Edward Deane v. Robert A. Maginn, Jr. ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
EDWARD DEANE, GEORGE WIHBEY, )
and JASON CUNNINGHAM IN HIS )
CAPACITY AS ATTORNEY-IN-FACT )
FOR WILLIAM CUNNINGHAM, for )
themselves and in the right and for the )
benefit of New Media Investors II-B, LLC )
and New Media II-B, LLC )
)
Plaintiffs, )
)
v. ) C.A. No. 2017-0346-LWW
)
ROBERT A. MAGINN, JUNIOR, )
)
Defendant, )
)
and )
)
NEW MEDIA INVESTORS II-C, LLC )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: July 14, 2022
Date Decided: November 1, 2022
David H. Holloway, SHLANSKY LAW GROUP, LLP, Wilmington, Delaware;
David J. Shlansky & Colin R. Hagan, SHLANSKY LAW GROUP, LLP, Chelsea,
Massachusetts; Counsel for Plaintiffs Edward Deane, George Wihbey,
& Jason Cunningham
Jody C. Barillare, Amy M. Dudash, & Kelsey A. Bomar, MORGAN LEWIS &
BOCKIUS LLP, Wilmington, Delaware; Jane M. Manchisi, Karen Pieslak
Pohlmann, & Laura Hughes McNally, MORGAN LEWIS & BOCKIUS LLP,
Philadelphia, Pennsylvania; Michael D. Blanchard of MORGAN LEWIS &
BOCKIUS LLP, Boston, Massachusetts; Counsel for Defendant Robert A.
Maginn, Jr.
WILL, Vice Chancellor
This is the post-trial decision in a long-running dispute that seeks to hold
defendant Robert A. Maginn, Jr. liable for breaches of fiduciary duty. Although the
plaintiffs’ legal theories have shifted during the five years that this case has been
pending, their beliefs that Maginn acted to advantage himself at the expense of the
members of New Media Investors II-B, LLC have remained constant. The plaintiffs’
charges have ultimately been validated.
Maginn was the managing member of New Media II-B, a vehicle formed to
facilitate investments in Jenzabar, Inc.—a private company that Maginn and his
spouse founded. The plaintiffs are members of New Media II-B.
Due to a restructuring, New Media II-B held warrants giving it rights to
purchase shares of Jenzabar common stock. The warrants were set to expire in June
2011. Because the value of Jenzabar common stock remained below the warrants’
exercise price, there was a risk that the warrants would expire unexercised. A special
committee of Jenzabar directors extended the expiration deadline, based on
Maginn’s expressed desire to find a solution for New Media II-B and its members.
At the same time, Jenzabar’s special committee was working to streamline the
company’s bloated capital structure. If New Media II-B’s members were able to
invest directly in Jenzabar, further complications could arise. Maginn proposed a
solution: an additional set of warrants could be issued for the benefit of New Media
II-B but held by a new entity in which New Media II-B’s members could then invest.
1
When the original warrants expired, the special committee approved the
issuance of new warrants to what it believed was New Media II-B’s successor entity.
But the warrants were given to New Media Investors II-C, LLC—an entity that
Maginn and his spouse had created in 2009 and solely owned.
Maginn borrowed money from New Media II-B to purchase the then-recently
approved warrants for New Media II-C. But Maginn did not tell New Media II-B’s
members about the investment opportunity at that time. When these warrants neared
expiration, Maginn used $3 million of personal funds to exercise them.
Six months later, Maginn sent a vague letter to New Media II-B’s members to
tell them that their investments would conclude upon the cashing of a “final check”
and that they could learn about a “new” Jenzabar opportunity if they signed a non-
disclosure agreement and release. Certain members, including the plaintiffs, neither
cashed their checks nor signed the NDA.
Maginn maintained his silence about having purchased and exercised the new
warrants for years. It was not until 2021, during discovery on a separate claim in
this litigation, that the plaintiffs learned about Maginn’s actions. Meanwhile, the
shares of Jenzabar common stock that Maginn obtained through exercising the
warrants have grown in value.
After trial, I find that Maginn breached his duty of loyalty when he usurped
from New Media II-B the opportunity to obtain the new warrants. I award rescissory
2
damages to remedy that harm. Given the nature of New Media II-B’s business and
Maginn’s ongoing involvement, I determine that a pro rata recovery to the members
of New Media II-B (excluding Maginn) is appropriate. A subsequent decision will
address the method for distributing damages to New Media II-B’s members.
I. FACTUAL BACKGROUND
Unless otherwise noted, the following facts were stipulated to by the parties,1
proven by a preponderance of the evidence at trial,2 or set forth in this court’s
March 2, 2022 summary judgment opinion (the “Summary Judgment Opinion”). 3
Trial was conducted over three days during which four fact witnesses and two expert
witnesses testified.4 The parties introduced 271 exhibits and three deposition
transcripts.5 To the extent that any conflicting evidence was presented, I have
weighed it and made findings of fact accordingly.
A. Maginn, Jenzabar, and New Media
In 1998, defendant Robert A. Maginn, Jr. and his spouse founded Jenzabar,
Inc., a private Delaware corporation that provides software and services for the
1
Joint Pre-trial Stipulation and Proposed Order (Dkt. 266) (“PTO”).
2
Where facts are drawn from exhibits jointly submitted by the parties at trial, they are
referred to according to the numbers provided on the parties’ joint exhibit list and cited as
“JX__” unless otherwise defined. Deposition transcripts are cited as “[Name] Dep.” Trial
testimony is cited as “[Name] Tr.”
3
Deane v. Maginn, 2022 WL 624415, at *2 (Del. Ch. Mar. 2, 2022) (“Summ. J. Op.”).
4
See Dkt. 299.
5
See Dkt. 264.
3
education sector.6 Maginn served as Jenzabar’s Chief Executive Officer from its
inception until 2019.7
In 1999 and 2000, respectively, Maginn formed New Media Investors II, LLC
(“New Media II”) and New Media Investors II-B, LLC (“New Media II-B”). Both
entities are Delaware limited liability companies formed to serve as “pass-the-hat”
vehicles for investing in Jenzabar.8 New Media II-B is governed by a Limited
Liability Company Agreement (the “LLC Agreement”). 9 Maginn served as the
Managing Member of New Media II-B from 2000 until 2013. 10
Plaintiffs Edward Deane, George Wihbey, and William Cunningham are
members of New Media II-B.11 The plaintiffs were not members of New Media II.12
B. The Series A Junior Warrants
In 2004, following litigation between Jenzabar and an investor, Jenzabar
recapitalized to satisfy certain repayment obligations. 13 As part of that restructuring,
6
Maginn Tr. 15; Summ. J. Op. at *2.
7
Summ. J. Op. at *2.
8
Maginn Tr. 15-17; Summ. J. Op. at *2.
9
JX 1 (“LLC Agreement”).
10
Summ. J. Op. at *2.
11
Id.12
See JX 72 at 13-16.
13
Summ. J. Op. at *2.
4
New Media II-B received 4,647 shares of Series A Junior Preferred stock and Series
A Junior warrants for 1,129,275 shares of Jenzabar common stock. 14
Jenzabar was to redeem the Series A Junior Preferred shares for a total of $4.7
million over the next six years beginning on June 30, 2005, provided that certain
financial metrics were achieved at the time of each redemption. 15 New Media II-B
held 4,647 of the outstanding 8,700 shares (53%) of Series A Junior Preferred
stock.16 The Series A Junior warrants had an exercise price of $0.89 per share and
a cashless exercise option, which would allow New Media II-B to exercise the
warrants with foregone shares (the value of which would be determined in “good
faith” by the board of directors of Jenzabar). 17
New Media II held 2,451,466 Series A Junior warrants and New Media II-B
held 1,129,275.18 Other investors—including Bain & Company Inc., FSC Corp.,
and Simon Worldwide, Inc.—also held Series A Junior warrants.19
14
PTO ¶ 4; Summ. J. Op. at *2; see JX 195; JX 10.
15
JX 194 § V.A.4(c)(ii); JX 195 at 1 n.1; see JX 15; JX 16; JX 19; JX 22; JX 30; JX 35;
JX 48.
16
JX 196 at 1. New Media II held 2,172 shares (24.97%). Id. Various other investors
held the other shares. Id.
17
JX 7 Preamble § 1(b); Maginn Tr. 53-55.
18
JX 167 at 18; JX 243; see supra note 14.
19
JX 243. On or around October 21, 2011, these investors allowed their Series A Junior
warrants to expire. JX 177 at 11; JX 59; JX 60; JX 66; see JX 72 at 8; JX 76 at 1.
5
The Series A Junior warrants were set to expire on June 30, 2011.20 The final
tranche of redemption payments for Series A Junior Preferred shares (amounting to
just under $1 million for New Media II-B) was also due to be paid at this time. 21
This forthcoming redemption payment and the Series A Junior warrants were the
only assets held by New Media II-B.22
According to Maginn, using the cash from the redemption payments to
exercise the Series A Junior warrants was infeasible.23 Similarly, the cashless
exercise option seemed impossible. An April 26, 2011 409A valuation by KPMG
concluded that the fair value of Jenzabar’s common stock as of the end of 2010 was
$0.66 per share—below the $0.89 per share strike price.24
As Maginn examined these options, he asked a special committee of
Jenzabar’s board of directors (the “Special Committee”)25 to grant a series of
extensions to the June 30 expiration of the Series A Junior warrants.26 The Special
20
JX 7 § 1(a)(i).
21
Maginn Tr. 52-53; see JX 48.
22
Maginn Tr. 55-57, 81.
23
Id.; but see infra at notes 178-94 and accompanying text (finding Maginn’s
characterization to be unsupported and self-serving).
24
JX 26 at 2; Maginn Tr. 57-58.
25
The Special Committee was established to simplify Jenzabar’s capital structure and
address any conflicts arising out of the fact that Maginn and his spouse Ling Chai Maginn
were major stockholders and executives of Jenzabar. Maginn Tr. 59.
26
Id. at 70-72.
6
Committee, composed of Dr. Joseph San Miguel and Dr. D. Quinn Mills, believed
that Maginn requested the extensions so that he could seek out further opportunities
for New Media II and New Media II-B members to invest in Jenzabar.27 The Special
Committee agreed to extend the expiration date to December 30, 2011. 28 It charged
New Media II and New Media II-B $3,580.74 for this final extension to
disincentivize Maginn from making further requests.29
On July 11, 2011, Jenzabar’s Special Committee decided to reassess the
feasibility of the cashless exercise option for the Series A Junior warrants, engaging
Bulger Capital Partners to review KPMG’s 2010 409A valuation.30 In September,
Bulger confirmed KPMG’s view that the value of Jenzabar common stock was
below the $0.89 strike price.31 The Special Committee concluded that a cashless
exercise of the Series A Junior warrants was not possible.32
27
Mills Dep. 226.
28
The expiration date was first extended from June 30, 2011 to September 30, 2011, and
then extended to October 21, 2011. JX 54. Finally, the expiration date was extended to
December 30, 2011. JX 67; JX 68 at 1-2.
29
JX 67; JX 68 at 1-2; Mills Dep. 225-26. This extension to December 30 only applied to
the Series A Junior warrants held by New Media II and New Media II-B. See supra note
19.
30
JX 51 at 1.
31
Id.; JX 56 at 5.
32
JX 51 at 2. The board of directors of Jenzabar agreed with the Special Committee and
delegated full power and authority to the Special Committee to proceed accordingly.
JX 53 at 1; JX 55 at 1.
7
C. Maginn’s Proposal
With the expiration of the Series A Junior warrants looming, Maginn assessed
another approach. It involved new warrants being issued to an investment vehicle
that—like New Media II and New Media II-B—would serve as a “pass-the-hat”
opportunity. The members of New Media II and New Media II-B could then make
“individual decisions” about whether to invest.33 Maginn considered whether such
warrants could be given to an entity called New Media Investors II-C, LLC (“New
Media II-C”).34
On October 15, 2011, Maginn wrote to Jenzabar’s General Counsel Jamison
Barr to raise this proposal.35 Maginn suggested that the “complexity” surrounding
the exercise of the Series A Junior warrants “could be solved by simply offering new
shares of Jenzabar Common stock in the same number and at the same $0.89 strike
price as the current warrants” to a “new” New Media entity.36 “If this were offered,”
Maginn explained, “the members of New Media [II and New Media II-B] that
wished to purchase shares could do so as a new New Media IIC [investor]
33
Maginn Tr. 56-57, 145, 168.
34
Id. at 69, 89, 197 (“[I]f we could get a new deal at a strike price of whether it’s 25 cents,
60 cents, whatever, that’s better than the 89 cents, then we’d form the new entity, II-C, and
offer it to everybody.”).
35
JX 61.
36
Id.
8
establishing new capital accounts to reflect their ownership percentages while
allowing the current warrants to expire unexercised.” 37
In December, Barr relayed to Maginn that he had spoken to San Miguel and
the Special Committee’s outside counsel about Maginn’s proposal.38 Barr told
Maginn that “the Special Committee believe[d] the better approach [w]as for the
[Series A Junior] warrants to terminate,” allowing “the right to buy stock” to be
offered to “[New] Media members at a later date.” 39
The Special Committee was concerned with simplifying Jenzabar’s capital
structure, which had become “too complex and constituted an almost
insurmountable barrier to further investment,” mergers and acquisitions, or an initial
public offering.40 In an email to San Miguel and outside counsel, Mills raised this
problem in light of the possibility that the Series A Junior warrants would be
exercised by individual New Media investors. Because it “appear[ed]” that “the
New Media group[] wishe[d] to exercise some or all of the [Series A] warrants,”
Mills cautioned that it would be “important to avoid replacing New Media as an
ent[ity] which owns warrants in [Jenzabar] with instead a whole group of new
37
Id.
38
JX 75; see Mills Dep. 40-41; JX 69 at 1.
39
JX 75.
40
JX 70.
