CHANCERY COURT FINDS PLAINTIFF’S CLAIMS OF FRAUD, BREACH OF FIDUCIARY DUTY, AND RELATED CLAIMS, PASS MUSTER UNDER 12(b)(6)
By: Scott E. Waxman and Douglas A. Logan
In Simon Ogus v. SportTechie, Inc., memorandum opinion 200131, C.A. No. 2018-0869-AGB, the Delaware Court of Chancery (the “Court”), generally held that Simon Ogus (the “Plaintiff”), pled sufficiently claims for fraud, breach of fiduciary duty, aiding and abetting, civil conspiracy and breach of contract against Oak View Group, LLC (“Oak View”) and individuals Taylor Bloom, Francesca Bodie, Daniel Kaufman (each a “Defendant” and together the “Defendants”). The claims stemmed from the Plaintiff’s termination and subsequent forced sale of shares in SportTechie, Inc. (“SportTechie or the “Company”), and the Court allowed most of the Plaintiff’s claims to survive the 12(b)(6) motion but dismissed a small number as well.
SportTechie was a Delaware corporation with its principal place of business in Washington, D.C. SportTechie primarily was a news source that reported on the technology aspects of sports that the Plaintiff co-founded with Bloom and in which he was the its Chief Operating Officer until March 2017. SportTechie originally formed as a limited liability company which was 55% owned by Bloom and 45% owned by the Plaintiff. Defendant Kaufman was an employee, officer, and stockholder of SportTechie. He was the sole in-house attorney at SportTechie at all relevant times and currently serves as Managing Director of SportTechie. Defendant Oak View is a Delaware limited liability company that is a controlling investor in SportTechie. Defendant Bodie was a director of SportTechie as a designee of Oak View, and was also the President of Business Development for Oak View.
The original operating agreement of the limited liability company gave the Plaintiff rights to veto major decisions. However, after raising funds, SportTechie converted from a limited liability company to a corporation. The Plaintiff gave his consent for this conversion, as required under the operating agreement. Upon conversion the Plaintiff signed a shareholder agreement that gave the SportTechie the right to repurchase his shares at fair market value upon his termination that could be with or without cause. This conversion and shareholder agreement were completed in quick succession. A month later, the board removed the Plaintiff and offered him approximately $800,000, with a check for 10% of the consideration and a note for the balance. The amount was determined by a third party valuation service provider. The Plaintiff did not accept the payment for his shares.
The Plaintiff asserted that the Defendants conspired to i) remove him from SportTechie, ii) eliminate his 44.5% interest in the company through a multi-step plan in order to enrich themselves, and iii) transfer control of the company to Oak View, a private equity and venture fund. The Plaintiff asserted these claims in seven separate claims as discussed below. The Defendants moved to dismiss all claims under 12(b)(6) for failure to state a claim. Under Court of Chancery Rule 12(b)(6) the standards governing the motion are well settled: (i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are “well-pleaded” if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible to proof. The Court analyzed each outstanding claim in turn.
Count for Fraud Against Bloom and Kaufman.
The Plaintiff’s fraud claim relied on essentially three separate actions: (i) converting the limited liability company into a corporation, which eliminated the Plaintiff’s ability to veto major actions and gave the board the authority to terminate officers and employees, including the Plaintiff; (ii) creating and expanding the board from which they excluded the Plaintiff which deprived him of a voice in board decisions; and (iii) executing the shareholders agreement, where Bloom and the Plaintiff agreed that the SportTechie could repurchase their shares upon the termination of their employment from the SportTechie. To state a claim for fraud in the inducement, a plaintiff must allege: a false representation; the defendant’s knowledge of or belief in its falsity or the defendant’s reckless indifference to its truth; the defendant’s intention to induce action based on the representation; reasonable reliance by the plaintiff on the representation; and causally related damages. And further, under applicable Court of Chancery rules, fraud must be pled with particularity. The Court found that the Plaintiff’s claims (i) and (ii) were supported by facts in the complaint however, his claim (iii) was not, and the Court therefore denied the Defendant’s motion with respect to claims (i) and (ii) but denied it with respect to claim (iii).
Count for Aiding and Abetting Fraud Against Bodie and Oak View
The Plaintiff claimed that Bodie and Oak View aided and abetted Bloom’s and Kaufman’s fraudulent conduct as described in Count I. The elements of aiding and abetting fraud are: (i) underlying tortious conduct, (ii) knowledge, and (iii) substantial assistance. The Court found the Plaintiff satisfied the first element, but failed to sufficiently pled facts in his complaint to satisfy the second element of the claim. Thus, the Court dismissed this count.
