LPPAS Representative, LLC v. ATH Holding Co. LLC, C.A. 2020-0241-KSJM / Shareholder Representative Services LLC v. ATH Holding Co. LLC, C.A. No. 2020-0443-KSJM (Del. Ch. May 2, 2023)

Delaware law recognizes parties’ ability to create a contractual right for an indemnifying party to participate in the defense of a claim. In this case, the Purchase Agreement provided the Sellers with such Participation Rights in connection with third-party claims that may give rise to Sellers’ indemnification obligations. The Court determined that the Buyer breached the Purchase Agreement by not allowing the Sellers to participate in the defense of investigations.

The Agreement here provided the Sellers with Control Rights over defenses of certain claims and created Participation Rights in connection with specified proceedings not falling under the Control provision, including regulatory claims. The Court held that the three investigations in question triggered Participation Rights. In relation to the government investigation, the Buyer breached the Agreement by unilaterally responding to numerous subpoenas without giving the Sellers an opportunity to review and comment, excluding the Sellers from the discussions related to the investigation, and not sharing the relevant information with the Sellers. In connection with a civil investigation, the Buyer similarly breached the Participation Rights provision by not allowing Sellers to review and partake in the discussion and execution of the tolling agreement entered into with the litigation adversary, as well as by not disclosing the existence of such agreement. Finally, in connection with a CMS investigation, the Buyer breached the Participation Rights provision by communicating with the government without giving the Sellers an opportunity to comment and by taking remedial measures without consulting Sellers. Addressing the Buyer’s affirmative defenses, the Court found that the Sellers did not repudiate the Agreement, and the undisputed facts demonstrated a material breach of the Participation Rights provision. Thus, the Court found for the Sellers and ordered fee shifting, while rejecting the Sellers’ claim for release of the escrowed funds based on the breaches.