9
shareholders (New Media participants).”41 Similarly, Maginn told Barr and the
Special Committee that a “failure” to organize the warrants under an LLC would
“expose the company to massive litigation risk and violate the very charter of the
Special Committee to simplify the capital structure.”42
The Series A Junior warrants expired unexercised at the end of 2011.43
D. The II-C Warrant
On June 21, 2012, the Special Committee met “to consider the proposal
received by Mr. Maginn and from [New Media II and New Media II-B] for a
successor entity, New Media Investors II-C, . . . to purchase new equity in the
Company.”44 The Special Committee resolved to “accept the proposal” made by
Maginn: that Jenzabar sell to “successor entity” New Media II-C “a warrant or
warrants, in substantially the form of warrants issued on June 30, 2004, to purchase
an aggregate of 6,500,000 shares of [Jenzabar] Common Stock.” 45 The exercise
price would be equal to one share of Jenzabar common stock on June 30, 2012, as
determined by an independent valuation. 46
41
Id. (Mills remarking that allowing the New Media participants to individually invest in
Jenzabar could “further complicate” Jenzabar’s capital structure); see Mills Dep. 206.
42
JX 68 at 1.
43
PTO ¶ 6.
44
JX 87.
45
Id.
46
Id.
10
The Special Committee hoped to encourage the New Media members’
continued investment in Jenzabar by approving Maginn’s proposal.47 Though the
sale would technically be made to New Media II-C, the expectation was that New
Media II-C would, in turn, offer the investment opportunity to the members of New
Media II and New Media II-B.48 Consistent with that goal, Barr explained to
Jenzabar’s outside counsel that the plan approved by the Special Committee would
have Jenzabar “sell warrants to purchase up to 6.5 million shares to [New Media II
and New Media II-B].”49
On June 29, 2012, the Special Committee issued warrants to purchase
Jenzabar common stock (the “II-C Warrant”) to New Media Investors II-C.50
Although the Special Committee believed that the II-C Warrant was being issued to
a new “successor entity” to New Media II and New Media II-B,51 Maginn had
formed New Media II-C in 2009.52 New Media II-C was solely owned by Maginn
and his spouse and it held no assets until it received the II-C Warrant.53
47
Mills Dep. 202-03.
48
Maginn Tr. 276-77.
49
JX 137 (Barr email to Donald Board, copying Adolfo Garcia); Maginn Tr. 275-76
(explaining that Garcia was outside counsel to Jenzabar).
50
JX 89; JX 91; see JX 87.
51
JX 87; see also JX 61 (Maginn referring to New Media II-C as a “new” entity).
52
Maginn Tr. 189-92.
53
Id.
11
The II-C Warrant was issued for 6,500,000 shares of Jenzabar common
stock.54 Each individual warrant had “a[n exercise] price per share equal to the fair
market value per share of Common Stock as determined by KPMG, LLP on an
illiquid basis as of June 30, 2012.”55 By its terms, the II-C Warrant would expire
within one year.56
Maginn used funds from New Media II and New Media II-B to pay the
$65,000 purchase price for the II-C Warrant.57 He testified that he did so because
he intended to procure the II-C Warrant for the benefit of New Media II and New
Media II-B members. 58 He eventually reimbursed $65,000 to New Media II and
New Media II-B in December 2013.59
E. The II-C Solicitation
On March 5, 2013, KPMG completed its valuation of Jenzabar common stock,
setting the exercise price for the II-C Warrant at $0.47 per share.60 New Media II
54
JX 89 Preamble, § 1(a).
55
Id.
56
Id.
57
Maginn Tr. 154.
58
Id. at 270-71; see JX 107.
59
Maginn Tr. 93, 104-05; JX 130. Maginn reimbursed the funds because he later realized
that “in order to send their [New Media II and New Media II-B members’] final redemption
payment . . . [h]e needed to [reimburse] the [$]65,000.” Maginn Tr. 105.
60
JX 99 at 3; JX 103.
12
and New Media II-B members had yet to learn that Maginn had procured the II-C
Warrant.
In May 2013, Maginn began drafting a letter to New Media II and New Media
II-B members to invite them to join New Media II-C and inform them about the
investment opportunity provided by the II-C Warrant.61 The initial draft explained
that the Series A Junior warrants had expired unexercised and recounted the origins
of the II-C Warrant. 62 It described the II-C Warrant, comparing the $0.47 per share
strike price to the higher $0.89 per share strike price of the Series A Junior
warrants.63 The draft also expressed confidence in Jenzabar’s future performance.64
In May, Maginn shared his initial draft with Barr, who revised the letter from
two pages to five sentences.65 The revised draft informed New Media II and New
Media II-B members of “another Jenzabar opportunity” but required those interested
to sign a non-disclosure agreement to learn about it. 66 At trial, Maginn testified that
61
Maginn Tr. 95.
62
JX 102 at 2-3.
63
Id.; Maginn Tr. 95-97. This draft also attached the 2012 KPMG valuation that set the
exercise price at $0.47 per share. JX 102.
64
JX 102 at 2; Maginn Tr. 95-97.
65
Maginn Tr. 97-99; see JX 102; JX 107; JX 108; JX 109.
66
JX 108.
13
the revisions were intended to “protect Jenzabar’s confidential information,” though
he could not identify what was confidential about the initial draft. 67
Maginn, with Barr’s assistance, finalized his correspondence to New Media
II and New Media II-B members by May 2013.68 But he did not send the letter (and
waited until December to do so). Maginn testified that “pedestrian administrative”
difficulties—such as locating the addresses of the 103 New Media II and 88 New
Media II-B members, ordering new checks, and turnover among administrative
personnel—caused delay.69 Maginn further testified that he asked the Special
Committee for an extension of the II-C Warrant, but the Special Committee
refused.70
On June 29, 2013, Maginn paid $3,055,000 to exercise the II-C Warrant.71 He
paid the exercise price with funds from New Media SP, LLC, an investment vehicle
owned by Maginn and his spouse to make personal investments.72
67
Maginn Tr. 131-32, 242-44.
68
Id. at 100; see JX 102; JX 107; JX 108; JX 109.
69
Maginn Tr. 101-02, 181-84, 264-69; see JX 124; JX 130; JX 153.
70
Maginn Tr. 101-02. There is no contemporaneous evidence of that request in the record.
71
JX 110.
72
Maginn Tr. 102-03, 152-53, 191; JX 121.
14
Six months later, on December 19, 2013, Maginn sent the correspondence he
had drafted in May to New Media II and New Media II-B members.73 That letter
(the “II-C Solicitation”) read:
Dear New Media Investor:
I write to you on the conclusion of your New Media
Investment either via New Media Investors II LLC or New
Media Investor II-B LLC. Enclosed please find your final
check(s) for you [sic] investments in New Media together
with a payment acknowledgement that indicates these
checks complete your New Media II and/or New Media
IIB investments.
I would also like to inform you that New Media Investors
has formed a new New Media entity, New Media Investors
II[-]C, LLC, to invest in another Jenzabar opportunity. As
a New Media Investor, we would like to invite you to
participate in this investment. If you would like to
participate in this investment, please sign and return the
attached non-disclosure agreement, and we will contact
you to provide you with information regarding this new
opportunity.
Sincerely,
Robert A. Maginn, Junior
Managing Member74
The II-C Warrant was not mentioned.75
73
Maginn Tr. 135; JX 133.
74
JX 133 at 1.
75
Id.
15
The II-C Solicitation was accompanied by a distribution of redemption
payments to New Media II-B members, which were described as their “final
checks.”76 Maginn also enclosed a “Payment Acknowledgement and Release”
agreement and a non-disclosure agreement (the “NDA”). 77 The Payment
Acknowledgement and Release provided that acceptance of the redemption payment
would represent a repurchase of the members’ equity and termination of their
membership in New Media II-B.78 It included a broad release of claims against New
Media II-B, and Jenzabar, and their directors, officers, and managing members. 79
New Media II-B members were required to sign the NDA to receive further details
about the “new opportunity.”80
F. Reactions to the II-C Solicitation
Of the 88 members of New Media II-B, the three plaintiffs (and perhaps
others) neither cashed their redemption checks nor signed the Payment
76
Id.; Maginn Tr. 128. This payment was for the final tranche of redemption payments on
the Series A Junior Preferred stock (see supra note 21 and accompanying text) and a
reimbursement of the $65,000 that Maginn used to purchase the II-C Warrant (see supra
note 59 and accompanying text).
77
JX 133 at 2-4.
78
Id. at 2.
79
Id. at 2.
80
Id. at 1; Maginn Tr. 121.
16
Acknowledgement and Release.81 Jason Cunningham (acting as attorney-in-fact for
his father, William Cunningham) testified that he did not sign the NDA because it
required a release of the New Media II-B investment.82 From December 2013 to
April 2014, 10 members of New Media II-B (and 14 members of New Media II, of
which 10 were also members of New Media II-B) signed and returned NDAs.83
Little evidence exists concerning what (if any) information was conveyed to
the members who signed NDAs. Maginn testified that his communications with
these members occurred orally by phone or in person.84 He further testified that he
“d[idn’t] know [and] may have” provided financial details about the II-C Warrant to
those members he talked with.85
Charles Farkas, a member of New Media II, wrote to Maginn on January 2014
to say that he was “happy to grant the release and w[ould] return the non-disclosure
81
See Maginn Tr. 238-42 (“[I]f you’re asking whether there are other people who didn’t
cash their checks, the answer is yes. We lost a few. Of the 150 people, we couldn’t find
their addresses and apparently couldn’t get them their checks, or if we did, they didn’t cash
them.”); JX 191; JX 192.
82
Cunningham Tr. 613-15.
83
JX 197; see JX 72 at 13-16.
84
Maginn Tr. 106-08, 122-24, 152; see JX 136.
85
Maginn Tr. 123.
17
as [he] was interested in New Media II-C.”86 Farkas signed an NDA but did not
receive any information about New Media II-C or the II-C Warrant.87
Ultimately, none of the members of New Media II or New Media II-B became
investors in New Media II-C.88
In December 2017, Maginn dissolved New Media II. 89 In December 2020,
Maginn sought to dissolve New Media II-B.90 On March 29, 2021, however, Deane
filed a certificate of correction with the Delaware Secretary of State, providing that
the certificate of cancellation filed in 2020 was “null and void.”91 In April 2021, the
plaintiffs purported to act by written consent to remove Maginn as Managing
Member and declare themselves the managers of New Media II-B.92
86
JX 138.
87
Farkas Dep. 13, 16, 43. Farkas testified, however, that he was “eager to exit.” Id. at
23-25; see Maginn Tr. 123.
88
Maginn Tr. 154.
89
Pls.’ Post-trial Br. (Dkt. 311) Ex. A.
90
JX 172; Maginn Tr. 236-37.
91
JX 179.
92
JX 181.
18
G. This Litigation
The plaintiffs first filed claims against Maginn in Delaware Superior Court on
December 6, 2016.93 On May 5, 2017, the plaintiffs filed the present action in this
court.94
On June 15, 2021, after being granted leave, the plaintiffs filed the operative
Amended Complaint. 95 The plaintiffs purport to bring their claims directly for
themselves and for the benefit of any other New Media II-B members and
derivatively on behalf of New Media II-B.
Count I of the Amended Complaint is for breach of fiduciary duty against
Maginn.96 Three distinct theories were advanced within that count. One concerned
whether Maginn caused the Series A Junior warrants to go unexercised despite being
“in the money” (the “Warrant Claim”).97 Another provided that Maginn caused
various securities held by New Media II-B to “disappear” (the “Disappearing
Securities Claim”).98 The third concerned whether Maginn “usurp[ed]” an
93
Summ. J. Op. at *3.
94
Verified Compl. (Dkt. 1).
95
Am. Compl. (Dkt. 99).
96
Id. ¶¶ 124-67; Summ. J. Op. at *4.
97
Am. Compl. ¶ 124.
98
Id.
19
investment opportunity—the II-C Warrant—belonging to New Media II-B (the
“II-C Claim”).99
Count II seeks a declaration that the plaintiffs are the sole members of New
Media II-B, have been elected its managers, and that Maginn is no longer a manager
or member of New Media II-B.100
Count III is an unjust enrichment claim.101 It is pleaded “in the alternative, to
the extent it is not entailed or cognizable in [the plaintiffs’] theories for breach of
fiduciary duty.”102
In the March 2, 2022 Summary Judgment Opinion, this court held that the
Warrant Claim and Disappearing Securities Claim were time-barred and granted
summary judgment with respect to those claims in Count I.103 As to the II-C Claim
and unjust enrichment claim, genuine issues of material fact remained as to their
timeliness.104 Summary judgment was denied with respect to the II-C Claim in
Count I, Count II, and Count III.
99
Id. ¶ 166.
100
Id. ¶¶ 168-83.
101
Id. ¶ 195.
102
Id. ¶ 185.
103
Summ. J. Op. at *5.
104
Id. at *11.
20
A three-day trial was held beginning on March 28, 2022. 105 After post-trial
briefing, this matter was submitted for decision as of July 12.106
II. LEGAL ANALYSIS
The plaintiffs’ claims at the time of trial were: the portion of Count I described
as the II-C Claim; the declaratory judgment claim in Count II; and the unjust
enrichment claim in Count III. The proponent of a claim has the burden of proving
each element of a cause of action by a preponderance of the evidence. 107 Proof by a
preponderance of the evidence means that something is more likely than not.108
I begin by discussing the plaintiffs’ remaining breach of fiduciary duty claims
in Count I. The plaintiffs’ post-trial briefs argued various forms of possible breaches
by Maginn, including matters that had been resolved in the Summary Judgment
Opinion.109 At post-trial argument, the plaintiffs clarified that they sought to prove
105
See Dkt. 299.
106
Dkt. 317.
107
Physiotherapy Corp. v. Moncure, 2018 WL 1256492, at *3 (Del. Ch. Mar. 12, 2018).
108
Id.109
See Pls.’ Post-trial Br. 15-33. To the extent that the plaintiffs sought to prove a duty of
care claim, it was disposed of in the Summary Judgment Opinion. The plaintiffs’ post-trial
brief includes a section titled “Duty of Care,” which sets out an argument that Maginn
“made a conscious decision not to attempt to convince Jenzabar that the 2004 warrants
were in-the-money and could be exercised cashlessly (or inquiring of the [New Media II-
B members] whether they wanted to pay to exercise the [Series A Junior warrants]).” Id.
at 17 (emphasis in original). That is a restatement of the Warrant Claim, which concerned
whether “Maginn caused the [Series A Junior warrants] to go unexercised despite being ‘in
the money.’” Summ. J. Op. at *4. The Warrant Claim was barred by the three-year statute
of limitations. Id. at *6-8. The Summary Judgment Opinion held that “the alleged
21
at trial that Maginn breached his duty of loyalty by failing to disclose material
information about the II-C Warrant and by usurping a business opportunity
belonging to New Media II-B.110
I first consider whether those claims are time-barred. I find that the disclosure
claim is time-barred but the usurpation claim is not. Turning to the merits of the
latter, I find that the plaintiffs proved that Maginn breached his duty of loyalty. I
then address the appropriate remedy for Maginn’s breach.
