      IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

                                      )
ITG BRANDS, LLC,                      )
                       Plaintiff,     )
                                      )
      v.                              )
                                      )          C.A. No. 2017-0129-AGB
REYNOLDS AMERICAN, INC. and           )
R.J. REYNOLDS TOBACCO                 )
COMPANY,                              )
                                      )
                                      )
                       Defendants.    )



                       MEMORANDUM OPINION

                    Date Submitted: September 11, 2017
                     Date Decided: November 30, 2017

Stephen C. Norman, Matthew F. Davis, and Matthew R. Dreyfuss, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Robert J. Brookhiser and
Elizabeth B. McCallum, BAKER & HOSTETLER LLP, Washington, DC; Attorneys
for Plaintiff.

Gregory P. Williams, Rudolf Koch, Robert L. Burns, and Matthew D. Perri,
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Peter J.
Biersteker and C. Kevin Marshall, JONES DAY, Washington, DC; Attorneys for
Defendants.




BOUCHARD, C.
      In the late 1990’s, several major tobacco manufacturers in the United States

entered into agreements with each of the fifty states in response to claims concerning

the health risks of smoking. They first entered into separate agreements with four

states (Florida, Minnesota, Mississippi, and Texas) before entering into a Master

Settlement Agreement governing the remaining forty-six states. Under each of these

agreements, the tobacco manufacturers are required to make annual payments based

on their volume of tobacco product sales in the United States in the year to which

the payment relates.

      The Master Settlement Agreement prohibits a party from transferring any of

its cigarette products unless the transferee agrees to assume that party’s obligations

under the Master Settlement Agreement before the transfer occurs. The agreements

with the other four states (the “Previously Settled States” or “PSS”) that were entered

into earlier do not contain a similar transfer provision.

      In July 2014, ITG Brands, LLC entered into an Asset Purchase Agreement to

acquire for approximately $7.1 billion four cigarette brands owned by R.J. Reynolds

Tobacco Company (“Reynolds Tobacco”), a wholly-owned subsidiary of Reynolds

American, Inc. (“Reynolds American”) (together, “Reynolds”). To ensure that ITG

Brands would assume Reynolds Tobacco’s obligations to the Previously Settled

States as of the closing, in particular its annual payment obligations, the Asset

Purchase Agreement requires that ITG Brands “use its reasonable best efforts” to

                                           1
reach agreements with those states with respect to the four cigarette brands that ITG

Brands contracted to acquire, as follows:

         [ITG Brands] shall use its reasonable best efforts to reach agreements
         with each of the Previously Settled States, by which [ITG Brands] will
         assume, as of the Closing, the obligations of a Settling Defendant under
         the PSS Agreement with each such State, with respect to the Acquired
         Tobacco Cigarette Brands, on the same basis as the Settling Defendants
         prior to the Closing.1

         The ITG Brands-Reynolds transaction closed on June 12, 2015 (the

“Closing”). As of the Closing, however, ITG Brands had not reached an agreement

to assume Reynolds Tobacco’s obligations under its settlement agreement with

Florida. Reynolds Tobacco and ITG Brands are now embroiled in litigation in

Florida state court where Florida is seeking to hold both Reynolds Tobacco and ITG

Brands accountable for annual payments of approximately $30 million associated

with post-Closing sales of the four cigarette brands that ITG Brands purchased. ITG

Brands responded by suing Reynolds in this Court, invoking the Delaware exclusive

forum provision in the Asset Purchase Agreement.

         The parties have filed cross-motions for partial judgment on the pleadings

over whether ITG Brands’ obligation to use its reasonable best efforts to reach an

agreement with Florida terminated at the Closing. The resolution of this question




1
    Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) F-2 § 2.2.

                                             2
turns on the meaning of the last four words of the provision quoted above: “prior to

the Closing.”

      ITG Brands contends that this phrase defines the temporal scope of its

obligation to use its reasonable best efforts to reach an agreement with Florida to

assume Reynolds Tobacco’s obligations, and that this obligation terminated when

the ITG Brands-Reynolds transaction closed in June 2015. Thus, according to ITG

Brands, it is off the hook for making payments to Florida for post-Closing sales of

the four cigarette brands it acquired even though it received (and continues to

receive) the benefit of the sales to which those payments relate.

      Reynolds contends that “prior to the Closing” as used in the foregoing

provision defines the nature of the obligations that ITG Brands agreed to assume,

i.e., the same obligations Reynolds Tobacco owed to Florida “prior to the Closing.”

Thus, according to Reynolds, ITG Brands’ obligation to use its reasonable best

efforts did not terminate at the Closing and continues until ITG Brands actually has

made reasonable best efforts to assume the annual payment obligations for post-

Closing sales of the four cigarette brands it acquired from Reynolds.

      For the reasons explained below, I find that Reynolds’ interpretation is

supported by the plain language of the Asset Purchase Agreement and that ITG

Brands’ interpretation is not. Accordingly, Reynolds’ motion for partial judgment

on the pleadings is granted, and ITG Brands’ cross-motion is denied.

                                          3
I.    BACKGROUND

      Unless noted otherwise, the facts in this opinion are drawn from the

allegations in the Verified Complaint that are admitted in defendants’ Answer and

Verified Counterclaims and documents incorporated therein.2 Any additional facts

are either not subject to reasonable dispute or subject to judicial notice.

      A.     Reynolds Tobacco and Other Tobacco Manufacturers Enter into
             Settlement Agreements with the States
      In the mid-1990s, a number of states sued Reynolds Tobacco, Lorillard

Tobacco Company, and other large tobacco manufacturers for publicly

misrepresenting the addictiveness and health risks of smoking. In 1997 and 1998,

Reynolds Tobacco, Lorillard Tobacco Company, and other manufacturers (the

“Settling Defendants”) entered into separate settlement agreements with four states:

Florida, Minnesota, Mississippi, and Texas (as defined above, the “Previously

Settled States” or “PSS”). Reynolds Tobacco’s 1997 settlement agreement with

Florida is referred to hereafter as the “Florida Settlement Agreement.” In November

1998, Reynolds Tobacco and other tobacco manufacturers entered into a Master




2
  See OSI Sys., Inc. v. Instrumentarium Corp., 892 A.2d 1086, 1090 (Del. Ch. 2006)
(“When there are cross-motions for judgment on the pleadings, the court . . . may consider
the unambiguous terms of exhibits attached to the pleadings, including
those incorporated by reference.”).