Count for Breach of Fiduciary Duty Against Kaufman
The Plaintiff claimed that Kaufman breached his fiduciary duty to SportTechie in two way, first that Kaufman pressured and threatened the Plaintiff to execute the conversion documents without the advice of outside counsel, and second, that Kaufman intentionally misrepresented information and omitted material information regarding the conversion and related documents. The Court found that the Plaintiff’s claims were sufficiently pled, except to the extent any claims relied upon the allegation related to the shareholder agreement due the reasoning of the Court with regard to the count for fraud.
Count for Breach of Fiduciary Duty Against Bodie and Bloom
Plaintiff asserted that Bodie and Bloom breached their fiduciary duties as directors of SportTechie in essentially three respects, by (i) withholding information about their plan to strip the Plaintiff of authority within the SportTechie, (ii) improperly purporting to terminate the Plaintiff’s employment, and (iii) purporting to repurchase Plaintiff’s shares at a price well below fair market value. Regarding the withholding of information, the Court found that the Plaintiff asserted facts reasonable to conclude that Bloom may have breached his fiduciary duty, but that Bodie was not yet a director when the alleged actions transpired and thus the Court was unwilling to expand fiduciary duty law to cover his actions. Further, regarding improper termination, the Court found that it was reasonable from the claims made by the Plaintiff that Bodie and Bloom acted in bad faith and breached their fiduciary duties. Finally, in terms of pricing of the shares, the Court held that the Plaintiff could not bring a claim of breach of fiduciary duty because the price of the shares was determined in accordance with the shareholder agreement, making it a breach of contract and not a potential breach of fiduciary duty. The Court has previously held in Nemec v. Shrader that “where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim. In that specific context, any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.”
Count for Aiding and Abetting Against Oak View
The Plaintiff asserted that Oak View aided and abetted Bodie in breaching her fiduciary duties. The elements for a claim of aiding and abetting are: the existence of a fiduciary relationship, a breach of the fiduciary’s duty, knowing participation in that breach by the defendants, and damages proximately caused by the breach. Because the Court found that the Plaintiff did not state a claim for breach of fiduciary duty against Bodie with respect to the withholding of information and the Defendant’s repurchase of the Plaintiff’s shares, this count also failed . However, the Plaintiff did state a claim for relief regarding the Plaintiff’s termination, which the Court found was well pled by facts in the complaint. As such, the Court dismissed the withholding of information and repurchase claims but let stand the termination claim.
Count for: Civil Conspiracy Against Bodie, Bloom, Kaufman and Oak View
The Plaintiff asserted that Bodie, Bloom, Kaufman, and Oak View engaged in a civil conspiracy to allow Oak View to obtain control of SportTechie by Oak View’s purchase of a secured convertible note and the subsequent execution of a multi-step plan that forced the Plaintiff out of SportTechie and allowed it to repurchase his shares “at below market price.” The elements for civil conspiracy are: a confederation or combination of two or more persons; an unlawful act done in furtherance of the conspiracy; and damages resulting from the action of the conspiracy parties. The Court found that the allegations as pled in complaint led to a reasonable inference of confederation between the Defendants due to the rapid pace of the sequence of events, along with the breach of fiduciary duty, and damages.
Count for Breach of the Shareholders Agreement Against SportTechie
The Plaintiff asserted that SportTechie breached the shareholders agreement by failing to determine in good faith the fair market value of SportTechie in connection with the repurchase of the Plaintiff’s shares. The board of SportTechie relied on a report by a third party valuation company to determine the price of the Plaintiff’s shares. The Plaintiff argued that the report contained notations and assumptions that were inconsistent with Defendants’ own representations regarding the treatment of $750,000 of convertible notes, SportTechie’s relationship with Oak View and its future investments, and the overall value of SportTechie. The Court held that because the Defendants argued that they were allowed to rely in good faith on an expert’s opinion regarding the valuation of the shares, the Defendants were in essence claiming an affirmative defense, and in so doing assumed the burden of proof. The Court held that the Defendants did not meet their burden, and the Plaintiff in fact had pled facts that showed it was reasonably conceivable that the board knew that the valuation report contained a false assumption such that the SportTechie’s purchase of the Plaintiff’s shares did not satisfy the good faith standard in the shareholders agreement.