Aveta Inc. v. Cavallieri
| Decision Date | 20 September 2010 |
| Docket Number | C.A. No. 5074–VCL. |
| Citation | 23 A.3d 157 |
| Parties | AVETA INC., MMM Holdings, Inc., and Preferred Medicare Choice, Inc., Plaintiffs,v.Roberto Bengoa CAVALLIERI, Ramon F. Echeandia Velez, Luis R. Romero Lopez, Oscar Hernandez Lopez, Sonia Cruz Miranda, Fernando Echeandia Fuster, Efrain Torres Castro, Angel B. Malave, Juan R. Iturregui Pagan, Confesor Lasalle Ruiz, Elvin Vigo Paredes, Juan A. Perez Vazquez, Nestor A. Perez, Ramon Echeandia Fuster, Evaristo Quinones, Jose Allende, Jorge Padilla Rodriguez, Luis Rosa Toledo, Mario O. Velez Gonzalez, Elba Velazquez Fraticelli, Maria A. Amezquita, Carlos Lugo Olivieri, Antonio Marerro, Antonio Gonzalez, and Victor L. Delgado Colon, Defendants. |
| Court | Court of Chancery of Delaware |
OPINION TEXT STARTS HERE
Richard L. Horwitz, Brian C. Ralston, Berton W. Ashman, Ryan W. Browning, Potter Anderson & Corroon LLP, Wilmington, Delaware; Andrew J. Frackman, Kenneth Murata, Peter C. Herrick, O'Melveny & Myers LLP, New York, New York; Attorneys for Plaintiffs Aveta Inc., MMM Holdings, Inc., and Preferred Medicare Choice, Inc.Michael A. Weidinger, Patricia R. Uhlenbrock, Pinckney, Harris & Weidinger, LLC, Wilmington, Delaware; Attorneys for Defendants Roberto Bengoa Cavallieri, Ramon F. Echeandia Velez, Luis R. Romero Lopez, Oscar Hernandez Lopez, Sonia Cruz Miranda, Fernando Echeandia Fuster, Efrain Torres Castro, Angel B. Malave, Juan R. Iturregui Pagan, Confesor Lasalle Ruiz, Elvin Vigo Paredes, Juan A. Perez Vazquez, Nestor A. Perez, Ramon Echeandia Fuster, Evaristo Quinones, Jose Allende, Jorge Padilla Rodriguez, Luis Rosa Toledo, Mario O. Velez Gonzalez, Elba Velazquez Fraticelli, Maria A. Amezquita, Carlos Lugo Olivieri, Antonio Marerro, Antonio Gonzalez, and Victor L. Delgado Colon.
In 2006, Aveta Inc. closed the acquisition of Preferred Medicare Choice Inc. (“PMC”), a Puerto Rico corporation. Aveta purchased PMC's Class A shares from its controlling shareholders for 60.93% of the aggregate consideration, then merged a Puerto Rico acquisition subsidiary into PMC. PMC's non-controlling Class B shares were converted into the right to receive the remaining 39.07% of the consideration. Part of the consideration was paid at closing, subject to post-closing adjustments, with the potential for an earn-out. Aveta would calculate the adjustments and earn-out, then attempt to reach agreement with Roberto L. Bengoa, who was designated in the transaction agreement as the “Shareholders' Representative.” If they agreed, then payments would be made using their calculations. If not, then Ernst & Young LLP (“E & Y”) would resolve any disputes and make the determinations.
In June 2007, some 110 former PMC shareholders purported to revoke Bengoa's authority as Shareholders' Representative. Twenty-five former PMC shareholders have attempted to litigate the consideration and related issues in Puerto Rico. The Puerto Rico litigation has been stayed pending the outcome of this proceeding.
The central question in this case is whether the contractual process for calculating the consideration, including the outcome of the E & Y arbitration, binds all former PMC shareholders. The parties have cross moved for summary judgment.
The controlling and non-controlling shareholders are differently situated. The controlling shareholders signed the transaction agreement and bound themselves to its terms. As to them, agency law controls. They appointed Bengoa irrevocably as their representative and selected Delaware law to govern the relationship. They are bound by Bengoa's acts.
None of the non-controlling shareholders signed the transaction agreement. They also did not vote in favor of the transaction, which was approved using the Class A shares' voting power. They are nevertheless bound as a matter of corporate law. The Puerto Rico statute governing the merger tracks the pre–1996 version of 8 Del C. § 251. As the statute contemplates, the transaction agreement clearly and expressly provided for the merger consideration to depend on facts ascertainable outside the agreement. The result applies to all of the Class B shares that were converted into a right to receive the merger consideration. The non-controlling shareholders, all of whom held Class B shares, consequently are bound irrespective of agency law.
