MEMORANDUM

To: Client
From: -
Date: 13.12.2023
Subject: Analysis of Contractual Obligations Under Delaware Law

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Introduction

This memorandum delves deep into the contractual dispute between BC Financial Group, LLC
("BCFG") and K L, LLC ("KL") and deeply analyzes it. It evaluates this legal dispute in light of
the acquisition of KL by Acquisition Corporation and all other subsequent actions by it that have
affected the ‘revenue share agreement’ under Delaware law.

Background

BCFG and KL had mutually agreed to share referral revenues, perpetually. But despite the fact
that BCFG had sold KL to Acquisition Corporation, it still received its revenue share. However,
after some time these revenue shares stopped being received by BCFG, mainly after there was
corporate restructuring and the user agreements were sent to various other subsidiaries.
According to BCFG, this was a clear violation of contractual terms. It went against the change-
in-ownership clause of the agreement BCFG had consented to and possibly constituted tortious
interferences, a breach of fair dealing in the corporate sector, and a breach of the principle of
good faith.

Contract Analysis

Upon deeply studying the contract and the relevant documentation, several vital clauses were
found to be relevant:

1. Revenue Share Clause: this clause specifies an indefinite revenue share for BCFG from
the continuing use of services by the end user.

2. Change-in-Ownership Clause: this clause is very important since it protects BCFG in

case of those possible circumstances where KL is sold out.

3. Termination and Amendment Provisions: this clause is also relevant as it holds that if
the contract is terminated, specific clauses of it will still survive, and the whole contract
won’t be rendered null and void.

Legal Framework

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Since the Memorandum is being reviewed under Delaware law, it’s important to understand that
contracts are generally understood by their plain meanings and the overall sense/context of the
agreement. The Delaware Courts have emphasized good faith in corporate practices.

Discussion

1. Good Faith and Fair Dealing

Under Delaware law, almost every other transaction or contract adheres very strictly to the
implied principles of ‘good faith’ and ‘fair dealings. So, this was how it is somewhat guaranteed
that the parties to the contract will play their part with utmost honesty and equality, especially in
those circumstances where one party holds discretion. These principles are the bane of existence
for most contracts since through the performance of one party, they decide the benefits imparted
to the other party in the contract. The Delaware Supreme Court has emphasized the importance
of this covenant since it safeguards against all or any unreasonable conducts or arbitrary actions
that may weaken a contract or disadvantage the parties, it also enforces that the discretions
should be used in good faith and reasonably.

In the present case scenario BCFG can argue that by restructuring and transferring the user
agreements to a daughter company, the Acquisition Corporation has committed was a strategy
motivated to avoid the sharing of revenue. This argument will gain weight as the aforementioned
measures have been proved to be taken in bad faith, against the spirit of the contract.

In "Oxbow Carbon & Minerals Holdings v. Crestview-Oxbow Acquisition," the Delaware

Supreme Court consistently stressed the unique nature of the implied principle of good faith and
fair dealing. It added that such implied principles can’t be applied casually to contracts in order
to bypass the condition of a contract or to create such rights that are independent of the main
contract. These principles may force the parties to the contract to fulfill their mutually decided
obligations, but they don’t, in any way, create additional obligations. According to BCFG, much
as these covenants are important, they still do not extend contractual responsibilities beyond
what all the parties to the contract agreed upon. If the BCFG can tactfully show that the
Acquisition Corporation has gone through all the changes only to avoid a revenue share
obligation, then it can break off the commitment.

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Other relevant cases: Dunlap v. State Farm Fire and Casualty Co and Winshall v. Viacom
International, Inc

2. Change-in-Ownership Provisions

Under Delaware Law, the courts have always valued the key concept of ‘contractual purpose’. It
has always given much importance to the ‘change-of-ownership’ clauses in contracts. This law
will generally enforce a clause on the parties to a contract if it instead of altering it, in its clear
and unambiguous meanings, states for them to do or not to do something, this stands true for the
present situation where the contract had explicitly stated that regardless of the company
ownership, the revenue shares will be paid. The Delaware courts will likely rule in favor of the
BCFG if it can prove that the change-in-ownership clause was meant solely to guarantee the
perpetual and secure attainment of revenue shares by it.

In "Norton v. K-Sea Transportation Partners L.P.," the Delaware Supreme Court

comprehensively reviewed the cases where there had been a change in the ownership contracts.
It held that according to the intent of the parties involved, clear and unambiguous ownership-
change contractual terms must be used. BCFG can contend that the Acquisition Corporation’s
actions breach this clause.

Other relevant cases: Gerber v. Enterprise Products Holdings, L.L.C

3. Corporate Veil

As is seen in most cases, in Delaware Legislation the principle of ‘piercing the corporate veil’ is
used very judiciously, especially when a subsidiary is used merely as a front or disguise for the
parent company. The Delaware Courts have ruled that the principles of good faith and fair
dealing may hinder a party to the contract from acting as it is mandated to, under the contract,
such that the other parties benefit from it. This is usually seen in those cases where daughter
companies are used to avoiding contractual commitments. If the BCFG argues that these
subsidiaries are not actually autonomous and only operate for the sole cause of avoiding a
revenue share, then BCFG may pierce the corporate veil and execute its original contract and the
commitments therein.

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In the "Fletcher v. Atex, Inc." decision, the Delaware Supreme Court recommends that if a
subsidiary is used as a disguise for the parent company, then its corporate veil should be pierced.
This applied to BCFG too, given that it can prove that these subsidiaries are exploited this way.

Other relevant cases: Outokumpu Engineering Enterprises, Inc. v. Kvaerner Enviropower,

Inc.:

4. Contractual Interpretation

If a contract is ambiguous then there must be a thorough investigation done into the expectation,
conduct, and performance of the parties to the contract. Unless they satisfy the expectations of
the parties, assuming clauses must be avoided as per Delaware Courts. BCFG may argue that the
contract must be enforced keeping in mind the initial expectations of the parties. Thus, good
faith, contractual intent, and focused interpretation of the contractual terms may bolster the
position of BCFG under Delaware Law.

The case "Eagle Industries, Inc. v. DeVilbiss Health Care, Inc." demonstrated that in order to
fully understand the genuine intentions of the parties, the Delaware courts carefully handled the
contractual ambiguities by deeply going through the agreements and transactions between the
parties. BCFG can argue to consider the entire context of the agreement, focusing on the intent to
provide BCFG with a perpetual revenue share and the ambiguity present within the contract
clauses.

Other relevant cases: Hamilton Partners, L.P. v. Englard:

Conclusion

Conclusively, we observe that BCFG apparently has a reasonable stance that their fair share of
revenue should be given to them according to the contractual terms irrespective of the structural
changes they had or the transfer of their employees. The Delaware Legislation also backs this. As
far as the question of the ‘strength of case’ is concerned, then it is very important that the
respondent heavily relies on the blatant violation of the principle of good faith and how the
parent company’s actions were against the spirit and purpose of the mutually consented contract.

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References: