Nationwide Emerging Managers, LLC v. Northpointe Holdings, LLC
112 A.3d 878
| Del. | 2015Background
- NorthPointe (buyer) purchased 65% of NorthPointe Capital from Nationwide (seller) for $25M in 2007; Exhibit D of the Purchase Agreement listed seven funds for which Nationwide agreed not to terminate NorthPointe as sub-advisor for three years.
- The contract provided a negotiated, formulaic Termination Fee schedule for those seven funds, with an aggregate cap of $3.5M, and two exceptions excusing payment: (1) a good-faith fiduciary determination and (2) specified performance “Cause” (bottom-third ranking over three years or five consecutive quarters).
- Nationwide launched a competing NVIT fund, withdrew assets from the NorthPointe NVIT, merged the funds, and terminated sub-advisory agreements for five funds between 2008–2009.
- NorthPointe sued for breach of contract, fraud, and breach of the implied covenant; at bench trial the Superior Court found express and implied breaches and awarded $15.1M in damages using an overpayment theory far exceeding the $3.5M contractual cap.
- On appeal the Delaware Supreme Court reversed, holding the Superior Court improperly reformed and rewrote the parties’ bargain, misapplied the Replacement and Termination provisions, and wrongly invoked the implied covenant to supply protections the parties did not negotiate.
Issues
| Issue | NorthPointe's Argument | Nationwide's Argument | Held |
|---|---|---|---|
| Whether Schedule 1 included the NorthPointe NVIT or should be reformed to exclude it | Schedule 1 was ambiguous or contained a latent typo; Schedule 1 should not apply to NorthPointe NVIT | Schedule 1 unambiguously included NorthPointe NVIT; court cannot rewrite contract absent clear-and-convincing evidence of mistake | Reformation was improper; plain language and bargaining history show NVIT was included; contract stands as written |
| Whether merger of NVITs amounted to a termination triggering the Termination Provision | Merger did not equate to termination for purposes of Schedule 1 | Merger caused termination of NorthPointe’s sub-advisory role and thus falls within Termination Provision | Merger caused termination and thus the Termination Provision applies; remand to determine if exceptions apply |
| Whether the Performance Period for Cause Exception runs pre-closing or from closing | Performance period should run prospectively from closing | Performance period may include pre-closing history; contract requires considering performance at all times | Superior Court’s unexplained ruling (period from closing) vacated; factual determination on remand needed |
| Whether Nationwide breached the Replacement Provision or the implied covenant by redeeming assets and launching a lower-fee competitor | Redeeming assets and fee strategy frustrated the bargain and violated implied duties and Replacement Provision | Replacement Provision is narrow; parties rejected express anti-redemption language; implied covenant cannot supply protections not bargained for | Finding of Replacement Provision breach was barred by law-of-the-case; implied covenant cannot be used to rewrite or supply protections the parties refused to negotiate; Superior Court erred |
Key Cases Cited
- Libeau v. Fox, 880 A.2d 1049 (Del. 2005) (courts should respect parties’ negotiated agreements)
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (limits on invoking implied covenant; courts must not rewrite bargains)
- Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141 (Del. 2002) (standard for contract reformation requires clear and convincing evidence)
- Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013) (implied covenant cannot supply protections parties failed to secure)
- Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434 (Del. 2005) (express contract terms control; implied good faith cannot circumvent parties’ bargain)