SS M&A Litigation Outlook - Flipbook - Page 25
Agspring Holdco, LLC v. NGP X US Holdings, LP,
C.A. No. 2019-0567-AGB (Del. Ch. July 30, 2020)
Why it is important
In Agspring, the court found that the plaintiffs
sufficiently pleaded fraud claims against a
private equity firm in connection with the sale
of a controlled business. The private equity firm
held 98 percent of the membership interests of
the equity, three of the five board seats, and had
significant knowledge of the company’s operations
and financials. Coupled with the fact that the
alleged misrepresentations concealed a decline in
EBITDA of nearly 50 percent, the court held that
the plaintiff adequately pleaded the private equity
firm’s knowledge of fraudulent misstatements in
the sale documents, including a material adverse
effect clause. Although Agspring arguably involved
an extreme set of facts, it nonetheless provides
a cautionary tale, illustrating Delaware law’s
low burden to plead fraud against a controlling
stockholder with a large financial stake and
significant operational knowledge.
Summary
In 2012, Agspring LLC (Agspring) entered into
an Advisory Services, Reimbursement, and
Indemnification Agreement with NGP X US
Holdings, L.P. (NGP), a private equity affiliated
partnership, whereby NGP provided approximately
96 percent of Agspring’s initial capital (US$150
million). In 2014, Agspring’s founders indicated
that they needed more capital to finance their
acquisitions, and suggested that NGP exit its
investment so that Agspring could find different
financing partners. Working with NGP, the founders
sought US$300 million from a buyer.
In January 2015, American Infrastructure MLP
Funds (AIM) expressed interest in acquiring
Agspring and signed a term sheet in May 2015 to
purchase Agspring for US$325 million in cash. In
mid-July, AIM sought a price reduction based on
its diligence findings regarding Agspring’s earnings,
and the price was lowered by US$5 million. Based on
further reduced projections of Agspring’s EBITDA
for 2016, AIM and NGP agreed on a further US$25
million reduction in the purchase price.
fiduciary duties, unjust enrichment, and contractual
indemnification. The defendants moved to dismiss
in December 2019 on several grounds.
First, the defendants moved on statute of
limitations grounds. The court, however, found
that the plaintiffs had sufficient alleged fraudulent
concealment on the part of the former founders, who
made statements to “perpetrate the myth that the
artificially inflated forecast they provided to AIM . . .
shortly before the closing remained achievable when
they knew otherwise.”
In November 2015, Agspring’s internal projections
continued to decline. However, it failed to disclose
these reductions to AIM until after the transaction
closed on December 14, 2015. In June 2016,
Agspring reported that its total 2016 EBITDA was
only US$701,900—not the US$33 million it had
projected in its final disclosure to AIM.
Second, the defendants argued that the fraud claim
was insufficiently pleaded because a statement as
to future performance was not actionable as fraud.
Rejecting this argument, the court held that it was
“reasonably conceivable,” given the “sharpness of the
financial decline the Company had experienced before
the closing and the known fact that the Company
would be incurring $80 million of additional debt,”
that events had already occurred that would lead
to Agspring’s default. The court also held that the
plaintiffs had pleaded adequate facts to render it
reasonably conceivable that the contractual “material
adverse effect” clause was knowingly inaccurate.
The plaintiffs (the buyer and investors) brought suit
in July 2019 against NGP, alleging claims for fraud,
aiding and abetting fraud, civil conspiracy, breach of
The court also held that the plaintiffs’ allegations
were sufficient to plead knowledge, i.e., that the
contractual representations were knowingly false
when made. In finding sufficient allegations to
establish NGP’s knowledge, the court considered,
among other things, the fact that NGP: (1) held 98
percent of Agspring; (2) had three of the five board
seats; (3) attended board meetings and regularly
received financial information; (4) had close
involvement in the sale to AIM; (5) understood
the importance of the EBITDA projection; (6)
“constantly communicated” with the founders; and
(7) pushed the founders to close the deal as the
forecasts worsened.
The court declined to consider the “novel issue”
whether the “personal participation doctrine” –
which provides that a corporate officer can only be
held liable for a tort they directed, ordered, ratified,
approved, or consented – can apply to a controlling
member of an LLC because the complaint sufficiently
alleged that NGP was contractually liable.
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