A. Whether the Plaintiffs’ Breach of Fiduciary Duty Claims Are
Time-Barred
Statutes of limitations apply by analogy to equitable claims that—like the II-C
Claim—seek legal relief. 111 “Absent tolling, the limitations period ‘begins to run
from the time of the [allegedly] wrongful act, without regard for whether the plaintiff
wrongful act [underlying the Warrant Claim] transpired on October 2, 2011, when Maginn
allowed the expiration [of the Series A Junior warrants] to occur” and that Cunningham
“was on inquiry notice [of the alleged wrongful act] by July 2012.” Id. at *6, *8 (“An
email from Cunningham to Maginn on July 23, 2012 made clear that Cunningham had
‘spoken to [Barr] numerous times about the expiration of [the plaintiffs’] warrants’ on
behalf of a ‘consortium of individual investors’ before that date.”).
110
Post-trial Tr. (Dkt. 321) 9-12.
111
Kraft v. WisdomTree Invs., Inc., 145 A.3d 969, 981 (Del. Ch. 2016) (explaining that
great weight is given to the analogous statute of limitations when considering equitable
claims).
22
became aware of the wrongdoing at that time.’”112 An analogous three-year statute
of limitations applies to the plaintiffs’ breach of fiduciary duty claims.113
The underlying wrongful acts occurred as early as June 2012 (when the II-C
Warrant was issued to New Media II-C) and as late as December 2013 (when the
II-C Solicitation was sent). The II-C Claim was not, however, pleaded until June
2021.114 Barring tolling, it is untimely.
The limitations period can be tolled “until the plaintiff discovers (or exercising
reasonable diligence should have discovered) his injury.” 115 The plaintiffs rely on
three doctrines to support tolling: (1) inherently unknowable injuries; (2) fraudulent
concealment; and (3) equitable tolling. “Each of these doctrines permits tolling of
the limitations period where the facts underlying a claim are so hidden that a
reasonable plaintiff could not timely discover them.”116
112
Firemen’s Ret. Sys. St. Louis v. Sorenson, 2021 WL 4593777, at *8 (Del. Ch. Oct. 5,
2021) (quoting Kraft, 145 A.3d at 989); see Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860
A.2d 312, 319 (Del. 2004) (“This Court has repeatedly held that a cause of action ‘accrues’
under Section 8106 at the time of the wrongful act, even if the plaintiff is ignorant of the
cause of action.”); ISN Software Corp. v. Richards, Layton & Finger, P.A., 226 A.3d 727,
733 (Del. 2020) (“Outside these [tolling] exceptions, the statute of limitations continues to
run even if the claimant is unaware of the facts supporting a cause of action.”).
113
See Wal-Mart, 860 A.2d at 319 (applying a three-year statute of limitations by analogy
to fiduciary duty and unjust enrichment claims under 10 Del. C. § 8106).
114
Am. Compl. ¶¶ 165-66.
115
In re Dean Witter P’ship Litig., 1998 WL 442456, at *6 (Del. Ch. July 17, 1998).
116
Krahmer v. Christie’s Inc., 903 A.2d 773, 778 (Del. Ch. 2006) (quoting Dean Witter,
1998 WL 442456, at *5).
23
Under the doctrine of inherently unknowable injuries:
[T]he running of the statute of limitations is tolled while
the discovery of the existence of a cause of action is a
practical impossibility. For the limitations period to be
tolled under this doctrine, there must have been no
observable or objective factors to put a party on notice of
an injury, and plaintiffs must show that they were
blamelessly ignorant of the act or omission and the
injury.117
“Fraudulent concealment requires an affirmative act of concealment or ‘actual
artifice’ by a defendant that prevents a plaintiff from gaining knowledge of the
facts.”118 “[T]he doctrine of equitable tolling stops the statute [of limitations] from
running while a plaintiff has reasonably relied upon the competence and good faith
of a fiduciary. No evidence of actual concealment is necessary in such case.” 119
If the limitations period is tolled under any of these doctrines, it is tolled only
until the plaintiffs discovered (or could have discovered through reasonable
diligence) their injuries.120 That is, the limitations period begins when a plaintiff is
put on inquiry notice, meaning that the plaintiff “was objectively aware, or should
have been aware, of facts giving rise to the wrong.”121
117
Dean Witter, 1998 WL 442456, at *5.
118
Weiss v. Swanson, 948 A.2d 433, 451 (Del. Ch. 2008).
119
In re Am. Int’l Grp., Inc., 965 A.2d 763, 812 (Del. Ch. 2009), aff’d sub nom. Teachers’
Ret. Sys. of La. v. PricewaterhouseCoopers LLP, 11 A.3d 228 (Del. 2011).
120
Dean Witter, 1998 WL 442456, at *6.
121
In re Tyson Foods, Inc., 919 A.2d 563, 585 (Del. Ch. 2007) (“Even where a defendant
uses every fraudulent device at its disposal to mislead a victim or obfuscate the truth, no
24
Maginn argues that the plaintiffs have been on inquiry notice of the II-C Claim
since receiving the II-C Solicitation in December 2013. 122 The plaintiffs, for their
part, assert that they lacked inquiry notice of the II-C Claim until March 2021 when
they learned about the II-C Warrant from Maginn’s deposition testimony.123 A
determination of when the plaintiffs were put on inquiry notice of the II-C Claim
must be considered under each of its two components: disclosure and usurpation of
a business opportunity.
1. The Disclosure Theory
The plaintiffs assert that Maginn breached his fiduciary duties to the
members of New Media II-B by failing to provide material information in the II-C
Solicitation.124 Setting aside the aspects of this argument that bear on their business
opportunity claim, the plaintiffs assert that the II-C Solicitation was materially
misleading because it “reflect[ed] an intention to discourage inquiry.” 125 In other
words, the II-C Solicitation failed to provide New Media II-B’s members with
sanctuary from the statute will be offered to the dilatory plaintiff who was not or should
not have been fooled.”).
122
Def.’s Post-trial Br. (Dkt. 314) 23-25.
123
Pls.’ Post-trial Br. 41; see Summ. J. Op. at *11.
124
Unlike the plaintiffs’ business opportunity claim, this disclosure claim is cognizable as
a direct claim. See Thornton v. Bernard Techs., Inc., 2009 WL 426179, at *3 (Del. Ch.
2009).
125
Pls.’ Post-trial Br. 27.
25
enough information to understand why their investment had ended or to determine
whether to pursue the “new” Jenzabar investment.
This direct disclosure claim is time-barred. The brevity of the II-C
Solicitation was apparent by its very terms. The packaging of members’ “final
checks” with a release and NDA was also obvious. Had the plaintiffs felt that the
II-C Solicitation was deficient after receiving it, they were not prevented from
promptly seeking relief. But the plaintiffs waited until years after the analogous
three-year statute of limitations had lapsed to advance this theory.
2. The Business Opportunity Theory
The doctrine of equitable tolling applies to the plaintiffs’ business opportunity
claim.126 That claim turns on whether Maginn took the opportunity presented by the
II-C Warrant for himself rather than offering it to New Media II-B. The plaintiffs
were entitled to rely on “the competence and good faith” 127 of Maginn, who was
tasked with protecting their interests as New Media II-B’s Managing Member. But
Maginn failed to disclose to New Media II-B or its members that a new warrant,
126
See generally Bocock v. Innovate Corp., 2022 WL 15800273, at *14 (Del. Ch. Oct. 28,
2022) (applying the doctrine of equitable tolling to a usurpation of corporate opportunity
claim at the pleadings stage). Because equitable tolling applies, it is unnecessary to address
whether the doctrine of inherently unknowable injury or fraudulent concealment apply.
127
Tyson, 919 A.2d at 590-91.
26
intended to provide redress for the expiration of the Series A Junior warrants, had
been issued to New Media II-C—an entity he owned and controlled.
The II-C Solicitation did not put the plaintiffs on inquiry notice of their
business opportunity claim. 128 As the Summary Judgment Opinion described,
“[n]othing in [the II-C Solicitation] indicates either that the [Jenzabar] opportunity
[referenced therein] was created specifically for [plaintiffs’] benefit or that it was
(allegedly) redirected for Maginn’s exclusive benefit, both of which are central to
the II-C Claim.”129 The II-C Solicitation stated only that “New Media Investors
ha[d] formed a new New Media entity, New Media Investors II[-]C, LLC, to invest
in another Jenzabar opportunity.”130 A reasonable person would not understand that
“another Jenzabar opportunity” was intended for the benefit of New Media II-B and
its members, much less that Maginn had himself exercised the II-C Warrant six
months earlier.
128
See Lehman Bros. Hldgs., Inc. v. Kee, 268 A.3d 178, 186 (Del. 2021) (“Where the
discovery rule applies, the statute of limitations is tolled until the plaintiff discovers the
facts constituting the basis of the cause of action or the existence of facts sufficient to put
a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to
the discovery of such facts.” (quoting Wal-Mart, 860 A.2d at 319)).
129
Summ. J. Op. at *11.
130
JX 133 at 1.
27
The evidence adduced at trial confirms that the plaintiffs lacked notice of their
business opportunity claim until just before it was pleaded.131 Deane testified that
he did not learn about the II-C Warrant until a deposition in 2021.132 Jason
Cunningham likewise testified that he (and his father) did not learn of the II-C
Warrant until 2021.133 Cunningham explained that “the [II-C Solicitation] made it
so that it really was a new opportunity versus the property of . . . II-B.”134
Cunningham and his father interpreted the II-C Solicitation to bear on whether
William was giving up rights in the Series A Junior warrants by cashing his check
and signing the Payment and Acknowledgement Release. 135 Similarly, Wihbey
testified that he only learned of the II-C Warrant “[l]ast year or so.”136
131
Insofar as Maginn argues the plaintiffs failed to request information, the outcome does
not change. Again, the II-C Solicitation would not have given the plaintiffs much reason
to inquire further. Nor were the plaintiffs given a clear opportunity to ask for information.
The NDA was packaged with the Payment Acknowledgement and Release, which led some
members (such as Cunningham) to ascribe a connection between receiving information and
cancelling their investment. See Cunningham Tr. 585. There is also reason to doubt
whether the plaintiffs would have been given information if they asked. Certain members
who returned their NDAs did not receive information about the II-C Warrant. See supra
note 87 and accompanying text; see also Cunningham Tr. 611 (Cunningham asked to sign
an NDA but never received one.).
132
Deane Tr. 549-50.
133
Cunningham Tr. 585.
134
Id. at 621.
135
Id.
136
Wihbey Tr. 627-28.
28
Maginn also argues that laches bar this claim. The “touchstone of the laches
inquiry is whether an inexcusable delay leads to an adverse change in the condition
or relations of the property or parties.”137 In Maginn’s view, he is prejudiced because
the plaintiffs’ delay benefitted them due to the increase in value of Jenzabar common
shares.138 But the plaintiffs could not have used time as an option to their advantage;
they lacked knowledge about the II-C Warrant in the first place.
Accordingly, the plaintiffs’ business opportunity claim is timely.
B. Whether the Duty of Loyalty Claim is Direct or Derivative
The plaintiffs’ remaining breach of fiduciary duty claim is for usurpation of a
business opportunity. “A claim that a director or officer improperly usurped a
corporate opportunity belonging to the corporation is a derivative claim.”139
Maginn recognizes as much.140 He argues that, nonetheless, the II-C Claim
should be treated as a direct claim, consistent with the approach taken in In re
Cencom Cable Income Partners, L.P. Litigation.141 In that case, the court was asked
137
Whittington v. Dragon Grp. LLC, 2009 WL 1743640, at *12 (Del. Ch. June 11, 2009).
138
See Quill v. Malizia, 2005 WL 578975, at *14 (Del. Ch. Mar. 4, 2005) (discussing the
prejudice suffered by a party where the counterparty “used time as an option . . . reserving
to himself the right to leisurely present a claim of ownership” with no downside risk).
139
In re Digex Inc. S’holders Litig., 789 A.2d 1176, 1189 (Del. Ch. 2000).
140
Def.’s Post-trial Br. 36.
141
2000 WL 130629 (Del. Ch. Jan. 27, 2000); see Def.’s Pre-trial Br. (Dkt. 277) 43-46;
Def.’s Post-trial Br. 36-37.
29
to decide whether claims brought by limited partner plaintiffs regarding the
liquidation of the partnership were direct or derivative. 142 The court acknowledged
that the claims were derivative because the alleged injury devalued the partnership’s
assets but considered the claims direct due to the unique circumstances of that
case.143 Specifically, the court explained that “the partnership’s business [was]
complete, the liquidation sale [was] over, and the only two parties to the partnership
[we]re now clearly adversaries.”144 The recovery could, as a practical matter, only
flow to the limited partner plaintiffs.
Similarly, in Anglo American Security Fund, L.P. v. S.R. Global International
Fund, L.P., the court allowed claims typically regarded as derivative to be brought
directly in the context of a limited partnership.145 The limited partnership in that
case was structured such that “whenever the value of the [partnership wa]s reduced,
the injury accrue[d] irrevocably and almost immediately to the current partners but
w[ould] not harm those who later become partners.”146 The approach in Anglo
American was grounded in the fact that “recovery would flow to partners that had
142
Cencom, 2000 WL 130629, at *4.
143
Id. at *4-6.
144
Id. at *4.
145
829 A.2d 143, 151 (Del. Ch. 2003).
146
Id. at 152.
30
joined the fund after the harm occurred, and would provide no relief to the former
partners who were actually harmed by the alleged conduct.” 147
The facts here are markedly different. New Media II-B is not a partnership.148
It has not been dissolved,149 and remains a “distinct legal creature for purposes of
this litigation.”150 It has not gained or lost investors since the litigation commenced.
Certain of the concerns animating Cencom and Anglo American may be relevant for
the distribution of damages (addressed below) but do not support disregarding the
derivative nature of the plaintiffs’ claim entirely.
