      IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

 COMPOSECURE, L.L.C.,                  )
                                       )
     Plaintiff/Counterclaim Defendant, )
                                       )
     v.                                )              C.A. No. 12524-VCL
                                       )
 CARDUX, LLC f/k/a AFFLUENT CARD, LLC, )
                                       )
     Defendant/Counterclaim Plaintiff. )

                              REPORT ON REMAND

                             Date Submitted: May 9, 2019
                              Date Decided: June 5, 2019

Myron T. Steele, Berton W. Ashman, Jr., Andrew H. Sauder, POTTER ANDERSON &
CORROON LLP, Wilmington, Delaware; Steven M. Coren, KAUFMAN, COREN &
RESS, P.C., Philadelphia, Pennsylvania; Attorneys for Plaintiff/Counterclaim Defendant.

David J. Margules, Elizabeth A. Sloan, Jessica C. Watt, BALLARD SPAHR LLP,
Wilmington, Delaware; Attorneys for Defendant/Counterclaim Plaintiff.

LASTER, V.C.
       The Delaware Supreme Court remanded this case with instructions to determine

whether the Sales Agreement required special approvals under the Restricted Activities

Provision.1 This report finds that the Sales Agreement was not subject to the Restricted

Activities Provision because it did not require CompoSecure to expend more than $500,000

in any fiscal year.

       The Restricted Activities Provision called for the Board to adopt an annual budget

and an annual business plan. LLCA § 4.1(p). Except as set forth in the annual budget or

the annual business plan, CompoSecure could not undertake any action that fell within a

list of “Restricted Activities” without “the prior approval of the Board and Investors (and

during the Earnout Period, the Class A Majority) . . . .” Id. The list of eighteen “Restricted

Activities” included “enter[ing] into . . . any contract, agreement, arrangement or

understanding requiring the Company . . . to make expenditures in excess of $500,000

during any fiscal year, other than in the ordinary course of business consistent with past

practice . . . .” Id. § 4.1(p)(ix)(A).

       The Sales Agreement did not receive prior approval from the Board, the Investors,

or the Class A Majority. The evidence at trial established that all three groups in fact

supported the Sales Agreement and would have provided the formal approvals had anyone

flagged the issue. The vote of the Class A Majority was controlled by CompoSecure’s



       1
        CompoSecure, L.L.C. v. CardUX, LLC, --- A.3d ---, 2018 WL 5816740, at *2 (Del.
Nov. 7, 2018). Capitalized terms used in this decision, unless defined herein, have the same
meaning as in the Delaware Supreme Court’s decision. “LLCA” refers to the LLC
Agreement. “SA” refers to the Sales Agreement.
CEO, Michelle Logan; she participated in the negotiations over the Sales Agreement,

signed it on behalf of CompoSecure, and supported it. The vote of the Investors was

controlled by a private equity firm; Mitchell Hollin represented the firm, negotiated the

final terms of the Sales Agreement, and supported it. The Board was briefed on the Sales

Agreement and supported it. The Board members included Logan and her father as well as

Hollin and one of his fellow managing directors from the private equity firm. To reiterate,

the only reason that the formal approvals were not obtained is because no one focused on

them at the time. See CompoSecure, L.L.C. v. CardUX, LLC (Trial Op.), 2018 WL 660178,

at *6–8, *13–14 (Del. Ch. Feb. 1, 2018).

       After the parties signed the Sales Agreement, everyone treated it as valid. That

changed only after CompoSecure accepted a major order—the Amazon Sale—that

triggered a multi-million-dollar commission for CardUX. At that point, CompoSecure

began coming up with reasons not to pay. See id. at *16, *18. After hiring litigation counsel,

CompoSecure asserted for the first time that the Sales Agreement had never received the

approvals required by the LLC Agreement. Id. at *18.

       The Sales Agreement did not require prior approvals under the Restricted Activities

Provision because it did not require expenditures of more than $500,000 in any fiscal year.

