Braga Investment & Advisory, LLC v. Musa Yenni, et al., C.A. No. 2019-0408-PAF (Del. Ch. May 31, 2023), Fioravanti, V.C.—The Delaware Court of Chancery entered judgment in favor of the defendants in a breach of contract dispute arising from the plaintiff’s purchase of a minority ownership interest in a Delaware limited liability company. The post-trial opinion explains the missteps that the plaintiff committed prior to closing, namely the failure to read agreements and ask questions, which proved fatal to its claims for relief. In light of these missteps, the court was unwilling to unwind the transaction between these sophisticated parties and entered judgment in favor of the defendants.
This litigation represents the third lawsuit between the parties. The defendant company was formed as a Delaware limited liability company to acquire an engineering firm. Prior to the closing of the acquisition, the plaintiff was invited to make a $700,000 investment in the defendant company. During the due diligence process, the plaintiff received a draft purchase agreement, which included a draft of the defendant company’s operating agreement (2015 Draft). The 2015 Draft was not signed and did not include any information concerning the members’ capital accounts. The parties participated in a teleconference, at which time revisions to the 2015 Draft were discussed. Following the teleconference, the plaintiff executed agreements to purchase a 23.3% ownership interest in the defendant company for $700,000 and become a party to the agreements underlying the acquisition of the engineering firm. The plaintiff also provided the managing member of the defendant company with an irrevocable power of attorney. Simultaneously, there were numerous communications between the parties and various law firms about revisions to the operating agreement. Despite these communications, the plaintiff executed the signature page for the operating agreement (2016 Operating Agreement) without reviewing the final draft. The 2016 Operating Agreement conferred significant authority upon the defendant managing member over the composition of the defendant company’s board and its affairs. A few years later, the 2016 Operating Agreement was revised, in which the defendant managing member exercised the irrevocable power of attorney to execute the document on the plaintiff’s behalf. The plaintiff filed suit in the Delaware Court of Chancery to, among other things, rescind the prior agreements and order the return of its $700,000 investment.
Under Delaware law, if a party’s assent is induced by the fraudulent acts of its counterpart, which the assenting party reasonably relied upon, then the contract may be voided. Fraud may take the form of an affirmative representation, the concealment of information, or an omission in light of a duty to speak. In an arm’s-length negotiation, neither party possesses a duty to speak. However, if a party chooses to speak, then it must not lie or mislead its counterpart.
The Delaware Court of Chancery refused to rescind the relevant agreements based on a fraudulent inducement theory. The court found that the defendants did not represent the 2015 Draft as the company’s operating agreement. The 2015 Draft was characterized in writing as a proposal. Communications between the parties indicated that further revisions to the 2015 Draft were necessary, in which the defendants confirmed that revisions were being made. The plaintiff reviewed and paid legal invoices from the company’s attorneys, referencing revisions to the proposed agreement. Further, the 2015 Draft was never executed. The parties ultimately executed the 2016 Operating Agreement, but the plaintiff maintained that the defendants obtained its consent to the 2016 Operating Agreement without providing the final draft or disclosing the differences between the relevant drafts. However, the court concluded that the defendants did not make any representations to the plaintiff that the 2016 Operating Agreement was the same as the 2015 Draft. Thus, the plaintiff could not establish a misrepresentation capable of substantiating its fraudulent concealment claim.
Even if the plaintiff had established a misrepresentation, its purported reliance on the defendants’ conduct was unreasonable. The plaintiff knew of revisions to the 2015 Draft, yet it provided an executed signature page without requesting, let alone reviewing, the final draft. Under Delaware law, if a party had an opportunity to read an agreement and discover any misrepresentations prior to the agreement’s execution, then it cannot avoid its obligations or attempt to rescind the agreement based on fraud. In this instance, the plaintiff could have protected itself in a number of ways: (1) requesting the final version of the 2016 Operating Agreement before executing the signature page; (2) withholding its consent or refusing to return the signature page; or (3) mandating that the signature page be held in escrow until it had an opportunity to review the final draft. The court succinctly summarized the plaintiff’s “predicament [a]s one of its own making and could easily have been avoided.”Braga reinforces the fundamentals of contract negotiations that even sophisticated parties may fail to follow. The plaintiff executed an agreement to invest a significant sum in an entity that did not have a fully executed operating agreement. The plaintiff made certain assumptions regarding the defendant company’s governance or, in the alternative, overlooked considerable evidence that would have rendered its assumptions incorrect. The plaintiff executed and returned its signature page, even though it did not receive the final draft of the agreement. Further, the plaintiff gave the defendant managing member irrevocable power of attorney without certain limitations on the scope of its authority. Braga likely represents the plaintiff’s last-ditch effort to avoid the consequences of its prior missteps, but the Delaware Court of Chancery will not save a party from a bad bargain.