Matrix Parent, Inc. v. Audax Management Company, LLC

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
MATRIX PARENT, INC.; H.I.G. )
MOBILE, L.P.; H.I.G. EUROPE )
MIDDLE MARKET LBO FUND, L.P.; ) C.A. No. N23C-10-212 MAA CCLD
H.I.G. MIDDLE MARKET LBO FUND )
III, L.P.; H.I.G. TECHNOLOGY )
PARTNERS A, L.P.; H.I.G. )
TECHNOLOGY PARTNERS B, L.P.; )
AND H.I.G. MATRIX COINVESTORS, )
L.P., )
Plaintiffs, )
)
v. )
)
AUDAX MANAGEMENT COMPANY, )
LLC; AG MOBILE HOLDINGS, LP; )
AUDAX PRIVATE EQUITY FUND V- )
A, L.P.; AUDAX PRIVATE EQUITY )
FUND V-B, L.P.; AFF CO-INVEST )
L.P.; AUDAX TRUST CO-INVEST, )
L.P.; AUDAX PE V CO-INVEST, A )
SERIES OF AUDAX CO-INVEST )
SERIES, LLC; IVESHU BHATIA; )
DANIEL DORAN; and TIMOTHY )
MACK, )
)
Defendants. )
Submitted: March 22, 2024
Decided: June 27, 2024
Defendants’ Motion to Dismiss:
GRANTED in Part, and DENIED in Part.
OPINION
Elena C. Norman, Esquire, Daniel M. Kirshenbaum, Esquire, and Michael A.
Laukaitis, II, Esquire, of YOUNG, CONAWAY, STARGATT, and TAYLOR LLP,
Wilmington, DE, and Michael S. Shuster, Esquire, and Vincent Levy, Esquire, of
HOLWELL SHUSTER & GOLDBERG LLP, New York, NY, Attorneys for
Plaintiffs.
Kevin R. Shannon, Esquire, of POTTER ANDERSON & CORROON LLP,
Wilmington, DE, and Kevin B. Huff, Esquire, of KELLOGG, HANSEN, TODD,
FIGEL & FREDERICK, P.L.L.C., Washington, DC, Attorneys for Defendants, and
Michael Kendall, Esquire, of WHITE & CASE LLP, Boston, MA, Attorneys for
Defendants Iveshu Bhatia, Daniel Doran, and Timothy Mack.
Adams, J.
2
INTRODUCTION
Plaintiff Matrix Parent, Inc. (“Matrix Parent”), along with Plaintiffs H.I.G.
Europe Middle Market LBO Fund, L.P., H.I.G. Middle Market LBO Fund III, L.P.,
H.I.G. Technology Partners A, L.P., H.I.G. Technology Partners B, L.P., Matrix Co-
Investors, L.P., and H.I.G. Mobile, L.P. (together, the “H.I.G. Plaintiffs,” and
together with Matrix Parent, “Plaintiffs”), bring this suit to recover hundreds of
millions of dollars that Plaintiffs allegedly overpaid for Mobileum, Inc.
(“Mobileum”) and connected entities. Plaintiffs allege that Mobileum’s purchase
price was artificially inflated by a fraudulent scheme to overstate the growth of
Mobileum’s new bookings and revenue.
Plaintiffs bring their claims against Defendants Audax Management
Company, LLC (“Audax”), AG Mobile Holdings, L.P., Audax Private Equity Fund
V-A, L.P., Audax Private Equity Fund V-B, L.P., AFF Co-Invest, L.P., Audax Trust
Co-invest, L.P., and Audax PE V Co-invest, a Series of Audax Co-Invest Series,
LLC (together with Audax, the “Audax Defendants”), as well as Defendants Iveshu
Bhatia, Daniel Doran, and Timothy Mack (together, the “Individual Defendants,”
and together with the Audax Defendants, “Defendants”). Plaintiffs allege that
Defendants are accountable for the fraud because Defendants controlled Mobileum
and the selling entity, Mobile Acquisition Holdings, LP (“Mobile Acquisition
Holdings”), while the fraudulent scheme was carried out.
3
Defendants now move to dismiss Plaintiffs’ Complaint. Defendants argue
that the Complaint fails to state a viable claim under Superior Court Civil Rule
12(b)(6) because Plaintiffs’ theories of liability are, in large part, barred by the
relevant Stock Purchase Agreement (the “SPA”) and are otherwise inadequately
pled. Defendants also assert under Rule 12(b)(2) that this Court lacks personal
jurisdiction over the Individual Defendants. Defendants alternatively move under
Rule 12(f) to strike Plaintiffs’ request for a jury trial because the SPA contains a
provision waiving the right to the same. This is the Court’s decision on these issues.
For the reasons stated herein, Defendants’ Motion is GRANTED in part, and
DENIED in part.
FACTS1
I. THE PARTIES
A. Plaintiffs
Matrix Parent is the designated “Buyer” under the SPA.2 It is a Delaware
corporation with its principal place of business in New York.3
The H.I.G. Plaintiffs are a group of investment funds that, together,
contributed $285 million towards Matrix Parent’s purchase of Mobileum.4 H.I.G.
1
These facts are drawn from Plaintiffs’ Complaint and the documents integral thereto. D.I. 1
(hereinafter, “Compl.”). These allegations are presumed to be true solely for purposes of this
Motion.
2
Id. ¶ 21.
3
Id.
4
Id. ¶ 22.
4
Europe Middle Market LBO Fund, L.P. is a Cayman Islands exempted limited
partnership with its principal place of business in Florida.5 H.I.G. Middle Market
LBO Fund III, L.P. is a Delaware limited partnership with its principal place of
business in Florida.6 H.I.G. Technology Partners A, L.P. is a Delaware limited
partnership with its principal place of business in Florida.7 H.I.G. Technology
Partners B, L.P. is a Delaware limited partnership with its principal place of business
in Florida.8 H.I.G. Matrix Co-Investors, L.P. is a Delaware limited partnership with
its principal place of business in Florida.9 H.I.G. Mobile, L.P. is a Delaware limited
partnership with its principal place of business in New York.10
B. Defendants
The Audax Defendants are a group of entities that indirectly owned Mobileum
prior to the at-issue sale.11 Audax is a Delaware limited liability company with its
principal place of business in Massachusetts.12 AG Mobile Holdings, L.P. is a
Delaware limited partnership with its principal place of business in Massachusetts.13
Audax Private Equity Fund V-A, LP is a Delaware limited partnership with its
5
Id.
6
Id.
7
Id.
8
Id.
9
Id.
10
Id.
11
Id. ¶ 24.
12
Id.
13
Id.
5
principal place of business in Massachusetts.14 Audax Private Equity Fund V-B, LP
is a Delaware limited partnership with its principal place of business in
Massachusetts.15 AFF Co-Invest LP is a Delaware limited partnership with its
principal place of business in Massachusetts.16 Audax Trust Co-invest LP is a
Delaware limited partnership with its principal place of business in Massachusetts.17
Audax PE V Co-invest, a Series of Audax Co-Invest Series, LLC is a Delaware
limited liability company with its principal place of business in Massachusetts.18
The Individual Defendants—Bhatia, Doran, and Mack—are natural persons
affiliated with the Audax Defendants and employed by Audax.19 Each of the
Individual Defendants is a Massachusetts resident.20
C. Relevant Non-Parties
Mobile Acquisition Holdings is the designated “Seller” under the SPA.21
Mobile Acquisition Holdings directly owned Mobile Acquisition Corp.22 Mobile
Acquisition Corp. directly owned Mobileum.23 Mobile Acquisition Corp. is the
designated “Company” under the SPA, but Mobileum was the principal operating
14
Id.
15
Id.
16
Id.
17
Id.
18
Id.
19
Id. ¶ 26.
20
Id.
21
Id. ¶ 25.
22
Id. ¶ 47.
23
Id.
6
company.24 Plaintiffs allege that Mobile Acquisition Holdings is a shell company
controlled by the Audax Defendants.25
Andrew Warner was Mobileum’s Chief Financial Officer and a member of
Mobileum’s Board at all relevant times.26 Plaintiffs allege that Warner was also
Audax’s employee and the Audax Defendants’ agent for purposes of managing
Mobileum.27
Orathi “Bobby” Srinivasan co-founded Mobileum.28 Srinivasan was
Mobileum’s Chief Executive Officer and a member of Mobileum’s Board at all
relevant times.29
II. THE SALE OF MOBILEUM
Mobileum provides a suite of services to mobile-network providers and other
telecommunications companies.30 Audax is a private equity firm that acquires,
grows, and then resells portfolio companies.31 In November 2016, Audax acquired
Mobileum.32 Audax kept Srinivasan in place as Mobileum’s CEO, but installed
24
Id. ¶¶ 47–48.
25
Id. ¶ 25.
26
Id. ¶ 28.
27
Id.
28
Id. ¶ 36.
29
Id. ¶ 29.
30
Id. ¶ 34.
31
Id. ¶ 35.
32
Id. ¶ 36.
7
Warner as Mobileum’s new CFO.33 Plaintiffs allege that Audax had twice before
placed Warner in an executive role at a portfolio company.34
From 2017 to 2020, Mobileum—under Audax’s control—acquired six new
companies.35 Then, in late 2020, Audax put the augmented Mobileum up for sale.36
Mobileum retained Jefferies LLC (“Jeffries”) to serve as a financial advisor and to
market Mobileum.37 In September 2021, Jeffries contacted H.I.G.38 and provided a
Confidential Information Memorandum (“CIM”) detailing Mobileum’s financial
position and projections.39
The CIM indicated Mobileum was financially sound and steadily growing.40
Most pertinent to this case, the CIM projected that Mobileum’s 2021 EBITDA
would reach $84 million, its revenue would grow at a rate of 15%, and its bookings
would grow at a rate of 18%.41 Those estimates and other promising figures
prompted H.I.G. to begin due diligence in late September 2021.42 In November
33
Id.
34
Id.
35
Id. ¶ 37.
36
Id.
37
Id.
38
The Complaint does not specify which H.I.G. entity led negotiations on the buy side. The
parties’ briefs likewise refer generally to “H.I.G.” for this purpose. As it does not affect any
substantive issues at this stage, the Court follows suit.
39
Id. ¶¶ 38–39.
40
Id. ¶ 39.
41
Id.
42
Id. ¶ 41.
8
2021, H.I.G. submitted a non-binding offer valuing Mobileum (on an Enterprise
Value basis) between $860 million and $920 million.43
The parties then engaged in “Phase 2” of due diligence.44 During this phase,
the Audax Defendants and Mobileum shared more detailed information about
Mobileum with H.I.G.45 H.I.G. retained the services of PricewaterhouseCoopers to
help analyze Mobileum’s financials.46 Sold on Mobileum’s potential, on December
9, 2021, H.I.G. submitted a binding offer that placed Mobileum’s Enterprise Value
at $890 million.47
Following additional diligence and negotiation, H.I.G. agreed to purchase a
majority stake in Mobileum based on a “headline” Enterprise Value of $915
million.48 Accordingly, on December 25, 2021, the parties gifted each other
executed copies of the SPA.49 The transaction closed on March 1, 2022.50
As for the mechanics of the transaction, H.I.G. formed Matrix Parent to be the
buyer.51 Matrix Parent then bought Mobile Acquisition Holdings’ shares in Mobile
43
Id. ¶ 42. For an explanation of Enterprise Value, see HBK Master Fund L.P. v. Pivotal Software,
Inc., 2023 WL 10405169, at *44 n.515 (Del. Ch. Aug. 14, 2023) (collecting sources).
44
Compl. ¶ 43.
45
Id.46
Id.47
Id. ¶ 44.
48
Id. ¶ 45.
49
Id. ¶ 46.
50
Id.
51
Id. ¶ 48.
9
Acquisition Corp., which directly owns Mobileum.52 The H.I.G. Plaintiffs
contributed $285 million in cash to partially fund the purchase, and Matrix Parent
covered the rest through debt.53 Additionally, the Audax Defendants and key
members of Mobileum’s management received around $141 million worth of
rollover shares in Matrix Topco LP, which indirectly owns Matrix Parent.54
III. THE ALLEGED FRAUD
The crux of this case is Plaintiffs’ allegation that Mobileum’s attractive
EBITDA, revenue growth, and bookings numbers were based on fraud and not actual
business performance. According to Plaintiffs, Mobileum’s revenue was actually in
decline during the relevant period and Mobileum’s 2021 EBITDA was at least $20
million less than advertised.55 Plaintiffs highlight three “pillars” of fraud to describe
the recipe Mobileum allegedly used to cook its books.
Each pillar is described more fully below but to summarize, Plaintiffs allege
that, under Defendants’ guidance, Mobileum: (1) improperly accelerated its revenue
recognition by acting as if it had performed more work than it had; (2) covered up
its improper revenue acceleration by creating, but not sending, invoices for work that
52
Id.
53
Id. ¶¶ 49–50.
54
Id. ¶ 51. Plaintiffs allege that H.I.G. insisted that the Audax Defendants retain a minority share
in Mobileum. Id.
55
Id. ¶ 58.
10
had not been done; and (3) recorded “sham” bookings from artificial entities,
knowing that the bookings would not lead to revenue.
A. Revenue Acceleration
Mobileum used the “percentage of completion” (“POC”) method to account
for its revenue under long-term contracts.56 The intuitively named POC method
allows a company to recognize the amount of contracted revenue that corresponds
with the percentage of the contracted work that has been performed.57 That method
can be abused in two ways: overstating how much work has been done on the
contract or understating how much work the contract requires. According to
Plaintiffs, Mobileum did both.
Plaintiffs recite one example from the fourth quarter of 2021 in which
Mobileum employees applied non-billable hours from the customer satisfaction
team to billable projects, making those projects seem more complete than they truly
were.58 In another example, purchase orders dated December 22, 2021 called for
400 hours of work to be done over six months; but, less than two weeks later, 240
hours were supposedly completed—including 160 hours by an employee that
Plaintiffs allege never worked on the project.59 Emails between Mobileum
56
Id. ¶ 62.
