Global Digital Solutions Inc (GDSI)

[Coreton]

GLOBAL DIGITAL SOLUTIONS, INC.,
Plaintiff, vs.
GRUPO RONTAN ELECTRO METALURGICA, S.A., JOAO ALBERTO BOLZAN, and
JOSE CARLOS BOLZAN,
Defendants.
/
______________________________________________
PLAINTIFF’S MEMORANDUM OF LAW IN OPPOSITION TO MOTION FOR PARTIAL SUMMARY JUDGMENT ON THE ISSUE OF LIQUIDATED DAMAGES UNDER COUNT I AND MOTION FOR SUMMARY JUDGMENT ON COUNT II FOR SPECIFIC PERFORMANCE
Plaintiff Global Digital Solutions, Inc. (“GDSI”) submits this memorandum of law in opposition to the Defendants’ “Motion for Partial Summary Judgment on the Issue of Liquidated Damages under Count I and Motion for Summary Judgment on Count II for Specific Performance” (“Motion”).
INTRODUCTION

The Motion widely misses the mark with respect to both of the grounds upon which it seeks summary judgment. First, the assertion that the Break-Up Fee in the Stock Purchase Agreement (“SPA”)1 constitutes an impermissible liquidated damages clause ignores the very nature of the provision. Unlike a liquidated damages clause—which by definition requires a breach of contract by the party against which the liquidated damages will be assessed—a breakup fee provision such as the
one in the SPA comes into play only in defined circumstances where a party walks away from an agreement without otherwise breaching it.

The Break-Up Fee was negotiated at arms’ length to address losses (such as opportunity costs) resulting from such a walk-away. It is not a liquidated damages provision and, thus, is entirely proper.

Second, the argument that the SPA cannot be specifically enforced because damages are an adequate remedy simply ignores the well-established law of Florida that, in circumstances involving closely-held corporations with no market valuation for their shares, just as is the case with Rontan, specific performance is an available remedy. That is all the more so when the stock sale at issue presented GDSI with the unique opportunity to own and operate Rontan, with the aim of increasing Rontan’s dominance into the North American market. Even more compelling is the fact that the SPA itself acknowledges that it may be subject to specific performance. Specific performance under these circumstances is unquestionably proper under Florida law.
ARGUMENT I. THE BREAK-UP FEE IS ENFORCEABLE
Defendants assert the Break-Up Fee in Section 9.2 constitutes an unlawful liquidated damages provision.

Their argument completely misses the mark.
Section 9.2. of the SPA, entitled “Effect of Termination,” provides for a “Break-Up Fee” in the following circumstances:
9.2. Effect of Termination.
9.2.1. If the Closing of the Transaction does not occur by reason of (i) the Sellers or Rontan consummating an Alternative Transaction or (ii) the Sellers terminating this Agreement without good reason, the Sellers shall, jointly and severally, on the closing date of such Alternative Transaction, pay to the Purchaser in immediately available funds an amount equal to fifteen percent (15%) of the sum of the following (a) the aggregate Purchase Price, plus (b) the Amount of Indebtedness of Rontan at the date of closing of the Alternative Transaction or termination, as the case may be, plus (c) the fair market value of the property identified in Disclosure Schedule 5.9.
It is a fundamental notion that liquidated damages are payable only in the event of breach of contract. The break-up fee in section 9.2 is not a liquidated damages provision because it is not predicated on a breach of the SPA. Instead, the break-up fee in the SPA is a traditional termination fee, which is payable even without a breach of the agreement.

Defendants build their entire argument by conflating two completely unrelated provisions of the SPA: (a) Section 9.2, which provides for payment of a termination fee even in the absence of a breach, and (b) Section 10.7, which spells the remedies out the available remedies in the event of breach. “Indeed, there is no reference in [Section 9.2] to damages, much less to liquidated damages.”
Anesthesia Healthcare Partners, Inc., v. Anesthesia Healthcare Solutions of North Florida, LLC, 2012 WL 13024036 at n.17 (N.D. Fla. 2012) (applying Georgia law).
The Defendants’ tortured reading of the SPA must be rejected and their motion for partial summary judgment denied.

