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8/14/2019 SR Motion to Dismiss
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SPOT R UNNER S MEMO OF PS & A S ISO MOT . TO DISMISS VERIFIED COMPLAINT CASE NO.: CV09-02487 PA (PLA X)
3693741_4.DOC
BORIS FELDMAN (State Bar No. 128838) [email protected] J. CLARK (State Bar No. 171499)[email protected] M. KINNEY (State Bar No. 216823)[email protected]. DAVID NEFOUSE (State Bar No. 243417)[email protected] SONSINI GOODRICH & ROSATIProfessional Corporation650 Page Mill RoadPalo Alto, CA 94304-1050Telephone: (650) 493-9300Facsimile: (650) 565-5100
Attorneys for DefendantSPOT RUNNER, INC.
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WPP LUXEMBOURG GAMMATHREE SARL, on its behalf andderivatively on behalf of SPOTRUNNER INC.,
Plaintiff,
v.
SPOT RUNNER INC., NICK GROUF,DAVID WAXMAN, DANNY RIMER,ROGER LEE, ROBERT PITTMAN,PETER HUIE, BATTERYVENTURES VI, LP, BATTERYINVESTMENT PARTNERS VI, LLC,BATTERY VENTURES VII, L.P.,BATTERY INVESTMENTPARTNERS VII, LLC, INDEXVENTURES III (JERSEY) L.P.,INDEX VENTURES III(DELAWARE) L.P., INDEXVENTURES III PARALLELENTREPRENEUR FUND (JERSEY)L.P.
Defendants.
Case No.: CV 09 02487 PA (PLAx)
SPOT RUNNER, INCSMEMORANDUM OF POINTSAND AUTHORITIES INSUPPORT OF MOTION TODISMISS VERIFIEDCOMPLAINT FOR SECURITIESFRAUD, VIOLATIONS OFCALIFORNIA CORPORATIONSCODE, BREACH OFFIDUCIARY DUTY,CONSTRUCTIVE TRUST, ANDBREACH OF CONTRACT
Date: September 14, 2009Time: 1:30p.m.Judge: Hon. Percy AndersonDept.: Courtroom 15
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TABLE OF CONTENTS
Page
INTRODUCTION .....................................................................................................1
BACKGROUND.......................................................................................................3
The Parties .......................................................................................................3
Series A, B and C Investments........................................................................3
Right of First Refusal and Co-Sale Agreement...............................................4
WPPs May 2007 Stock Purchase...................................................................5
Summary of the Allegations............................................................................6
ARGUMENT.............................................................................................................8
I. APPLICABLE LEGAL STANDARDS .........................................................8
A. State Law Claims ..................................................................................9
II. WPPS SECTION 10(B) AND RULE 10B-5 CLAIM SHOULD BEDISMISSED (COUNT ONE) .......................................................................10
A. The Complaint Fails to Adequately Plead Loss Causation. ...............11
III. WPP FAILS TO STATE A CLAIM FOR VIOLATIONS OFCALIFORNIA CORPORATION CODE SECTIONS 25401 AND25501 (COUNT TWO) .................................................................................13
IV. WPPS DERIVATIVE CLAIM FOR BREACH OF FIDUCIARYDUTY AGAINST SPOT RUNNER FAILS AS A MATTER OF LAW(COUNT FIVE).............................................................................................16
V. WPPS INDIVIDUAL CLAIM FOR BREACH OF FIDUCIARYDUTY AGAINST SPOT RUNNER FAILS AS A MATTER OF LAW(COUNT SIX) ...............................................................................................17
A. WPP Is Precluded From Asserting An Individual Breach of Fiduciary Duty Claim Against Spot Runner.......................................18
B. In The Alternative, WPPs Direct Claim For Breach of FiduciaryDuty Is A Derivative Claim And Fails As A Matter of Law..............19
C. Spot Runner Did Not Violate the ROFR and Co-Sale Agreement.....22
VI. WPPS CLAIM FOR CONSTRUCTIVE TRUST AGAINST SPOTRUNNER FAILS AS A MATTER OF LAW (COUNT SEVEN)...............23
CONCLUSION........................................................................................................24
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TABLE OF AUTHORITIES
Page(s)
CASES
Agostino v. Hicks , 845 A.2d 1110 (Del. Ch. 2004).....................................16, 20, 21
Alessi v. Beracha , 849 A.2d 939 (Del. Ch. 2004) .......................................18, 19, 20
Arnold v. Society for Savings Bancorp, Inc. , 678 A.2d 533 (Del. 1996) ..........18, 19