When analyzing a provision in an LLC agreement, “a court applies the same principles that

are used when construing and interpreting other contracts.” Godden v. Franco, 2018 WL

3998431, at *8 (Del. Ch. Aug. 21, 2018). “When interpreting a contract, the role of a court

is to effectuate the parties’ intent.” Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d

728, 739 (Del. 2006). Absent ambiguity, the court “will give priority to the parties’

                                              2
intentions as reflected in the four corners of the agreement, construing the agreement as a

whole and giving effect to all its provisions.” Salamone v. Gorman, 106 A.3d 354, 368

(Del. 2014) (internal quotation marks omitted). The “contract’s construction should be that

which would be understood by an objective, reasonable third party.” Id. at 367–68 (internal

quotation marks omitted). The contract’s “terms themselves will be controlling when they

establish the parties’ common meaning so that a reasonable person in the position of either

party would have no expectations inconsistent with the contract language.” Eagle Indus.,

Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997). A court will

“construe the contract in accordance with that plain meaning and will not resort to extrinsic

evidence to determine the parties’ intentions.” BLG Hldgs. LLC v. enXco LFG Hldg., LLC,

41 A.3d 410, 414 (Del. 2012). “To be ambiguous, a disputed contract term must be fairly

or reasonably susceptible to more than one meaning.” Alta Berkeley VI C.V. v. Omneon,

Inc., 41 A.3d 381, 385 (Del. 2012).

       The operative term in the Restricted Activities Provision is “requiring.” That verb

is a commonly used word with a clear meaning. Something required is necessary or

essential, and a requirement is something that must take place.2 In the context of the



       2
         See, e.g., Merriam-Webster, https://www.merriam-webster.com/dictionary (last
visited May 21, 2019) (defining “require” as “to demand as necessary or essential,” and
“requirement” as “something essential to the existence or occurrence of something else”);
Requirement, BLACK’S LAW DICTIONARY (10th ed. 2014) (“Something that must be done
because of a law or rule; something legally imposed, called for, or demanded; an imperative
command <building requirements specified in the Americans with Disabilities Act>”;
“Something that someone needs or asks for <the new telephone system meets all our
requirements>”; “Something, such as good test results, that an employer, university, etc.
sets as a necessary qualification; a requisite or essential condition <fulfilling the
                                             3
Restricted Activities Provision, a contract “requiring the Company . . . to make

expenditures in excess of $500,000 during any fiscal year” is a contract that mandates

spending in that amount, without any contingencies, conditions, or optionality. LLCA §

4.1(p)(ix)(A).

       The Sales Agreement only required CompoSecure to make two expenditures: (i) an

annual expense reimbursement capped at $20,000 and (ii) a commission advance of

$10,000 per month during the first fifteen months. SA §§ 4.2(a), 6.2(a). The Sales

Agreement thus required total expenditures falling well below the threshold in the

Restricted Activities Provision.

       CompoSecure claims that the Sales Agreement required CompoSecure to pay

commissions and points out that the commission for the Amazon Sale exceeds $500,000.

It is true that the Sales Agreement contemplated commissions, but any payment obligation

was doubly conditional. CompoSecure only would have an obligation to pay a commission

if two contingencies were met. First, an “Approved Prospect” would have to place an order.

Second, CompoSecure would have to accept the order.

       The first condition—receipt of an order from an Approved Prospect—meant that

neither CardUX nor CompoSecure could unilaterally cause any commission payment to be




requirements for college admission>”; “The act of establishing something as a need or
necessity; a demand <the requirement by management that no children under 10 be allowed
at our workplace>”); Require, BLACK’S LAW DICTIONARY (5th ed. 1979) (“To direct,
order, demand, instruct, command, claim, compel, request, need, exact”; “To be in need
of”; “To ask for authoritatively or imperatively”).

                                            4
required. Because of the second condition, CompoSecure could unilaterally block any

commission from being due, but neither CardUX nor CompoSecure could single-handedly

cause a commission to be due. Whether anyone placed an order was an eventuality entirely

within the control of the third parties who might order cards, and only orders placed by

third parties found on the list of Approved Prospects could satisfy the first condition.

Absent an order from an Approved Prospect, CompoSecure would never be required to

pay a commission. The existence of the Sales Agreement, standing alone, did not require a

commission payment.

