Geoffrey "Reff" Sykes v. Touchstream Technologies, Inc., d/b/a Shodogg

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GEOFFREY “REFF” SYKES, REFF )
HOLLINGS PTY LTD., SHODOGG )
PTY LTD., and MASH IN MUSIC PTY )
LTD., )
)
Plaintiffs, )
)
v. ) C.A. No. 2022-0861-SG
)
TOUCHSTREAM TECHNOLOGIES, )
INC., d/b/a SHODOGG, )
TOUCHSTREAM ANZ, LLC, )
HERBERT MITSCHELE, JOHN )
BURNS, and DAVID STROBER, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: December 7, 2023
Date Decided: March 27, 2024
Sean J. Bellew, BELLEW LLC, Wilmington, Delaware; OF COUNSEL: Scott C.
McAdam, LAW OFFICE OF SCOTT C. MCADAM, Henderson, Nevada, Attorneys
for Plaintiffs.
Sean A. Meluney, William M. Alleman, Jr., and Stephen A. Spence, MELUNEY
ALLEMAN & SPENCE, LLC, Lewes, Delaware, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor
The individual Plaintiff here, Geoffrey “Reff” Sykes, is an investor and equity
holder in Defendant Touchstream Technologies, Inc., d/b/a Shodogg (“Shodogg”).
Sykes seeks to vindicate his creditor and equity rights in Shodogg through this
litigation under a variety of theories. Shodogg is a repeat litigator here, a kind of
Canis Familiaris in the Court of Chancery.1 This latest addition to the Shodogg
litter involves the Defendants’ Motion to Dismiss the Amended Complaint, under
Rule 12 (b)(6). In this Memorandum Opinion, I examine the various counts of the
Amended Complaint, finding, generally speaking, that Plaintiffs’ legal claims
seeking declaratory judgment stand, but that his fiduciary-duty claims and fraud
claim are deficient. My reasoning follows a statement of the facts alleged, below.
I. BACKGROUND
A. Factual Background
The following facts are taken from the Amended Complaint, and presumed
true for purposes of my analysis.
1. The Parties
Plaintiff Geoffrey “Reff” Sykes is a resident of Australia.2
1
See Fetch Interactive Television LLC v. Touchstream Techs. Inc., 2019 WL 193921 (Del. Ch.
Jan. 15, 2019); Fetch Interactive Television LLC v. Touchstream Techs. Inc., 2022 WL 4462165(Del. Ch. Sept. 26, 2022); Fetch Interactive Television LLC v. Touchstream Techs. Inc., 2023 WL
3265128 (Del. Ch. May 5, 2023).
2
Verified Am. Compl. ¶ 6, Dkt. No. 13 (“Am. Compl.”).
1
Plaintiff Reff Holdings PTY LTD (“Reff Holdings”) is a proprietary limited
company formed under the laws of Australia, with its principal place of business
Queensland.3 Sykes founded Reff Holdings on October 20, 2011.4
Plaintiff Shodogg PTY LTD is a proprietary limited company formed under
the laws of Australia with its principal place of business in Sydney, Australia. 5
Sykes founded Shodogg PTY LTD on August 31, 2011.6
Plaintiff Mash in Music PTY LTD (“Mash in Music” and collectively with
Sykes, Reff Holdings, and Shodogg PTY LTD, “Plaintiffs”) is a proprietary limited
company formed under the laws of Australia, with its principal place of business in
Sydney, Australia.7 Shodogg founded Mash in Music on October 8, 2015.8
Defendant Touchstream Technologies, Inc., d/b/a Shodogg (“Shodogg”), is a
corporation formed and existing under the laws of Delaware. 9 Shodogg was co-
founded by Sykes and Defendant Herbert Mitschele in 2011.10
3
Id. ¶ 7.
4
Id.
5
Id. ¶ 8.
6
Id.
7
Id. ¶ 9.
8
Id.
9
Id. ¶ 10.
10
Id. ¶ 6.
2
Defendant Herbert Mitschele is a resident of Pennsylvania, who serves as the
Chief Executive Officer of Shodogg and is a member of Shodogg’s board of
directors.11
Defendant John Burns is a resident of Canada and serves as the Chairman of
Shodogg’s board of directors.12
Defendant David Strober (collectively with Mitschele and Burns, the
“Individual Defendants”) is a resident of New York and serves as a director on
Shodogg’s board of directors.13
Defendant Touchstream ANZ, LLC (collectively with Shodogg, Mitschele,
Burns, and Strober, “Defendants”) is a limited liability company formed under the
laws of Delaware and an affiliate of Shodogg.14
2. Sykes and Mitschele Found Shodogg
In 2011, Sykes and Mitschele, among others, co-founded Shodogg.15
Shodogg is a software development company that developed at least four significant
patents related to “casting” media content from one device to another (the “Shodogg
Patents”).16 At its founding, Sykes contributed capital to Shodogg’s development.17
11
Id. ¶ 11.
12
Id. ¶ 12.
13
Id. ¶ 13.
14
Id. ¶ 14.
15
Id. ¶ 16.
16
Id.
17
Id. ¶ 17.
3
In exchange for the capital and his efforts in establishing and growing Shodogg
globally, Sykes received 3% equity interest in Shodogg.18
3. Sykes and Mitschele Establish a Joint Venture
On August 1, 2011, Sykes and Mitschele negotiated the terms of a Joint
Venture Agreement (the “JV Agreement”) to develop and deploy Shodogg’s
intellectual property in the Australian and New Zealand markets. 19 Sykes, through
Reff Holdings, loaned money to the joint venture.20 These loans were recorded in
the financial documents of Shodogg PTY LTD.21 Section 6.4 of the JV Agreement
provides Sykes with an annual salary of $180,000.22 The JV Agreement
acknowledges that Sykes made a “Capital Contribution” of $125,000 to Shodogg
PTY LTD.23
For the next two-and-a-half years, Sykes worked to help Defendants develop
Shodogg’s software and products.24 Sykes also established Shodogg’s presence in
Australia and New Zealand while contributing to Shoodgg’s global business.25
Although Sykes was working for Shodogg during this time, Defendants asked Sykes
18
Id.
