Opinion
SUCV201803878BLS1
05-31-2019
White Winston Select Asset Funds, LLC v. Professional Diversity Network, Inc.
Judge (with first initial, no space for Sullivan, Dorsey, and Walsh): Kaplan, Mitchell H., J.
MEMORANDUM OF DECISION AND ORDER ON DEFENDANT’S MOTION TO DISMISS
Mitchell H. Kaplan Justice of the Superior Court
The plaintiff, White Winston Select Asset Funds, LLC (White Winston), is a private equity firm. The defendant Professional Diversity Network, Inc. (PDN) is a publicly traded corporation organized under the laws of Delaware. On March 30, 2016, White Winston provided financing to PDN in a commercial transaction governed by a Master Credit Facility. As part of this transaction, the parties also entered into agreements pursuant to which White Wintston received warrants to purchase common shares of PDN (the Warrant Agreements). On November 9, 2016, White Winston exercised the warrants and acquired just under three hundred and fifty thousand PDN shares. At the time of exercise, these shares were not registered with the Securities and Exchange Commission (SEC) and the stock certificates for the shares bore a legend stating: "The Shares Represented by this Certificate have not been Registered under the Securities Act of 1933 ..." Thereafter, PDN filed a Form S-1 registration statement with the SEC, which became effective on February 13, 2017, covering the shares. In this action, White Winston alleges that under the Warrant Agreements and Delaware law, PDN had an obligation to provide it with new, unlegended stock certificates on request promptly after February 13, 2017, but failed and refused to do so preventing it from selling the shares in a favorable market for the stock that existed in February and March 2017. It pleads its complaint in five counts: Breach of Contract (Count I); Violation of Delaware statutes Del. UCC Section 8-401 and 8 Del. C. Section 158 (Count II); Breach of the Covenant of Good Faith and Fair Dealing (Count III); Violation of Chapter 93A (Count IV); and Count V (Attorneys Fees).
The case is now before the court on PDN’s motion to dismiss. For the reasons that follow, that motion is DENIED.
ADDITIONAL FACTS
The following additional facts material to the court’s consideration of the motion are alleged in the complaint and therefore presumed to be true for the purposes of this motion.
As soon as the S-1 became effective on February 13, 2017, White Winston requested new stock certificates without the restrictive legend. According to White Winston, it was unable to sell its PDN shares in the "robust" market that then existed for them so long as the certificates had the legend on them. PDN, however, refused to issue the new certificates. First, it wrongfully asserted that it could not issue new certificates without a legal opinion issued to its transfer agent that this was permissible, and it was White Winston’s obligation to pay for the opinion. Second, PDN’s CEO and one of its attorneys both told White Winston that there was an internal investigation of board members and officers, this was confidential information, and having been provided this non-public information, White Winston could not sell its shares. Neither the CEO nor counsel told White Winston when the investigation had concluded; White Winston had to learn this information from another source.
On April 6, 2017, PDN received a legal opinion that certificates without the legend could be issued to White Winston. White Winston presented its legended certificates, but still did not receive the new certificates until May 19, 2016. By this time the opportunity to sell the shares at favorable prices had passed.
Count I- Breach of Contract and Count III- Breach of the Implied Covenant
The Warrant Agreement included a provision that stated that PDN "will not ... avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of [White Winston] against material impairment."
PDN, however, argues that there is no specific provision in the Master Credit Facility or the Warrant Agreement that requires PDN to deliver share certificates without a legend that states that the shares are not registered with the SEC. That is true. However, the Warrant Agreements include multiple provisions all designed to require PDN to register the shares as soon as practicable, including registering the shares pursuant to a Form S-3 when requested by White Winston, if PDN is eligible to do so, and registering them in any states in which White Winston wished to sell them. Accordingly, a refusal to deliver unlegended certificates to White Winston after the shares were registered, when no legal impediment to delivering the clean certificates existed, could constitute either a breach of the contract provision quoted above or the covenant of good faith and fair dealing that is implied in every contract.
Under Massachusetts law the implied covenant arises out of a contract between parties, but does not create rights or duties beyond those the parties agreed to when they entered into the contract. See Ayash v. Dana-Farber Cancer Inst., 443 Mass. 367, 385, 822 N.E.2d 667, cert. denied sub nom. Globe Newspaper Co. v. Ayash, 546 U.S. 927, 126 S.Ct. 397, 163 L.Ed.2d 275 (2005). However, the covenant ensures that the parties act in good faith so that neither does "anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Druker v. Roland Wm. Jutras Assocs., Inc., 370 Mass. 383, 385 (1976). Here, at this early stage of the litigation, taking the allegations of the complaint in the light most favorable to White Winston, the allegations plausibly suggest that among the fruits of the financing transaction that the parties entered into was the grant of warrants for shares of PDN stock that White Winston could sell as soon as PDN was practicably able to register them. After the S-1 was effective, PDN failed to act in good faith when it refused to provide unlegended certificates to White Winston and, for its own purposes, deprived White Winston of the ability to sell the shares of these publicly traded securities when the prices were high. Perhaps, PDN feared that the sale of White Winston’s large block would depress share prices, but that remains for factual development through discovery. In any event, whether considered a breach of PDN’s broad contractual obligations not to materially impair the rights granted White Winston under the loan documents or a breach of the implied covenant, a claim is stated.