       The second condition—a decision by CompoSecure to accept the order—gave

CompoSecure the ability to determine unilaterally whether it would ever be required to pay

a commission. Section 5.1 of the Sales Agreement specified that “[a]ll purchase orders

solicited by [CardUX] from Approved Prospects are subject to approval, rejection or

modification by CompoSecure pursuant to Section 5.2.” Section 5.2 stated: “CompoSecure

reserves the right, in its sole discretion, to: (a) accept, or decline to accept, any purchase

order for Products received from any Person . . . .” CompoSecure undertook only to “review

proposed projects and purchase orders submitted through [CardUX] consistent with the

manner in which it conducts its business in the ordinary course.” Id. § 5.2. CardUX

acknowledged in the same provision that “CompoSecure’s exercise of discretion may result




                                              5
in no Commission owed, or a reduction or delay in the payment of Commission owed, to

[CardUX] under this Agreement.”3

      Because of the second condition, CompoSecure could never be required to pay a

commission unless CompoSecure determined that the order from an Approved Prospect

provided sufficient value to CompoSecure to warrant accepting the order and making the

commission payment. See Trial Op., 2018 WL 660178, at *37 (“CardUX receives

compensation only if CompoSecure determines that a sale is beneficial.”). CompoSecure

might decline an order for myriad potential business reasons. An order might seek

discounts that would not be sufficiently profitable for CompoSecure. Or an order might

require product changes or increased capacity that would necessitate additional investment

by CompoSecure and distract from other opportunities. If CompoSecure declined an order,

which it could do in its “sole discretion,” then CompoSecure would not be required to make

any payment to CardUX.

      The Amazon Sale illustrates these principles. The Amazon Sale was an extremely

large order which required that CompoSecure ramp up its manufacturing capacity. The

order also came through Chase, and CompoSecure was trying to develop other channels to



      3
         Id. CompoSecure argues that because of its relationship with Chase, it would have
been contrary to the ordinary course of its business to reject the order that led to the
Amazon Sale. Section 5.2 of the Sales Agreement required CompoSecure to “review” an
order in a manner consistent with how CompoSecure conducted its business in the ordinary
course. The ordinary-course requirement covered the review process, not the acceptance
of orders. CardUX introduced this provision out of concern that CompoSecure might delay
its review of an order to take it outside the contractual payment period. CompoSecure
reserved for itself the “sole discretion” to reject any order it wished.

                                            6
reduce the percentage of cards that CompoSecure sold through Chase. Because of the

concentration issue, CompoSecure initially attempted to steer the Amazon business away

from Chase to another issuer. When that effort failed, CompoSecure’s management team

decided that the order was so profitable that it was worth accepting, even though it required

increased capacity, even though it came through Chase, and even though it triggered

CardUX’s right to a commission. As Logan told Hollin, “Oh boy Mitchell . . . . I know that

we are trying to decrease the customer concentration but it’s hard to say no to 70% margin

business.” Id. at *15.

       When the parties entered into the Sales Agreement, CompoSecure was not required

to pay any commissions to CardUX, and it certainly was not required to pay a commission

for the Amazon Sale. To reiterate, CompoSecure did not have any obligation to pay

commissions to CardUX unless two conditions were met: first, an order from an Approved

Prospect, and second, a decision by CompoSecure to accept that order. Both conditions

were beyond CardUX’s control. The first was a third-party decision; the second rested in

CompoSecure’s sole discretion. For the Amazon Sale, the first contingency was not

satisfied until CompoSecure received the order for the Amazon Sale. The second

contingency was not satisfied until CompoSecure decided to accept the order.

       To argue for the opposite result, CompoSecure cites documents from the early

phases of negotiations over the Sales Agreement when the parties were discussing different

concepts, such as a fully outsourced sales function. In those documents, principals of

CardUX made back-of-the-envelope projections about the potential revenue opportunity,

which they viewed as large, and which (if achieved) could have resulted in commission

                                             7
payments of more than $500,000 per year. Those documents are preliminary, speculative,

and remote from the final Sales Agreement, both temporally and conceptually. Regardless,

they could not create a requirement that CompoSecure make any commission payments.

They at most represented one side’s expectations during an early phase of the negotiations.