Application of the Tooley test further underscores that the plaintiffs’ claim is
derivative.151 Two questions form that test: “(1) who suffered the alleged harm (the
corporation or the suing stockholders, individually); and (2) who would receive the
147
Metro. Life Ins. Co. v. Tremont Grp. Hldgs., Inc., 2012 WL 6632681, at *11 (Del. Ch.
Dec. 20, 2012) (citation and emphasis omitted).
148
See Akins v. Cobb, 2001 WL 1360038, at *6 n.18 (Del. Ch. Nov. 1, 2001) (declining to
expand the “fact-intensive [Cencom] decision . . . into the corporate context”); see also
Agostino v. Hicks, 845 A.2d 1110, 1125 (Del. Ch. 2004) (“Cencom, which involved a
dissolving partnership, is limited to its own unique set of facts.”).
149
See supra notes 90-92 and accompanying text. See Metro. Life Ins., 2012 WL 6632681,
at *11 (declining to extend Cencom to an entity that was winding up but not dissolved).
New Media II, by contrast, was dissolved. Pls.’ Post-trial Br. Ex. A. The plaintiffs are not
proceeding on behalf of New Media II.
150
Agostino, 845 A.2d at 1125.
151
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).
31
benefit of any recovery or other remedy (the corporation or the stockholders,
individually)?”152
A claim is derivative where the “nature of the alleged injury is such that it
falls directly on the LLC as a whole and only secondarily on an individual member
as a function of and in proportion to his pro rata investment in the LLC.”153 The
plaintiffs’ duty of loyalty claim centers on the issuance of the II-C Warrant to New
Media II-C instead of New Media II-B. The II-C Warrant was never intended to
issue to New Media II-B members individually but to an entity.154 Any direct harm
to the individual members of New Media II-B would have come later, when making
individual investment decisions and from an absence of distributions.
The remedy would also accrue to New Media II-B in the first instance.155
Maginn asserts that damages would need to be determined on an individual basis
because some members were not interested in, and would not have invested in, the
152
Id.153
Kelly v. Blum, 2010 WL 629850, at *9 n.63 (Del. Ch. Feb. 24, 2010); In re J.P. Morgan
Chase & Co. S’holder Litig., 906 A.2d 808, 819 (Del. Ch. 2005) (“The plaintiffs, if they
were harmed at all, were harmed indirectly and only because of their ownership in
JPMC.”), aff’d, 906 A.2d 766 (Del. 2006); Anglo Am., 829 A.2d at 150 (“If the injury is
one that affects all partners proportionally to their pro rata interests in the corporation, the
claim is derivative.”).
154
See supra notes 33-42 and accompanying text; see also JX 87 (approving Maginn’s
proposal “for a successor entity, New Media Investors II-C . . . to purchase new equity in
[Jenzabar]”).
155
See Tooley, 845 A.2d at 1033.
32
II-C Warrant. 156 Even so, the members are not entitled to a personal recovery. They
would “recover pro rata in proportion with their ownership of the [LLC].”157
C. Whether Maginn Breached His Duty of Loyalty
The plaintiffs contend that Maginn breached his fiduciary duty of loyalty by
obtaining the II-C Warrant for himself rather than for New Media II-B. The elements
of a breach of fiduciary duty claim are (1) the existence of a fiduciary duty owed by
the defendant to the plaintiff and (2) a breach of that duty.158 I consider each element
in turn.
156
Def.’s Post-trial Br. 36-37; Def.’s Pre-trial Br. 47-49. Some members of New Media
II-B, such as Farkas, appear to have been uninterested in the II-C Warrant and desired to
exit their investment completely. Other members signed the Payment Acknowledgement
and Release, relinquishing their interests in New Media II-B.
157
CMS Inv. Hldgs., LLC v. Castle, 2015 WL 3894021, at *7 (Del. Ch. June 23, 2015) (“If
all of the stockholders (or in this case, LLC members) ‘are harmed and would recover pro
rata in proportion with their ownership of the [company] solely because they are [interest
holders], then the claim is derivative in nature.’”); see El Paso Pipeline GP Co., L.L.C. v.
Brinckerhoff, 152 A.3d 1248, 1264 (Del. 2016) (“Were [plaintiff] to recover directly for
the alleged decrease in the value of the [entity’s] assets, the damages would be
proportionate to his ownership interest. The necessity of a pro rata recovery to remedy the
alleged harm indicates that his claim is derivative.”); Cencom, 2000 WL 130629, at *3
(“[A] derivative claim states injury against and seeks relief for a business association as a
whole. Any relief flowing to the association’s participants as individuals only comes to
them indirectly, by way of their pro-rata stake in the association.”); see also infra notes
327-32 and accompanying text (discussing pro rata distribution of damages).
158
See Beard Rsch., Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010), aff’d sub nom. ASDI,
Inc. v. Beard Rsch., Inc., 11 A.3d 749 (Del.).
33
1. Maginn’s Fiduciary Duties
As Managing Member, Maginn owed fiduciary duties to New Media II-B and
its members. “By default, limited liability company managers owe fiduciary duties
akin to those owed by directors of a corporation.”159 In the analogous corporate
context, “the duty of loyalty mandates that the best interest of the corporation and
its shareholders takes precedence over any interest possessed by a director, officer
or controlling shareholder and not shared by the stockholders generally.”160 The
duty of loyalty includes a “subsidiary element” requiring that the fiduciary act in
good faith.161
The LLC Agreement vested the Managing Member with a manager’s
traditional fiduciary duties. It provided that the Managing Member had:
full, exclusive and complete discretion to manage and
control the business and affairs of the Company, to make
all decisions affecting the business and affairs of the
Company and to take all such actions as [the Managing
Member] deem[ed] necessary or appropriate to
accomplish the purpose of the Company as set forth
[t]herein.162
159
Mehra v. Teller, 2021 WL 300352, at *28 (Del. Ch. Jan. 29, 2021) (citing 6 Del. C.
§ 18-1104).
160
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
161
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006).
162
LLC Agreement § 11(ii).
34
It also stated that the Managing Member had:
the right, power and authority, in the management of the
business and affairs of the Company, to do or cause to be
done any acts and all acts deemed by the Managing
Member to be necessary or appropriate to effectuate the
business, purposes and objective of the Company, at the
expense of the Company.163
The LLC Agreement did not alter the Managing Member’s default fiduciary
duties.164
2. Maginn’s Breach of His Duty of Loyalty
The plaintiffs sought to prove that Maginn breached his duty of loyalty when
he diverted the II-C Warrant to New Media II-C, usurping an opportunity meant for
New Media II-B.165 The corporate (or business) opportunity doctrine is “a
subspecies of the fiduciary duty of loyalty.”166 As such, the determination of
whether a corporate opportunity occurred should not be “decided on narrow or
163
Id. § 12.
164
See id.; see also Mehra, 2021 WL 300352, at *28 (“Although Delaware law permits a
limited liability company to eliminate fiduciary duties in the governing agreement, the LLC
Agreement does not do so.” (citing 6 Del. C. § 18-1101(e))).
Pls.’ Post-trial Br. 18-23. The opportunity would also have been intended for New
165
Media II but the plaintiffs do not (and cannot) seek recovery for that now-canceled entity.
166
Pers. Touch Hldg. Corp. v. Glaubach, 2019 WL 937180, at *14 (Del. Ch. Feb. 25, 2019)
(quoting Eric Talley, Turning Servile Opportunities to Gold: A Strategic Analysis of the
Corporate Opportunities Doctrine, 108 Yale L.J. 277, 279 (1998)); see also Broz v.
Cellular Info. Sys., Inc., 673 A.2d 148, 154-55 (Del. 1996) (explaining that the corporate
opportunity doctrine is “one species of the broad fiduciary duties assumed by a corporate
director or officer”).
35
technical grounds, but upon broad considerations of corporate duty and loyalty.”167
This “duty has been consistently defined as ‘broad and encompassing,’ demanding
of a [fiduciary] ‘the most scrupulous observance.’”168
The “classic statement of the doctrine” was set out in Guth v. Loft, Inc.:
[I]f there is presented to a corporate officer or director a
business opportunity which the corporation is financially
able to undertake, is, from its nature, in the line of the
corporation’s business and is of practical advantage to it,
is one in which the corporation has an interest or a
reasonable expectancy, and, by embracing the
opportunity, the self-interest of the officer or director will
be brought into conflict with that of his corporation, the
law will not permit him to seize the opportunity for
himself.169
More recently, the Delaware Supreme Court in Broz v. Cellular Information
Systems, Inc. described the doctrine as follows:
[A] corporate officer or director may not take a business
opportunity for his own if: (1) the corporation is
financially able to exploit the opportunity; (2) the
opportunity is within the corporation’s line of business; (3)
the corporation has an interest or expectancy in the
opportunity; and (4) by taking the opportunity for his own,
the corporate fiduciary will thereby be placed in a position
inimicable to his duties to the corporation.170
167
Guth v. Loft, Inc., 5 A.2d 503, 511 (Del. 1939).
168
BelCom, Inc. v. Robb, 1998 WL 229527, at *3 (Del. Ch. Apr. 28, 1998) (quoting Cede,
634 A.2d at 361).
169
Guth, 5 A.2d at 510-11.
170
Broz, 673 A.2d at 154-55.
36
“No one factor is dispositive and all factors must be taken into account insofar
as they are applicable.”171 “Rulings on business opportunity issues are therefore
fact-intensive, and ‘[h]ard and fast rules are not easily crafted.’”172 The central
inquiry is “whether or not the [fiduciary] has appropriated something for himself
that, in all fairness, should belong to his [company].”173
a. Financial Ability
The first Broz factor looks to whether the company had the financial ability to
take on the opportunity. In analyzing this element, the court may consider “a number
of options and standards for determining financial inability, including but not limited
to, a balancing standard, temporary insolvency standard, or practical insolvency
standard.”174 The Court of Chancery has applied the “insolvency-in-fact” test, which
looks to whether the entity “is practically defunct.”175 It has also considered
“whether the [entity] is in a position to commit capital, notwithstanding the fact that
171
Id. at 155.
172
Metro Storage Int’l LLC v. Harron, 275 A.3d 810, 852 (Del. Ch. 2022) (quoting Broz,
637 A.2d at 155).
173
Equity Corp. v. Milton, 221 A.2d 494, 497 (Del. 1966).
174
Pers. Touch, 2019 WL 937180, at *14 (quoting Yiannatsis v. Stephanis by Sterianou,
653 A.2d 275, 279 n.2 (Del. 1995)).
175
Gen. Video Corp. v. Kertesz, 2008 WL 5247120, at *19 (Del. Ch. Dec. 17, 2008)
(quoting Sterianou ex rel. Stephanis v. Yiannatsis, 1993 WL 437487, at *4 (Del. Ch.
Oct. 4, 1993)).
37
the [entity] is actually solvent.”176 Regardless, “consistent with the discretion
afforded the court to determine financial ability, such a determination is a
fact-intensive inquiry that generally requires a developed record.”177
There is no question that New Media II-B had the ability to purchase the II-C
Warrant for $65,000 on June 29, 2012, when the II-C Warrant was issued to New
Media II-C.178 Indeed, New Media II-B paid slightly less than half of the purchase
price.179
Maginn subsequently exercised the II-C Warrant for $3,055,000.180 Maginn
testified that New Media II-B had $920,000 in its bank accounts (from the Series A
Junior Preferred redemption payments) in or around June 2012.181 Bank account
statements showed that New Media II-B still had these funds in April 2013.182
176
In re Riverstone Nat., Inc. S’holder Litig., 2016 WL 4045411, at *9 (Del. Ch.
July 28, 2016).
177
Id.178
See Broz, 673 A.2d at 155.
179
New Media II paid $33,813.14 and New Media II-B paid $31,186.86. JX 130 at 2.
180
JX 110.
181
Maginn Tr. 232. New Media II had $500,000. Id. at 232.
182
JX 101.
38
Given the anticipated involvement of New Media II, 183 it seems unlikely that
New Media II-B would have paid the full $3 million to exercise the II-C Warrant.184
Additionally, the II-C Warrant had a cashless exercise option, meaning further cash
investments (beyond the $65,000 purchase) may have been unnecessary.185 The
plaintiffs testified that had the opportunity been presented, they would have invested
further in New Media II-B to fund the exercise.186
Maginn does not dispute that New Media II-B had the means and ability to
exercise the warrants. He argues, instead, that New Media II-B’s funds were
unavailable because they were “promised” for distribution to the members of New
Media II-B and could not be used to purchase (or exercise) the II-C Warrant. 187
183
The II-C Warrant was intended to be a substitute to the Series A Junior warrants held
by both New Media II and New Media II-B. See supra notes 33-42 and accompanying
text.
184
New Media II held 2,451,466 Series A Junior warrants. JX 167 at 18; JX 243. New
Media II-B held 1,129,275 Series A Junior warrants. JX 7.
185
JX 89 § 1(b).
186
Deane Tr. 550-551. The plaintiffs had substantial personal assets sufficient to exercise
the II-C Warrant. See JX 198; JX 199; JX 201; JX 202; JX 185; JX 187. The defendant
filed a Motion in Limine to Exclude Evidence and Argument Regarding Plaintiffs’ Ability
to Exercise the II-C Warrant. Dkt. 241. The defendant withdrew that motion before trial
but reserved his rights to press it pending completion of the plaintiffs’ document
production. Dkt. 263. I assume that motion is moot. Insofar as it is not, the motion is
denied. Maginn had the opportunity at trial to cross-examine the plaintiffs on their personal
abilities to exercise the II-C Warrant.
187
Def.’s Post-trial Br. 39-40.
39
New Media II-B had a practice of making distributions to its members. For
example, previous Series A Junior Preferred redemption payments from Jenzabar
had been distributed to New Media II-B members.188 But there is no evidence that
New Media II-B’s funds were “promised” or committed for the sole purpose of
distributions and thus unavailable for any other use. The LLC Agreement did not
mandate distributions but left the decision of whether to make distributions to
Maginn’s sole discretion.189 Further, the 2004 solicitation asking New Media II-B
members to approve the Jenzabar restructuring expressly warned members that
“there can be no assurances that . . . any such cash payments [for the redemptions]
will be made.”190
Maginn’s delay in distributing the final Series A Junior Preferred redemptions
to New Media II-B members further indicates that New Media II-B’s funds were not
committed as distributions. On September 9, 2011, Jenzabar paid New Media II-B
188
See JX 13 at 2; JX 30 at 2; see Maginn Tr. 183.
