Monday, July 31, 2017

Curtis Cox v. SNAP, Inc. (4th Circuit)

Filed: June 13, 2017

Opinion by: Diana Gribbon Motz, Circuit Judge


            When reviewing a contract providing for a non-qualified stock option to purchase shares of common stock, Defendant corporation's argument that the contract only promised to issue options in the future was without merit because the prevention doctrine provides, "if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused." Consequently, the fourth circuit court of appeals affirmed the district court, holding Defendant corporation liable for breach of contract, awarding Plaintiff damages in the amount of $637,867.42.


             “In 2006, SNAP, a Virginia corporation, sought to expand its business in the field of federal procurement by contracting with Curtis Cox, a Maryland resident and the president of C2 Technologies, an established government contracting firm. On January 12, 2006, the parties executed a memorandum of understanding in which Cox agreed ‘to promote and market [SNAP] in exchange for obtaining an equity stake’ in the company.” There was no dispute that the memorandum constituted a binding contract.

            Under the terms of the contract, Cox and C2 Technologies agreed to provide various forms of assistance to SNAP, including using their best efforts to help SNAP obtain specific contracts, to consider SNAP for any potential leads, and to provide SNAP with approximately $240,000 worth of marketing support and assistance.

            “In return, the contract provides that ‘on January 12, 2006,’ the same day the parties executed the contract, SNAP ‘will issue a non-qualified stock option to Mr. Cox granting him the right to purchase 308 shares, representing five (5%) percent of the total authorized shares of stock of [SNAP].’ The contract announces SNAP’s intention to execute a stock split, under which Cox’s options at any time after January 1, 2008 and gives Cox the right to require SNAP to repurchase his options – a “put option” – any time after January 1, 2011. The repurchase price is payable to Cox ‘over a five-year period with interest at the then current prime rate.’”

            “Cox attempted to exercise his put option on March 18, 2011 in a letter to SNAP President Navneet Gupta. The parties discussed but never came to a resolution regarding Cox’s request. On October 6, 2015, Cox sent Gupta a second letter demanding that SNAP pay him the full value of his options. On October 9, 2015, Gupta replied that ‘[SNAP] owed you nothing.’”

            “A month later, in November 2015, Cox filed suit for breach of contract against SNAP in Virginia state court. SNAP removed the case to the district court for the Eastern District of Virginia. After removal, Cox filed an amended complaint alleging breach of contract for failure to repurchase, breach of contract for failure to issue his options, and quantum meruit.”

            In August 2016, the parties filed cross-motions for summary judgment. The district court granted Plaintiff summary judgment, reasoning, “the plain language of the contract showed that SNAP issued the stock options to Cox and that the contract did not require any further steps as a condition precedent before those options issued. In the alternative, the court held that the language at issue was patently ambiguous and must therefore be construed against SNAP. Applying the contract’s formula for calculating the value of Cox’s options and interest owed, the court awarded cox a total of $637,867.42.” Defendant appealed.


(1)  Liability and breach of contract

The court held Defendant liable because as the contract conveyed the stock options to Plaintiff, and Defendant breached the contract by refusing to repurchase them when Plaintiff exercised his put option. Defendant argued that the contract did not actually convey stock options to Plaintiff, rather, the contract merely promised to issue stock options in the future, and therefore the issuance of stock options was a condition precedent to Defendant’s obligation to repurchase them.

The court found this defense without merit, calling the defense a “self-defeating position.” The court explains, “even if issuing the stock options was a condition precedent to [Defendant]’s obligation to repurchase, [Defendant] has excused that condition by breaching its promise to issue the options, and so the prevention doctrine dooms its case. Under the prevention doctrine, ‘if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused…For the prevention doctrine to apply, [Plaintiff] need only show that [Defendant] materially contributed to the non-occurrence of the condition.”

The court further bolsters its analysis with Supreme Court of Virginia case law (Parish v. Wightman), which held, “where a contract is performable on the occurrence of a future event there is an implied agreement that the promisor will place no obstacle in the way of the happening of such even, particularly where it is dependent in whole or in part on his own act; and, where he prevents the fulfillment of a condition precedent or its performance by the adverse party, he cannot rely on such condition to defeat his liability.” The court further noted the failure to act can be considered, “contributing to the non-occurrence of the condition.”

Here, “[Defendant] controlled whether the stock options issued, and, even under its own interpretation, it had a contractual obligation to issue those options. By refusing to do so, [Defendant] plainly forfeited its right to rely on their issuance as an unfulfilled condition precedent to its obligation to repurchase [Plaintiff’s] options.”