                                            4
Settlement Agreement (the “Master Settlement Agreement”) governing the

remaining forty-six states.

         In the Florida Settlement Agreement, the Settling Defendants collectively

agreed to pay Florida an initial amount of $750 million, followed by annual

payments.3 Each Settling Defendant’s annual payments are calculated from a base

amount “pro rata in proportion equal to its respective Market Share” for that year.4

The Florida Settlement Agreement and the other PSS settlement agreements have no

provisions requiring the assumption of settlement payment obligations upon the

transfer of cigarette brands, nor is there any mechanism for a transferee to join those

agreements.

         Like the PSS settlement agreements, the Master Settlement Agreement

requires that the manufacturers make annual payments based on their volume of

sales in the year to which the payment relates.5          Unlike the PSS settlement

agreements, the Master Settlement Agreement provides in Section XVIII(c) that a

party may not transfer any of its products covered by the agreement to a nonparty,

unless the nonparty assumes the party’s obligations under the Master Settlement

Agreement before the transfer occurs:


3
    Compl. (Dkt. 1) Ex. 4. §§ II.B.1-3.
4
    Compl. (Dkt. 1) Ex. 4 § II.B.3; 1998 Amend. § 7.
5
 Defs.’ Answer and Verified Countercl. (hereafter, “Answer”) (Dkt. 30) ¶ 26; Compl. (Dkt.
1) Ex. 5 § IX(c).

                                             5
         No Original Participating Manufacturer may sell or otherwise transfer
         or permit the sale or transfer of any of its Cigarette brands, Brand
         Names, Cigarette product formulas or Cigarette businesses . . . to any
         person or entity unless such person or entity is an Original Participating
         Manufacturer or prior to the sale or acquisition agrees to assume the
         obligations of an Original Participating Manufacturer with respect to
         such Cigarette brands, Brand Names, Cigarette product formulas or
         businesses.6

         B.     The Reynolds-Lorillard Merger and Asset Purchase Agreement

         On July 15, 2014, Reynolds American, the parent of Reynolds Tobacco, and

Lorillard, Inc., the parent of Lorillard Tobacco Company, entered into a merger

agreement. To facilitate regulatory approval of the merger, Reynolds American and

ITG Brands entered into an Asset Purchase Agreement dated as of July 15, 2014

(“Asset Purchase Agreement”), in which Reynolds American agreed to sell four

cigarette brands (Winston, Salem, Kool, and Maverick) (the “Acquired Tobacco

Cigarette Brands”) to ITG Brands for approximately $7.1 billion. Both transactions

closed on June 12, 2015 (as defined above, the “Closing”).

         The Asset Purchase Agreement provides that ITG Brands will assume

liabilities under the Master Settlement Agreement and the PSS settlement

agreements. The terms for doing so are detailed in an exhibit to the Asset Purchase




6
    Compl. (Dkt. 1) Ex. 5 § XVIII(c).

                                             6
Agreement entitled “Agreed Assumption Terms,” which is part of the Asset

Purchase Agreement.7

         With respect to the Master Settlement Agreement, Section 2.1 of the Agreed

Assumption Terms provides that “[a]s required by MSA § XVIII(c), [ITG Brands]

shall assume, as of the Closing, the obligations of an [Original Participating

Manufacturer] with respect to all of the Acquired Tobacco Cigarette Brands.”8 With

respect to the PSS settlement agreements, Section 2.2 of the Agreed Assumption

Terms imposes an obligation on ITG Brands to use its “reasonable best efforts” to

reach agreements with each of the Previously Settled States, as follows:

         [ITG Brands], with the assistance and cooperation of [Reynolds
         American] and Lorillard in communications and negotiations as
         required by the Agreement, shall use its reasonable best efforts to reach
         agreements with each of the Previously Settled States, by which [ITG
         Brands] will assume, as of the Closing, the obligations of a Settling
         Defendant under the PSS Agreement with each such State, with respect
         to the Acquired Tobacco Cigarette Brands, on the same basis as the
         Settling Defendants prior to the Closing. Provided, however, that such
         agreements shall include terms providing either that any direct-pay
         statute (also known as an equity-fee law or NPM-fee law) of a
         Previously Settled State does not apply to the Acquired Tobacco
         Cigarette Brands or that, if [ITG Brands] is required to make payments
         with respect to Acquired Tobacco Cigarette Brands under a direct-pay
         statute (or any distributor or other party is required to make such
         payments with respect to the Acquired Tobacco Cigarette Brands),




7
  Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) A-2 (defining the term “Agreement”
to include the Asset Purchase Agreement and its “Exhibits”).
8
    Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) F-2 § 2.1.

