Court Opinion

ID: 8205759
Source: CourtListenerOpinion
Date Created: 2022-09-12 17:03:24.034541+00
Date Added: 2024-06-11T16:41:10.677640
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

NASK4INNOVATION SP. Z.O.O.,            )
                                       )
                       Plaintiff,      )
                                       )
     v.                                )    C.A. No. 2021-0406-MTZ
                                       )
SCOTT SELLERS, TERRANCE M.             )
DRABANT, AND ROSS A. BOTT,             )
                                       )
                       Defendants.     )
                                       )
SCOTT SELLERS, TERRANCE M.             )
DRABANT, AND ROSS A. BOTT,             )
                                       )
            Counterclaim Plaintiffs,   )
                                       )
     v.                                )
                                       )
NASK4INNOVATION SP. Z.O.O.,            )
                                       )
            Counterclaim Defendant.    )

                       MEMORANDUM OPINION
                        Date Submitted: June 9, 2022
                      Date Decided: September 12, 2022

Thomas A. Uebler and Joseph L. Christensen, MCCOLLOM D’EMILIO SMITH
UEBLER LLC, Wilmington, Delaware, Attorneys for Plaintiff and Counterclaim
Defendant NaskInnovation Sp. Z.o.o.

Ryan D. Stottmann and Miranda N. Gilbert, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware, Attorneys for Defendant and Counterclaim
Plaintiffs Scott Sellers, Terrance M. Drabant, and Ross A. Bott.

ZURN, Vice Chancellor.
      The parties to this case dispute the enforceability of a far-reaching release

included in a letter of transmittal. A stockholder owed merger consideration was

presented with a letter of transmittal that included language purporting to release all

known and unknown claims—including claims for breach of fiduciary duty—

against the seller and its directors and officers, among others. The stockholder

protested this release but, when its objections fell on deaf ears, the stockholder

signed the letter of transmittal and received its merger consideration.

      The stockholder then came to this Court seeking a declaratory judgment that

the release is unenforceable. The defendants, three former directors of the seller,

filed a counterclaim seeking a declaratory judgment that the stockholder is bound by

the letter of transmittal. The stockholder and the former directors joined issue on

the releases’ validity on the defendants’ motion for judgment on the pleadings.

      But the stockholder has not filed any other claims implicating the letter of

transmittal or the releases contained therein, and the former directors have not raised

the releases as a defense to any such claim. Accordingly, I find that the parties’

claims are not ripe, and that opining on the enforceability of the release would be

improperly advisory. Because the claims are not ripe, they are dismissed for lack of

subject matter jurisdiction.

                                          1
      I. BACKGROUND

          Nonparty Azul Systems Inc. (“Azul”) was a privately held information

technology company incorporated in Delaware.1 Plaintiff Nask4Innovation Sp.

Z.o.o. (“Nask”), a Polish limited liability company, bought Azul preferred stock

from Azul investors on two separate occasions: once in October 2013, and again in

June 2015.2 The stock was subject to a voting agreement (the “Voting Agreement”)

that imposed on Nask an obligation “to execute and deliver all related

documentation and take such other action in support of the Sale of the Company as

shall reasonably be requested by [Azul].”3

          On January 31, 2020, Azul and affiliates of nonparty Vitruvian Partners

executed an Agreement and Plan of Merger (the “Merger Agreement”) by which a

merger subsidiary would merge into Azul, with Azul surviving as a wholly-owned

subsidiary of a Vitruvian Partners affiliate (the “Merger”).4 The outstanding shares

of Azul common and preferred stock would be cancelled after closing and converted

into the right to receive consideration.5 Closing of the Merger was conditioned on

95% of Azul’s stockholders approving the Merger Agreement, and Azul requested

1
    See Docket Item (“D.I.”) 1 [hereinafter, “Compl.”], Ex. 1 at 5.
2
    See D.I. 10, at 25 ¶¶ 15–16 [hereinafter “Countercl.”]; id. at Exs. A, B.
3
    See id. at Ex. C § 1.8(a)(iv).
4
    Compl. Ex. 1 at 1.
5
    Id. at Ex. 1 at 9.