189
LLC Agreement § 15. Of course, as the manager of New Media II-B, Maginn had sole
discretion over whether to liquidate the Jenzabar investments held by New Media II-B and
to distribute these proceeds to members. Id. §§ 12, 15. But, his discretion was
circumscribed by the fiduciary duty of loyalty.
190
JX 5 at 2; see also JX 12 at 1 (“[T]he Company will redeem the remaining $4,700,000
. . . , provided that the Company meets certain financial metrics at the time of each
redemption, the achievement of which is not guaranteed nor reasonably assured at this
time. On the other hand, the remaining shares held by New Media II and New Media II-B
may be redeemed earlier than six years, however, the Company cannot give any assurances
at this time that such event will occur.” (emphasis added)).
40
$965,637.67 for the final tranche of Series A Junior Preferred redemptions.191 But
Maginn did not distribute this money to New Media II-B members until December
2013—more than two years later.192 That Maginn used New Media II-B’s funds to
purchase an extension to the Series A Junior warrants and to purchase the II-C
Warrant for New Media II-C further undercuts his assertion that the funds were
unavailable.193
Ultimately, Maginn’s characterization of New Media II-B’s financial status is
unsupported and self-serving.194 Maginn offered no evidence indicating that New
Media II-B was financially unable to purchase or exercise (at least a significant part
of) the II-C Warrant.
b. Line of Business
The second Broz factor directs me to consider whether the II-C Warrant was
in New Media II-B’s “line of business.”195 “[A] company’s line of business includes
191
JX 48.
192
See JX 101; JX 132; JX 140; Maginn Tr. 157, 219-20. In the past, Maginn had
distributed the payments promptly. See JX 30 (showing that Jenzabar paid New Media II-
B on January 21, 2011, and New Media II-B distributed the payment to members on March
4, 2011).
193
Maginn Tr. 154; JX 130 at 2; JX 68. Maginn also used New Media II funds for “various
Delaware fees” of New Media II-C—amounting to $1,640.14. JX 130 at 2. Maginn
eventually reimbursed these expenses to New Media II. Id.
194
See Grove v. Brown, 2013 WL 4041495, at *9 (Del. Ch. Aug. 8, 2013) (rejecting waiver
defense to corporate opportunity claim because “[t]he only evidence of waiver was self-
serving testimony from [the defendant]”).
195
See Broz, 673 A.2d at 155.
41
all activities where the company has ‘fundamental knowledge, practical experience
and ability to pursue’ provided that the activity is ‘consonant with its reasonable
needs and aspirations for expansion.’”196 This concept “has a flexible meaning,
which is to be applied reasonably and sensibly to the facts and circumstances of the
particular case,” and “latitude should be allowed for development and expansion.”197
“Delaware courts accordingly have ‘broadly interpreted’ the ‘nature of the
corporation’s business’ when ‘determining whether a corporation has an interest in
a line of business.’”198
“For purposes of an investment, the focus of this factor should be on whether
the form of investment was suitable for the entity and vice versa.”199 Maginn does
not dispute that the II-C Warrant was a suitable investment for New Media II-B.200
The “business and purpose” of New Media II-B was to make “investments in
196
SDF Funding LLC v. Fry, 2022 WL 1511594, at *16 (Del. Ch. May 13, 2022) (quoting
Guth, 5 A.2d at 514).
197
Guth, 5 A.2d at 514.
198
Pers. Touch, 2019 WL 937180, at *16 (quoting Dweck v. Nasser, 2012 WL 161590, at
*13 (Del. Ch. Jan. 18, 2012)).
199
Metro Storage, 275 A.3d at 853.
200
See Def.’s Post-trial Br. 37-42.
42
securities and other interests of Jenzabar.”201 New Media II-B also previously held
warrants (the Series A Junior warrants) nearly identical to the II-C Warrant.202
c. Interest or Expectancy
The third Broz factor looks at whether New Media II-B had an “interest or
expectancy” in the II-C Warrant. 203 “In order for a company to have an ‘actual or
expectant interest’ in a corporate opportunity, ‘there must be some tie between that
[opportunity] and the nature of the corporate business.’”204 This factor “implicates
many of the [same] issues” as the “line of business” inquiry. 205 The court in Broz,
for example, found that the company in that case had no interest or expectancy in a
license because it was divesting its holdings and its business plan did not
contemplate any new acquisitions.206
There is a clear “tie between” New Media II-B’s business—which was to
make “investments in securities and other interests of Jenzabar”—and the II-C
Warrant.207 Yet, Maginn contends that New Media II-B had no interest or
201
LLC Agreement § 2.
202
Compare JX 7 (Series A Junior warrants) with JX 89 (II-C Warrant).
203
See Broz, 673 A.2d at 155.
204
SDF Funding, 2022 WL 1511594, at *16 (quoting Johnston v. Greene, 121 A.2d 919,
924 (Del. 1956)).
205
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 973
(Del. Ch. 2003), aff’d, 845 A.2d 1040 (Del. 2004).
206
Broz, 673 A.2d at 156.
207
LLC Agreement § 2.
43
expectancy in the II-C Warrant because New Media II-B’s business “effectively
concluded.”208 He points out that the Series A Junior Preferred stock had been fully
redeemed and the Series A Junior warrants were expiring.
New Media II-B was not, however, constructed to hold a single Jenzabar
investment.209 “The business and purpose of [New Media II-B was] to make such
investments as [Maginn] determine[d], including, without limitation, investments in
securities and other interests in Jenzabar.”210 So long as Jenzabar remained a going
concern and the New Media entities had a lawful right to invest in Jenzabar
securities, that purpose remained viable. Indeed, the investments held by New
Media II-B had already morphed once as a result of the 2004 Jenzabar restructuring.
It was possible for these investments to morph once again—this time from cash into
the II-C Warrant.
If Maginn had determined that New Media II-B’s business had been
accomplished, he could have returned each member’s investment and sought to
208
Def.’s Post-trial Br. 37-39.
209
Maginn argues that a contrary finding would mean that New Media II-B competed with
New Media II. Id. at 5, 41-42. Not so. The factual circumstances surrounding the
formation of New Media II-B are different from those surrounding the issuance of the II-C
Warrant. At the time New Media II-B was formed, New Media II had no liquid assets and
thus was not financially able to pursue the investment opportunity that was ultimately
placed into New Media II-B. See JX 167 at 18-19.
210
LLC Agreement § 2.
44
terminate New Media II-B’s corporate status.211 He did not. Instead, he purportedly
set out to find additional Jenzabar investment opportunities for New Media II-B. He
did not attempt to cancel New Media II-B’s corporate status until 2020.212
Finally, Maginn argues that New Media II-B lacked an expectancy in the II-C
Warrant because it was not intended to issue to New Media II-B. This position is
belied by Maginn’s own insistence that his actions were motivated by a desire to
seek a better outcome for New Media II-B and its members.213 Maginn proposed
and created the New Media II-C investment structure, causing the Special
Committee to issue the II-C Warrant to New Media II-C instead of New Media II-B.
The Special Committee believed that the II-C Warrant would to go a “successor
entity” to New Media II and New Media II-B.214
In sum, the record supports the conclusion that New Media II-B had an interest
in, and a reasonable expectation of, an opportunity to acquire the II-C Warrant.
211
See supra note 189 (discussing the discretion granted to Maginn by the LLC
Agreement). Maginn’s discretion was also limited by Section 13 of the LLC Agreement,
which provides that winding up and dissolution are only possible upon “the written
determination of the Members” or “the entry of a decree of judicial dissolution.” LLC
Agreement § 13. That Maginn did not have the unilateral power to wind-up and dissolve
New Media II-B further cuts against his assertion that New Media II-B’s investment in
Jenzabar had concluded by June 2012.
212
JX 172.
213
See supra notes 33-37 and accompanying text.
214
JX 87.
45
d. Inimical Position
The fourth Broz factor prohibits a fiduciary from taking an opportunity for his
own if “the corporate fiduciary will thereby be placed in a position inimicable to his
duties to the corporation.” 215 “For a traditional business opportunity, this factor
typically looks to whether the fiduciary will be competing in some way with the
entity he serves or depriving it of an advantage.”216 “[T]he fiduciary’s seizure of an
opportunity [must] result[] in a conflict between the fiduciary’s duties to the
corporation and the self-interest of the director as actualized by the exploitation of
the opportunity.”217
Although Maginn was a member of New Media II-B, he only held a 4.58%
interest in that entity.218 He knew that the II-C Warrant was intended to address the
expiration of the Series A Junior warrants. He “borrowed” funds from New Media
II-B to pay for the II-C Warrant. But despite the understanding that the II-C Warrant
would be placed with a new “successor entity,” it was given to New Media II-C—
an entity wholly owned by Maginn and his spouse.219 Maginn was able to personally
215
Broz, 673 A.2d at 155.
216
Metro Storage, 275 A.3d at 854.
217
Broz, 673 A.2d at 157.
218
JX 196 at 5.
219
Maginn Tr. 190-92.
46
reap a financial benefit not equally shared by the members of New Media II-B. He
deprived New Media II-B of the chance to share in the II-C Warrant.220
At the time Maginn obtained the II-C Warrant, he did not know the exercise
price, which would later be determined by KPMG. It is clear, however, that he
expected some upside.221 Around the time the warrants issued, Maginn was
“enthusiastic and optimistic about” Jenzabar,222 had inside knowledge of Jenzabar’s
prospects by virtue of his officer role, already held a sizable portion of Jenzabar,223
and was able to obtain the II-C Warrant (representing 11% of Jenzabar’s fully diluted
equity224) for just $65,000.
That Maginn placed himself in a position inimical to his corporate duties to
New Media II-B is underscored by his furtive behavior. Despite his role as
Managing Member of New Media II-B, he remained silent about the II-C Warrant.
The II-C Solicitation provided virtually no information about the opportunity and by
the time it was sent, Maginn had already exercised the II-C Warrant. In fact, as
discussed above, the plaintiffs only found out about the II-C Warrant years later
during discovery in this litigation.
220
See Metro Storage, 275 A.3d at 854.
221
See id.
222
Maginn Tr. 179.
223
See JX 76 (Jenzabar capitalization table as of December 30, 2011).
224
See id.
47
* * *
All four factors of the Broz framework favor the plaintiffs. Considering the
factors holistically, 225 I find that Maginn breached his fiduciary duty of loyalty by
usurping from New Media II-B the opportunity to obtain the II-C Warrant. 226
D. Whether the Plaintiffs Proved Unjust Enrichment
In addition to their duty of loyalty claim, the plaintiffs sought to prove that
Maginn was unjustly enriched. To prevail on their unjust enrichment claim, the
plaintiffs needed to demonstrate, by a preponderance of the evidence: (1) an
enrichment, (2) an impoverishment; (3) a connection between the enrichment and
the impoverishment; (4) the absence of justification; and (5) the absence of a remedy
provided at law.227 Because the plaintiffs proved that Maginn breached his duty of
loyalty, they have also proven unjust enrichment. 228
225
Broz, 673 A.2d at 155 (“No one factor [of the Broz framework] is dispositive and all
factors must be taken into account insofar as they are applicable.”).
226
Maginn suggests that he cannot be found to have usurped a business opportunity
because the II-C Solicitation presented the opportunity to members, who declined to pursue
it. See Def.’s Pre-trial Br. 40-41. As discussed above, the II-C Solicitation merely
mentioned that “New Media Investors ha[d] formed a new New Media entity, New Media
Investors IIC, LLC, to invest in another Jenzabar opportunity.” JX 133 at 1. It did not
mention the II-C Warrant, financial details about the warrants, or the intended benefit for
New Media II and New Media II-B. See supra notes 128-36. The II-C Solicitation also
came months after Maginn had taken the opportunity for himself.
227
See Winner Acceptance Corp. v. Return on Cap. Corp., 2008 WL 5352063, at *13 (Del.
Ch. Dec. 28, 2008).
228
See MCG Cap. Corp. v. Maginn, 2010 WL 1782271, at *25 n.147 (Del. Ch. May 5,
2010) (“If MCG is able to prove Maginn breached his duty of loyalty in Count Five then it
will also be successful in proving unjust enrichment in Count Six. Both claims hinge on
48
Maginn was enriched when he obtained the full value of the II-C Warrant he
had supposedly negotiated for the members of New Media II and New Media II-B.
New Media II-B was not given the opportunity to obtain the II-C Warrant and its
members did not receive any of the benefits. But the fiduciary duty and unjust
enrichment claims seek an identical recovery, making them redundant. 229 The
plaintiffs are not entitled to further relief for their unjust enrichment claim beyond
that described below.
E. The Appropriate Remedy
The plaintiffs must prove their damages by a preponderance of the
evidence.230 Damages must “logically and reasonably relate[] to the harm or injury
for which compensation is being awarded.”231 But “[t]he law does not require
certainty in the award of damages where a wrong has been proven and injury
whether Maginn was disloyal to Jenzabar by the manner in which he procured the 2002
Bonus.”).
229
See id.; Deputy v. Deputy, 2020 WL 1018554, at *47 (Del. Ch. Mar. 2, 2020).
230
See, e.g., In re Mobilactive Media, LLC, 2013 WL 297950, at *24 (Del. Ch. Jan. 25,
2013); Metro Storage, 275 A.3d at 859.
231
In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 773 (Del. 2006)
49
established.”232 Rather, “once a breach of duty of loyalty is established, uncertainties
in awarding damages are generally resolved against the wrongdoer.”233
“Delaware law dictates that the scope of recovery for a breach of the duty of
loyalty is not to be determined narrowly.”234 “Responsible estimates that lack
mathematical certainty are permissible so long as the court has a basis to make a
responsible estimate of damages.”235 But, “[s]peculation is an insufficient basis”
upon which to award damages.236
1. Form of Damages
This court has broad discretion to “fashion any form of equitable and
monetary relief as may be appropriate, including rescissory damages.”237 A remedy
for a proven breach of the duty of loyalty may require the defendant fiduciary to
232
Red Sail Easter Ltd. P’rs, L.P. v. Radio City Music Hall Prods., Inc., 1992 WL 251380,
at *7 (Del. Ch. Sept. 29, 1992).