A. The Break-Up Fee is not “Liquidated Damages” because it is payable where there is a “termination” without breach.
“In Florida, the law is well-settled that the parties to a contract may agree in advance on an amount to be paid or retained as liquidated damages if the contract is breached.”
Mineo v. Lakeside Village of Davie, LLC, 983 So.2d 20, 21 (Fla. 3d DCA 2008) (emphasis added) (citing Poinsettia Dairy Prods. v. Wessel Co., 123 Fla. 120, 166 So. 306, 309 (1936); S. Menhaden Co. v. How, 71 Fla. 128, 70 So. 1000, 1004 (1916)). In other words, liquidated damages are payable only in the event of a breach of contract.
Lefemine v. Baron, 573 So.2d 326, 328 (Fla. 1991)
In addition to the Break-Up Fee, the Sellers shall also pay the Purchaser’s actual costs and expenses (including reasonable legal fees) in connection with the negotiation, preparation, execution and delivery of this Agreement ....”It
is well settled that in Florida the parties to a contract may stipulate in advance to an amount to be paid or retained as liquidated damages in the event of a breach.”) (emphasis added).
While this proposition seems obvious, the necessary corollary to this rule is dispositive of the Defendants’ motion for summary judgment: A termination fee in a merger agreement is not a form of “liquidated damages” where the fee is payable without a breach. See
St. Jude Med., Inc. v. Medtronic, Inc., 536 N.W.2d 24, 28 (Minn.Ct.App.1995) (“A liquidated damages analysis is inappropriate here, however, because this case lacks the breach of contract necessary to invoke such analysis.”); see also Anesthesia Healthcare Partners, Inc., 2012 WL 13024036 at n.17 (“In this case, there is no indication, in the language of the Physician Agreement or otherwise, that the parties intended the direct service provision to provide the measure of damages for a breach of the restrictive covenants. ... In fact, by its terms, the provision contemplates there being no breach and thus no presumed damages. ... The provision simply provides the defendants an optional means by which to avoid enforcement of the restrictive covenants.”) (emphasis added).
A plain reading of the SPA indicates that the Break-Up applies only where the Sellers have not breached the contract; thus, the court must look elsewhere in the contract (or under the common law) to determine GDSI’s remedies for breach of the SPA. First, the Break-Up Fee is found in a section of the SPA entitled “Effect of Termination.” It is not in a section on remedies for breach. Remedies for breach are set forth in Section 10.7:
Injunction. ...[I]n the event of a breach of any provision of this Agreement, the aggrieved party or parties may elect to institute and prosecute proceedings in any court of competent jurisdiction to enforce specific performance or to enjoin the continuing breach of such provision without the requirement of posting a bond, as well as to obtain damages for breach of this Agreement.……consummates an Alternative Transaction, and where the Seller terminates “without good reason.” As discussed below, the trigger for “termination without good reason” means termination without a prior breach by a party to the agreement.
B. Section 9.1.2 makes it clear that the Break-Up Fee Does Not Apply where the Seller has breached
The “Effect of Termination” provision in Section 9.2 must be read in tandem with Section 9.1, entitled “Methods of Termination.” As relevant, Section 9.1 provides for termination:
9.1.1 by mutual consent of the Purchaser and Seller;
9.1.2 by the Purchaser or the Sellers if the Transaction is not consummated within twenty days of the delivery of the Opinion; {{provided that if any party has breached or defaulted with respect to its obligations under this Agreement on or before such date, such party may not terminate this Agreement pursuant to this Section}} 9.1.3, and each other party to this Agreement may at its option enforce the rights against such breaching or defaulting party and seek any remedies against such party, in either case as provided hereunder;
***
9.1.4 By the Purchaser or the Sellers, as the case may be, if any condition to closing as identified in Section 3 above is not satisfied prior to the Closing Date; or
9.1.5. By the Purchaser if the Sellers or Rontan enter into an Alternative Transaction.
SPA § 9.1.2 (emphasis added). As this section of the SPA makes explicit, the “Methods of Termination” listed in Section 9 assume that there has been no prior breach by the
3 Section 10.7 is titled “Injunction.” The SPA does not contain a boilerplate “cumulative remedies” provision.
SPA § 10.7 (emphasis added).
Second, by its terms, the Break-Up Fee is payable in two circumstances: where the Seller
consummates an Alternative Transaction, and where the Seller terminates “without good reason.” As discussed below, the trigger for “termination without good reason” means termination without a prior breach by a party to the agreement.
Payment of the Break-Up Fee under section 9.2., therefore, sets forth the “Effect of Termination” without that prior breach.
As explained in the Declaration of Matthew Kelley, this reading is consistent with the traditional “breakup fee” included in a merger or acquisition agreement involving a public company, which is designed to give the parties the option to walk away from a deal upon payment of the fee. (Ex. A; Kelley Decl at ?7.) It is typically payable in circumstances in which there has been no breach of the merger agreement. (Id. at ?7 & ?8.) In other words, it is not designed to compensate a non-breaching party for a breach by the other party and, by definition, is not a liquidated damages provision. (Id.) This was exactly the intent of the parties in negotiating the Break-Up Fee in the SPA. (Id. at ?9.)
C. The “Alternative Performance” Doctrine further supports the argument that the Break-Up Fee is payable even without a prior breach
Florida courts have recognized the doctrine of alternative performance. See, e.g., Bradley v. Health Coalition, Inc., 687 So.2d 329 (Fla. 3d DCA 1997) (superseded by statute on other grounds). Other jurisdictions are in accord. E.g., Minnick v. Clearwire U.S. LLC, 174 Wash.2d 443, 275 P.3d 1127, 1135 (2012) (en banc) (early termination fee in contract was alternative performance provisions and not liquidated damages: “In an alternative contract where one of the alternatives is a sum of money, the promisee is entitled to the sum of money even though the other alternative may be less onerous to the promisor.”). A termination without breach—but “without good reason”—would include situations in which the Sellers acted for their own convenience or changed their minds. As one court observed, payment of a Break-Up Fee is a form of alternative performance, completely unrelated to the question of breach. See St. Jude, supra.

