STEELE, Chief Justice, HOLLAND and RIDGELY, Justices for the Majority.
Booz Allen ("the Company") redeemed Joseph Nemec's and Gerd Wittkemper's stock after their post-retirement put rights expired, but before selling its government business division. Nemec and Wittkemper asserted, and the Chancellor dismissed, claims that the board breached the Company's Stock Plan's implied covenant of good faith and fair dealing, and its fiduciary duty; and unjustly enriched itself. Because the board exercised an express contractual right, we
FACTUAL AND PROCEDURAL BACKGROUND
Nemec retired from Booz Allen on March 31, 2006, after nearly 36 years of
Wittkemper also retired from Booz Allen on March 31, 2006, after nearly 20 years of service with the Company. Wittkemper built the foundation for Booz Allen's German business and helped expand Booz Allen's business throughout Europe. For nine years Wittkemper was a member of Booz Allen's Worldwide Commercial Business Leadership Team. He also served as head of the Communications Media Technology practice, and later as head of Booz Allen's European Business.
Booz Allen, a Delaware corporation headquartered in McLean, Virginia, is a strategy and technology consulting firm. In July 2008, Booz Allen had approximately 300 shareholders, 21,000 employees, and annual revenues of approximately $4.8 billion. Booz Allen was founded as a partnership in 1914, but later changed its legal structure and became a Delaware corporation. Booz Allen retained, however, the attitude and culture of a partnership, owned and led by a relatively small cadre of corporate officers, who were referred to as the "partners."
The individual defendants were members of Booz Allen's board of directors at the time the plaintiffs' Booz Allen shares were redeemed, and at the time the Company sold Booz Allen's government business to The Carlyle Group. The Directors collectively owned about 11% of Booz Allen's outstanding common stock.
The Booz Allen Stock Rights Plan
Throughout their tenure, Nemec and Wittkemper, along with all other officers of the Company, were partially compensated with annual grants of stock rights that were convertible into common stock of the Company. Those rights were granted under the Booz, Allen & Hamilton Inc. Officers Stock Rights Plan. Under the Stock Plan, each retired officer had a "put" right, exercisable for a period of two years from the date of his or her retirement, to sell his or her shares back to the Company at book value.
When they retired in March 2006, Nemec owned 76,000 shares of Booz Allen stock (representing about 2.6% of the Company's issued and outstanding common shares), and Wittkemper owned 28,000 shares (representing almost 1% of those shares). Nemec retained all of his Booz Allen stock during the two-year period following his retirement; Wittkemper sold most of his shares but retained some of them.
The Carlyle Transaction
In February 2007, Booz Allen reorganized its two principal lines of business into two separate business units: (i) a government unit, which provided consulting services to governments and governmental
During the summer of 2007, Booz Allen's leadership discussed internally a possible transaction in which Booz Allen would sell its government business. In October 2007, Booz Allen and The Carlyle Group began negotiations, which culminated in The Carlyle Group's November 2007 offer to purchase Booz Allen's government business for $2.54 billion.
On January 16, 2008, the Wall Street Journal reported that Booz Allen was engaged "in discussions to sell its government-consulting business to private-equity firm Carlyle Group," and that "the sale price will likely be around $2 billion." They reported that the transaction was expected to close by March 31, 2008. At some point before March 31, 2008, however, Booz Allen's board and management learned that the Carlyle transaction would close later than planned.
In March 2008, Booz Allen's board of directors, in anticipation of the Carlyle transaction, extended their (and management's) terms of office by 90 days, until the end of June 2008, and declined to issue new stock rights to its officers, thus preserving the contemporaneous Booz Allen stock ownership. Booz Allen's commercial business stockholders also elected the persons who would become the board of directors of a newly formed entity — Booz & Company, Inc. — that would operate Booz Allen's commercial business after the Carlyle transaction closed.
On May 15, 2008, Booz Allen entered into (i) a formal merger agreement that would result in the sale of its government business to The Carlyle Group,
The Redemption of Plaintiffs' Booz Allen Stock
If allowed to participate in the Carlyle transaction, the plaintiffs would have received materially more than the March 2008 (pre-transaction) book value of their Booz Allen shares. In April 2008, the Company redeemed the plaintiffs' shares at their pre-transaction book value (approximately $162.46 per share).
The plaintiffs later filed these actions (which were later consolidated) in the Court of Chancery.
The plaintiffs' amended complaint asserted three separate claims. Count I alleged that by redeeming the plaintiffs' shares at a time when the Carlyle transaction was virtually certain to occur, Booz Allen breached its covenant of good faith and fair dealing implied in the Stock Plan. Count II claimed that the Directors breached their fiduciary duty of loyalty to the plaintiffs by causing the Company to redeem the plaintiffs' shares, in favor of the Directors' personal interests. Count III alleged that as a result of the improper redemptions, the Directors were unjustly enriched.
The defendants moved to dismiss the complaint for failure to state a claim upon which relief can be granted. The Chancellor granted the motion and dismissed the complaint in its entirety. This appeal followed.