19
Id. ¶ 19.
20
Id. ¶ 21.
21
Id.
22
Id. ¶ 22.
23
Id. ¶ 24.
24
Id. ¶ 28.
25
Id.
4
to defer his salary that was guaranteed under the JV Agreement.26 Sykes agreed to
do so while continuing to invest capital into Shodogg’s development.27
The JV Agreement states that the JV Agreement will terminate upon mutual
agreement of the parties in writing.28 However, the termination of the JV
“Agreement shall not release a party from any obligations or liabilities to the other
parties, whether pursuant to the provisions of this Agreement or at law or in
equity.”29 If the JV Agreement is terminated, Shodogg PTY LTD “shall be wound
up and assets and properties of [Shodogg PTY LTD] liquidated and distributed to
the parties in accordance with the distribution priorities set forth in” the JV
Agreement.30
4. Sykes and Mitschele Enter into the Amended and Restated Joint
Venture Agreement
On April 1, 2014, Sykes and Mitschele entered into an Amended & Restated
Joint Venture Agreement (the “A&R JV Agreement”) to add Shodogg, the parent
company of Touchstream ANZ, LLC, to the JV Agreement, along with Shodogg
PTY LTD, the joint venture company.31 The A&R JV Agreement provides that
Sykes will receive an annual salary of $180,000.32 Section 7.7 of the A&R JV
26
Id..
27
Id.
28
Id. ¶ 25.
29
Id. ¶ 26 (quoting Am. Compl., Ex. A § 17.2, Dkt. No. 13).
30
Id. ¶ 27 (quoting Am. Compl., Ex. A § 17.3).
31
Id. ¶¶ 29–30.
32
Id. ¶ 31 (citing Am. Compl., Ex. B § 6.4, Dkt. No. 13).
5
Agreement states that Sykes made a “Capital Contribution” of $125,000 to Shodogg
PTY LTD.33 The A&R JV Agreement restated the sections regarding termination
as first included in the JV Agreement, discussed above in Section I.A.3.34
5. Sykes and Shodogg Execute an Agreement to Terminate the Joint
Venture Agreement
On January 13, 2015, Sykes and Mitschele, on behalf of Shodogg, entered into
the Agreement to Terminate ANZ Joint Venture (the “JV Termination Agreement”),
to terminate the A&R JV Agreement upon the occurrence of specific events.35
Under the terms of the JV Termination Agreement, Sykes was promised “549,600
shares of the 6,058,550 available share [sic] pre series A” shares of Shodogg in
exchange for his agreement to terminate the A&R JV Agreement.36 The JV
Termination Agreement further provided that “[a]n additional 56,255 shares will be
transferred from [ ] Mitschele to [Sykes], to complete the 10% total equity holding
of [Sykes] in [Shodogg].”37 Sykes was further provided an executive level role with
a starting annual salary of $100,000 in addition to healthcare benefits.38
The JV Termination Agreement lays out the process to terminate the parties’
joint venture.39 Specifically, the JV Termination Agreement provides that the joint
33
Id. ¶ 33.
34
See id. ¶¶ 34–36 (quoting Am. Compl., Ex. B §§ 16.1–16.3).
35
Id. ¶ 37.
36
Id. ¶ 39 (quoting Am. Compl., Ex. C, Dkt. No. 13).
37
Id.
38
Id.
39
Id. ¶ 40.
6
venture would terminate on a date chosen by Shodogg, after the repayment of the
joint venture’s debt.40 Upon the successful closure of bridge funding, Shodogg was
to assume liability for the joint venture’s debt.41 The JV Termination Agreement
states that Reff Holdings loaned Shodogg $565,000, accruing interest at an annual
rate of 7%; that amount is deemed a “priority repayment.”42 The joint venture’s debt
was expected to be paid within a reasonable amount of time following the successful
closure of Shodogg’s Series B round funding.43
Since its execution in 2015, Shodogg has yet to repay Sykes’s $565,000 loan
and its associated interest.44 Sykes has also not been provided the stock certificates
representing the shares that were to be transferred to Sykes under the JV Termination
Agreement.45 Shodogg has never paid Sykes the $100,000 annual salary due to him
under the terms of the JV Termination Agreement, nor the healthcare benefits
associated with that salary.46
6. Sykes and Shodogg Execute the Licensing Agreement
On January 24, 2016, Sykes’ entity, Mash in Music, entered a licensing
agreement with Shodogg (the “Licensing Agreement”).47 Under the terms of the
40
Id. (citing Am. Compl., Ex. C).
41
Id.
42
Id.
43
Id.
44
Id. ¶ 42.
45
Id.
46
Id.
47
Id. ¶ 45.
7
Licensing Agreement, Sykes was provided a license to use Shodogg’s intellectual
property encompassed by the Shodogg Patents and the related casting technology
that Shodogg developed in connection with the Shodogg Patents.48 Sykes invested
more than $700,000 in Mash in Music to develop and deploy the Shodogg
technology in Australia and New Zealand, but Mash in Music needed to use the
Shodogg Patents for its business model to be viable.49 On April 20, 2017, Sykes and
Shodogg execute an Addendum to the Licensing Agreement (the “Addendum”) to
extend the term of the Licensing Agreement.50 On August 14, 2017, Shodogg shut
off Sykes’ cloud access to the Shodogg technology service, contrary to the terms of
the Licensing Agreement,51 but Sykes was still able to access Shodogg’s technical
software development services utilized to develop the software at the heart of the
Licensing Agreement.52
7. Shodogg’s 2017 Convertible Note Offering
In April 2017, Shodogg underwent a recapitalization to secure bridge funding
that would be used, in part, to pursue a patent infringement action to enforce the
Shodogg Patents.53 These funds were raised via an issuance of convertible notes to
48
Id.
49
Id. ¶ 46.
50
Id. ¶ 47.
51
Id. ¶ 48.
52
Id. ¶ 151.
53
Id. ¶ 50.
