FDG Logistics LLC v. A&R Logistics Holdings, Inc.

CourtCourt of Chancery of Delaware
Citation131 A.3d 842
Docket NumberC.A. No. 9706–CB
Parties FdG Logistics LLC, Plaintiff/Counterclaim Defendant, v. A&R Logistics Holdings, Inc., Defendant/Counterclaimant, v. FdG Associates LP, David S. Gellman, James E. Bedeker, Cynthia M. Brankin, Steven R. Brantley, Norman C. Buck, John P. Ciszek, Robert N. Dotson, Paul Garber, Michael J. Hogan, Jeremy K. Lohrens, Andrew J. Mantey, Jeffrey J. O'Connor, Brian R. Reichert, Leeanne Rice, Stephen W. Robinson, Paul D. Sweeden, and Richard Thompson, Additional Counterclaim Defendants.
Decision Date23 February 2016

David J. Margules and Evan W. Krick, Ballard Spahr LLP, Wilmington, Delaware; Julian W. Friedman, Ballard Spahr LLP, New York, New York; Philip J. Kessler, Joseph Aviv, Bruce L. Segal, Jennifer Zbytowski Belveal, and B. Michael Ortwein III, Honigman Miller Schwartz and Cohn LLP, Detroit, Michigan; Counsel for Plaintiff/Counterclaim Defendant FdG Logistics LLC and Counterclaim–Defendants FdG Associates LP and David S. Gellman.

Philip Trainer, Jr. and Toni–Ann Platia, Ashby & Geddes, P.A., Wilmington, Delaware; Counsel for Counterclaim–Defendants James E. Bedeker, Cynthia M. Brankin, Norman C. Buck, John P. Ciszek, Robert N. Dotson, Paul Garber and Paul D. Sweeden; Patrick T. Brankin, Schain, Banks, Kenny & Schwartz, LTD., Chicago, Illinois; Co–Counsel for Counterclaim Defendants James E. Bedeker and Cynthia M. Brankin.

C. Barr Flinn and Tammy L. Mercer, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware; Robert A. Chapman and Shannon T. Knight, Chapman Spingola, LLP, Chicago, Illinois; Counsel for Counterclaim Defendants Jeffrey J. O'Connor and Brian R. Reichert.

Michael F. Bonkowski and Nicholas J. Brannick, Cole Schotz PC, Wilmington, Delaware; Vance L. Liebman, Damon E. Dunn and Neil M. Rosenbaum, Funkhouser Vegosen Liebman & Dunn Ltd., Chicago, Illinois; Counsel for Counterclaim Defendant Andrew J. Mantey.

Peter B. Ladig, Patricia A. Winston and Elizabeth A. Powers, Morris James LLP, Wilmington, Delaware; Counsel for Counterclaim Defendants Steven R. Brantley, Michael J. Hogan, Jeremy Lohrens and Stephen W. Robinson.

Henry E. Gallagher, Jr. and Ryan P. Newell, Connolly Gallagher LLP, Wilmington, Delaware; David K. Herzog and James P. Hanlon, Faegre Baker Daniels LLP, Indianapolis, Indiana; Counsel for Defendant/Counterclaimant A & R Logistics Holdings Inc.

OPINION

BOUCHARD

, C.

This action arises out of a private equity firm's 2012 purchase of a trucking company now owned by A & R Logistics Holdings, Inc. ("A & R" or the "Buyer") through a merger transaction. FdG Logistics LLC ("FdG Logistics") initiated this action as the representative of the selling securityholders (the "Securityholders") to recover a pre-closing tax refund. In response, Buyer asserted counterclaims for indemnification, violation of the Delaware Securities Act, common law fraud, and unilateral mistake. This opinion resolves the Securityholders' motion to dismiss certain parts of the counterclaim, and FdG Logistics' motion for summary judgment concerning the tax refund.

The Securityholders seek to dismiss Buyer's common law fraud claim insofar as that claim asserts fraud based on extra-contractual statements made to Buyer before it entered the merger agreement. This aspect of the Securityholders' motion is denied because the merger agreement does not contain an affirmative disclaimer of reliance by Buyer sufficient to preclude it from asserting a claim for fraud based on representations outside the four corners of the merger agreement under this Court's precedents.

Buyer's claim under the Delaware Securities Act fails to state a claim for relief because Buyer has not established the requisite factual nexus between the challenged merger and Delaware to trigger application of the Act. Given the absence of such a nexus, Buyer makes the novel argument that the parties to the merger agreement made the Delaware Securities Act apply automatically by including in the merger agreement a Delaware choice of law provision stating that the merger agreement "will be governed by and construed in accordance with the laws of the State of Delaware." I conclude that Buyer's interpretation of the choice of law provision is not a reasonable construction. Among other things, such an interpretation would lead to the bizarre result of converting a blue-sky statute that the Legislature intended to regulate intrastate securities transactions into one that would regulate interstate securities transactions.

