Chancery Court Declines to Dismiss Breach of Contract, Implied Covenant and Declaratory Judgment Claims Stemming from Termination Purportedly for Cause
In William Patrick Sheehan, et al. v. AssuredPartners, Inc., et al., C.A. No. 2019-0333-AML (Del. Ch. May 29, 2020), the Delaware Court of Chancery (the “Court”) granted in part and denied in part a motion to dismiss brought by insurance brokerage firm, AssuredPartners, Inc. (“AP Inc.”), and its private equity backers (collectively, the “Defendants”) finding that plaintiffs’ claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory judgment survived under the minimal pleading standard for a motion to dismiss.
In December 2014, William Patrick Sheehan and Mark Joseph Sheehan (the “Sheehans” or the “Plaintiffs”) sold their insurance agency (the “Agency”), to Defendants AP Inc. and AssuredPartners of Virginia, LLC (“AP Virginia,” and together with AP Inc., “AssuredPartners”). In connection with the sale, the Sheehans signed agreements with AssuredPartners governing their continued employment (the “Employment Agreements”) and entered into an earn-out agreement.
AssuredPartners offered management employees of the Agency, including the Sheehans, the opportunity to become a limited partner (a “Management LP”) of AssuredPartners’ parent company, Dolphin Holdco, L.P. (“Holdco”). The Sheehans accepted the offer, which included the option to purchase Class A-2 Interests and Class B Profit Interests (the “Interests”) in Holdco. The Interests were governed by the Dolphin Holdco Limited Partnership Agreement (the “Holdco LPA”) and the Dolphin Holdco Equity Incentive Plan (the “Plan”). Non-parties Apax VIII-AIV A L.P. and Apax VIII-AIV B L.P. (together “Apax VIII”) controlled AssuredPartners through their ownership of Holdco. Apax VIII also owned Apax Limited Partner (“Apax LP”).
Under the Plan, termination of a Management LP’s employment triggered certain rights held by Holdco and Apax LP. For instance, Holdco and Apax LP could repurchase a Management LP’s Interests within six months after termination. The consideration for such Interests depended on whether the termination was “for cause” or without cause. If a Management LP was terminated without cause, Holdco or Apax LP could only repurchase the Interests for fair market value. However, if a Management LP was terminated “for cause,” Holdco or Apax LP could repurchase the Interests for the lesser of (i) the fair market value of those Interests or (ii) the amount paid by the Management LP to acquire them.
The Sheehans’ employment was terminated on February 12, 2019, purportedly for cause, based on “certain financial and accounting irregularities” that demonstrated knowing and willful breaches of certain duties and obligations to AssuredPartners. Per the terms of the Plan, Holdco repurchased the Sheehans’ Class A-2 Interests at the Sheehans’ original acquisition cost and cancelled the Sheehans’ Class B Profit Interests. Less than a week later, AssuredPartners, Holdco’s only asset, was sold for $2.7 million in a merger transaction (the “Merger”), and some of Holdco’s interest holders received rollover shares in the buyer.
The Sheehans filed a complaint against the Defendants alleging non-compliance with the earn-out agreement, employment agreements, the Holdco LPA, and the Plan. Shortly thereafter, the Defendants filed a motion to dismiss all claims in the Plaintiffs’ complaint. The Court granted in part and denied in part Defendants’ motion, addressing each claim in turn.
First, the Court declined to dismiss the Plaintiffs’ claim that AP Virginia breached the employment agreements when it terminated them for cause without a contractual basis. The Court found that the Sheehans had adequately pleaded that the purported “cause” for which they were terminated was “purposefully manufactured” in order to oust them from Holdco and prevent them from receiving any benefit in connection with the Merger. Applying similar reasoning, the Court also declined to dismiss the Plaintiffs’ claim that AP Virginia’s conduct had breached the implied covenant of good faith and fair dealing. The Sheehans had adequately pleaded that their termination had been motivated by an improper purpose, the Court noted, sufficient to survive a motion to dismiss.
The Court then dismissed Plaintiffs’ request for a declaration that the Class A-2 Interests’ repurchase and Class B Profit Interests’ cancellation were ineffective, and that the Sheehans therefore never ceased to be Management LPs in Holdco. The relief sought would be duplicative of other claims, the Court noted, and the restoration of Management LP status would be contrary to the terms of the Holdco LPA and the Plan. The Court also dismissed Plaintiffs’ allegations that Apax LP, as majority limited partner of Holdco breached its obligations when it did not give the Plaintiffs a chance to receive consideration from the Merger. Because their Interests had already been repurchased and cancelled, the Court found that the Sheehans had no rights at the time of the Merger and therefore lacked a basis for the claims against Apax LP.
The Court next dismissed Plaintiffs’ claims against Holdco and Dolphin GP, Inc., the general partner of Holdco (“Dolphin GP”), alleging a breach of the Plan. Plaintiffs alleged each of Dolphin GP and Holdco breached the Plan in connection with the determination that Plaintiffs termination was for cause. However, the Court held that Plaintiffs had not plead that Dolphin GP or Holdco had a hand in the for-cause determination. It was in fact AP Virginia that made the determination termination was for-cause, neither Holdco nor Dolphin GP had any discretion or contractual obligation with respect to such termination. The Court also dismissed Plaintiffs’ claim for conversion against Holdco seeking restoration of their Interests. The claim was effectively duplicative of Plaintiffs’ claims for breach of contract, the Court stated, and under Delaware law, a plaintiff cannot bring a conversion claim arising only out of a breach of contract claim.
Next, the Court declined to dismiss Plaintiffs’ claim they received incorrect and unfair value for their Interests per the Holdco LPA. Because the Sheehans could potentially prove at trial that they were terminated “without cause”, they had stated a valid claim that they may be entitled to the corresponding benefits under the Plan. However, the Court dismissed Plaintiffs’ claim that AP Virginia had breached the Employment Agreements by making allegations in its original complaint that damaged the Sheehans’ reputation. The Court noted that the absolute litigation privilege acts as a complete defense to the tort of defamation based on allegations in pleadings, irrespective of accuracy or malice.
Finally, the Court determined Plaintiffs’ request for a declaration that they be freed from post-termination non-interference and non-competition could survive a motion to dismiss. These obligations, Plaintiffs argued, should be excused as a result of alleged material breaches by AP Virginia of express and implied terms of the Employment Agreements. Having already determined these alleged breaches survived a motion to dismiss, the Court determined the Plaintiffs’ request for a declaration could also survive.
For the reasons outlined above, the Court entered an order that Defendant’s motion to dismiss be granted in part and denied in part.