The facts in Credit Suisse Securities (USA) LLC v. West Coast Opportunity Fund, LLC, C.A. No. 4380-VCN (Del. Ch. Ct. July 30, 2009) are fascinating, though complicated.
- Evans was the sole member and manager of Investment Hunter LLC (“Holding LLC”), which was the sole member of WindHunter LLC.
- In December 2006, Holding LLC became the controlling shareholder of GreenHunter Energy, Inc. (“Operating Corp.”) after a reverse-merger of WindHunter into an insolvent corporation. Evans became Operating Corp.’s CEO and President.
- In March 2007, Operating Corp. entered into a PIPE transaction with group of investors. That is, it issued shares, and agreed that “as soon as possible” (but within a year) register the shares for resale to the public (“registration rights”).
- In connection with the registration rights, all of the executive officers of Operating Corp., including Evans entered into a Lock-up Agreementagreeing that they would not, without the consent of the lead investor, pledge or sell, directly or indirectly, any shares of Operating Corp. until 360 days after the effective date of the registration statement covering the shares purchased by the investors.
- Evans signed the Lock-Up Agreement in his own name, and described himself as “Chief Executive Officer”, but did not name either Operating Corp. or Holding LLC.
- In July 2008, Holding LLC opened a margin account with, and borrowed substantial sums from, Credit Suisse. At that time, Holding LLC pledged its shares of Operating Corp. to secure repayment of the loan.
- “Within a few months” the value of the Operating Corp. shares dropped, and Credit Suisse issued a margin call. Operating Corp. and the lead investor claimed that any sale of the pledged shares by Credit Suisse would violate the lock-up agreement.
- On December 29, 2009, a registration statement covering the sale of the lead investor’s shares was declared effective.
In February, 2009, Credit Suisse sued, claiming, among other things, that the lock-up agreement did not prevent its sale of the pledged shares to meet the margin call. Vice Chancellor Noble held that the Holding LLC was not bound by the lock- up agreement, and granted judgment on the pleadings on that claim.
Evans does not own the GreenHunter stock in question. It is entirely the property of [Holding LLC] , and Evans’s status as a member does not alter this fact. Evans did not sign the Lockup Agreement in his capacity as a member or manager of Investment Hunter, and there is, as noted, no evidence of an intent to act in that capacity. Therefore, the Lockup Agreement does not serve to bind [Holding LLC]. ‘[T]he ordinary rule is that only the formal parties to a contract are bound by its terms. Because [Holding LLC] is not a party to the Lockup Agreement it is not bound by it. Evans cannot encumber property he does not own.
Id.at 8-9 (footnotes omitted) (emphasis added). It does not appear that Credit Suisse claimed that Evans acted on behalf of Holding LLC. Because Evans was not designated as the ‘Chief Executive Officer’ of Holding LLC, the addition of that language does not show an intent to act on behalf of the LLC. Still, given that the Chancellor was dismissing on the pleadings, it seems odd for him to refer to the lack of evidence that Evans was acting on behalf of Holding LLC. I’m a transactional sort, but I thought that evidence came after the pleadings.
As to the argument that the “directly or indirectly” language of the lock-up agreement was broad enough to include the Holding LLC’s shares, Chancellor Noble responded
Perhaps [the parties] intended that the Lockup Agreement prohibit the very behavior Evans is alleged to have engaged in. Yet, nothing on the face of the Lockup Agreement evinces such an intent to bind [Holding LLC] or any other entity with which Evans has a relationship. Instead, it binds only Evans.
Slip Op., at 9. Earlier, in a footnote, the Chancellor had noted that there were no allegations sufficient to make out a claim for disregard of the corporate fiction. Id. at 9 n.23.
Hat-tip Francis G.X. Pileggi.