                                                2
that approval in the form of written consents.6 Azul’s stockholders received certain

materials relating to the Merger summarizing the terms of the Merger Agreement

and attaching the agreement itself.7

          The Merger Agreement conditioned payment of Merger consideration on each

stockholder executing a letter of transmittal (the “LOT”).8 Among other things, the

LOT includes a section purporting to release known and unknown claims—

including for breaches of fiduciary duty—against Azul and its directors, among

others (the “Releases”).9

          After receiving the LOT, Nask “informed [Azul’s] counsel that the Releases

were unenforceable,” and requested that they be deleted.10 Azul declined to modify

the LOT, and Nask executed the LOT on April 28, 2021.11 Nask has since received

its initial Merger consideration.12

6
    Id. at Ex. 1 at 7.
7
 See id. at Ex. 1. These included a confidential information statement, notice of action by
written consent, request for consent to the Merger, and notice of statutory appraisal rights.
8
    See Compl. ¶ 32.
9
    Id. at Ex. 2 § 11.
10
     Compl. ¶ 34.
11
     See id. ¶¶ 35, 36; id. at Ex. 2.
12
   Compl. ¶ 37; Countercl. at 31 ¶ 35. The Merger Agreement provides that Azul
stockholders are entitled to certain consideration at closing, and that post-closing they may
be entitled to additional funds held in escrow subject to certain purchase price adjustments
and indemnity obligations. See Compl. Ex. 1 at 8–9, 16–17.

                                             3
         On May 10, 2021, Nask filed a complaint (the “Complaint”) seeking only a

declaratory judgment that the Releases are unenforceable against it, and that Nask is

not barred from bringing suit for breach of fiduciary duty.13 Nask named as

defendants Azul’s founder, CEO, and former director Scott Sellers, and former

directors Terry Drabant and Ross Bott (together, “Defendants”).14

         On September 17, 2021, Defendants answered the Complaint and asserted a

counterclaim for a declaratory judgment that Nask is bound by the terms of its LOT,

including the Releases (the “Counterclaim”).15

         On December 9, 2021, Defendants moved for judgment on the pleadings

pursuant to Court of Chancery Rule 12(c) (the “Motion”).16 The parties briefed the

Motion and I heard oral argument on June 9, 2022.17

         Nask advances a series of arguments as to why the Releases are unenforceable

against it. First, Nask contends that the LOT is unenforceable as a separate contract

because Nask received no additional consideration for signing the LOT, as Azul had

a preexisting duty to pay its stockholders the Merger consideration. Second, Nask

argues the Releases are voidable because Azul’s directors were interested in the

13
     See Compl. ¶¶ 38–52; id. at 14 at A–B.
14
     Id. ¶¶ 5–7.
15
     See Countercl. at 32–33 ¶¶ 41–46.
16
     D.I. 13.
17
     See D.I. 14; D.I. 16; D.I. 19; D.I. 23.

                                               4
Releases. Third, Nask argues the Releases are void because Defendants failed to

disclose all material information in connection with seeking approval of the

Releases. Fourth, Nask contends Defendants coerced Nask into signing the Releases

by withholding the Merger consideration unless Nask agreed.           Finally, Nask

contends that the Releases are unenforceable as a matter of public policy.

         Defendants argue that the Voting Agreement compelled Nask to sign the LOT

to support the sale of Azul. Defendants also argue Nask’s signing of the LOT and

acceptance of the Merger consideration constitutes an act of acquiescence or a

waiver. Lastly, Defendants contend that Nask should not be permitted to avoid the

terms of the LOT because it is a valid and binding contract supported by

consideration.

         Nask has not filed a breach of fiduciary duty action against Azul’s former

directors, and accordingly, Defendants have not had reason to wield the Releases.