57
Id. ¶ 63. For example, if 50% of the contracted work is completed, the company can recognize
50% of the revenue provided by the contract. Id.
58
Id. ¶ 65.
59
Id. ¶ 66.
11
employees suggest that this “revenue acceleration” was done to “keep the forecast”
and “reach the revenue target.”60 Plaintiffs claim this type of timesheet manipulation
was “pervasive” at Mobileum.61
Plaintiffs also allege Mobileum—led by Warner—further exploited the POC
method by improperly reducing the denominator of the determinative calculation. 62
In October 2021, Warner allegedly instructed Mobileum’s revenue team to reduce
the numbers of hours required to be worked under a particular contract with no
justification other than accelerating revenue recognition.63 In the third quarter of
2021, Mobileum allegedly reduced the estimated time to complete one project from
490 person-days to 81 person-days, which allowed Mobileum to record 100%
completion of the project by the end of September.64 Despite that supposed
completion, Mobileum later recorded 3,800 non-billable hours on the same project.65
This tactic allowed Mobileum to claim a greater percentage of completion than was
accurate, which led to recognizing more revenue than was appropriate.
B. “Dummy” Invoices
An impediment to the alleged revenue acceleration scheme is the fact that
customers would not welcome invoices for work that had not be performed. That
60
Id. ¶ 65.
61
Id. ¶ 67.
62
Id. ¶ 68.
63
Id.
64
Id. ¶ 69.
65
Id.
12
leads to high levels of “unbilled” revenue, which can be a red flag in due diligence.66
Indeed, unbilled revenue became a problem for Mobileum in the lead-up to the sale,
growing from $6 million in 2019 to $23 million in 2021.67 Mobileum—Warner in
particular—tried to explain away the issue during due diligence by blaming
accounting rules and “bureaucratic” customers.68 But, ultimately, Mobileum
allegedly took a more direct approach to confronting the accumulation of unbilled
revenue.
Mobileum needed to issue invoices for the “accelerated” revenue; but it could
not send customers invoices for work that had not been done. To resolve that
dilemma, Warner and other Mobileum employees allegedly created “dummy”
invoices, which were recorded for accounting purposes but not sent to customers.69
Mobileum employees were told to use “a generic description like ‘interim
milestone’” when there was no applicable contractual milestone to invoice. 70 In
early December 2021, Warner and other Mobileum executives described the creation
of fictitious invoices as “an immediate priority” and a “top priority.”71
66
Id. ¶¶ 70–72. Unbilled revenue specifically refers to revenue that the company has recognized
but has not issued an invoice to collect. Id. ¶ 72.
67
Id. ¶ 73.
68
Id. ¶ 70.
69
Id. ¶ 75.
70
Id. ¶ 76.
71
Id. ¶¶ 75–76.
13
This alleged ploy had its intended effect. Mobileum’s unbilled revenue began
to recede—at least on paper.72 Jeffries sent H.I.G. a document on December 15,
2021 that showed Mobileum’s unbilled revenue steadily dropping.73 That same day,
Srinivasan celebrated the new numbers in an email sent to a group that included
Bhatia and Doran, saying, “[f]rankly, this should be game, set and match for . . .
HIG.”74 The parties executed the SPA just ten days later.75
C. Illegitimate Bookings
The final pillar of the alleged fraud relates to Mobileum’s efforts to show that
it was growing its customer base through new bookings. Mobileum allegedly did so
in at least two fraudulent ways. The first method was converting “whitespace” to
actual bookings.76 In other words, Mobileum employees recorded customer leads as
if the potential customer had already committed to making a purchase.77 Plaintiffs
allege that Warner encouraged this activity and told Mobileum employees, “[t]he
reality is we have a target number from Bobby [Srinivasan], then build the support
that makes the number seem reasonable, but we can not [sic] say that!!”78
72
Id. ¶ 78.
73
Id.
74
Id. (omission in original).
75
Id. ¶ 46.
76
Id. ¶ 80.
77
Id.
78
Id. (second alteration in original).
14
The second alleged method for propping up Mobileum’s bookings numbers
was having functionally fake companies sign up for millions of dollars’ worth of
services with no plan to pay for them.79 Plaintiffs claim this was not an isolated
practice, but the Complaint predominantly focuses on the example of “Kibott
SARL” (“Kibott”).80 Warner—whose role as CFO did not include direct
involvement with Mobileum’s sales efforts—“sourced” Kibott as a customer.81
Kibott’s CEO was Warner’s friend, and the two had worked together since 2019.82
Plaintiffs allege that Mobileum and Kibott’s business relationship began in June
2021, just as Mobileum’s relationships with certain other customers terminated.83
By the end of the year, Kibott had signed up for products and services worth
approximately 12 million euros.84
Prior to December 2021, however, Kibott was not a registered limited liability
company.85 Nor did Kibott have significant assets, customers, a business plan, or
even a website.86 Kibott ultimately paid Mobileum less than 60,000 euros.87 When
Mobileum demanded more after H.I.G. took over, Kibott entered bankruptcy
79
Id. ¶ 81.
80
Id.
81
Id. ¶ 82.
82
Id.
83
Id. ¶ 83.
84
Id. ¶ 86.
85
Id. ¶ 87.
86
Id.
87
Id. ¶ 103.
15
proceedings.88 Plaintiffs allege that Warner knew Kibott was a hollow entity
throughout their dealings.89
Nevertheless, Kibott was a valuable partner for Mobileum while Mobileum
was on the auction block. Warner told Mobileum employees to “think of [Kibott]
as a blank canvas.”90 Accordingly, when Mobileum had problems with its revenue
numbers, it repeatedly used Kibott as the solution.91 In one example that took place
less than two weeks before the parties executed the SPA, Warner asked his Kibott
go-between92 for “another favor on the [Kibott] agreement.”93 That “favor” was
amending the relevant contract to allow Mobileum to issue invoices for 1.8 million
euros, which would help Mobileum reduce its unbilled revenue balance.94 In
response, Warner was told, “[m]issed your email last night but basically yes, go for
it.”95 Plaintiffs allege that Kibott was so accommodating because Kibott’s
executives received reassurances that they would not have to pay as promised.96
88
Id.
89
Id. ¶ 87.
90
Id. ¶ 92 (alteration in original).
91
Id. ¶¶ 85–102.
92
The Complaint refers to this intermediary as “Consultant A.” Id. ¶ 82. Consultant A received
“hefty” commissions for this work, which Plaintiffs allege were shared with Kibott. Id. ¶ 85.
93
Id. ¶ 93 (alteration in original).
94
Id.
95
Id. (alteration in original).
96
Id. ¶ 92.
16
IV. THE SPA’S RELEVANT PROVISIONS
The SPA is at the epicenter of this dispute. The SPA’s terms serve as the basis
for both Plaintiffs’ primary claims and several of Defendants’ defenses. The
provisions most relevant to this Motion, in somewhat abridged form, are as follows.
A. The Contested Representations97
Article IV of the SPA comprises Mobile Acquisition Corp.’s representations
and warranties to Matrix Parent.98 Plaintiffs allege that at least seven of the
representations therein were false—Sections 4.05(a), 4.05(b), 4.06, 4.09(a), 4.12,
4.15(a), and 4.22(a) (together, the “Contested Representations”).99 SPA Section
4.05(a) represented in pertinent part:
[T]he Financial Statements reflect the information set forth in the
Acquired Companies’ books and records and present fairly, in all
material respects, the financial position, results of operations and cash
flows of the Acquired Companies (taken as a whole) as of the times and
for the periods referred to therein in accordance with GAAP,
consistently applied throughout the periods covered thereby . . . . The
Company maintain a system of internal accounting controls sufficient
to provide reasonable assurances that transactions are recorded in a
timely manner and as necessary to permit preparation of the Financial
Statements in accordance with GAAP.
97
Plaintiffs acknowledge that the terms of the SPA limit Plaintiffs’ fraud claims to the express
representations contained in the SPA. See D.I. 25 (hereinafter, “Pls.’ Opp’n”) at 22. The extra-
contractual misrepresentations alleged in the Complaint are only offered to help demonstrate the
knowing falsity of the intra-contractual misrepresentations, according to Plaintiffs. Id.
98
See D.I. 6 (hereinafter, “Defs.’ Mot.”), Ex. A (hereinafter, “SPA”) § 4.
99
Compl. ¶ 55.
17
SPA Section 4.05(b) represented:
The Acquired Companies each maintain books and records that
accurately and completely reflect in all material respects their
respective assets and Liabilities. Except as set forth on Schedule
4.05(b), the Acquired Companies each maintain, adhere to and enforce
internal accounting controls that are designed to provide reasonable
assurance that: (i) transactions are executed only in accordance with
management's authorization; (ii) transactions are recorded as necessary
to permit preparation of the financial statements of the Acquired
Companies in accordance with GAAP; (iii) receipts and expenditures
of each Acquired Company are executed only in accordance with such
management’s authorization; and (iv) unauthorized acquisition,
disposition or use of assets is prevented or timely detected. To the
Company’s knowledge, there is no weakness in the design or operation
of such internal accounting controls that would reasonably be expected
to adversely affect the ability of any of the Acquired Companies to
initiate, record, process or report financial data.
SPA Section 4.06 represented in pertinent part: “Since the date of the Latest
Balance Sheet [September 30, 2021] through the date hereof, each Acquired
Company has conducted its business in the Ordinary Course of Business and there
has not been any Material Adverse Effect.”
SPA Section 4.09(a) represented in pertinent part: “The Acquired Companies
have timely filed (taking into account any applicable extensions) all income Tax
Returns and all other material Tax Returns that were required to be filed by them
and such Tax Returns are true, correct, and complete in all material respects.”
SPA Section 4.12 represented in pertinent part:
To the Company’s knowledge, there are no facts or circumstances
existing that would reasonably be expected to serve as a basis for any
[defined] Claims, actions or Legal Proceedings which, if determined
18
adversely to [an] Acquired Company, would reasonably be expected to
be material to the Acquired Companies, taken as a whole.
SPA Section 4.15(a) represented in pertinent part:
[E]ach of the Acquired Companies has at all times since January 1,
2018 been in compliance, and is currently in compliance in all material
respects with all Laws and regulations of all Governmental Bodies
applicable to such Acquired Company, its business or the ownership or
use of its assets and properties.
SPA Section 4.22(a) represented in pertinent part: “The accounts receivable
of each of the Acquired Companies arose from bona fide transactions entered into
in the Ordinary Course of Business[.]”
B. The Limitations on Liability
Various SPA provisions purport to allocate risk between the SPA’s parties
and balance their respective rights and remedies. In that regard, the SPA states:
The Parties agree that the limits imposed on Buyer’s, the Company’s
and the other Buyer Related Parties’[100] remedies with respect to this
Agreement and the transactions contemplated hereby (including this
Section 9.01) were specifically bargained for between sophisticated
parties and were specifically taken into account in the determination of
the amounts to be paid to Seller hereunder.101
100
The definition of “Buyer Related Parties” covers the H.I.G. Plaintiffs, stating in pertinent part,
“‘Buyer Related Parties’ means, collectively, Buyer, its Affiliates, and their respective directors,
managers, officers, employees, owners, advisors, and representatives[.]” SPA § 10.01. The
definition of Affiliate, in turn, states in pertinent part, “‘Affiliate’ of any particular Person means
any other Person controlling, controlled by, or under common control with such particular Person
where ‘control’ means the possession, directly or indirectly, of the power to direct the management
and policies of a Person whether through the ownership of voting securities, Contract or
otherwise.” Id.
101
SPA § 9.01(b).
19
Defendants now raise several such provisions to defend against Plaintiffs’ claims.
To start, the SPA contains provisions in which Plaintiffs broadly disclaimed
reliance on any extra-contractual representations, including forecasts, projections,
the CIM, and other due diligence materials or discussions.102 Those provisions are
buttressed by a similarly broad integration clause.103 Since Plaintiffs have confirmed
that they base their fraud claims solely on the falsity of express contractual
representations,104 the details of the SPA’s non-reliance and integration provisions
are inessential here.
SPA Section 11.17(b) contains a broad non-recourse provision that provides
in pertinent part:
This Agreement may only be enforced against, and any claim or suit or
cause of action based upon, arising out of, or related to this Agreement,
or the negotiation, execution or performance of this Agreement . . .
(including any representation or warranty made in or in connection with
this Agreement or . . . as an inducement to enter into this Agreement
. . .), whether in contract or in tort, in law or in equity or otherwise, may
only be brought against the express named Parties to this Agreement
. . . and then only with respect to the specific obligations set forth herein
. . . with respect to the named Parties to this Agreement (in all cases, as
limited by the provisions of Section 9.01) . . . . No Person who is not
an express named Party to this Agreement . . . including any past,
present or future director, manager, officer, employee, incorporator,
member, partner, stockholder, Affiliate, agent, attorney, or
representative of the Company, Seller or Buyer or any of their
respective Affiliates (the "Non-Recourse Parties"), will have or be
subject to any Liability or indemnification obligation (whether in
102
Id. §§ 11.17(a), (c).
103
Id. § 11.09.
104
See supra note 97.