Aronson v. Lewis , 473 A.2d 805 (Del. 1984), overruled on other grounds by Brehm v. Eisner , 746 A.2d 244 (Del. 2000)...............................17
Ashcroft v. Iqbal , 129 S. Ct. 1937 (2009).......................................................8, 9, 13,15, 23
Batchelder v. Kawamoto , 147 F.3d 915 (9th Cir. 1998) ...........................................9
Bell Atl. Corp. v. Twombly , 550 U.S. 544, 127 S. Ct. 1955, 167 L.Ed.2d929 (2007) ............................................................................................8, 9, 13,
15, 23
Bokat v. Getty Oil Co. , 262 A.2d 246 (Del. 1970), overruled on other grounds by Tooley v. Donaldson, Lufkin, & Jenrette, Inc ., 845A.2d 1031 (Del. 2004).......................................................................16, 17, 22
Branch v. Tunnell , 14 F.3d 449 (9th Cir. 1994), overruled on other grounds by Galbraith v. County of Santa Clara , 307 F.3d 1119(9th Cir. 2002) .................................................................................................4
Communist Party v. 522 Valencia, Inc. , 35 Cal. App. 4th 980, 41 Cal.Rptr. 2d 618 (1995) .......................................................................................23
Crescent/Mach I Partners, L.P. v. Turner , 846 A.2d 963 (Del. Ch.2000)..............................................................................................................23
Dieterich v. Harrer , 857 A.2d 1017 (Del. Ch. 2004)..............................................20
Dura Pharms., Inc. v. Broudo , 544 U.S. 336, 125 S. Ct. 1627, 161L.Ed.2d 577 (2005) ...........................................................................11, 12, 13
Edgar v. MITE Corp. , 457 U.S. 624, 102 S. Ct. 2629, 73 L.Ed.2d 269(1982) ..............................................................................................................9
Feldman v. Cutaia , 951 A.2d 727 (Del. 2008) ........................................................20
First Natl City Bank v. Banco Para El Comercio Exterior de Cuba ,462 U.S. 611, 103 S. Ct. 2591, 77 L.Ed.2d 46 (1983) ....................................9
Gaffin v. Teledyne, Inc. , 611 A.2d 467 (Del. 1992) ..........................................18, 19
In re Daou Systems, Inc. , 411 F.3d 1006 (9th Cir. 2005)........................................10
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-iii- 3693741_4.DOC
In re Digex, Inc. Sholders Litig. , 789 A.2d 1176 (Del. Ch. 2000).........................16
In re Infonet Servs. Corp. Sec. Litig. , 310 F. Supp. 2d 1080 (C.D. Cal.2003)................................................................................................................9
In re Sagent Tech., Inc. Derivative Litig. , 278 F. Supp. 2d 1079 (N.D.Cal. 2003) ..................................................................................................9, 10
In re Silicon Graphics, Inc. Sec. Litig. , 183 F.3d 970 (9th Cir. 1999)....................11
In re Stac Elecs. Sec. Litig. , 89 F.3d 1399 (9th Cir. 1996)........................................9
In re Verisign, Inc. Derivative Litig. , 531 F. Supp. 2d 1173 (N.D. Cal.2007)................................................................................................................9
Jones v. H.F. Ahmanson & Co ., 1 Cal. 3d 93, 81 Cal. Rptr. 592 (1969) ................17
Kainos Lab., Inc. v. Beacon Diagnostics, Inc. , No. C-97-4618 MHP,1998 WL 2016634, (N.D. Cal. Sept. 14, 1998) ............................................14
Kearns v. Ford Motor Co. , 567 F.3d 1120 (9th Cir. 2009)...............................10, 14
Kona Enter. Inc. v. Estate of Bishop , 179 F.3d 767 (9th Cir. 1999) .......................17
Kramer v. W. Pac. Indus. , 546 A.2d 348 (Del. 1988).................................16, 20, 21
LaSala v. Bordier et cie , 519 F.3d 121 (3d Cir. 2008)............................................20
Lentell v. Merrill Lynch & Co. , 396 F.3d 161 (2d Cir. 2005).................................11
Lewis v. Chiles , 719 F. 2d 1044 (9th Cir. 1983)......................................................17
MTC Elec. Tech. Co. v. Leung , 876 F. Supp. 1143 (C.D. Cal. 1995) .....................14 Malik v. Universal Res. Corp. , 425 F. Supp. 350 (S.D. Cal. 1976) ..................14, 15
McKee v. McKee, No. Civ. A. 17773-VCN, 2007 WL 1378349 (Del.Ch. May 3, 2007)...........................................................................................24