As discussed above, the Minnesota court of appeals in St. Jude Medical refused to classify a breakup-fee clause as a liquidated damages provision. Instead, the court upheld the breakup-fee under the contractual theory of alternative performance:
the parties have agreed that either one of the two alternative performances is to be given by the promisor and received by the promisee as the agreed exchange and equivalent for the return performance rendered by the promisee .... even though one of the alternative performances is the payment of a liquidated sum of money.

D. The Break-Up Fee is Reasonable
While cases analyzing the reasonableness of the amount of “liquidated damages” recoverable are not controlling, the break-up fee under Section 9.2 is reasonable even under that analytical framework.
First, the Break-Up Fee was negotiated at arm’s length. The Letter of Intent signed in September 2015 provided for 20% breakup fee. (Ex. B; RONTAN00001.) The parties then signed an Addendum to the LOI that negotiated the fee down to 10%. (Ex. C; RONTAN00008.) The Break-Up Fee was again negotiated before the execution of the SPA. (Ex. D; GDSI- 00005832.) GDSI’s vice president of merger and acquisitions sent an email to Rontan’s transaction counsel on the eve of the execution of the SPA, in which he explicitly referenced the concession GDSI had made to complete the deal, including an adjustment to the Break-Up Fee:
Honestly, we gave you everything you asked for ..... We came down on the breakup fee from 20% down to 15%.

The St. Jude court quoted from Professor Williston on alternative performance contracts as follows: “A contract may give an option to one or both parties to either perform a specified act or make a payment. Although this form of contract cannot be used as a cover for the enforcement of a penalty, if on a true interpretation, it appears that it was intended to give a real option, that is, that it was conceived possible that at the time fixed for performance, either alternative might prove the more desirable, the contract will be enforced according to its terms.” 14 Williston on Contracts § 42:10 (4th ed.2004).
536 N.W.2d at 28.
(Ex. D; GDSI-00005832.) The fact that the Break-Up Fee was so extensively negotiated, and that it figured so prominently in the final allocation of risks and rewards under the SPA, weighs heavily in favor of its reasonableness. See Brazen v. Bell Atlantic Corp., 695 A.2d 43, 48-49 (Del. 1997) (“arms-length negotiations” weighed in favor of enforcement of $550 million termination fee).
Second, GDSI’s lost opportunities weigh in favor of enforcement if the requirements of section 9 are met. Mr. Jose Bolzan (the majority shareholder of Rontan), Mr. Maxamiliano (Rontan’s Chief Executive Officer), and Mr. Goncalves (Rontan’s former CEO), all traveled to Palm Beach over a period of nine months to negotiate GDSI’s acquisition of Rontan. (Ex. E) (DE 27-1; Declaration of Ross Trevino at ?5 through ?23.) As early as January 6, 2015, Mr. Maxamiliano wrote to GDSI’s CEO stating that “I am deeply committed to make the transaction happen...” (Ex. F; GDSI-00001256.) In deposition, Mr. Bolzan testified that Maxamiliano was not actually the CEO of Rontan, but that the Defendants deliberately held out Mr. Maxamiliano as CEO in order to “impress investors” like GDSI:
Q. Mr. Bolzan, did Maximiliano serve as the chief executive officer of Rontan?
A. Not legally. In order to be a member of the board or occupy a senior position, this would have to be formalized in our Articles of Incorporation, which it was not. He asked to insert himself into this role in order to interest clients. In Brazil, he was never legally the CEO. He simply represented himself to be such in order to impress investors.
(Ex. G; Jose Bolzan Depo. 78:14 – 78:23) (emphasis added). GDSI was impressed. It relied on those representations and negotiated with Rontan for over fourteen months, from January 2015 to March 2016, foregoing the pursuit of other opportunities.