233
Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 466 (Del. Ch. 2011) (citation
omitted).
234
Thorpe by Castleman v. CERBCO, Inc., 676 A.2d 436, 445 (Del. 1996).
235
Pers. Touch, 2019 WL 937180, at *18 (quoting Red Sail Easter, 1992 WL 251380,
at *7).
236
Id.237
Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983); see Int’l Telecharge, Inc. v.
Bomarko, Inc., 766 A.2d 437, 440 (Del. 2000) (explaining that “[i]n determining damages,
the powers of the Court of Chancery are very broad in fashioning equitable and monetary
relief”).
50
“disgorge all profits and equity from the usurpation.” 238 “If an officer or director of
a corporation, in violation of his duty as such, acquires gain or advantage for himself,
the law charges the interest so acquired with a trust for the benefit of the corporation,
at its election, while it denies to the betrayer all benefit and profit.”239
The plaintiffs seek rescissory damages measured by the total profits Maginn
received from the II-C Warrant as of December 2020.240 Maginn contends that the
proper remedy is compensatory damages as of 2013, amounting to $20,825 based
on the plaintiffs’ proportionate interests in the II-C Warrant.241 He asserts that this
approach, rather than rescissory damages, is equitable because Maginn did not
deprive the plaintiffs of property they actually owned. 242 A beneficiary can,
however, “force a fiduciary to disgorge the benefits that the fiduciary received
without a showing of harm to the beneficiary.”243
238
Mobilactive Media, 2013 WL 297950, at *23; see also Pers. Touch, 2019 WL 937180,
at *18 (“[T]his court has awarded lost profits as a measure of damages for usurpation of
ongoing business opportunities.”); Dweck, 2012 WL 161590, at *17 (awarding the
defendant’s profits as damages); Grove, 2013 WL 4041495, at *10 (same).
239
Guth, 5 A.2d at 510.
240
Pls.’ Post-trial Br. 50-57.
241
Def.’s Post-trial Br. 53-56.
242
See Def.’s Opp’n to Pls.’ Mot. Lim. (Dkt. 259) ¶¶ 5-10.
243
Metro Storage, 275 A.3d at 860 (citing Kahn v. Kolberg Kravis Roberts & Co., L.P., 23
A.3d 831, 838 (Del. 2011); Oberly v. Kirby, 592 A.2d 445, 463 (Del. 1991).
51
Compensatory damages “determined at the time of the transaction”244 would
not fully compensate the plaintiffs for their harm. “It is an act of disloyalty for a
fiduciary to profit personally from the use of information secured in a confidential
relationship, even if such profit or advantage is not gained at the expense of the
fiduciary.”245 To remedy Maginn’s disloyal actions, damages must account for the
benefit that Maginn realized by obtaining the II-C Warrant instead of providing that
opportunity to New Media II-B.246
Maginn next argues that rescissory damages—measured as of 2020—are
inappropriate because the plaintiffs delayed in prosecuting their case. Although the
passage of time “plays less of a role ‘for rescissory damages than with true
rescission,’” “it remains “a relevant consideration when determining whether to
award rescissory damages.”247 A plaintiff’s delay in bringing a claim may counsel
against awarding rescissory damages when such damages would (1) amount to
“windfall awards” or (2) reward a plaintiff “who attempts to ‘sit back and test the
244
Strassburger v. Earley, 752 A.2d 557, 579 (Del. Ch. 2000).
245
Oberly, 592 A.2d at 463.
246
See Mobilactive Media, 2013 WL 297950, at *23; Oberly, 592 A.2d at 466 (explaining
that a plaintiff may “demand rescission of the transaction or, if that is impractical, the
payment of rescissory damages” where the defendant has breached its duty of loyalty).
247
SPay, Inc. v. Stack Media Inc., 2021 WL 6053869, at *4 (Del. Ch. Dec. 21, 2021)
(quoting In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 41 (Del. Ch. Feb. 28,
2014)).
52
waters, see how the transaction plays out, and then sue[s] for rescissory damages if
the deal turned out well for the other side.’”248
Neither situation is present here. At times, the plaintiffs have not proceeded
with any semblance of alacrity in pursuing their claims. 249 But, again, they did not
learn about the II-C Warrant and associated duty of loyalty claim until 2021. 250
Rescissory damages would also not amount to a windfall in this context. The
court has been reluctant to award rescissory damages when doing so could “include
elements of value causally unrelated to the wrongdoing.” 251 Those concerns are
lessened where a fiduciary engages in self-dealing or usurps an opportunity
belonging to a plaintiff entity. In such situations, the court may impose a remedy to
counter the fiduciary’s unjust enrichment. 252
248
Id. at *4; Ryan v. Tad’s Enters., Inc., 709 A.2d 682, 699 (Del. Ch. 1996) (“The
underlying policy reason is that excessive delay enables a plaintiff otherwise to ‘sit back
and test the waters,’ opportunistically waiting to see whether the defendants achieve an
increase in the value of the company above its likely appraisal value, before deciding to
assert a claim for rescission, or its monetary equivalent, rescissory damages.”).
249
See Summ. J. Op. at *6-11.
250
See supra notes 128-36; Deane Tr. 549-50; Cunningham Tr. 585; Wihbey Tr. 627-28.
251
Strassburger, 752 A.2d at 580; Oberly, 592 A.2d at 463 (explaining that a court of
equity will not countenance a fiduciary to profit from a breach of the duty of loyalty, which
would amount to unjust enrichment).
252
See Strassburger, 752 A.2d at 581.
53
It would be equitable in this case to assess the plaintiffs’ damages at the time
of trial.253 But as a practical matter, the time at which the plaintiffs’ rescissory
damages are measured must be earlier due to the availability of evidence presented
by the parties. That time is December 31, 2020.
2. Quantification of Damages
Maginn exercised the II-C Warrant for $3,055,000 and received 6,500,000
common voting Jenzabar shares and 65,000,000 common non-voting Jenzabar
shares.254 That is, each individual warrant equated to one voting shares and ten non-
voting shares of Jenzabar common stock. To quantify the value of those shares, each
party relied on an expert. Maginn offered the expert opinion of Sean O’Reilly, a
253
See Pers. Touch, 2019 WL 937180, at *18-19 (awarding damages based on the
defendant’s profits, as measured at time of trial in 2018, for usurpation of corporate
opportunity in 2015); Orchard, 88 A.3d at 39 (“In a case involving corporate stock,
rescissory damages can be measured at the time of judgment, the time of resale, or at an
intervening point when the stock had a higher value and remained in control of the disloyal
fiduciary.”).
The plaintiffs filed a Motion in Limine to Establish that Damages Should be
Ascertained as of the Time of Trial, which Maginn opposed. See Pls.’ Mot. Lim. (Dkt.
239); Def.’s Opp’n to Pls.’ Mot. Lim. (Dkt. 259). I declined to rule on that motion in
advance of trial since it asked the court to determine how damages would be calculated
before the court had heard evidence in the case. To the extent that the motion in limine
sought an evidentiary ruling, is it is denied. Nonetheless, I have determined that calculating
damages “at the time of trial” (specifically, as of December 31, 2020) is appropriate—
effectively the same relief requested in the plaintiffs’ motion.
254
Maginn purchased the II-C Warrant on June 29, 2012. JX 89; 91; see JX 87. A few
days later on July 1, Jenzabar performed a share dividend. Each stockholder received ten
new, non-voting shares. Maginn Tr. 211-13; JX 128 at 26. Thus, each individual warrant
provided for in the II-C Warrant netted one share of Jenzabar voting common stock and 10
shares of Jenzabar non-voting common stock.
54
partner in the valuation services practice of CFGI, LLC. 255 The plaintiffs offered the
opinion of Jason Cunningham, an investment banker and the managing partner of
Eaglehill Advisors, LLC, a private credit investment firm. 256
O’Reilly calculated that fair market value of the operating equity of Jenzabar
as of December 31, 2020 to be $119,341,000 on a marketable, minority basis.257 He
reached that value based on a discounted cash flow (“DCF”) analysis and a
comparable companies analysis. O’Reilly opined that the fair market value of
Jenzabar’s voting and non-voting common stock was $0.3149 per share and $0.3086
per share, respectively, on a fully-diluted, minority, non-marketable basis as of
December 31, 2020. 258 Thus, the common shares provided by each warrant are
worth $3.4009,259 and the total shares represented by the II-C Warrant (consisting of
255
See JX 269 (“2022 O’Reilly Report”) ¶ 6; see also JX 174 (“2021 O’Reilly Report”);
JX 189 (“Rebuttal O’Reilly Report”).
256
See JX 176 (“Rebuttal Cunningham Report”) at 2; see also JX 188 (“Supplemental
Cunningham Report”); JX 204 (“Updated Cunningham Report”). Jason Cunningham is
also serving as the attorney-in-fact for his father, William Cunningham. In reviewing
Cunningham’s analyses, I am mindful of any bias that might have influenced his opinions.
Certain of Cunningham’s positions are, however, objectively reasonable and I give them
the appropriate weight in considering the parties’ respective arguments on damages.
257
2022 O’Reilly Report ¶ 95, App. E at B.5a.
258
Id. ¶ 98, app. E at B.5a.
259
Each warrant in the II-C Warrant amounts to 10 non-voting shares and one voting share
or ($0.3086 * 10 + $0.3149 * 1) = $3.4009.
55
6,500,000 warrants) are worth $22,105,850.260 After accounting for the $3,055,000
exercise price and $65,000 purchase price paid by Maginn, O’Reilly’s analysis
indicates that the value of the benefit wrongly obtained by Maginn is $18,985,850
as of the end of 2020.261
Cunningham considered a comparable companies analysis in assessing the
fair value of Jenzabar’s shares.262 Cunningham’s overall approach was to examine
a 409A valuation of Jenzabar’s common stock as of June 30, 2020 performed by
KPMG on October 23, 2020 (the “2020 409A Valuation”).263 He calculated the total
equity value of Jenzabar to be $478,119,800 as of December 31, 2020.264 He
calculated the total equity value for Jenzabar common shares on a fully-diluted basis
to be $471,470,800 as of December 31, 2020.265 Cunningham then determined each
260
Maginn calculated the average value between voting and non-voting shares to be
($0.3149 * 10 + $0.3086) ÷ 2 or $0.3118 per share. He multiplies this figure by the
71,500,000 voting and non-voting shares controlled by the II-C Warrant. Def.’s Post-trial
Br. 60 n.24. This is wrong because it fails to weight the 10:1 ratio of voting to non-voting
shares.
261
See id. Maginn calculated this value to be $19,237,610. This is wrong for the reasons
explained in supra note 260.
262
Updated Cunningham Report at 1.
263
Id.; Cunningham Tr. 451, 456-57; see JX 171 (“2020 409A Valuation”). Compared
with O’Reilly’s and Cunningham’s analyses, the 2020 409A Valuation, performed for
Internal Revenue Code 409A purposes, provided the lowest valuation. See JX 165 at 20
(“[E]verybody wants [a 409A analysis] to be low because they don’t want to . . . declare
any more income than necessary on their tax return.”).
264
Updated Cunningham Report at 1; Cunningham Tr. 453.
265
Updated Cunningham Report at 2.
56
pre-split common share to be worth $13.85.266 Based on that figure, the shares
provided by the II-C Warrant would be worth $90,011,350.267 Less the $3,055,000
exercise price and $65,000 share purchase price, the plaintiffs ask that Maginn be
ordered to pay a net figure of $86,891,350, ascertained as of the end of 2020.268
After considering the evidence and expert reports, I find O’Reilly’s DCF
analysis to be unreliable and give it no weight. I look, instead, to the comparable
companies analysis presented by each party. I adopt the set of comparables O’Reilly
relied upon. But I disagree with certain of the multiples selected by O’Reilly and
Cunningham. I also reject O’Reilly’s discount for lack of marketability. My
analysis yields a total equity value for Jenzabar of $453,223,255. I calculate a value
per common voting share of $1.194 and per common non-voting share of $1.170 as
of December 31, 2020.
I then consider the allocation of damages between New Media II and New
Media II-B. Ultimately, I find New Media II-B entitled to $25,451,992 in damages.
266
Id. One pre-split share equates to one warrant for purposes of the $13.85 value.
Cunningham calculated a share of post-split Jenzabar common stock to be worth $1.2589
(captured as an average price for each 11-share grouping). Id.
267
Pls.’ Post-trial Br. 51.
268
Id.
57
a. Discounted Cash Flow Analysis
O’Reilly calculated the fair market value of Jenzabar common shares by
performing a DCF analysis. He presented this income approach to value—based on
the present value of expected future economic benefits—as more reliable than his
market approach. He gave 90% weight to the $117,930,000 equity value resulting
from his DCF analysis and 10% weight to the $132,040,000 equity value resulting
from his comparable companies analysis.269
That relative weighting appears arbitrary. KPMG’s 2020 409A Valuation, for
example, gives 75% weight to DCF and 25% to a comparable companies method.270
O’Reilly did not explain his logic, except to say that a potential buyer would be
focused on cash flow.271 Even so, giving 90% weight to the lower value seems
unwarranted.
O’Reilly’s DCF relied upon Jenzabar management projections included in the
2020 409A Valuation.272 Despite Jenzabar’s consistent revenue growth and
profitability since 2013, the projections forecast a significant drop in revenue for
269
2022 O’Reilly Report ¶ 95, app. E at B.5a.
270
2020 409A Valuation sched. 1.0.
271
2022 O’Reilly Report ¶ 95.
272
Id. ¶¶ 81-82, app. E at B.3a.
58
2021 and 2022.273 Revenue was projected to drop by 18.2% from 2020 to 2021.274
Based on those projections, O’Reilly’s DCF assumed an initial revenue decline in
2021, followed by 5.0% annual growth from 2022 to 2025.275 This initial drop in
2021 propagated through and stepped-down all future years’ revenue in O’Reilly’s
DCF model.276
“An informative DCF valuation requires reliable projections.”277 The
projections relied upon by O’Reilly, however, are uncertain. They are an
uncontextualized forecast from a report within a report. I do not know how Jenzabar
management prepared the projections KPMG used for the 2020 409A Valuation.278
273
See Cunningham Tr. 457-58, 478-79, 512-14; see also 2021 O’Reilly Report
app. E at 1b (2007-2009 revenue); 2022 O’Reilly Report app. E at A.1b (2010-2013
revenue), B.1b. (2017-2020 revenue).