20
Contract or in tort, in Law or in equity, based upon any theory that seeks
to impose Liability of an entity part against its owners or affiliates, or
otherwise) to any other Person resulting from (nor will any Person have
any claim with respect to) (i) the distribution to Buyer, or Buyer’s use
of, or reliance on, any information, documents, projections, forecasts or
other material made available to Buyer in certain “data rooms,”
information memorandum, management presentations or in any other
form, including meetings, calls or correspondence with management of
any Acquired Company or Seller or their respective Affiliates or
Representatives and whether delivered to or made available prior to or
after the date hereof in expectation of, or in connection with, the
transactions contemplated by this Agreement, (ii) any claim based on,
in respect of, or by reason of, the sale and purchase of the Acquired
Companies, including any alleged non-disclosure or misrepresentations
made by any such Persons, or (iii) for any obligations or Liabilities
otherwise arising under, in connection with or related to this Agreement
. . . or for any claim based on, in respect of, or by reason of this
Agreement . . . or the negotiation or execution hereof . . . , in each case,
regardless of the legal theory under which such Liability or obligation
may be sought to be imposed, whether sounding in Contract or tort, or
whether at Law or in equity, or otherwise; and each Party irrevocably
waives and releases all such Liabilities and obligations against any such
Persons.
SPA Section 9.01(b) adds to the non-recourse provision by providing in
pertinent part:
Each of Buyer and the Company, on its own behalf and on behalf of the
other Buyer Related Parties, acknowledges and agrees that no Buyer
Related Parties may avoid any limitation on liability set forth herein
(including in this Section 9.01(b)) by . . . seeking damages for breach
of contract, tort, or pursuant to any other theory of liability or asserting
any claim against any Non-Recourse Party for conspiracy, aiding or
abetting or other theory of liability with respect to a claim that may be
asserted against a Party to this Agreement, all of which are hereby
irrevocably waived[.]
21
Essentially, those two provisions purport to shield the “Non-Recourse Parties”—
including Defendants105—from any liability related to the SPA, including liability
for aiding and abetting or civil conspiracy.
SPA Section 9.01(b) contains an exclusive remedy provision that provides in
pertinent part:
[E]xcept . . . (iii) Retained Claims, each of Buyer and the Company
hereby irrevocably waives and releases and covenants not to sue, on its
own behalf and on behalf of the Buyer Related Parties, to the fullest
extent permitted under applicable Law, Seller and the Non-Recourse
Parties (including the other Seller Related Parties), whether in any
individual, corporate, or any other capacity, from and against any and
all other rights, claims, and causes of action it may have against Seller
and the Non-Recourse Parties (including the other Seller Related
Parties) by virtue of, or based on, the subject matter of this Agreement,
the negotiation, execution, or performance of this Agreement, any
Exhibit or Disclosure Schedule or other Schedule hereto, or any other
document delivered pursuant to this Agreement, . . . or the ownership
or operation of the Acquired Companies prior to the Closing, including
whether arising under or based upon any Law or otherwise and
including any rights of contribution, indemnification, reimbursement,
or other similar rights, other than the Retained Claims.
As relevant here, the “Retained Claims” include “claims for Fraud.”106 SPA Section
10.01 defines Fraud to mean:
intentional and knowing common law fraud under Delaware law in the
representations and warranties set forth in this Agreement, any
Contribution Agreement and the certificates delivered pursuant to
Section 2.02(f)(i) and Section 2.03(d)(i). A claim for Fraud may only
be made against the Party committing such Fraud. “Fraud” does not
105
In addition to not being “express named Part[ies]” to the SPA, see SPA § 11.17(b), Defendants
fall under the SPA’s definition of Seller’s “Affiliate.” See supra note 100.
106
SPA § 9.01(a).
22
include equitable fraud, constructive fraud, promissory fraud, unfair
dealings fraud, unjust enrichment, or any torts (including fraud) or other
claim based on negligence or recklessness (including based on
constructive knowledge or negligent misrepresentation) or any other
equitable claim.
Accordingly, through the SPA, Plaintiffs waived any fraud claims not based on the
knowing falsity of a contractual representation.
PROCEDURAL HISTORY
Plaintiffs filed their Complaint on October 24, 2023.107 Plaintiffs’ Complaint
contains four causes of action108: common-law fraud (Counts I and II);109 aiding and
abetting fraud (Counts III and IV);110 civil conspiracy (Counts V and VI);111 and
unjust enrichment (Counts VII and VIII).112 One week later, AG Mobile Holdings,
L.P. filed a competing suit in the Court of Chancery, which blames H.I.G.’s
mismanagement for Mobileum’s post-closing decline and claims that the
investigation that led to this case was a predetermined farce.113
Returning to this action, Defendants moved to dismiss the Complaint on
December 8, 2023.114 The parties completed briefing on the motion to dismiss on
107
Compl.
108
For each cause of action, Plaintiffs bring a separate Count for Matrix Parent and the H.I.G.
Plaintiffs. Id. ¶¶ 138–93.
109
Id. ¶¶ 138–57.
110
Id. ¶¶ 158–71.
111
Id. ¶¶ 172–83.
112
Id. ¶¶ 184–93.
113
See AG Mobile Hldgs., L.P. v. H.I.G. Mobile L.P., C.A. No. 2023-1103-MAA (Del. Ch.). A
motion to dismiss is presently pending in that action.
114
Defs.’ Mot.
23
February 12, 2024.115 The Court heard argument on March 22, 2024.116 The matter
is now ripe for decision.
STANDARDS OF REVIEW
I. RULE 12(b)(2)
In the context of Superior Court Civil Rule 12(b)(2), “the plaintiff bears the
burden of showing a basis for the trial court’s exercise of jurisdiction over the
nonresident defendant.”117 At the pleading stage, a plaintiff is only required to
“make a prima facie showing” of the Court’s jurisdiction.118 While the Court draws
all reasonable inferences in the plaintiff’s favor, the complaint’s allegations may be
contradicted by affidavit.119
II. RULE 12(b)(6)
Under well-settled principles, the pivotal question under Superior Court Civil
Rule 12(b)(6) is “whether the plaintiff would be entitled to recovery ‘under any
reasonably conceivable set of circumstances.’”120 The Court must “accept as true all
well-pled factual allegations that provide the opposing party notice of the claim.”121
115
Pls.’ Opp’n; D.I. 46 (hereinafter, “Defs.’ Reply”).
116
D.I. 53 (hereinafter, “Tr.”).
117
Wiggins v. Physiologic Assessment Servs., LLC, 138 A.3d 1160, 1164 (Del. Super. 2016)
(citations omitted).
118
Id. at 1164–65 (citations omitted).
119
Id. at 1165.
120
State ex rel. Jennings v. Monsanto Co., 299 A.3d 372, 381 (Del. 2023) (quoting Cent. Mortg.
Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011)).
121
Id.24
The Court must also “draw all reasonable inferences in favor of the plaintiff.”122 The
Court does not, however, “accept as true conclusory allegations ‘without specific
supporting factual allegations.’”123
ANALYSIS
I. THE COURT LACKS A STATUTORY BASIS FOR PERSONAL JURISDICTION
OVER THE INDIVIDUAL DEFENDANTS.
Delaware courts employ a “two-step analysis” to determine whether the
exercise of personal jurisdiction is proper.124 The first step is determining whether
a statute provides a basis for jurisdiction over the nonresident defendant.125 The
Court then evaluates whether exercising jurisdiction comports with the Due Process
Clause of the Fourteenth Amendment.126
Here, for the reasons expressed below, the Court finds that Plaintiffs have not
made a prima facie showing of a statutory basis for jurisdiction over the Individual
Defendants. A separate due process analysis is, therefore, unnecessary in this
instance.127
122
Id.123
Page v. Oath Inc., 270 A.3d 833, 842 (Del. 2022) (quoting In re Gen. Motors (Hughes)
S’holder Litig., 897 A.2d 162, 168 (Del. 2006)).
124
Ross v. Earth Movers, LLC, 288 A.3d 284, 293 (Del. Super. 2023) (citing Boone v. Oy Partek
Ab, 724 A.2d 1150, 1154 (Del. Super. 1997)).
125
See id. (citing Boone, 724 A.2d at 1154–55).
126
Id.127
See Cargill, Inc. v. Rossi, 2023 WL 6812881, at *5–6 (Del. Super. Oct. 16, 2023).
25
A. The Manager-Consent Statute Does Not Provide Jurisdiction.
Plaintiffs argue that 6 Del. C. § 18-109 provides a statutory basis for
jurisdiction over the Individual Defendants.128 This provision of the Delaware
Limited Liability Company Act establishes that “managers” of a Delaware limited
liability company (an “LLC”) consent to service of process in this state—which is a
basis for personal jurisdiction—with respect to claims relating to the manager’s role
in the LLC.129
In this context, “manager” can refer to either a formal manager “as defined in
§ 18-101”130 or an acting manager who “participates materially in the management
of the limited liability company.”131 To qualify as an acting manager under Section
18-109(a)(ii), the individual must have “a significant role in managing an LLC
or . . . play[] a significant part in an activity or event that constitutes part of the
management of the LLC.”132
128
Pls.’ Opp’n at 50–53.
129
See In re P3 Health Grp. Hldgs., LLC, 285 A.3d 143, 151–52 (Del. Ch. 2022) (citations
omitted).
130
6 Del. C. § 18-101(12) defines “manager” in pertinent part as “a person who is named as a
manager of a limited liability company in, or designated as a manager of a limited liability
company pursuant to, a limited liability company agreement or similar instrument under which the
limited liability company is formed[.]”
131
6 Del. C. § 18-109(a); In re P3 Health, 285 A.3d at 152.
132
In re P3 Health, 285 A.3d at 153.
26
Delaware courts use a three-part test to determine whether a claim sufficiently
relates to an LLC’s business such that the LLC’s manager is subject to this state’s
specific jurisdiction for the claim:
An action involves or relates to the business of an LLC within the
meaning of § 18-109(a) if: (1) the allegations against the manager
focus centrally on his rights, duties and obligations as a manager of a
Delaware LLC; (2) the resolution of the matter is inextricably bound up
in Delaware law; and (3) Delaware has a strong interest in providing a
forum for disputes relating to the ability of managers of an LLC formed
under its law to properly discharge their respective managerial
functions.133
Here, Plaintiffs argue that the Individual Defendants’ roles at Audax and non-
party Mobile GP Holdings LLC (“Mobile GP”) suffice to provide a basis for
jurisdiction under Section 18-109.134 The Court disagrees.
1. Plaintiffs Have Not Adequately Shown that the Individual
Defendants are “Managers” of Audax.
Plaintiffs contend the Individual Defendants were acting managers of Audax
under Section 18-109(a)(ii).135 Thus, Plaintiffs must show that the Individual
Defendants had a significant role in the management of Audax. 136 To do so,
Plaintiffs begin by listing the Individual Defendants’ titles at Audax—Bhatia is a
“managing director,” Mack is a “partner,” and Doran is a “principal.”137 But the
133
Lone Pine Res., LP v. Dickey, 2021 WL 2311954, at *8 (Del. Ch. June 7, 2021) (quoting
Hartsel v. Vanguard Grp., Inc., 2011 WL 2421003, at *8 (Del. Ch. June 15, 2011)).
134
Pls.’ Opp’n at 50–51.
135
Id.136
See In re P3 Health, 285 A.3d at 153.
137
Pls.’ Opp’n at 50–51.
27
relevant inquiry turns on the putative manager’s actions with respect to the LLC, not
the title such person holds.138 Nor do Plaintiffs tie those titles—which are shared by
numerous Audax employees139—to any specific powers or responsibilities at Audax.
This argument, then, does little to show that the Individual Defendants materially
participated in the management of Audax.
With respect to the Individual Defendants’ activities at Audax, Plaintiffs
adduce no support for the conclusion that the Individual Defendants controlled or
managed Audax itself. Instead, Plaintiffs only discuss the control the Individual
Defendants had over Mobileum in their roles with Audax.140 That, however, is
beside the point. As Plaintiffs recognize, Mobileum was but one of Audax’s
portfolio companies.141 Managing a discrete task or project on behalf of an LLC is
distinct from managing the LLC itself.142 Were it otherwise, Section 18-109(a)(ii)
could broadly apply to LLC employees who have little role in the LLC’s internal
governance but participate in the LLC’s operations. Delaware courts have not
138
Cf. In re P3 Health, 285 A.3d at 155–57 (holding that a person with no official role at an LLC
qualified as an acting manager).
139
See Leadership, AUDAX GROUP, https://www.audaxgroup.com/leadership (last visited June 27,
2024). Cf. The Scourge of Job-Title Inflation, THE ECONOMIST, December 8, 2022,
https://www.economist.com/business/2022/12/08/the-scourge-of-job-title-inflation (explaining
the growing tendency to bestow seemingly high-level titles upon a broader pool of employees).
140
Pls.’ Opp’n at 50–51.
141
See Compl. ¶ 35.
142
See Dlayal Hldgs., Inc. v. Al-Bawardi, 2021 WL 6121724, at *7 (Del. Ch. Dec. 27, 2021)
(holding that managing some of an LLC’s assets does not equate to managing the LLC for purposes
of Section 18-109).
28
interpreted Section 18-109 in that way.143 Indeed, the Court of Chancery explicitly
rejected the notion that “Section 18-109 applies ‘when the claims alleged involve
members’ actions in their official capacity negotiating contracts on behalf of
Delaware LLCs.’”144
Because Plaintiffs have alleged no facts that suggest the Individual
Defendants managed Audax in any material way, Plaintiffs have not made a prima
facie showing that the Individual Defendants were “managers” of Audax for
purposes of Section 18-109.
2. Plaintiffs’ Claims Do Not Involve or Relate to Mobile GP.
Plaintiffs also suggest the Individual Defendants’ roles at Mobile GP provide
a basis for jurisdiction under Section 18-109.145 Mobile GP was the general partner
of Mobile Acquisition Holdings.146 Mobile GP’s Amended and Restated Limited
Liability Company Agreement explicitly designated Bhatia and Mack as
managers.147 Accordingly, the critical inquiry with respect to personal jurisdiction
143
Endowment Rsch. Grp., LLC v. Wildcat Venture Partners, LLC, 2021 WL 841049, at *5 (Del.