In essence, the Defendants ask this court to create a bright-line rule that invalidates breakup fees over a certain dollar amount. As noted above, this argument ignores the distinction between liquidate damages for breach of contract and a breakup fee that is payable even in the absence of breach. But it also ignores the business realities of breakup fees in modern day acquisitions. Even where the purchase price reaches into billions of dollars, it is now common in the merger context to see termination fees as high as twenty percent. For example:
• 2011 proposed merger of AT&T and T-Mobile. According to the stock purchase agreement filed by AT&T with the SEC, AT&T agreed to acquire T- Mobile USA from Deutsche Telekom AG for a purchase price of $39 billion. In the event that AT&T did not close on the acquisition of T-Mobile, Deutsche Telekom was entitled to a breakup fee of $3 billion and certain spectrum rights. (Ex. H.)5 After encountering opposition from regulatory authorities, in December of 2011 AT&T announced that it was abandoning its bid to take over T-Mobile. AT&T said that it would “recognize a pretax accounting charge of $4 billion”— which includes the $3 billion breakup fee as well as spectrum rights worth another $1 billion. See AT&T, Inc. Form 8K (Nov. 21, 2011). (Ex. I.) In other words, the termination fee represented more than 10 percent of the $39 billion purchase price.
• 2012 Google, Inc. acquisition of mobile telephone maker, Motorola Mobility Holdings Inc. The merger closed in May 12 for $12.5 billion. However, had the transaction not closed, the merger agreement provided that Motorola was entitled to a termination fee of $2.5 billion if Google did not close, representing 20 percent of the purchase price. (Ex. J.)6
Termination fees in the amount of ten- or fifteen-percent are not limited to mergers and acquisitions. E.g., IOTC Air, LLC v. Bombardier Inc., 2012 WL 13013072 (S.D. Fla. 2012) ($4.9 million aircraft acquisition contract providing for breakup fee of 10%). Even Congress, by statute, has recognized a 15% breakup fee as reasonable for breach of a contract in connection
5 Stock Purchase Agreement by and between Deutsche Telekom AG and AT&T Inc. (Mar. 20, 2011), available at http://sec.gov/Archives/edgar/data/732717/000119312511072458/dex21.htm. 6 Agreement and Plan of Merger by and among Google Inc., RB98 Inc. and Motorola Mobility Holdings, Inc. (Aug. 15, 2011), available at http://sec.gov/Archives/edgar/data/1495569/000119312511225797/dex21.Degirmenci v. Sapphire-Fort Lauderdale, LLLP, 642 F.Supp.2d 1344, 1348-49 (S.D. Fla. 2009) (discussing a seller’s obligation under 15 U.S.C. §1703(d)(3) to provide notice of a 15% breakup in the event of breach of purchase contract). Courts also have upheld termination fees not as a percentage of the deal in question, but as a percentage of a company’s total capitalization. Brazen v. Bell Atlantic Corp., 695 A.2d 43, 48-49 (Del. 1997) ($550 million termination fee was reasonable where it represented 2% of party’s market
in the event Rontan walked away from the transaction without breaching the SPA. It is not a
liquidated damages provision which, by definition, is predicated on a breach of the agreement.
II. GDSI IS ENTITLED TO SPECIFIC PERFORMANCE
As their second argument for partial summary judgment, defendants assert that the SPA does not “fall within the narrow band of types of contracts for which the case law permits specific performance.” (Motion at 14.) Contrary to defendants’ argument, Florida law specifically allows the remedy of specific performance when the subject of the contract is the acquisition of stock in a closely-held corporation, the shares of which are not traded and do not
have a readily ascertainable value on a public market, as is the case here.