At most, Nask says it “may bring a plenary breach of fiduciary duty action against

the Defendants regarding the Merger.”18

18
     Compl. ¶ 3.

                                          5
      II.      ANALYSIS

            “The Court of Chancery is proudly a court of limited jurisdiction.”19 The

Court has a duty to determine whether it has subject matter jurisdiction over a

plaintiff’s claims and can raise the issue sua sponte.20

            “The Court of Chancery can exercise subject matter jurisdiction only when a

case falls into one of three buckets.”21 Those buckets contain cases in which (i) “a

plaintiff states an equitable claim,” (ii) “a plaintiff requests equitable relief and there

is no adequate remedy at law,” and (iii) “jurisdiction exists by statute.”22 Claims

19
  Perlman v. Vox Media, Inc., 2019 WL 2647520, at *4 (Del. Ch. June 27, 2019), aff’d,
249 A.3d 375 (Del. 2021).
20
   See, e.g., Ct. Ch. R. 12(h)(3) (“Whenever it appears by suggestion of the parties or
otherwise that the Court lacks jurisdiction of the subject matter, the Court shall dismiss the
action.”); Envo, Inc. v. Walters, 2009 WL 5173807, at *4 n.10 (Del. Ch. Dec. 30, 2009)
(“The issue of subject matter jurisdiction is so crucial that it may be raised at any time
before final judgment and by the court sua sponte.”; Int’l Bus. Machs. Corp. v. Comdisco,
Inc., 602 A.2d 74, 77 n.5 (Del. Ch. 1991) (“[U]nlike many jurisdictions, judges in the
Delaware Court of Chancery are obligated to decide whether a matter comes within the
equitable jurisdiction of this Court regardless of whether the issue has been raised by the
parties.”). Whether a claim is ripe is a question of subject matter jurisdiction. Bebchuk v.
CA, Inc., 902 A.2d 737, 740 (Del. Ch. 2006) (“Ripeness, the simple question of whether a
suit has been brought at the correct time, goes to the very heart of whether a court has
subject matter jurisdiction. As such, the court has a positive duty to raise this issue on its
own motion, even if neither party objects to the court’s exercise of power over the case.”
(footnote omitted)); Humanigen, Inc. v. Savant Neglected Diseases, LLC, 2021 WL
4344172, at *9 (Del. Super. Sept. 23, 2021) (“A ripeness challenge attacks a court’s subject
matter jurisdiction, and so may be fended sua sponte.”).
21
   Delawareans for Educ. Opportunity v. Carney, 2018 WL 4849935, at *5 (Del. Ch. Oct.
5, 2018); see also Candlewood Timber Grp., LLC v. Pan Am. Energy, LLC, 859 A.2d 989,
997 (Del. 2004) (identifying the three ways the “Court of Chancery can acquire subject
matter jurisdiction”).
22
     Carney, 2018 WL 4849935, at *5.

                                              6
seeking a declaratory judgment must still fall within one of these buckets. 23 Both

parties seek to invoke this Court’s limited jurisdiction through the second and third

buckets: Nask relies on 8 Del. C. § 111 and 10 Del. C. §§ 341–342,24 and Defendants

rely on 8 Del. C. § 111 and 10 Del. C. § 341.25

         Even if a declaratory judgment claim falls into one of the above three

categories, subject matter jurisdiction still depends on the existence of an “actual

controversy” between the parties.26 The Delaware Supreme Court has set forth the

criteria by which a controversy will be considered an “actual controversy”:

         (1) It must be a controversy involving the rights or other legal relations
         of the party seeking declaratory relief; (2) it must be a controversy in
         which the claim of right or other legal interest is asserted against one
         who has an interest in contesting the claim; (3) the controversy must be
         between parties whose interests are real and adverse; (4) the issue
         involved in the controversy must be ripe for judicial determination.27

23
   Diebold Comput. Leasing, Inc. v. Com. Credit Corp., 267 A.2d 586, 591 (Del. 1970)
(“[T]he Chancery Court has jurisdiction in a declaratory judgment action if there is any
underlying basis for equity jurisdiction measured by traditional standards.”).
24
     Compl. ¶ 8.
25
     Countercl. at 24 ¶ 11.
26
     See XL Specialty Ins. Co. v. WMI Liquidating Tr., 93 A.3d 1208, 1216–17 (Del. 2014).
27
     Id. at 1217 (quoting Stroud v. Milliken Enters., Inc., 552 A.2d 476, 479–80 (Del. 1989)).