Finally, the court referred to the Restatement, which reiterates that “when a condition in a contract fails to occur solely because a party breached one of its other obligations in the very same contract, there is no doubt that the party caused the non-occurrence for the purposes of the prevention doctrine.”

Holding that Defendant cannot avoid liability, the court affirmed the district court, explaining, “there is no doubt that [Defendant] had an obligation to bring about the condition it now tries to hide behind.”

(2)  Calculating Damages

Finding that the district court’s natural reading of the contractual language was appropriate, the court affirmed the district court’s holding, awarding Plaintiff a total of $637,867.42. The contract stipulated a formula for calculating the repurchase price of Plaintiff’s options:

“The price shall be determined based on the excess of the then fair market value of [SNAP], with such value determined based on .8 times [SNAP’s] annual sales during the most recently preceding twelve-month period, over the initial strike price…For purposes of determining the strike price of the options issued pursuant to paragraph 1, the value of [SNAP] will be based on a valuation of .8 times [SNAP’s] sales in calendar year 2005. This amount is estimated to be approximately $12,000,000.” [Amount payable] over a five-year period with interest at the then current prime rate [3.25%].
            The parties agreed that the value of Plaintiff’s options may be expressed as: ((80% of Defendant’s 2010 sales) – (80% of Defendant’s 2005 sales)) x 0.05. The district court found Defendant’s 2010 sales were $18,365,265 and that its 2005 sales were $4,938,584. Applying the above formula, the court found that Plaintiff’s options were worth $537,067.25. Defendant concedes that the district court used the proper formula to calculate damages, but it contends that the district court erred when it found that Defendant’s 2005 sales were $4,938,584. Specifically, Defendant relies on its contractual language, contending that its actual sales are immaterial because the contract stipulates that the 2005 sales were an estimated $12,000,000. The court disagreed.

The court found Defendant’s argument without merit, and instead held, “the contract provides that the value of [Plaintiff’s] options depends on the growth in [Defendant’s] value from 2005 to the time that [Plaintiff] finally exercises his put option. Under these circumstances, it stands to reason that the parties would have established a rough benchmark against which they could track the value of [Plaintiff’s] options.”

The court provided three reasons why Defendant’s logic was flawed. First, “the ordinary meaning of ‘estimate’ connotes a ‘rough or approximate calculation,’ not a fixed assumption. Common sense recommends we adhere to this meaning, since the parties estimated that the amount described is ‘approximately’ $12,000,000.” Second, the court argued, “it is not clear whether ‘this amount’ refers to [Defendant’s] 2005 sales or an estimate of the initial strike price, that is, 80% of [Defendant’s] sales. This unresolved ambiguity suggested that the parties did not mean for the estimate to serve as a stipulation.” Finally, the court argued, “[Defendant’s] reading would leave the parties and the court no way to establish a concrete strike price, and therefore no way to determine the value of [Plaintiff’s] options…for the purposes of establishing a strike price, it would be exceedingly strange for the parties to stipulate to an indeterminate figure."

In conclusion, the court found that “sales in calendar year 2005” referred to Defendant’s actual sales in 2005, and affirmed the district court’s award to Plaintiff of $637,867.42.

The full opinion is available in PDF.

Thursday, July 27, 2017

Greenspring Quarry Assoc., Inc. v. Beazer Homes Corp. (U.S.D.C.)

Filed:  June 26, 2017

Opinion by:  James K. Bredar

Holding:  Where (1) a principal exerts control over a corporation’s board via a majority acting within the principal’s scope of employment, (2) the board takes actions in breach of contract and in contravention of principal’s express statements, and (3) sufficient privity exists to survive a challenge based on economic loss doctrine, well-pleaded allegations of fraudulent misrepresentation against the principal are sufficient to survive a motion to dismiss for failure to state a claim.

Facts:  Plaintiffs (“Owners”) are members of master and subordinate property owners’ associations in a mixed residential and commercial development.  Defendant (“Developer”) is the developer of the relevant properties.

Development began in 2005, and Developer incorporated master and subordinate owners’ associations one year later.  Soon thereafter, Developer caused its employees to occupy the initial positions on both associations’ boards.  Developer filed on behalf of each association similar covenants under which a management company would maintain common areas, with Developer to pay costs until such time as it transferred title to the common area property to the associations.  Developer began billing Owners in 2008 but did not transfer title to the common areas until December 2015.

