The Delaware Court of Chancery Undertakes Exacting Calculations of Equitable Damages and Will Award Tens of Millions of Dollars? Yes, It Does That, Too.
The Delaware Court of Chancery is of course a court of equity, focusing often on governance and contractual rights. The Court of Chancery also periodically issues damages opinions, and on May 28, 2024, Vice Chancellor Lori Will did just that in Brown v. Matterport, Inc. At issue in Matterport was whether the plaintiff stockholder—following an earlier trial ruling that the defendant corporation had wrongfully (albeit in good faith) prohibited the stockholder from selling his shares—was entitled to damages and, if so, the proper method for computing damages. Vice Chancellor Will held that damages were appropriate based on the facts at issue, and in issuing a damages award of approximately $79 million, the Court undertook a rigorous approach in determining both the appropriate method to compute damages as well as the inputs for that calculation.
Factual Background
This action was commenced by William Brown, the former CEO of Matterport, which began as a private company in 2011. Brown was compensated with stock options and, after purchasing additional shares, ultimately held the right to approximately 1.4 million shares of legacy Matterport stock. Following his departure, Brown sought to sell his position, but terms were not reached. Later, Matterport went public through a July 2021 de-SPAC transaction. In connection with the transaction, bylaws were adopted that included transfer restrictions, which, according to the opinion, the Matterport board thought (based on advice from counsel) applied to all Matterport stockholders, including Brown. The lockup period was for 180 days post-closing and applied to all shares held “immediately following” the closing.
Brown ultimately commenced a lawsuit in the Delaware Court of Chancery, which sought to enjoin the enforcement of the transfer restrictions. Following trial, Vice Chancellor Will held that Brown never held lockup shares “immediately following” the closing, and that his shares were free to trade during the 180-day post-closing restricted period. Brown subsequently sold his shares in January 2022 over a multi-day period (still within the 180-day lockup period) at roughly $14 per share for total proceeds of approximately $80 million. But Brown then claimed that he incurred damages from his delayed sales. This particular opinion in Matterport addressed whether Brown could recover losses caused by his inability to sell his shares sooner. In holding in the affirmative, the Court of Chancery walked through the appropriate, and exacting, method of calculating these damages.
The Damages Formula
At the outset, Vice Chancellor Will noted the Court’s “broad discretion to form an appropriate remedy for a particular wrong,” including the Court’s ability “to provide supplementary relief ‘whenever necessary or proper’ in resolving a claim.” Here, Brown claimed that, but for the company’s improper lockup of his shares, he would have sold them earlier and at higher prices. Accordingly, Brown advocated for application of the “highest intermediate price method,” as articulated by the Delaware Supreme Court in Duncan v. TheraTx. This method would calculate the difference between (1) the highest intermediate price of Matterport stock during a reasonable time in which Brown could have sold his shares but for the lockup and (2) his January 2022 sale proceeds of approximately $80 million.
The Court held, however, that Brown’s preferred model was not appropriate here, because the company “was not found to have breached a contract, committed a tort, or violated positive law,” and instead the parties—including Brown himself—“believed that the lockup as written extended to all legacy stockholders.” In doing so, the Court rejected the theoretical justifications offered to support Brown’s preferred model, which included the “optimal deterrence theory” (i.e., remedies sufficient to “deter a party from infringing on others’ rights unless doing is socially optimal,” such as in the “efficient breach” context) and the “efficient contracting theory” (i.e., a remedy to “fill[] gaps in contracts and suppl[y] default remedies on what parties would have agreed to had they contemplated an issue”).
The Damages Calculation, Including the Inputs
Vice Chancellor Will ultimately calculated damages using the average price of Matterport stock during a reasonable time that, if able, Brown would have traded. The Court noted that this method was “a more exacting calculation” appropriate here, based on the extensive factual record and context. In a rather logical sequence, Vice Chancellor Will then walked through each calculation step, while considering testimony from experts and the plaintiff.
Step 1: Determine when a reasonable trading period began.
The Court determined that, but for the lockup, Brown could have begun trading his shares two business days after he received his shares. Here, he received them on November 18, 2021; transferred them to his brokerage account on November 19; and therefore “could realistically have begun trading as early as Monday November 22 had his shares not been restricted.”
Step 2: Determine the volume of shares Brown could have traded per day with minimal price impact.
Vice Chancellor Will next determined the volume of shares Brown would have rationally sold in the market as a percentage of the total trading volume—known as the “participation rate.” The parties’ experts offered competing target participation rates, and the Court adopted the calculation advanced by Matterport’s expert—a former sell-side trader—which relied on three algorithmic trading strategies to simulate scenarios using a 20% target participation rate. The Court noted that the 20% participation rate was aligned with Brown’s stated objective of quickly liquidating his Matterport position while limiting price impact, and consistent with a rate used by Brown’s financial management advisor when preparing to sell the shares.
Step 3: Determine the length of a reasonable trading period.
Beginning with November 22, 2021 and applying a 20% participation rate, Vice Chancellor Will then proceeded to determine the length of a reasonable trading period. She considered (1) the maximum number of shares that Brown could sell per trading day and (2) the total amount of time needed to sell his stake. The maximum shares that could be sold per day was calculated by multiplying the average daily trading volume by the participation rate. The Court used Brown’s expert’s 30-day approach, noting that it “appeared objective” (the 30-day average daily volume or ADV).
Using the November 22 start date, the 30-day ADV (10/19/21 – 11/19/21) was approximately 5.74 million shares—and thus, a 20% participation rate indicated that a maximum of 1,148,508 Matterport shares could be sold per day. Post-transaction, Brown owned approximately 5.7 million shares (he received roughly 4.1 shares for each of his original shares), meaning he would need approximately 4.9 business days to liquidate his position. Accordingly, the Court determined that the reasonable trading period would have been November 22 to 29, 2021 (accounting for holidays).
Step 4: Determine the average price of Matterport stock on the associated trading days.
Vice Chancellor Will then endorsed a volume weighted average price (VWAP) strategy to determine the average price of Matterport stock on the relevant trading days, given its consistency with Brown’s goal to sell fast while limiting price impact. The average price was calculated by dividing the dollar value of each transaction over a defined time period (11/22/21 – 11/29/21) by the total number of shares traded over that period. Using expert testimony offered by Brown, the VWAP over the reasonable trading period was $27.92 per share.
Step 5: Multiply the number of Brown’s shares by the average price during the reasonable trading period.
Multiplying the number of Brown’s shares (5,713,441) by the average price during the reasonable trading period ($27.92) yielded total proceeds of $159,519,272.72. Less the $80,427,139.60 Brown received from selling his shares in January 2022, the Court ruled that net damages were $79,092,133.12 (before accounting for interest).
Takeaways
As noted, the Court of Chancery ultimately awarded approximately $79 million to the plaintiff, even after finding that the company made a good faith determination to lock up the plaintiff’s shares. Thus, when assessing whether to enforce a lockup provision or any other contractual provision, practitioners and companies alike should consider whether to analyze potential damage estimates that may result in the event of a challenge of such provision, utilizing the calculation steps above or a range of other potential appropriate steps.
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.