Metzler Inv. GMBH v. Corinthian Colls., Inc. , 540 F.3d 1049 (9th Cir.2008)........................................................................................................11, 13
Patrick v. Alacer Corp. , 167 Cal. App. 4th 995, 84 Cal. Rptr. 3d 642(2008) ............................................................................................................17
Rose Hall Ltd. v. Chase Manhattan Overseas Banking Corp. , 494 F.Supp. 1139 (D. Del. 1980) ......................................................................16, 17
Sprewell v. Golden State Warriors , 266 F.3d 979 (9th Cir. 2001)............................8
State Farm Mut. Auto. Ins. Co. v. Superior Court , 114 Cal. App. 4th434, 8 Cal. Rptr. 3d 56 (2003).......................................................................10
Taormina v. Taormina Corp. , 78 A.2d 473 (Del. Ch. 1951) ..................................16
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-iv- 3693741_4.DOC
Vess v. Ciba-Geigy Corp. USA , 317 F.3d 1097 (9th Cir. 2003).................10, 14, 15,23
STATUTES
Cal. Civ. Code 2224......................................................................................7, 8, 23
Cal. Corp. Code 25401 ...................................................................6, 13, 14, 15, 16
Cal. Corp. Code 25501 .........................................................................6, 13, 15, 16
RULES
Fed. R. Civ. P. 9(b) ............................................................................................10, 23
Fed. R. Civ. P. 23.1..................................................................................................17
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financing throughout the relevant period at issue. During each round of financing,
the price of Spot Runners stock increased . WPP was able to capitalize on this
increase, selling almost 40% of common shares it had purchased in May 2007 at a
substantial profit just ten months later. As evidence of the supposed fraud, WPP points to an email exchange with Spot Runners General Counsel. The full email
exchange makes clear that Mr. Huies statements concerning WPPs purchase of
common stock from the Company were accurate and provide no basis for securities
claims.
WPP makes other allegations concerning supposed breaches of fiduciary
duties by Spot Runner. First, as a matter of law, WPP cannot assert a derivative
claim against Spot Runner itself. Second, Spot Runner owes no fiduciary duty to
WPP as an investor in the Company. Finally, WPP, Spot Runner and its investors
negotiated at arms-length an agreement that would govern the procedure
surrounding the purchases and sales of stock in Spot Runner. Under the
agreement, WPP knew that a super-majority of the preferred shareholders could
waive any provision in the agreement. For WPP to belatedly assert derivative and
direct claims based on conduct expressly permitted under the agreement on atheory that the conduct was unfair rings hollow in the face of the plain language
of the agreement, and belies the level of sophistication of WPP as an investor.
Although the Complaint paints WPP as a victim, plaintiff is a large,
sophisticated and experienced communications company that took a chance on a
small start-up company. In the midst of a severe economic downturn, WPP filed
an opportunistic lawsuit seeking to eliminate any risk it faces with its investment.
The fiduciary and securities laws were not constructed to reimburse investors for
losses due to a poor economy or other normal investment risks that start-up
businesses face. WPPs claims against Spot Runner should be dismissed with
prejudice.
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BACKGROUND
The Parties
Plaintiff WPP is a Luxembourg company that is one of the worlds largest
communications services groups. As noted above, defendant Spot Runner is a private start-up company that was founded by Nick Grouf and David Waxman.
See Cmpl. 22. Spot Runner is a Delaware corporation that engages in media
buying and is developing an internet media-buying platform that provides an
innovative way for businesses to purchase cable and broadcast TV advertising
services online. Id. 5, 23.
Mr. Grouf is the current Chief Executive Officer and a member of the Board.
