CERBERUS INTERN. LTD. v. Apollo Mgmt. LP

• Decision Date: 13 March 2002
• Docket Number: No. 131, 2001.,131, 2001.
• Citation: 794 A.2d 1141
• Parties: CERBERUS INTERNATIONAL, LTD., Cerberus Partners, L.P., Pequod Investments, L.P., and Ultra Cerberus, Ltd., Plaintiffs Below, Appellants, v. APOLLO MANAGEMENT, L.P. and Mobile Technology, Inc., Defendants Below, Appellees.
• Court: United States State Supreme Court of Delaware

794 A.2d 1141

CERBERUS INTERNATIONAL, LTD., Cerberus Partners, L.P., Pequod Investments, L.P., and Ultra Cerberus, Ltd., Plaintiffs Below, Appellants, v. APOLLO MANAGEMENT, L.P. and Mobile Technology, Inc., Defendants Below, Appellees.

No. 131, 2001.

Supreme Court of Delaware.

Submitted: November 27, 2001.

Decided: March 13, 2002.

Ronald A. Brown, Jr., of Prickett, Jones & Elliott, Wilmington, Delaware, for Appellants.

Lawrence C. Ashby, and Richard D. Heins, of Ashby & Geddes, Wilmington, Delaware; Charles E. Bachman (argued), and James L. Burns, of O'Sullivan, Graev & Karabell, LLP, New York City, of counsel, for Appellees.

Before VEASEY, Chief Justice, WALSH, HOLLAND, BERGER and STEELE, Justices, constituting the Court en Banc. VEASEY, Chief Justice.

This case involves a merger agreement that plaintiffs seek to reform based upon an alleged mistake of fact in the drafting of the agreement. We review the judgment of the Court of Chancery granting defendants' motion for summary judgment and dismissing the complaint. The Court of Chancery determined that there were no material issues of fact that would enable any reasonable finder of fact to conclude that there was clear and convincing evidence of a mutual mistake of fact entitling the plaintiffs to reformation of the merger agreement.

We hold that the trial court erred in granting summary judgment. We find that there was a triable issue of material fact of mutual mistake or unilateral mistake coupled with knowing silence, even considering the plaintiffs' ultimate burden at trial to prove its case for reformation by clear and convincing evidence. Accordingly, we reverse the judgment of the Court of Chancery and remand for further proceedings consistent with this Opinion.

Facts

This case concerns an acquisition in which Apollo Management, L.P. ("Apollo") acquired Mobile Technology, Inc. ("MTI"), both defendants below and appellees. Plaintiffs-appellants (collectively "Cerberus") constitute a stockholder group that controlled MTI until the time of the acquisition. Cerberus brought this action in the Court of Chancery seeking reformation of the merger agreement or a declaratory judgment in its favor.

Apollo entered into a merger agreement with MTI. Under this agreement, MTI was to merge into MTI Acquisition Corp. The new entity would then become a whollyowned subsidiary of Alliance Imaging, Inc., an affiliate of Apollo.

The initial correspondence between the two companies tends to shed light on their intentions going into the merger negotiations. Apollo offered to acquire MTI for $65 million in a November 14, 1997 letter. MTI's CEO, Joseph W. Cilurzo, responded by letter dated November 19, 1997, reiterating that Apollo's offer was for $65 million and stating that MTI would be "pleased to discuss such a transaction based upon the following conditions...." One of the conditions in this 1½ page letter was that "$3 million [from the exercise of outstanding warrants to purchase stock in MTI] shall be paid to the existing stockholders of [MTI]."¹ On December 1, 1997, Joshua J. Harris, CEO of Apollo, faxed a copy of Cilurzo's November 1997 letter back to MTI with the handwritten notation, "This looks fine."

Thereafter, in a November 26, 1997 letter, Cilurzo wrote, "We feel that it is important to ensure that we have a common understanding of the issues discussed in [a November 24] conversation, and therefore, have documented the key points below." There were six key points. The first stated that "Apollo is interested in acquiring all of MTI's equity for $65 million in cash...." The third stated that "Apollo understands and agrees that the proceeds of warrant and stock purchase plans accrue to the benefit of the current stockholders." Divided among existing stockholders, the $65 million purchase price would have equaled approximately $56.70 per share of MTI. Thus, the total purchase price for MTI would have been $65 million minus transaction costs plus proceeds from sales of options and warrants.

