Joseph Golden v. ShootProof Holdings, LP ( 2023 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JOSEPH GOLDEN, )
)
Plaintiff, )
)
v. ) C.A. No. 2022-0434-MTZ
)
SHOOTPROOF HOLDINGS, LP, )
SHOOTPROOF HOLDINGS GP, LLC, )
SHOOTPROOF, LLC, PSG EQUITY L.L.C., )
PROVIDENCE STRATEGIC GROWTH III )
L.P., PROVIDENCE STRATEGIC GROWTH )
III-A L.P., STEPHEN MARSHALL, and )
THOMAS MCDERMOTT, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: November 9, 2022
Date Decided: February 28, 2023
Michael A. Barlow, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Rollo
C. Baker, IV, Margaret Schmidt, QUINN EMANUEL URQUHART &
SULLIVAN, New York, New York, Attorneys for Plaintiff.
Bradley R. Aronstam, S. Reiko Rogozen, Holly E. Newell, ROSS ARONSTAM &
MORITZ LLP, Wilmington, Delaware; Yehudah L. Buchweitz, Joshua S. Amsel,
Andrew Cauchi, WEIL, GOTSHAL & MANGES LLP, New York, New York,
Attorneys for Defendants.
ZURN, Vice Chancellor.
This case presents a familiar story. Two co-founders started a business that
succeeded and grew into a target for an acquisition. When the company entered
negotiations with a purchaser, the plaintiff co-founder emphasized the importance
of the management team and employees, including the plaintiff’s spouse, staying on
with the new post-transaction company. According to the plaintiff, the purchaser
and its affiliates and agents assured him that he and his management team would
have prominent roles in the new company, and that together they would incentivize
employee retention. The agreements documenting the merger did not make any such
assurances; they also contained integration and antireliance language. After the
transaction closed, the new company fired the plaintiff and his spouse.
The plaintiff, a Washington state resident, filed an action in this Court against
the purchaser and its affiliates and agents alleging the defendants violated
Washington securities law. Count I alleges the defendants made misleading
statements in connection with a sale of securities. Count II alleges certain of the
defendants are jointly and severally liable for those misleading statements.
The two individual defendants, who are not Delaware residents, sought
dismissal for lack of personal jurisdiction. The plaintiff argues this Court can
exercise personal jurisdiction over the individual defendants via the merger
agreement’s forum selection clause because they were third-party beneficiaries or
closely related to the agreement. The plaintiff also argues the individual defendants
1
engaged in substantial acts in Delaware in connection with the merger that subject
them to personal jurisdiction under Delaware’s long arm statute. This opinion
concludes neither route secures personal jurisdiction over the individual defendants.
All the defendants moved to dismiss the complaint for failure to state a claim
due to the plaintiff’s contractual inability to rely on extracontractual statements. The
plaintiff argues the antireliance and integration provisions are void because they
impermissibly waive claims under Washington securities law. The defendants argue
the provisions do not act as a waiver and are not void, but rather narrow the universe
of possible statements the plaintiff can contest as misleading. Washington law
supports the defendants’ argument. Accordingly, I grant the defendants’ motion and
the complaint is dismissed.
2
I. BACKGROUND1
Plaintiff Joseph Golden (“Plaintiff”2), a Washington resident, is the former
co-founder and co-CEO of Collage.com, Inc. (“Collage”). Nonparty Kevin Borders
was Collage’s other co-founder and co-CEO. Founded in 2007, Collage was an e-
commerce business offering a variety of customizable photo and home products.
In late 2020, Collage met with defendant ShootProof, LLC (“ShootProof”), a
Georgia limited liability company headquartered in Georgia that provided amateur
and professional photographers with tools to market and sell their photographs
online. Defendant Stephen Marshall, a Georgia resident, was ShootProof’s CEO,
and Defendant Thomas McDermott, a Georgia resident, was its CFO (together with
Marshall, the “Individual Defendants”). ShootProof’s private equity sponsor was
Defendant PSG Equity L.L.C. (“PSG”), a Delaware limited liability company, which
1
I draw the following facts from the Verified Complaint, the documents attached and
integral to it, affidavits, and any discovery of record. Docket Item (“D.I.”) 1 [hereinafter
“Compl.”]. See, e.g., Himawan v. Cephalon, Inc., 2018 WL 6822708, at *2 (Del. Ch.
Dec. 28, 2018); In re Gardner Denver, Inc. S’holders Litig., 2014 WL 715705, at *2 (Del.
Ch. Feb. 21, 2014); Sprint Nextel Corp. v. iPCS, Inc., 2008 WL 2737409, at *5 (Del. Ch.
July 14, 2008) (citing Ryan v. Gifford, 935 A.2d 258, 265 (Del. Ch. 2007)). Citations in
the form of “OB —” refer to the Opening Brief in Support of Defendants’ Motion to
Dismiss Plaintiff’s Verified Complaint, available at D.I. 14. Citations in the form of
“AB —” refer to Plaintiff’s Answering Brief in Opposition to Defendants’ Motion to
Dismiss, available at D.I. 16. Citations in the form of “RB —” refer to the Reply Brief in
Further Support of Defendants’ Motion to Dismiss Plaintiff’s Verified Complaint,
available at D.I. 19.
2
Plaintiff is married to nonparty Lindsey Golden. Compl. ¶ 3. To the extent this opinion
refers to Joseph Golden and Lindsey Golden by their first names, it is in pursuit of clarity
and without intending any disrespect or familiarity.
3
“invests in growth-stage software businesses and the founders and management
teams that drive them.”3 PSG invested in ShootProof through ShootProof’s majority
owner, Defendant ShootProof Holdings, LP (“Holdings”), a Delaware limited
partnership.4 ShootProof Holdings GP, LLC (“Holdings GP”) is Holdings’s general
partner, and Defendants Providence Strategic Growth III L.P. and Providence
Strategic Growth III-A L.P. are Delaware limited partnerships and Class A Preferred
Limited Partners in Holdings (together with PSG, ShootProof, Holdings, Holdings
GP, and the Individual Defendants, “Defendants”).
On December 2, 2020, Collage and ShootProof executed a letter of intent that
outlined the basic terms of an acquisition. ShootProof proposed acquiring Collage
for $82.5 million, to be adjusted upward or downward based on formal valuation and
diligence, but “no less than” $26.5 million of that consideration would be in the form
of “rollover equity by key Collage managers into ShootProof equity interests.”5 The
letter of intent reflected Defendants’ belief that “Collage represent[ed] an
opportunity to invest behind,” and partner with, “a strong team.”6 Defendants also
emphasized that “PSG has a strong track record of partnering with founders and
3
PSG’s principal place of business is in Boston, Massachusetts. Id. ¶ 13.
4
Holdings’s principal place of business is in Georgia. Id. ¶ 10.
5
Id. ¶ 40.
6
Id. ¶ 41 (emphasis omitted).
4
management teams to scale software companies.”7 Collage viewed ShootProof as
“a strong strategic partner” to help it grow and succeed.8
Between December 2020 and March 2021, ShootProof, PSG, and Collage
negotiated ShootProof’s acquisition of Collage by combining Collage and a merger
subsidiary into a single surviving ShootProof subsidiary, called Foreground.
Plaintiff and Borders negotiated on behalf of Collage. While the Individual
Defendants negotiated on behalf of ShootProof, their “strategic decisions and
substantive positions” aligned with PSG.9
Plaintiff and Borders made clear to Defendants that they would not proceed
with the transaction absent representations and assurances that they would have
active and substantial roles in the surviving entity, and that Collage employees
would keep their positions. Plaintiff negotiated for the payment of retention bonuses
to Collage employees. In January 2021, Plaintiff spoke with Marshall about
developing a post-closing retention plan for Collage employees because he believed
Collage’s employees were key to the company’s future success. Marshall agreed
retention was important and suggested Plaintiff work with PSG to develop a plan.
In February 2021, Plaintiff discussed with Defendants, including PSG, the
7
Id.
8
Id. ¶ 43; see id. ¶¶ 42–45.
9
Id. ¶¶ 46–47.