                                             7
         [ITG Brands] will receive a credit against otherwise due payments
         under the PSS settlement equal to the full payments made.9

         The term “direct-pay statute” in the second sentence of Section 2.2 refers to

statutes that impose fees on cigarette sales by tobacco manufacturers that have not

entered into a settlement agreement with the state. Three of the Previously Settled

States (Minnesota, Mississippi, and Texas) have direct-pay statutes.10 Florida does

not. One purpose of the direct-pay statutes is to compensate the state for the costs

attributable to cigarette use.11

         The Agreed Assumption Terms are addressed in the body of the Asset

Purchase Agreement in Sections 6.19 and 6.20. Both provisions provide that the

duties specified in the Agreed Assumption Terms apply “both before and after the

Closing”:

          “As soon as practicable after the date of this Agreement, and both
           before and after the Closing, each of the Parties shall . . . make all
           such communications with and provide all such information to . . .
           the States . . . and take all such other steps . . . as are necessary

9
    Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) F-2 § 2.2.
10
  See Minn. Stat. § 297F.24, Miss. Code. Ann. § 27-70-5, Texas Health and Safety Code
§ 161.603.
11
   See Minn. Stat. Ann. § 297F.24 (“The purpose of this fee is to: (1) ensure that
manufacturers of nonsettlement cigarettes pay fees to the state that are comparable to costs
attributable to the use of the cigarettes . . .”); Miss. Code. Ann. § 27-70-1 (“The purpose of
this chapter is to . . . [p]rotect the tobacco settlement agreement, and funding . . . for
programs that are funded wholly or partly by payments to this state under the tobacco
settlement agreement . . .”); Tex. Health & Safety Code Ann. § 161.601 (“The purpose of
this subchapter is to: (1) recover health care costs to the state imposed by non-settling
manufacturers . . .”).

                                              8
                and/or expedient for the purposes of . . . obtaining the agreement as
                necessary of the States . . . to the Agreed Assumption Terms.”12

            “. . . each of the Parties undertakes that from and after the date of
             this Agreement and both before and after the Closing it shall . . .
             adhere fully to and not deviate in any respect from the Agreed
             Assumption Terms including in any communications with any of the
             States . . .”13

            “Each of [ITG Brands] and [Reynolds American] further undertakes
             from and after the Closing, to take . . . all such steps as are necessary
             or expedient . . . to cause the Agreed Assumption Terms, as
             applicable, to become fully effective and binding on each of the
             States.”14

           C.      ITG Brands’ Efforts to Join the Settlement Agreements
           On July 15, 2014, ITG Brands, Reynolds Tobacco, and Lorillard Tobacco

Company contacted the Attorneys General of all fifty states, informing them that,

with respect to the transferred brands, ITG Brands would assume the obligations of

an Original Participating Manufacturer under the Master Settlement Agreement and

would attempt to join the PSS settlement agreements in Mississippi, Florida, Texas,

and Minnesota.15

           In June 2015, ITG Brands joined the Mississippi settlement agreement.16




12
     Compl. (Dkt. 1). Ex. 1 (Asset Purchase Agreement) § 6.19 (emphasis added).
13
     Id. § 6.20 (emphasis added).
14
     Id.
15
     Answer (Dkt. 30) ¶ 37; Compl. (Dkt. 1) Ex. 6.
16
     Answer (Dkt. 30) ¶ 39; Compl. (Dkt. 1) Ex. 8.

                                                9
         On June 8, 2015, ITG Brands sent letters to Florida, Texas, and Minnesota,

indicating its willingness to join the PSS settlement agreements governing those

states.17 In its letters to Texas and Minnesota, ITG Brands stated that if no joinder

was in place when the Closing occurred, ITG Brands would make statutory

payments on the Acquired Tobacco Cigarette Brands from that point forward.18 ITG

Brands did not join the Texas and Minnesota settlement agreements before the

Closing, but alleges that it has been making statutory payments to Texas and

Minnesota since then.19

         ITG Brands did not join the Florida Settlement Agreement before the Closing

and has made no payments to Florida since it purchased the Acquired Tobacco

Cigarette Brands. In December 2015, about six months after the Closing, Florida

and ITG Brands discussed the possibility of ITG Brands joining the Florida

Settlement Agreement, but the parties did not reach an agreement.20 On January 11,

2017, representatives from ITG Brands and Reynolds met with Florida to “discuss

the potential resolution of the payment issues under the Florida Settlement

Agreement,” but those meetings were unsuccessful.21


17
     Answer (Dkt. 30) ¶ 42; Compl. (Dkt. 1) Exs. 9, 10, 11.
18
     Answer (Dkt. 30) ¶ 42; Compl. (Dkt. 1) Exs. 10, 11.
19
     Compl. (Dkt. 1) ¶¶ 42-43, 45.
20
     Compl. (Dkt. 1) Ex. 14.
21
     Compl. (Dkt. 1) Ex. 15.

                                             10
          Reynolds Tobacco is a defendant in a Florida state court action that was filed

by the state of Florida. On January 18, 2017, Florida filed a motion seeking to join

ITG Brands as a defendant and to enforce the Florida Settlement Agreement against

both Reynolds Tobacco and ITG Brands to recover annual payments for post-

Closing sales of the Acquired Tobacco Cigarette Brands.22 According to the motion,

Florida “is presently owed more than $45 million and will continue to suffer annual

losses of approximately $30 million absent the Court’s enforcement of the

Settlement Agreement it approved and adopted more than 20 years ago.”23 The

motion also states that “Reynolds made its proportionate share of the annual

payments under the terms of the Settlement Agreement for nearly two decades, until

recently when it sold [four] of its most iconic cigarette brands to ITG for $7 billion

in cash consideration plus ITG’s assumption of certain liabilities.”24

II.       PROCEDURAL HISTORY

          On February 17, 2017, ITG Brands filed this action asserting five claims for

injunctive and declaratory relief. That same day, ITG Brands filed a motion for a

temporary restraining order to enjoin Reynolds from pursuing their claims against

ITG Brands in the Florida action based on an exclusive Delaware forum provision



22
     Answer (Dkt. 30) ¶ 55; Compl. (Dkt. 1) Ex. 16 at 1, 21.
23
     Compl. (Dkt. 1) Ex. 16 at 1.
24
     Id. at 2.

                                             11
in the Asset Purchase Agreement. The Court granted that motion, in part, on March

1, 2017.

       On May 16, 2017, ITG Brands filed a motion for partial judgment on the

pleadings on Count II of its complaint, seeking a declaration that any obligation ITG

Brands owed to use its reasonable best efforts to reach an agreement with Florida to

join the Florida Settlement Agreement terminated at the Closing. On June 23, 2017,

Reynolds filed a cross-motion for partial judgment on the pleadings, seeking a

declaration that ITG Brands’ duty to use its reasonable best efforts to reach an

agreement with Florida to join the Florida Settlement Agreement did not terminate

due to the Closing.

