         IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE


    WESTERN STANDARD, LLC,                    )
    Individually and as Stockholder           )
    Representative for Former BancTec, Inc.   )
    Common Stockholders,                      )
                                              )
                            Plaintiff,        )
                                              )
                  v.                          )   C.A. No. 2018-0280-JRS
                                              )
    SOURCEHOV HOLDINGS, INC. and              )
    PANGEA ACQUISITIONS, INC.,                )
                                              )
                            Defendants.       )


                        ORDER REFUSING CERTIFICATION OF
                            INTERLOCUTORY APPEAL

         WHEREAS, Plaintiff, Western Standard, LLC, filed a complaint alleging

that Defendant, Pangea Acquisitions, Inc. (“Pangea”), improperly refused to pay

earn-out consideration owed to former stockholders of BancTec, Inc. after a merger

between BancTec’s parent entity, Defendant, SourceHOV Holdings, Inc.

(“SourceHOV”) and Exela Technologies, Inc.;

         WHEREAS, SourceHOV moved to dismiss Plaintiff’s Verified Amended

Complaint on August 10, 2018, and Pangea moved to dismiss eleven days later1;




1
    D.I. 13; D.I. 17.
         WHEREAS, the Court issued a Memorandum Opinion on July 24,

2019 (the “Opinion”), 2 in which it denied Defendants’ motions to dismiss upon

concluding that (i) the shares to which the earn-out right allegedly attached did not

conclusively cease to exist after a reverse triangular merger between Pangea and

SourceHOV; and (ii) the earn-out provision was ambiguous by “obscure meaning

and indefiniteness of expression”3;

         WHEREAS, on August 5, 2019, Defendants filed an application for

certification of an interlocutory appeal of the Opinion (the “Application”)4;

         WHEREAS, the Application asserts three grounds for interlocutory appeal

under Supreme Court Rule 42: (1) “the Opinion resolves ‘fundamental principles’

of Delaware corporate law in a manner that conflicts with prior decisions from this

Court and the Delaware Supreme Court”—citing Supreme Court Rule 42(b)(iii)(B);

(2) the “question of law decided by the Opinion relates to the construction of a statute

of this State—8 Del. C. § 251(b)(5)—that should be settled by the Supreme Court

promptly”—citing Supreme Court Rule 42(b)(iii)(C); and (3) “interlocutory review



2
 Capitalized terms in this Order assume the same meaning as ascribed to them in the
Opinion unless otherwise defined.
3
  Western Standard, LLC v. SourceHOV Hldgs., Inc., 2019 WL 3322406, at *8 (Del. Ch.
July 24, 2019).
4
    D.I. 42.


                                           2
would terminate the litigation if the Supreme Court were to reverse and hold that the

specific Lead Investor Shares ceased to exist prior to, and did not exist at, the time

of the alleged Realization Event . . . .”—citing Supreme Court Rule 42(b)(iii)(G)5;

         WHEREAS, on August 15, 2019, Plaintiff opposed the Application

(the “Opposition”)6; and

         WHEREAS, the Court has carefully considered the Application, Plaintiff’s

Opposition and the criteria set forth in Supreme Court Rule 42,

         IT IS HEREBY ORDERED, this            21st   day of August, 2019, that:

         1.     Supreme Court Rule 42(b)(i) provides, “[n]o interlocutory appeal will

be certified by the trial court or accepted by the Court unless the order of the trial

court decides a substantial issue of material importance that merits appellate review

before a final judgment.”7 Rule 42(b)(ii) provides that instances where the trial

court certifies an interlocutory appeal “should be exceptional, not routine, because

[interlocutory appeals] disrupt the normal procession of litigation, cause delay, and

can threaten to exhaust scarce party and judicial resources.” 8      For this reason,



5
    Application ¶ 1.
6
    D.I. 43.
7
    Supr. Ct. R. 42(b)(i).
8
    Supr. Ct. R. 42(b)(ii).


                                           3
“parties should only ask for the right to seek interlocutory review if they believe in

good faith that there are substantial benefits that will outweigh the certain costs that

accompany an interlocutory appeal.”9

           2.   When certifying an interlocutory appeal, “the trial court should identify

whether and why the likely benefits of interlocutory review outweigh the probable

costs, such that interlocutory review is in the interests of justice. If the balance is

uncertain, the trial court should refuse to certify the interlocutory appeal.”10

           3.   After carefully reviewing the Opinion, I am satisfied it does not decide

a substantial issue of material importance that merits appellate review before a final

judgment. Specifically, it does not conflict with existing jurisprudence or address

the application of a Delaware statute.        Additionally, it is unlikely interlocutory

review of the appeal would terminate the litigation.         With no substantial issue

decided, I cannot say the benefits of an interlocutory appeal outweigh the costs or

that interlocutory review would otherwise serve considerations of justice.          The

Application’s arguments to the contrary are rejected for the following reasons.




