Chancery, Affirmed: Delaware is ‘Contractarian,’ So Please Read The Fine Print
On July 5, 2024, the Delaware Supreme Court affirmed a Court of Chancery decision in REM OA Holdings, LLC v. N. Gold Holdings, LLC that serves as a warning for parties entering a contract or other binding document to diligently review each term of the agreement, including by proactively seeking out, reviewing, and analyzing any documents incorporated by reference.
The dispute involved two members of REM EQ Holdings, LLC (the “Company”)— REM OA Holdings, LLC (“REM OA”) and Northern Gold Holdings, LLC (“Northern Gold”)— which held the assets of former longstanding firearms manufacturer Remington Outdoor Co. In early 2021, REM OA and Northern Gold each held a 50% membership interest in the Company as the Company faced dwindling cash reserves. To address the need for capital, REM OA obtained on behalf of the Company an eight-page commitment letter from private equity firm SIFT Capital Limited Partners (together with its assignee SIFT Fixed US002, LLC, “SIFT”) for a $10 million loan in exchange for a warrant to purchase 2.5% of the Company’s membership interests. The warrant thus would dilute equally Northern Gold and REM OA’s ownership interests.
Under the Company’s LLC agreement, REM OA needed the consent of Northern Gold to proceed with the loan transaction. Accordingly, in May 2021, REM OA sent Northern Gold a three-page written consent authorizing, among other things, the Company to enter into the commitment letter with SIFT. But the commitment letter itself was not provided with the written consent. And though Northern Gold, represented by counsel, reviewed the written consent for two weeks and discussed various aspects of it with REM OA, Northern Gold did not request a copy of the commitment letter, nor did it ask REM OA about it. Northern Gold therefore did not learn of the warrant being provided to SIFT: the warrant was not mentioned in the consent, only in the commitment letter.
In June 2021, Northern Gold signed the consent, and REM OA shortly after executed the commitment letter on behalf of the Company. Nine months later, SIFT exercised its warrant, claiming a 2.5% membership interest that diluted REM OA’s and Northern Gold’s membership interests to 48.75% each. When Northern Gold refused to accept that it no longer owned 50% of the Company, SIFT, together with REM OA, filed in the Court of Chancery for a declaration as to SIFT’s membership interest. Northern Gold counterclaimed, challenging the validity of the loan transaction by arguing, inter alia, that Northern Gold did not authorize the commitment letter and that it had been misled about the terms of the loan transaction.
Vice Chancellor Lori Will rejected Northern Gold’s arguments and ruled in favor of SIFT and REM OA, concluding that Northern Gold authorized the loan transaction when its agent signed the written consent explicitly authorizing the commitment letter and its related documents. The Court explained that Northern Gold, as a sophisticated party represented by counsel, was bound by the terms of the written consent, which in three pages had referenced the commitment letter eight separate times and made apparent that the letter concerned a loan from SIFT.
The Court’s analysis explained further that Delaware is a “contractarian” state, Op. 47, where parties signing contracts and other binding documents are bound by the obligations and terms contained in those agreements, especially when the parties are sophisticated, were represented by counsel, and engaged in arms-length negotiations. The Court elaborated that the “obligation of a contracting party to read any contract it signs extends to documents incorporated by reference, which become part of the terms of the parties’ agreement at the time of execution.” Op. 50.
Though acknowledging REM OA’s “underhandedness,” Op. 3, including through obscuring from Northern Gold the warrant to SIFT by mentioning it only in the commitment letter, and not proactively sending that letter to Northern Gold, Vice Chancellor Will held that Northern Gold’s defense of fraudulent inducement did not apply because it “had the opportunity to read the contract and by doing so could have discovered” the warrant, Op. 52, and yet it “opted not to investigate.” Op. 53. Northern Gold, Vice Chancellor Will explained, “does not get a do-over for its failed diligence.” Op. 3.
Vice Chancellor Will’s decision, now affirmed by the Delaware Supreme Court, underscores the importance of carefully reviewing and understanding the terms of any potential contract or other binding agreement, including the documents referenced within them. Indeed, the decision clarifies that parties cannot claim adequate diligence simply by reviewing all contractual documents provided by an offering counterparty; they must instead be alert to references to additional documents, seek those documents out, and diligently review them. The decision also reinforces the longstanding tenet of Delaware law that agreements, particularly involving sophisticated entities, will be construed strictly according to their terms. Well-resourced parties therefore likely will struggle to evade contractual text through appeals to equity or fairness.
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.