Ch. Mar. 5, 2021) (“This court has interpreted [Section 18-109] to narrowly refer to corporate
governance and the internal affairs of an LLC.” (first citing CLP Toxicology, Inc. v. Casla Bio
Hldgs. LLC, 2020 WL 3564622, at *12 (Del. Ch. June 29, 2020); and then citing Hartsel, 2011
WL 2421003, at *9)).
144
Id.145
Pls.’ Opp’n at 51.
146
Pls.’ Opp’n, Ex. 3.
147
Pls.’ Opp’n, Ex. 5 § 7.1. It does not appear that Doran was a formal manager of Mobile GP.
For the reasons that follow, that difference does not bear on this analysis.
29
via Mobile GP is whether Plaintiffs’ claims “involve or relate to” Mobile GP’s
business.
Notably, Mobile GP went wholly unmentioned by Plaintiffs until Plaintiffs
sought a basis for personal jurisdiction over the Individual Defendants. The
Complaint contains counts for aiding and abetting, civil conspiracy, and unjust
enrichment against an array of Audax-affiliated entities, but nowhere mentions
Mobile GP. While the Court is mindful that Plaintiffs are entitled to have reasonable
inferences drawn in their favor at this stage, the proposition that Plaintiffs simply
overlooked Mobile GP’s supposed role in this case when preparing their Complaint
does not strike the Court as a reasonable inference.148 Plaintiffs’ opposition brief
further reflects Mobile GP’s tenuous connection to Plaintiffs’ claims.
In the relevant subsection of Plaintiffs’ opposition brief—labeled, “b.
Involving or relating to the [entity’s] business”149—Mobile GP is once again
unmentioned. Instead, that subsection concludes, “the Complaint alleges that the
Individual Defendants ‘used their capacity as managers of [Audax Management
LLC] to commit the well-pled wrongs when negotiating contracts involving the
148
Cf. BV Advisory Partners, LLC v. Quantum Computing Inc., 2024 WL 2723119, at *10 (Del.
Ch. May 28, 2024) (Under analogous Rule 12(b)(6) standards, “the Court should not ‘accept every
strained interpretation of the allegations . . . or draw unreasonable inferences in the plaintiff’s
favor.’” (quoting City of Fort Myers Gen. Emps.’ Pension Fund v. Haley, 235 A.3d 702, 716 (Del.
2020))).
149
Pls.’ Opp’n at 52 (emphasis and alteration in original).
30
change of control of [Mobileum].’ That is enough.”150 But because Plaintiffs have
not shown that the Individual Defendants were Audax’s managers, that is not
enough.
To reiterate, Plaintiffs bear the burden to make a prima facie showing of
personal jurisdiction.151 Mentioning Mobile GP in a single sentence across both the
Complaint and the opposition brief does little to carry that burden.152
More substantively, as already noted, Delaware courts interpret Section
18-109 “to narrowly refer to corporate governance and the internal affairs of an
LLC.”153 Fraud allegedly committed by Defendants through the actions of
Mobileum employees, without more, does not raise any issues related to the
governance or internal affairs of Mobile GP. Nor do the allegations against the
Individual Defendants “focus centrally on [the Individual Defendants’] rights, duties
and obligations as [managers] of [Mobile GP].”154 Rather, Plaintiffs’ allegations
against the Individual Defendants explicitly focus on the Individual Defendants’
150
Id. at 53 (alterations in original) (citations omitted).
151
Wiggins, 138 A.3d at 1164.
152
Cf. Emerald Partners v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are
deemed waived.” (citations omitted)). To be clear, the Court does not consider this issue “waived”
because Plaintiffs did raise it; but the lack of substantive briefing weighs heavily against finding
Plaintiffs carried their burden with respect to this argument.
153
Endowment Rsch. Grp., 2021 WL 841049, at *5 (citations omitted).
154
Id. (quoting Vichi v. Koninklijke Phillips Elecs. N.V., 2009 WL 4345724, at *8 (Del. Ch. Dec.
1, 2009)).
31
roles with the Audax Defendants.155 Accordingly, the Individual Defendants’
positions at Mobile GP do not confer personal jurisdiction for purposes of this action.
B. The Long-Arm Statute Does Not Provide Jurisdiction.
Plaintiffs’ only other proposed basis for statutory jurisdiction is 10 Del. C.
§ 3104(c)(1).156 That provision establishes a basis for jurisdiction over any
nonresident who “[t]ransacts any business or performs any character of work or
service in the State.”157 Section 3104(c)(1) provides only specific jurisdiction, so
the plaintiff’s claim must relate to the activity that satisfies the statute in order for
the defendant to be subject to the Court’s jurisdiction.158
Plaintiffs only point to the SPA-related creation of four Delaware entities (the
“Matrix Entities”)159 as the transaction that triggers Section 3104(c)(1).160
“Delaware courts have held consistently that forming a Delaware entity constitutes
the transaction of business within Delaware that is sufficient to establish specific
personal jurisdiction under Section 3104(c)(1).”161 The Matrix Entities, however,
155
See, e.g., Compl. ¶ 139 (“[T]he Individual Defendants (as senior management of Audax who
oversaw the sale process) made, participated in making, or caused to be made the False
Representations[.]” (emphasis added)); Id. ¶ 56 (“[T]he Individual Defendants . . . managed the
Company on behalf of the Audax Defendants[.]” (emphasis added)).
156
Pls.’ Opp’n at 53–56.
157
10 Del. C. § 3104(c)(1).
158
Ross, 288 A.3d at 294 (citing Boone, 724 A.2d at 1155).
159
The Matrix Entities are Matrix Parent, Matrix Holdco, Inc., Matrix Topco GP, LLC, and Matrix
Topco, L.P. See D.I. 26 (“Levy Aff.”) ¶ 9.
160
Pls.’ Opp’n at 54.
161
Lone Pine Res., 2021 WL 2311954, at *5 (citation omitted).
32
were created by H.I.G., not Audax or the Individual Defendants.162 The key inquiry,
then, is whether H.I.G.’s creation of the Matrix Entities can be imputed to the
Individual Defendants for jurisdictional purposes. In this circumstance, the answer
is no.
“As a defendant’s involvement in the underlying transaction and the
formation of the Delaware entity becomes more attenuated, it becomes more difficult
to hold that the defendant transacted business in the state.”163 For example, in EBG
Holdings LLC v. Vredezicht’s Gravenhage 109 B.V.,164 the Court of Chancery held
that the Dutch parent of an entity that participated in the formation of a Delaware
LLC was “simply too attenuated” from the formation of the LLC to be subject to
Delaware’s jurisdiction on that basis.165 The court noted that the Dutch defendant’s
subsidiary held only a small interest in the new LLC, and that neither the defendant
nor the subsidiary controlled the LLC after it was created.166
The Court of Chancery followed EBG Holdings’ reasoning in In re Swervepay
Acquisition, LLC.167 There, the plaintiffs alleged that a defendant “took specific
fraudulent actions, which [were] the subject of [that] lawsuit, in order to effectuate
162
See Compl. ¶ 48.
163
Terramar Retail Ctrs., LLC v. Marion #2-Seaport Trust U/A/D/ June 21, 2002, 2017 WL
3575712, at *8 (Del. Ch. Aug. 18, 2017).
164
2008 WL 4057745 (Del. Ch. Sept. 2, 2008).
165
Id. at *6.
166
Id. at *6–7.
167
2022 WL 3701723, at *15 (Del. Ch. Aug. 26, 2022).
33
the [Purchase Agreement].”168 The plaintiffs continued that the relevant purchase
agreement contemplated forming three Delaware entities, which was a jurisdiction-
establishing transaction.169 Yet, the court concluded, “[t]his argument fails because
the Seller Complaint does not allege that [the defendant] played any role in forming”
the new entities.170 The court dismissed the defendant for a lack of personal
jurisdiction.171
In Mobile Diagnostic Group Holdings, LLC v. Suer,172 a plaintiff attempted
to use the formation of a Delaware entity as part of a larger transaction as a
jurisdictional hook over an individual who helped negotiate the transaction.173 The
Court of Chancery rejected that attempt, saying, “[t]hat plaintiffs (or the Sponsors)
chose to consummate the transaction using Delaware entities does not constitute an
act in Delaware by [the defendant] that would subject him to personal jurisdiction
under the long-arm statute.”174 Notably, though, the defendant’s participation in the
negotiations was limited to provisions that affected him, not the overall structure of
the transaction.175
168
Id. (third alteration in original).
169
Id.170
Id.171
Id.172
972 A.2d 799 (Del. Ch. 2009)
173
Id. at 807.
174
Id. at 808.
175
Id. at 808–09.
34
The Court also notes that, generally, “when a corporation creates a Delaware
entity, that action will not be attributed to the corporation’s officers and directors.”176
That is true even where the director or officer “directed the corporation to take that
act.”177 In contrast, where a director has a particularly close connection to the
creation of a Delaware entity—for example, by proposing the creation of the new
entity, becoming the founder and CEO of the new entity, and retaining a twenty
percent stake in the new entity—that can suffice under Section 3104(c)(1).178
Guided by these principles, the Court finds that the Individual Defendants
were too attenuated from the formation of the Matrix Entities to predicate
jurisdiction on that transaction. There are no allegations that the Individual
Defendants proposed forming the Matrix Entities in Delaware, received any personal
benefit from the formation of the Matrix Entities, or took any affirmative act specific
to forming the Matrix Entities. In fact, Plaintiffs’ allegations say little about what
role the Individual Defendants played in negotiating the SPA; Plaintiffs instead
focus on the Individual Defendants’ roles in preparing Mobileum for sale and the
due diligence process.179 Plaintiffs’ allegations only support an inference that the
176
Microsoft Corp. v. Amphus, Inc., 2013 WL 5899003, at *10 (Del. Ch. Oct. 31, 2013) (first
citing Hamilton Partners, L.P. v. Englard, 11 A.3d 1180, 1201 (Del. Ch. 2010); and then citing
Ruggiero v. FuturaGene, plc, 948 A.2d 1124, 1134 (Del. Ch. 2008)).
177
Ruggiero, 948 A.2d at 1134.
178
See Microsoft Corp., 2013 WL 5899003, at *10.
179
Separate from allegations related to due diligence, the SPA only claims that the Individual
Defendants “oversaw the sale process” and “made, participated in making, or caused to be made”
the Contested Representations. See Compl. ¶ 139. Based on those largely conclusory allegations,
35
Individual Defendants were aware H.I.G. would form the Matrix Entities to effect
the acquisition. Such awareness, without more, is not an adequate basis for the Court
to exercise personal jurisdiction over a nonresident.180
The citations Plaintiffs offer do not compel a different result. In the seminal
case, Papendick v. Bosch,181 the nonresident defendant directly formed the new
Delaware entity, which readily distinguishes Papendick from this case.182 The same
is true of In re P3 Health Group Holdings, LLC183 and Cairns v. Gelmon.184 Albert
the Court accepts for present purposes that the Individual Defendants had some role in the SPA’s
preparation, but Plaintiffs offer no hint as to the breadth of that role. Even in their briefing,
Plaintiffs only say, “Defendants negotiated terms sheets and agreements calling for the formation
of new Delaware entities[.]” Pls.’ Opp’n at 54. But that allegation refers to both the Individual
Defendants and the Audax Defendants generally, so it sheds no light on the Individual Defendants’
involvement in structuring the SPA. These vague allegations do not support that the Individual
Defendants were meaningfully involved in the decision to create the Matrix Entities. See In re
Swervepay, 2022 WL 3701723, at *15 (noting a defendant must “participate in the formation of a
Delaware entity in a meaningful fashion” for the Court to exercise jurisdiction on that basis
(cleaned up) (quoting EBG Hldgs., 2008 WL 4057745, at *7)).
180
Plaintiffs’ argument in this regard is reminiscent of the so-called “active-involvement theory”
in the context of applying forum selection clauses to non-signatories. See Neurvana Med., LLC v.
Balt USA, LLC, 2019 WL 4464268, at *7–8 (Del. Ch. Sept. 18, 2019). Putting aside nuances that
are immaterial here, the active-involvement theory would bind a non-signatory to a jurisdiction-
granting forum selection clause if the non-signatory was actively involved in the negotiation of the
relevant agreement. Id. Replacing “forum selection clause” in that sentence with “formation of a
Delaware entity” creates a fair approximation of Plaintiffs’ current argument. And yet, the active-
involvement theory has been squarely rejected by Delaware courts. Id.; see also BAM Int’l, LLC
v. MSBA Grp. Inc., 2021 WL 5905878, at *13–14 (Del. Ch. Dec. 14, 2021).
181
410 A.2d 148 (Del. 1979).
182
Id. at 149 (explaining the defendant “incorporated under the laws of the State of Delaware a
corporation . . . having one of its explicit purposes the function of serving as a vehicle for the
[at-issue] acquisition”).
183
2022 WL 8011513, at *5 (Del. Ch. Oct. 14, 2022) (explaining the defendant “caused [two
Delaware entities] to be formed so that they could engage in the Merger at issue”).
184
1998 WL 276226, at *1 (Del. Ch. May 21, 1998) (noting the defendants “incorporated [the
Delaware entity]”).