9
     Id.
10
     Supr. Ct. R. 42(b)(iii).


                                             4
        4.     First, the Opinion does not decide an issue that “relate[s] to the merits

of the case.”11 After reviewing well-regarded authority, I concluded that shares of

a target entity are not necessarily extinguished by operation of a reverse triangular

merger. I then turned to the factual allegations in the Amended Complaint and

emphasized that I had no basis at the pleadings stage to reject Plaintiff’s well-pled

allegations that the Lead Investor’s Shares (to which the earn-out right allegedly

attached) and Pangea (as an entity) remained intact at the time of the alleged

Realization Event.12 Indeed, Defendants failed to identify specifically how “pre-

merger Pangea common stock” was cancelled but new Pangea common stock was

issued such that the earn-out right that attached to the pre-merger stock was

eliminated.13 Plaintiff, on the other hand, pled that Pangea’s common stock existed

before and after the SourceHOV-Pangea Merger and pointed to the fact that




11
   Castaldo v. Pittsburgh-Des Moines Steel Co., Inc., 301 A.2d 87, 87 (Del. 1973)
(“Generally speaking, the substantive element of the appealability of an interlocutory order
must relate to the merits of the case . . . .”).
12
     Western Standard, 2019 WL 3322406, at *6 n.53.
13
  Id. at *6 n.52 (quoting Defs.’ Opening Br. in Supp. of Their Mots. to Dismiss the Am.
Compl. at 10 n.4).


                                             5
Pangea’s governing documents, including its certificate of incorporation that

authorized the class of shares owned by the Lead Investor, remained unchanged.14

          5.      Neither case law nor the merger agreements definitively answered

whether the Lead Investor’s shares (and the earn-out right allegedly attached to

them) survived the transactions at issue, and Defendants cannot rewrite Plaintiff’s

complaint.        As required on a motion to dismiss, I accepted Plaintiff’s well-pled

facts as true and drew reasonable inferences in Plaintiff’s favor.15 Since the pled

facts are that the Lead Investor’s Shares survived the reverse triangular merger, an

inference that Defendants remained liable for Pangea’s earn-out claim is reasonable.

That is as far as the Opinion went; there was no determination on the merits.           If

discovery reveals the Lead Investor’s Shares did not exist at the time of the alleged

Realization Event, then Defendants will have an opportunity to present those facts

to the Court on summary judgment. If undisputed, Plaintiff’s claim that BancTec

stockholders are entitled to earn-out consideration likely will not pass through the

summary judgment filter. Until then, the Court’s unremarkable observation that

target company shares are not always eliminated in a reverse triangular merger,

either as a matter of structure or matter of law, does not justify interlocutory appellate


14
   Id. at *6 nn.52–53 (citing Am. Compl. ¶¶ 24–25; SourceHOV-Pangea Agreement
§ 1.4(b)(i); Transmittal Aff. of Samuel J. Lieberman, Exs. A–B).
15
     Id. at *5.


                                             6
review. 16      The same is true for the Court’s pleadings-stage determination that

Plaintiff has pled a sufficient factual predicate for its allegation that the Lead

Investor’s shares, and the earn-out right allegedly attached to them, remained intact

at the time of the alleged Realization Event such that Defendants are on notice of

Plaintiff’s breach of contract claim.17

         6.     Second, the Opinion does not conflict with existing trial court decisions.

This case presented unique factual circumstances that were not present in the cases

on which Defendants rely.        As explained, I determined that a reverse triangular

merger does not necessarily extinguish the shares of an acquired target entity.

None of Defendants’ cases stand for the proposition, as a matter of law, that the Lead

Investor’s Shares were extinguished in the reverse triangular merger at issue here.

In Lewis v. Ward, for example, the parties did not dispute factually that plaintiff lost

her shares in the merger; there, the issue was whether the merger was a product of

fraud.18 Nothing in Lewis can be read to support the proposition that, come what

may, the target’s shares in a reverse triangular merger disappear such that any right

connected to those shares ceases to exist.