                                               7
This case begs the question of whether the parties’ claims are ripe for judicial

determination. This Court will decline subject matter jurisdiction over a claim that

is not ripe.28

         In determining whether a dispute is ripe, the Court must take a practical view

of all relevant facts and make a common-sense determination of whether

adjudicating a dispute at present is a prudent use of judicial resources.29 In doing so,

the Court must weigh “the benefits to be derived from issuing a declaratory judgment

. . . against the court’s desire to avoid advisory opinions.”30 Specifically, the Court

will weigh the interests of the party seeking relief in obtaining a prompt resolution

of the question at issue, including the harm that would be suffered if the Court waits

28
   Feldman v. AS Roma SPV GP, LLC, 2021 WL 3087042, at *10 (Del. Ch. July 22, 2021)
(“If a claim is moot or not ripe, the Court cannot assert subject matter jurisdiction over it.”
(citing Stroud v. Milliken Enters., Inc., 552 A.2d 476, 480 (Del. 1989)); Solak v. Sarowitz,
153 A.3d 729, 736 (Del. Ch. 2016) (“The ripeness doctrine prevents Delaware courts from
exercising jurisdiction over disputes . . . .”); K&K Screw Prod., L.L.C. v. Emerick Cap.
Invs., Inc., 2011 WL 3505354, at *9 (Del. Ch. Aug. 9, 2011) (“Ripeness refers to whether
a suit has been brought at the correct time. It is essential for a controversy to be justiciable
and, therefore, for the Court to have subject matter jurisdiction over it.”).
29
     XL Specialty Ins., 93 A.3d at 1217–18.
30
  In Re Allergan, Inc. S’holder Litig., 2014 WL 5791350, at *6 (Del. Ch. Nov. 7, 2014);
Monsanto Co. v. Aetna Cas. & Sur. Co., 565 A.2d 268, 274 (Del. Super. 1989); see also
Stroud v. Milliken Enters., Inc., 552 A.2d 476, 480 (Del. 1989) (“The reasons for not
rendering a hypothetical opinion must be weighed against the benefits to be derived from
the rendering of a declaratory judgment.”); KLM Royal Dutch Airlines v. Checchi, 698
A.2d 380, 382 (Del. Ch. 1997) (“Determining whether the parties’ dispute is ready for
decision requires consideration of, inter alia, the present effects of the challenged conduct
versus the future harm to be suffered by the plaintiff if resolution is delayed, the likelihood
of a change in the factual circumstances, and the legal issues involved. These
considerations must be weighed against the important policies enumerated above.”).

                                               8
to hear the dispute, on one hand, and the conservation of limited judicial resources

and the risk of granting an unsound judgment by ruling on a procedurally or factually

premature dispute, on the other.31

         Both parties seek a declaratory judgment regarding the Releases’

enforceability.32 For purposes of this analysis, I assume the two claims fall within

the ambit of 8 Del. C. § 111 and therefore may be adjudicated by this Court if an

actual controversy exists.

         The parties’ interests in immediate declaratory relief are minimal. Nask has

taken the position that it cannot bring a breach of fiduciary duty action unless it first

receives a declaratory judgment that the Releases are unenforceable and that Nask

is not barred from bringing that suit. But the existence of a potential defense to

liability does not preclude a plaintiff from bringing suit, so long as the plaintiff in

good faith believes it can prevail over that defense. Nask’s apparent good faith basis

to conclude the Releases are unenforceable can support a breach of fiduciary duty

suit just as well as it can support this suit on the Releases alone.