Count II- Breach of Delaware Statutory Law
White Winston has clearly stated a viable claim for violation of two interrelated Delaware statutes: 8 Del. C. § 158 and § 8-401 of Delaware’s version of the UCC. In Bender v. Memory Metal, Inc., 514 A.2d 1109, 1115 (Del.Ch. 1986), Vice Chancellor Jacobs explained the related obligations arising under these Delaware statutes as follows.
8 Del.C. § 158 expressly entitles every holder of certificated stock " ... to have a certificate ... representing the number of shares registered in certificate form." By necessary implication this includes the right to a proper certificate without a legend or restriction, where such a legend is no longer appropriate. That result is consistent with the common law, which recognizes the existence of a claim for wrongful refusal to issue a stock certificate. See, Reeves v. Transport Data Communications, Inc., Del.Ch., 318 A.2d 147, 150 (1974); Riskin v. National Computer Analysts, Inc., N.Y.Supr., 62 Misc.2d 605, 308 N.Y.S.2d 985 (1970), aff’d, N.Y.App., 37 A.D.2d 952, 326 N.Y.S.2d 419 (1971). On that basis alone- and wholly independent of the UCC- the plaintiff has alleged a valid basis under § 158 for the relief she seeks.
In addition, the plaintiff has alleged a cognizable claim for relief under UCC § 8-401. The defendant’s argument that the registration of a transfer is not equivalent to the issuance of a new certificate ignores the realities of the securities transfer process. Where certificated stock is transferred, the issuance of a new certificate to the transferee is normally an integral step in that process. And where the stock is restricted, the issuance of a new, clean certificate to the transferor is normally the essential first step. Given those commercial realities, it is reasonable to construe the term "register the transfer," as used in § 8-401 of the UCC, to include those ministerial acts that normally accompany such registration, including, where applicable, the issuance of a new certificate. Nothing in the language or text of Article 8 expressly prohibits that construction, and the only contrary decision touching upon that subject is not persuasive.
For the above reasons, Ms. Bender has alleged a valid statutory basis for her claim.
PDN’s only argument in support of its motion to dismiss this statutory claim is dependent on an unreported decision from the Delaware Federal District Court in which that court held that to state a claim under § 8-401 the plaintiff must also allege that it presented the restricted certificates to the issuer. See Jing Jing v. Weyland Tech., Inc., No. 17-446, 2017 U.S. Dist. LEXIS 91973, *6 (D.De. June 15, 2017). In this case, White Winston alleges that it presented the certificates after the legal opinion issued in April 2017, and, therefore, its cause of action could not arise until that time. Further, according to PDN, there is no allegation that by that date White Winston could have still sold its PDN shares at favorable prices.
In Jing Jing there was a substantial issue as to who rightfully owned and held the legended shares in dispute. That of course is not an issue here. It is clear that White Winston owned the shares, which were by February 13, 2017 registered with the SEC and not subject to the restriction cited in the legend, and could produce the certificates on request. Indeed, the allegations of the complaint plausibly suggest that after the shares were registered and a request for clean certificates made, PDN responded that it would not produce certificates until after it had an opinion of counsel, paid for by White Winston, to the effect that clean certificates could be delivered. If presentment is generally a precondition to a request for unlegended certificates, White Winston may well be able to prove that PDN is estopped by its behavior from reliance on that condition. In any event, to the extent that the Jing Jing decision was intended to announce a general new pleading obligation of presentment in circumstances like those alleged in this case, this court declines to adopt it. First, the Jing Jing decision makes no reference to the obligations imposed on Delaware corporations by 8 Del.C. § 158. Additionally, the court finds it more appropriate to look for guidance in in its interpretation of Delaware corporate law to the Bender decision issued by the Chancery Court. Bender makes no reference to an obligation to plead presentment (something that may certainly be required of a security holder before a new certificate is delivered).
Count IV- Chapter 93A
PDN has moved to dismiss the Chapter 93A claim. It asserts that the conduct that White Winston alleges constitutes unfair or deceptive acts or practices in violation of G.L.c. 93A, § 2 involves matters of corporate governance and therefore is not in trade or commerce. See, e.g., Riseman v. Orion Research, Inc., 394 Mass. 311, 313 (1985) (where the SJC held that "wrongs in the governance of the corporation" do not constitute a violation of c. 93A). PDN’s argument in this regard is not without some merit. Certainly, a shareholder’s claims brought under 8 Del.C. § 158 concerning its rights to receive certificates representing its ownership of shares involve intra-corporate matters. In this case, however, the rights allegedly impaired by PDN’s wrongful acts might also be viewed as arising under the Master Credit Facility and related documents pursuant to which White Winston provided financing to PDN- clearly a commercial transaction. At this early stage of the litigation, it is not necessary to grapple with the question of whether the facts allegedly underlying the c. 93A claim fall into the intra-corporate or the commercial transaction bucket. The pendency of the c. 93A claim will not affect the scope of discovery. The issue should be considered after further factual development.
Count V- Attorneys Fees
The claim for attorneys fees logically ought not be pled in a separate count. Certain of the loan documents provide for attorneys fees if a party has to enforce its contractual rights through litigation. In consequence, it is a category of damages that might be awarded if a breach of contract is proved. As the breach of contract claim has not been dismissed, neither will Count V.
ORDER
For the foregoing reasons, the motion to dismiss is DENIED.