8
existing investors (the “Convertible Note Offering” or the “Offering”).54 On April
20, 2017, Mitschele informed Sykes that Sykes would be required to invest an
additional $11,656.11 in the Convertible Note Offering or Sykes would lose 2.36%
of his co-founder stock in Shodogg.55 If Sykes did not participate in the Convertible
Note Offering, Sykes’ ownership interest would be diluted down to less than one-
tenth of one percent.56 On May 19, 2017, Sykes and Shodogg entered into a
Convertible Note Purchase Agreement (the “Convertible Note”).57 Under the
Convertible Note, Sykes invested $50,000 in the Convertible Note Offering, with
$11,656.11 being contributed to maintain Sykes’ pre-Offering 2.36% equity interest
in Shodogg.58 The excess amount contributed in the Offering that entitled Sykes to
an additional 7.547% equity stake.59 The Convertible Note had a maturity date of
June 30, 2022.60
8. Sykes Receives “Notice of Breach” Letters from Shodogg
On April 18, 2022, Defendant Burns, on behalf of Shodogg, sent Sykes a
“Notice of Breach” letter concerning the Convertible Note Purchase Agreement (the
“April 2022 Letter”).61 In the letter, Shodogg alleged that Sykes (1) breached a
54
Id. ¶¶ 50, 52.
55
Id. ¶ 54.
56
Id.
57
Id. ¶ 55.
58
Id.
59
Id.
60
Id.
61
Id. ¶ 62.
9
restrictive covenant in the Convertible Note and (2) made a misrepresentation in the
Convertible Note Purchase Agreement.62 Shodogg threatened to sue Sykes for these
breaches unless he agreed to voluntarily relinquish his rights under the Convertible
Note Purchase Agreement and the accompanying Convertible Note.63
The following month, Mitschele, as CEO of Shodogg, emailed other parties
who had participated in the Convertible Note Offering regarding the upcoming June
30, 2022 maturity date of the convertible notes to provide those parties with
instructions to convert the notes to common stock in Shodogg prior to the maturity
date (the “Conversion Notice”).64 Specifically, the Conversion Notice stated that
participants would receive a separate email from Shodogg’s legal counsel with a
document that the recipient needed to complete and sign to convert their notes to
common stock.65 Despite having contributed $50,000 in the Offering, Sykes was
excluded from the Conversion Notice and was not sent the document necessary to
convert his convertible note to common stock.66
On May 31, 2022, Sykes received another “Notice of Breach” letter that
referenced Sykes’s alleged breach of the Convertible Note Purchase Agreement and
threatened litigation against Sykes if he did not resolve the dispute by June 10,
62
Id.
63
Id.
64
Id. ¶ 65.
65
Id.
66
Id.
10
2022.67 Sykes received a “Follow-Up to Notice of Breach” letter on July 1, 2022.68
The follow-up letter informed Sykes that his Convertible Note had matured without
Sykes acting to convert his convertible note to common stock.69 In the follow-up
letter, Shodogg requested payment instructions for the return of Sykes’s $50,000
used to participate in the Offering.70 Shodogg threatened to sue Sykes if Sykes failed
to respond to Shodogg’s request by July 13, 2022.71
9. Shodogg Holds an Annual Meeting
On November 19, 2022, Shodogg sent out a “Notice Regarding Annual
Meeting for [Shodogg]” (the “Annual Meeting Notice”), scheduled for December
20, 2022 (the “December Meeting”), with an agenda that included a board election
of proposed nominees an attached proxy form.72 Stockholders who wished to
nominate an alternative slate of directors had until December 13, 2022, to do so.73
This annual meeting was Shodogg’s first annual meeting in more than five years.74
After receiving the Annual Meeting Notice, Sykes sent Shodogg a formal
“Demand for Stockholder Information” on November 30, 2022.75 In his demand,
67
Id. ¶ 66.
68
Id. ¶ 67.
69
Id.
70
Id.
71
Id.
72
Id. ¶ 71.
73
Id. ¶ 76.
74
Id. ¶ 71.
75
Id. ¶ 73.
11
Sykes requested information necessary for Sykes to confirm his stock ownership and
relative percentage of his vote in the director election, and contact other stockholders
about a possible alternative slate of director candidates.76 Two days later, Shodogg
responded to Sykes’s Demand for Stockholder Information by demanding that Sykes
enter into a confidentiality agreement before Shodogg would produce any of the
requested information to Sykes.77 Sykes returned the executed confidentiality
agreement to Shodogg on December 6, 2022.78
Subsequently, Shodogg provided Sykes with a capitalization table dated
December 7, 2022 (the “December Cap Table”).79 The December Cap Table
reflected that Sykes’ equity interest in Shodogg was 0.041% and not the 20.547%
that, up until receipt of the December Cap Tables, Sykes believed he owned.80 On
December 9, 2022, Shodogg provided Sykes with its Shodogg’s stockholder list that
included physical and email addresses for all current stockholders.81 The
stockholder list did not include the stockholders’ respective equity positions nor the
stockholders’ phone numbers, despite Sykes’ demand for that information.82
76
Id.
77
Id. ¶ 75.
78
Id. ¶ 76.
79
Id. ¶ 77.
80
Id. ¶ 78.
81
Id. ¶ 79.
82
Id.
12
On December 13, 2022, Sykes emailed Mitschele to request Shodogg provide
remote video access for stockholders to attend the December Meeting.83 Shodogg
had not responded to this request when Sykes sent Mitschele another request for
remote video access for stockholders on December 19, 2022.84 Later that day,
Mitschele circulated a telephone number for stockholders to use to call into the
December Meeting.85
The December Meeting began at 3:00 pm.86 The stockholders who dialed in
for the annual meeting using the telephone number provided by Mitschele were
permitted only to listen and were unable to be heard by other participants.87 At 3:11
pm, the telephone participants were disconnected and removed from the December
Meeting.88 It was not until after the telephonic participants were removed from the
December Meeting that Shodogg conducted the election process for the board of
directors.89
Prior to the start of the December Meeting, Sykes submitted written questions
to Shodogg’s board in the manner prescribed by Shodogg for remote attendees to do
83
Id. ¶ 80.