36
v. Alex. Brown Management Services, Inc.185 similarly held that the defendants “took
part in the formation of . . . two Delaware entities;”186 and Albert focused more on
the defendants’ “day-to-day management” of the new Delaware entities.187 So did
RJ Associates, Inc. v. Health Payors’ Organization L.P.,188 which is the precedent
Albert relied most heavily upon.189
Plaintiffs also cite the Court of Chancery’s opinion in In re General Motors
(Hughes) Shareholders Litigation.190 There, a nonresident corporate defendant,
“News,” was subjected to specific jurisdiction in Delaware based on its negotiation
of a merger transaction even though News did not directly engage in any acts within
Delaware.191 News did, however, have a major role in orchestrating the merger, and
the merger required the filing of a Certificate of Merger in Delaware.192 The court
thus concluded:
By negotiating and engaging in a transaction between itself, an indirect
Delaware subsidiary . . . , and another Delaware corporation . . . , in
which Delaware law was to be applied, and necessary acts by the parties
in furtherance of that transaction would be taken in Delaware, News
has “purposefully availed” itself of the laws of Delaware and should
185
2005 WL 2130607, at *14–16 (Del. Ch. Aug. 26, 2005).
186
Id.187
Id.188
1999 WL 550350, at *5 (Del. Ch. July 16, 1999) (“[The plaintiff] alleges more than the mere
formation of the Partnership as the basis for asserting in personam jurisdiction over [the
defendant].”).
189
See Albert, 2005 WL 2130607, at *15 (“The operative facts of this case, as alleged in the
complaints, are similar to those in RJ Associates.”).
190
2005 WL 1089021, at *22 (Del. Ch. May 4, 2005), aff’d, 897 A.2d 162 (Del. 2006).
191
Id. at *22–23.
192
Id.37
have reasonably anticipated being haled into a Delaware court for a
cause of action related to that transaction.193
The General Motors court emphasized the importance of Delaware providing a
forum in which to vindicate violations of Delaware-imposed fiduciary duties,
including claims for aiding and abetting such violations.194
Suer’s thoughtful distinction of General Motors resonates here.195 Like the
defendant in Suer, the Individual Defendants were involved in negotiating the at-
issue transaction but are not alleged to have been the driving force behind the SPA
like News was for the merger at issue in General Motors. The Suer court also
explained that the “most important[]” distinction with General Motors is the delta
between Delaware’s “obligation” to provide a forum in which to remedy breaches
of fiduciary duties owed to Delaware corporations and Delaware’s lesser interest in
hearing more ordinary civil disputes involving out-of-state parties.196 Where, like
Suer and here, the aforementioned “obligation” is not present, the plaintiff’s burden
under Section 3104(c)(1) is heavier than that imposed in General Motors.197
193
Id. at *23 (footnotes omitted).
194
Id. (“Delaware has an interest in ensuring that boards of directors of Delaware corporations
fulfill their fiduciary duties, an interest that would be undermined if entities that allegedly aid and
abet breaches of fiduciary duties of Delaware corporations could not be held accountable in
Delaware courts.”).
195
See Suer, 972 A.2d at 807–09.
196
Id. at 807.
197
Id. (“Th[e] obligation to provide such a forum informed the General Motors Court’s decision
to hold that even a relatively small act in Delaware by someone other than the defendant could
provide a basis for personal jurisdiction under § 3104(c)(1).”). Notably in this regard, then-
Chancellor Chandler decided both General Motors and Suer.
38
At bottom, the Court finds that the allegations pertaining to the Individual
Defendants are significantly closer to those in Suer than those in General Motors.
The Individual Defendants’ acquiescence to H.I.G. creating the Matrix Entities as
part of Mobile Acquisition Holdings’ sale of Mobileum did not amount to the
Individual Defendants transacting business in Delaware. Thus, Plaintiffs’ argument
pursuant to Section 3104(c)(1) fails to make a prima facie showing of jurisdiction
over the Individual Defendants. Since none of Plaintiffs’ jurisdictional theories are
availing, the claims against the Individual Defendants must be dismissed.198
II. PLAINTIFFS HAVE PLED REASONABLY CONCEIVABLE FRAUD CLAIMS.
Plaintiffs’ principal claims against Defendants allege common-law fraud. The
elements of common-law fraud are:
(1) a false representation made by the defendant; (2) the defendant
knew or believed the representation was false or was recklessly
indifferent to its truth; (3) the defendant intended to induce the plaintiff
198
Near the conclusion of Plaintiffs’ jurisdictional argument at the hearing, Plaintiffs requested
jurisdictional discovery for the first time. Tr. at 129:11–19. Defendants opposed that request on
rebuttal. Id. at 141:2–18. It is well-settled that “[i]ssues not addressed in briefing, and raised for
the first time during oral argument, are deemed waived.” CRE Niagara Hldgs., LLC v. Resort
Grp., Inc., 2021 WL 2110769, at *6 n.86 (Del. Super. May 25, 2021) (quoting Saunders v.
Preholdings Hampstead, LLC, 2012 WL 1995838, at *3 (Del. Super. May 23, 2012)). In this
multi-faceted litigation, the Court expects these highly sophisticated parties to timely raise any
arguments they wish to be considered; the Court will not be inclined to abide sandbagging absent
a strong justification. No such justification exists for this request. In any event, Plaintiffs did not
specify what discovery they would seek or how such discovery might support their claims.
Accordingly, even if Plaintiffs’ request were timely, it would not be sufficiently articulated. See
Chumash Cap. Invs., LLC v. Grand Mesa Partners, LLC, 2024 WL 1554184, at *10 (Del. Super.
Apr. 10, 2024) (“To obtain jurisdictional discovery, a plaintiff must articulate a good-faith reason
for it that is neither futile nor the launch of a drag net fishing expedition.” (internal quotation marks
omitted) (quoting Green Am. Recycling, LLC v. Clean Earth, Inc., 2021 WL 2211696, at *8 (Del.
Super. June 1, 2021))).
39
to act or refrain from acting; (4) the plaintiff acted or refrained from
acting in justifiable reliance on the representation; and (5) damage
resulted from such reliance.199
Superior Court Civil Rule 9(b) heightens the pleading standard for fraud
claims.200 Pursuant to that Rule, a plaintiff must plead with particularity “the time,
place, and contents of the false representations; the facts misrepresented; the identity
of the person(s) making the representation; and what that person(s) gained from
making the misrepresentation.”201 In contrast, under Rule 9(b), “knowledge and
other condition of mind of a person may be averred generally.”202
“When a party sues based on a written representation in a contract . . . it is
relatively easy to plead a particularized claim of fraud” because the surrounding
circumstances are largely evidenced by the contract itself. 203 Therefore, once a
plaintiff identifies purportedly false contractual representations, “the plaintiff need
only allege facts sufficient to support a reasonable inference that the representations
were knowingly false.”204
In this Motion, Defendants primarily challenge the adequacy of Plaintiffs’
pleading with regard to the knowledge element.205 Defendants also argue that
199
Valley Joist BD Hldgs., LLC v. EBSCO Indus., Inc., 269 A.3d 984, 988 (Del. 2021) (citing
Prairie Cap. III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 49 (Del. Ch. 2015).
200
Id.201
Id. (citations omitted).
202
Id. (quoting Super. Ct. Civ. R. 9(b)).
203
Prairie Cap., 132 A.3d at 62.
204
Id.205
Defs.’ Mot. at 28–41.
40
Plaintiffs have not satisfied Rule 9(b) with regard to the falsity element.206 The Court
reviews those arguments in turn.
A. Plaintiffs Have Raised a Fair Inference that Defendants Knew of
the Fraud.
The parties are in accord that the SPA forecloses claims of reckless fraud and
only permits claims of knowing fraud.207 This limitation is permitted under
Delaware law.208 Where the parties diverge is whether Plaintiffs have adequately
pled knowing—as opposed to reckless—fraud by Defendants. The parties have
effectively centered their dispute on what is required to plead knowing fraud when
a contract expressly prohibits claims of reckless fraud.209 Thus, the Court will pay
particular attention to the applicable standard before applying that standard to
Plaintiffs’ Complaint.
1. The “Position to Know” Standard Applies for Pleading Purposes.
Plaintiffs argue they adequately pled Defendants’ knowledge of the fraud
because Plaintiffs’ Complaint raises a reasonable inference that the falsity of the
Contested Representations was knowable and Defendants were in a position to know
it.210 Defendants retort that using a “position to know” standard would be
206
Id. at 41–42.
207
See Pls.’ Opp’n at 20.
208
See Express Scripts, Inc. v. Bracket Hldgs. Corp., 248 A.3d 824, 830–32 (Del. 2021)
(discussing ABRY Partners V, L.P. v. F&W Acq. LLC, 891 A.2d 1032 (Del. Ch. 2006)).
209
See Pls.’ Opp’n at 23–25; Defs.’ Reply at 5–14.
210
Pls.’ Opp’n at 27.
41
tantamount to permitting a claim for reckless fraud in contravention of the SPA. 211
Defendants posit that Plaintiffs are required to allege facts demonstrating
“Defendant[s’] actual knowledge of, or involvement in, the specific fraud [Plaintiffs]
allege.”212 Contrary to Defendants’ protestations, Plaintiffs accurately describe the
current state of Delaware law.
As the Supreme Court of Delaware recited in one of its most recent
descriptions of the pleading requirements for a fraud claim, “where pleading a claim
of fraud has at its core the charge that the defendant knew something, there must, at
least, be sufficient well-pled facts from which it can reasonably be inferred that this
‘something’ was knowable and that the defendant was in a position to know it.”213
This Court and the Court of Chancery—which, of course, defer to the Supreme
Court—have used the same language to describe pleading knowing fraud.214
This standard is not a particularly recent development. The above phrasing
of the position-to-know test was introduced to Delaware’s jurisprudence more than
two decades ago in Iotex Communications, Inc. v. Defries.215 Defendants cannot
211
Defs.’ Reply at 7–8.
212
Id. at 14.
213
Valley Joist BD Hldgs., 269 A.3d at 988 (emphasis added) (quoting Trenwick Am. Litig. Tr. v.
Ernst & Young, L.L.P., 906 A.2d 168, 208 (Del. Ch. 2006)).
214
See Sofregen Med. Inc. v. Allergan Sales, LLC, 2023 WL 2034584, at *11 (Del. Super. Feb. 3,
2023) (quoting ABRY Partners, 891 A.2d at 1050); In re Swervepay, 2022 WL 3701723, at *20
(quoting Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 147
(Del. Ch. 2005)).
215
1998 WL 914265, at *4 (Del. Ch. Dec. 21, 1998) (“[W]here pleading a claim of fraud . . . that
has at its core the charge that the defendant knew something, there must, at least be sufficient well-
42
argue that Iotex’s pronouncement was made in the context of recklessness. The
relevant portion of Iotex analyzed a breach of fiduciary duty claim subject to Rule
9(b) in which “a central element . . . rest[ed] on the general allegation that [the
defendant] ‘knew’ as a ‘fact’ (and failed to disclose) something about the state of
mind of [an affiliate] and others during the period of negotiation of the
Agreements.”216 The word “reckless” does not appear anywhere in Iotex.
Defendants are, in a sense, correct that this standard draws a “distinction
between the scienter element [Plaintiffs] must prove at trial (intentional fraud) and
what [Plaintiffs must] allege at the motion-to-dismiss stage (mere ‘position to
know’).”217 Defendants are incorrect, however, that there is no justification for such
a distinction. The justification lies in Delaware’s “minimal” and “plaintiff friendly”
pleading standard, which denies dismissal if there is even “a possibility of
recovery.”218 And while Rule 9(b) raises the standard for most elements of fraud,
the scienter element is explicitly exempted because Delaware law holds that “any
attempt to require specificity in pleading a condition of mind would be unworkable
and undesirable.”219
pleaded facts from which it can reasonably be inferred that this ‘something’ was knowable and
that the defendant was in a position to know it.”).
216
Id. (emphasis added).
217
Defs.’ Reply at 9.
218
See G-New, Inc. v. Endurance Am. Ins. Co., 2022 WL 4128608, at *2 (Del. Super. Sept. 12,
2022) (citations omitted).
219
ABRY Partners, 891 A.2d at 1050 (quoting Desert Equities, Inc. v. Morgan Stanley Leveraged
Equity Fund, II, L.P., 624 A.2d 1199, 1208 (Del. 1993)).
43
In effect, the position-to-know test simply describes the allegations that make
it reasonably conceivable that a defendant knew something. Stated differently, if a
defendant was in a position to know a knowable fact, it is reasonably conceivable
that the defendant did know that fact. In this way, the position-to-know test does not
lower the pleading standard for knowledge, it only articulates more clearly how the
ordinary reasonable conceivability standard is met.
Defendants also argue the myriad cases that apply the position-to-know test
to fraud claims are inapposite because none of them dealt with contractual language
expressly disclaiming reckless fraud.220 The Court does not see that as a controlling
distinction. As explained above, the position-to-know test applies to pleading
knowledge, not recklessness. As such, even though alleging knowledge is
contractually required in this matter, the actual element that Plaintiffs must plead is
no different than in the cases that apply the position-to-know test. Accordingly, to
adequately plead knowledge in this case, Plaintiffs must raise a reasonable inference
that the fraud was knowable and Defendants were in a position to know about it.221
220
Defs.’ Reply at 7–8.
221
Defendants are not the first to resist application of the position-to-know test in the context of
contractual fraud. In EMSI Acquisition, Inc. v. Contrarian Funds, LLC, the defendants “urge[d]
th[e] court to take guidance from federal securities fraud cases and adopt a more searching pleading
standard that would impose a ‘stringent rule for inferences involving scienter.’” 2017 WL
1732369, at *13 (Del. Ch. May 3, 2017) (footnote omitted) (quoting Teamsters Local 445 Freight
Div. Pension Fund v. Dynex Cap. Inc., 531 F.3d 190, 194 (2d Cir. 2008)). The Court of Chancery
rejected that argument and applied the position-to-know test. Id. at *13–14.
44
2. It is Reasonable to Infer that Defendants were in a Position to
Know about Knowable Fraud.
Although the position-to-know test is a lower standard than particularity, the
Court stresses that it is not a perfunctory analysis. To the contrary, the position-to-
know test serves as a check on the broad language of “pled generally.”222 Even still,
Defendants’ staunch resistance to application of the position-to-know test presages
their inability to dispel the inference that Defendants were in a position to know
about knowable fraud. The bulk of Defendants’ response to Plaintiffs’ invocation
of the position-to-know test is dedicated solely to the supposed inapplicability of
that standard.223 Having decided against Defendants on that threshold question, the
ensuing analysis is relatively straightforward on these facts.