274
2022 O’Reilly Report ¶ 82. 2020 revenue was $102,048,000. Id. app. E at B.1c.
Projected 2021 revenue was $83,430,000 and projected 2022 revenue was $87,601,000.
Id. app. E at B.3a.
275
Id. ¶ 82, app. E at B.3a.
276
The model started from an inexplicable projected 2021 base of $83,430,000 (instead of
105% of 2020, which would be $107,150,400). See Updated Cunningham Report at 4.
277
In re BGC P’rs, Inc. Deriv. Litig., 2022 WL 3581641, at *34 (Del. Ch. Aug. 19, 2022);
see In re Appraisal of SWS Grp., Inc., 2017 WL 2334852, at *11 (Del. Ch. May 30, 2017)
(explaining that cash flow projections are “‘the most important input’ in performing a
DCF” and, without reliable projections, ‘a DCF analysis is simply a guess’” (quoting
Delaware Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290, 332 (Del. Ch.
2006))). “With reliable inputs, a DCF valuation may be considered an educated guess.”
SWS Grp., 2017 WL 2334852, at *11 n.180.
278
Indeed, Maginn derided Cunningham for relying on KPMG’s 2020 409A Valuation.
Def.’s Post-trial Br. 60.
59
The record provides no information about whether the projections were prepared in
the ordinary course or for some specific purpose (such as the 409A valuation). More
critically, I lack any credible explanation for why Jenzabar management predicted
that its business would drop off precipitously in 2021 after years of steady growth.
O’Reilly speculated, without basis, that the drop was “COVID-related.”279
Perhaps. But it seems unlikely that Jenzabar in early 2020 had the foresight to know
how COVID would affect its business in the years ahead. In fact, as Cunningham
credibly testified, the “Ed Tech” industry in which Jenzabar operates grew post-
COVID.280 Jenzabar’s actual financial results for 2020 are consistent with that
growth.281 For example, Jenzabar’s 2020 revenue increased by $1.628 million
relative to 2019, exceeding management’s forecast.282
With no basis to accept the revenue projections as reliable (and reasons to
question their dependability), I give no weight to O’Reilly’s DCF analysis.
279
O’Reilly Tr. 375-76.
280
Cunningham Tr. 457-58; see also Updated Cunningham Report at 4-5 (“There is no
explanation for this massive drop . . . . The only reference is that this information had been
provided by Management. There has been no industry-wide recession, and Jenzabar’s
contracts are very sticky. In fact Ed Tech growth has continued through 2021.”).
281
See Cunningham Tr. 457-58; Updated Cunningham Report app. C.
282
2019 revenue was $100,420,00. Management projected 2020 revenue to be
$100,518,000; actual 2020 revenue was $102,048,000. 2022 O’Reilly Report app. E at
B.1b; 2020 409A Valuation sched. 3.0.
60
b. Guideline Public Company Method
Both O’Reilly and Cunningham analyzed the value of Jenzabar using a
guideline public company, or comparable company, analysis. “This is a standard
valuation technique whereby financial ratios of public companies similar to the one
being valued are applied to a subject company.”283 The methodology takes a market
approach, indicating value based upon multiples calculated using the market value
of minority interests in publicly traded comparable companies.284
This methodology is appropriate only where the guideline companies selected
are truly comparable. 285 The burden of establishing that the companies used in the
analysis are sufficiently comparable rests upon the party advancing the comparables
method.286 The selected companies need not be a perfect match but, to be reliable,
the methodology must employ “a good sample of actual comparables.” 287
283
BGC Partners, 2022 WL 3581641, at *32; see Kleinwort Benson Ltd. v. Silgan Corp.,
1995 WL 376911, at *4 (Del. Ch. June 15, 1995) (recognizing the reliability of comparable
company analyses).
284
2022 O’Reilly Report ¶ 49.
285
See, e.g., Laidler v. Hesco Bastion Env’t, Inc., 2014 WL 1877536, at *8 (Del. Ch. May
12, 2014) (rejecting a comparable companies analysis where the proponent failed to
demonstrate the companies were “truly comparable”); see also BGC Partners, 2022 WL
3581641, at *32.
286
See ONTI, Inc. v. Integra Bank, 751 A.2d 904, 916 (Del. Ch. 1999) (“The burden of
proof on the question whether the comparables are truly comparable lies with the party
making that assertion.”).
287
In re Orchard Enters., Inc. S’holder Litig., 2012 WL 2923305, at *10 (Del. Ch. July 18,
2012).
61
O’Reilly selected eight guideline companies that are engaged in the same or a
similar line of business as and have reasonably similar investment characteristics to
Jenzabar. After searching for and identifying the appropriate comparables, he
selected: American Software, Inc.; Blackbaud, Inc.; Manhattan Associates, Inc.; 2U,
Inc.; Tribal Group plc; Stride, Inc. (formerly known as K12 Inc.); Grand Canyon
Education, Inc.; and Zovio, Inc.288 These companies were all in the software
business and four (2U, Tribal, Zovio, and Grand Canyon) operated in the education
sector.289 Like Jenzabar, the selected comparables were mature companies and had
similar revenues and EBITDA. 290
With the exception of two, the guideline public companies that O’Reilly
selected overlap with those chosen by KPMG for its 2020 409A Valuation.291
Cunningham largely agreed that O’Reilly’s selected comparables were
appropriate.292 I adopt this pool of eight comparables as the starting point for my
analysis.
288
See 2022 O’Reilly Report ¶ 50, app. E at A.4a, B.4a; O’Reilly Tr. 334-35.
289
2022 O’Reilly Report app. E at B.4a.
290
Id. app. E at B.4b, B.4c.
291
Id. ¶ 91. The two companies not included in the 2020 409A Valuation are Grand
Canyon and Zovio. See 2020 409A Valuation at 4.
292
Cunningham Tr. 443. Cunningham testified that three of the guideline companies
O’Reilly selected—Zovio, Tribal, and Grand Canyon—are not sufficiently comparable to
Jenzabar. See id. at 446 (testifying that “Zovio is a distressed company” and Tribal is not
an appropriate comparable because it is “a European company, trades on a different
market”), 447 (asserting that Grand Canyon is much larger than Jenzabar). That criticism
62
i. The Derived Multiple
Both Cunningham and O’Reilly used revenue (rather than EBITDA) multiples
in their analyses.293 Their respective approaches are reflected as follows:294
Guideline Revenue Multiples
LTM NFY NFY + 1
MVIC / TEV / MVIC / MVIC /
Revenue Revenue Revenue Revenue
High 11.28 9.7 11.03 9.90
3rd Quartile 5.00 3.53 4.84 4.57
Average 4.20 3.65 3.97 4.14
Median 4.01 3.15 3.59 3.68
1st Quartile 2.23 1.8 2.06 2.72
Low 0.39 0.9 0.52 0.82
O’Reilly Selected 1.31 1.29 1.77
Cunningham Selected 4.00
is not contained in his expert report, and I lack evidence to substantiate it. O’Reilly, on the
other hand, applied a thoughtful methodology to support the selection of each comparable.
See O’Reilly Tr. 333-35, 364-365; 2022 O’Reilly Report ¶¶ 91-92, app. E at B.4a, B.4b,
B.4c. Though I recognize the logic behind Cunningham’s arguments, I decline to exclude
Zovio, Tribal, and Grand Canyon from the comparables analysis.
293
O’Reilly Tr. 370; Cunningham Tr. 427-31.
294
Data in this chart is derived from: 2022 O’Reilly Report app. E at B.4c, B.4d;
2020 409A Valuation at 4, sched. 6.0; Updated Cunningham Report at 1.
LTM stands for last twelve months (the fiscal year ending December 31, 2020). NFY
stands for next fiscal year (the fiscal year ending December 31, 2021). NFY + 1 stands for
the fiscal year subsequent to the next fiscal year (the fiscal year ending December 31,
2022). MVIC is the market value of invested capital, which is the sum of the market value
of equity (i.e., market capitalization or the price per share multiplied by the number of
outstanding shares) and debt. See Robert W. Holthausen & Mark E. Zmijewski, Corporate
Valuation: Theory, Evidence & Practice 261 (2014). TEV is total enterprise value, which
is equal to total invested capital minus cash and cash equivalents. Id. at 559-60.
63
According to Cunningham, the education technology sector has migrated to
using a TEV/revenue multiple rather than a TEV/EBIDTA multiple.295 Cunningham
selected a NFY TEV/revenue multiple of 4x.296 He bases that assessment on the
2020 409A Valuation’s selection of market multiples.297 The average of these
multiples was 3.65x.298
O’Reilly selected three MVIC/revenue multiples: LTM, NFY, and NFY + 1.
He selected one of each type by averaging the 1st quartile and lowest value of the
guideline company multiples.299 O’Reilly’s guideline company analysis weighted
295
Updated Cunningham Report at 1; Cunningham Tr. 505-06. Cunningham has vacillated
between using EBITDA and revenue multiples. In his first report, Cunningham used an
EBITDA multiple, explaining that in his “professional experience, actual buyers and sellers
in this market space . . . valued software educational companies almost exclusively using
a market multiple of the company’s EBITDA, and to a lesser extent sales multiples.”
Rebuttal Cunningham Report at 3. But less than a year later, Cunningham explained that
“a fair valuation methodology should place a greater emphasis on Revenue (called Sales in
the industry), because that is the preferred methodology in this software market now.”
Supplemental Cunningham Report at 1.
296
Cunningham states he uses a “4x forward Revenue” multiple. Supplemental
Cunningham Report at 4; Updated Cunningham Report at 2; Cunningham Tr. 474 (I
“appl[ied] a 4 times forward sales multiple.”). But for unexplained reasons, he applied this
multiple to Jenzabar’s 2020 revenue rather than Jenzabar’s 2021 revenue. Updated
Cunningham Report at 1; Cunningham Tr. 475 (“I took Jenzabar’s 2020 revenue, [and]
multipl[ied] it by 4.”).
297
Id. at 3.
298
2020 409A Valuation at 4.
299
2022 O’Reilly Report ¶¶ 92-94; O’Reilly Tr. 364-72, 386-87.
64
the total invested capital values indicated by his application of LTM, NFY, and
NFY + 1 MVIC/revenue multiples—attributing 33.33% to each.300
I do not adopt either expert’s approach wholesale.
First, I do not find Cunningham’s analysis reliable, especially given his
inconsistent approach to backward-looking and forward-looking multiples and his
vacillation over EBITDA versus revenue multiples. 301 He did not calculate his own
multiples, but rather critiqued approaches taken in the 2020 409A Valuation. 302 He
provides no data to support his choice of a 4x multiple, other than analogizing
Jenzabar to American Software, which has similar revenue and EBITDA margins
and trades at a 3.3x revenue multiple. 303 His opinion that Jenzabar would trade at a
premium to American Software because Jenzabar’s capital expense is lower than
American Software as a percentage of sales is unsupported. 304
As to O’Reilly’s approach, I conclude that it is overly pessimistic. The same
problems with Jenzabar’s projections that taint his DCF render his valuation
300
2022 O’Reilly Report app. E at B.4d.
301
See supra notes 295 & 296. The multiples from the 2020 409A Valuation he purports
to rely upon are forward-looking TEV/revenue multiples—the dependability of which are
questionable given their reliance on the Jenzabar forecasts discussed above.
302
See Hodas v. Spectrum Tech., Inc., 1992 WL 364682, at *3-4 (Del. Ch. 1992) (rejecting
as “unpersuasive” a valuation that consisted solely of criticisms of another valuation).
303
Cunningham Tr. 507; Updated Cunningham Report at 3.
304
Updated Cunningham Report at 3.
65
approaches applying NFY and NFY + 1 multiples unhelpful.305 Thus, I focus my
analysis on the LTM MVIC/revenue multiples, which are necessarily
backward-looking and supported by Jenzabar’s actual results.306 I likewise disregard
O’Reilly’s decision to select a MVIC/revenue multiple towards the bottom of the
range. O’Reilly took that approach because “Jenzabar was forecast to have a . . .
fairly significant drop in revenue and to be smaller than all the guideline
companies.”307
I conclude that it is reasonable to select the median LTM MVIC/revenue
multiple of 4.01x.
ii. Total Equity Value
Applying a multiple of 4.01x to the Company’s actual FYE 2020 revenue
yields total invested capital of $409,212,480.308 Consistent with O’Reilly’s analysis,
305
Specifically, O’Reilly used the bearish revenue 2021 and 2022 forecasts of $83.430
million and $87.601 million. 2022 O’Reilly Report app. E at B.4d.
306
Cunningham did not provide a LTM TEV/revenue multiple.
307
O’Reilly Tr. 368. In other words, O’Reilly’s approach of selecting a multiple towards
the bottom of the guideline range was based on the negative outlook reflected in Jenzabar’s
projections. Again, I do not find those forecasts reliable.
308
FYE stands for fiscal year ending (i.e., FYE 2020 means the fiscal year ending
December 31, 2020). Jenzabar’s actual revenue for FYE 2020 was $102,048,000. See
2022 O’Reilly Report app. E at B.1b; Updated Cunningham Report at 1.
66
I add the value of certain Jenzabar investments in other businesses to that total
invested capital and subtract debt to determine the equity value. 309
Both O’Reilly and Cunningham agreed on the value of Jenzabar’s marketable
securities investments.310 Each applied a liquidation discount because Jenzabar
would be unable to sell large blocks of the investments all at once. 311 I find either
approach to the liquidation discount reliable and take the average of the two.312
O’Reilly Tr. 348-50. Cunningham added cash but he started with total enterprise value.
309
Updated Cunningham Report at 1; see supra note 294.
310
That figure is $48,992,000. See 2022 O’Reilly Report app. E at B.8; Updated
Cunningham Report at 1.
311
2022 O’Reilly Report ¶ 96; O’Reilly Tr. 348-50; Updated Cunningham Report at 1.
312
Jenzabar held a large block of securities in Tribal and a smaller block of securities in
Quad Partners V LP. 2020 409A Valuation at 8. O’Reilly calculated a liquidation
discounted value of $42,806,750 for the large block of Tribal securities. 2022 O’Reilly
Report ¶ 96, app. E at B.5a, B.8. He did not apply the liquidation discount to the smaller
block of Quad Partners securities, which amounted to $1,475,000. Id. The total value of
marketable securities, as calculated by O’Reilly, was $44,281,750. Cunningham did not
distinguish between the Tribal and Quad Partners securities. Updated Cunningham Report
at 1. He calculated a total discounted value of $44,029,800. Id.