84
Id. ¶ 81.
85
Id.
86
Id. ¶ 84.
87
Id. ¶ 83.
88
Id. ¶ 84.
89
Id.
13
so.90 Those questions were not addressed at the December Meeting.91 Upon being
removed from the December Meeting, Sykes emailed Mitschele the same list of
written questions.92 Sykes sent a follow-up email on January 5, 2023, to request that
his written questions be addressed and to be sent a copy of Shodogg’s meeting
minutes from the December Meeting.93 When Mitschele responded on January 10,
2023, he refused to answer Sykes’ questions and failed to provide Sykes with a copy
of the December Meeting minutes.94 Sykes requested the December Meeting
minutes twice more before Mitschele agreed to give Sykes a copy, so long as Sykes
agreed that those minutes were subject to the confidentiality agreement Sykes had
signed on December 6, 2022.95 Sykes executed a new version of the confidentiality
agreement on February 8, 2023, and was provided a copy of the December Meeting
minutes on February 9, 2023.96
B. Procedural History
Plaintiffs filed suit on September 26, 2022,97 before filing the operative
complaint on March 20, 2023 (the “Amended Complaint”).98 The Amended
90
Id. ¶ 82.
91
See id. ¶ 86.
92
Id.
93
Id. ¶ 87.
94
Id. ¶ 88.
95
Id. ¶¶ 89–90.
96
Id. ¶ 90.
97
See Verified Compl. for Inj. Relief, Decl. Relief, and Damages, Dkt. No. 1.
98
See Am. Compl.
14
Complaint contains nine causes of action: (1) declaratory relief with respect to the
validity of the Convertible Note Purchase Agreement; (2) declaratory relief with
respect to Sykes’ total holdings in Shodogg; (3) specific performance of the JV
Termination Agreement; (4) fraud; (5) breach of contract with respect to the JV
Agreement and the A&R JV Agreement; (6) breach of contract with respect to the
Licensing Agreement and Amendment thereto; (7) breach of fiduciary duty against
Mitschele; (8) breach of fiduciary duty against Burns; and (9) breach of fiduciary
duty against Strober.99 Defendants moved to dismiss the Amended Complaint for
failure to state a claim on April 19, 2023.100 The parties finished briefing the motion
to dismiss on June 12, 2023.101 I heard oral argument on December 7, 2023, and
consider the matter fully submitted as of that date.102
II. ANALYSIS
A. Standards of Review
Defendants have moved to dismiss the Amended Complaint under Court of
Chancery Rule 12(b)(6) for failure to state a claim.103
The standard for reviewing a motion to dismiss under Rule 12(b)(6) is well
settled:
99
Id. ¶¶ 98–170.
100
See Defs.’ Mot. to Dismiss Am. Compl., Dkt. No. 16 (“Defs.’ OB”).
101
See Defs.’ Reply Br. Supp. Mot. to Dismiss Am. Compl., Dkt. No. 19 (“Defs.’ RB”).
102
See Judicial Action Form re Mot. to Dismiss before Vice Chancellor Glasscock dated 12.7.23,
Dkt. No. 21.
103
See Defs.’ OB 13–14.
15
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.104
The Court need not, however, “accept as true conclusory allegations without
specific supporting factual allegations.”105
B. Counts I and II: Declaratory Judgment
Where a plaintiff seeks to have the Court consider a claim for declaratory
judgment, that plaintiff must sufficiently allege that: (1) the dispute “involve[s] a
claim of right or other legal interest of the party seeking declaratory relief;” (2) the
party against whom the claim is asserted “has an interest in contesting the claim;”
(3) the parties’ “conflicting interests [are] real and adverse; and (4) the issue [is] ripe
for judicial determination.”106
1. Plaintiffs State Claims for Declaratory Judgment
In Count I, Plaintiffs seek declaratory judgment that the Convertible Note
Purchase Agreement is a valid, enforceable contract by which Sykes purchased
equity in Shodogg in the form of a $50,000 Convertible Note.107 In Count II,
Plaintiffs further seek declaratory judgment that Sykes owns 20.547% equity interest
104
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
105
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006).
106
Mehiel v. Solo Cup, Co., 2005 WL 1252348, at *4 (Del. Ch. May 13, 2005).
107
Am. Compl. ¶ 99.
16
in Shodogg, comprised of (a) 9.907% equity interest pursuant to the Convertible
Note Purchase Agreement; (b) 10% equity interest pursuant to the JV Termination
Agreement; and (c) 0.64% equity interest that constitutes the balance of Sykes’ 3%
co-founder shares less the 2.36% that was repurchased in the Convertible Note
Offering.108
a. Count I: Declaratory Judgment for the Convertible Note
Defendants ask that Count I be dismissed because it is redundant and
subsumed by Count II.109 Plaintiffs acknowledge that their equity holding in
Shodogg under the Convertible Note is “part of the declaratory relief Sykes seeks in
both Counts I and II[.]”110 While the validity and enforceability of the Convertible
Note will be assessed by the Court in deciding Count II, Plaintiffs can only recover
once if the Convertible Note is found to be valid and enforceable under both Counts
I and II. I decline to dismiss Count I merely for redundancy.111
Defendants next contend that Count I fails as a matter of law because
convertible notes are debt instruments that only give the note holder the option to
convert the note into equity prior to the maturity date, which Sykes failed to do.112
In response, Plaintiffs explain that Sykes intended to convert the Convertible Note
108
Id. ¶ 107.
109
Defs.’ OB 15; Defs.’ RB 3–4.
110
Pls.’ Resp. in Opp’n to Defs.’ Mot. to Dismiss 22, Dkt. No. 18 (“Pls.’ AB”).
111
See Osram Sylvania Inc. v. Townsend Ventures, LLC, 2013 WL 6199554, at *6 (Del. Ch. Nov.
19, 2013) (explaining that dismissal for redundancy is within the Court’s discretion).
112
Defs.’ OB 15–20; Defs.’ RB 5–7.