III.   ANALYSIS

       A.    Legal Standards
       This Court will grant a motion for judgment on the pleadings when there are

no material issues of fact and the movant is entitled to judgment as a matter of law.25

Judgment on the pleadings “is a proper framework for enforcing unambiguous

contracts because there is no need to resolve material disputes of fact.”26




25
  Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199,
1205 (Del. 1993).
26
  Lillis v. AT&T Corp., 904 A.2d 325, 329-30 (Del. Ch. 2006) (internal citations and
quotations omitted).

                                           12
         “When analyzing a contract on a motion for judgment on the pleadings, this

Court will grant such a motion only if the contract provisions at issue are

unambiguous.”27 “Ambiguity does not exist simply because the parties disagree

about what the contract means . . . Rather, contracts are ambiguous when the

provisions in controversy are reasonably or fairly susceptible of different

interpretations or may have two or more different meanings.”28

         The Asset Purchase Agreement, which includes the Agreed Assumption

Terms, is governed by Delaware law.29 Under Delaware law, courts are required to

give unambiguous contract terms their plain meaning, without regard to extrinsic

evidence.30 Delaware law also “adheres to the objective theory of contracts, i.e., a

contract’s construction should be that which would be understood by an objective,

reasonable third party.”31 When interpreting a contract, this Court “will give priority

to the parties’ intentions as reflected in the four corners of the agreement,”

construing the agreement as a whole and giving effect to all of its provisions.32


27
   Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., 2013 WL 5787958,
at *4 (Del. Ch. Oct. 25, 2013).
28
     Id. (internal citations and quotations omitted).
29
     Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) § 12.12.
30
     Norton v. K-Sea Transp. Partners, L.P., 67 A.3d 354, 360 (Del. 2013).
31
   Salamone v. Gorman, 106 A.3d 354, 367-368 (Del. 2014) (citing Osborn ex rel. Osborn
v. Kemp, 991 A.2d 1153, 1159 (Del. 2010)).
32
  Id. (citing GMG Capital Inv., LLC. v. Athenian Venture Partners I, L.P., 36 A.3d 776,
779 (Del. 2012)).

                                                13
       In interpreting contract language, “[c]lear and unambiguous language . . .

should be given its ordinary and usual meaning.”33 Courts also may look to the

grammatical construction of a contractual provision to discern its meaning.34

       B.     Reynolds’ Interpretation of Section 2.2 is Supported by the Plain
              Language of the Asset Purchase Agreement
       Reynolds contends that the phrase “prior to the Closing” as used in Section

2.2 of the Agreed Assumption Terms is part of a clause that defines the nature of the

obligations that ITG Brands agreed to assume with each of the Previously Settled

States (i.e., the same obligations Reynolds Tobacco had with each of those states

“prior to the Closing”) and that the phrase thus did not impose a hard stop on ITG

Brands’ obligation to use its reasonable best efforts to reach an agreement with

Florida. According to Reynolds, ITG Brands’ obligation to reach an agreement with

Florida remains in place until ITG Brands actually has expended its reasonable best




33
  Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006) (quoting
Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del.
1992)).
34
   See, e.g. Paul v. Deloitte & Touch, LLP, 974 A.2d 140, 146 (Del. 2010) (resolving
grammatical dispute to determine the clear and unambiguous meaning of a contractual
provision); see also Viking Pump, Inc. v. Liberty Mut. Ins. Co., 2007 WL 1207107, at 17
n.97 (Del. Ch. Apr. 2, 2007, revised Apr. 13, 2007) (Strine, V.C.) (quoting Wirth & Hamid
Fair Booking, Inc. v. Wirth, 192 N.E. 297, 300 (1934)) (“[P]unctuation and grammatical
construction are reliable signposts in the search for contractual intent.”); 11 Williston on
Contracts § 32:9 (4th ed.) (“Courts often pay attention to grammar and punctuation in
determining the proper interpretation of a contract.”).

                                            14
efforts to do so.      In making this argument, Reynolds primarily relies on the

grammatical construction and structure of Section 2.2.

         The first sentence of Section 2.2 of the Agreed Assumption Terms provides,

in relevant part, that:

         [ITG Brands], with the assistance and cooperation of [Reynolds
         American] and Lorillard in communications and negotiations as
         required by the Agreement, shall use its reasonable best efforts to reach
         agreements with each of the Previously Settled States, by which [ITG
         Brands] will assume, as of the Closing, the obligations of a Settling
         Defendant under the PSS Agreement with each such State, with respect
         to the Acquired Tobacco Cigarette Brands, on the same basis as the
         Settling Defendants prior to the Closing.35

This sentence consists of an independent clause and a dependent clause.36 The

independent clause, which expresses a complete thought, appears at the beginning

of the sentence: “[ITG Brands], with the assistance and cooperation of [Reynolds

American] and Lorillard in communications and negotiations as required by the

Agreement, shall use its reasonable best efforts to reach agreements with each of the

Previously Settled States . . .” The dependent clause, which does not express a

complete thought, comprises the latter part of the sentence: “. . . by which [ITG



35
     Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) F-2 § 2.2.
36
   “An independent clause is one that contains a subject and a predicate and makes sense
standing alone, that is, it expresses a complete thought.” Hamilton v. Werner Co., 268 F.
Supp. 2d 1085, 1088 (S.D. Iowa 2003) (citing Kenneth G. Wilson, The Columbia Guide to
Standard American English 243 (1993)). “A dependent clause is a subject-verb
construction that could not stand alone as a sentence.” Bryan A. Garner, The Redbook: A
Manual on Legal Style § 1.6(d) (2d. ed. 2006).

                                            15
Brands] will assume, as of the Closing, the obligations of a Settling Defendant under

the PSS Agreement with each such State, with respect to the Acquired Tobacco

Cigarette Brands, on the same basis as the Settling Defendants prior to the Closing.”

