Kingfishers L.P. v. Finesse US, Inc. ( 2024 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
KINGFISHERS L.P., MIKE BLITZER, )
and GUY SHANON )
)
Plaintiffs
)
v. ) C.A. No. 2024-0344-SG
)
FINESSE US, INC., )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: October 23, 2024
Date Decided: October 30, 2024
Benjamin P. Chapple, John T. Miraglia, REED SMITH LLP, Wilmington, Delaware,
Attorneys for Plaintiffs Kingfishers L.P., Mike Blitzer, and Guy Shanon.
Sean M. Brennecke, Aimee M. Czachorowski, LEWIS BRISBOIS BISGAARD &
SMITH, LLP, Wilmington, Delaware; Albert J. Carroll, Samuel E. Bashman,
MORRIS JAMES LLP, Wilmington, Delaware; OF COUNSEL: Elisabeth A.
Moriarty, Steven A. Stein, Eric M. Sefton, GREENBERG GLUSKER FIELDS
CLAMAN & MACHTINGER LLP, Los Angeles, California, Attorneys for
Defendant Finesse US, Inc.
GLASSCOCK, Vice Chancellor
This matter is before me on a Motion to Dismiss. The allegations are factually
simple. Plaintiff Kingfishers L.P. (“Kingfishers”), and its assignees, also Plaintiffs,
invested in a start-up, Finesse US, Inc. (“Finesse” or the “Company”). Per the
Complaint, the principals for these parties had a pre-investment meeting at which
Kingfishers discussed investing $250,000 in Finesse, in return for which
representatives of Finesse agreed that, upon a next-round sale of equity, Kingfishers
would participate up to the value of its investment at a 70% discount to the rate paid
by the next-round investors. Kingfishers would also be the beneficiary of a valuation
cap which would limit the implied price to which their discount would be applied;
such cap was to be “consistent with prior investment rounds,” which Kingfishers
interpreted as an agreement to a cap valuing Finesse at no more than $13 million.
Finesse prepared a contract governing this $250,000 investment using a form
Simple Agreement for Future Equity (“SAFE”). The SAFE prepared by Finesse
omitted any valuation cap and provided for a discount rate of 70%—that is, Finesse
equity would be distributed to Kingfishers, based on its $250,000 investment, at the
rate paid in the next round, multiplied by .7. In other words, Kingfishers expected
to be provided equity at a 70% discount—paying 30% of the cost to the new
investors; instead, the SAFE provided that the price would be 70% of that cost.
Plaintiffs do not argue that any ambiguity lurks in the SAFE, and I find none—the
agreement is clear: no valuation cap, and discount rate of 70%.
1
Despite the clear language of the SAFE, Plaintiffs aver they were surprised to
be faced with Finesse’s application of those terms, when the qualifying next equity
round occurred. This appears to be because no representative of Kingfishers ever
read the six-page SAFE; instead, Kingfishers relied on the representations made by
Finesse’s principal at the pre-investment meeting, and signed the SAFE without
review.
Plaintiffs seek reformation of the SAFE to comply with the agreement
allegedly reached at the pre-investment meeting. They rely on theories of mistake,
fraud, and equitable fraud. Defendant seeks to dismiss under Rule 12(b)(6).
Upon review, I find that Plaintiffs have failed to state a claim for fraud or
equitable fraud. My consideration of the matter under the doctrine of mistake is
more problematic. A likely inference may be drawn that the parties discussed but
did not agree on the amount of any valuation cap, and that there was confusion about
whether equity would vest at a 70% discount to the price of the round, or at discount
rate of 70%. This led to a misunderstanding on the part of Plaintiffs, which would
have been dispelled had they read the SAFE. If so, reformation is not supported.
But the standard for the motion to dismiss does not allow me to draw a
defendant-friendly inference where a reasonable inference in favor of Plaintiffs
would support a claim. Plaintiffs have pled here that Finesse agreed to a 70%
discount and a valuation cap at no more than $13 million. Assuming the truth of that
2
averment, I may infer that either Defendant made a mistake in drafting the SAFE in
a way erroneously representing the agreement, or that Defendant, knowing that
Plaintiffs would anticipate a SAFE which embodied their agreement, stood silent as
Plaintiffs entered the non-compliant SAFE. This would state a case in equity for
reformation.