5
mechanics of the retention bonuses. Marshall stated that his “number one concern”
was to make sure “no one goes anywhere.”10 Later that month, Marshall circulated
a draft slide deck directed toward Collage employees announcing, “We’re growing;
no roles are being eliminated.”11
In late February 2021, Lindsey Golden, Collage’s general counsel and
Plaintiff’s spouse, emailed the Individual Defendants to seek clarity about her role
as general counsel in the surviving entity since ShootProof did not have in-house
counsel. On March 2, McDermott affirmed that Lindsey would have a role as
counsel in the surviving entity and provided her with a list of “short term needs.”12
The Individual Defendants confirmed Lindsey’s role in a phone call with her the
next day.13 Also on March 2, Marshall emailed Plaintiff about compensation and
titles in the surviving entity. Marshall indicated he was “concerned about using the
‘President’ title” for Plaintiff, and instead proposed exploring “Chief Economist” or
“other CxO titles.”14 Marshall stated Borders would “tak[e] on the CTO title and
role.”15
10
Id. ¶ 53 (emphasis omitted).
11
Id. ¶ 54 (emphasis omitted).
12
Id. ¶ 56.
13
Id.
14
Id. ¶ 58.
15
Id.
6
On March 5, Collage’s lead banker asked PSG to confirm it did not have “an
intent to reduce compensation amongst the go forward employees.”16 PSG
responded, “Of course not. We’ve got no intention of modifying comp or cutting
headcount. We simply feel that if we’re buying 100% of a business, we should not
be restricted from operating it as we see fit (which of course includes board and
management discussions, of which Joe and Kevin would be a part).”17
On March 10, the transaction closed. The transaction parties consummated
the merger pursuant to the Agreement and Plan of Merger by and among ShootProof,
LLC, Collage Merger Sub Inc., Lindsey Golden as Stockholder Representative, and
Collage.com, Inc., dated March 10, 2021 (the “Merger Agreement”).18 ShootProof
paid approximately two-thirds of the $91.4 million purchase price in cash and the
remaining one-third in shares of common stock of ShootProof Parent Corp.19 The
Merger Agreement provides that Collage Class A common stock would be converted
into the right to receive both cash and shares in ShootProof Parent Corp.20 It also
16
Id. ¶ 60.
17
Id.
18
Compl. Ex. A.
19
Compl. ¶ 48; Compl. Ex. B at Recitals. ShootProof Parent Corp., a Delaware
corporation, “is the owner of all the equity interests of ShootProof Senior LLC, a Delaware
limited liability company . . . . ShootProof Senior LLC is the owner of all of the interests
in ShootProof Intermediate, LLC, a Delaware limited liability company, which in turn is
the owner of all of the equity interests of [ShootProof].” Compl. Ex. A §§ 1.1, 6.1; id. at
Preamble.
20
Compl. Ex. A § 3.1(c).
7
provides as a condition of closing that holders of Class A common stock would
execute a Contribution and Exchange Agreement (the “Contribution and Exchange
Agreement”) by which the shares in ShootProof Parent Corp. would be converted
into newly issued common limited partnership units in Holdings.21 The Complaint
defines “Rollover Shares” as the Holdings units that Plaintiff ultimately received.22
Plaintiff ultimately received $12,901,316 of the purchase price in Rollover
Shares, and a seat on Holdings GP’s board. Plaintiff viewed the Rollover Shares as
an opportunity to share in the benefits of the transaction and the new entity’s
anticipated growth. As foretold in the Merger Agreement, he exchanged Shootproof
Parent Corp. shares for partnership units in Holdings pursuant to the Contribution
and Exchange Agreement dated March 10.23 The Merger Agreement and the
Contribution and Exchange Agreement are governed by Delaware law, and include
integration and antireliance provisions.24
21
Compl. Ex. A § 4.1(d)(vii); id. at Recitals; Compl. Ex. B.
22
Compl. ¶ 48(d); see also id. at 6 n.2; id. ¶ 107. For its part, the Contribution and
Exchange Agreement defines “Rollover Shares” as shares of ShootProof Parent Corp. that
Collage’s “Class A Stockholders” received pursuant to the Merger Agreement. Compl.
Ex. B at Recitals; see also Compl. Ex. A at Recitals (explaining Class A Stockholders
would receive “shares of Parent Corp Stock” pursuant to the Merger Agreement); id. § 1.1
(defining “Parent Corp Stock” as common stock in ShootProof Parent Corp.); see also AB
at 13 (“Defendants cannot challenge the second element of [Plaintiff’s RCW 21.20.010]
claim because the Merger was clearly the sale of a security.”). This opinion adopts
Plaintiff’s definition in considering his theory.
23
Compl. Ex. B § 1.1.
24
Compl. Ex. A §§ 8.10, 9.2, 9.8(a); Compl. Ex. B §§ 2.2(n), 4.7, 4.8(a).
8
Marshall stayed on as Foreground’s CEO, and McDermott remained as CFO.
But Collage’s management team’s role in Foreground was uncertain. On March 11,
Plaintiff sent the legacy Collage employees an email that had been circulated to and
approved by Defendants’ representatives, including the Individual Defendants. The
email stated “[n]o one is losing their jobs as a result of the merger” and “[e]veryone
on our team is staying.”25 It also identified Plaintiff as “Chief ??? Officer” and
indicated “Joe will manage an expanded research and analysis department, and pick
up TBD leadership responsibilities once we better understand the needs to the
combined organization.”26 Beginning on March 17, Plaintiff corresponded with
Marshall about serving on Foreground’s compensation committee.
On March 18, McDermott told Lindsey that she would be fired as general
counsel based on PSG’s discomfort with conflicts stemming from her marriage to
Plaintiff. On March 21, Marshall withdrew his offer to Plaintiff to sit on
Foreground’s compensation committee. Around this time, Borders resigned from
his position as Foreground CTO and was never replaced.
On April 13, Plaintiff asked Defendants to buy back his Rollover Shares.
They refused. On April 21, Plaintiff met with Marshall to negotiate a potential
separation agreement. Marshall’s conditions included Plaintiff relinquishing his seat
25
Compl. ¶ 66.
26
Id.
9
on the Holdings GP board. Plaintiff refused unless Defendants bought out his
Rollover Shares. Plaintiff declined to accept the terms of the separation agreement,
and his employment at Foreground was terminated.
Plaintiff turned to this Court. On May 18, 2022, he filed a verified complaint
(the “Complaint”) seeking over $12 million in rescissory damages.27 Count I alleges
“Defendants made untrue statements of material fact” to Plaintiff “regarding the
retention and involvement of Collage management and employees, in violation of
the Revised Code of Washington, Title 21, Chapter 21.20, Section 21.20.010 (‘RCW
21.20.010’)” in connection with the sale of the Rollover Shares in Holdings while
he was in Washington.28 Count II alleges PSG, Holdings GP, and the Individual
Defendants are “controlling persons of ShootProof within the meaning of” the
Revised Code of Washington, Title 21, Chapter 21.20, Section 21.20.430 (“RCW
21.20.430”), and so are liable for PSG and ShootProof’s violations of RCW
21.20.010.29
27
Compl.
28
Id. ¶¶ 106–113.
29
Id. ¶¶ 114–121.
10
On June 13, Defendants moved to dismiss the Complaint (the “Motion”)
under Court of Chancery Rules 12(b)(2) and 12(b)(6).30 The parties briefed the
Motion, and I heard argument on November 9.31
II. ANALYSIS
The Individual Defendants seek dismissal of the claims against them under
Court of Chancery Rule 12(b)(2) for lack of personal jurisdiction. All Defendants
have moved this Court to dismiss the action under Rule 12(b)(6) for failure to state
a claim. For the reasons that follow, I conclude this Court lacks personal jurisdiction
over the Individual Defendants, and the Complaint fails to state a claim upon which
relief may be granted.
A. This Court Lacks Personal Jurisdiction Over The Individual
Defendants.
Courts can only adjudicate cases in which they have personal jurisdiction over
the parties.32 “Because a motion under Rule 12(b)(2) presents factual and legal
questions, a court cannot grant it ‘simply by accepting the well pleaded allegations
of the complaint as true, because the pleader has no obligation to plead facts that
30
D.I. 9.
31
OB; AB; RB; D.I. 29; D.I. 30 [hereinafter “Hr’g Tr.”].
32
Genuine Parts Co. v. Cepec, 137 A.3d 123, 129 (Del. 2016).
11
show the amenability of the defendant to service of process.’”33 When a defendant
moves to dismiss under Rule 12(b)(2), the plaintiff has the burden to show a prima
facie case of personal jurisdiction over a nonresident defendant by demonstrating
“specific facts,” and not “rely[ing] on mere conclusory assertions.”34 “While such a
showing is frequently made on the basis of documentary evidence and affidavits,
and sometimes deposition or live testimony, in appropriate circumstances, a plaintiff
also may make the necessary prima facie showing using only the facts alleged in the
complaint.”35 Delaware courts can exercise personal jurisdiction over nonresident
defendants by consent through conduct,36 statutory means,37 or by “dint of a
contractual arrangement.”38
33
Neurvana Med., LLC v. Balt USA, LLC (Neurvana I), 2019 WL 4464268, at *2 (Del. Ch.