         In Schick Inc. v. Amalgamated Clothing & Textile Workers Union, Chancellor

Allen explained that a declaratory judgment action designed to obtain a defendant-

31
  See XL Specialty Ins., 93 A.3d at 1217–18; Stroud, 552 A.2d at 480; KLM Royal Dutch
Airlines, 698 A.2d at 382.
32
     See Compl. ¶¶ 38–52; Countecl. at 32–33 ¶¶ 41–46.

                                            9
friendly ruling on a potential derivative plaintiff’s standing before the derivative

action was filed was not ripe.33 He concluded that lack-of-standing defense was

most efficiently and prudently heard in the context of the derivative suit.34

Following his lead, I do not see why bifurcating the Release defense from an

underlying claim is helpful, let alone necessary or a prudent use of judicial

resources.35 I conclude the only benefit of an immediate declaratory judgment to the

parties is greater certainty as to whether the Releases are enforceable against Nask,

which is insufficient to render the claims ripe.36 For the same reasons, the parties

33
  Schick Inc. v. Amalgamated Clothing & Textile Workers Union, 533 A.2d 1235, 1241–
42 (Del. Ch. 1987).
34
     Id.
35
     See id. at 1240–1242.
See Hoechst Celanese Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 623 A.2d 1133,
1137 (Del. Super. 1992) (“A litigant need not have suffered actual harm, but an actual
controversy must exist so that judicial resources are not wasted on hypothetical disputes or
on situations in which a judicial declaration will not end the dispute between the parties.”).
36
    See XL Specialty Ins. Co., 93 A.3d at 1220 (noting a potential insurance claimant’s
interest in guidance on how much coverage would be available if it were to initiate
litigation was not sufficient to ripen its declaratory judgment claim); Schick, 533 A.2d at
1242 (“Employment of the declaratory judgment procedure solely to achieve tactical
advantage should not be endorsed.”); Dana Corp. v. LTV Corp., 668 A.2d 752, 757 (Del.
Ch. 1995) (“A court will not grant declaratory relief to a party whose primary purpose is
to achieve an unfair procedural advantage.” (citing Schick, 533 A.2d at 1242), aff’d, 670
A.2d 1337 (Del. 1995). But see Schick, 533 A.2d at 1242 (contrasting an unripe declaratory
judgment claim on a putative plaintiff’s standing against a claim that a putative plaintiff
“is barred by limitations or laches from asserting the substantive claim”).

                                             10
will suffer no harm if they wait to receive a ruling on the Releases until such time as

the Releases are raised as a defense to liability, if ever.37

       More fundamentally, any breach of fiduciary duty dispute between the parties

is hypothetical, and litigation regarding the Releases’ enforceability specifically is

not inevitable.38 The Complaint suggests, but stops short of stating, that Nask will

bring suit for breach of fiduciary duty in connection with the Merger if it prevails in

this action.39 Even if Nask brought that suit, the Releases’ enforceability would not

be at issue unless Defendants raised them as a defense.40 Under these circumstances,

waiting to adjudicate the Releases’ enforceability until they are otherwise before the

Court is a better use of judicial resources.

       Navigating the declaratory judgment claims exchanged between Nask and

Defendants at this juncture would also necessarily require careful steering around

37
  Schick, 533 A.2d at 141 (noting the putative defendant would “bear no hardship if it must
await the filing of a derivative claim to litigate its assertion that” the putative plaintiff
lacked standing).
38
  See In re Allergan, Inc., 2014 WL 5791350, at *9; K&K Screw Prod., L.L.C., 2011 WL
3505354, at *10; Stroud, 552 A.2d at 481 (citing Stabler v. Ramsay, 32 Del. Ch. 547, 550
(Del. 1952)).
39
   See Compl. ¶¶ 3, 14. Mere allegations that an event may occur in the future are
insufficient to render a dispute ripe for adjudication. See Hoechst Celanese Corp., 623
A.2d at 1137.
40
   See Chester Cnty. Emps’. Ret. Fund v. New Residential Inv. Corp., 2016 WL 5865004,
at *13 (Del. Ch. Oct. 7, 2016), aff’d, 186 A.3d 798 (Del. 2018).