The Complaint alleges in detail that the Individual Defendants—who are not
subject to this Court’s jurisdiction but whose knowledge can nevertheless be
imputed to their employers224—worked closely with Mobileum employees to
222
See ABRY Partners, 891 A.2d at 1050 (citing Albert, 2005 WL 2130607, at *11).
223
Defs.’ Reply at 5–14.
224
See, e.g., EMSI Acq., 2017 WL 1732369, at *13 (imputing employee’s knowledge to their
corporate employer for purposes of fraud allegations). Defendants contend that Warner’s
knowledge cannot be imputed to the Audax Defendants. See Defs.’ Mot. at 33–41. Defendants
make no similar argument with respect to the Individual Defendants, who are alleged to have been
working directly for the Audax Defendants while managing Mobileum. Because the Court finds
that it is reasonably conceivable that Defendants knew about the alleged fraud even without
imputing Warner’s knowledge, the Court need not decide at this stage whether Warner’s
knowledge can be imputed to the Audax Defendants.
45
prepare Mobileum for sale. In this regard, Plaintiffs allege the Individual
Defendants:
were deeply imbedded in Mobileum’s day-to-day management and
operation (for which they collected hefty management fees); set
Mobileum’s overall business and growth strategy; sourced and led
diligence of Mobileum’s acquisition targets; set the compensation of
Mobileum’s senior management; received monthly, weekly, and at
times daily updates from Mobileum’s senior management on their
revenue recognition and acceleration schemes; set what they knew to
be unrealistic revenue, earnings, and booking targets; had full access to
Mobileum’s internal revenue database and its customer lists; were
alerted to reporting, compliance, and substantive issues with
Mobileum’s financial data; and led the overall sale process, including
crafting narratives around Mobileum’s revenue and earnings growth.
Bhatia, Doran, and Mack in turn acted as directors and officers of
Mobile Acquisition Holdings, LP and the Audax Defendants, who thus
gained knowledge of fraudulent schemes and the falsity of the False
Representatives and Warranties.225
This involvement was not limited to the big-picture development of Mobileum.
Plaintiffs allege, for example, that Bhatia conferred with Warner via email
regarding specific cash flow estimates.226 That conversation included Bhatia asking
whether the figures were kept internal and telling Warner, “I assume [the potential
buyer] will see something better.”227 The Complaint also alleges that in December
2021, Bhatia instructed Mobileum not to answer certain questions from H.I.G. about
Mobileum’s audited financials and gave instructions about “how to position certain
225
Compl. ¶ 142.
226
Id. ¶ 117.
227
Id. (alteration in original).
46
numbers.”228 Similarly, just days before the parties executed the SPA, Bhatia
allegedly instructed Warner to lie to H.I.G. about the reason a specific booking did
not generate any revenue for more than a year.229 Plaintiffs allege that Warner then
communicated Bhatia’s false explanation to H.I.G.230 Likewise, Srinivasan’s email
touting the purportedly fraudulent unbilled revenue numbers was sent to both Bhatia
and Doran.231
As a whole, the Complaint alleges that the Audax Defendants—through
Bhatia, Doran, and others—were closely involved with the preparation of
Mobileum’s allegedly fraudulent financials and the presentation of the same to
H.I.G.232 Audax even allegedly came to Mobileum’s aid when an accounting firm
representing another potential buyer uncovered “material” problems with
Mobileum’s accounting practices, which led that buyer to terminate negotiations.233
According to Plaintiffs, Audax pressured the accounting firm to not share the firm’s
discovery with others and had Bhatia work with Srinivasan to “conceal the reason”
that buyer walked away.234
228
Id. ¶ 120.
229
Id. ¶ 121.
230
Id.
231
Id. ¶ 78.
232
See id. ¶ 124 (“Through the Individual Defendants and others, Audax remained in constant
communication with Warner and Srinivasan, collaborated with them on the presentation of key
financial metrics, and signed off on their communications with H.I.G. and other potential buyers,
including the contracted-for representations and warranties[.]”).
233
Id. ¶ 127.
234
Id.
47
As Defendants emphasize, none of those allegations directly show that
Defendants knew about the three pillars of alleged fraud. Those allegations do,
however, suggest that Defendants were in a position to know about the three pillars
of fraud if such fraud was actually occurring. That is, because Defendants were
deeply ingrained in preparing Mobileum for sale, it is reasonable to infer that
Defendants knew about the alleged, “pervasive” efforts to fraudulently boost
Mobileum’s revenue and bookings numbers.235
This is not a case where the plaintiffs allege that a seller should be liable for
not catching the omission of “a few miscellaneous line items . . . that should have
been included.”236 Defendants seek to portray the falsified timesheets, invoices, and
bookings as “administrative minutiae.”237 But while such documents might be
relatively insignificant when kept accurately, the decision to falsify them is hardly
routine. In fact, senior Mobileum executives—including Warner—allegedly
described the creation of dummy invoices as an “immediate priority” and a “top
priority.”238 The priorities of senior executives cannot fairly be called
“administrative minutiae.”
235
See ITW Glob. Invs. Inc. v. Am. Indus. Partners Cap. Fund IV, L.P., 2017 WL 1040711, at *8–
9 (Del. Super. Mar. 6, 2017) (explaining that “[k]knowledge in fraud cases is often proven by
circumstantial evidence”).
236
See Roma Landmark Theaters, LLC v. Cohen Exhibition Co. LLC, 2020 WL 5816759, at *14–
15 (Del. Ch. Sept. 30, 2020).
237
Defs.’ Mot. at 30.
238
Compl. ¶¶ 75–76.
48
Nor is this a case like that cautioned against in ABRY Partners, where the
seller undertook little oversight of its subsidiary and was essentially at the same risk
as the buyer of being defrauded by the subsidiary’s executives.239 The evidence
might bear out that Defendants were just as deceived as Plaintiffs allegedly were, if
any deception occurred at all. But for now, the allegations of Defendants’ assiduous
management of Mobileum create a reasonable inference that Defendants would have
known about widespread fraud occurring at Mobileum. For that reason, Plaintiffs’
allegations of Defendants’ knowledge suffice to withstand this Motion.
B. Plaintiffs Have Raised a Fair Inference that the SPA Contained
False Representations.
Defendants next argue that Plaintiffs’ Complaint fails to put Defendants on
notice of how the Contested Representations were false.240 Defendants do not argue,
however, that the Contested Representation could be accurate if Plaintiffs’
allegations are true, which the Court must assume at this stage. This portion of
Defendants’ Motion does not require extensive discussion.
The Court first notes that the Court’s role at this stage is not to distill the
representations that can support a viable fraud claim from those that cannot; instead,
the Court’s task is to assess whether each aggregated claim of fraud adequately
239
See ABRY Partners, 891 A.2d at 1062–63.
240
Defs.’ Mot. at 41.
49
pleads the essential elements.241 The standard used to measure falsity at the pleading
stage is whether the plaintiff’s allegations “support a reasonable inference” that the
at-issue representations were “materially misleading.”242
Defendants’ position that Plaintiffs’ allegations of falsity are impermissibly
vague is belied by the Complaint. Paragraph 107 of the Complaint contains a chart
comparing side-by-side the SPA’s representations and Plaintiffs’ rendition of “The
Truth.”243 Reproducing the full details of that chart is unnecessary in this instance
because, if Plaintiffs’ allegations are true, the resulting falsity of several Contested
Representations would be apparent. In brief, the Contested Representations form
three basic categories: (1) the material accuracy of Mobileum’s financial statements,
bookkeeping, and tax returns;244 (2) Mobileum operating in the “Ordinary Course of
Business” and not suffering any “Material Adverse Effects;”245 and (3) Mobileum
241
See Cablemaster LLC v. Magnuson Grp. Corp., 2023 WL 8678043, at *7 (Del. Super. Dec. 5,
2023) (“Once the Court determines the claim as a whole is sound, testing the strength of every
individual girder is inessential.”); but see FlexWage Sols. LLC v. Ceridian HCM Hldg. Inc., 2024
WL 2132620, at *7 n.119 (Del. Super. May 13, 2024) (permitting the parsing of an aggregated
breach-of-contract claim where a particular defendant and an entire contract could be removed
from the controversy).
242
LVI Grp. Invs., LLC v. NCM Grp. Hldgs., LLC (LVI Grp. I), 2018 WL 1559936, at *12 (Del.
Ch. Mar. 28, 2018); accord EMSI Acq., 2017 WL 1732369, at *15 (“[T]he Complaint supports a
pleading-stage inference that the Company intentionally misled the Buyer with respect to [an
allegedly false] representation.”).
243
Compl. ¶ 107.
244
Id. (citing SPA §§ 4.05(a)–(b), 4.09(b)).
245
Id. (citing SPA §§ 4.06, 4.22(a)).
50
materially complying with all applicable laws and not subjecting Mobileum to
adverse legal claims.246
If Plaintiffs’ allegations are true, Mobileum’s financial misfeasance would
have necessarily involved illegitimate bookkeeping, misleading financial
statements, and, likely, inaccurate tax filings. Similarly, the three pillars of alleged
fraud are not indicative of the ordinary course of business, and Delaware courts have
found an inference of a material adverse effect in comparable instances of internal
financial manipulation.247 Last, the falsification of financial documents—including
producing backdated invoices for work that had not been performed—is inconsistent
with several laws248 and put Mobileum at risk of litigation.
In sum, Plaintiffs’ allegations raise a reasonable inference that the Contested
Representations were false. The Court emphasizes that Plaintiffs have yet to prove
these claims, and Defendants may be able to demonstrate the truth of the Contested
Representations once the pleading stage’s imbalanced standards are set aside. For
now, though, Plaintiffs’ fraud claims survive dismissal as to the Audax Defendants.
246
Id. (citing SPA §§ 4.12, 4.15(a)).
247
See EMSI Acq., 2017 WL 1732369, at *15 (citing Osram Sylvania Inc. v. Townsend Ventures,
LLC, 2013 WL 6199554, at *7–9 (Del. Ch. Nov. 19, 2013)).
248
See, e.g., 11 Del. C. § 871(c) (“Falsifying business records is a class A misdemeanor.”).
51
III. PLAINTIFFS HAVE PLED REASONABLY CONCEIVABLE CLAIMS OF AIDING
AND ABETTING AND CIVIL CONSPIRACY.
Plaintiffs also bring claims for aiding and abetting fraud and civil conspiracy
(together, the “Secondary Fraud Claims”). To state a claim of aiding and abetting
fraud, the plaintiff must allege: “(i) underlying tortious conduct, (ii) knowledge, and
(iii) substantial assistance.”249 To state a claim of civil conspiracy, the Plaintiff must
allege that: “two or more persons combined or agreed with the intent to do an
unlawful act or to do an otherwise lawful act by unlawful means.” 250 When fraud is
the underlying unlawful act, both torts fall under Rule 9(b).251 Although these torts
are distinguishable, “Delaware decisions have largely equated the two theories,
noting that they often cover the same ground and that the distinctions usually are not
material.”252
In opposition to the Secondary Fraud Claims, Defendants primarily rely on
SPA provisions that purport to waive any claims for conspiracy or aiding and
abetting.253 Defendants also argue that even if the Secondary Fraud Claims are not
249
RGIS Int’l Transition Holdco, LLC v. Retail Servs. Wis Corp., 2024 WL 568515, at *5 (Del.
Super. Feb. 13, 2024) (quoting Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I,
LLLP, 2014 WL 6703980, at *23 (Del. Ch. Nov. 26, 2014)).
250
Id. (quoting In re Transamerica Airlines, Inc., 2006 WL 587846, at *6 (Del. Ch. Feb. 28,
2006)).
251
Id. at *5 n.60 (collecting authority).
252
New Enter. Assocs. 14, L.P. v. Rich, 292 A.3d 112, 176 (Del. Ch. 2023) (citations omitted).
The main difference between the two is that “[a]iding and abetting is a cause of action that focuses
on the wrongful act of providing assistance, unlike civil conspiracy that focuses on the agreement.”
Id. at 177 (quoting WaveDivision Hldgs., LLC v. Highland Cap. Mgmt., L.P., 2011 WL 5314507,
at *17 (Del. Super. Nov. 2, 2011)).
253
Defs.’ Mot. at 45–47.
52
contractually barred, Plaintiffs have failed to adequately plead them.254 The Court
addresses each argument in turn.
A. The Terms of a Fraudulently Procured Contract Cannot Exempt
from Liability Entities that were Knowingly Complicit in the
Fraud.
Defendants urge that SPA Section 9.01(b) prohibits Plaintiffs from bringing
the Secondary Fraud Claims. The most relevant language reads, “no Buyer Related
Parties may avoid any limitation on liability set forth herein . . . by . . . asserting any
claim against any Non-Recourse Party for conspiracy, [or] aiding or abetting[.]”255
Plaintiffs argue that such clauses are unenforceable under Delaware law when
knowing fraud is the underlying tort.256 Defendants respond that because the SPA
prohibits the Secondary Fraud Claims more explicitly than the non-recourse and
exclusive remedy provisions in previous cases, the Court should enforce the SPA’s
plain language.257 For the reasons that follow, the Court finds that under Delaware
law, the terms of a fraudulently procured contract cannot exempt from liability
entities that were knowingly complicit in the fraud, including entities that aided,
abetted, or conspired to commit such fraud.
254
Id.255
SPA § 9.01(b). SPA § 11.17(b) also purports to broadly waive claims against the Non-
Recourse Parties, which includes Defendants. See supra note 105.
256
Pls.’ Opp’n at 45–47.
257
Defs.’ Reply at 25–27.
