United States: Chancery Partially Grants Motion To Dismiss Regarding Waiver Claim

The doctrine of waiver is fairly straightforward. Its application, on the other hand, can prove to be not so simple.

The recent decision of Stephen W. Bomberger v. Benchmark Builders, Inc., et al., C.A. No. 11572-VCMR (Del. Ch. Aug. 19, 2016), reflects the potential difficulty in applying the doctrine to corporate acts, and more importantly, pleading such a claim. In Bomberger, the Court ruled upon Defendants' motion to dismiss a complaint filed by a stockholder seeking fair value of his stock post-termination, requesting among other things a declaration that the company waived its contractual right to reimburse a stockholder with the lower of the book value of his stock, and the amount originally paid for such stock.

Background

Bomberger, along with three brothers Francis, Richard, and Eugene Julian, co-founded Defendant Benchmark Builders ("Benchmark" or the "Company") in 1988. As the Company's principal stockholders, the individuals subsequently entered into the Agreement of the Principal Shareholders of Benchmark Builders, Inc., dated March 2, 1994 (the "Shareholders Agreement"). Under the Shareholders Agreement, if a stockholder's employment with Benchmark is terminated for any reason other than those specified therein, the Company has the right to repurchase such Benchmark stock at the lower of either the original purchase price or the stock's current net book value.

In 2015, Bomberger's employment with Benchmark was terminated. Later that month, Francis, on behalf of Benchmark's board of directors (the "Board") offered to repurchase Bomberger's shares for $747 a share. Bomberger refused and asserted that his shares had a net book value of $3,925.15 per share. Benchmark responded by informing Bomberger that it was exercising its right under the Shareholders Agreement to repurchase his shares for the price he originally paid, at $100 per share.

In October 2015, Bomberger filed the instant action asserting four claims against Benchmark, Francis, Richard, William Alexander, William J. DiMondi, Dean C. Pappas, and Kang Development, LLC (collectively, "Defendants"). Those claims include: (i) a declaration that Benchmark waived its right under the Shareholders Agreement to repurchase Bomberger's shares for the amount he originally paid; (ii) breach of fiduciary duty claim against the Company's board; (iii) promissory estoppel claim against Benchmark; and (iv) specific performance against Kang Development, LLC. Defendants filed a motion to dismiss the Complaint under Court of Chancery Rule 12(b)(6).

Analysis

In Count I of the Complaint, Bomberger sought a declaration that Benchmark waived its right under the Shareholders Agreement to repurchase Bomberger's shares for the price he originally paid. Bomberger relied upon a prior Court decision involving substantially the same parties, Julian v. Eastern States Construction Service, Inc. ("Julian I"), 2008 WL 2673300 (Del. Ch. July 8, 2008), to support his contention that the Company's prior interactions with Eugene Julian in a related situation resulted in a waiver of its repurchase right under the Shareholders Agreement.

In Julian I, the Court addressed a dispute between the three Julian brothers that culminated in Eugene's termination from Benchmark in 2003. Because "by the end of 2003, [Eugene] no longer had a formal relationship with Benchmark other than as a stockholder[,] . . . Benchmark had the right to demand the reacquisition of [Eugene's] Benchmark shares" under the Shareholders Agreement. The Court found, however, that "Benchmark knew of, and intentionally chose not to enforce, this right . . . to demand the buy-back of [Eugene's] Benchmark shares," until late 2005 or early 2006.

Bomberger argued that the Company's delay in seeking to repurchase Eugene's shares (the "2003 Waiver") and the Board's February 10, 2006 express waiver of the Company's right to repurchase Eugene's shares at his original repurchase price (the "2006 Waiver") constitute permanent waivers of the Company's right to repurchase Benchmark shares under the Shareholders Agreement at the lower of the original purchase price and the net book value.

The Court found that Bomberger misapplied and misconstrued Julian I. That decision did not apply because here, the Company promptly sought to repurchase Bomberger's shares within 3 months, whereas in Julian I, the Company delayed over two years.

The Court granted the motion to dismiss to the extent that the Company waived its right to seek repurchase of Bomberger's shares in this instance. However, the Court found that whether the Company intended to permanently waive that right was a separate question. The Complaint did not include any allegations regarding whether the Board, at the time of the 2006 Waiver, intended to extend that waiver to all Benchmark stockholders, or solely to Eugene. Because, however, the Complaint adequately alleged that the 2006 Waiver constituted an express waiver, that aspect of Count I is dismissed, but without prejudice to file an amended complaint to include allegations that the Board intended to extend the waiver to all Benchmark stockholders.

In sum, this decision demonstrates that whether an entity waived its right to enforce contractual rights under a stockholder agreement is not always a straightforward consideration, and it is important to recognize that waiver as to an individual act versus a permanent and blanket waiver to enforce contractual rights are separate concepts.

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