      The first, independent clause requires ITG Brands to “use its reasonable best

efforts to reach agreements with each of the Previously Settled States.” The second,

dependent clause describes the nature of the “agreements” to be reached.

Specifically, under the PSS settlement agreements, ITG Brands will assume, as of

the Closing, the same obligations that the Settling Defendants had prior to the

Closing.37 In other words, Section 2.2 provides that, when ITG Brands assumes the

obligations of the Settling Defendants, it will step into the shoes that Reynolds

Tobacco occupied prior to the Closing. Thus, the phrase “prior to the Closing” is a

time reference that adds precision to the nature of the obligations that ITG Brands

agreed to use its reasonable best efforts to assume with each of the Previously Settled

States.

      This interpretation is consistent with the “nearest-reasonable-referent canon,”

which provides that a modifying phrase “normally applies only to the nearest

reasonable referent.”38 Here, the nearest reasonable referent to “prior to the Closing”


37
  As discussed below, the obligation to assume the “same” obligations that the Settling
Defendants had prior to the Closing is subject to the proviso in the second sentence of
Section 2.2.
38
  Parm v. Nat’l Bank of Cal., N.A., 835 F.3d 1331, 1336 (11th Cir. 2016) (quoting Antonin
Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 153 (2012));
                                           16
is the immediately preceding language “on the same basis as the Settling

Defendants,” not the phrase “shall use its reasonable best efforts” that appears fifty

words earlier in a separate clause.

       ITG Brands acknowledges that the nearest-reasonable referent canon is an

accepted canon of contract construction but argues that “on the same basis as the

Settling Defendants” is not a reasonable referent. I disagree. The phrase “prior to

the Closing” adds precision to the nature of the obligations that ITG Brands agreed

to use its reasonable best efforts to assume. By serving as a time reference for the

language immediately preceding it, the phrase makes clear that ITG Brands will step

into the shoes that the Settling Defendants occupied before the Closing and not as of

some other point in time.39



see also U.S. Fire Ins. Co. v. Kelman Bottles, 538 Fed. Appx. 175, 180 (3d Cir. 2013)
(same).
39
   ITG Brands argues that “Reynolds’ interpretation reads more ambiguity into the contract
since the term ‘prior to [the] Closing’ is not a specific date and therefore could mean the
obligations that existed at any time ‘prior to [the] Closing’” and that if “the parties agreed
that the term ‘prior to [the] Closing’ refers only [to] the scope of the obligations . . . they
would have used ‘at closing.’” Pl. Reply Br. (Dkt. 54) 10. Use of the phrase “at closing”
to define the nature of the obligations to be assumed would not be a clear solution, however.
It could be argued that Reynolds American already had transferred the Acquired Tobacco
Cigarette Brands to ITG Brands “at” the Closing and thus no longer had any obligations
with respect to those brands. Perhaps the parties could have used somewhat more precise
language when drafting Section 2.2, such as “immediately prior to the Closing.” No
principled reason has been advanced, however, why one seriously would think that ITG
Brands should assume obligations under the Florida Settlement Agreement that existed at
some earlier point in time but had been modified before the Closing. That is not to say that
the inclusion of a time reference to define the obligations to be assumed was unnecessary—
such a reference certainly is necessary for precision—but just that the “Court will not
                                              17
         By contrast, the referent ITG Brands proposes is not reasonable and would

give “unjustifiably expansive modifying power” to the modifier “prior to the

Closing.”40 ITG Brands asks the Court to find that the phrase “prior to the Closing”

jumps over the action of the clause in which it appears to modify an action that

appears fifty words earlier in a separate clause. But it is more natural to give the

sentence an orderly grammatical sense, in which the independent clause is set forth

in full and then the dependent clause is set forth in full, rather than finding that “prior

to the Closing” modifies an action that appears in a separate clause.

         Construing the phrase “prior to the Closing” to define the nature of the

obligations that ITG Brands agreed to assume also is consistent with how the second

sentence in Section 2.2 operates. That sentence states, as follows:

         Provided, however, that such agreements shall include terms providing
         either that any direct-pay statute (also known as an equity-fee law or
         NPM-fee law) of a Previously Settled State does not apply to the
         Acquired Tobacco Cigarette Brands or that, if [ITG Brands] is required
         to make payments with respect to Acquired Tobacco Cigarette Brands
         under a direct-pay statute (or any distributor or other party is required
         to make such payments with respect to the Acquired Tobacco Cigarette
         Brands), [ITG Brands] will receive a credit against otherwise due
         payments under the PSS settlement equal to the full payments made.41



manufacture an ambiguity where one does not exist.” See, e.g. Julian v. Julian, 2010 WL
1068192, at *8 (Del. Ch. Mar. 22, 2010).
40
  See U.S. Fire Ins. Co., 538 F. App’x at 180 (explaining that, by overlooking six words
separating a modifier from its supposed referent, “the District Court gave an unjustifiably
expansive modifying power to” the modifier).
41
     Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) F-2 § 2.2 (emphasis added).

                                            18
The second sentence is a proviso, i.e., “a clause that introduces a condition by the

word provided.”42 A proviso “conditions the principal matter that it qualifies,”

which is “almost always the matter immediately preceding.”43

           Here, the proviso makes clear that, if a Previously Settled State has a direct-

pay statute, ITG Brands is entitled to obtain contractual protection against making

double payments on the Acquired Tobacco Cigarette Brands, i.e., either the state will

agree to exempt ITG Brands from the direct-pay statute or will give it a credit for

any payments it makes under the statute. Significantly, the proviso addresses the

nature of the obligations that ITG Brands agreed to assume with each of the

Previously Settled States. As such, because the proviso qualifies the immediately

preceding dependent clause where the phrase “prior to the Closing” appears, it is

logical to interpret that preceding clause in parallel fashion as also addressing the

nature of the obligations ITG Brands must seek to assume. ITG Brands has offered

no substantive response to this point.