Sept. 18, 2019) (quoting Ruggiero v. FuturaGene, plc., 948 A.2d 1124, 1131 (Del. Ch.
2008)).
34
Mobile Diagnostic Gp. Hldgs., LLC v. Suer, 972 A.2d 799, 802 (Del. Ch. 2009) (citations
omitted).
35
Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the
Delaware Court of Chancery § 3.02, at 3-7 (2022) (internal quotation marks omitted)
(quoting Canadian Com. Workers Indus. Pension Plan v. Alden, 2006 WL 456786, at *11
n.93 (Del. Ch. Feb. 22, 2006), and citing N. Am. Cath. Educ. Programming Found., Inc. v.
Gheewalla, 2006 WL 2588971, at *6 n.63 (Del. Ch. Sept. 1, 2006), aff’d, 930 A.2d 92(Del. 2007)).
36
E.g., Ross Hldg. & Mgmt. Co. v. Advance Realty Gp., LLC, 2010 WL 1838608, at *11
(Del. Ch. Apr. 28, 2010) (citing Hornberger Mgmt. Co. v. Haws & Tingle Gen.
Contractors, Inc., 768 A.2d 983, 989 (Del. Super. 2000)).
E.g., Mobile Diagnostic, 972 A.2d 799, 803 (Del. Ch. 2009); BAM Int’l, LLC v. MSBA
37
Gp. Inc., 2021 WL 5905878, at *5 (Del. Ch. Dec. 14, 2021).
38
BAM Int’l, 2021 WL 5905878, at *6.
12
“Where the parties to the forum selection clause have consented freely and
knowingly to the court’s exercise of jurisdiction, the clause is sufficient to confer
personal jurisdiction on a court.”39 Consent renders a “minimum contacts” analysis
unnecessary.40 Contractual consent to jurisdiction only extends to claims identified
by and encompassed by the consent provision.41 “Forum selection/consent to
jurisdiction clauses are ‘presumptively valid’ and should be ‘specifically’ enforced
unless the resisting party ‘could clearly show that enforcement would be
unreasonable and unjust, or that the clause was invalid for such reasons as fraud and
overreaching.’”42
39
Nat’l Indus. Gp. (Hldg.) v. Carlyle Inv. Mgmt. L.L.C., 67 A.3d 373, 381 (Del. 2013)
(citing Nat’l Equip. Rental, Ltd. v. Szukhent, 375 U.S. 311, 315–16 (1964)); accord Solae,
LLC v. Hershey Can., Inc., 557 F. Supp. 2d 452, 456 (D. Del. 2008) (citing Res. Ventures,
Inc. v. Res. Mgmt. Int’l, Inc., 42 F.Supp.2d 423, 431 (D. Del. 1999)).
40
Ingres Corp. v. CA, Inc., 8 A.3d 1143, 1145 (Del. 2010) (“[W]here contracting parties
have expressly agreed upon a legally enforceable forum selection clause, a court should
honor the parties’ contract and enforce the clause, even if, absent any forum selection
clause, the [common law] principle might otherwise require a different result.” (collecting
authorities)); see BAM Int’l, 2021 WL 5905878, at *6.
41
Ruggiero, 948 A.2d at 1132 (“Of course, the party is bound only by the terms of the
consent, and such consent applies only to those causes of action that are identified in the
consent provision.”); Multi-Fineline Electronix, Inc. v. WBL Corp., 2007 WL 431050, at
*6–7 (Del. Ch. Feb. 2, 2007) (finding defendants did not actually consent to jurisdiction
because the complaint did not plead a dispute within the scope of the forum selection
clause).
42
Cap. Gp. Cos., Inc. v. Armour, 2004 WL 2521295, at *3 (Del. Ch. Oct. 29, 2004)
(quoting M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972), and citing Burger
King v. Rudzewicz, 471 U.S. 462, 472 n.14 (1985)); accord Salzberg v. Sciabacucchi, 227
A.3d 102, 135 (Del. 2020) (citing and quoting Bremen, 407 U.S. at 15).
13
Plaintiff alleges that the Individual Defendants effectively consented to this
Court’s jurisdiction pursuant to the Merger Agreement’s forum selection clause
because they were intended third-party beneficiaries of, or closely related to, the
Merger Agreement.43 Section 9.8(b) provides, in pertinent part:
The Parties hereby irrevocably submit to the exclusive jurisdiction of
the Court of Chancery of the State of Delaware sitting in Wilmington,
Delaware (or if such court lacks jurisdiction, in any appropriate state or
federal court in the State of Delaware sitting in Wilmington, Delaware)
over all claims or causes of action (whether in contract or tort) that may
be based upon, arise out of or relate to this Agreement, or the
negotiation, execution or performance of this Agreement (including
any claim or cause of action based upon, arising out of or related to any
representation or warranty made in or in connection with this
Agreement or as an inducement to enter into this Agreement) and each
Party hereby irrevocably agrees that all claims in respect of any such
Action related thereto may be heard and determined in such courts.44
43
Compl. ¶ 24; AB at 31–32. Plaintiff does not claim the Individual Defendants consented
to jurisdiction under the Contribution and Exchange Agreement’s forum selection clause.
See id.; Compl. Ex. B § 4.8(b). But because Plaintiff’s theory is pinned to the exchange of
Holdings units under the Contribution and Exchange Agreement, I note for the sake of
completeness that the Individual Defendants are not “Parties,” signatories, or third-party
beneficiaries to the Contribution and Exchange Agreement. Compl. Ex. B at Preamble; id.
§ 4.6 (“Nothing express or implied in this Agreement is intended or shall be construed to
confer upon or give any person other than the parties and their respective successors and
permitted assigns any right, benefit or remedy under or by reason of this Agreement.”).
Plaintiff does not argue the Individual Defendants received any benefit from the
Contribution and Exchange Agreement, nor that it was foreseeable they would be bound.
See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are
deemed waived.”).
44
Compl. Ex. A § 9.8(b).
14
The Individual Defendants are not “Parties” to the Merger Agreement.45 And
as a foundational principle, “Delaware law clearly holds that officers of a
corporation are not liable on corporate contracts as long as they do not purport to
bind themselves individually.”46 While Marshall signed the Merger Agreement on
ShootProof’s behalf, there is no evidence that either of the Individual Defendants
purported to bind themselves individually to the Merger Agreement.
But Delaware law provides a framework for considering whether a forum
selection clause is enforceable against those who are not otherwise individually
bound by the agreement. Capital Group Companies, Inc. v. Armour explains:47
[A] court can enforce a forum selection provision against a non-
signatory if the following three elements are met: (i) the agreement
contains a valid forum selection provision; (ii) the non-signatory has a
sufficiently close relationship to the agreement, either as an intended
third-party beneficiary under the agreement or under principles of
estoppel; and (iii) the claim potentially subject to the forum selection
provision arises from the non-signatory’s standing relating to the
agreement.48
45
Id. at Preamble.
46
Ruggiero, 948 A.2d at 1132 (internal quotation marks omitted) (quoting Amaysing Tech.
Corp. v. CyberAir Commc’ns, Inc., 2005 WL 578972, at *3 (Del. Ch. Mar. 3, 2005));
accord Brown v. Colonial Chevrolet Co., 249 A.2d 439, 441 (Del. Super. 1968) (“As a
general rule, so far as personal liability on corporate contracts is concerned, officers of
corporations are in the same position as agents of private individuals and are not liable on
corporate contracts as long as they do not act and purport to bind themselves individually.”
(citing 19 AM. JUR. 2D Corporations § 1341 (1965))).