This Court reviews de novo the grant of a motion to dismiss under Court of Chancery Rule 12(b)(6), "to determine whether the trial judge erred as a matter of law in formulating or applying legal precepts."
The Chancellor Properly Dismissed Count I
The implied covenant of good faith and fair dealing involves a "cautious enterprise," inferring contractual terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated.
The plaintiffs lacked "a reasonable expectation of participating in the benefits" of the Carlyle transaction.
The complaint's allegation that the Company, a Delaware corporation, would not be for sale in whole or in part during the redemption period, and that no one at the time of drafting and adopting the Stock Plan could have anticipated that possibility (and if they had, all parties would have agreed to compensate retired stockholders as if they had contributed to the deal's value) stands naked, wholly unworthy of the inference that it is fully clothed.
The Chancellor found no cognizable claim for a breach of the implied covenant because the Stock Plan explicitly authorized the redemption's price and timing, and Booz Allen, Nemec, and Wittkemper received exactly what they bargained for under the Stock Plan. The Chancellor wrote "[c]ontractually negotiated put and call rights are intended by both parties to be exercised at the time that is most advantageous to the party invoking the option."
No facts gleaned from the complaint suggest that anyone negotiating for the working stockholders would have made
The Company's redemption of the retired stockholders' shares now produces the retirees' accusation that the Company breached the covenant of fair dealing and good faith implied in the stock plan. The directors did nothing unfair and breached no fiduciary duty by causing the Company to exercise its absolute contractual right to redeem the retired stockholders' shares at a time that was most advantageous to the Company's working stockholders. The fact that some directors were in the group of working stockholders who received a pro rata share of the $60 million did not make it an interested transaction because those director stockholders received the same pro rata benefit as all other stockholders similarly situated.
The plaintiffs assert that the Company violated an "implied" obligation to exercise its redemption right in "good faith and to deal fairly with the plaintiffs."
Crafting, what is, in effect, a post contracting equitable amendment that shifts economic benefits from working to retired partners would vitiate the limited reach of the concept of the implied duty of good faith and fair dealing.
The Chancellor Properly Dismissed Count II
Count II of the complaint alleges that by causing the Company to redeem the plaintiffs' shares before the Carlyle transaction closed, the Directors acted to further their own economic self-interest, at the expense and to the detriment of the plaintiffs, thereby breaching their fiduciary duty of loyalty. Those allegations, even if true, do not establish an enforceable breach of fiduciary duty claim in the specific circumstances alleged here.
It is a well-settled principle that where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim. In that specific context, any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.
The plaintiffs argue that the Chancellor legally erred by concluding that the Stock Plan foreclosed their breach of fiduciary duty claim. Although the plaintiffs concede that both their contract and fiduciary claims have a "common nucleus of operative facts," the fiduciary duty claim, they contend, is grounded on an additional and distinct fact
This contention, in our view, lacks merit. Even though the Directors caused the Company to redeem the plaintiffs' shares when it did, the fiduciary duty claim still arises from a dispute relating to the exercise of a contractual right — the Company's right to redeem the shares of retired nonworking stockholders. That right was not one that attached to or devolved upon all the Company's common shares generally, irrespective of a contract. Rather, that right was solely a creature of contract, and attached only to those shares that retired stockholders acquired under the Stock Plan. As a consequence, the nature and scope of the Directors' duties when causing the Company to exercise its right to redeem shares covered by the Stock Plan were intended to be defined solely by reference to that contract.
The Chancellor Properly Dismissed Count III
Count III claims that the Directors were unjustly enriched by the pre-transaction redemption of the plaintiffs' Booz Allen shares. The Chancellor dismissed this Count on two alternative grounds. The first is that "the alleged wrong [which made the Directors' enrichment unjust] arises from a relationship governed by contract" (i.e., the Stock Plan) and "Delaware courts ... have consistently refused to permit a claim for unjust enrichment when the alleged wrong arises from a relationship governed by contract." The second is that Booz Allen properly exercised its redemption right under the Stock Plan.
Unjust enrichment is "the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience."
The plaintiffs contend that the complaint adequately pleads these elements. Although the plaintiffs' complaint pleads the first four elements, it fails to establish the fifth requirement, that absent an unjust enrichment claim the plaintiffs will have no remedy to recover the benefit of which they were wrongfully deprived. The first three elements of the plaintiffs' unjust enrichment claim are intertwined: the pre-Carlyle transaction redemption of plaintiffs' shares reduced the number of "slices" into which the Carlyle transaction "cake" (a fixed amount) would be cut, thereby enlarging each "slice." As a direct result of that redemption, all remaining Booz Allen working stockholders — and stockholding Directors — received higher value for their shares, equal to the nearly $60 million of transaction consideration of which the plaintiffs allegedly were deprived. Just as the plaintiffs have failed on the merits of their breach of contract claim, they have failed to prove that the Directors' unjustly benefited from the pre-transaction redemption, in contravention of "... the fundamental principles of justice or equity and good conscience."