17
into equity, however, Defendants excluded Sykes from receiving the instructions on
how to convert included in the Conversion Notice.113 Taking Plaintiffs’ well-pled
allegations as true, it is reasonable to infer that Defendants acted to prevent Plaintiffs
from exercising their contractual right to convert the Convertible Note to equity. By
asserting Count I, Plaintiffs seek to have that contractual right determined by the
Court. Therefore, Plaintiffs have stated a claim for declaratory judgment regarding
the validity and enforceability of the Convertible Note.
b. Count II: Declaratory Judgment Regarding Total Equity
Holdings
Defendants assert that Count II should be dismissed by mounting arguments
against each individual component that Plaintiffs allege in support of their
contention that they own 20.547% equity interest in Shodogg.114 Specifically,
Defendants reassert their argument that Sykes did not purchase equity under the
Convertible Note.115 Defendants also argue that Plaintiffs’ 0.64% equity attributable
to Sykes’ co-founder shares is calculated incorrectly because the 0.64% is based on
Plaintiffs’ incorrect assertion that Sykes purchased equity under the Convertible
Note.116 Similarly, Defendants aver that Plaintiffs’ asserted 10% equity holding
113
Pls.’ AB 23–27.
114
See Defs.’ OB 20–23; Defs.’ RB 7–9.
115
Defs.’ OB 20–21; Defs.’ RB 8.
116
Defs.’ OB 22–23; Defs.’ RB 9.
18
under the JV Termination Agreement is untimely, mathematically impossible, and
waived by Plaintiffs’ participation in the Convertible Offering.117
It is not my practice to grant motions to dismiss piecemeal by reviewing each
allegation underlying a cause of action to confirm whether those allegations
individually state a cause of action.118 Here, Plaintiffs have adequately alleged that
their equity holding in Shodogg is 20.547%, which Shodogg contests by asserting
that Plaintiffs’ equity holdings amount to only 0.041%. There is a present dispute
between the parties regarding the quantum of equity holdings in Shodogg held by
Plaintiffs, and parties who have an interest in contesting the claimed ownership.
Therefore, Defendants’ motion to dismiss Count II for failure to state a claim is
denied.
c. Proper Defendants for Counts I and II
Defendants argue that Plaintiffs improperly assert their claims for declaratory
judgment against the Individual Defendants.119 According to Defendants, only
Shodogg has a cognizable interest in determining Sykes’ degree of equity ownership
in Shodogg.120 In response, Plaintiffs argue that declaratory judgment is appropriate
117
Defs.’ OB 21–22; Defs.’ RB 8.
118
See Glob. Discovery BioSciences Corp. v. Harrington, C.A. No. 2022-1132-SG, at 5–6 (Del.
Ch. Aug. 17, 2023) (TRANSCRIPT).
119
See Defs.’ OB 20–21; Defs.’ RB 4, 7.
120
Defs.’ OB 21; Defs.’ RB 4, 8.
19
against all Defendants, including the Individual Defendants, because an entity
cannot act without its officers and directors taking actions.121
As explained above, a claim for declaratory relief “must be asserted against
one who has an interest in contesting the claim.”122 Here, the defendant with an
interest in contesting Plaintiffs’ claim seeking declaratory judgment regarding
Plaintiffs’ ownership in Shodogg is Shodogg itself. The relief sought by Plaintiffs
is a declaration that Plaintiffs’ equity holdings in Shodogg is greater than the 0.041%
Shodogg contends it is. If Plaintiffs are ultimately successful and awarded this relief,
Shodogg would be the party required to acknowledge Plaintiffs’ adjudicated equity
holdings.
While Plaintiffs are correct that a corporation cannot act unless an agent of
the corporation acts on behalf of the corporation,123 complete relief for Plaintiffs’
claims for declaratory judgment is available only from Shodogg.
C. Count III: Specific Performance
In the Amended Complaint, Plaintiffs also seek specific performance of
Shodogg’s obligations under the JV Termination Agreement, including repayment
of Sykes’ loans, 10% equity interest in Shodogg, and payment of Sykes’ annual
121
Pls.’ AB 21–22, 28.
122
Mehiel, 2005 WL 1252348, at *4.
123
See Prairie Cap. III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 60 (Del. Ch. 2015) (“Because
it lacks a body and mind, a corporation only can act through human agents”).
20
salary and benefits.124 Defendants argue that Count III is time-barred and should be
dismissed.125 Plaintiffs assert that Count III is not barred by laches and, in the
alternative, that the Amended Complaint pleads sufficient facts for the Court to toll
the running of the analogous statute of limitations.126
Laches is an affirmative defense that “generally requires the establishment of
three things: first, knowledge by the claimant; second, unreasonable delay in
bringing the claim, and third, resulting prejudice to the defendant.”127 The existence
of these elements “is generally determined by a fact-based inquiry.”128 Accordingly,
laches is “not ordinarily well-suited for treatment on” a Rule 12(b)(6) motion to
dismiss.129 Even where the statute of limitations applies by analogy, tolling is a fact-
intensive matter as well. Given the limited factual record before me, I decline to
dismiss Count III at this time.
D. Count IV: Fraud
Plaintiffs assert a claim for fraud, fraud in the inducement, and fraudulent
conspiracy.130 Defendants contend that Count IV is improper bootstrapping, time-
barred, and does not satisfy the pleading requirements of Rule 9(b).131 Plaintiffs
124
Am. Compl. ¶¶ 110–18.
125
Defs.’ OB 23–29; Defs.’ RB 9–15.
126
Pls.’ AB 31–39.
127
Homestore, Inc. v. Tafeen, 888 A.2d 204, 210 (Del. 2005).
128
Id.129
Reid v. Spazio, 970 A.2d 176, 183 (Del. 2009).
130
Am. Compl. ¶¶ 119–29.
131
Defs.’ OB 29–33; Defs.’ RB 16–18.