47
2004 WL 2521295, at *5.
48
Fla. Chem. Co., LLC v. Flotek Indus., Inc., 262 A.3d 1066, 1090 (Del. Ch. 2021) (citing
Cap. Gp., 2004 WL 2521295, at *5, and Neurvana I, 2019 WL 4464268, at *3), cert. denied
15
“For a non-signatory to be bound by a contract’s forum selection clause, the answer
to all three questions must be yes.”49
Here, the parties do not dispute the first or third elements as to the whether
the Individual Defendants are bound by the Merger Agreement: they only dispute
the second.50 “Under the second element of the Capital Group test, a forum selection
provision can bind a non-signatory that has a sufficiently close relationship to the
agreement, either as an intended third-party beneficiary under the agreement or
based on principles of estoppel.”51
The Individual Defendants are not intended third-party beneficiaries to the
Merger Agreement. Section 9.13 of the Merger Agreement provides:
2021 WL 4170712 (Del. Ch. 2021); see id. at 1093 (addressing the third element and noting
that “[d]espite making passing mention of standing, the [Capital Group] decision seems to
have simply analyzed whether the claims fell within the scope of the forum selection
provision.”); id. at 1093–97 (analyzing the third Capital Group element).
49
Sustainability P’rs LLC v. Jacobs, 2020 WL 3119034, at *5 (Del. Ch. June 11, 2020)
(citing Neurvana I, 2019 WL 4464268, at *3).
50
Hr’g Tr. 84; AB at 31; OB at 36–37; RB at 24–27.
51
Fla. Chem. Co., 262 A.3d at 1090.
16
Third-Party Beneficiaries. Except for the D&O Indemnified Person
who shall have the right to enforce their respective rights under Section
7.5 and as contemplated by Section 7.6, and Article 8, nothing in this
Agreement, express or implied, is intended to confer upon any Person
other than the Parties any rights or remedies of any nature whatsoever
under or by reason of this Agreement. From and after the Closing, all
of the Persons identified as third-party beneficiaries in the immediately
preceding sentence shall be entitled to enforce such provisions and to
avail themselves of the benefits of any remedy for any breach of such
provisions, all to the same extent as if such Persons were parties to this
Agreement.52
In other words, only “D&O Indemnified Person[s]” with rights under Section 7.5 are
intended third-party beneficiaries. Section 7.5 provides for indemnification of the
Company’s directors and officers. It defines “D&O Indemnified Persons” as “each
present and former director and officer of the Company.”53 The “Company” is
defined as Collage.54 The Individual Defendants were officers of ShootProof and
Foreground, but not Collage.55 Accordingly, the Individual Defendants are not
intended third-party beneficiaries to the Merger Agreement.
The Individual Defendants are also not bound by principles of estoppel.
Those principles can bind nonsignatories who are “closely related” to an
52
Compl. Ex. A § 9.13 (emphasis omitted).
53
Id. § 7.5(a).
54
Id. at Preamble.
55
Compl. ¶¶ 1, 16, 17; OB at 7.
17
agreement.56 They do so only if: (1) “the party receives a direct benefit from the
agreement”; or (2) “it was foreseeable that the party would be bound by the
agreement.”57 “Although the direct-benefit and foreseeability inquiries have been
articulated as disjunctive, many Delaware cases have relegated the foreseeability
inquiry to a subordinate role.”58
Plaintiff argues the Individual Defendants received a direct benefit from the
Merger Agreement under Baker v. Impact Holding, Inc.59 Specifically, Plaintiff
asserts the Individual Defendants directly benefitted from the Merger Agreement
because they became officers in the post-transaction entity, Foreground.60 In Baker,
the Court found that where a stock purchase agreement “expressly name[d]” a party
as a director, he received a direct benefit that bound him to that agreement.61 That
56
Fla. Chem., 262 A.3d at 1092; Neurvana I, 2019 WL 4464268, at *4 (internal quotation
marks omitted) (quoting iModules Software, Inc. v. Essenza Software, Inc., 2017 WL
6596880, at *3 (Del. Ch. Dec. 22, 2017) (ORDER), and citing Cap. Gp., 2004 WL
2521295, at *6 nn.40 & 41).
57
Baker v. Impact Hldg., Inc., 2010 WL 1931032, at *4 (Del. Ch. May 13, 2010) (citing
Weygandt v. Weco, LLC, 2009 WL 1351808, at *4 (Del. Ch. May 14, 2009)); accord Fla.
Chem., 262 A.3d at 1090–94.
58
Neurvana I, 2019 WL 4464268, at *5 (footnote omitted) (citing McWane, Inc. v. Lanier,
2015 WL 399582, at *8 (Del. Ch. Jan. 30, 2015)).
59
2010 WL 1931032.
60
AB at 31–32.
61
Baker, 2010 WL 1931032, at *4.
18
party sued to enforce that benefit “received via the [agreement],” and was bound by
its forum selection clause.62
Not so with the Individual Defendants. Unlike the agreement in Baker, the
Merger Agreement did not “expressly name[]” them to their posts in the post-
transaction entity.63 Those positions were not “received via the” Merger
Agreement.64 “This Court’s case law on this point is clear: to be bound by forum
selection clauses, non-signatories must actually receive a benefit under or by way of
the contract.”65 That the Individual Defendants stayed on when ShootProof became
Foreground is insufficient to bind the Individual Defendants to the Merger
Agreement as nonsignatories.
Turning from direct benefit to foreseeability, this Court has applied the
foreseeability inquiry as a standalone basis for satisfying the closely-related test in
two scenarios: (1) where a nonsignatory defendant seeks to enforce a forum
selection clause against a signatory plaintiff;66 or (2) where a controlled
nonsignatory, who bears a “clear and significant connection to the subject matter of
62
Id.63
Id.64
Id.65
Sustainability P’rs, 2020 WL 3119034, at *6 (emphasis omitted and emphasis added).
66
Neurvana I, 2019 WL 4464268, at *5–6 (citing Ashall Homes Ltd. v. ROK Entm’t Gp.,
Inc., 992 A.2d 1239, 1249 (Del. Ch. 2010), and Lexington Servs. Ltd. v. U.S. Patent No.
8019807 Delegate, LLC, 2018 WL 5310261, at *5–6 (Del. Ch. Oct. 26, 2018)).
19
the agreement,” could be manipulated by controller signatories in an “end-run”
around the agreement’s forum selection clause.67 “[T]he test should not extend to
all non-signatories that a signatory ‘happens to control.’”68
These facts do not resemble any of those limited scenarios. Plaintiff argues
that the Individual Defendants are “closely-related to the [Merger Agreement] in
such a way that it would be foreseeable that they would be bound” because they
“were the CEO and CFO of ShootProof . . . and they were the lead negotiators for
ShootProof with regard to the Merger Agreement.”69 The Individual Defendants’
positions as officers and their contacts with the negotiating process are insufficient
to bind them to the Merger Agreement under the foreseeability prong.70 I conclude
the Individual Defendants have not implicitly consented to the Merger Agreement’s
forum selection clause as nonsignatories under the Capital Group test.
Plaintiff alternatively alleges the Individual Defendants are subject to this
Court’s jurisdiction under 10 Del. C. § 3104. Where a nonresident defendant has
not consented to personal jurisdiction, state courts can exercise personal jurisdiction
67
Id. at *6 (citing and quoting iModules, 2017 WL 6596880, at *3–4, and then Weygandt,
2009 WL 1351808, at *2, *4–6, and then Ashall Homes, 992 A.2d at 1248).
68
Id. (quoting iModules, 2017 WL 6596880, at *3).
69
AB at 31 (internal quotation marks omitted) (quoting Carlyle Inv. Mgmt. LLC v.
Moonmouth Co. SA, 779 F.3d 214, 219 (3d Cir. 2015), and then citing Compl. ¶ 46); see
also AB at 32 (citing Compl. ¶¶ 25, 38, 41, 46, 56, 64, and Compl. Ex. A).
70
See supra note 46 and accompanying text.
20
over her by either general jurisdiction or specific jurisdiction.71 In both cases,
Delaware courts apply a two-prong analysis to determine whether the plaintiff
satisfied its burden.72 First, courts consider whether the defendant has sufficient
contacts for statutory jurisdiction.73 Section 3104(c)(3) is “a ‘single act’ statute that
establishes jurisdiction over nonresidents on the basis of a single act or transaction
engaged in by the nonresident within the state.”74 Thus, Section 3104(c)(3) permits
the exercise of “specific personal jurisdiction over claims arising from the
jurisdictional contacts” at issue.75 Second, should the court find the long-arm statute
applies, it “must ‘evaluate whether subjecting the nonresident to jurisdiction in
Delaware violates the Due Process Clause of the Fourteenth Amendment (the so-
called ‘minimum contacts’ requirement).’”76
Plaintiff asserts specific jurisdiction over the Individual Defendants is
warranted because they “engaged in substantial acts which caused the merger of two
71
See Genuine Parts, 137 A.3d at 129–30.