Id. 6. Mr. Waxman is a co-founder and a member of Spot Runners Board of
Directors. Id. 7. Collectively they are referred to as the Founders. Mr. Grouf
and Mr. Waxman, together with Robert Pittman, Roger Lee and Danny Rimer,
comprise Spot Runners Board of Directors (the Board Defendants). The
Complaint also names as a defendant Peter Huie, the general counsel for Spot
Runner, and Series A and Series B investors Battery Ventures, and its affiliated
entities (Battery), and Index Ventures, and its affiliated entities (Index). Id. 11-18. The Founders, the Board Defendants, Mr. Huie and Battery and Index are
collectively referred to as Defendants.
Series A, B and C Investments
Spot Runners capital structure is like that of many high-risk/high-reward
start-ups. The Company was initially financed by Mr. Grouf and later venture
capitalists invested money in it. Battery and Index each invested approximately $6
million in Spot Runner through early 2006, buying preferred stock in the
Companys Series A and Series B financing rounds. Id. 25. Battery and Index
are preferred stockholders of Spot Runner, collectively representing more than
sixty percent (60%) of shares held by preferred investors. Id. 26. In August
2006, Spot Runner held the Series C financing round, in which WPP purchased
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approximately 2.7 million shares for approximately $10 million. Id. 31-32.
WPP and Spot Runner entered into a Board Observer Rights Agreement, which
provided that Spot Runner and WPP would mutually agree on a WPP
representative who would be entitled to attend Spot Runners meetings of theBoard of Directors. Id. 34-36; see Declaration of L. David Nefouse in Support
of Spot Runners Motion to Dismiss (Nefouse Decl.), Exhibit (Ex.) A. 2
On September 1, 2006, the holders of the Series A, Series B, and Series C
preferred stock entered the Second Amended and Restated Right of First Refusal
and Co-Sale Agreement (ROFR and Co-Sale Agreement or the Agreement)
with the Company and the Founders. Id. 38; Nefouse Decl. Ex. B.
Right of First Refusal and Co-Sale Agreement
Under the ROFR and Co-Sale Agreement, before any common stock can be
sold by a Founder, the Company has a right of first refusal to purchase those
shares. Id. 39; Nefouse Decl. Ex. B at 1.1. The Agreement provides that if the
Company does not exercise its right to purchase shares from the Founder, each
preferred investor has the right to purchase its pro rata share, or a lesser amount, of
those shares not purchased by the Company. Cmpl. 40; Nefouse Decl. Ex. B at 1.7.
If the right of first refusal to purchase shares from the Founders is not
exercised by the Company and the purchase right is not exercised by the preferred
investors, the Agreement provides a co-sale right where each preferred investor
2 Under the incorporation by reference doctrine, the Court may consider on amotion to dismiss documents that a plaintiff relies upon in its Complaint andwhose authenticity is not questioned. See Branch v. Tunnell , 14 F.3d 449, 453-54(9th Cir. 1994) (holding that documents whose contents are alleged in a complaintand whose authenticity no party questions, but which are not physically attached tothe pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss),overruled in part on other grounds by Galbraith v. County of Santa Clara , 307F.3d 1119 (9th Cir. 2002).
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shall have the right to participate in any sale on the same terms and conditions.
Cmpl. 41; Nefouse Decl. Ex. B at 2.1.
Importantly, the ROFR and Co-Sale Agreement also contains a proviso that
states the holders of sixty percent (60%) of the Shares held by the Investorsvoting together may waive, discharge, terminate, modify or amend, on behalf of
all Investors , any provisions hereof . Cmpl. 44 (emphasis added); Nefouse
Decl. Ex. B 3.9. Added together, Battery and Index hold more than sixty percent
(60%) of the shares held by preferred investors, and they have the right to waive
any provision in the Agreement on behalf of all the preferred investors. Cmpl.
26.
WPPs May 2007 Stock Purchase
In April 2007, Spot Runner sent WPP a letter offering WPP the opportunity
to purchase stock from the Company on the same terms as a recent institutional
investor. Cmpl. 63. Approximately a month later, on May 10, 2007, Spot
Runner sent WPP a second letter informing WPP that the institutional investor
desired to purchase additional common stock and giving WPP a separate
opportunity to sell stock to this institutional investor. Cmpl. 66; Nefouse Decl.Ex. C. The letter informed WPP that the investor has expressed a desire to
purchase additional shares of common stock. The Company currently does not
need additional capital but has offered to help facilitate sales of common stock by
existing stockholders (if possible). Id. The letter went on to state that, we are
notifying all preferred stockholders and the founders of the Investors desire to
purchase additional shares. Cmpl. 67 (emphasis added). The letter further
added that [i]n order to ensure an orderly and efficient process, we will facilitate
by allocating, on a pro rata basis, the Investors demand among the notified
stockholders who have indicated an interest to sell . Id. (emphasis added). WPP
chose not to participate in this separate secondary sale opportunity. The sales by
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existing stockholders related to this separate secondary offering closed in June
2007.