21
retort that the fraud claim, as pled, satisfies Rule 9(b); is not improper bootstrapping
because it satisfies an exception recognized by the Court; and could not have been
brought until Defendants sent the April 2022 Letter that revealed Defendants’ true
intent to never perform their contractual obligations.132
Even if the fraud claim states satisfies Rule 9(b)’s heightened pleading
standard, “Delaware law holds that a plaintiff cannot ‘bootstrap’ a claim of breach
of contract into a claim of fraud merely by alleging that a contracting party never
intended to perform its obligations.”133 An example of improper bootstrapping
would be where a plaintiff “couch[es] an alleged failure to comply with a contract
as a failure to disclose an intention to take certain actions arguably inconsistent with
that contract[.]”134 This Court has explained that bootstrapping is improper where
“the plaintiff has simply tacked on conclusory allegations that the defendant made
the contract knowing it would not or could not deliver on its promises.”135 However,
a fraud claim may be brought alongside a breach of contract claim without
constituting “improper bootstrapping” if, for example, the “plaintiff has made
particularized allegations that a seller knew contractual representations were false or
lied regarding the contractual representation[.]”136
132
Pls.’ AB 39–46.
133
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *15 (Del. Ch. Dec. 22, 2010).
134
Id.135
Pilot Air Freight, LLC v. Manna Freights, Sys., 2020 WL 5588671, at *25 (Del. Ch. Sept. 18,
2020).
136
Id. at *26.
22
Plaintiffs’ fraud claim is improper bootstrapping. Plaintiffs have asserted
claims for breach of contract against Defendants based on Defendants’ failure to
comply with their contractual obligations under the JV Agreement, the A&R JV
Agreement, and the Licensing Agreement and Addendum thereto. Plaintiffs’ fraud
claim rests on the allegation that, at the time of entering of these agreements,
Defendants failed to disclose to Plaintiffs that Defendants never intended to perform
or abide under the agreements.137 While Plaintiffs aver that these allegations are
sufficient to show that Defendants “knew contractual representations were false or
lied regarding the contractual representation,” and therefore fall into the “anti-
bootstrapping” rule, I disagree.
Plaintiffs do not point to a specific contractual representation that Defendants
knew was false or lied about. Rather, Plaintiffs have tacked onto their breach of
contract claims conclusory allegations that Defendants never intended to perform
under the contracts. Plaintiffs’ allegations, in my view, fall squarely within the
definition of improper bootstrapping.138 Thus, Count IV for fraud is dismissed.139
137
Am. Compl. ¶¶ 120–22.
138
See Pilot Air Freight, LLC, 2020 WL 5588671, at *25 (explaining that improper bootstrapping
occurs where “the plaintiff has simply tacked on conclusory allegations that the defendant made
the contract knowing it would not or could not deliver on its promises.”).
139
Since I have concluded that Count IV must be dismissed as improper bootstrapping, I decline
to address Defendants’ assertions that Count IV is time-barred and fails to comply with the
heightened pleading standards under Rule 9(b).
23
E. Breach of Contract Claims: Counts V and VI
Plaintiffs bring two breach of contract claims against Defendants for
breaching (1) the JV Agreement and the A&R JV Agreement and (2) the Licensing
Agreement and Addendum thereto.140
To state a claim for breach of contract, a plaintiff must allege “first, the
existence of the contract, whether express or implied; second, the breach of an
obligation imposed by that contract; and third, the resultant damage to the
plaintiff.”141 In determining whether a plaintiff has sufficiently pled the existence
of a contract and a breach of an obligation contained therein, “the [C]ourt must
consider, and often construe the proffered contract at the heart of the claim[.]”142
Although “[t]he construction of a contract is a question of law,”143 the Court will not
grant a defendant’s motion to dismiss a breach of contract claim “under Rule
12(b)(6) unless the interpretation of the contract on which [defendant’s] theory of
the case rests is the only reasonable construction as a matter of law.”144
140
Am. Compl. ¶¶ 130–55.
141
VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003).
142
Skye Min. Invs., LLC v. DXS Cap. (U.S.) Ltd., 2020 WL 881544, at *14 (Del. Ch. Feb. 24,
2020).
143
Id.144
Kahn v. Portnoy, 2008 WL 5197164, at *3 (Del. Ch. Dec. 11, 2008) (emphasis in original)
(internal quotations omitted).
24
1. Count V: Breach of the JV Agreement and the A&R JV Agreement
Plaintiffs contend that Defendants breached the JV Agreement and the A&R
JV Agreement by failing to: (a) repay Sykes’ loans to and investments in the joint
venture; (b) provide Sykes with shares in Shodogg; (c) provide Sykes a salary; (d)
failing to keep Sykes informed of “Other IP;” and (e) recognize Sykes’ work with
Chinese companies.145 Defendants seek dismissal of Count V because Plaintiffs fail
to cite the provisions in the contract that impose the alleged obligations on
Defendants and on the grounds that the claim is time-barred.146
a. Whether the Cited Provisions Support Plaintiffs’ Claim
Plaintiffs have facially stated a claim for breach of the JV Agreement and the
A&R JV Agreement. Defendants argue that the provisions relied upon by Plaintiffs
in stating the claim do not impose the obligations that Plaintiffs allege were
breached.147
Under the incorporation by reference doctrine, a Court may review documents
relied upon by plaintiffs in asserting a claim to confirm that plaintiffs have not
misconstrued the contents.148 The Court, however, cannot review the documents
when the parties fail to provide those documents to the Court. Defendants advocate
145
Am. Compl. ¶ 133.
146
Defs.’ OB 33–37; Defs.’ RB 19–21.
147
Defs.’ OB 34–37.
148
Lebanon Cnty. Emps.’ Ret. Fund v. Collis, 287 A.3d 1160, 1181 (Del. Ch. 2022).