72
Mobile Diagnostic, 972 A.2d at 802.
73
Id. at 803; Genuine Parts, 137 A.3d at 127 (noting that in the circumstance where
Delaware cannot exercise general jurisdiction over a foreign corporation, the analysis turns
to specific jurisdiction under the long-arm statute).
74
Carlton Invs. v. TLC Beatrice Int’l Hldgs., Inc., 1995 WL 694397, at *10 (Del. Ch.
Nov. 21, 1995) (citing Eudaily v. Harmon, 420 A.2d 1175, 1180 (Del. 1980), and Tabas v.
Crosby, 444 A.2d 250, 254 (Del. 1982)).
75
Id.76
Mobile Diagnostic, 972 A.2d at 803 (quoting AeroGlobal Cap. Mgmt., LLC v. Cirrus
Indus., Inc., 871 A.2d 428, 438 (Del. 2005)).
21
Delaware corporations,” “are or were officers or directors of Delaware entities,
including [Holdings GP] and [a] nonparty . . . Delaware corporation created for the
purpose of the transaction that is the subject of th[e] complaint,” and “made various
fraudulent statements that give rise to the cause of action underlying the
Complaint.”77 None of these acts support long-arm jurisdiction. “Causing” a merger
governed by Delaware law, by itself, does not satisfy Section 3104(c).78 A Delaware
court cannot exercise personal jurisdiction over a director or officer for an act of the
corporation simply because the officer or director directed the corporation to take
that act.79
Neither does the creation of the Delaware corporation, Collage Merger Sub
Inc., that merged into Collage to create Foreground.80 Plaintiff does not allege the
Individual Defendants formed the Delaware entity, only that they were officers or
77
Compl. ¶¶ 25–26; AB at 34. Plaintiff’s answering brief does not cite 10 Del. C. § 3114;
any argument under that statute is waived. Emerald P’rs, 726 A.2d at 1224.
78
See Fortis Advisors LLC v. Johnson & Johnson, 2021 WL 5893997, at *6–7 (Del. Ch.
Dec. 13, 2021) (finding merger did not create long-arm jurisdiction over individual
defendants where negotiations did not take place in Delaware and the relevant statements
were not made within the state).
79
E.g., Microsoft Corp. v. Amphus, Inc., 2013 WL 5899003, at *10 n.40 (Del. Ch.
Oct. 31, 2013) (“Where a director acts solely in that capacity to cause a corporation to take
action, the corporation’s action will not be attributed to the director for purposes of
jurisdiction unless the plaintiff can establish that the corporation was acting as the
director’s agent or alter ego.” (citation omitted)).
80
Compl. ¶¶ 25–26; Compl. Ex. A at Recitals.
22
directors thereof.81 Even if he had so alleged, “merely participating in the formation
of a Delaware entity, without more, does not create a basis for jurisdiction in
Delaware.”82 “Instead, ‘the formation of a Delaware entity must be central to the
plaintiff’s claims of wrongdoing.’”83 While the creation of the merger subsidiary
was a necessary step to complete the merger, it “cannot reasonably be viewed as an
integral part of the wrongdoing by the individual defendants alleged in the
Complaint.”84
Finally, Plaintiff contends the Individual Defendants made various false
statements in violation of Washington securities law. But the merger negotiations
did not take place in Delaware, the relevant statements were not made in Delaware,
and Plaintiff was not in Delaware when he received them.85 Indeed, Plaintiff’s
Washington securities law claims hinge on his injury having taken place in
Washington. The injuries allegedly suffered have no nexus to Delaware. The
81
Compl. ¶¶ 25–26.
82
Conn. Gen. Life Ins. Co. v. Pinkas, 2011 WL 5222796, at *2 (Del. Ch. Oct. 28, 2011).
83
Fortis, 2021 WL 5893997, at *7 (quoting Dow Chem. Co. v. Organik Kimya Hldg. A.S.,
2017 WL 4711931, at *8 (Del. Ch. Oct. 19, 2017)).
84
Id.85
E.g., Compl. ¶ 108 (“Defendants made the material misrepresentations alleged herein to
Joe . . . who was in Washington State. Defendants also engaged in the transaction at issue,
including the sale of securities to Joe while Joe was in Washington State. Defendants also
knew that Joe was going to acquire securities from his location in Washington State, and
he did in fact acquire securities from his location in Washington State.”).
23
Individual Defendants lack have committed no act in Delaware supporting specific
statutory jurisdiction.
For the reasons explained, this Court does not have personal jurisdiction over
the Individual Defendants and the Complaint is therefore dismissed as to them
pursuant to Rule 12(b)(2). I decline to grant Plaintiff jurisdictional discovery.86
B. Plaintiff Fails To State A Claim Under Rule 12(b)(6).
Defendants also move to dismiss the Complaint under Court of Chancery Rule
12(b)(6) for failure to state a claim for relief. The standard for a motion to dismiss
under Rule 12(b)(6) is 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.”87
86
Neurvana Med., LLC v. Balt USA, LLC (Neurvana II), 2019 WL 5092894, at *2 (Del.
Ch. Oct. 10, 2019) (“[T]he decision to grant jurisdictional discovery is discretionary.”); In
re Am. Int’l Gp., Inc., 965 A.2d 763, 816 n.195 (Del. Ch. 2009) (“It is also not appropriate
to give the Stockholder Plaintiffs the benefit of jurisdictional discovery so they can fish for
a possible basis for this court’s jurisdiction. Before ordering personal jurisdiction
discovery there must be at least ‘some indication that this particular defendant is amenable
to suit in this forum.’” (quoting Hansen v. Neumueller GmbH, 163 F.R.D. 471, 475 (D. Del.
1995))), aff’d sub nom. Tchrs.’ Ret. Sys. of La. v. PricewaterhouseCoopers LLP, 11 A.3d
228 (Del. 2011) (TABLE).
87
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
24
Thus, the touchstone “to survive a motion to dismiss is reasonable
‘conceivability.’”88 This standard is “minimal”89 and plaintiff-friendly.90 “Indeed,
it may, as a factual matter, ultimately prove impossible for the plaintiff to prove [its]
claims at a later stage of a proceeding, but that is not the test to survive a motion to
dismiss.”91 Despite this forgiving standard, the Court need not accept conclusory
allegations unsupported by specific facts or draw unreasonable inferences in favor
of the nonmoving party.92 “Moreover, the court is not required to accept every
strained interpretation of the allegations proposed by the plaintiff.”93
Counts I and II both allege violations of Washington State’s Blue Sky Laws
based on extracontractual assurances made to Plaintiff during negotiations to the
effect that he, his spouse, and his Collage colleagues would keep their jobs after the
merger.94 Count I alleges Defendants made material misrepresentations in
88
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 536–37 (Del.
2011).
89
Id. at 536.
90
E.g., Clouser v. Doherty, 175 A.3d 86, 2017 WL 3947404, at *9 (Del. 2017) (TABLE)
(citing Malpiede v. Townson, 780 A.2d 1075, 1082 (Del. 2001)).
91
Cent. Mortg. Co., 27 A.3d at 536.
92
E.g., Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009) (citations
omitted).
93
In re Trados Inc. S’holder Litig., 2009 WL 2225958, at *4 (Del. Ch. July 24, 2009)
(internal quotation marks omitted) (quoting In re Gen. Motors (Hughes) S’holder Litig.,
897 A.2d 162, 168 (Del. 2006)).
94
E.g., Compl. ¶¶ 39, 41, 45, 59–66, 106–121; AB at 6–10, 20.
25
connection with the sale of Holdings’s securities in violation of the Revised Code of
Washington (“RCW”) 21.20.010.95 RCW 21.20.010(2) provides that: “[i]t is
unlawful for any person, in connection with the offer, sale or purchase of any
security, directly or indirectly . . . (2) [t]o make any untrue statement of a material
fact or to omit to state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they are made, not misleading.”96 This
provision was modeled on Section 101 of the Uniform Securities Act of 1956 and is
substantially similar to Rule 10b-5 of the Securities Exchange Act.97 To plead a
claim under RCW 21.20.010(2), a plaintiff must demonstrate that: (1) the defendant
made a statement “in connection with the offer, sale or purchase of any security,
directly or indirectly;”98 and (2) the statement was an “untrue statement of material
fact” or an omission of a material fact that, “in light of the circumstances under
which [the statements] are made,” would be misleading.99
Count II alleges PSG, Holdings GP, and the Individual Defendants are liable
under RCW 21.20.430 for PSG and ShootProof’s alleged violations of RCW
95
Compl. ¶¶ 106–113; id. at 17.