Following WPPs decision and commitment to purchase stock as part of the
Companys offering, Alexander Barry, counsel for WPP, emailed Mr. Huie onMay 21, 2007 asking questions about the logistics of WPPs share purchase. Id.
70; Nefouse Decl. Ex. D. The two were discussing WPPs purchase of stock from
the Company, as supported by the subject line of Mr. Barrys email, WPP Share
Purchase. Nefouse Decl. Ex. D. Mr. Barry then asked what WPPs ownership
percentage would be after these purchases, and also asked is there an existing
investor and/or founder selling existing shares related to this offering? If so, who
is selling shares and how many shares are they selling? Id. Because this purchase
was directly from the Company , wholly separate from the opportunity to sell
shares, and thus did not involve secondary shares, Mr. Huie appropriately and
accurately responded that [t]his offering does not involve the sale of any existing
shares. It is an entirely new issuance by the Company. Cmpl. 71. On May 24,
2007, WPP purchased approximately 383,111 shares of common stock, as part of
the offering outlined in the April 17, 2007 offering letter, for a total investment of approximately $1.7 million. Id. 73. This purchase was wholly unrelated to the
separate offering to participate in a secondary sale of shares that was outlined in
the May 10, 2007 letter. Id. 66; Nefouse Decl. Ex. C.
Summary of the Allegations
On April 9, 2009, WPP filed this purported derivative and direct lawsuit
against Spot Runner, the Board Defendants, Mr. Huie, Battery and Index. The
Complaint alleges nine causes of action, five of which are directed against Spot
Runner. WPP asserts direct claims for violation of the Securities Exchange Act
Section 10(b) and rule 10b-5 (Count One), violation of California Corporations
Code Sections 25401 and 25501 (Count Two), and purported derivative and direct
claims against Spot Runner itself for breach of fiduciary duty to itself and breach
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of fiduciary duty to WPP (Counts Five and Six). Lastly, plaintiff seeks a
constructive trust under California Civil Code Section 2224 (Count Seven).
The crux of the Complaints allegations under Section 10(b) and the state
securities claim relates to WPPs May 2007 purchase of additional Spot Runner shares for approximately $1.7 million. WPP alleges Mr. Huie misrepresented that
there were no secondary sales occurring by the Founders or existing investors. 3
Cmpl . 53. As set out in the Motion to Dismiss filed on behalf of Messrs. Grouf,
Waxman, and Huie (Management Motion), which the Company joins, WPP has
not sufficiently alleged a misrepresentation by the Defendants. See Management
Motion at 4-12. As such, the securities claims fail because Mr. Huies email
contained no misrepresentation, as the title of the email itself makes clear that he
was discussing WPP[s] Share Purchase from the Company . Moreover, WPP
has not and cannot allege that this email caused its supposed loss. In fact, Spot
Runners stock price went up through the relevant period. For this additional
reason, the Section 10(b) claim also fails.
The remaining direct and derivative allegations against Spot Runner concern
stock sales by individual defendants that took place at various times from 2006-2008. The allegations include sales from the period before WPP had even invested
in Spot Runner, and center around claims that the Founders, Battery and Index sold
certain of their holdings in the Company without notice to WPP. Id. 47. The
Complaint acknowledges Defendants waived certain notice rights concerning these
sales and other rights of investors pursuant to the ROFR and Co-Sale Agreement.
Id. 47-48. Plaintiff alleges that these waivers of rights breached fiduciary
obligations to the Company, despite being permissible by the plain language of the
Agreement. Id. 47. Indeed, the Complaint acknowledges that Battery and Index
3 WPP acknowledges it was informed of secondary sales that occurred inMarch 2008. Id. 58.
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collectively held more than requisite number shares to waive any provision under
the ROFR and Co-Sale Agreement. Id. 55; see also Nefouse Decl. Ex. B at 3.9.
The Complaint fails to state a claim against Spot Runner.