I think it safe to say that reading contracts before signing is good practice. It
is also safe to say that Plaintiffs have a difficult road to vindicate a claim to
reformation. Nonetheless, I am compelled to deny the Motion to Dismiss in this
regard, at the pleading stage. My reasoning follows.
3
I. BACKGROUND 1
A. Factual Background
1. The Parties
Plaintiff Kingfishers is a limited partnership organized under the laws of
Delaware.2 Kingfishers is an investment fund controlled by Kingstown Capital
Management LP (“Kingstown”). 3
Plaintiff Mike Blitzer and Plaintiff Guy Shanon are co-Chief Investment
Officers of Kingstown. 4
Defendant Finesse is a corporation organized under the laws of Delaware,
with its principal place of business located in Wilmington, Delaware. 5
2. Discussions for the Simple Agreement for Future Equity
On September 8, 2021, Kingfishers’ representatives and Finesse’s Chief
Executive Officer (“CEO”), Ramin Ahmari,6 discussed the terms of a proposed
SAFE during an in-person meeting held in Kingstown’s office in New York City.7
Ahmari, Blitzer, and Paula Sutter, a Kingstown advisor, attended this meeting.8 A
SAFE is an agreement that allows investors to invest money in early-stage startups
1
This Memorandum Opinion only contains facts necessary to my analysis.
2
Verified Compl. ¶ 10, Dkt. No. 1 (“Compl.”).
3
Id.
4
Id. ¶ 11.
5
Id. ¶ 12.
6
Id. ¶ 13.
7
Id. ¶¶ 3, 18–21.
8
Id. ¶ 18.
4
in exchange for the right to receive stock in subsequent equity issuances. 9 The
agreement is a “widely utilized” public template contract that was developed by Y
Combinator, a startup accelerator.10 The open terms that the parties needed to
negotiate and agree upon for the template SAFE were the discount percentage and
valuation cap (and the amount of investment).11
During the meeting, Ahmari represented to Blitzer and Sutter that Kingfishers
“would receive a 70% discount on the to-be-issued shares of the Company’s capital
stock (in connection with a future Series A financing).”12 In addition, Ahmari
represented that the SAFE would contain a valuation cap consistent with prior
investment rounds. 13 In these prior investment rounds, Finesse entered into at least
four SAFEs with other investors, which all contained both discount and valuation
cap provisions.14 The prior valuation caps ranged from $5 million to $13 million,
with the SAFE immediately preceding the one between Kingfishers and Finesse
including a $13 million valuation cap. 15 Ahmari represented to Blitzer and Sutter
9
See id. ¶¶ 1, 16, 25 n.1.
10
Id. ¶ 25 n.1.
11
Id. ¶ 25. Plaintiffs’ Complaint does not mention the open term of the amount of investment.
However, based on the executed SAFE, the parties needed to agree upon this term as well. See
Compl.; Exs. A and B to Opening Br. in Supp. of Def. Finesse US. Inc.’s Mot. to Dismiss, Ex. A,
Dkt. No. 16 (“SAFE”).
12
Compl. ¶ 19.
13
Id.
14
Id. ¶ 20.
15
Id.
5
that the SAFE would be on terms that were the same as or substantially similar to
those of prior investment rounds. 16
Based on Finesse’s representations, Kingfishers believed that both parties
shared the same understanding: that the SAFE would contain both a 70% discount
and a valuation cap consistent with prior rounds (i.e., no higher than $13 million).17
3. The Terms of the Executed SAFE
On September 10, 2021, Kingfishers entered the SAFE under which
Kingfishers, in exchange for an initial investment of $250,000, received the right to
certain shares of to-be-issued capital stock in Finesse.18 Peter Ondishin, the Chief
Financial Officer of Kingstown, signed the SAFE on behalf of Kingfishers.19
Kingfishers was not represented by counsel in connection with this transaction. 20
The SAFE was a total of six pages, including a signature page. 21 The terms
of the executed SAFE included a “70% discount rate” rather than a “70%
discount.” 22 More specifically, the SAFE states “this Safe will automatically convert
into the number of shares of Safe Preferred Stock equal to the Purchase Amount
divided by the Discount Price.” 23 “Discount Price” is defined as “the lowest price
16
Id. ¶ 19.