96
RCW 21.20.010(2).
97
See Fed. Home Loan Bank of Seattle v. Credit Suisse Sec. (USA) LLC, 449 P.3d 1019,
1022, 1027 (Wash. 2019).
98
Defendants do not challenge this element. RB at 6 n.10; AB at 13; Hr’g Tr. 64.
99
RCW 21.20.010(2).
26
21.20.010.100 A finding on Count II necessarily depends on whether Plaintiff has
stated a claim in Count I.101 I begin with Count I.
Defendants argue Plaintiff has failed to overcome the antireliance provision
in the Contribution and Exchange Agreement and the integration provisions in that
agreement and the Merger Agreement.102 Alternatively, Defendants assert Plaintiff
failed to allege the extracontractual statements were false when made. I need only
address Defendants’ first argument.
100
Compl. ¶¶ 114–121; id. ¶ 120 (“PSG and ShootProof committed violations of RCW
21.20.010.”). Under RCW 21.20.430, a person who buys or sells securities in violation of
RCW 21.20.010, or a person who directly or indirectly controls a buyer or seller who
transacted securities in violation of RCW 21.20.010 is liable to the counterparty in the
securities transaction. RCW 21.20.430(1)–(3). It is unclear whether Plaintiff is pursuing
Count II under RCW 21.20.430(2) against the identified Defendants as sellers, or just RCW
21.20.430(3) against the identified Defendants as alleged controllers of the sellers. Compl.
¶¶ 114–121.
101
RCW 21.20.430(1) (“Any person, who offers or sells a security in violation of any
provisions of RCW 21.20.010, . . . is liable to the person buying the security from him or
her . . . .”); RCW 21.20.430(2) (“Any person who buys a security in violation of the
provisions of RCW 21.20.010 is liable to the person selling the security to him or
her . . . .”); RCW 21.20.430(3) (“Every person who directly or indirectly controls a seller
or buyer liable under subsection (1) or (2) above, every partner, officer, director or person
who occupies a similar status or performs a similar function of such seller or buyer, . . . is
also liable jointly and severally with and to the same extent as the seller or buyer . . . .”).
102
The Merger Agreement is mutually integrated with the Contribution and Exchange
Agreement. Compl. Ex. B § 4.7; Compl. Ex. A § 9.2. The Merger Agreement also has an
antireliance provision. Compl. Ex. A § 8.10. Defendants only wield the provisions in the
Contribution and Exchange Agreement and the Merger Agreement’s integration provision,
perhaps because the Merger Agreement’s antireliance provision in Section 8.10 only
applies to ShootProof and its representatives. E.g., OB at 10, 18 & n.60; RB at 7 n.11;
Compl. Ex. A § 8.10.
27
1. Sections 2.2(n) And 4.7 Of The Contribution And Exchange
Agreement Do Not Violate Washington’s Antiwaiver Statute
And Are Not Void.
Plaintiff asserts the antireliance and integration provisions must be void as
against Washington securities law claims because they are waivers of such claims,
and such waivers are precluded by Washington statute. Plaintiff asserts that a
provision trimming actionable statements to only those on which a plaintiff can rely
is an impermissible waiver of otherwise actionable securities claims, and therefore
void under RCW 21.20.430(5). As I read Washington law, these provisions are
permissible and not void.
Washington’s securities laws provide that parties cannot contractually waive
compliance with those laws. Under RCW 21.20.430(5), “[a]ny condition,
stipulation, or provision binding any person acquiring any security to waive
compliance with any provision of this chapter or any rule or order hereunder is
void.”103 Washington courts have described this section as evidencing the
Washington legislature’s “intention to hold violators strictly accountable” by
“prohibit[ing] a purchaser . . . from contractually agreeing to waive the protections
103
RCW 21.20.430(5).
28
of the Act’s remedy provision.”104 In perhaps a more familiar context for Delaware
readers, the Exchange Act contains an identical provision in Section 29(a).105
In 2004, the Washington Court of Appeals in Stewart v. Estate of Steiner held
a waiver or release of Washington securities claims is distinguishable from a waiver
of compliance with the Securities Act of Washington: it instructed that merely
limiting the bases for a fraud action “does not require anyone to waive compliance
with the [Securities Act of Washington].”106 Stewart rejected the argument that a
subscription agreement’s nonreliance provision violated RCW 21.20.430(5)’s
antiwaiver language.107
104
Go2net, Inc. v. Freeyellow.Com, Inc., 143 P.3d 590, 592 (Wash. 2006) (discussing
RCW 21.20430(5) and itsresulting effect) (internal quotation marks omitted) (quoting
Go2Net, Inc. v. Freeyellow.com, Inc., 109 P.3d 875, 881 (Wash. Ct. App. 2005), aff’d, 143
P.3d 590).
105
See 15 U.S.C. § 78cc(a). But see Kittilson v. Ford, 608 P.2d 264, 265 (Wash. 1980)
(“The coordination of the federal courts with federal regulations does not require imitation
by this court in construing our act, only that our construction not interfere with the federal
scheme.” (citation omitted)).
106
Stewart v. Est. of Steiner, 93 P.3d 919, 925 (Wash. Ct. App. 2004).
107
Id. (citing Harsco Corp. v. Segui, 91 F.3d 337, 343–44 (2d Cir. 1996)). Stewart also
held that Washington’s securities laws required a plaintiff to prove reliance on the
misrepresentation. Id. at 924; see also FMC Techs., Inc. v. Edwards, 2007 WL 1725098,
at *4 (W.D. Wash. June 12, 2007) (noting the significance of a valid antireliance provision
in the context of an otherwise investor-friendly securities law claim requiring a
determination of reasonable reliance), aff’d, 302 F. App’x 577 (9th Cir. 2008). But in 2019,
the Washington Supreme Court in Federal Home Loan Bank of Seattle v. Credit Suisse
Securities (USA) LLC held that “reliance is not an element of a private securities claim
under [RCW 21.20.010(2)].” 449 P.3d at 1021.
Plaintiff argues Federal Home Loan also set aside Stewart’s characterization of a
nonreliance provision as a proper limitation on grounds for a securities claim rather than
29
Stewart relied on Harsco Corp. v. Segui by the United States Court of Appeals
for the Second Circuit, which provides that while integration and nonreliance clauses
“limit[] the bases upon which a fraud action could be brought,” they do not run afoul
of the analogous “anti-waiver” provision of the Securities Exchange Act’s Section
29(a).108 The Second Circuit distinguished between “a contractual provision which
prohibits a party from suing at all,” which would violate Section 29(a), and
integration and nonreliance clauses.109 And in 2022, the United States District Court
for the Western District of Washington in Zunum Aero, Inc. v. Boeing Company
an improper waiver. Plaintiff also argues that because reliance is no longer an element of
a Washington securities law claim, a nonreliance clause cannot preclude a Washington
securities law claim. According to Plaintiff, enforcing an antireliance provision would
improperly limit those claims only to statements on which a plaintiff relied, in
contravention of Federal Home Loan Bank’s removal of reliance as an element of those
claims. See 449 P.3d at 1021.
But, as best I can tell, Washington law still permits such limitations. No language
in Federal Home Loan addresses the validity of a nonreliance clause. See generally Fed.
Home Loan, 449 P.3d 1019. And last year, the District Court for the Western District of
Washington enforced contractual acknowledgements of certain facts as limitations on what
statements the plaintiff could point to as fraudulent—and cited Stewart. Zunum Aero, Inc.
v. Boeing Co., 2022 WL 2116678, at *14 (W.D. Wash. June 13, 2022) (agreeing with
defendant that “Zunum cannot for purposes of this claim disavow these contractual
acknowledgments and contend that it was misled” in violation of RCW 21.20.010(2)
(citing Stewart, 93 P.3d at 924, and Hammond v. Everett Clinic, PLLC, 2021 WL 961130,
at *5–6 (Wash. Ct. App. Mar. 15, 2021)), reconsid. denied, 2022 WL 2342891, at *5 (W.D.
Wash. June 29, 2022) (denying reconsideration of its holding that the contracts at issue
foreclosed the plaintiff’s securities fraud claim). I read Zunum to stand for the proposition
that even after Federal Home Loan clarified that reliance is not an element of a Washington
securities fraud claim, contractual provisions can still properly operate to limit the universe
of statements on which a plaintiff can bring a claim.
108
Harsco, 91 F.3d at 343–44.