I use the average of $44,281,750 and $44,029,800, which is $44,155,775.
67
My calculated total invested capital value, less Jenzabar’s total
interest-bearing debt,313 plus the total marketable securities adjusted for a liquidation
discount, yields a total equity value of $453,223,255. That calculation is below:
Calculation of Total Equity Value
FYE 2020 Revenue $102,048,000
Guideline Multiple
MVIC / Revenue Multiple 4.01
Total Invested Capital $409,212,480
Less
Debt $145,000
Plus
Marketable Securities $48,922,000
Adjusted for Liquidation Discount $44,155,775
Total Equity Value $453,223,255
iii. Discount for Lack of Marketability
O’Reilly applied a 25% discount for lack of marketability.314 He opined that
doing so is appropriate since Jenzabar common shares lack a ready market for
purchase and there is no liquidity event on the immediate horizon.315 Cunningham
O’Reilly estimated Jenzabar’s total interest-bearing debt to be $145,000. 2022 O’Reilly
313
Report ¶¶ 90, 94, app. E at B.1c, B.4d. Cunningham used a value of zero for debt. Updated
Cunningham Report at 1. This difference is minimal.
314
2022 O’Reilly Report ¶¶ 9, 59, 98, app. E at B.6, B.7; O’Reilly Tr. 313-18.
315
2022 O’Reilly Report ¶ 9.
68
disagreed, arguing that “a significant stake” in a company like Jenzabar would have
provided various opportunities for value realization.316
I decline to apply a lack of marketability discount for two reasons.
First, O’Reilly applied this discount to Jenzabar’s common equity value. Such
marketability discounts are disfavored where (as in the appraisal context) the court’s
objective is to value the entity itself, “as distinguished from a specific fraction of its
shares as they may exist in the hands of a particular shareholder.” 317 “Even if taken
‘at the corporate level’ (in circumstances in which the effect on the fair value of the
shares is the same as a ‘shareholder level’ discount) such a discount is, nevertheless,
based on the trading characteristics of the shares themselves, not any factor intrinsic
to the corporation or its assets.”318 That logic applies here.
Second, to apply an entity-wide marketability discount on these facts would
defeat the plaintiff-friendly approach to damages I am charged to take in fashioning
a remedy for a breach of a duty of loyalty. 319
316
Updated Cunningham Report at 5.
317
Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1144 (Del. 1989); see also Prescott Grp.
Small Cap, L.P. v. Coleman Co., 2004 WL 2059515, at *32 (Del. Ch. Sept. 8, 2004) (noting
that “marketability discounts at the shareholder level are impermissible under Delaware
appraisal law”); Gearreald v. Just Care, Inc., 2012 WL 1569818, at *11 (Del. Ch. Apr. 30,
2012).
318
Borruso v. Commc’ns Telesystems Int’l, 753 A.2d 451, 460 (Del. Ch. 1999).
319
See supra notes 234-39 and accompanying text.
69
c. Allocation of Equity
I next consider the allocation of equity to common stockholders. Jenzabar
had Series B Junior Preferred stock and Subordinated Preferred stock, both of which
have liquidation preferences. Cunningham deferred to the 2020 409A Report’s
analysis—which used an option pricing model—to calculate these liquidation
preferences.320 O’Reilly performed his own independent analysis, also using the
option pricing model. 321
These two calculations yield almost identical values.322 I find that both are
reliable and take the average, arriving at a total liquidation preference of $6,599,350
for Series B Junior Preferred stock and Subordinated Preferred stock. I consider the
number of outstanding common shares to be 374,050,600 for purposes of my
analysis.323
320
Updated Cunningham Report at 2 (citing 2020 409A Valuation sched. 16.0).
321
2022 O’Reilly Report ¶ 97, app. E at B.9a.
322
O’Reilly allocated $2,056,249 to Series B Junior Preferred stock and $4,493,450 to
Subordinated Preferred stock. Id. ¶ 97, app. E at B.5a, B.9a. Cunningham allocated
$2,085,000 and $4,564,000, respectively. Updated Cunningham Report at 2; 2020 409A
Valuation at 11, sched. 14.0. The average aggregate liquidation preference is
$6,599,349.50.
323
According to the 2020 409A Valuation, Jenzabar had 34,004,600 voting common shares
and 340,046,000 non-voting common shares (a total of 374,050,600 common shares). See
2020 409A Valuation sched. 13.0. Jenzabar also had 1,500 Series B Junior Preferred shares
and 456,355 Subordinated Preferred shares; both preferred shares were non-convertible
and non-participating. Id. That is the figure I adopt. See 2020 409A Valuation scheds.
13.0, 16.0, 17.0.
70
The following reflects my calculation of the value of Jenzabar common stock,
adopting the 2% discount for non-voting common stock O’Reilly calculated:324
Calculation of Common Stock Value
Total Equity Value $453,223,255
Less
Liquidation Preferences $6,599,350
of Preferred Stock
Common Equity Value $446,623,906
Common Shares Outstanding 374,050,600
Value per Voting Share $1.194
Value per Non-Voting Share $1.170
Value Per “Warrant” $12.895
(10 Voting Shares and 1 Non-
Voting Share)
d. Allocation Between New Media II and New Media II-B
As shown above, I find that each common share (equating to 10 non-voting
and 1 voting share) provided by the II-C Warrant to have a value of $12.895 as of
December 31, 2020. Thus, the total shares provided to Maginn by the II-C Warrant
(6,500,000 pre-split) were worth $83,817,500 as of December 31, 2020. Less the
O’Reilly used 374,061,600 for the number of common shares outstanding. 2022
O’Reilly Report app. E at B.5a. He does not explain how he arrives at this figure.
Cunningham used 374,508,455 (sum of the number of common voting and non-voting,
Series B Junior Preferred, and Subordinated Preferred shares) because he assumed
(wrongly) the preferred shares would participate with common shares. Updated
Cunningham Report at 2.
324
O’Reilly Tr. 318; 2022 O’Reilly Report ¶ 98. Cunningham adopted a 2.25% discount
rate. Updated Cunningham Report at 2. But the 2020 409A Valuation he cites for this
appears to use a 2% discount rate. 2020 409A Valuation sched. 17.0, Workpaper 2.0.
71
$3,055,000 exercise price and $65,000 to purchase the warrants, Maginn profited by
$80,697,500.
New Media II-B is not entitled to that full amount as damages. New Media II
also had an expectation in a substantial portion of the II-C Warrant. New Media II
was, however, dissolved. None of the plaintiffs were members of New Media II and
they cannot act on that default entity’s behalf. New Media II-B would obtain a
windfall if it could recover for the total value of a business opportunity that was also
intended for New Media II.
I find that it is appropriate to allocate damages in proportion to the Series A
Junior warrants held by the respective entities since the II-C Warrant was intended
to be a follow-on investment to these Series A Junior warrants.325 New Media II-B
held 31.54% of these Series A Junior warrants.326 Applying that ratio to the portion
of the II-C Warrant opportunity New Media II-B could reasonably have expected to
receive had Maginn not usurped it, I find New Media II-B entitled to $25,451,992
in damages.
325
See supra notes 33-42 and accompanying text.
326
New Media II-B held 1,129,275 Series A Junior warrants. JX 7. New Media II held
2,451,455 Series A Junior warrants. JX 167 at 18.
72
F. Pro Rata Distribution to New Media II-B Members
The damages awarded in this decision are for a derivative business
opportunity claim. The individual members are not entitled to a personal recovery.
Given the unique circumstances of this case and the nature of New Media II-B, I go
on to consider whether a pro rata recovery at the member level is appropriate.
“[S]ubstantial authority supports a court’s ability to grant a pro rata recovery
on a derivative claim. Such a recovery is the exception, not the rule, but it is
possible.”327 There is a “certain elegance in this approach” where “it would prevent
wrongdoers who misappropriate[] corporate property from enjoying any aspect of
the corporation’s recovery.”328 An investor-level recovery on an entity-level claim
may be appropriate where “an entity-level recovery would benefit ‘guilty’
stockholders, but an investor-level recovery could be more narrowly tailored to
benefit only ‘innocent’ stockholders” or where “the entity is no longer an
independent going concern, such that channeling the recovery through the
corporation is no longer feasible or a pro rata recovery is more efficient.” 329
327
In re El Paso Pipeline P’rs, L.P. Deriv. Litig., 132 A.3d 67, 75 (Del. Ch. 2015), rev’d
on other grounds sub nom. El Paso Pipeline GP Co., LLC v. Brinckerhoff, 152 A.3d 1248(Del. 2016); see also In re Happy Child World, Inc., 2020 WL 5793156, at *2 (Del. Ch.
Sept. 29, 2020) (“As a court of equity, this Court . . . would be within its authority to fashion
[a direct recovery for a derivative claim] if it did so with care.”).
328
Happy Child, 2020 WL 5793156, at *2.
329
El Paso, 132 A.2d at 123-25.
73
These scenarios are salient to the present matter. Maginn may remain a
member of New Media II-B.330 Even if he is not, New Media II-B’s nature as a
vehicle to raise funds to invest in Jenzabar calls for a pro rata recovery. If the
opportunity of the II-C Warrant had been given, in part, to New Media II-B, then its
members would have ultimately benefitted in the form of distributions. Ordering
the full award to be paid to New Media II-B—given the questions surrounding its
member roster and current managers—could lead to further deceit and inequity.
Accordingly, damages will be distributed pro rata to the members of New Media
II-B (excluding Maginn).
Although the plaintiffs recognize that there may well be members of New
Media II-B in addition to the plaintiffs, their identities are presently unknown. The
limited evidence on this issue is unilluminating.331 It indicates that there may be
330
The plaintiffs sought a declaration that Maginn is no longer a member of New Media
II-B. The written discovery responses by Maginn that the plaintiffs cite on this basis
provide that Maginn “received” a final check but not that he cashed or deposited it. See
JX 173 at 14. It is not clear to me whether Maginn remains a member of New Media II-B.
331
Maginn has continued to argue that Count II is barred by Court of Chancery Rule 19
because the plaintiffs have failed to join necessary parties. See Def.’s Post-trial Br. 52
(renewing “his Rule 19 and 23.1 arguments for why Count [II] is barred”). To the extent
he has not briefed those arguments post-trial, they are waived. See Emerald P’rs v. Berlin,
726 A.2d 1215, 1224 (Del. 1999). It is not clear what “Rule 23.1 arguments” he refers to
that continue to apply. Regarding Rule 19, as at the summary judgment stage, he failed to
show that there exist persons necessary or indispensable to the action. See Summ. J. Op.
at *12-13.
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somewhere between two and 85 remaining members of New Media II-B.332
Here, I pause to consider the plaintiffs’ request for declaratory relief. That
New Media II-B members beyond the three plaintiffs may remain is, alone, grounds
to reject the plaintiffs’ request for a declaratory judgment that they are the sole
remaining members of New Media II-B and acted to remove Maginn as Managing
Member of New Media II-B and to elect themselves as managers.333 Nor can I find
that these actions were valid.334
A number of practical problems result. The parties appear not to know the
identities of New Media II-B’s members. 335 They have not addressed the method by
which members of New Media II-B will be located. They have not considered who
(beyond this court) will be responsible for overseeing the distribution of damages to
the members that are identified. If Maginn remains the Managing Member of New
Media II-B, as he claims, it would hardly be appropriate for him to handle this task.
332
See id. at *13 (discussing evidence offered by Maginn); see also Deane Tr. 565-67.
333
See Pls.’ Post-trial Br. 56; Am. Compl. ¶¶ 168-83.
334
See JX 181.
335
They also disagree on which members would be entitled to recover. The plaintiffs say
that the members who intentionally relinquished their membership in New Media II-B
should be considered “out of the division of the pie,” while those who were never contacted
by Maginn, did not receive the II-C Solicitation, did not sign a release, or did not terminate
their membership would be entitled to recovery. Post-trial Tr. 10. The defendants, on the
other hand, argue that the plaintiffs alone should be awarded damages totaling 0.75% of
the total remedy, in proportion to their interests in New Media II-B. Def.’s Post-trial
Br. 60.
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The plaintiffs previously moved for the appointment of a receiver to seek out
the members of New Media II-B and assess whether such members have credible
claims to recover in this litigation.336 In the Summary Judgment Opinion, I
explained that because the Delaware Limited Liability Company Act lacks a
provision on appointing receivers, the court would need to rely on its general
equitable powers to grant that relief.337 Appointing a receiver would have been
inappropriate then. After trial, however, the appointment of a receiver (or monitor)
is an equitable means to prevent further harm and carry out the court’s judgment.338
These issues must be resolved to provide a fair remedy in the unique
circumstances of this case. Accordingly, the parties shall brief a proposed course of
action for providing a pro rata recovery to New Media II-B’s members (excluding
Maginn). Their submissions shall address whether the appointment of a receiver
would be appropriate to assist with the distribution process. A further decision of
this court will address the parties’ submissions and next steps.
336
See Dkt. 174.
337
Summ. J. Op. at *13.
338
See Drob v. Nat’l Mem’l Park, 41 A.2d 589 (Del. Ch. 1945); see also In re Oxbow
Carbon LLC Unitholder Litig., 2018 WL 3655257, at *7-8 (Del. Ch. Aug. 1, 2018)
(explaining that “[c]ourts of equity have tools at their disposal to mitigate the problem of
supervising a complex remedy” and appointing a monitor to supervise the parties’
compliance with a decree of specific performance), rev’d on other grounds, 202 A.3d 482(Del. 2019).
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III. CONCLUSION
Maginn is liable for breaching his duty of loyalty by usurping an opportunity
from New Media II-B. Judgment will be entered against him on that basis. The
quantum of New Media II-B’s damages is $25,451,992, which will be paid pro rata
to the members of New Media II-B (other than Maginn). Further proceedings are
necessary to determine the method by which such members will be identified and
their recovery will be distributed. The parties shall confer on and submit a proposed
schedule for filing the submissions requested above.
77