           Finally, Reynolds asserts that, in addition to the plain language of Section 2.2

itself, Sections 6.19 and 6.20 of the Asset Purchase Agreement support the

conclusion that ITG Brands’ obligation to use its reasonable best efforts to reach an




42
  Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 154
(2012).
43
     Id.

                                              19
agreement with Florida did not terminate at the Closing. Those provisions expressly

require the parties to take action “both before and after the Closing” to comply with

the Agreed Assumption Terms, in which Section 2.2 appears. Specifically, Section

6.19 provides, in relevant part, that:

         . . . both before and after the Closing, each of the Parties shall . . . take
         all such other steps . . . as are necessary and/or expedient for the
         purposes of . . . (c) obtaining the agreement as necessary of the States
         . . . to the Agreed Assumption Terms.44

Section 6.20 similarly provides, in relevant part, that:

         . . . each of the Parties undertakes that from and after the date of this
         Agreement and both before and after the Closing it shall . . . adhere
         fully to and not deviate in any respect from the Agreed Assumption
         Terms including in any communications with any of the States. . . Each
         of [ITG Brands] and [Reynolds American] further undertakes from and
         after the Closing, . . . to take all such steps as are necessary or expedient
         . . . to cause the Agreed Assumption Terms, as applicable, to become
         fully effective and binding on each of the States.45

         “[W]ell established canons of contract interpretation require courts to read a

contract as a whole.”46 “In giving sensible life to a real-world contract, courts must

read the specific provisions of the contract in light of the entire contract.”47 Reading


44
     Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) § 6.19 (emphasis added).
45
     Id. § 6.20 (emphasis added).
46
   Am. Legacy Found. v. Lorillard Tobacco Co., 831 A.2d 335, 344 n.37 (Del. Ch. 2003),
aff’d sub nom. Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 731 (Del.
2006); see also Northwestern Nat’l Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del. 1996)
(“Contracts must be construed as a whole, to give effect to the intentions of the parties.”).
47
  Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 913-14
(Del. 2017).

                                              20
Section 2.2 in light of the “both before and after the Closing” language in Sections

6.19 and 6.20 of the Asset Purchase Agreement, it makes sense that the reasonable

best efforts clause in Section 2.2 also was intended to operate beyond the Closing.

         ITG Brands agrees that Sections 6.19 and 6.20 “encompass and provide

general obligations that cover the Agreed Assumption Terms as a whole” and “make

plain that [the parties’] communication and other obligations apply ‘both before and

after the Closing.’”48 ITG Brands contends, however, that the provisions do not

apply to Section 2.2 on the theory that the specific language of Section 2.2 trumps

the more general language of Sections 6.19 and 6.20. I disagree.

         The rule of contractual interpretation that a “specific provision ordinarily

qualifies the meaning of [a] general one” logically applies where “specific and

general provisions conflict.”49 But there is no necessary conflict here. As discussed

above, the plain language of Section 2.2 of the Agreed Assumption Terms compels

the conclusion that ITG Brands’ obligation to use its reasonable best efforts to reach

an agreement with Florida did not terminate at the Closing. As such, this provision

is entirely consistent with Sections 6.19 and 6.20, which expressly provide, among

other things, that the parties shall cause the Agreed Assumption Terms to become

fully effective and binding on each of the States “both before and after the Closing.”


48
     Pl. Reply Br. (Dkt. 54) 7, 23.
49
     DCV Holdings, Inc. v. ConAgra, Inc., 889 A.2d 954, 961 (Del. 2005).

                                            21
                                         *****

       For the reasons explained above, the plain language of Section 2.2 supports

the conclusion that ITG Brands’ obligation to use its reasonable best efforts to reach

an agreement with Florida to assume Reynolds Tobacco’s obligations under the

Florida Settlement Agreement for the Acquired Tobacco Cigarette Brands did not

terminate due to the Closing.50

       C.     ITG Brands’ Interpretation of Section 2.2 is Unreasonable
       ITG Brands argues that the phrase “prior to the Closing” in Section 2.2 defines

the temporal scope of its obligation to use its reasonable best efforts to reach an

agreement with Florida. In making this argument, ITG Brands advances its own

grammatical construction of the provision and contends that its interpretation is

supported by other provisions of the Asset Purchase Agreement. ITG Brands’

interpretation is unreasonable in my view for essentially five reasons.

       First, ITG Brands’ reading of Section 2.2 is based on the premise that the

phrases italicized below, which consist of text set off by commas in the first sentence


50
   Pointing to the fact that ITG Brands seemed to invite post-Closing negotiations with
three of the Previously Settled States in letters it sent them a few days before the Closing
(see Compl. (Dkt. 1) Exs. 9-11), Reynolds argues that ITG Brands’ course of conduct is
inconsistent with its litigation position concerning the meaning of Section 2.2. I do not
consider this evidence because course of conduct evidence generally is irrelevant to
construing an unambiguous contract provision. See Eagle Indus., Inc. v. DeVilbiss Health
Care, Inc., 702 A.2d 1228, 1233 (Del. 1997) (“In construing an ambiguous contractual
provision, a court may consider evidence of prior agreements and communications of the
parties as well as trade usage or course of dealing.”) (emphasis added).

                                            22
of Section 2.2, are “nonrestrictive clauses” that could be taken out of the sentence

without changing its essential meaning:51

         [ITG Brands], with the assistance and cooperation of [Reynolds
         American] and Lorillard in communications and negotiations as
         required by the Agreement, shall use its reasonable best efforts to
         reach agreements with each of the Previously Settled States, by
         which [ITG Brands] will assume, as of the Closing, the obligations of
         a Settling Defendant under the PSS Agreement with each such State,
         with respect to the Acquired Tobacco Cigarette Brands, on the same
         basis as the Settling Defendants prior to the Closing.