109
Id. at 344.
30
dismissed a claim under RCW 21.20.010(2) because the contract foreclosed
misrepresentation claims, citing Stewart.110 I read Washington common law to hold
that contractual provisions can properly limit the universe of actionable
misrepresentations without running afoul of the statutory prohibition against
waiving compliance with securities law.111
Sections 2.2(n) and 4.7 of the Contribution and Exchange Agreement do not
operate as a waiver in violation of RCW 21.20.430(5). The plain language of
Contribution and Exchange Agreement Sections 2.2(n) and 4.7 do not require
Plaintiff or anyone to “waive compliance with any provision . . . or any rule or any
order” under the Securities Act of Washington.112 Nor do they prohibit Plaintiff
110
Zunum, 2022 WL 2116678, at *14 (citing Stewart, 93 P.3d at 924, and Hammond, 2021
WL 961130, at *5–6); id. at *15 (“Zunum fails to state a plausible securities fraud claim
because the 2016 PIA and 2017 and 2018 IRLs foreclose its claim . . . .”).
111
Plaintiff looks to law outside Washington to argue that antireliance and integration
provisions violate the Securities Act of Washington’s antiwaiver provision. Given
Washington’s binding authority on the matter, Plaintiff’s cited authorities are not
persuasive. E.g., Zunum, 2022 WL 2116678, at *14 (citing Stewart, 93 P.3d at 924, and
Hammond, 2021 WL 961130, at *5–6); Stewart, 93 P.3d at 924–25; Kittilson, 608 P.2d at
265 (holding that coordination with federal courts interpreting federal securities law “does
not require imitation” by Washington courts “in construing [Washington’s securities] act,
only that [Washington’s] construction not interfere with the federal scheme”). See AES
Corp. v. Dow Chem. Co., 325 F.3d 174, 181–82 (3d Cir. 2003) (holding that reliance is an
element of a Rule 10b-5 claim, and that enforcing a nonreliance clause is inconsistent with
Section 29(a)’s prohibition on anticipatory waiver); Kronenberg v. Katz, 872 A.2d 568,
593, 597–98 (Del. Ch. 2004) (noting an integration clause alone, unaccompanied by a
nonreliance clause, cannot bar a Pennsylvania blue sky claim based on extracontractual
statements, and explaining “[p]arties who wish to protect themselves against fraud claims
can seek explicit anti-reliance language that will have that effect”).
112
RCW 21.20.430(5); Stewart, 93 P.3d at 925.
31
from suing at all.113 Section 2.2(n) of the Contribution and Exchange Agreement
provides:
Representations and Warranties of the Rollover Sellers. To induce the
Partnership to issue the Partnership Units as herein provided, each
Rollover Seller (severally and not jointly) hereby represents and
warrants to the Partnership as follows: . . . (n) Such Rollover Seller
acknowledges that the only representations and warranties made by or
on behalf of the Partnership are the representations and warranties
expressly set forth in Sections 2.1 and, except for the representations
and warranties expressly set forth in Sections 2.1, such Rollover Seller
has not relied upon any other express or implied representations or
warranties or any other information.114
Plaintiff is a “Rollover Seller” under the Contribution and Exchange Agreement.115
Section 4.7 provides:
113
Harsco, 91 F.3d at 344. In connection with the transaction, Plaintiff also executed a
“Restrictive Covenants Agreement.” See Compl. Ex. B § 4.7 (integrating the Contribution
and Exchange Agreement with the Merger Agreement and “Ancillary Documents referred
to herein or therein”); Compl. Ex. A § 1.1 (defining “Ancillary Documents” to include
“each Restrictive Covenants Agreement”). Defendants acknowledged they “are not
moving to dismiss the Complaint on the basis of the release or covenant not to sue [in the
Restrictive Covenants Agreement] because they are cognizant of the ‘anti-waiver’
language of the [Securities Act of Washington].” OB at 9 n.26; AB at 20 (quoting OB at
9 n.26). The Restrictive Covenants Agreement is not integral to the Complaint, so I do not
reach whether it operates as an impermissible waiver under RCW 21.20.430(5). Fortis
Advisors LLC v. Allergan W.C. Hldg. Inc., 2019 WL 5588876, at *3 (Del. Ch.
Oct. 30, 2019).
114
Compl. Ex. B § 2.2(n) (emphasis omitted).
115
Id. at Schedule I.
32
Entire Agreement; Other Matters. This Agreement, the Partnership
Agreement, the Merger Agreement, the Ancillary Documents and the
other writings referred to herein or therein or delivered pursuant hereto
or thereto constitute the entire agreement, and supersede all other prior
agreements, understandings, representations and warranties both
written and oral, among the parties, with respect to the subject matter
hereof.116
The Contribution and Exchange Agreement’s antireliance and integration
sections merely limit the scope of representations on which Plaintiff may rely.117
Accordingly, Sections 2.2(n) and 4.7 are not void, and they must be applied to
Plaintiff’s claims.
2. Sections 2.2(n) And 4.7 Of The Contribution And Exchange
Agreement Foreclose Plaintiff’s Count I Claim Under RCW
21.20.010(2).
Plaintiff alleges “Defendants made untrue statements of material fact to [him]
regarding the retention and involvement of Collage management and employees.”118
As pled, Count I’s claim for violation of RCW 21.20.010(2) is based on allegedly
misleading extracontractual statements or omissions in connection with the sale of
Holdings’s securities, which he received solely pursuant to the Contribution and
116
Id. § 4.7 (emphasis omitted).
117
See, e.g., Zunum, 2022 WL 2116678, at *14 (citing Stewart, 93 P.3d at 924, and
Hammond, 2021 WL 961130, at *5–6); Stewart, 93 P.3d at 925 (citing Harsco, 91 F.3d at343–44).
118
Compl. ¶ 107; id. ¶ 110 (“Defendants made material misrepresentations concerning
Joe’s, Kevin’s, and Lindsey’s roles in the combined company after the sale, as well as the
retention of Collage employees, including specific material, false statements alleged above
and the material omissions of fact necessary to make the statements not misleading.”).
33
Exchange Agreement.119 Count I makes no allegations about the intermediate
receipt of ShootProof Parent Corp. securities under the Merger Agreement. I
therefore consider the challenged sale of securities to be the sale of Holdings
securities under the Contribution and Exchange Agreement.120
In the Contribution and Exchange Agreement, Plaintiff expressly represented
and agreed, inter alia, that: (i) the Contribution and Exchange Agreement, “the
[Holdings] Partnership Agreement, the Merger Agreement, the Ancillary
Documents [as defined in the Merger Agreement] and the other writings referred to
herein or therein or delivered pursuant hereto or thereto constitute the entire
119
Id. ¶ 107 (“As sellers of securities in the form of Rollover Shares in ShootProof
Holdings, LP, Defendants made untrue statements of material fact to Joe . . . .”); id.. ¶ 48(d)
(defining “Rollover Shares” as “equity in [Holdings]”); id. at 6 n.2 (“A copy of the
Contribution and Exchange Agreement, dated March 10, 2021 (the ‘Contribution
Agreement’), pursuant to which [Plaintiff] received Rollover Shares and exchanged those
Rollover Shares for Partnership Units (as those terms are defined in the Contribution
Agreement), is attached as Exhibit B.”). Plaintiff received partnership units in Holdings
pursuant to the Contribution and Exchange Agreement. Compl. Ex. B at Recitals; see
supra note 22 (explaining the Contribution and Exchange Agreement defines “Rollover
Shares” as shares of ShootProof Parent Corp. that Collage’s Class A common stockholders
received pursuant to the Merger Agreement).
120
Kinney v. Cook, 154 P.3d 206, 211 (Wash. 2007) (“At a minimum, a sale includes a
mutual agreement to exchange a security.”); Mehta v. Mobile Posse, Inc., 2019 WL
2025231, at *2 (Del. Ch. May 8, 2019) (“[T]he Court does not rely on those exhibits that
contradict the complaint’s well-pled facts.”); Parseghian ex rel. Gregory J. Parseghian
Revocable Tr. v. Frequency Therapeutics, Inc., 2022 WL 2208899, at *9 (Del. Ch. June
21, 2022) (“A Court must examine what has been alleged in the pleadings, not what a
plaintiff believes has been alleged.” (quoting Gabelli & Co., Inc. v. Liggett Gp., Inc., 1983
WL 18015, at *3 (Del. Ch. Mar. 2, 1983), aff’d, 479 A.2d 276 (Del. 1984))).
