which makes the ART stock "subject to further adjustment under . . . Section 7") distinguish between mergers where the original issuer of the Warrant is — or is not — the surviving corporation. If Section 6 made such a distinction, then one would have expected the defendants to argue that the plaintiff is not entitled to receive ART stock when the Warrant is exercised. Yet the defendants concede that the plaintiff would be entitled to purchase ART stock.
The Merger Agreement is to be governed by Delaware law. Merger Agreement at ¶ 16(e).
In this case the relevant "context" is this: the plaintiff bargained for certain anti-dilution protections, and for other protections in the event of a merger that converted the stock the Warrant-holder was originally entitled to purchase into securities of the acquiring company. Both protections are mandated by the same Section — Section 6 — which directs that adjustments be made to the stock received by reason of a merger under Sections 5 and 7. Unless the "context" from which both of these protections arise is respected, the defendants will be permitted to use the structure of the Merger self-servingly as both a shield and a sword — a sword to force the plaintiff warrant-holder to accept ART stock upon exercising the Warrant, and a shield to prevent that warrant-holder from enforcing anti-dilution provisions that are part and parcel of the same package of contractual protections. That simply cannot be.
The defendants respond that despite the linkage (in Section 6) between the Section 6 and Section 7 adjustments, and despite the plaintiff's entitlement under Section 6 to purchase ART stock when it exercises the Warrant, the plaintiff is not entitled to the anti-dilution adjustments under Section 7. The reason, defendants say, is that Telecom continues, post-Merger, as a viable entity capable of satisfying its obligations under the Warrant. But that argument is hopelessly flawed. To make it, the defendants must first de-couple Sections 6 and 7, and then assert that a Section 7 adjustment need not necessarily or inevitably follow or accompany a Section 6 adjustment. The flaw is that unless "the Company" means ART in this context, Section 7 will essentially be read out of the Warrant contract. Unless the stock of "the Company" received by virtue of a Section 6 (merger) adjustment is the same as the stock of "the Company" that is adjusted (for dilution) under Section 7, then no post-merger dilution of the stock underlying the Warrant would ever trigger a Section 7 adjustment: That result would violate the explicit command of Section 6, which makes the stock received in the Merger "subject to adjustment under Section 7." Only by interpreting "the Company" in Section 7 as the same "Company" whose stock will be received by the warrant-holder under Section 6, can the Court avoid a construction that would render Section 7 superfluous and disregard a critical provision in Section 6. The defendants' interpretation would contravene New York's rule of construction, which prohibits a reading that would render a provision of a contract superfluous as "unsupportable under standard principles of contract interpretation."
The defendants cite as an example, a Section 6 merger for cash. It is true that in that case, there would be no Section 7 adjustment. But the example is irrelevant, because cash need not be "adjusted" to prevent stock dilution, since the warrant-holder would not be receiving any stock that is capable of dilution.
Lawyers' Fund for Client Protection v. Bank Leumi Trust Co., 706 N.Y.S.2d 66, 69-70 (N.Y. 2000); see also Ruttenberg v. Davidge Data Sys. Corp., 626 N.Y.S.2d 174, 177 (N.Y.App.Div. 1995) (rejecting a reading of the contract the practical effect of which would be to render terms nugatory).
In short, the context requires that ART be deemed "the Company" under Section 7. First, the anti-dilution adjustment formula in Section 7 works only if the stock triggering the anti-dilution adjustment is the same as the stock that is the subject matter of the Warrant. Second, at present the subject matter of the Warrant is, by virtue of the Merger, and Section 6, ART stock. Third, transactions involving ART stock are the only transactions that are capable of diluting the value of the Warrant. If ART is not "the Company" after its stock has been substituted for that of Telecom, then what entity can be? It cannot be Telecom. Logically and by process of elimination, the "context requires" that "the Company" be ART.
4. The Defendants' "Insufficient Pleading" Argument
Lastly, and in the alternative, the defendants argue that even if ART is determined to be "the Company" for purposes of Section 7, the Complaint still cannot survive because it fails to meet the pleading standard to survive a 12(b)(6) motion to dismiss. That standard requires that "a plaintiff must allege facts that, taken as true, establish each and every element of a claim upon which relief could be granted." The defendants contend that to state a claim for breach of Section 7 of the Warrant, the complaint must allege that the per-share consideration actually received in the complained-of transaction is less than the Purchase Price under the Warrant. In this case, however, the Complaint does not allege a specific price; it states only that the issuances were "at a price per share less than the applicable Purchase Price under the Warrant."