Projections are predictions, not requirements. Under the Sales Agreement, CompoSecure’s

obligation to pay a commission did not depend on projections. It only would arise if (i) an

Approved Prospect placed an order that (ii) CompoSecure decided to accept.4




       4
         CompoSecure formally disclaims any effort to turn expectations into requirements,
but its briefs belie that assertion. See Dkt. 186 at 6 (contending that “the parties reasonably
expected” commissions exceeding $500,000 in any fiscal year); id. at 45 (asserting that
“the surrounding circumstances confirm that commissions in excess of $500,000 were
contemplated by the Sales Agreement in any fiscal year” (emphasis added)); see also Dkt.
194 at 10 (“But once the Amazon Sale was accepted, the obligation to pay the commission
was established as required under Section 6.1 of the agreement.” (first emphasis added)).

       CompoSecure argued tersely and for the first time in its reply on remand that “the
Amazon Sale was itself a Restricted Activity” because it was an “arrangement” requiring
CompoSecure to pay a commission in excess of $500,000. Dkt. 194 at 11. Addressing this
issue would exceed the scope of the remand, which directed “the trial court to determine
whether the Sales Agreement is a Restricted Activity and to make any necessary related
determinations.” CompoSecure, 2018 WL 5816740, at *2. Although the Delaware
Supreme Court authorized this court “to consider any ancillary issues that arise on
remand,” it did not authorize the consideration of new, independent bases to challenge a
commission payment to CardUX. See id. at *12 n.76.

       Assuming for the sake of argument that the remand could encompass
CompoSecure’s new contention, I would reject it. The Amazon Sale standing alone was
not an “arrangement” requiring the payment of a commission. The Amazon Sale was an
order that triggered a commission under a different arrangement: the contractual
arrangement found in the Sales Agreement. It is possible that the Amazon Sale might
qualify in its own right as a Restricted Activity, but if there were problems under the
Restricted Activities Provision, then those problems would infect the Amazon Sale as a
whole. In that event, CompoSecure would have to approach Amazon and invalidate the
sale. CompoSecure could not treat the Amazon Sale as valid for all purposes except for the
                                              8
       CompoSecure also cites the ThoughtWorks decision, in which a corporation’s

charter contained a restricted-activities provision requiring “the consent of a majority of

the preferred stockholders if it enters into any contractual arrangement providing for the

payment of $500,000 or more per year by either party if the transaction is either (1) outside

the ordinary course of business or (2) not contemplated by the corporation’s annual

budget.” ThoughtWorks, Inc. v. SV Inv. P’rs, 902 A.2d 745, 755 (Del. Ch. 2006). The

corporation entered into a $10 million line of credit without obtaining the preferred

stockholders’ consent. The corporation argued that the line of credit did not call for any

“payment” by ThoughtWorks, because it was only a line of credit. This court disagreed,

stressing that the restricted-activities provision was not limited to payments but rather

encompassed “any contractual arrangement providing for the payment of $500,000 or

more per year by either party thereto.” Id. at 755 n.39. The court explained that this

provision encompassed the contractual arrangement embodied in a line of credit:

       A line of credit is a contractual arrangement with a financial institution
       whereby a credit facility is set up so that, at any time, the company can
       borrow money, which in this case was up to $10 million. Thus, to obtain this
       line of credit, ThoughtWorks would have to enter into “a contractual
       arrangement” with a bank that “provided for the payment of over $500,000
       per year by either party.”




commission payment due to CardUX. Conversely, if the Amazon Sale was valid for
purposes of CompoSecure’s relationship with Amazon, then it should be valid for purposes
of the commission payment to CardUX. CompoSecure is not suggesting that the Amazon
Sale as a whole was invalid. CompoSecure cannot have it both ways.

                                             9
Id. The court also held that the line of credit did not fall within either of the exceptions to

the approval requirement. Id. at 755–57.

       As CompoSecure reads the case, ThoughtWorks shows that a restricted-activities

provision can extend to an arrangement that does not require an immediate payment but

rather contemplates one in the future. CompoSecure argues that under its interpretation of

ThoughtWorks, the Restricted Activities Provision should apply to the Sales Agreement,

because the Sales Agreement contemplated future commission payments if the necessary

conditions were met.

