August 23, 2024
On Wednesday, August 21, Willkie won a major victory for client L-5 Healthcare Partners, LLC (“L-5”), a family office investment vehicle. In a post-trial memorandum opinion, the Delaware Court of Chancery ordered defendant Alphatec Holdings, Inc. (“Alphatec”), a company in which L-5 had invested, to perform its contractual obligations to sell L-5 over a million Alphatec warrants. This case addressed a novel question: whether and how to award specific performance for breach of a right to participate in a complex fundraising, when the fundraising had closed years ago and could not be unwound. The court addressed that question by awarding specific performance and structuring it to most closely resemble the economics of the original transaction.
This trial victory caps a long saga for L-5. In 2017, L-5 invested in Alphatec and became Alphatec’s largest shareholder. L-5’s investment was memorialized in a securities purchase agreement with Alphatec. The contract contained a standard preemptive rights provision: if Alphatec issued additional equity in the future, it had to first offer L-5 pro rata participation. In 2019, Alphatec issued warrants and a note to a third party investor. The warrants were designed to compensate the investor above and beyond the interest on the note. L-5 sought to enforce its preemptive rights and participate pro rata in the financing, which would entail purchasing a portion of the warrants and making part of the loan. Alphatec took the position that L-5’s preemptive rights did not apply because the warrants were issued in connection with a loan.
In 2020, Vice Chancellor McCormick ruled in favor of L-5 on the pleadings that Alphatec had breached the preemptive rights provision by failing to offer L-5 pro rata participation in the 2019 financing. In January 2024—following lengthy and contentious discovery—the court held trial on the issue of L-5’s remedy for the breach. The case had since been transferred to Vice Chancellor Cook.
Because L-5 sought the equitable remedy of specific performance (i.e., its pro rata share of the warrants), much of the trial testimony focused on the balancing of the equities. The court held that Alphatec’s general counsel appeared to have structured the financing to avoid honoring L-5’s preemptive rights. It found that Alphatec had been “talking out of both sides of its mouth,” telling L-5 that it would honor L-5’s contractual rights in the future while acknowledging internally that it had no intention of doing so. The court remarked that Alphatec’s conduct comes “close to crossing into bad faith territory.”
In addition to balancing the equities, the court also granted specific performance because the parties agreed to the remedy of specific performance in the securities purchase agreement. The court determined that, while not binding on the court, this provision should be afforded great weight, and was not to be disturbed unless the defendant offers a “case specific reason.”
As a result, the court held that Alphatec must sell L-5 over one million Alphatec warrants for a price well under their current value. This holding represents the latest development in the dynamic area of Delaware jurisprudence concerning specific performance remedy clauses.
The trial team included partners Tony Yanez, Alex Cheney, and Brady Sullivan, and associates Sean Lavin, Emma Rosen, and Rahima Ghafoori.
This trial victory caps a long saga for L-5. In 2017, L-5 invested in Alphatec and became Alphatec’s largest shareholder. L-5’s investment was memorialized in a securities purchase agreement with Alphatec. The contract contained a standard preemptive rights provision: if Alphatec issued additional equity in the future, it had to first offer L-5 pro rata participation. In 2019, Alphatec issued warrants and a note to a third party investor. The warrants were designed to compensate the investor above and beyond the interest on the note. L-5 sought to enforce its preemptive rights and participate pro rata in the financing, which would entail purchasing a portion of the warrants and making part of the loan. Alphatec took the position that L-5’s preemptive rights did not apply because the warrants were issued in connection with a loan.
In 2020, Vice Chancellor McCormick ruled in favor of L-5 on the pleadings that Alphatec had breached the preemptive rights provision by failing to offer L-5 pro rata participation in the 2019 financing. In January 2024—following lengthy and contentious discovery—the court held trial on the issue of L-5’s remedy for the breach. The case had since been transferred to Vice Chancellor Cook.
Because L-5 sought the equitable remedy of specific performance (i.e., its pro rata share of the warrants), much of the trial testimony focused on the balancing of the equities. The court held that Alphatec’s general counsel appeared to have structured the financing to avoid honoring L-5’s preemptive rights. It found that Alphatec had been “talking out of both sides of its mouth,” telling L-5 that it would honor L-5’s contractual rights in the future while acknowledging internally that it had no intention of doing so. The court remarked that Alphatec’s conduct comes “close to crossing into bad faith territory.”
In addition to balancing the equities, the court also granted specific performance because the parties agreed to the remedy of specific performance in the securities purchase agreement. The court determined that, while not binding on the court, this provision should be afforded great weight, and was not to be disturbed unless the defendant offers a “case specific reason.”
As a result, the court held that Alphatec must sell L-5 over one million Alphatec warrants for a price well under their current value. This holding represents the latest development in the dynamic area of Delaware jurisprudence concerning specific performance remedy clauses.
The trial team included partners Tony Yanez, Alex Cheney, and Brady Sullivan, and associates Sean Lavin, Emma Rosen, and Rahima Ghafoori.