17
Id. ¶¶ 4, 21.
18
Id. ¶ 1.
19
SAFE 6.
20
Compl. ¶ 21.
21
See SAFE.
22
Compl. ¶ 22.
23
SAFE 1.
6
per share of the Standard Preferred Stock sold in the Equity Financing multiplied by
the Discount Rate.” 24 “Discount Rate” is 70%, as written on the first page of the
SAFE. 25 Put simply, a 70% discount rate means that Plaintiffs would convert at 70%
of the price per share in an equity issuance. On the other hand, a 70% discount
means that Plaintiffs would convert at 30% of the price per share in an equity
issuance.
In addition, the executed SAFE did not contain a valuation cap. 26 Besides the
first page and signature page of the SAFE, each page of the SAFE includes a header
that states “DISCOUNT ONLY.” 27 Finesse removed the “DISCOUNT ONLY”
header on the first page of the template SAFE. 28 Instead, the first page of the SAFE
includes a header that states “FINESSE SAFE NOTE.” 29
When Mr. Ondishin signed the SAFE, Kingfishers represented that it “ha[d]
such knowledge and experience in financial and business matters that [it was] . . .
capable of evaluating the merits and risks of [the] investment.”30
4. Assignment of the SAFE
On September 23, 2022, pursuant to a SAFE Assignment Agreement (the
24
Id. at 2 (emphasis added).
25
Id. at 1.
26
Compl. ¶ 22.
27
See SAFE; Compl. ¶¶ 25–27.
28
Compl. ¶ 27.
29
SAFE 1.
30
Id. at 4.
7
“Assignment Agreement”), Kingfishers assigned its interests under the SAFE to
Blitzer and Shanon 31 in exchange for $250,000.32 Under the Assignment
Agreement, Blitzer and Shanon each received 50% of Kingfishers’ “right, title, and
interest in and to the SAFE.” 33
The Assignment Agreement states that, upon execution of the Assignment
Agreement, Kingfishers “shall have no rights of any kind in the SAFE or any
securities issuable upon conversion of the SAFE.” 34 It also states that “the
documents referenced [i.e., the SAFE] set forth the entire agreement and
understanding between the parties relating to the subject matter [i.e., the SAFE] and
supersedes all prior or contemporaneous disclosures, discussions, understandings
and agreements, whether oral or written, between them.” 35
5. Defendant Attempts to Enforce the SAFE in Connection with a
Series A Transaction
On or about June 22, 2023, Finesse’s outside counsel informed Plaintiffs that
the SAFE would be automatically converted into shares of preferred stock in
connection with the Company’s Series A financing (the “Series A Transaction”).36
The SAFE was to be converted into 20,862 shares of Series A-6 Preferred Stock, at
31
Compl. ¶ 11.
32
Exs. A and B to Opening Br. in Supp. of Def. Finesse US. Inc.’s Mot. to Dismiss, Ex. B at 1,
Dkt. No. 16 (“Assignment”).
33
Assignment 1; Compl. ¶ 11.
34
Assignment 1 ¶ 3.
35
Id. at 2 ¶ 10.
36
Compl. ¶ 28.
8
a conversion price of $11.9830 per share. 37 This is consistent with the 70% discount
rate and no valuation cap applied to the SAFE. 38 Despite stating that the conversion
would occur automatically, Finesse still requested Plaintiffs to sign off on the
conversion no later than 5:00 PM on June 23, 2023.39 Plaintiffs refused to sign off,
and the Series A Transaction closed on June 26, 2023. 40
Under the plain language of the SAFE with no valuation cap and a discount
rate of 70%, upon conversion, Blitzer and Shanon would have received 20,862
shares of Series A-6 Preferred Stock, at a conversion price of $11.9830 per share. 41
In contrast, if a 70% discount was applied, the SAFE would have converted into
48,679 shares, at a conversion price of $5.1356 per share. 42 Alternatively, if a
valuation cap of $13 million, which is the valuation cap of the immediately prior
SAFE, 43 was applied, the SAFE would have converted into 149,476 shares, at a
conversion price of $1.6725 per share. 44
B. Procedural Background
Plaintiffs filed a Complaint on April 2, 2024. 45 Plaintiffs assert three
37
Id. ¶ 29.
