A recent case from the Delaware Supreme Court, Leaf Invenergy v. Invenergy Renewables, C.A. No. 208, 2018, serves as a firm reminder of the importance of expectations in deal-making. Delaware courts will enforce the terms of well-drafted, unambiguous contracts. Clearly communicating and memorializing parties' expectations in the terms of their contract puts parties in the best position possible to have their expectations enforced and receive the benefit of their bargain. The steep increase from the $1 in nominal damages awarded by the Delaware Court of Chancery to the $126 million damages award granted by the Supreme Court clearly illustrates how critical these drafting decisions can be.

The Parties' Dispute

The parties' relationship began in 2008, when Leaf Clean Energy Co. (Leaf Parent), through plaintiff-appellant Leaf Invenergy Co. (Leaf), invested $30 million in a Series B investment round for defendant-appellee Invenergy Wind, a wind energy developer. The Series B notes that Leaf received in return for the investment were governed by the “Series B note agreement,” and, among other things, that agreement gave Leaf the right to convert its notes into equity subject to the “Series B LLC agreement” that would be executed by it and Invenergy upon conversion.

Both the Series B note agreement and the Series B LLC agreement (together, the agreements) contained provisions restricting Invenergy's ability to conduct a “material partial sale,” a term defined in those agreements which the Supreme Court construed as referring to “a sale of a significant portion of Invenergy's assets.” Specifically, these provisions prohibited Invenergy from engaging in a material partial sale unless Invenergy either obtained Leaf's consent to the sale, or paid Leaf a premium to redeem its interest called a “target multiple.” Although several aspects of both the agreements were renegotiated over the years, the provisions restricting Invenergy's ability to conduct a material partial sale remained in effect throughout the course of the parties' relationship, including in the third amended and restated LLC agreement agreed to in 2014. Indeed, during these renegotiations, “all parties had contemporaneous understandings that [the material partial sale provisions] would require Invenergy to pay the target multiple to Leaf if Invenergy chose to conduct a material partial sale without Leaf's consent.”

In late 2014, Invenergy began exploring the possibility of an asset sale to TerraForm Power Inc., and, by June 2015, Invenergy entered into an exclusive negotiation period with TerraForm to finalize the deal. Though Leaf was aware that Invenergy was considering an asset sale, Invenergy worked to keep Leaf in the dark about the progress of the transaction. Nonetheless, Leaf elected on June 18, 2015, to convert its notes into equity under the Series B note agreement. That agreement required Invenergy to convert Leaf's shares within three days, but Invenergy did not admit Leaf as a member until Sept. 24. In the meantime, Invenergy continued to negotiate with TerraForm, executing an initial purchase agreement on July 1 and publicly announcing the deal July 6. Invenergy and TerraForm ultimately executed an amended purchase agreement and closed the transaction in December 2015, without Invenergy ever seeking or obtaining Leaf's consent to the sale or paying Leaf the target multiple.

Proceedings Before the Court of Chancery

Shortly after the TerraForm deal closed, Leaf filed suit in the Court of Chancery. Leaf filed for judgment on the pleadings, seeking a ruling by the Court of Chancery that Invenergy had breached the LLC agreement by closing the TerraForm transaction without Leaf's consent and without paying Leaf the target multiple.

The Court of Chancery agreed that Invenergy's conduct constituted a breach of the LLC agreement, and granted Leaf's motion. The Court of Chancery reserved judgment on damages, however, and ordered a trial to determine the appropriate measure. Despite its conclusion that Invenergy breached the LLC agreement, the Court of Chancery concluded in its post-trial opinion that Leaf was not entitled to the damages it sought—i.e., the target multiple—and instead awarded Leaf just $1 in nominal damages.

In arriving at this conclusion, the Court of Chancery interpreted the provision in the LLC agreement regarding payment of the target multiple as an “exception” to the requirement that Invenergy obtain Leaf's consent to a material partial sale. The Court of Chancery construed the provision as entitling Leaf to the target multiple only if Invenergy opted to pay it instead of seeking Leaf's consent to the material partial sale. As a result of this construction, the Court of Chancery considered Invenergy's breaching conduct only to be its failure to obtain Leaf's consent, and not its failure to pay Leaf the target multiple. Because it found that no harm befell Leaf as a result of Invenergy's failure to obtain Leaf's consent to the TerraForm deal, the Court of Chancery awarded only nominal damages of $1 to compensate Leaf for this harmless breach.

The Delaware Supreme Court Reverses

Justice Gary Traynor, writing for the Delaware Supreme Court, reversed the Court of Chancery's nominal damages award and granted Leaf $126 million in damages, equal to the target multiple provided for in the LLC agreement. The Supreme Court disagreed with the Court of Chancery's characterization of the target multiple payment provision as an “exception.” Rather, in the Supreme Court's view, the LLC agreement gave Invenergy only two options if it wanted to conduct a material partial sale: obtain Leaf's consent to the material partial sale, or pay Leaf the target multiple. Understood in such a binary fashion, “it is only the combination of the TerraForm deal plus the failure to obtain consent plus the failure to pay the target multiple that constituted the breach [by Invenergy].”

The Supreme Court emphasized the importance of clearly defining parties' expectations in evaluating the appropriate measure of expectation damages to which Leaf was entitled. As both the Court of Chancery and the Supreme Court observed, “the proper measure of damages should give Leaf the benefit of the bargain it struck with Invenergy and should be based on Leaf's expected position but for Invenergy's breach.” Thus, the Supreme Court took issue not with the Court of Chancery's legal formulation, but its choice of “'but-for-the-breach' position.” The lower court's error, then, was in its failure to “examine the frame of reference in which Invenergy paid the target multiple as both parties expected in a nonconsensual material partial sale.” In order to properly enforce the parties' expectations as memorialized in the unambiguous terms of the LLC agreement, the Delaware Supreme Court awarded Leaf damages equivalent to the target multiple that Invenergy failed to pay it after conducting the nonconsensual material partial sale to TerraForm.

Practical Considerations

The Supreme Court's opinion is a clear reminder to practitioners of the importance of parties' expectations in deal-making, and the Delaware courts' commitment to enforcing those expectations when they are unambiguously memorialized in contract terms. In order to receive the benefit of their bargain, parties should strive to be precise in drafting contracts that adequately reflect their expectations about certain occurrences. Accomplishing this up front makes it substantially more likely that agreements will be enforced according to their terms and that parties will receive the benefit of their bargain if the deal ultimately winds up in litigation.

Here, for example, Leaf and Invenergy evidently came to the understanding during the drafting and renegotiation of the agreements that Leaf would be entitled to payment of the target multiple if Invenergy conducted a material partial sale without Leaf's consent. As the Supreme Court explained, the LLC agreement was drafted in such a way as to unambiguously reflect that expectation, and the evidence offered at trial supported that conclusion. Because the parties' expectations were clearly set forth in the LLC agreement, the Supreme Court enforced the agreement's terms and upheld the parties' expectations.

Ellis E. Herington ([email protected]) is an associate in the trial and dispute resolution practice group of Pepper Hamilton, resident in the Wilmington office.

Douglas D. Herrmann ([email protected]) is an attorney with Pepper Hamilton, resident in the firm's Wilmington office. He concentrate his practice in the areas of corporate governance and commercial litigation, stockholder litigation, fiduciary duties, and partnership and limited liability company disputes.