25
for dismissal by explaining their understanding of each section of the contracts relied
upon by Plaintiffs.149 However, the JV Agreement and the A&R JV Agreement are
not included as exhibits to the Amended Complaint nor included as exhibits in the
pleadings, so I cannot refer to them to determine whether Plaintiffs have accurately
represented their contents.150 Accordingly, Defendants’ motion to dismiss Count V
is denied without prejudice to any motion for partial summary judgment upon a
record sufficient to support Defendants’ contractual contentions.
b. Timeliness of Plaintiffs’ Claim
The statute of limitations for breach of contract claims is three years from the
accrual of the cause of action.151 A claim for breach of contract does not accrue until
the breach occurs.152 Delaware courts recognize that circumstances may exist that
warrant the tolling of the statute of limitations for a period of time.153 At the motion
to dismiss stage, the Court must accept all facts pled in the complaint as true. 154 If
the complaint pleads facts sufficient to demonstrate that the Court should toll the
statute of limitations, this Court will not dismiss the complaint.155
149
Defs.’ OB 36–37.
150
See Letter to the Ct. re: Certain Exs. Filed with the Am. Compl., Dkt. No. 15.
151
10 Del. C. § 8106.
152
Certainteed Corp. v. Celotex Corp., 2005 WL 217032, at *7 (Del. Ch. Jan. 24, 2005).
153
See Collis, 287 A.3d at 1211–21 (explaining different tolling doctrines utilized by Delaware
courts).
154
Savor, Inc., 812 A.2d at 896–97.
155
Certainteed Corp., 2005 WL 217032, at *6.
26
Defendants generally assert that the statute of limitations ran at least three
years before Plaintiffs filed suit by relying on the execution dates of the JV
Agreement and the A&R JV Agreement.156 Plaintiffs allege that Defendants
repeatedly reassured Plaintiffs that the Defendants intended to comply with the
obligations laid out in the JV Agreement and A&R JV Agreement.157 Thus,
Plaintiffs only became aware that Defendants’ intention to breach the contracts when
Defendants stated so in the April 2022 Letter.158
The facts alleged in the Amended Complaint demonstrate reasonably
conceivable grounds for tolling the statute of limitations. For example, the Amended
Complaint sufficiently pleads that Defendants owed Sykes a salary and were
obligated to repay Sykes for amounts he owed to the joint venture.159 Although
Sykes was not paid his salary nor repaid for loans, the Amended Complaint
adequately alleges that Defendants requested that Sykes defer exercising his rights
to monetary compensation while assuring Sykes that those contractual obligations
still existed and would be performed once Defendants succeeded in patent
infringement actions involving the Shodogg Patents.160 As alleged by Plaintiffs,
Defendants’ inability to pay Sykes’ salary under the contracts was a result of funding
156
Defs.’ OB 33–34; Defs.’ RB 19.
157
Pls.’ AB 49 (citing Am. Compl. ¶¶ 62, 114, 124).
158
Id.159
See Am. Compl. ¶¶ 18–36.
160
See id. ¶ 49.
27
limitations, which Defendants acknowledged in a 2020 email.161 Plaintiffs have
plead sufficient facts to make it reasonably conceivable that a tolling doctrine may
apply, which, if so, makes Count V timely.162 Therefore, I decline to dismiss Count
V as time-barred.
2. Count VI: Breach of the Licensing Agreement and Addendum
Plaintiffs also assert a claim for breach of the Licensing Agreement and
Addendum thereto based on Defendants turning off Sykes’ access to the Shodogg
technology service and failing to complete the technology promised under the
Licensing Agreement and Addendum.163 Defendants advocate for dismissal of
Count VI because (a) Plaintiffs failed to cite the exact provisions in the Licensing
Agreement or Addendum that Defendants breached; (b) the claim is time-barred
because the alleged breach occurred in 2017; and (c) the claim has no basis in fact.164
In the Amended Complaint, Plaintiffs allege that the Licensing Agreement
and Addendum granted Sykes use of Shodogg’s intellectual property.165 The
Addendum was entered into by the parties on April 20, 2017, to extend the term of
the Licensing Agreement.166 Plaintiffs’ allegations that Shodogg breached these
161
See id. ¶ 138.
162
I note that a developed factual record may indicate otherwise. However, at the motion to
dismiss stage with plaintiff-friendly inferences is not an appropriate point in litigation to determine
a fact-intensive question such as the application of a tolling doctrine.
163
Am. Compl. ¶ 145.
164
Defs.’ OB 37–38; Defs.’ RB 21–22.
165
Am. Compl. ¶ 45.
166
Id. ¶ 47.
28
contracts by preventing Sykes from accessing and using the licensed intellectual
property is directly contradicted by Plaintiffs’ further allegations that, despite having
his access to Shodogg’s technology “turned off,” Sykes was still able to operate
under the Licensing Agreement.167 While Plaintiffs allege this “shutting off” of
Sykes access caused Sykes’ ability to operate under the contracts to be “more
restricted” than previously, Plaintiffs acknowledge that the Sykes continued to
access Shodogg’s technical software development services used to develop the
software at the core of the Licensing Agreement.168
Plaintiffs fail to state how the Licensing Agreement was breached if Sykes
continued to access the intellectual property at the core of the Licensing Agreement,
nor have they alleged that Sykes was damaged by his allegedly “restricted” access
that permitted him to continue to perform under the Licensing Agreement. Thus,
with respect to Count VI for breach of the Licensing Agreement and Addendum
thereto, Plaintiffs have not sufficiently pled a claim for breach of contract.
Accordingly, Count VI is dismissed for failure to state a claim.169
167
Compare Am. Compl. ¶ 149, with Am. Compl. ¶¶ 150–51.
168
Compare Am. Compl. ¶ 150, with Am. Compl. ¶ 151.
169
Because I have dismissed Count VI for failure to state a claim, I decline to reach Defendants’
arguments regarding the timeliness of Count VI and whether Plaintiffs were required to cite exact
provisions in the Licensing Agreement to adequately place Defendants on notice of the claim.