After apparently agreeing in principle on the merger, Apollo and MTI proceeded to draft a merger agreement. Our review of the record suggests that the merger agreement, in pertinent part, was drafted as follows. Apollo's counsel, O'Sullivan, Graev & Karabell, LLP, prepared the first draft. Thereafter, drafts were exchanged. Section 2.1(a)(iii) of the final draft of the merger agreement (dated January 13, 1998) provides that the owner of each "Merger Share" would receive an amount in cash equal to the "Merger Consideration." The "Maximum Closing Merger Consideration," a number needed to calculate the Merger Consideration, was $65 million less transaction expenses. The Merger Consideration was the Maximum Closing Merger Consideration divided by the number of shares outstanding, "assuming that all Shares issuable upon the exercise or conversion of any Company Stock Option, Warrant or convertible security and all shares of phantom stock (or any similar security) have been converted into Shares." The definition of "Merger Share," however, was "the Shares that are issued and outstanding...."

Although the parties made a number of changes to the various drafts of the merger agreement, they never changed how the merger agreement treated the proceeds from the sale of options and warrants. There is no evidence in the record before us that the parties renegotiated or discussed renegotiation of either the base $65 million purchase price or the principle that the proceeds of the options and warrants would go to MTI's stockholders.

Thus, the record appears to suggest that, instead of increasing the price MTI's stockholders would receive, the existence of the options and warrants counted against this price. This happened in two steps. First, the Maximum Closing Merger Consideration, the cash available to be distributed to the stockholders, did not count the proceeds from the sale of options and warrants that would have come in after the merger. The Maximum Closing Merger Consideration thus apparently undervalued MTI by $3 million. Second, the definition of Merger Consideration divided the Maximum Closing Merger Consideration by an apparently inflated number of stockholders, counting unissued options and warrants as if they had been issued. The actual pool of stockholders receiving the Merger Consideration, however, appears to have included only those who actually had been issued shares. These stockholders were not merely holders of options or warrants. Thus, instead of receiving a total of approximately $65 million (or $56.70 per share), a rational finder of fact could conclude on this record that MTI stockholders received $58 million (or $54.15 per share). If so, rather than receiving a purchase price of $65 million minus transaction costs plus options and warrants proceeds, these stockholders were to receive $65 million minus transaction costs minus options and warrants proceeds.

In connection with the merger, MTI solicited the consent of its stockholders. In the Consent Solicitation Statement, MTI mentioned the $65 million purchase price. It also represented that its stockholders would each receive $56.70 per share. Apollo admits on appeal that this $56.70 figure is "consistent with Plaintiff's claimed `other' agreement."

The deposition testimony tends to shed light on the beliefs of MTI and Latham & Watkins, counsel for MTI in the merger negotiations. There were two lawyers from Latham & Watkins who were primarily involved in the matter. Bryant Edwards was the partner in charge, and Richard Davis was the primary day-to-day lawyer running the transaction.

Cilurzo testified in his deposition that Davis was told to incorporate into the merger agreement the points set out in Cilurzo's November 26 letter. He testified specifically that Davis was to include the proceeds of the options and warrants as part of the purchase price. There was not, however, in the summary judgment record, any discussion of the options and warrants proceeds during the merger negotiations.

James Pike, Vice President and Treasurer of MTI, testified that he was "having trouble with these terms" and that Davis "kind of walked me through how it was supposed to work, and I was satisfied with that explanation." There is no evidence in this record, however, that they specifically discussed the proceeds from the sale of the options and warrants. Both Pike and Joyce Johnson-Miller, Cerberus' representative for the negotiations, admitted that they did not see anything in the merger agreement that allocated the options and warrants proceeds to MTI's stockholders. Johnson-Miller also admitted that "there's no binding agreement on the parties until the negotiations are done and everybody signs."

On March 4, 1998, Cilurzo, Pike and Davis had a conference call in which they calculated the merger price to be included in the consent solicitation. Cilurzo's notes from that call indicate that the purchase price was to be calculated by adding the proceeds from options and warrants sales to the $65 million price, then subtracting transaction expenses. Cilurzo testified that, during the course of the call, Davis never stated that the proceeds from the options and warrants would not go to MTI's stockholders. Pike also testified that Davis had never told them that MTI stockholders would not receive the proceeds.

The recollections of Bryant and Davis at their depositions was somewhat different from that of MTI's executives. Bryant testified in his deposition that he was not aware of any agreement between MTI and Apollo giving the proceeds of the options and warrants to MTI's stockholders. He also testified that, from the first draft of the merger agreement until closing, no one from MTI or Cerberus told him that they expected that the proceeds would be paid to MTI's stockholders. Davis also testified that MTI had no agreement with Apollo regarding the proceeds and that no one instructed him otherwise from the time of...