34
agreement” between the parties;121 and (ii) “the only representations and warranties
made by or on behalf of the [Holdings] are the representations and warranties
expressly set forth” therein.122
Plaintiff does not contest that these antireliance and integration provisions
generally perform their typical functions. Rather, he contends that integration
clauses, alone, do not bar fraud suits, citing Washington and Delaware law.123 Under
Washington law, an integration clause alone may not bar a fraud claim law, but it
can when read together with an antireliance clause, as in the Contribution and
Exchange Agreement.124 Moreover, the functioning of these provisions in the
abstract is a matter of Delaware law: the Contribution and Exchange Agreement is
governed by Delaware law.125 Under Delaware law, contractual antireliance
language is effective when it identifies the specific information on which a party has
considered in entering the contract to the exclusion of other information.126 The
121
Compl. Ex. B § 4.7; Compl. Ex. A § 1.1 (defining “Ancillary Documents”).
122
Compl. Ex. B § 2.2(n).
123
AB at 17 (citing FMC Techs., 2007 WL 1725098, at *5, and Helenius v. Chelius, 120
P.3d 954, 965–66 (Wash. Ct. App. 2005), and Kronenberg, 872 A.2d at 575).
124
See, e.g., FMC Techs., 2007 WL 1725098, at *4 (citing Helenius, 120 P.3d at 963–66).
125
Compl. Ex. B § 4.8(a).
126
Prairie Cap. III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 50 (Del. Ch. 2015) (citing
RAA Mgmt., LLC v. Savage Sports Hldgs., Inc., 45 A.3d 107, 118–19 (Del. 2012)); MidCap
Funding X Tr. v. Graebel Cos., Inc., 2020 WL 2095899, at *19–20 (Del. Ch. Apr. 30, 2020)
(holding that because the plaintiffs represented they only relied on the particular
information delineated by the antireliance and integration provisions, the plaintiff’s
35
Contribution and Exchange Agreement plainly contains such language in Sections
2.2(n) and 4.7.127
Plaintiff does not dispute that the misrepresentations upon which he bases his
claims are extracontractual.128 The only alleged misstatements about the retention
or involvement of management or employees occurred outside the four corners of
the Contribution and Exchange Agreement and the agreements integrated under
Section 4.7, including the Merger Agreement. For example, Plaintiff alleges
Defendants made misstatements in the parties’ December 2020 letter of intent.129
The letter of intent is extracontractual. Plaintiff also alleges “Defendants [made]
numerous material misrepresentations and omissions in connection with the merger
negotiations and sale of ShootProof equity securities to [him].”130 Plaintiff cites
conversations, slide decks, and emails between the parties during pre-closing
representation “establishes the universe of information on which that party relied” (internal
quotation marks omitted) (quoting Prairie Cap. III, 132 A.3d at 51)); see also Kronenberg,
872 A.2d at 593 (“Stated summarily, for a contract to bar a fraud in the inducement claim,
the contract must contain language that, when read together, can be said to add up to a clear
anti-reliance clause by which the plaintiff has contractually promised that it did not rely
upon statements outside the contract’s four corners in deciding to sign the contract. The
presence of a standard integration clause alone, which does not contain explicit anti-
reliance representations and which is not accompanied by other contractual provisions
demonstrating with clarity that the plaintiff had agreed that it was not relying on facts
outside the contract, will not suffice to bar fraud claims.”).
127
Compl. Ex. B §§ 2.2(n), 4.7.
128
See AB at 6–10, 20.
129
Compl. ¶¶ 40–41.
130
Id. at 17 (capitalization altered); id. ¶¶ 39, 49–66.
36
negotiations.131 One email documents the removal of restrictive operating covenants
around employee compensation from the Merger Agreement.132 Plaintiff also cites
Defendants’ approval of a post-closing email he sent as evidence of a misleading
“assurance.”133 These, too, are extracontractual.
The plain and unambiguous language of the antireliance and integration
provisions in Contribution and Exchange Agreement Sections 2.2(n) and 4.7,
respectively, foreclose Plaintiff’s allegations that Defendants violated RCW
21.20.010(2) by making misleading extracontractual statements or omissions.134
Defendants’ Motion is granted as to Count I.
131
E.g., id. ¶ 39 (alleging Defendants made false assurances in late 2020 conversations);
id. ¶ 52 (alleging Marshall made misstatements to Joe in a January 29, 2021 conversation);
id. ¶ 53 (alleging Marshall made misrepresentations to Plaintiff in February 2021 emails);
id. ¶ 54 (alleging Marshall made misrepresentations to Plaintiff in a February 11, 2021
slide deck); id. ¶¶ 55–59 (alleging Marshall made misrepresentations to Lindsey in March
2021 emails); id. ¶ 60 (alleging a PSG principal made a “materially false” statement to
Collage’s lead banker that the banker forwarded to Plaintiff).
132
Id. ¶ 60.
133
Id. ¶ 66.
134
Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1057 (Del. Ch. 2006) (“[A] party
cannot promise, in a clear integration clause of a negotiated agreement, that it will not rely
on promises and representations outside of the agreement and then shirk its own bargain in
favor of a ‘but we did rely on those other representations’ fraudulent inducement claim.”
(collecting cases)); Progressive Int’l Corp. v. E.I. Du Pont de Nemours & Co., 2002 WL
1558382, at *7 (Del. Ch. July 9, 2002) (“Delaware courts have held that sophisticated
parties may not reasonably rely upon representations that are inconsistent with a negotiated
contract, when that contract contains a provision explicitly disclaiming reliance upon such
outside representations.” (collecting cases)); Sunline Com. Carriers, Inc. v. CITGO
Petroleum Corp., 206 A.3d 836, 846 (Del. 2019) (“When the contract is clear and
unambiguous, we will give effect to the plain-meaning of the contract’s terms and
37
3. Plaintiff’s Count II Claim Under RCW 21.20.430 Fails
Without An Underlying Violation Of The Securities Act Of
Washington.
Count II alleges PSG, Holdings GP, and the Individual Defendants are liable
under RCW 21.230.430 for the securities law violations alleged in Count I.135 RCW
21.20.430 provides, in pertinent part:
(2) Any person who buys a security in violation of the provisions of
RCW 21.20.010 is liable to the person selling the security to him or her,
who may sue either at law or in equity to recover the security, together
with any income received on the security, upon tender of the
consideration received, costs, and reasonable attorneys’ fees, or if the
security cannot be recovered, for damages. . . .
(3) Every person who directly or indirectly controls a seller or buyer
liable under subsection (1) or (2) above, every partner, officer, director
or person who occupies a similar status or performs a similar function
of such seller or buyer, every employee of such a seller or buyer who
materially aids in the transaction, and every broker-dealer, salesperson,
or person exempt under the provisions of RCW 21.20.040 who
materially aids in the transaction is also liable jointly and severally with
and to the same extent as the seller or buyer, unless such person sustains
the burden of proof that he or she did not know, and in the exercise of
reasonable care could not have known, of the existence of the facts by
reason of which the liability is alleged to exist. There is contribution as
in cases of contract among the several persons so liable.
provisions, without resort to extrinsic evidence.” (internal quotation marks omitted)
(quoting Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159–60 (Del. 2010))).
135
Compl. ¶¶ 114–121; id. ¶ 116 (“PSG, [Holdings] GP, and the Individual Defendants
(the ‘Control Defendants’), as executive officers, owners, and/or ‘persons’ who directly or
indirectly control [Holdings], are liable jointly and severally with and to the same extent
as [Holdings] under RCW 21.20.430.”); id. ¶ 120 (“PSG and ShootProof committed
violations of RCW 21.20.010.”); id. ¶ 119 (“PSG, [Holdings] GP, Marshall, and
McDermott are controlling persons of ShootProof within the meaning of RCW
21.20.430.”).
38
Having concluded Plaintiff has failed to state the requisite claim for violation of
RCW 21.20.010(2), he cannot establish liability under RCW 21.20.430.136
Defendants’ Motion is granted as to Count II.
III. CONCLUSION
Defendants’ Motion to Dismiss is GRANTED. Counts I and II are dismissed
with prejudice.
136
E.g., Hunichen v. Atonomi LLC, 2022 WL 971567, at *7 (W.D. Wash. Mar. 31, 2022)
(dismissing a counterclaim under RCW 21.20.430(2) where the counterclaimant failed to
“set forth a plausible claim for fraud or other conduct that would violate RCW 21.20.010”).
39