Aaron Houseman v. Eric S. Sagerman
CA No. 8897-VCG
| Del. Ch. | Jul 20, 2021Background
- Plaintiffs Aaron and Nancy Houseman were former Universata stockholders; Aaron was a former director and had a separate put agreement with Thomas Whittington.
- Universata merged into a HealthPort subsidiary for $17.5 million; $2.5 million of that purchase price was placed in an escrow to cover certain post-closing claims and purchase-price adjustments.
- A group of controlling shareholders (the Owners, ~72% of stock) signed the merger agreement and appointed Thomas Whittington as the Shareholders’ Representative with broad, contractually defined authority and discretion; the agreement states the representative’s actions are binding on all Shareholders.
- Plaintiffs challenged (1) using sale proceeds to fund the escrow instead of requiring the Owners to fund indemnities out-of-pocket and (2) the standard of review applicable to the Shareholders’ Representative’s decisions; many specific distribution decisions were also contested and assigned to a Special Master.
- The Special Master issued a Final Report largely upholding the representative’s decisions; the Vice Chancellor reviewed the report de novo, ruled the escrow was properly funded from sale proceeds, and held the representative’s duties are limited to subjective good faith.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper funding of indemnification/escrow | Owners (not all shareholders) should have deposited the $2.5M from their own funds | Escrow is part of the Purchase Price, funded by Purchaser; deductions from escrow reduce all shareholders' pro rata payouts | Escrow was properly created from sale proceeds; Owners remain liable for amounts only after escrow depletion per agreement |
| Whether the Shareholders' Representative binds non-signing shareholders | Appointment by Owners alone means Rep cannot bind non-signatories (like Houseman) | Merger contract designates the Rep and states his actions bind all Shareholders | Rep's actions bind all shareholders when taken under the Merger Agreement; Aveta precedent supports this |
| Standard of review for Rep's actions | Rep should face an 'accounting' / entire fairness standard; burden on Rep to show fairness | Rep is a contractual agent with discretion; duties are contractual not full fiduciary obligations | Rep's fiduciary-like duties were contractually limited; applicable standard is subjective good faith (not entire fairness) |
| Applicability of Cigna (unenforceability of post-closing adjustments) | Cigna renders post-closing indemnities binding non-consenting shareholders unenforceable | This Merger's indemnities are explicit, capped, and time-limited; Cigna is distinguishable | Cigna inapplicable because indemnification here is expressly limited in amount/duration |
Key Cases Cited
- DiGiacobbe v. Sestak, 743 A.2d 180 (Del. 1999) (Court applies de novo review to exceptions to a Master's report)
- Aveta Inc. v. Cavallieri, 23 A.3d 157 (Del. Ch. 2010) (stockholders' representative's post-closing actions can bind non-signatory former stockholders)
- Gatz Properties, LLC v. Auriga Cap. Corp., 59 A.3d 1206 (Del. 2012) (contractual provisions can define or limit fiduciary duties)
- Winshall v. Viacom Int'l, Inc., 55 A.3d 629 (Del. Ch. 2011) (discussing role of shareholders' representative as attorney-in-fact)
- Cigna Health & Life Ins. Co. v. Audax Health Sols., Inc., 107 A.3d 1082 (Del. Ch. 2014) (post-closing adjustments that leave consideration indeterminate can render a merger term unenforceable under § 251)
- Coleman v. Newborn, 948 A.2d 422 (Del. Ch. 2007) (attorney-in-fact generally assumes fiduciary obligations)