38
Id.
39
Id. ¶ 30.
40
Id. ¶ 31.
41
Id. ¶¶ 6, 34.
42
Id. ¶¶ 32, 34.
43
Id. ¶ 20.
44
Id. ¶¶ 33, 34.
45
Compl.
9
causes of action.46 For Count I, Plaintiffs assert a cause of action for reformation
based on mistake, and request the Court to reform the SAFE to provide for a 70%
discount and include a valuation cap no higher than $13 million. 47 In the alternative,
for Count II, Plaintiffs assert a cause of action for reformation based on fraudulent
inducement, and request the Court to reform the SAFE to include a valuation cap no
higher than $13 million.48 In the alternative, for Count III, Plaintiffs assert a cause
of action for equitable fraud, and request the Court to reform the SAFE to include a
valuation cap no higher than $13 million. 49
On June 7, 2024, Defendant filed a Motion to Dismiss. 50 The parties
completed briefing on August 16, 2024.51 I heard oral argument on the Motion to
Dismiss on October 23, 2024, and I consider the matter submitted as of that date.52
II. ANALYSIS
Defendant has moved to dismiss the Complaint under Court of Chancery Rule
46
Id. ¶¶ 37–61.
47
Id. ¶¶ 37–46.
48
Id. ¶¶ 47–54.
49
Id. ¶¶ 55–61.
50
Def. Finesse US. Inc.’s Mot. to Dismiss, Dkt. No. 16.
51
Opening Br. in Supp. of Def. Finesse US. Inc.’s Mot. to Dismiss, Dkt. No. 16 (“Def. OB”); Pl.’s
Answering Br. in Opp’n to Def.’s Mot. to Dismiss, Dkt. No. 21 (“Pls. AB”); Def. Finesse US,
Inc.’s Reply Br. in Supp. of its Mot. to Dismiss, Dkt. No. 23 (“Def. RB”).
52
Mot. to Dismiss before Vice Chancellor Sam Glasscock, III on 10.23.24 re: Matter taken under
advisement, Dkt. No. 26.
10
12(b)(6) for failure to state a claim.53 When considering a motion to dismiss under
Rule 12(b)(6), the Court turns to the well-settled, requisite standard:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (i[v]) dismissal is inappropriate
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.” 54
I need not, however, “accept as true conclusory allegations ‘without specific
supporting factual allegations.’”55 In addition, I refer to certain documents that are
incorporated by reference in the Complaint. 56
As a threshold matter, Defendant contends that Plaintiff Kingfishers must be
dismissed for lack of standing.57 Kingfishers is the assignor of the SAFE.58
Plaintiffs Blitzer and Shanon are the assignees of the SAFE.59 Defendant argues that
Kingfishers must be dismissed because it retains no rights or interest in the SAFE,
post-assignment. 60 Defendant further contends that the integration clause of the
Assignment Agreement precludes the assignees from relief here.61 Plaintiffs
53
See Def. OB.
54
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (citations omitted).
55
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (citations omitted).
56
See Windsor I, LLC v. CWCapital Asset Mgmt. LLC, 238 A.3d 863, 873 (Del. 2020) (quoting
Vanderbilt Income & Growth Assoc., LLC v. Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del.
1996)). I refer both to the SAFE and the Assignment Agreement, which are referenced in
Plaintiff’s Complaint. See Compl.
57
Def. OB 9–10.
58
Assignment 1.
59
Id.60
Def. OB 9.
61
Id. at 20.
11
contend the right to reformation, if it existed prior to the assignment, must reside
somewhere. 62 I agree that I may defer this decision at this pleading stage, and do
not consider it further in this Memorandum Opinion.