       This argument is not persuasive. As a textual matter, it ignores the different

language in the two restricted-activities provisions. In ThoughtWorks, the operative

language covered any “contractual arrangement providing for the payment of $500,000 or

more per year.” In this case, the operative language covers “any contract . . . requiring the

Company . . . to make expenditures in excess of $500,000 during any fiscal year.” The

latter is a narrower standard than the former, with the provision in this case “requiring” the

expenditure rather than more broadly encompassing an “arrangement providing for” the

expenditure. The ThoughtWorks court cited the relative breadth of the provision it

interpreted when holding that it applied to the revolving line of credit. See id. at 755.

       As a contextual matter, CompoSecure’s reliance on ThoughtWorks ignores a key

structural difference between the revolving line of credit and the Sales Agreement. Once

ThoughtWorks entered into the line of credit, its management team could draw on it at will,

creating the obligation that the restricted-activities provision protected against. Because it

was an open line of credit, management could draw on the line, pay it back, draw on it

                                              10
again, and continue repeating that process, each time acting unilaterally. For purposes of

the restricted-activities provision, entering into the credit line created an unimpeded path

to the financial obligation that the restricted-activities provision sought to limit.

       The potential obligation to pay commissions under the Sales Agreement is different.

Even after CompoSecure entered into the Sales Agreement, CompoSecure would not be

required to make any commission payments based on unilateral action by either CardUX

or CompoSecure. A commission payment only would become due if (i) an Approved

Prospect placed an order and (ii) CompoSecure chose to accept it in the exercise of its sole

discretion. CardUX had no ability to force a payment, and CompoSecure remained

protected by its sole-discretion approval right. Going forward, CompoSecure could decide

whether or not to sell to an Approved Prospect, and it only would need to pay a commission

if CompoSecure determined that the sale was sufficiently beneficial to warrant accepting,

taking into account the obligation to make the commission payment that would arise if

CompoSecure accepted.

       Given the different structures of the two contracts, the analysis of the line of credit

in ThoughtWorks is not a persuasive precedent for the Sales Agreement in this case.

Instead, the contrast with ThoughtWorks helps illustrate why applying the Restricted

Activities Provision would be inconsistent with its purpose. In ThoughtWorks, the

management team’s interest in using the company’s cash to run its business ran contrary

to the preferred stockholders’ desire to have that cash used to redeem their shares. The

management team entered into the line of credit because it provided a source of operating

cash that would not increase the company’s redemption obligation, since the increased cash

                                              11
would be offset by the increased debt. The restricted-activities provision gave the preferred

the ability to block significant decisions where management’s interests might diverge from

the preferred’s. Applying the restricted-activities provision to the revolving line of credit

fulfilled the provision’s purpose.

       In the current case, the Restricted Activities Provision theoretically serves a similar

purpose by ensuring that the management team cannot commit CompoSecure to make a

major expenditure without the approval of the Investors, the Class A Majority, and the

Board. But that purpose is not implicated by the facts of this case, where every one of those

constituencies was involved in the negotiation of the Sales Agreement and wanted to go

forward with the contract. CompoSecure’s decision to enter into the Sales Agreement was

the antithesis of a management team acting unilaterally to commit CompoSecure to a major

expenditure without the oversight of its owners. CompoSecure’s management team and its

owners were aligned on and uniformly supported the decision to enter into the Sales

Agreement. Everyone whom the Restricted Activities Provision was designed to protect

had the opportunity to protect themselves at the time through their direct involvement in

the transaction. They also had the ability to protect themselves on an ongoing basis by

causing CompoSecure to reject any order from an Approved Prospect that was not

advantageous to CompoSecure. Having chosen to go forward with the Sales Agreement,

and having chosen to go forward with the Amazon Sale, CompoSecure’s management team

and its owners are now invoking the Restricted Activities Provision in an effort to enable

their current selves to escape the consequences of actions taken by their former selves.



                                             12
       Because the Sales Agreement did not fall within the scope of the Restricted

Activities Provision, that section of the LLC Agreement did not require any additional

approvals, and it was not void because of a failure to obtain them. Given the outcome on

this question, this report does not reach the other issues raised or arguments advanced by

the parties.




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