The defendants also seek to evade the contractual procedures in the transaction agreement by citing a term sheet executed by Aveta and Bengoa while they were disputing the post-closing adjustments and earn-out. Res judicata bars the controlling shareholders from relying on the term sheet. Stare decisis prevents the non-controlling shareholders from doing so.
Finally, by asserting claims in Puerto Rico that depended on the transaction agreement, the defendants breached the agreement's exclusive Delaware forum selection clause. Aveta's motion for summary judgment is granted, and the defendants' motion is denied.
The factual record consists of affidavits and documents submitted by the parties. I take judicial notice of filings in related litigation in the courts of this State and the Commonwealth of Puerto Rico. The parties dispute the factual underpinnings for applying agency law to the non-controlling shareholders, but I do not reach those issues. There are no material factual disputes about the corporate transactions or the controlling stockholders' execution of the transaction agreement.
Plaintiff Aveta, a Delaware corporation, is a health insurance company that specializes in building provider networks and management service organizations. Plaintiff MMM Holdings, Inc., also a Delaware corporation, is a subsidiary through which Aveta owns business interests in Puerto Rico. I refer to the two entities together as “Aveta.” Plaintiff PMC, a Puerto Rico corporation, operates a provider network of doctors and other health professionals on the island.
Aveta acquired PMC pursuant to an Agreement and Plan of Merger and Stock Purchase, by and among MMM Holdings, Inc., PMC Holdings, Inc., Preferred Medicare Choice, Inc., BER Health Partners Group, Inc. (“BER”), and certain stockholders of Preferred Medicare Choice and BER, dated as of May 4, 2006 (the “Purchase Agreement” or “PA”). As suggested by the document's lengthy name, the underlying transaction involved both a purchase of shares and a merger (together, the “Transaction”).
At the time of the Transaction, PMC had two classes of shares: Class A and Class B. Class A shares comprised 51% of PMC's issued and outstanding stock. Class B shares comprised the remaining 49%.
The Class A shares were owned by BER, a holding company. All of BER's shares were owned by a control group consisting of Bengoa, his father Roberto Bengoa Cavallieri (“Bengoa, Sr.”), Ramon F. Echeandia Velez, and Luis R. Romero Lopez. The Purchase Agreement referred to these individuals collectively as the “Principal Shareholders.” BER and each of the Principal Shareholders signed the Purchase Agreement.
The Class B shares were owned by over 100 individuals; many (if not all) were the doctors and other health professionals who made up PMC's provider network. The Class B shareholders did not sign the Purchase Agreement and did not vote on the transactions it contemplated.
The named defendants in the current action (the “Shareholder Defendants”) commenced litigation in Puerto Rico against Aveta. Three of the Shareholder Defendants were Principal Shareholders: Bengoa, Sr., Ramon F. Echeandia Velez, and Luis R. Romero Lopez (the “Principal Shareholder Defendants”). The remaining Shareholder Defendants were Class B shareholders (the “Class B Defendants”).
In the Transaction, MMM first purchased all of BER's equity from the Principal Shareholders in return for 60.93% of the total “Transaction Consideration,” a term defined in the Purchase Agreement. By purchasing all of BER's equity, MMM gained sole ownership of the entity that held all of PMC's Class A shares. MMM next contributed to BER all of the common stock of PMC Holdings, a newly formed Puerto Rico corporation. In this fashion, PMC Holdings became a wholly owned subsidiary of BER, which at that point was a wholly owned subsidiary of MMM.
MMM, BER, and the Principal Shareholders then approved the merger of PMC Holdings with and into PMC. In the merger, PMC's Class A shares were cancelled, PMC's Class B shares were converted into the right to receive 39.07% of the Transaction Consideration, and the shares of PMC Holdings were converted into shares of PMC.
Aveta emerged from the Transaction with its subsidiary MMM owning 100% of BER, which in turn owned 100% of PMC. As a result of the share purchase, the Principal Shareholders had a right to 60.93% of the Transaction Consideration. As a result of the merger, the Class B Shareholders had a right to 39.07% of the Transaction Consideration.
The Transaction Consideration had several components. At closing, Aveta paid $157 million in cash. PA § 2.1. The Transaction Agreement contemplated potential earn-out payments for 2006 and 2007, depending on PMC's performance. PA § 2.2 (the “Earn–Out Payments”). The Transaction Agreement also provided for post-closing adjustments to the Transaction Consideration. One adjustment accounted for the level of PMC's working capital at closing. PA § 2.5 (the “Working Capital Adjustment”). Another accounted for PMC's actual claims experience for liabilities “Incurred But Not Recorded” at closing. PA § 2.3 (the “IBNR Adjustment”). I refer to the Earn–Out Payments, Working Capital Adjustment, and IBNR Adjustment collectively as the “Post–Closing Adjustments.”
The Purchase Agreement established mechanisms for calculating the Post–Closing Adjustments. Generally speaking, by a given target date, Aveta would determine the respective amount from PMC's books and records, then provide its...
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