The acquisition of a company, and the concomitant right to operate the business, present a unique opportunity that is subject to specific performance. See In re IBP, Inc. Shareholders Litigation, 789 A.2d 14, 82 (Del. Chancery 2001). Thus, where the stock sale would result not just in the acquisition of a mere interest in a company, but in the acquisition of the entire business, there exists “a unique, non-replicable business opportunity” that may be enforced by equitable remedies. See, e.g., Allegheny Energy, Inc. v. DQE, Inc., 171 F.3d 153, 163 (3d Cir. 1999).
The fact that Rontan owns substantial real estate that would have been acquired by way of the stock sale further compels a finding that the acquisition presented a unique opportunity for GDSI and may be enforced through the remedy of specific performance. Keathley v. Larson, 348 So.2d 382, 384 (Fla. 2d DCA 1977). Despite the Defendants’ unsupported assertion to the contrary, (Motion at ?6), the acquisition included the transfer of “all real property owned, leased, [and] utilized in the conduct of Rontan’s Business,” (SPA § 5.9.) The exact real estate that
It is not disputed that Rontan is a closely-held corporation owned by the two Bolzan
brothers. (Rontan’s SUF at ¶ 2; Kelley Decl. at ¶ 10.) It is also not disputed that its shares are not traded publicly and that no value on a public market for the shares is readily available. (Kelley Decl. at ¶ 10.) Rontan is thus precisely the type of corporation with respect to which a share sale and purchase agreement such as the SPA may be subject to specific performance.
What is more, Rontan presented an opportunity for GDSI that it could not replicate. At the time
of the SPA, Rontan was the largest company of its kind in Latin America. (Rontan’s SUF at ¶ 3;
Kelley Decl. at ¶ 11.) GDSI intended that its acquisition of Rontan would allow it to expand its
business in the United States and beyond. (Kelley Decl. at ¶ 12.) The opportunity Rontan
presented GDSI was a unique one to use the combination of both companies to become one of
the largest players in the market for specialty vehicles not only Latin America and the United
States, but beyond. In re IBP, 789 A.2d at 83 (allowing specific performance because “the target
company is unique and will yield value of an unquantifiable nature, once combined with the acquiring company.

CONCLUSION
For the foregoing reasons, Defendants’ motion for partial summary judgment should be denied.
Dated: October 4, 2019 Respectfully submitted,
BOIES SCHILLER FLEXNER LLP
By: /s/ Carlos M. Sires Carlos M. Sires, Esq.
10 Further compelling denial of the Motion is the fact that section 10.7 of the SPA provides that “in the event of a breach of any provision of this Agreement, the aggrieved party or parties may elect to institute and prosecute proceedings in any court of competent jurisdiction to enforce specific performance or to enjoin the continuing breach of such provision without the requirement of posting a bond, as well as to obtain damages for breach of this Agreement.” Qantum Communications Corp. v. Star Broadcasting, Inc., 473 F.Supp.2d 1249, 1266 (S.D. Fla. 2007) (“Plaintiff is entitled to specific performance to enforce the agreement under the plain language of the Agreement.”)

(Florida Bar No. 319333)
James M. Grippando, Esq.
(Florida Bar No. 383015)
401 East Las Olas Blvd., Suite 1200 Fort Lauderdale, Florida 33301 Telephone: [phone] Facsimile: [phone] [e-mail] [e-mail]
William A. Isaacson, Esq. (pro hac vice to be submitted) 5301 Wisconsin Avenue, NW Suite 800
Washington, DC 20015 Telephone: [phone] Facsimile: [phone] [e-mail]
Attorneys for Global Digital Solutions, Inc.
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on October 4, 2019, a true and correct copy of the foregoing document was served via the CM/ECF System to the following counsel of record: Carlos F. Osorio, Esq., ([e-mail]), Warren Daniel Zuffuto, Esq., ([e-mail]), Evelyn Barroso, Esq., ([e-mail]), Osorio International, P.A., 175 S.W. 7th Street, Suite 1900, Miami, FL 33130.
By: /s/ Carlos M. Sires Carlos M. Sires, Esq.

NOTE

I removed some case studies that were not needed to understand the nature of the argument. To understand this document you should first read the MSJ filed by Rontan which is available in numerous posts.