                                             11
hazards of preclusion and stare decisis.41 Nask and Defendants brought individual

claims seeking declarations regarding only Nask’s LOT. Other Azul stockholders

who did or did not sign an LOT are not before the Court to defend and protect their

rights. But those stockholders, and any release they signed, would likely be before

the Court if Nask or another stockholder brings a representative breach of fiduciary

duty action. Nor did Nask name Azul as a defendant.42 The speculative implications

of a ruling on Nask’s LOT on Azul, its directors, and its other current and former

stockholders counsel against taking on that claim as presented here. These same

concerns apply to the Counterclaim.             These hazards counsel in favor of a

commonsense finding that the Release claims, standing alone and brought by and

against a single stockholder in its own capacity, are not ripe.43

41
   Schick, 533 A.2d at 1239 (“[T]o the extent that the judicial branch contributes to law
creation in our legal system, it legitimately does so interstitially and because it is required
to do so by reason of specific facts that necessitate a judicial judgment. To address a matter
before the facts surrounding the dispute are fully developed necessarily not only increases
the risk of an incorrect judgment in the particular case, but risks, as well, an inappropriate
or unnecessary step in the incremental law building process itself.”).
42
  Where an action seeks to validate or invalidate a contract to which a corporation is a
party, “it is proper and necessary to make such . . . corporation a party defendant to the
suit, because that . . . corporation has a substantial interest” in that determination. See
Elster v. Am. Airlines, 106 A.2d 202, 204 (Del. Ch. 1954). The joinder of “indispensable
parties is a condition precedent to issuing judgment.” Germaninvestments AG v. Allomet
Corp., 2020 WL 6870459, at *6 (Del. Ch. Nov. 20, 2020). Azul may need to be joined as
a party to any litigation involving the validity of the LOT or its terms. See Ct. Ch. R.
19(a)(2).
43
   See The O’Brien Corp. v. Hunt-Wesson, Inc., 1999 WL 126996, at *8 (Del. Ch.
Feb. 25, 1999) (“As was the case in Dana, a ruling in O’Brien’s favor in this case would
not bind the plaintiffs in the Lead Pigment Litigations nor can it preclude those plaintiffs
                                              12
         Finally, I note that aspects of this case may touch on “novel and important”

issues of Delaware corporate law, including the viability of a stockholder waiver of

the duty of loyalty in a letter of transmittal.44 The implication of such issues weighs

heavily in favor of the Court waiting to resolve these questions until this dispute

arrives before the Court in a more concrete form.45

         For the forgoing reasons, common sense recommends against issuing

declaratory relief to either party at this time.

      III.   CONCLUSION

         For the forgoing reasons, both the Complaint and the Counterclaim are

DISMISSED without prejudice for want of subject matter jurisdiction. Counsel

shall submit a proposed implementing order.

from arguing that the laws of states other than Delaware’s should determine whether
O’Brien is liable to them. Its only effect would be to assist O’Brien in a suit against Hunt–
Wesson in the event that O’Brien is ever found liable in one of the Lead Pigment
Litgations.”); Aviva Life & Annuity Co. v. Am. Gen. Life Ins. Co., 2014 WL 1677798, at
*11 (Del. Ch. Apr. 29, 2014) (finding claim seeking a declaratory judgment was not ripe,
in part because “even if [the Court] were to address and decide th[e] issue, [its] decision
would not be binding on the IRS or the federal courts”).
44
     See Stroud, 552 A.2d at 481.
45
  Id. at 481 (“These issues are novel and important ones to Delaware corporate law as well
as to these parties. The significance of these issues requires this Court to demand that the
dispute between the parties be close to a ‘concrete and final form.’” (quoting Schick, 533
A.2d at 1239)); Bebchuk, 902 A.2d at 740 (“Especial caution is appropriate, the [Stroud]
court noted, in matters that raise ‘novel and important [issues] to Delaware Corporate
law.’” (second alteration in original) (quoting Stroud, 552 A.2d at 481)).

                                             13