53
1. Guiding Precedent
The SPA’s particularly precise provisions with respect to limiting fraud
liability create a scenario for which neither the parties nor the Court located a perfect
analogue—i.e., the express disclaimer of aiding and abetting and conspiracy claims
in a case alleging knowing fraud. Notwithstanding that fact, the Court is not
venturing into uncharted legal territory. To the contrary, the seminal case ABRY
Partners has been followed up with nearly two decades’ worth of incremental
development of the extent to which contracting parties can limit fraud liability. The
Court’s holding here is a natural corollary of that existing precedent.
Beginning with ABRY Partners, that decision has been summarized and
analyzed many times before.258 The Supreme Court, in Express Scripts, explained
and reaffirmed ABRY Partners’ holding.259 The central tension that ABRY Partners
resolved is Delaware’s “especially strong” respect for freedom of contract weighed
against American courts’ “strong tradition” of prohibiting the contractual waiver of
fraud claims.260 To balance those competing policies, then-Vice Chancellor Strine
258
See, e.g., RAA Mgmt., LLC v. Savage Sports Hldgs., Inc., 45 A.3d 107, 116–19 (Del. 2012);
Prairie Cap., 132 A.3d. at 59–61; AmeriMark Interactive, LLC v. AmeriMark Hldgs., LLC, 2022
WL 16642020, at *5–8 (Del. Super. Nov. 3, 2022); Online HealthNow, Inc. v. CIP OCL Invs.,
LLC, 2021 WL 3557857, at *11–20 (Del. Ch. Aug. 12, 2021); Aveanna Healthcare, LLC v.
Epic/Freedom, LLC, 2021 WL 3235739, at *16–21 (Del. Super. July 29, 2021); Anschutz Corp. v.
Brown Robin Cap., LLC, 2020 WL 3096744, at *7–8 (Del. Ch. June 11, 2020); Roma Landmark
Theaters, 2020 WL 5816759, at *14–17.
259
Express Scripts, 248 A.3d at 830.
260
Id. (quoting ABRY Partners, 891 A.3d at 1059–60).
54
held that contracting parties could allocate the risk of reckless and negligent
misrepresentations by waiving resulting claims, but a contracting party cannot limit
its “exposure for its own conscious participation in the communication of lies to the
[counterparty].”261 In other words, if a defendant “acted with an illicit state of mind”
in fraudulently procuring a contract, public policy forbids such person from using
the terms of that contract to avoid liability.262
Importantly, as explained in Prairie Capital, ABRY Partners’ holding does
not only apply to the entity that directly made the false contractual representation.263
In Prairie Capital, a fraud claim against a private equity fund and its managers
survived a motion to dismiss because the counterclaim-plaintiff adequately alleged
that those defendants knew the target company’s representations were false.264 As
the Court of Chancery later recounted, “[t]he court [in Prairie Capital] reasoned
that, although under the terms of the stock purchase agreement only the company
made the representations, the scope of a claim for contractual fraud sweeps more
broadly to cover those who knew that such representations were false.”265
In Online HealthNow, then-Vice Chancellor Slights further elucidated that
doctrine.266 As relevant here, Online HealthNow examined the enforceability of a
261
Id. (quoting ABRY Partners, 891 A.2d at 1064).
262
ABRY Partners, 891 A.2d at 1064.
263
Prairie Cap., 132 A.3d at 59–61 (citations omitted).
264
Id. at 61–62.
265
Online HealthNow, 2021 WL 3557857, at *13 (cleaned up) (emphasis in original).
266
Id. at *2.
55
non-recourse provision where the plaintiff alleged knowing fraud.267 Similarly to
the SPA here, the agreement in Online HealthNow broadly waived claims against
non-parties and said:
“no officer, director, partner, manager, equityholder, employee or
Affiliate of any Party . . . will have any liability or obligation with
respect to [the SPA] or with respect to any claim or cause of action
(whether in contract, tort or otherwise)” arising out of or related to the
SPA “(including a representation or warranty made in connection with
[the SPA] or as an inducement to enter into [the SPA]).”268
Following an “explication de texte” of ABRY Partners and its progeny, the court in
Online Healthnow held that “[b]ecause Plaintiff has well pled that [a non-recourse
party] did, in fact, know of and facilitate the fraudulent misrepresentations in the
SPA . . . [the non-recourse party] cannot invoke the non-recourse provision to avoid
liability under ABRY Partners and its progeny.”269
This Court, in AmeriMark, followed Online HealthNow and held: “Public
policy against fraud may defeat . . . non-recourse contractual language at the motion
to dismiss stage in litigation, if the plaintiff can adequately plead that a non-signatory
party was knowingly complicit when a contracting party made fraudulent
representations in a contract.”270 The AmeriMark court then analyzed fraud-based
267
Id.
268
Id. at *5 (alterations and omission in original).
269
Id. at *11–16, 20.
270
AmeriMark, 2022 WL 16642020, at *8.
56
aiding and abetting and conspiracy claims notwithstanding the “very broad” non-
recourse provision.271
The Court is similarly guided by LVI Group.272 There, the Court of Chancery
faced a circumstance analogous to this one. The relevant exclusive remedy
provision carved out “claims for fraud against the Person who committed such
fraud.”273 The court was then asked to decide whether the plaintiff could
nevertheless bring a fraud-based civil conspiracy claim.274 The court spared the
conspiracy claim from Rule 12(b)(6), initially citing ambiguity as to the application
of the exclusive remedy provision.275 The court later confirmed that the exclusive
remedy provision did not apply to fraud-based conspiracy claims and allowed those
claims to proceed past summary judgment.276
The LVI Group court explained that conspiracy law attributes one
conspirator’s acts to each co-conspirator, so “[i]n a sense . . . all members of a
conspiracy to commit fraud have ‘committed such fraud,’ as the [relevant
271
Id. at *11–13. To address the defendants’ contention that the non-recourse provision barred
the aiding and abetting claim, the court in AmeriMark only said, “[t]he Court previously has found
that the non-recourse provision does not bar claims for fraud under the circumstances presented in
this case.” Id. at *12. The court did not mention the non-recourse provision when discussing the
conspiracy claim. Id. at *12–13.
272
2018 WL 1559936, at *14.
273
Id. (emphasis added). The Court notes that the SPA’s definition of Fraud embraces a similar
limitation. See SPA § 10.01 (“A claim for Fraud may only be made against the Party committing
such Fraud.”).
274
LVI Grp. I, 2018 WL 1559936, at *14.
275
Id.276
LVI Grp. Invs., LLC v. NCM Grp. Hldgs., LLC (LVI Grp. II), 2019 WL 7369198, at *29–30
n.299, 301 (Del. Ch. Dec. 31, 2019) (citations omitted).
57
agreement] requires. If that is correct, [plaintiff] may pursue a claim for conspiracy
to defraud against the [conspiracy defendants] without running afoul of the exclusive
remedies clause.”277 As noted, the court ultimately adopted that interpretation.278
2. Application of the Established Doctrine
Three accepted premises emerge from settled law that, when taken together,
compel the Court’s conclusion: (1) the critical factor under ABRY Partners and its
progeny is the defendant’s illicit mental state; (2) ABRY Partners’ holding that
contractual provisions cannot displace liability for knowing fraud does not only
apply to the entity that directly made the misrepresentation; and (3) the Secondary
Fraud Claims have knowing complicity as an essential element. Together, those
established rules reflect that when a plaintiff adequately pleads that a defendant
knowingly promoted279 fraud, the defendant cannot shield itself from liability by
relying on protections in the fraudulently procured contract.
Delaware law is clear that the Secondary Fraud Claims require an illicit mental
state.280 As this Court recently stated, “[a] civil conspiracy claim requires a plaintiff
277
LVI Grp. I, 2018 WL 1559936, at *14.
278
LVI Grp. II, 2019 WL 7369198, at *30 n.301
279
The Court uses the term “promoted” as shorthand for the “encouragement or assistance” that
can support aiding and abetting, see Yangaroo Inc. v. Duplication Media Servs., 2024 WL
2791100, at *10 (Del. Super. May 30, 2024) (citation omitted), as well as the “agreement or
common design” that can support civil conspiracy, see LVI Grp. I, 2018 WL 1559936, at *16
(citation omitted).
280
See RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 862 (Del. 2015) (“The aider and abettor
must act . . . with an ‘illicit state of mind.’” (quoting In re Oracle Corp., 867 A.2d 904, 931 (Del.
Ch. 2004)); LVI Grp. II, 2019 WL 7369198, at *30 (“Conspiracy is an intentional tort[.]”).
58
establish that ‘two or more persons combined or agreed with the intent to do an
unlawful act or to do an otherwise lawful act by unlawful means.’”281 Stated
differently, “[a] plaintiff alleging civil conspiracy must . . . prove ‘knowing
participation’ among the conspiring partners[.]”282 Aiding and abetting similarly
requires that the defendant “knowingly assisted” the fraud.283 Indeed, “[t]he most
critical element for an aiding-and-abetting claim is knowing participation.”284
There is a caveat to the above, however. Like fraud’s scienter requirement,
the relevant knowledge for aiding and abetting can ordinarily be satisfied by
“constructive knowledge,” which entails “reckless indifference” to the truth.285
ABRY Partners held that the risk of reckless fraud could fairly be allocated by
contracting parties, including by waiving such claims.286 That reasoning neatly ports
to claims of reckless aiding and abetting. Accordingly, the remainder of this
discussion pertains only to aiding and abetting claims based on actual knowledge,
rather than constructive knowledge, of the underlying fraud.
281
RGIS Int’l, 2024 WL 568515, at * 5 (emphasis added) (quoting In re Transamerica Airlines,
2006 WL 587846, at *6).
282
Ogus v. SportTechie, Inc., 2023 WL 2746333, at *14 (Del. Ch. Apr. 3, 2023) (emphasis added)
(quoting Binks v. DSL.net, Inc., 2010 WL 1713629, at *11 (Del. Ch. Apr. 29, 2010)).
283
Yangaroo, 2024 WL 2791100, at *10; see also Atl. NWI, LLC v. Carlyle Grp. Inc., 2022 WL
15800272, at *1 (Del. Ch. Oct. 28, 2022) (explaining aiding and abetting “requires a defendant’s
knowing assistance”).
284
Principal Growth Strategies, LLC v. AGH Parent LLC, 2024 WL 274246, at *10 (Del. Ch.
Jan. 25, 2024).
285
See RBC Cap. Mkts., 129 A.3d at 862 (citations omitted).
286
ABRY Partners, 891 A.2d at 1064 n.82.
59
The Court now turns to the other two premises. ABRY Partners’ well-
established holding is based upon the “moral difference between a lie and an
unintentional misrepresentation” as well as the “practical difference between lies
and unintentional misrepresentations.”287 The moral difference justifies courts’
reluctance “to enforce contracts excusing liars for responsibility for the harm their
lies caused.”288 The practical difference explains the legitimate basis to disclaim
reckless misrepresentations—namely, risk allocation—that is absent in the context
of knowing misconduct.289 Those factors similarly apply to the Secondary Fraud
Claims.
Morally, abettors and conspirators make the choice to promote tortious
conduct that causes harm to third parties. Neither justice nor social norms are served
by enabling bad actors to make that choice without fear of legal repercussions.
Practically, the scienter element of the Secondary Fraud Claims already protects
from liability those who inadvertently assist or act alongside fraudsters.290 Thus,
even in the absence of contractual protection, an actor can confidently avoid liability
287
Id. at 1062.
288
Id.289
Id.290
Cf. In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214, at *41 (Del. Ch. Aug. 27,
2015) (“Because the involvement of secondary actors in tortious conduct can take a variety of
forms that can differ vastly in their magnitude, effect, and consequential culpability, the element
of ‘knowing participation’ requires that the secondary actor have provided ‘substantial assistance’
to the primary violator.” (citation omitted)).
60
for Secondary Fraud Claims simply by declining to promote fraud. 291 As in ABRY
Partners, those considerations counsel against permitting the contractual waiver of
the Secondary Fraud Claims.
The Court also finds important Delaware courts’ refusal to narrowly apply
ABRY Partners to the party that made the misrepresentation. Instead, “as a matter
of public policy, the scope of a claim for contractual fraud swe[eps] more
broadly.”292 To that end, anyone who causes another to make a knowingly false
representation can also be liable as a principal fraudster.293 Of course, the Secondary
Fraud Claims are only necessary to hold liable those who are not principal fraudsters.
Still, the Court sees substantial overlap in the wrongfulness of causing another to
make a false statement and the wrongfulness of either substantially assisting or
agreeing to another making a false statement. In each circumstance, the actor is
consciously participating in a course of conduct that leads to someone else
defrauding a third party. The shared culpability of secondary tortfeasors is reflected
291
The Court recognizes, as did ABRY Partners, that there remains the unfortunate risk of judicial
error or uncompensated costs from successfully defending a claim. 891 A.2d at 1062. But, as
ABRY Partners concluded, that risk does not justify broadly sanctioning the conscious promotion
of fraud. The Court also notes that the risk of uncompensated litigation costs can be effectively
mitigated by a contractual fee-shifting provision. See Bako Pathology LP v. Bakotic, 288 A.3d
252, 280–81 (Del. 2022) (explaining that “‘prevailing party’ clauses” provide a viable exception
to the American Rule).
292
Prairie Cap., 132 A.3d at 60.
293
Id. at 59–61. Specifically, a defendant can be liable “if the misrepresentation, although not
made directly to the other, is made to a third person and the maker intends or has reason to expect
that its terms will be repeated or its substance communicated to the other, and that it will influence
his conduct in the transaction.” Id. at 59 (quoting Restatement (Second) of Torts § 533 (1977)).
61
by the law’s willingness to hold them jointly and severally liable for the underlying
tort.294
Finally, although these parties invited a detailed analysis of this issue, the
Court reiterates that this is not a new rule. Rather, this conclusion merely follows
the holdings in AmeriMark and LVI Group. The only difference here is that the
SPA’s attempt to preclude secondary liability was more explicit than in past cases.