ARGUMENTI. APPLICABLE LEGAL STANDARDS
To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must provide more
than labels and conclusions, and a formulaic recitation of the elements of a cause of
action; rather, a plaintiff must provide the grounds upon which its claim rests
through factual allegations sufficient to raise a right to relief above the speculative
level. Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555,127 S. Ct. 1955, 1964-65,
167 L.Ed.2d 929 (2007). A 12(b)(6) motion to dismiss should be granted if the
complaint fails to proffer enough facts to state a claim for relief that is plausible
on its face. Id. at 556-561, 570-572.
Recently, the United States Supreme Court reaffirmed its discussion in
Twombly of the pleading requirements under Rule 8, and removed any doubt that
those requirements apply to all civil actions. See Ashcroft v. Iqbal , 129 S. Ct. 1937,
1944, 1949-52 (2009). The Court in Iqbal emphasized that the plausibilitystandard is not akin to a probability requirement, but asks for more than a sheer
possibility that defendant has acted unlawfully, and requires the pleading of facts
that would make a claim plausible and not just conceivable. Id. at 1949. While all
allegations of material fact are taken as true, mere legal conclusions couched as
factual allegations are insufficient and are disentitle[d] . . . to the presumption of
truth. Id. at 1951 ([T]he Federal Rules do not require courts to credit a
complaints conclusory statements without reference to its factual context.). See
also Sprewell v. Golden State Warriors , 266 F.3d 979, 988 (9th Cir. 2001) (holding
that a Court is not required to accept as true allegations that are merely conclusory,
unwarranted deductions of fact, or unreasonable inferences.).
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To assess plausibility, courts reject labels and plaintiffs conclusions that
parrot the elements of the claims. Twombly , 550 U.S. at 556-561; Iqbal , 129 S. Ct.
at 1950. This is especially true where such allegations are contradicted by
documents referenced in the complaint or in other information that may be judicially noticed. See, e.g. , In re Stac Elecs. Sec. Litig ., 89 F.3d 1399, 1403-1405
(9th Cir. 1996); In re Infonet Servs. Corp. Sec. Litig. , 310 F. Supp. 2d 1080, 1088
(C.D. Cal. 2003). The Complaint fails to state a claim that is plausible on its face.
A. State Law Claims
Spot Runner is incorporated in Delaware. Cmpl. 5. Under the internal
affairs doctrine, a corporations internal affairs are governed by the law of the state
of incorporation. See First Natl City Bank v. Banco Para El Comercio Exterior
de Cuba , 462 U.S. 611, 621, 103 S. Ct. 2591, 77 L.Ed.2d 46 (1983). A
corporations internal affairs are those matters peculiar to the relationships among
or between the corporation and its current officers, directors, and shareholders.
Edgar v. MITE Corp. , 457 U.S. 624, 645, 102 S. Ct. 2629, 2643, 73 L.Ed.2d 269
(1982). Because Spot Runner is a Delaware corporation, plaintiffs claims for
breach of fiduciary duty, constructive trust, and breach of contract are evaluatedunder Delaware law. See In re Sagent Tech ., Inc . Derivative Litig. , 278 F. Supp.
2d 1079, 1086-87 (N.D. Cal. 2003) (In general, courts in California follow this
rule and apply the law of the state of incorporation in considering claims relating to
internal corporate affairs.); In re Verisign, Inc. Derivative Litig ., 531 F. Supp. 2d
1173, 1214-15 (N.D. Cal. 2007) (Thus, Delaware law, the law of the state of
VeriSigns incorporation, applies to all causes of action that implicate the
Companys internal affairs, including the claims for breach of fiduciary duty,
accounting, unjust enrichment, rescission, constructive fraud, corporate waste,
breach of contract, gross mismanagement, and restitution.).
Both federal and state courts in California routinely follow this maxim . See
Batchelder v. Kawamoto , 147 F.3d 915, 920 (9th Cir. 1998) (in a derivative suit,
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the jurisdiction of incorporation determines issues relating to the internal affairs of
the corporation); Sagent , 278 F. Supp. 2d at 1090-92 (applying Delaware law to
claims of breach of fiduciary duty and insider trading asserted against directors of a
Delaware corporation headquartered in California);State Farm Mut. Auto. Ins. Co.
v. Superior Court , 114 Cal. App. 4th 434, 446, 8 Cal. Rptr. 3d 56, 67 (2003)
(applying Illinois law to claims by policy holders challenging Board decision about
dividends, finding that such claims of breach of contract and breach of the
covenant of good faith and fair dealing involve matters peculiar to the
relationships among or between the corporation and its current officers, directors,
and shareholders.) (citation omitted).