According to ITG Brands, when these nonessential terms are disregarded, the

remaining text (in bold above) makes clear that the parties intended for the phrase

“prior to the Closing” to refer back to the obligation to use reasonable best efforts

and to impose a firm deadline on that obligation. ITG Brands then argues that the

phrase “on the same basis as the Settling Defendants” tells the parties all they need

to know about what obligations ITG Brands must seek to assume. Under this theory,

“prior to the Closing” must be a temporal limitation or it would be surplusage.52

         “The cardinal rule of contract construction is that, where possible, a court

should give effect to all contract provisions.”53 This Court thus must “read a contract




51
     Pl. Opening Br. (Dkt. 42) 14-15, 14 n.5; see also Tr. 10 (Sept. 11, 2017).
52
     See Tr. 10-11, 35-36, 38-39, 41, 93 (Sept. 11, 2017).
53
  Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 1177, 1184 (Del. 1992)
(emphasis in original) (citing E.I. du Pont de Nemours & Co., Inc. v. Shell Oil Co., 498
A.2d 1108, 1114 (Del. 1985)).

                                               23
as a whole and . . . give each provision and term effect, so as not to render any part

of the contract mere surplusage.”54

      A basic flaw in ITG Brands’ argument is that it would render meaningless

important qualifications in the language of Section 2.2 italicized above.         For

example, the italicized language makes clear that the obligations ITG Brands must

seek to assume only concern the four “Acquired Tobacco Cigarette Brands”

(Winston, Salem, Kool, and Maverick) and not any of the brands that Reynolds

Tobacco retained. This qualification is not already embedded in the phrase “on the

same basis as the Settling Defendants,” which covers the full universe of Reynolds

Tobacco’s obligations to the Previously Settled States, including its obligation to

continue making payments on cigarette brands it retained. This qualification is thus

essential to define accurately the nature of the obligations ITG Brands must seek to

assume. Similarly, the italicized language is necessary to ensure that the obligations

are assumed “as of the Closing” and not as of some other time. Because ITG Brands’

proffered construction gives no meaning to these important qualifications, its

construction of Section 2.2 is unreasonable.

      Second, and related to the first point, adopting ITG Brands’ interpretation of

Section 2.2 would give unjustifiably expansive modifying power to the modifier


54
  Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (quoting Kuhn
Construction, Inc. v. Diamond State Port Corp., 2010 WL 779992, at *2 (Del. Mar. 8,
2010)).

                                         24
“prior to the Closing,” as discussed above. Apart from its “nonrestrictive clause”

theory, ITG Brands offers no rule of construction to warrant interpreting Section 2.2

in such a strained manner as to find that the phrase “prior to the Closing” jumps over

the action of the clause in which it appears to modify an action that appears fifty

words earlier in a separate clause.

      To repeat, it is more natural to give the sentence an orderly grammatical

reading, in which the independent clause is set forth in full and the dependent clause

is then set forth in full. When the sentence is read in that manner, the phrase “prior

to the Closing” serves as a necessary time reference for the language immediately

preceding it to make clear that, with respect to the Acquired Tobacco Cigarette

Brands, ITG Brands must seek to assume the obligations Reynolds Tobacco owed

before the Closing and not at some other time. In that way, the provision achieves

the obvious objective of having ITG Brands step into the shoes that Reynolds

Tobacco occupied before the Closing.

      Third, if the parties wanted “prior to the Closing” to define when ITG Brands’

duty to use its reasonable best efforts would expire, the parties logically would have

placed that phrase within the independent clause, close to the action they wanted it

to modify. For example, the provision easily could have been written to state that

ITG Brands “shall use its reasonable best efforts, prior to the Closing, . . .” This

formulation would have mirrored another part of the same sentence providing that

                                         25
ITG Brands “will assume, as of the Closing, the obligations . . .” There, the parties

placed a modifier (“as of the Closing”) next to a verb (“will assume”) to define when

that action would occur, demonstrating that they knew how to place a temporal

modifier on an action when they wished to do so.55

         Fourth, I am unpersuaded by ITG Brands’ argument that its construction is

supported by other provisions in the Asset Purchase Agreement using the phrase

“reasonable best efforts.” According to ITG Brands, Section 6.11(b) of the Asset

Purchase Agreement “uses both ‘reasonable best efforts’ and ‘prior to the Closing’

in exactly the same way as Section 2.2 does.”56 The relevant sentence of Section

6.11(b) states: “Each of the Parties shall use its reasonable best efforts to identify

and develop Service Descriptions for all Transitional Services prior to the Closing.”

This sentence, however, consists of a single clause with a simple structure. It is

nothing like the first sentence of Section 2.2, where “prior to the Closing” appears

in a dependent clause fifty words away from the action that ITG Brands suggests it

should modify. Put differently, the phrase “use its reasonable best efforts” is the




55
  See Roseton OL, LLC v. Dynegy Holdings Inc., 2011 WL 3275965, at *10 (Del. Ch. July
29, 2011) (comparing two contractual provisions and noting that the language of the second
provision “demonstrates that when the parties intended to make a particular restriction
applicable to both DHI and its subsidiaries, they knew how to do so and readily could
accomplish that objective”).
56
     Pl. Rely Br. (Dkt. 54) 3.

                                           26
nearest reasonable referent for “prior to the Closing” in Section 6.11(b), but not in

Section 2.2.

         The only other provision in the Asset Purchase Agreement that ITG Brands

makes any effort to discuss is Section 2.02(a), which states, in part, that:

         [Reynolds American] will, and will cause each of the other Sellers …
         to, use its and their reasonable best efforts to obtain any consent
         necessary for the transfer or assignment of any such Transferred Asset
         claim, right or benefit to [ITG Brands] at no cost to [ITG Brands] … If
         on or prior to the Closing Date any such consent is not obtained, . . . (i)
         at the Closing, the Sellers and [ITG Brands] will enter into one or more
         mutually agreeable Contracts under which [ITG Brands] would obtain
         the benefits and assume the obligations and bear the economic burdens
         associated with such Transferred Asset . . . (ii) after the Closing Date,
         [Reynolds American] will, and will cause each of the other Sellers to,
         continue to use its and their reasonable best efforts to obtain any
         consent necessary . . . 57

This provision, which draws a distinction between obligations owed “at” and “after”

the Closing, operates very differently than Section 2.2 of the Agreed Assumption

Terms. Far from aiding ITG Brands, Section 2.02(a) confirms that there is nothing

remarkable about having a “reasonable best efforts” obligation extend beyond the

Closing without a specific end-point.

