Authored By: Matthew Smith and Dave Mollicone
On November 2, 2023, the Michigan Court of Appeals issued its for-publication opinion in Kircher v Boyne USA, Inc, et al. The case arose from two successive settlement agreements between the plaintiff shareholder of defendant Boyne USA, Inc. Pursuant to a 2014 settlement agreement, the plaintiff shareholder had a right to have her shares in Boyne USA redeemed subject to a cap and a variable per-share redemption price. The agreed upon formula for calculating the variable stock price was based on 6.5 times an Average of EBITDA, minus the “Total Company Debt” as reflected in the preceding year’s financial statements. Per the parties’ settlement agreement, this formula governed the calculation of the per-share redemption price “unless otherwise agreed by the Parties.”
Using this formula, the per-share redemption prices ranged from a low of $324 per share to a high of $773 per share in 2018. In 2019 the parties entered into a second settlement agreement, which memorialized the redemption prices for 2015 through 2018. In that settlement agreement, the 2019 redemption price was listed as “TBD” because the preceding year’s financial statements were not yet available. Eventually the plaintiff shareholder learned that in 2018 Boyne USA had shifted from an “operate leased assets” business model, by borrowing nearly $300 Million to purchase real estate and assets that it had previously leased. Because of this decision, the variable per-share redemption price under the formula dropped from $773 in 2018 to a negative $2,164.94 per share.
The plaintiff shareholder filed her complaint in 2020, asserting a claim for breach of the parties’ 2014 settlement agreement. In support of this claim, the plaintiff alleged that Boyne USA had breached the settlement agreement by entering into the 2018 real estate transaction in bad faith, thereby destroying the contracted-for right to redemption and value of her shares. Boyne USA moved for summary disposition under MCR 2.116(C)(8), arguing that the 2014 settlement agreement did not limit its ability to acquire assets or incur debt. The trial court disagreed, finding questions of fact concerning whether plaintiff could prevail on a theory of the implied covenant of good faith and fair dealing.
On leave granted, the Michigan Court of Appeals affirmed. In the to-be-published opinion authored by Judge Douglas Shapiro, the Court recognized that “[t]he covenant of good faith and fair dealing is an implied promise contained in every contract that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” While not a standalone cause of action, the Court “conclude[d] that when a contract confers discretion on a party, a breach-of-contract action will lie for an alleged bad-faith exercise of that discretion.” Here, the Court found such discretion conferred on Boyne USA by the parties’ agreement to calculate the per-share redemption price using the formula, “unless otherwise agreed by the Parties.” Accepting plaintiff’s allegations, her “reasonable expectation that she would be able to redeem her shares had been frustrated, yet defendants refused to consider an alternative method to calculate the redemption price, as expressly permitted by the 2014 settlement.” Under these facts, the Court “agree[d] with plaintiff that she has sufficiently stated a breach-of-contract claim on the basis of defendants’ alleged bad-faith decision to not utilize a different formula to calculate her redemption price.”