In Todd O’Gara and Wanu Water, Inc. v. Sheldon Coleman, et al., C.A. No. 2018-0708-KSJM (Del. Ch. Feb. 14, 2020), the Delaware Court of Chancery (the “Court”) granted a motion to dismiss claims made in connection with an alleged conspiracy to seize control of a beverage company by certain former directors and current stockholders. The founder and the company itself filed the complaint asserting claims for breach of fiduciary duty, tortious interference with business relations and contract, civil conspiracy, and libel. The Court found that the complaint failed to plead facts satisfying the essential elements of each claim and, furthermore, did not establish personal jurisdiction over certain of the defendants.
Wanu Water, Inc. (“Wanu”) is a Delaware corporation based in California that produces nutrient-infused water. Plaintiff O’Gara (“O’Gara”) founded Wanu in 2010, stepped down as CEO in 2014 (but continued as President and Chairman), and in 2017, executed voting agreements and irrevocable proxies that gave him control over approximately 52% of the voting power in Wanu. In early 2018, Wanu’s board of directors (the “Board”) voted to remove Wanu’s then-CEO. Immediately thereafter, the former CEO and two Wanu stockholders (together, “Stockholder Defendants”), began raising allegations against O’Gara and exchanged emails in which one of them declared “Operation ‘gain leverage’ commences.”
Over the course of several months, O’Gara was the subject of several allegations and investigations by certain stockholders of Wanu, including allegations that he had issued several hundred thousand Wanu shares to himself without authorization, that his business expenses were excessive and unsustainable, and that he misrepresented his educational background in various investor documents, amongst other assertions. During this time, O’Gara was unable to agree with the Board about the form, structure, and terms of a potential capital raise, including a convertible note offering proposed by Sheldon Coleman (“Coleman”), a director. The stockholders and Board members variously communicated amongst themselves and with the other Wanu stockholders about their concerns with O’Gara. The Board called a special meeting to discuss these concerns, but before the meeting could occur, O’Gara executed a written consent removing Coleman and three other directors (“Director Defendants”) from the Board, and designating three new directors in their place.
Following the removal of Director Defendants, Stockholder Defendants and Director Defendants sent emails and letters to Wanu’s stockholders, variously criticizing the removal of Director Defendants, putting forward allegations against O’Gara, and calling for O’Gara’s resignation. O’Gara responded with a letter to all Wanu stockholders addressing the allegations against him and, acting together with Wanu (together, “Plaintiffs”), commenced litigation against Director Defendants and certain stockholders. Plaintiffs ultimately settled with and dismissed several of the original parties to the litigation, and submitted an amended complaint (the “Amended Complaint”) with respect to just Coleman and two non-Delaware entities through which Coleman owned stock in Wanu (such entities together, “Green Lantern” and collectively with Coleman, “Defendants”). Defendants moved to dismiss the Amended Complaint for failure to state a claim and for lack of personal jurisdiction with respect to Green Lantern.
The standard of review for failure to state a claim is reasonable conceivability. In reviewing the motion, the Court first found no “reasonably conceivable basis” that Coleman engaged in civil conspiracy by exchanging emails criticizing or raising concerns about O’Gara. In Delaware, a claim for civil conspiracy requires, as an initial threshold, facts supporting the existence of a confederation or combination of two or more persons. According to the Court, the cited email exchanges between Coleman and Stockholder Defendants did not support the existence of an agreement to act, but rather suggested that Coleman and Stockholder Defendants shared significant concerns regarding O’Gara’s leadership and the potential implications thereof for Wanu, and that Coleman acted appropriately in his capacity as director of Wanu to express his concerns. The Court found that the conspiracy allegations were conclusory and not supported by or inferred from well-pleaded facts, and thus the Court need not accept them as true.
Second, the Court found no “rational inference” that Coleman breached his fiduciary duty of loyalty by proposing the convertible note financing or by communicating with stockholders about O’Gara’s conduct. The Court observed that a claim can survive a motion to dismiss by the inference that a director harbored self-interest adverse to stockholders’ interests or acted in bad faith. In the instant matter, the Court agreed it was reasonably conceivable that the proposed convertible note financing undervalued Wanu. However, the Court found no evidence of Coleman’s self-interest in proposing the financing, no allegation of Coleman’s desire to acquire more stock, and no reason to infer that Coleman would intentionally act to harm the value of his pre-existing interests in Wanu. The Court stated that Coleman’s disagreements with O’Gara with respect to the potential capital raise were a byproduct of a healthy deliberative process, and that his communications about O’Gara’s perceived misconduct reflected a fiduciary’s concern for Wanu. As such, the Court found that the Amended Complaint did not supply a reasonably conceivable basis to infer that Coleman breached his fiduciary duty of loyalty.
Third, the Court found no “reasonable probability” that Coleman tortiously interfered with Plaintiffs’ business relations. To survive dismissal, a claim of tortious interference with business relations must allege, among other things, the reasonable probability of a business opportunity with which the defendant intentionally interfered. A plaintiff cannot rely on generalized allegations of harm, and must assert something more than a mere perception of a prospective business relationship. Here, the Court held that the Amended Complaint did not plead facts suggesting that four current Wanu stockholders were reasonably expected to make another investment in Wanu. The current stockholders’ mere status as such, standing alone, was not enough to reasonably infer that there was more than a mere hope of a prospective business relationship.
Fourth, the Court rejected Plaintiffs’ claim that Coleman tortiously interfered with various contracts to which Plaintiffs were party. In Delaware, a tortious interference with contract claim must establish the existence of a contract of which the defendant was aware (along with an intentional, unjustified act that is a significant factor in causing the breach of such contract and that causes injury). The Court found that the Amended Complaint provided insufficient information about the existence of particular contracts, or about Coleman’s knowledge of such contracts. Although the Amended Complaint alleged Coleman tortiously interfered with certain Wanu voting agreements, it did not allege any breach of such agreements.
Fifth, the Court rejected Plaintiffs’ claim that Coleman committed libel by publishing defamatory or false statements about O’Gara’s educational background or conduct. In Delaware, if a plaintiff is a public figure, the test for defamation is subject to a heightened standard and such plaintiff must plead falsity and actual malice. Public figure status is a question of law, and there are two types of public figures: all-purpose and limited-purpose. In the Court’s view, O’Gara was a limited-purpose public figure because he had greater access to channels of effective communication to counter criticism and expose falsehoods (and in fact used those channels in a letter on company letterhead to all Wanu stockholders), and he voluntarily assumed a role which ran the risk of closer public scrutiny as Board chairman and president of Wanu. The Amended Complaint did not adequately provide factual support to establish either falsity or actual malice in Coleman’s communications. Accordingly, the Court found that Plaintiffs failed to establish a claim for libel.
Finally, the Court found that Plaintiffs could not use the conspiracy theory of jurisdiction to assert personal jurisdiction over Green Lantern. Under the conspiracy theory of jurisdiction, acts of each conspirator are attributable to each other conspirator, and jurisdiction asserted over one conspirator can be asserted over each other conspirator. Here, the Court found that the Amended Complaint failed to support the existence of a civil conspiracy involving Green Lantern and therefore the Court did not assert jurisdiction over Green Lantern. Likewise, the Court found no basis to order jurisdictional discovery over Green Lantern.