Buyer's claim of unilateral mistake also fails to state a claim for relief because it would not be unconscionable to enforce the merger agreement, which was the product of arm's-length negotiations between sophisticated parties. This count also fails to state a claim because it would not be possible in my view to return the parties to the status quo through rescission of the merger more than three years after it closed.

Finally, I grant FdG Logistics' motion for summary judgment concerning the tax refund claim based on the undisputed facts of record and the plain language of the merger agreement, which expressly states that pre-closing tax refunds are the "property" of the Securityholders and are to be paid to their representative "promptly" after receipt.

I. BACKGROUND

The facts for purposes of the Securityholders' motion to dismiss come from A & R's Verified Amended Counterclaim dated April 10, 2015 (the "Counterclaim"), documents incorporated therein, or facts of which the Court may take judicial notice. Because the issues left for decision on the motion to dismiss are fairly discrete, only a general summary of the factual background of this case is necessary.1

The facts relevant to FdG Logistics' motion for summary judgment are limited in number and admitted in A & R's Amended Answer dated April 10, 2015 (the "Answer").

A. The Parties

A & R Logistics Holdings, Inc. is a Delaware corporation headquartered in

Louisville, Kentucky. It is the holding company for A & R Logistics, Inc., a trucking company located in the Midwest (the "Trucking Company"). A & R is a leading provider of dry bulk transportation and logistics solutions serving the plastics, chemical, and food industries in North America. It owns and operates a network of approximately twenty-five terminals and warehouses across the United States.

A & R was the surviving corporation following a merger with A & R Merger Corp., a subsidiary of Mason Wells, a private equity firm based in Milwaukee, Wisconsin. In this opinion, I refer to A & R as it existed before the merger as "Old A & R," and I refer to the surviving entity as "A & R" or "Buyer."

FdG Associates LP ("FdG Associates") is a Delaware limited partnership headquartered in New York, New York. FdG Logistics, LLC, a Delaware limited liability company, was the primary vehicle through which FdG Associates held its ownership interest in Old A & R.2 As of the date of the merger, that ownership interest amounted to approximately 62.15% of Old A & R's stock. Most if not all of the remaining shares of Old A & R were owned by individuals who were made parties to this case in response to A & R's Counterclaim.

In its Counterclaim, A & R asserts claims against FdG Associates, FdG Logistics, and eighteen individuals. One of these individuals, David S. Gellman, is the founder and a manager of FdG Associates. Gellman also was a director and a Vice President and Secretary of Old A & R. The other seventeen individuals held stock or options in Old A & R before the merger, and served in one or more capacities as a director, officer or employee of Old A & R. For simplicity, I use the term "Securityholders" to refer collectively to FdG Associates, FdG Logistics, and the eighteen individuals named as counterclaim defendants.3

A & R Merger Corp., Old A & R, FdG Logistics (as the Securityholders' Representative), and certain of the Securityholders are parties to an Agreement and Plan of Merger dated as of December 18, 2012 (the "Merger Agreement").

B. The History of Old A & R

James E. Bedeker founded Old A & R in 1969. Bedeker began his career as a truck driver and started his company with three trucks. Over several decades, Bedeker expanded Old A & R's operations, acquiring additional facilities and trucks and targeting the dry-bulk transportation market. During Bedeker's tenure, Old A & R became one of the largest dry-bulk carriers operating in North America.

Around 2007, FdG Associates invested in Old A & R, recapitalizing it through a purchase of over 60% of its equity from Bedeker. FdG Associates created FdG Logistics to hold its investment in Old A & R. FdG Associates was an active manager of Old A & R, and several of its employees are alleged to have worked closely with Old A & R from 2007 to 2012. More specifically, Buyer alleges that FdG Associates exerted control and domination over Old A & R, dictating how Old A & R was to operate and imposing various initiatives at the company, including cost-saving and cost-cutting programs, frequently without Old A & R management's consent, feedback, or input.

C. The Sale Process

During the summer of 2012, Old A & R's board solicited interest to sell Old A & R through an auction process with the assistance of Harris Williams & Co., an investment bank, and BB & T Capital Markets, a financial advisor. In connection with this process, a 73–page confidential information memorandum was prepared in July 2012 to tell Old A & R's story and generate interest in the market. It touted Old A & R's market leadership in dry-bulk transportation, stating that Old A & R had the "highest quality fleet of specialized trucks, trailers, and other equipment in the industry."4

On September 13, 2012, representatives of Buyer met with Old A & R's senior management team at the company's headquarters. During the meeting, they received a 38–slide PowerPoint presentation from management. This presentation touted Old A & R's "high-quality, specialized fleet of trucks, trailers, and other...

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