Defendant also argues that Counts I, II, and III must be dismissed for failure
to state a claim pursuant to Rule 12(b)(6). I determine that, with plaintiff-friendly
inferences, Plaintiffs have stated a claim for Count I for reformation based on
mistake. But Plaintiffs have failed to state a claim for Count II for reformation based
on fraudulent inducement and Count III for reformation based on equitable fraud.
My analysis follows.
A. Count I: Reformation – Mistake
Plaintiffs assert that Kingfishers and Defendant held a shared understanding
that the SAFE would contain a 70% discount and a valuation cap consistent with
prior investment rounds at the time the SAFE was executed, but the executed SAFE
materially departs from this understanding because of mistake.63 Plaintiffs request
reformation of the SAFE to include a 70% discount (rather than 70% discount rate)
and a valuation cap consistent with prior investment rounds (no higher than $13
million).64 Defendant argues that Plaintiffs have not stated a claim for reformation
62
Pls. AB 18–20.
63
Compl. ¶¶ 37–45.
64
Id. ¶ 46.
12
based on mistake because they have not alleged facts sufficient to meet their
heightened pleading burden.65 I disagree.
Both mutual mistake and unilateral mistake allow for reformation. 66 For
mutual mistake, “the plaintiff must show that both parties were mistaken as to a
material portion of the written agreement.” 67 For unilateral mistake, the plaintiff
“must show that it was mistaken and that the other party knew of the mistake but
remained silent.”68 For both types of mistake, the plaintiff must plead the existence
of a “specific prior understanding that differed materially from the written
agreement.”69 “Under Court of Chancery Rule 9(b), ‘[i]n all averments of fraud or
mistake, the circumstances constituting fraud or mistake shall be stated with
particularity.’”70 Accordingly, to survive the Motion to Dismiss, Plaintiffs must
plead with particularity that: (i) Plaintiffs thought the executed SAFE included a
valuation cap of no more than $13 million and a discount of 70%; (ii) Finesse was
also similarly mistaken, or knew of Plaintiffs’ mistake and remained silent; and (iii)
Finesse and Kingfishers specifically agreed that the SAFE would include a valuation
cap of no more than $13 million and a discount of 70%, materially different from
their written contract, the SAFE.
65
Def. OB 10.
66
Cerberus Intern., Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1151 (Del. 2002).
67
Id.68
Id.69
Id. at 1152.
70
Ogus v. SportTechie, Inc., 2020 WL 502996, at *4 (Del. Ch. Jan. 31, 2020) (citation omitted).
13
Defendant argues that Plaintiffs’ Complaint lacks sufficiently particularized
allegations that support a reasonable inference of the parties’ specific prior
understanding.71 I disagree. In their Complaint, Plaintiffs allege that prior to the
execution of the SAFE, “Kingfishers and Defendant reached a specific prior
understanding that the SAFE would contain a 70% discount and a valuation cap
consistent with prior investment rounds (i.e., no higher than $13 million).” 72 To
support this allegation of a specific prior understanding, Plaintiffs rely on
sufficiently particularized factual allegations. First, Plaintiffs plead that on
September 8, 2021, there was an in-person meeting at Kingstown’s New York City
office to discuss the terms of the SAFE, which was attended by Blitzer, Sutter, and
Defendant’s CEO.73 Second, Plaintiffs aver that Defendant’s CEO made repeated
representations that Kingfishers would receive a 70% discount, and the SAFE would
include a valuation cap consistent with prior investments.74 Third, Plaintiffs plead
that the prior four SAFEs that Defendant entered with other investors included
valuation caps between $5 million to $13 million. 75 At the motion to dismiss stage,
71
Def. OB 10–15.
72
Compl. ¶ 38.
73
Id. ¶ 18.
74
Id. ¶ 19.
75
Id. ¶ 20. Defendant argues that Plaintiffs fail to adequately allege that the parties had a “complete
mutual understanding” because Plaintiffs fail to state where the valuation cap would fall in the $5
million to $13 million range of previous investments. Def. RB 9–10. Even so, I must make the
plaintiff-friendly inference that, based on Plaintiffs’ allegations, the parties had a specific prior
understanding that the SAFE would include a valuation cap, and that the valuation cap would be
similar to the prior investments.