For the foregoing reasons, the Court of Chancery's judgment is
JACOBS, Justice, dissenting and BERGER, Justice joining in dissent:
The majority holds that, as a matter of law, Booz Allen did not breach the implied covenant of good faith and fair dealing. The majority reasons as follows: The Stock Plan expressly granted the Company, and the Company exercised, an unqualified contractual right to redeem the plaintiffs' shares. The redemption of the plaintiffs' shares in reliance on that contract right did not breach the implied covenant merely because the result was to "simply limit advantages to the other [contracting] party."
A party does not act in bad faith (the majority argues) by relying on contract provisions for which that party bargained, even if the result is to eliminate advantages the counterparty would otherwise receive. That is a correct, but incomplete, statement of the law. To avoid running afoul of the implied covenant, the challenged conduct must also further a legitimate interest of the party acting in reliance on the contract. Stated differently, under Delaware case law, a contracting party, even where expressly empowered to act, can breach the implied covenant if it exercises that contractual power arbitrarily or unreasonably.
A. The Scope Of The Implied Covenant
"The covenant is best understood as a way of implying terms in the agreement, whether employed to analyze unanticipated developments or to fill gaps in the contract's provisions."
The complaint alleges no facts from which it may reasonably be inferred that the plaintiffs contractually agreed to waive their implied right to be treated fairly by the Company in any redemption of their shares. Their claim that Booz Allen breached the implied covenant by exercising its power to redeem the plaintiffs' shares in the circumstances alleged here was, therefore, legally cognizable. Whether or not that claim will ultimately be validated must await the development of a factual record. That is why Count I was erroneously dismissed.
B. The Complaint Sufficiently Alleges That The Company Did Not Exercise Its Redemption Right in Good Faith
The majority concede that the Stock Plan does not address whether retired stockholders can share in any "locked in value" of the Company.
The Carlyle transaction, as timed in relation to the redemptions effected here, was an unforeseen circumstance not provided for by the Stock Plan. That frames the issue, which is whether the complaint pleads facts from which one can infer that if the parties negotiating the Stock Plan had specifically addressed the circumstances presented here, they would have agreed that the Company could not exercise its redemption right before the transaction closed. A fair reading of the complaint requires an affirmative answer to that question.
It is fairly inferable that the redemption of the plaintiffs' shares served no legitimate interest of Booz Allen. Once Booz Allen's government business was sold to The Carlyle Group, the Company would cease to exist as a "partner-owned" corporation, and Booz Allen would become a wholly owned Carlyle Group subsidiary. Second, the complaint alleges that the transaction — which would result in Booz Allen's metamorphosis from a "partner-owned" entity to a wholly owned subsidiary — was all but certain to occur before the Company's redemption right legally came into existence. Accepting that averment as true, as we must at this stage, no legitimate interest of Booz Allen would be furthered — or even implicated — by redeeming the plaintiffs' shares before the Carlyle transaction closed. Third, the Stock Plan's purpose was to incentivize partners to work diligently for the long term benefit of the Company,
The majority suggest that our view would "expand" the doctrine of the implied duty of good faith and fair dealing and "vitiate the limited reach" of that concept.
It is now settled Delaware law that a contracting party's exercise of a power in reliance on an explicit contractual provision may be deemed "arbitrary" or "unreasonable" where the other contracting party is thereby disadvantaged and no legitimate interest of the party exercising the right is furthered by doing so.
In Dunlap, the plaintiff requested its excess liability insurer to approve a proposed agreement to settle with a primary insurer for an amount less than the underlying primary insurer's coverage limits. The excess insurer refused, relying on a contractual and statutory "exhaustion of primary insurance" requirement.
The majority's response rests on a characterization of the Stock Plan as a contract between the plaintiffs and the Company "negotiating for the working stockholders."
The majority concedes that "[t]he redemption would not affect the Company
The demerit of this contention is twofold. First, the majority cites no authority, nor articulates any reasoning, to support its conclusory statement that the working stockholders would have a valid claim for breach of fiduciary duty against the directors for not redeeming the plaintiffs' shares. If that is so, then it is equally arguable that the plaintiffs would have had an identical fiduciary duty claim against the directors for causing their shares to be redeemed for the sole benefit of the working stockholders. Second, and more fundamentally, even if the working stockholders arguably had a legitimate economic interest in not being deprived of the $60 million the plaintiffs would otherwise have received, that is an interest that pertains only to the working stockholders — not the Company. Only by conflating the interest of the working shareholders with that of the Company is the majority then able to posit a legitimate corporate interest that the Company then became entitled (indeed, required) to further. This attribution of the working stockholders' interest to Booz Allen magically puts a second rabbit into the same hat.
At this stage, all that is before us, and before the Court of Chancery, is a motion to dismiss a complaint. At this stage, all that can be decided is whether the complaint states a cognizable legal claim. Whether or not that claim is factually supportable is a question to be resolved at a later stage.