A Small Phantom Is Still a Phantom: Chancery Declines To Imply Materiality Requirement When the Parties Have Not Done So

In a recently issued opinion in HControl Holdings v. Antin Infrastructure Partners, Chancellor McCormick of the Delaware Court of Chancery allowed a buyer to avoid closing on a transaction based on the failure of a closing condition related to the capitalization representation.

Even though the court seemed to deem that failure immaterial, the failure was nonetheless enough to justify not closing given the absence of any materiality qualifier and a well-documented negotiating history in which a materiality qualifier was requested and rejected multiple times.  The case also gave the court an opportunity to define the term “phantom equity,” a term often used, but not defined in either the purchase agreement at issue or prior Delaware caselaw.

First, the facts: Antin Infrastructure Partners (the Buyer) entered into a merger agreement to acquire a group of four privately held, Florida-based broadband companies (the Seller), referred to as OpticalTel.  After the parties entered into the merger agreement, a former employee of OpticalTel—Rafael Marquez—emerged, asserting an ownership interest in an OpticalTel subsidiary.

Marquez was hired by the Seller when it “could not afford to pay Marquez” solely in cash.  As a result, his compensation package included “5% ownership of HControl Corporation to be distributed upon a liquidation event.” The Court noted that, “Marquez never received a K-1, never received any distributions, and never voted on any matters as a stockholder of HControl Corporation.”

The decision turned on the representation in the purchase agreement that “there are no outstanding … phantom equity, … or other similar rights, agreements, arrangements, undertakings, or commitments of any kind….” This representation was required to be accurate in all respects at the time of closing.  The merger agreement, however, did not define phantom equity.

The Buyer terminated the merger agreement based on alleged breaches by the Seller, claiming that Marquez held phantom equity contrary to the terms of the purchase agreement.  The Seller argued that Marquez’s contract did not create phantom equity because that term only refers to management compensation with other “attributes of stock” such as dividends or voting rights.

The court disagreed, writing that, “just like ghosts are not people, phantom equity is not equity.” The court held that Marquez’s ownership rights were phantom equity and defined the term as “an unsecured contractual right that takes on economic characteristics of the employer’s equity.”

Because the Buyer negotiated for the representations to be true and correct in all respects, the Court rejected the Seller’s argument that there should be an implied de minimis qualifier.

The Seller attempted to cure the existence of the phantom equity by filing to dissolve the subsidiary in which Marquez claimed an ownership stake.  The Seller transferred software assets and contracts to another OpticalTel subsidiary that was part of the merger and placed in trust an amount of money to cover Marquez’s claims.  It also provided an indemnity for any damages over that amount.

The Court found that filing for dissolution on February 23, 2023 did not solve the problem.  A dissolved corporation can still revoke its dissolution within 120 days, is still able to be sued, and still retains the same ownership stakes as before.  The court observed that dissolution proceedings take months to conclude, and the 120-day period after filing—where notice must be given to known claimants of the dissolution—overlaps with the debt financing commitment that was set to expire on June 9, 2023. In sum, the court wrote that, “for all intents and purposes, whatever right Marquez had before the dissolution, he has now.”

Finally, the Sellers alleged that the Buyers breached the best efforts clause of the merger agreement by not doing all things that were “necessary, proper and advisable … to consummate the Transaction.” The Court concluded that the Buyers were not in breach because an efforts clause does not require the identified outcome, but instead only requires the party to try to achieve the outcome, subject to a reasonableness test.

The provision does not “require Buyers to sacrifice their negotiated contractual rights to solve a breach.”


  • The Court of Chancery again reaffirmed that it will hold sophisticated parties to the bargain they struck.
  • The definition of phantom equity seems to align with practitioner expectations and is not required to have all of the characteristics of equity (such as voting or distributions); rather, it is an unsecured contractual right that takes on some characteristics of equity.
  • Delaware Courts will not interpret best-efforts clauses to change bargained for terms of a contract.


This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.