Owners, as members of the master and subordinate associations, brought separate but practically identical actions alleging breach of contract, negligent misrepresentation, and fraudulent misrepresentation.  Developer removed both actions under diversity jurisdiction and moved to dismiss the tort claims for failure to state a claim.  Removal was granted, and both actions were joined for convenience and efficiency.

Analysis:  Developer first argued that Owners’ allegations sounded only in contract.  The court began by noting that under the doctrine of respondeat superior, because Developer’s employees joined the boards under its direction and in furtherance of its objectives, Developer would be vicariously liable for any tortious acts committed by the board.  By extension, because board members of Maryland non-stock corporations owe the same fiduciary obligations as any other Maryland corporation, breach of duty accompanying a contractual obligation would be sufficient to support a tort claim.  So finding, the court permitted Owners’ tort claims.

Developer next argued that the economic loss doctrine barred any tort claims, such that its alleged negligence causing purely economic harms ought not create tort liability in the absence of privity, actual physical injury, or risk thereof.  However, noting that Maryland has traditionally permitted tort actions for purely economic losses in the context of fraud, and finding more than sufficient allegation of privity between the parties via the intimate nexus between Owners and the associations, and Developer’s control of the boards, the court deemed risk of tort liability reasonably foreseeable.

Third, Developer argued that Owners’ reliance on Developer’s allegedly negligent or fraudulent statements was unreasonable.  Avoiding the factual question of whether reliance was reasonable, the court evaluated the board’s alleged conduct under the adverse domination doctrine, where knowledge or actions of an agent whose interests are adverse to the principal cannot be imputed to the principal.  Because corporate entities act through agents who wouldn’t rationally be expected to communicate their own wrongdoing to the principal, equitable considerations lean in favor of the corporation and create a rebuttable presumption.  Here, a cause of action against the board (and vicariously, Developer) would not accrue if a disinterested majority board could be proven.  In the court’s view, Developer had not alleged sufficient facts to show that the boards contained a disinterested majority during the time period at issue.

Lastly, Developer argued that Owners’ claims failed to meet FRCP Rule 9(b)’s particularity requirements that time, place, and contents of allegedly fraudulent statements and the person making such statements be pled with sufficiency.  Finding the complaint to contain sufficiently complete allegations (an accounting of dated bills approved by the boards while under Developer’s control, with identities of the board members responsible), the court found Owners to have met their Rule 9(b) burden.

Accordingly, the court found Owners to have survived Developer’s motions to dismiss.

The full opinion is available in PDF.

Tuesday, July 25, 2017

In re American Capital, Ltd. Shareholder Litigation (Cir. Ct. Mont. Cnty)

Filed: July 12, 2017

Opinion by: Ronald B. Rubin

Holding:  A claim that a transaction is subject to the entire fairness standard of review survives a motion to dismiss under Delaware law where a minority shareholder exercised actual control over corporate decision-making by apparently forcing a quick sale for its own short-term gain, threatening ouster of the board to pressure members to ignore other serious bids and alternative courses of action at better values, and demanding unique and unjustifiable compensation for the deal.


Plaintiffs are the common shareholders of American Capital Ltd. (the “Company”). Following a settlement with the Company’s directors and officers, the only remaining Defendant was a management corporation described as being an activist hedge fund. From 2014 to 2015, the Company’s board regularly considered strategic options for the Company and eventually decided on a plan to spin the Company off into a new business development company, which the Company would manage. On September 20, 2015, the Company announced the spin-off plan and requested shareholder approval.

On November 16, 2015, Defendant emailed the Company CEO reporting an 8.4% ownership interest in the Company, and stating their intention to file a preliminary proxy contesting the spin-off plan. This was followed up by a telephone call informing him of their intention to remove him, the management and the board. Shortly thereafter, Defendant sent a letter criticizing the management and board, an attack on the spin-off plan, and a press release. Defendant urged the Company to drop the spin-off plan, replace the board, and undertake a strategic review. Defendant also filed a proxy statement with the SEC contesting the spin-off and urging shareholders to vote against any proposal by the board. After threatening to publicly call for the resignation of the CEO, Defendant began to by-pass him in dealings with the Company.

Shortly thereafter, the Company announced the formation of a strategic review committee to review the Company’s prospects, including a possible sale. Defendant reported an increase in ownership to 9.1%, and on that same day, a Capital Corporation sent the CEO a letter urging the Company to enter into a transaction with them. Defendant made recommendations regarding the review and sought to meet with the committee and the Company’s investment bankers. It continued to demand a sale and to threaten to seek the replacement of the Company’s board and management. It provided a list of potential buyers and continued to report increases in its ownership. When the board announced the decision to solicit purchase offers, Defendant called it the right course of action. Defendant also requested that the Company postpone the annual shareholder meeting and director nomination deadline.