16
     Id. at *6 nn.48–49.
17
     Id. at *6 n.53.
18
     Lewis v. Ward, 2003 WL 22461894, at *1 (Del. Ch. Oct. 29, 2003).

                                             7
       7.     The Opinion explores the distinction between a standard two-party

merger and a reverse triangular merger in deciding that shares of a target entity do

not conclusively disappear in a reverse triangular merger. The remaining cases on

which Defendants rely acknowledge a well-accepted principal for two-party

mergers—that the shares of one entity will not survive the merger—but do not

address the different transactional structure and different consequences that can flow

from a reverse triangular merger.19 In Shields v. Shields, for example, the court

acknowledged that “the stock in a constituent corporation (other than the surviving

corporation) ceases to exist legally. The [stock of the merged corporation] thus

vanishes, so to speak, at that point and its place is taken by stock interest in another

distinct corporation.”20 This is consistent with the court’s determination in Crown

Books Corp. v. Bookstop, Inc., where “Bookstop itself was the corporation surviving



19
   And, unsurprisingly, the questions presented in these cases did not require the courts to
address the unusual situation of an earn-out right allegedly tied to shares of a company
acquired in a reverse triangular merger.
20
   498 A.2d 161, 168 & n.6 (Del. Ch. 1985). Defendants point out that the stock of the
disappearing entity in Shields was held to no longer exist even though the merger
agreement provided for conversion of the shares without their cancellation. But, again,
Shields involved a two-party merger where one entity survived and one entity disappeared.
Application ¶ 8. See also Halpin v. Riverstone Nat’l, Inc., 2015 WL 854724, at *5
(Del. Ch. Feb. 26, 2015) (noting petitioners’ assertion that their argument was supported
by a “principle of Delaware law that once a merger becomes effective the shares of the
acquired corporation are cancelled, having been legally converted into the right to receive
cash or seek appraisal”).


                                             8
the merger, but the Bookstop stock owned by Crown was converted into the right to

receive cash and no longer exists.”21 None of these cases addresses the survival

(or not) of a target entity’s shares in a reverse triangular merger.

        8.     Third, the Opinion did not purport to construe Section 251 of the

DGCL.        My conclusions at the motion to dismiss stage were premised on the

language of the SourceHOV-Pangea Agreement, the Pangea-BancTec Agreement

and Plaintiff’s well-pled facts.      The SourceHOV-Pangea Agreement does not

address the central question of how “common stock of [Pangea] in its capacity as the

surviving corporation” was issued and exchanged for the merger subsidiary’s stock

without any supporting documents or any change to Pangea’s governing documents,

particularly in light of Plaintiff’s allegations.22 Section 251 may have a role to play

here as the facts are developed; it is not, however, dispositive of the outcome at the

pleadings stage. Accordingly, I had no reason to (and did not) construe the statute

in a manner that would justify interlocutory appellate review.

        9.     Fourth, interlocutory review may not terminate the litigation.       The

primary focus of the Opinion was on the ambiguity of the earn-out and related

provisions in the Pangea-BancTec Agreement. As Plaintiff’s Opposition reiterates,




21
     Crown Books Corp. v. Bookstop, Inc., 1990 WL 26166, at *4 (Del. Ch. Feb. 28, 1990).
22
     SourceHOV-Pangea Agreement § 1.5(b)(ii).

                                            9
“since ‘[t]his is one of those’ ‘rare instances’ where the ‘court is unable to divine

any meaning from the contract’ as to what triggers the earn-out, extrinsic evidence

may prove that the parties’ intent behind the earn-out does not require resolving the

legal issue raised by the Application.”23 Outstanding issues in this case include the

meaning of the earn-out and related provisions, the effect of the SourceHOV-Pangea

transaction on ownership of Pangea and the factual matter of whether Pangea stock

was eliminated and new Pangea common stock issued.24

         10.     Under these circumstances, I cannot certify that the likely benefits of

interlocutory review outweigh the probable costs such that interlocutory review is in

the interests of justice. Defendants’ application to certify an interlocutory appeal,

therefore, must be REFUSED.



                                                  /s/ Joseph R. Slights III
                                                       Vice Chancellor




23
     Opposition ¶ 2 (quoting Western Standard, 2019 WL 3322406, at *1).
24
     Id. ¶¶ 4, 13.

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