Lewis v. Austen, Del. Ch., C.A. No. 12937, Jacobs, V.C., Mem. Op. at 12 (June 2, 1999) (emphasis added).
Complaint at ¶¶ 30, 31, 32, 33, 36.
The argument cannot withstand scrutiny. The plaintiff has pled a breach of the Warrant with the specificity required by Court of Chancery Rule 8 (a). As that Rule requires, the Complaint gave "the opposing party fair notice of the nature of the [breach of contract] claim," by pleading the existence of a contract, a breach thereof, and a demand for relief, namely, a declaratory judgment and specific performance of the defendants' obligation to provide the plaintiff with an Accountants' Certificate. Indeed, only after an Accountants' Certificate is furnished (i.e., after the relief prayed for is granted) would the plaintiff be able to plead the specific prices paid in the triggering dilutive stock transactions. At this stage, it is unnecessary for the plaintiff to plead, with that degree of specificity, facts that are entirely within the defendants' knowledge and control.
Balm v. Amerimar Realty Co., Del. Ch., C.A. No. 12896, Jacobs, V.C., Mem. Op. at 7-8 (Dec. 23, 1993).
Because the "context" requires that ART be deemed "the Company" under Section 7 of the Warrant, the plaintiff is entitled to judgment on the pleadings on its breach of contract claim.
The defendants also contend that, to the extent that the breach of contract claim rests on an alleged dispute over whether the Merger triggered an adjustment under Section 5 or 6 of the Warrant, that claim must be dismissed due to the absence of a ripe controversy, because the defendants concede that ART's acquisition of Telecom resulted in the Warrant becoming exercisable for ART stock. That concession, however, does not divest this Court of subject matter jurisdiction over the plaintiff's claim for breach of the Warrant, because the issue is not which stock the plaintiff is entitled to receive, but how much. As to that latter issue, there is a ripe controversy. For that reason, the defendants' dismissal argument based upon an asserted lack of a case or controversy is denied.
C. The Accountants' Certificate Claim
The final issue concerns the plaintiffs claim of entitlement to an Accountants' Certificate. That claim is governed by Section 9 of the Warrant, which provides that when
any adjustment . . . in the shares of Common Stock . . . issuable upon the exercise of the Warrants [is due], the Company at its expense will promptly cause the Company's regularly retained auditor to compute such adjustment . . . in accordance with the terms of the Warrants and prepare a certificate setting forth such adjustment . . .
That provision appears, on its face, to entitle the plaintiff to an Accountants' Certificate that computes and discloses the adjustment required by the transactions complained of. The defendants argue, however, that the claim for an Accountants' Certificate is time-barred, because more than three years have passed since the Merger occurred. The plaintiff responds that the Accountants' Certificate it seeks is acurrent Certificate, that would necessarily take into account all transactions that occurred since the Warrant was issued. Such a current Certificate, the plaintiff urges, would not be time-barred.
Actions for breach of contract in Delaware, must be brought within three years of the accrual of the cause of action. 10 Del. C. 31 Del. C. § 8106.
I agree. Although more than three years have elapsed since the Merger, that fact is irrelevant for limitations purposes, because the plaintiffs right to an adjustment under Section 7 of the Warrant accrued after the post-Merger dilutive transactions occurred. There is no claim that the plaintiff's entitlement to a Section 7 adjustment is time-barred. How then can its claim for an Accountants' Certificate documenting those adjustments be precluded? The Accountants' Certificate merely records the adjustment, and enables the plaintiff to know how many ART shares it will receive upon exercising the Warrant. To apply the statute of limitations to bar the contractual right to receive an Accountants' Certificate that only documents adjustments that are not time-barred, would be illogical and inappropriate.
IV. CONCLUSION
For the foregoing reasons, (1) with respect to the plaintiffs claims for breach of contract (including its claim of right to receive an Accountants' Certificate), the plaintiffs motion for judgment on the pleadings is granted and the defendants' motion to dismiss is denied; and (2) with respect to the plaintiffs claim for unjust enrichment, the defendants' motion to dismiss is granted. IT IS SO ORDERED.