Chancery Court Finds Commission Under Sales Agreement Was Not "Required" Such That Entry Into Sales Agreement Required Additional Approvals
In CompoSecure, L.L.C. v. CardUX, LLC f/k/a Affluent Card, LLC, C.A. No. 12524-VCL (Del. Ch. June 5, 2019), the Delaware Court of Chancery (the “Court”) concluded in a Report on Remand from the Delaware Supreme Court that a Sales Agreement (“Agreement”) entered into by CompoSecure, L.L.C. (“CompoSecure”) and CardUX, LLC (“CardUX”) was not subject to the heightened approval requirements contained in the CompoSecure LLC Agreement because the Agreement did not require CompoSecure to expend more than $500,000 in any fiscal year.
The Agreement obligated CompoSecure to pay commissions to CardUX under certain circumstances. The parties negotiated and entered into the Agreement and initially treated it as valid. However, after CompoSecure accepted a major order that triggered a multi-million dollar commission obligation under the Agreement (the “Commission”), it sought a reason not to pay.
CompoSecure argued that entry into the Agreement constituted a “Restricted Activity” under its LLC Agreement, and since it had failed to obtain the requisite approvals for a Restricted Activity, the Agreement was invalid. The LLC Agreement provides that except as set forth in its annual budget or business plan, CompoSecure may not take certain actions without the approval of its investors, board of directors, and holders of a Majority of Class A shares. The relevant provision in this case (the “Restricted Activity Provision”) covers entry “into . . . any contract, agreement, arrangement or understanding requiring the Company . . . to make expenditures in excess of $500,000 during any fiscal year . . .”
The Court first recounted the circumstances surrounding entry into the Agreement. It noted that each of the board, the investors and the Class A Majority in fact supported entry into the Agreement. The vote of the Class A Majority was controlled by CompoSecure’s CEO, who negotiated and supported the Agreement. The investor vote was controlled by a private equity firm that was represented in negotiation of the Agreement and supported the Agreement. Finally, the board was briefed on and supported the Agreement. Although CompoSecure did not obtain formal approval from such stakeholders, all approved at the time of entry into the Agreement.
The Court next shifted to interpretation of the Restricted Activity Provision, focusing on what it meant to “require” a $500,000 expenditure. It noted that “[s]omething required is necessary or essential, and a requirement is something that must take place.” In this context, the Court interpreted the Restricted Activity Provision to cover only a “contract that mandates spending [$500,000 during any fiscal year], without any contingencies, conditions or optionality.”
Applying this definition, the Court found that the Agreement did not “require” expenditures in excess of the threshold. The only mandatoryexpenditures were (i) an annual expense reimbursement capped at $20,000, and (ii) a commission advance of $10,000 per month during the first fifteen months. While the Agreement contemplated commissions of the kind at issue in this case, such commissions were not mandatory; they were in fact doubly conditional. First, any commission obligation was contingent on an approved prospect actually placing an order. Second, CompoSecure, in its sole discretion, could choose whether to accept the order. Because of this conditionality, the Court concluded the Commission was not “required,” and therefore the Agreement had not been subject to heightened approval requirements under the Restricted Activity Provision.
Having concluded the Agreement was not within the scope of the Restricted Activity Provision, the Court determined the additional approvals were not required and the Agreement was not void for failure to obtain them.