After the Capital Corporation made an unsolicited purchase offer, Defendant urged the Company to reach a deal as soon as possible. The Company’s financial advisers met with the Defendant’s representatives. Defendant encouraged the investment bankers to finalize the sale even if it meant selling at a loss. In February 2016, the Company proposed three alternative scenarios to a quick sale of the whole Company. The Company’s management believed the shareholders would receive greater returns through an orderly liquidation or by remaining a standalone company. Yet the Company’s board continued to push for a sale, as demanded by the Defendant. The board once again pushed back its annual meeting, which extended the deadline for the Defendant to file a competing proxy. Furthermore, the committee and investment bankers withheld the liquidation scenario projections from the Company’s board.

The Company received several bids to acquire it. Defendant signed confidentiality agreements with the Company affording it unfettered access to the review process, and with the Capital Corporation to view its bid information. In a meeting with the Company’s legal and financial advisers, Defendant expressed a strong preference for the Capital Corporation’s bid—even though other offers appeared to have a better value. It also expressed a preference for a quick sale over an orderly liquidation—even at a lower value.

Soon after, the Company’s board outright rejected a competing bidder who increased its proposal subject to an exclusivity provision. The Capital Corporation submitted a revised bid and negotiated a voting agreement to lock in Defendant’s support. Defendant threatened the Company that if it failed to settle with Defendant for its expenses and close the deal, the Company’s board would be reconstituted. When the Company tried to revise terms of settlement, the Defendant threatened another strategic review unless the sale closed.

In May 2016, a merger with the Capital Corporation was announced. The Company approved a settlement agreement on the following terms: if the deal did not close, the board members would be replaced by the Defendant’s selections, the chairman would resign, and another review would be undertaken. In exchange, the Defendant would not launch a proxy fight before the next annual meeting. The Company also agreed to pay the Defendant $3 million.

Defendant filed a Motion to Dismiss the Plaintiff’s Amended Complaint on the grounds that personal jurisdiction is lacking, and that the transaction is not subject to entire fairness review under Delaware law. The Court denied both Motions.


Defendant satisfied the transacting business prong of the Maryland long-arm statute and the purposeful availment requirement of the Due Process clause because: the Company was headquartered in Maryland where it employed hundreds  (many of which were laid off due to the sale); Defendant initiated many calls to Maryland; Defendant triggered the process and events that led to the filing of the case when it sent the initial email (followed by many others) to the Company; and until the deal closed, Defendant enmeshed itself in the Company’s strategic review process and the board’s deliberations. These constitute repeated and intentional efforts towards the sale of a Maryland-based company. From the facts pleaded, it also appears that Defendant intentionally acquired a large portion of Company stock and increased it for a single purpose—to force a sale and make a short-term gain.

As for the substantive issue, Plaintiffs viewed the merger as the predictable result of Defendant’s pressuring the board to sell or be ousted. Defendant counters that the merger was the best value reasonably available, was vetted through a competitive bidding process, and that the Company’s board merely took the input of a large shareholder seriously.

Where, as here, a shareholder owns less than 50% of the Company’s stock, Plaintiffs must allege domination through actual control of corporate conduct. Under Delaware law, a minority shareholder is a controller if it has such formidable power that it exercises actual control over corporate decision-making. Here, Plaintiffs allege that Defendant was a controller for the specific purpose of forcing the sale, and that Defendant reaped unique benefits unavailable to the other shareholders. The controller test is a fact-based inquiry difficult to satisfy, but this case meets the threshold.

Here, the facts if proven would amount to actual control over the sale. No other shareholder received separate monetary compensation for the deal. The sale was already vetted by the financial advisers, and it is not clear what value Defendants added to merit the $3 million payment. The Plaintiffs adequately laid out the profit-making playbook for activist hedge funds, by forcing quick sales such as this one, which took only about six months.

Also, enough facts were pleaded to show that the board did not act independently. Defendant dominated the process and favored the Capital Corporation to the exclusion of other serious bidders that offered better long-term value. The board effectively took no actions to negotiate with those bidders. Collectively, the active role played by Defendant, the apparent willingness of bidders to pay a higher price, and the discount to book value of the stock gives credence to contention that the board knew the Capital Corporation undervalued the Company, but brushed this concern aside in order not to lose a proxy battle to Defendant. This amounts to a colorable claim of board domination. Thus, Plaintiffs sufficiently invoke the benefit of the entire fairness standard of judicial review.

The full opinion is available in PDF.