Moreover, as WPPs complaint sounds in fraud, its claims must also be
pleaded with particularity under Federal Rule of Civil Procedure 9(b). See Vess v.
Ciba-Geigy Corp. USA , 317 F.3d 1097, 1106-1107 (9th Cir. 2003) (holding that to
the extent a plaintiff relies upon allegations of fraudulent conduct to support state
law claims, a plaintiff must plead particularized facts detailing the who, what,
when, where and how required by Rule 9(b)); Kearns v. Ford Motor Co. , 567
F.3d 1120, 1125 (9th Cir. 2009) (applying Rule 9(b) to California state lawclaims); see also In re Daou Systems, Inc. , 411 F.3d 1006, 1027 (9th Cir. 2005).
The Complaint fails to plead the fraud allegations with particularity. See, e.g.
45-49, 53, 55, 65, 79, 91.
II. WPPS SECTION 10(B) AND RULE 10B-5 CLAIM SHOULD BEDISMISSED (COUNT ONE)
In the interest of avoiding duplication of arguments, Spot Runner joins in the
Management Motion to the extent it argues that the Complaint fails to plead a false
statement, fails to create a strong inference of scienter and fails to adequately plead
reliance under Section 10(b) of the Securities Exchange Act. Management Motion
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at 4-18. 4 The Complaint fails to state a Section 10(b) claim for the additional
reason that plaintiff has not pleaded loss causation.
A. The Complaint Fails to Adequately Plead Loss Causation.
WPP has not alleged and cannot establish that the alleged fraud caused anyloss. The Complaint does not allege any decline in the value of Spot Runner
common stock that WPP purchased in May 2007. In fact, WPP sold a portion of
this stock for a substantial profit less than a year later. This is a separate and
independent basis for dismissal of the Section 10(b) claim against Spot Runner. A
securities fraud plaintiff must prove both reliance (also known as transaction
causation) and loss causation. Dura Pharms., Inc. v. Broudo, 544 U.S. 336,
341-42, 125 S. Ct. 1627, 161 L.Ed.2d 577 (2005). Loss causation is akin to
proximate causation, and requires the complaint to provide a causal connection
between a loss and the alleged misrepresentation. Id. at 342; see also Lentell v.
Merrill Lynch & Co., 396 F.3d 161,171 (2d Cir. 2005).
Under Dura , the misrepresentation that allegedly caused the inflated
purchase price must also have caused the economic loss, not just the potential for
one. Dura , 544 U.S. at 345-46 (finding the complaint must provide defendantswith notice of what the relevant economic loss might be or what the causal
connection might be between that loss and the [alleged] misrepresentation); see
also Metzler Inv. GMBH v. Corinthian Colls., Inc. , 540 F.3d 1049, 1062-63 (9th
Cir. 2008) (affirming dismissal of securities case holding that loss causation
requires more than an allegation that a stock was purchased at an inflated price, the
complaint must allege that the companys stock price fell significantly after the
truth became known).
4 Plaintiffs Section 10(b) claim is subject to the stringent requirements of thePrivate Securities Litigation Reform Act of 1995 (PSLRA), which was enactedto deter opportunistic private plaintiffs from filing abusive securities fraud claims,in part, by raising the pleading standards for private securities fraud plaintiffs. Inre Silicon Graphics, Inc. Sec. Litig. , 183 F.3d 970, 973 (9th Cir. 1999).
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Indeed, the price of a company stock can decline for a number of reasons,
including, changed economic circumstances, changed investor expectations, new
industry-specific or firm specific facts, conditions or other events, which taken
separately or together account for some or all of that lower price. Dura
, 544 U.S.at 343. The Complaint fails to allege, as it must, that the alleged misrepresentation
caused a loss. The Supreme Court reaffirmed in Dura that the securities laws
operate not to provide investors with broad insurance against market losses, but to
protect them against those economic losses that misrepresentations actually cause.
Dura , 544 U.S. at 345. WPP has failed to plead loss causation.
