Capella Holdings, LLC v. James Thomas Anderson v. Capella Healthcare, LLC, CA 9809-VCS

Background

James T. Anderson, former director/officer and SMA signee, sued Capella after Capella’s board approved a 2014 recapitalization converting preferred into >1.1 billion common shares; Anderson declined to participate and alleged the recapitalization violated Section 1(k) of his Senior Management Agreement (SMA).
Section 1(k) of the SMA reserved a pool of 2,211,688 “Additional Common Stock” for issuance to executives/employees and stated any reserved shares not allocated by the Board would “remain unissued.”
Anderson filed a Tennessee suit disclosing privileged and non-public Company information in his public filings; Capella treated that disclosure as a material breach of Section 7(a) of the SMA, terminated Anderson for Cause, and sued him in Delaware Chancery Court.
The parties litigated whether Section 1(k) contains an anti-dilution restriction that precluded the recapitalization, and whether any alleged prior breach by Capella excused Anderson’s disclosure of confidential information.
The Court considered Capella’s motion for summary judgment on Anderson’s contract claims and Capella’s claims against Anderson; Anderson had earlier moved (then withdrew) for partial summary judgment relying on a prior-breach defense.

Issues

Issue	Plaintiff's Argument (Capella)	Defendant's Argument (Anderson)	Held
Whether §1(k) of the SMA contains an anti-dilution restriction preventing issuance of additional common stock outside the reserved pool	§1(k) is a limited executive-compensation reserve; it does not restrict the Company from issuing common stock generally	§1(k) (by use of “any” and incorporation provisions) should be read to limit issuance and thus prevents dilution of Anderson’s holdings	Court: §1(k) is not an anti-dilution provision; it reserves a 2,211,688-share pool for executive compensation and does not bar other issuances
Whether Capella breached the SMA by recapitalizing (and whether such breach would excuse Anderson’s later conduct)	No breach: §1(k) was not violated by recapitalization	Prior breach defense: Capella’s alleged breach of §1(k) excused Anderson from confidentiality obligations and other performance	Court: No breach of §1(k); prior-breach defense fails as a matter of law
Whether Anderson breached SMA confidentiality and repurchase provisions (and thus is liable for breach and forfeiture of severance)	Anderson admitted publicly disclosing privileged/non-public information and failing to comply with repurchase notice; such conduct breached Sections 7(a) and 3 and supports termination for Cause, forfeiting severance	Anderson relied principally on prior-breach defense and did not raise material factual disputes on the confidentiality or repurchase issues	Court: Summary judgment for Capella on breach of contract claims (confidentiality, repurchase, severance denial)
Whether Capella’s fiduciary duty claim against Anderson can proceed separately from contract claims	Capella asserts fiduciary breach (disclosure of confidential information) distinct from contractual breach	Anderson argued contract governs; he sought to rely on prior-breach excuse	Court: Fiduciary claim is duplicative of contract claims and is dismissed (summary judgment denied as to that claim but claim dismissed as not cognizable apart from contract)

Key Cases Cited

Grabowski v. Mangler, 956 A.2d 1217 (Del. 2008) (summary judgment burden-shifting principles)
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153 (Del. 2010) (contract interpretation rule against absurd results)
United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810 (Del. Ch. 2007) (contracts unambiguous: summary judgment appropriate)
Conway v. Astoria Fin. Corp., 837 A.2d 30 (Del. Ch. 2003) (non-moving party must present competent evidence to defeat summary judgment)
Osborn (same as above) (rule rejecting constructions yielding absurd results)
Hollinger Int’l v. Black, 844 A.2d 1022 (Del. Ch. 2004) (director breached loyalty by disclosing confidential information)
Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571 (Del. Ch. 1998) (contract headings and structure considered in interpretation)
Stroud v. Grace, 606 A.2d 75 (Del. 1992) (contractual remedies prevail over duplicative fiduciary claims)