14
I must make plaintiff-friendly inferences. Assuming this meeting took place and
these representations were made, I may reasonably infer that the parties had a
specific prior understanding that the SAFE would include a 70% discount and a
valuation cap consistent with prior investments (i.e., no higher than $13 million).
This is materially different than the executed SAFE that included a 70% discount
rate (rather than a 70% discount) and no valuation cap.
Based on these facts, I may also reasonably infer that either Defendant made
a mistake in drafting the SAFE in a way that does not reflect the specific prior
understanding, or that Defendant, knowing that Plaintiffs would anticipate a SAFE
which embodied their agreement, stood silent as Plaintiffs entered the non-compliant
SAFE. In addition, Plaintiffs have sufficiently pled that they thought the executed
SAFE included a valuation cap of no higher than $13 million and a 70% discount.76
As such, Plaintiffs have alleged sufficiently particularized facts to meet their
pleading burden for requesting reformation based on mistake.
Of course, other inferences could be drawn from the facts, which would not
support reformation. Plaintiffs’ pleading is sufficient to overcome the hurdle of a
motion to dismiss, nonetheless.
Defendant also relies on Parke Bancorp Inc. v. 659 Chestnut LLC, where the
Delaware Supreme Court held that a reformation claim is barred when the failure to
76
Compl. ¶ 2.
15
read an agreement amounts to “bad faith.” 77 Defendant points to Plaintiffs’ failure
to do what a reasonable actor would have: read the brief text of the SAFE before
execution.78 However, Defendant does not argue that Kingfishers’ failure to
discover the mistake amounted to bad faith, or point to anything in the Complaint
that indicates there is bad faith (as opposed to, say, gross negligence or foolish
disregard of self-interest) on the part of Plaintiffs. As such, a reformation claim is
not barred.
Accordingly, Defendant’s motion to dismiss Count I is denied.
B. Counts II and III: Reformation – Fraudulent Inducement/Equitable Fraud
Plaintiffs assert, in the alternative, a fraudulent inducement claim against
Defendant alleging that Defendant represented to Kingfishers that the SAFE would
include a valuation cap similar to prior investments to induce reliance. 79 Plaintiffs
also assert, again in the alternative, an equitable fraud claim against Defendant
alleging that Defendant negligently represented to Kingfishers that the SAFE would
include a valuation cap during the parties’ meeting.80 Plaintiffs request reformation
of the SAFE to include a valuation cap no higher than $13 million.81 Defendant
argues that Plaintiffs have failed to state claim for fraudulent inducement, or in the
77
Def. OB 11–12; Parke Bancorp Inc. v. 659 Chestnut LLC, 217 A.3d 701, 711 (Del. 2019).
78
Def. OB 11.
79
Compl. ¶¶ 20, 47–54.
80
Id. ¶¶ 55–61.
81
Id. ¶¶ 54, 61.
16
alternative, equitable fraud, 82 because the plain text of the SAFE contradicts the
existence of a valuation cap term, and thus, Plaintiffs cannot have reasonably relied
on Defendant’s alleged representations.83 I agree.
“To state a claim for fraud in the inducement, a plaintiff must allege: ‘(i) a
false representation, (ii) the defendant’s knowledge of or belief in its falsity or the
defendant’s reckless indifference to its truth, (iii) the defendant’s intention to induce
action based on the representation, (iv) reasonable reliance by the plaintiff on the
representation, and (v) causally related damages.’”84 As this is a claim of fraud,
Court of Chancery Rule 9(b) applies here as well. 85
Plaintiffs have failed to plead a reasonably conceivable claim for fraudulent
inducement because the Complaint does not have particularized factual allegations
from which the Court may reasonably infer reasonable reliance. First, the SAFE
does not include a valuation cap, and Plaintiffs acknowledge this in their
82
The parties disagree as to whether the doctrine of equitable fraud—typically reliant on a special
equitable relationship—can apply here given that these parties were simply contractual
counterparties in an arm’s length negotiation. Def. OB 17–19; Pls. AB 16–17; Def. RB 14–15. I
need not reach the question, as reasonable reliance is an element of both common-law and
equitable fraud, precluding vindication under either theory. See Williams v. White Oak Builders,
Inc., 2006 WL 1668348, at *7 (Del. Ch. June 6, 2006) (quoting H–M Wexford LLC v. Encorp, Inc.,
832 A.2d 129, 144 (Del. Ch. 2003)), aff'd, 913 A.2d 571 (Del. 2006) (“A claim of negligent
misrepresentation, or equitable fraud, requires proof of all of the elements of common law fraud
except ‘that plaintiff need not demonstrate that the misstatement or omission was made knowingly
or recklessly.’”).