         Fifth, ITG Brands’ interpretation would lead to an absurd result in my view.

Delaware courts avoid adopting “[a]n unreasonable interpretation [that] produces

an absurd result or one that no reasonable person would have accepted when



57
     Compl. (Dkt. 1) Ex. 1 (Asset Purchase Agreement) § 2.02(a).

                                             27
entering the contract.”58 But here, adopting ITG Brands’ reading of Section 2.2

would have the nonsensical result of incentivizing ITG Brands to stall its discussions

with Florida until after the Closing in order to avoid making annual payments tied

to its own sales of cigarette products.59

         The Master Settlement Agreement and PSS settlement agreements were

intended to provide each of the states with a continuous stream of annual payments

for “health care costs that those States had paid for their citizens who smoked.”60

Those annual payments are based on the volume of cigarette sales that occur in that

year. The obvious purpose of Section 2.2 was to transfer to ITG Brands the payment

obligations associated with the Acquired Tobacco Cigarette Brands so that the

payment obligation runs with the party benefiting from the revenues. In my view,

no reasonable tobacco manufacturer would have agreed to expose itself to the

prospect of making annual payments to a Previously Settled State for cigarette




58
     Osborn, 991 A.2d at 1160.
59
  The obligation in Section 2.2 applies to each of the four Previously Settled States. The
perverse incentive to stall, however, is most acute in ITG Brands’ discussions with Florida.
Unlike the three other Previously Settled States, Florida does not have a direct-pay statute
that guarantees a stream of payments based on cigarette sales volume irrespective of a
contractual assumption of liability.
60
     Answer (Dkt. 30) ¶ 20.

                                            28
product revenues it no longer receives by incentivizing an acquiror to stall and run

out the clock.61

         ITG Brands admits that its interpretation would create such “an incentive”62

but argues that Reynolds’ reading of Section 2.2 would lead to two other

unreasonable results. ITG Brands first contends that if a PSS settlement agreement

were amended post-Closing, it would be joining on terms different from those

binding other signatories.63 As an initial matter, this would not be unreasonable.

The whole point of the time referent “prior to the Closing” in Section 2.2 is to make

clear which obligations ITG Brands agreed to use its reasonable best efforts to

assume, i.e., the same ones that governed “the Settling Defendants prior to the

Closing.” It is not unreasonable to hold ITG Brands to the bargain it struck.64




61
   This is the predicament in which Reynolds Tobacco now finds itself. Although ITG
Brands agrees that Reynolds Tobacco should no longer have any obligations with respect
to the Acquired Tobacco Cigarette Brands “because sales of those brands were no longer
included in its volume” (Answer (Dkt. 30) ¶ 27), Florida apparently disagrees. It is seeking
to enforce the Florida Settlement Agreement against both Reynolds Tobacco and ITG
Brands for those sales. See Answer (Dkt. 30) ¶ 55; Compl. (Dkt. 1) Ex. 16, 1.
62
     Tr. 51.
63
     Pl. Reply Br. (Dkt. 54) 9-13.
64
   ITG Brands’ concern also seems imaginary. If Reynolds Tobacco amended a PSS
settlement agreement post-Closing in some beneficial way for the brands it retained, it is
hard to imagine that the state involved would not agree to comparable terms with ITG
Brands for the brands it acquired. And, if Reynolds Tobacco were to amend a PSS
settlement agreement post-Closing in some manner that ITG Brands viewed to be adverse,
ITG Brands undoubtedly would prefer not to be bound to use its reasonable best efforts to
agree to such an amendment with respect to the Acquired Tobacco Cigarette Brands.

                                            29
         ITG Brands’ second contention is that Reynolds’ interpretation of Section 2.2

would mean that ITG Brands’ obligation to use its reasonable best efforts would go

on “potentially forever.”65 This argument is without merit. A duty to use reasonable

best efforts is not limitless in time but simply requires that one actually expend

reasonable best efforts, which is a question of fact.66 Indeed, as discussed above,

ITG Brands expressly agreed in at least one other provision of the Asset Purchase

Agreement (Section 2.02(a)) to use its reasonable best efforts after the Closing and

thus cannot be heard to suggest that undertaking such an obligation would lead to an

unreasonable result.

                                         *****

         For the reasons explained above, the plain language of Section 2.2 does not

support the conclusion that ITG Brands’ obligation to use its reasonable best efforts

terminated at the Closing, an interpretation I find to be unreasonable.




65
     Pl. Opening Br. (Dkt. 42) 17.
66
   See Williams Co., Inc. v. Energy Transfer Equity, L.P.,159 A.3d 264, 273 (Del. 2017)
(“reasonable best efforts” covenants impose “an affirmative obligation” to “take all
reasonable steps to solve problems and consummate the [contemplated] transaction”);
Lewes Inv. Co. v. Estate of Graves, 2013 WL 508486, at *17 (Del. Ch. Feb. 12, 2013),
aff’d, 74 A.3d 654 (Del. 2013) (“What constitutes a ‘reasonable time’ is a question of fact,
dependent on the circumstances of the case.”).

                                            30
IV.   CONCLUSION

      As explained above, Reynolds’ interpretation of Section 2.2 is supported by

the plain and unambiguous language of that provision, but ITG Brands’

interpretation is not. Accordingly, Reynolds’ motion for partial judgment on the

pleadings is granted, and ITG Brands’ cross-motion is denied. In holding that ITG

Brands’ obligation under Section 2.2 to use its reasonable best efforts did not

terminate due to the Closing, the Court expresses no view on whether or not such

efforts have been expended, which is a fact question that must be decided on an

appropriate record. The parties are directed to submit a form of order implementing

this decision within five business days.

      IT IS SO ORDERED.




                                           31