29
F. Counts VII–IX: Breach of Fiduciary Duty
Plaintiffs assert a breach of fiduciary duty claims against each of the three
Individual Defendants based on Sykes’ position as a shareholder of Shodogg and the
Individual Defendants’ alleged misdeeds that harmed Sykes as a shareholder.170
Defendants advocate for dismissal of Counts VII–IX by attacking each alleged act
underlying the claim.171 Specifically, Defendants (1) claim to have mooted the lack
of an annual stockholder meeting by holding such a meeting in December 2022; (2)
note that Plaintiffs’ information rights are governed by statute; (3) argue that the
allegation that the Individual Defendants acted in their own self-interest are wholly
conclusory; and (4) aver that failure to honor valid contracts is a bootstrapped
contract claim that is barred.172
“The plaintiff is the master of the complaint[.]”173 Accordingly, I will limit
my assessment of whether Plaintiffs stated a claim for breach of fiduciary duty to
the allegations Plaintiffs have included in support of Counts VII–IX.174 According
to Plaintiffs, each individual defendant breached their fiduciary duties owed to Sykes
by: (a) failing to hold an annual stockholder meeting for more than five years; (b)
170
See Am. Compl. ¶¶ 157–58, 162–63, 167–68.
171
Defs.’ OB 39–42; Defs.’ RB 23–25.
172
Defs.’ OB 39–41; Defs.’ RB 23–25. I note that Defendants did not assert in their briefs a
Section 102(b)(7) defense. See Defs.’ OB; Defs.’ RB.
173
NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 23 (Del. Ch. 2009).
174
That is, without regard to whether facts pled elsewhere in the Amended Complaint could
support a claim of breach of fiduciary duty.
30
failing to provide Sykes with information pertaining to Shodogg’s business affairs;
(c) failing to provide Sykes with requested financial records related to Shodogg; (d)
acting contrary to Shodogg’s best interests while acting in each defendants’ own
self-interest; (e) failing to keep Sykes apprise of important corporate matters; and (f)
attempting to disenfranchise Sykes of his shares in Shodogg.175 Plaintiffs also allege
that Mitschele breached his fiduciary duties by failing to honor valid agreements
Shodogg entered into with Sykes.176
First, I consider Plaintiffs attempt to invoke rights arising under statute as
breach-of-duty claims. Plaintiffs allege that the Individual Defendants breached
their fiduciary duties by failing to comply with the Delaware General Corporation
Law (the “DGCL”).177 Specifically, Plaintiffs allege that Individual Defendants
breached their fiduciary duties by violating Section 211, for failing to hold an annual
meeting, and Section 220 for failing to provide Plaintiffs with requested books and
records.178 As owners of Shodogg stock, Plaintiffs can exercise their rights to bring
direct actions against the Company for breaches violations of specific provisions of
the DGCL.179 Plaintiffs have not attempted to vindicate their statutory rights by
175
See Am. Compl. ¶¶ 158, 163, 168.
176
Id. ¶ 159.
177
Pls.’ AB 57–59.
178
Id.
179
See In re Activision Blizzard, Inc. S’holder Litig., 124 A.3d 1025, 1049–1050 (Del Ch. 2015)
(explaining that the Delaware Supreme Court recognizes “that the DGCL, the certification of
incorporation, and the bylaws together constitute a multi-party contract among the directors,
officers, and stockholders of the corporation. As parties to the contract, stockholders can enforce
31
assert claims for breaches of the DGCL. Instead, Plaintiffs plead solely fiduciary
duty claims based on alleged failures of the Company to comply with the DGCL.
But this is an improper attempt to bootstrap a fiduciary claim out of a legal claim,180
and the fiduciary claims based on Sections 211 and 220 are dismissed.
With respect to Plaintiffs’ allegation that the Individual Defendants have
disenfranchised Plaintiffs by representing that Sykes’ ownership interest in Shodogg
is only 0.041%, the determination of Plaintiffs’ actual ownership amount will be
determined under Plaintiffs’ request for declaratory judgment. If Plaintiffs are
correct, then they will receive declaratory relief to that effect. Alone, Plaintiffs’
allegation that the Individual Defendants have misrepresented Plaintiffs’ actual
ownership in Shodogg does not support a claim for breach of fiduciary duty.
Plaintiffs also allege that the Individual Defendants acted in their own self-
interest and contrary to the interests of Shodogg and its stockholders, and that
Mitschele caused Shodogg to fail to honor valid agreements. To the extent these
it.”); accord Grunstein v. Silva, 2009 WL 4698541, at *6 (Del. Ch. Dec. 8, 2009) (“the general
rule under Delaware law . . . is that a plaintiff may not ‘bootstrap’ a breach of fiduciary duty claim
[from] a breach of contract claim merely by restating the breach of contract claim as a breach of
fiduciary duty.”); Data Mgmt. Internationale, Inc. v. Saraga, 2007 WL 2142848, at *3 (Del Super.
July 25, 2007) (“Under Delaware law, a plaintiff bringing a claim based entirely upon a breach of
the terms of a contract generally must sue in contract, and not in tort.”); see also In re Est. of
Tinley, 2007 WL 2304831, at *1 (Del. Ch. July 19, 2007) (explaining that “the vindication of
purely statutory rights represents an exercise of the prerogative of the legislature, and not the equity
Court. Such a purely statutory right, therefore, will be enforced by this Court not as a matter of
equity, but of law”).
180
See id.32
allegations state a claim, that claim is derivative in nature because the harm caused
by these breaches of fiduciary duties, and the remedy thereto, would run to Shodogg,
not Plaintiffs individually.181 Therefore, Counts VII–IX are dismissed for failure to
state a claim.
III. CONCLUSION
Defendants’ motion to dismiss Counts IV and VI–IX are GRANTED.
Defendants’ motion to dismiss Count II is GRANTED IN PART. Defendants’
motion to dismiss Counts I, III, and V is DENIED. The parties should submit a form
of order consistent with this memorandum opinion.
181
See Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251, 1263 (Del. 2021) (quoting Tooley
v. Donaldson, Lufkin & Jennette, Inc., 845 A.2d 1031, 1033 (Del. 2004) (reaffirming the Tooley,
i.e., to decide if a claim is direct or derivative, the Court must only consider “(1) who suffered the
alleged harm (the corporation or the stockholders, individually); and (2) who would receive the
benefit of any recovery or other remedy (the corporation or the stockholders, individually)?”).
33