But the non-recourse provision in AmeriMark waived as to non-parties, “all claims,
obligations, liabilities, or cause[s] of action (whether in Contract or in tort, in law or
in equity)” connected to the relevant agreement.295 That “very broad” language
putatively barred aiding and abetting and civil conspiracy claims, but such claims
were nevertheless permitted.296 Likewise, given LVI Group’s holding that “all
members of a conspiracy to commit fraud have committed that fraud,”297 allowing
co-conspirators to contractually avoid fraud liability would conflict with ABRY
Partners. Accordingly, this result is not merely aligned with ABRY Partners’
culpability-focused reasoning, it is commanded by more recent developments of that
doctrine.
294
See In re Columbia Pipeline Grp., Inc. Merger Litig., 299 A.3d 393, 481 n.38 (Del. Ch. 2023)
(collecting sources); KT4 Partners LLC v. Palantir Techs. Inc., 2021 WL 2823567, at *31 (Del.
Super. June 24, 2021) (citing NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 35 (Del. Ch. 2009)).
295
AmeriMark, 2022 WL 16642020, at *2.
296
Id. at *2, 11–13.
297
LVI Grp. II, 2019 WL 7369198, at *30 n.301 (citation omitted).
62
B. Plaintiffs Adequately Pled the Secondary Fraud Claims.
Plaintiffs’ aiding and abetting and civil conspiracy claims are legally distinct,
but they are so closely related that the Court analyzes them together.298 Additionally,
aside from the SPA’s exclusive remedy and non-recourse provisions, Defendants
rely almost exclusively on the supposed defectiveness of Plaintiffs’ principal fraud
claims to defeat the Secondary Fraud Claims. Since the Court has already explained
that the SPA does not bar these claims and Plaintiffs’ principal fraud claims are well-
pled, there is not much left to discuss. In the interest of completeness, the Court will
briefly address the elements.
The first two elements of aiding and abetting—i.e., Defendants’ knowledge
of an underlying tort299—have already been addressed at length. For the reasons
stated in Section II of this Analysis, Plaintiffs have raised a reasonable inference that
Defendants knew certain representations in the SPA were false. The only remaining
element is Defendants’ substantial assistance of the fraud.300
Aiding and abetting’s third element requires the plaintiff to show that “the
abettor’s ‘encouragement or assistance [wa]s a substantial factor in causing the
resulting tort.’”301 As noted above, Plaintiffs allege that the Individual Defendants,
298
See New Enter. Assocs., 292 A.3d at 176–77.
299
See RGIS Int’l, 2024 WL 568515, at *5.
300
Id.301
Yangaroo, 2024 WL 2791100, at *10 (quoting In re Oracle Corp. Deriv. Litig., 2020 WL
3410745, at *11 (Del. Ch. June 22, 2020)).
63
working on behalf of the Audax Defendants, encouraged the fraud by “set[ting] what
they knew to be unrealistic revenue, earnings, and bookings targets.”302 Plaintiffs
also allege that the Audax Defendants employees, including the Individual
Defendants, “collaborated with [Mobileum] on the presentation of key financial
metrics, and signed off on [Mobileum’s] communications with H.I.G. and other
potential buyers, including the contracted-for representations and warranties.”303
Audax also allegedly “attempted to leverage its influence in the private equity
industry” to convince an accounting firm to withhold from potential buyers a report
that documented “material issues” with Mobileum’s accounting practices.304 The
Court thus finds it reasonably conceivable that Defendants’ encouragement and
assistance was a substantial factor in causing the fraud.
The conspiracy claim is essentially satisfied by the same conduct. As Vice
Chancellor Glasscock has explained:
it seems likely . . . that civil conspiracy is, in many cases, to borrow a
term, a “lesser-included” claim within an aiding and abetting claim; an
“agreement” and act in furtherance does not necessarily rise to the level
of “substantial assistance,” while “substantial assistance,” if shown,
normally includes an “agreement,” even if implicit, and act in
furtherance thereof.305
302
Compl. ¶ 142.
303
Id. ¶ 124.
304
Id. ¶ 127.
305
Great Hill Equity Partners, 2014 WL 6703980, at *22 (emphasis in original).
64
The Vice Chancellor continued, “[i]t is not clear to me that—in the fraud context . . .
—a litigant would be likely to show aiding and abetting without incidentally having
shown the elements of civil conspiracy were satisfied.”306 This is not the unlikely
case. The allegations that raise an inference of substantial assistance also provide
sufficient circumstantial evidence to reasonably infer that the Audax Defendants
conspired to perpetrate a fraud.307 Therefore, the Court will not dismiss the
Secondary Fraud Claims.308
IV. PLAINTIFFS’ UNJUST ENRICHMENT CLAIMS ARE BARRED BY THE SPA.
Plaintiffs also bring claims for unjust enrichment. “To plead unjust
enrichment, a plaintiff must show: ‘(1) an enrichment, (2) an impoverishment, (3) a
relation between the enrichment and the impoverishment, [and] (4) the absence of
justification.’”309 As with the Secondary Fraud Claims, Defendants argue this cause
of action is barred by the SPA and the underlying fraud is not well pled.310 Plaintiffs
likewise resume their argument that a well-pled claim of knowing fraud defeats
306
Id.; see also New Enter. Assocs., 292 A.3d at 176–77 (“Our cases have viewed aiding and
abetting as the larger, more encompassing theory [compared to conspiracy.]” (citations omitted)).
307
See LVI Grp. II, 2019 WL 7369198, at *30 (“[A] claim for conspiracy can rely on
circumstantial evidence from which a reasonable factfinder can conclude there was an agreement.”
(citing In re Am. Int’l Grp., Inc., 965 A.3d 763, 806 (Del. Ch. 2009))).
308
The Court notes that Defendants did not argue that the Secondary Fraud Claims are duplicative
of each other. Cf. Great Hill Equity Partners, 2014 WL 6703980, at *24. As previously noted,
the Court declines to consider arguments that the parties did not raise. See supra note 198.
309
Chumash Cap. Invs., 2024 WL 1554184, at *14 (alteration in original) (quoting CFGI, LLC v.
Common C Hldgs. LP, 2023 WL 325567, at *6 (Del. Super. Jan. 29, 2024)).
310
Defs.’ Mot. at 47–49.
65
contractual limitations on liability.311 Defendants’ contractual argument is availing
with respect to this cause of action.
As relevant here, the exclusive remedy provision in SPA Section 9.01(b)
waives all claims except those for “Fraud.”312 The SPA’s definition of Fraud
expressly excludes claims of “unjust enrichment.”313 Defendants also raise language
in SPA Sections 9.01(b) and 11.17(b) that purports to preclude liability “based on
. . . the ownership or operation of the Acquired Companies prior to the Closing[.]”314
These provisions unambiguously waive claims against Defendants for unjust
enrichment, so Plaintiffs’ claims are only viable if public policy renders this aspect
of the SPA unenforceable.315
311
Pls.’ Opp’n at 48.
312
SPA § 9.01. The SPA retained certain other narrow categories of claims that are impertinent
here. Id.
313
SPA § 10.01.
314
Defs.’ Mot. at 48 (citing SPA §§ 9.01(b), 11.17(b)).
315
The Court notes that SPA Section 11.15 lists Audax and the Seller Related Parties as third-
party beneficiaries with the ability to enforce the non-recourse provision and other provisions of
the SPA. Cf. LVI Grp. I, 2018 WL 1559936, at *14, 17 (permitting unjust enrichment claim to
survive dismissal where defendants’ ability to enforce the exclusive remedy provision was in
doubt). Also, Plaintiffs do not seek rescission of the SPA or otherwise argue that the SPA is wholly
invalid. Cf. S’holder Representative Servs. LLC v. RSI Holdco, LLC, 2019 WL 2207452, at *6
(Del. Ch. May 22, 2019) (“Because [plaintiffs] have challenged the validity of the Merger
Agreement, the Merger Agreement does not preclude the unjust enrichment claim from proceeding
(footnote omitted) (citing JCM Innovation Corp. v. FL Acq. Hldgs., Inc., 2016 WL 5793192, at *7
(Del. Super. Sept. 30, 2016))). Defendants, for their part, do not contend that their relationship
with Plaintiffs is comprehensively governed by the SPA. Cf. CFGI, LLC, 2024 WL 325567, at *7
(dismissing portion of an unjust enrichment claim that was “entirely cover[ed]” by an enforceable
contract). Thus, this case presents an unusual circumstance where non-signatories to a valid
agreement can enforce the agreement to oppose a fraud-related unjust enrichment claim that is not
precluded by the mere existence of the agreement.
66
Similarly to the Secondary Fraud Claims, neither the parties nor the Court
located an exact precedent for this circumstance.316 Plaintiffs cite Online
HealthNow, which allowed past the pleading stage an unjust enrichment claim that
was ancillary to a contractual fraud claim.317 But in Online HealthNow, the
defendants did not argue that the contract directly barred unjust enrichment; instead,
the defendants only argued the agreement “bar[red] Plaintiffs’ predicate claim for
fraud.”318 The Online HealthNow court therefore did not separately consider the
agreement’s effect on unjust enrichment or other ancillary fraud-based claims.319
This case is also unlike the circumstances in Chumash Capital Investments, where
the language of an exclusive remedy provision’s fraud exception was broad enough
to encompass unjust enrichment.320
The Court thus returns to the guiding precedent detailed in Section III.A of
this Analysis. As previously discussed, Delaware’s “especially strong” respect for
freedom of contract only yields to contractually prohibited fraud claims where the
316
The Court suspects this may be due, at least in part, to the atypical scenario of this case
described in the preceding footnote. See supra note 315.
317
Pls.’ Opp’n at 48 (citing Online HealthNow, 2021 WL 3557857 at *19–20).
318
Online HealthNow, 2021 WL 3557857, at *20.
319
Id. (“Having now rejected [the argument against the predicate fraud claim], for reasons
explained, Defendants’ motion to dismiss Counts II–IV must be denied.”).
320
Chumash Cap. Invs., 2024 WL 1554184, at *15 (analyzing the language “nothing in [the
relevant portion of the agreement] shall limit . . . any Person’s right to seek any remedy on account
of Actual Fraud” (emphasis and omission in original)); accord bioMérieux, Inc. v. Rhodes, 2024
WL 2076661, at *10 (Del. Super. May 9, 2024) (noting “claims arising from Fraud” is broader
than “claims of Fraud” or “claims for Fraud” (emphasis in original)).
67
defendant acted with an “illicit state of mind.”321 And similar public policy
exceptions to the enforceability of contracts “are not to be lightly found.”322
Accordingly, and as discussed more fully above, a scienter element is necessary for
ABRY Partners’ rationale to apply. Unjust enrichment has no such element.
“As the Delaware Supreme Court has stated, ‘[r]estitution serves to deprive
the defendant of benefits that in equity and good conscience he ought not to keep,
even though he may have received those benefits honestly in the first instance[.]’”323
For that reason, “[r]estitution is permitted even when the defendant retaining the
benefit is not a wrongdoer.”324 In fact, unjust enrichment has been permitted
alongside fraud claims specifically because unjust enrichment can reach defendants
who were not implicated in the fraud.325
Because unjust enrichment can force disgorgement from “innocent”
parties,326 the public policy concerns addressed by ABRY Partners do not apply to
321
ABRY Partners, 891 A.2d at 1059, 1064.
322
Id. at 1060 n.66 (citation omitted).
323
RSI Holdco, LLC, 2019 WL 2207452, at *7 (emphasis added) (first alteration in original)
(quoting Schock v. Nash, 732 A.2d 217, 232 (Del. 1999)).
324
Id. (citing Schock, 732 A.2d at 232).
325
Great Hill Equity Partners, 2014 WL 6703980, at *28 (“[A]ssuming the Plaintiffs can prove
that the Moving Defendants profited, and the Plaintiffs were impoverished, as the result of the
non-moving Defendants' fraud; and assuming that Plaintiffs are unable to implicate the Moving
Defendants in that fraud, unjust enrichment would be invoked.”); see also LVI Grp. I, 2018 WL
1559936, at *17. The requirement of the absence of a remedy at law discussed in Great Hill Equity
Partners and LVI Group I is no longer an element of unjust enrichment claims brought in Superior
Court or pursuant to the Court of Chancery’s clean-up jurisdiction. See Monsanto, 299 A.3d at
391.
326
Great Hill Equity Partners, 2014 WL 6703980, at *28.
68
this quasi-contractual claim. Accordingly, in this circumstance,327 the SPA’s plain
language will be enforced, and Plaintiffs’ unjust enrichment claims are dismissed.
V. THE COURT WILL PERMIT ADDITIONAL BRIEFING ON DEFENDANTS’
MOTION TO STRIKE.
The Court chooses to permit additional briefing on the issue of Defendants’
Motion to Strike Plaintiffs’ jury demand. Compared to the more pressing issues
addressed herein, the effect of the SPA’s jury waiver provision on this group of
parties received sparse attention from the litigants. Of the attention this issue did
receive, most of it was spent debating the procedural propriety of raising an
argument in a footnote. The Court believes a more substantive discussion of this
issue is worthwhile before a decision is rendered. The parties shall therefore propose
a briefing schedule and a word limit that is less than that provided by Rule 107(h)(1)
to better address the impact of the SPA’s jury waiver provision on this litigation.
327
See supra note 315.
69
CONCLUSION
In conclusion, Defendants’ Motion to Dismiss Plaintiffs’ Complaint is
GRANTED as to the Individual Defendants and Counts VII and VIII, but DENIED
in all other respects. The parties are instructed to submit a proposed briefing
schedule for Defendants’ Motion to Strike by July 19, 2024.
IT IS SO ORDERED.
70