83
Def. OB 15, 17; see Def. RB 15.
84
Ogus, 2020 WL 502996, at *4 (citations omitted).
85
Id.17
Complaint.86 Second, the SAFE includes a header stating, “DISCOUNT ONLY,”
on all the pages except the first page (where the header was changed to “FINESSE
SAFE NOTE”) 87 and the signature page. 88 “[I]t is unreasonable to rely on oral
representations when they are expressly contradicted by the parties’ written
agreement.”89 There is no reasonable reliance on representations “when one had the
opportunity to read the contract and by doing so could have discovered the
misrepresentation.” 90 While I make the plaintiff-friendly inference that Defendant
represented to Kingfishers that the SAFE would include a valuation cap, the
executed SAFE is unambiguous—there is no valuation cap. Plaintiffs had an
opportunity to read the SAFE and discover that there is no valuation cap term. Thus,
regardless of the alleged representations made to Kingfishers during the September
8, 2021 meeting, Plaintiffs have failed to adequately plead reasonable reliance on
those representations. 91 Accordingly, I find both fraudulent inducement and
equitable fraud precluded, as reasonable reliance is an element of both common law
and equitable fraud.92
86
Compl. ¶ 22; see SAFE.
87
SAFE 1.
88
Id. at 1–6; Compl. ¶ 27.
89
Ogus, 2020 WL 502996, at *7 (citations omitted).
90
Carrow v. Arnold, 2006 WL 3289582, at *11 (Del. Ch. Oct. 31, 2006) (citation omitted).
91
Looked at another way, if Defendant was attempting to defraud Kingfishers, it was wildly
incompetent in that attempt (by furnishing an unambiguous written agreement disclosing the fraud)
and supremely lucky in its choice of victim (fortuitously, marks willing to bind themselves,
blindly).
92
See Williams, 2006 WL 1668348, at *7.
18
Plaintiffs argue that the request for reformation of the SAFE to include a
valuation cap does not seek to override any plain and unambiguous terms of the
SAFE because the header “DISCOUNT ONLY” is not a term of the SAFE. 93 In
other words, Plaintiffs argue that there is no term in the SAFE that states that there
is no valuation cap. I do not find this argument persuasive. It does not matter that
the header “DISCOUNT ONLY” is not a term of the SAFE. By reading the SAFE,
Plaintiffs could have discovered that the written agreement does not include a
valuation cap term through either the “DISCOUNT ONLY” header or simply failing
to find such a term. The lack of a valuation cap term is clear and unambiguous in
the SAFE, with or without the “DISCOUNT ONLY” header. Thus, Plaintiffs have
failed to adequately plead reasonable reliance because Plaintiffs would have
discovered that there is no valuation cap, contrary to what Defendant had allegedly
represented, by simply reading the six-page SAFE.
Accordingly, Defendant’s motion to dismiss Counts II and III is granted. 94
III. CONCLUSION
For the foregoing reasons, Defendant’s Motion to Dismiss the Complaint is
93
Pl. AB 21.
94
Defendant also argues that “[t]o the extent Shanon asserts a claim for [Count II] fraudulent
inducement or [Count III] equitable fraud other than as an assignee of Kingfishers, those claims
fail because . . . Shanon does not allege that Finesse ever made any misrepresentations or omissions
to him.” Def. OB 21. Because Defendant’s motion to dismiss Counts II and III is granted, I decline
to address this argument.
19
GRANTED with respect to Count II (reformation based on fraudulent inducement)
and Count III (reformation based on equitable fraud) of the Complaint. With respect
to Count I, Defendant’s Motion to Dismiss is DENIED. The parties should submit
a form of order consistent with this Memorandum Opinion.
20