The Section 10(b) claim solely hinges on an email from May 2007, where
Mr. Huie allegedly misrepresented that there were no secondary sales occurring by
the Founders, Battery, Index or existing investors prior to the purchase of common
stock by WPP. Cmpl. 53, 88-89. Specifically, the Complaint alleges that on
May 21, 2007, Alexander Barry, counsel to WPP, emailed Mr. Huie following
WPPs decision to purchase additional shares of Spot Runner. Id. 70. Mr. Barry
asked, [i]s there an existing investor and/or founder selling existing shares related
to this offering? If so, who is selling shares and how many shares are theyselling? Id. Mr. Huie responded stating, among other things, [t]his offering does
not involve the sale of any existing shares. It is an entirely new issuance by the
Company. Id. 71. As explained in the Management Motion at 4-12, Mr. Huies
email response was in response to WPPs question regarding its purchase of stock
from the Company, and was wholly separate and distinct from secondary sales that
occurred in June 2007.
The Complaint bases its entire loss causation theory on this one email.
According to the Complaint, [i]n purchasing an additional 383,111 shares of Spot
Runner stock in May 2007, WPP reasonably relied on Defendants representations
that Grouf, Waxman, Battery and Index were not selling their shares of the
Company, and WPP would not have acquired the additional Company stock had
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they known of these sales. Id. 90. WPP then claims that as a result of the email,
it has suffered damages under Section 10(b), no less than the total purchase price
of the stock it purchased in May 2007. Id. 92.
The Complaint entirely misses the point of loss causation. The securitieslaws are not intended to provide insurance against losses, but to protect them
against those economic losses that misrepresentations actually cause. Dura , 544
U.S. at 345. WPP has not and cannot allege that Mr. Huies email caused it any
loss. The allegations in the Complaint refute this claim. There is not a single
allegation that once the fact that the Founders, Battery and Index sold stock had
supposedly been revealed, Spot Runners stock price dropped. Indeed, WPP
cannot allege this.
WPP alleges that it purchased common stock in May 2007, for a per share
price of $4.66. Cmpl. 73. Later, in March 2008, WPP was given yet another
opportunity to sell a portion of its stake in Spot Runner. Id. 77. This time WPP
sold approximately 150,000 of its common shares in Spot Runner at $6.00 a share,
or $1.34 higher than the common stock it had purchased in May 2007 when it was
supposedly misled. Id. 82. Moreover, the allegations in the Complaint establishthat for the entire period at issue, the price of Spot Runner stock went up , not
down. Id. 59, 61, 64, 76. Nowhere in the Complaint does WPP point to a
revelation that the Defendants were selling stock, coupled with a decline in share
price. This alone defeats loss causation . Metzler, 540 F.3d at 1062-63. Because
the Complaint on its face establishes that there is no plausible basis to establish
loss causation, the Complaint should be dismissed on this further ground. Iqbal ,
129 S. Ct. at 1949-50; Twombly , 550 U.S. at 555-556.
III. WPP FAILS TO STATE A CLAIM FOR VIOLATIONS OFCALIFORNIA CORPORATION CODE SECTIONS 25401 AND 25501(COUNT TWO)
Similar to the Section 10(b) claim, WPPs claim under Sections 25401 and
25501 solely hinges on Mr. Huies email from May 21, 2007, which exclusively
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deals with WPPs purchase of common stock in May 2007. Id. 53, 88-89, 93-
95. As explained more fully in the Management Motion at 4-12, Defendants did
not misrepresent that the individual defendants were not selling their shares. See
alsoCmpl. 91, 93-95. Read in context, the May 21, 2007 email clearly
concerns WPPs purchase of common stock from the primary offering and cannot
be construed to mean that there was not a secondary offering involving the
opportunity to sell by existing shareholders. Id. ; see also supra at 6, 12-13. In
addition, the response by Mr. Huie to Mr. Barry was true the shares WPP
committed to purchase were from the Company. Id. Given that the email said that
the offering round was an entirely new issuance of shares, WPP could not have
reasonably interpreted that statement to have meant that no existing shareholders
were selling in the secondary round. Id.
Moreover, to have a valid cause of action under Section 25401, a plaintiff
must allege that there was a sale or purchase of stock in California by fraudulent
untrue statements or by omitting material facts that would by omission make the
statements misleading. See Cal. Corp. Code 25401. Such claims must also be
pleaded with particularity under Rule 9(b) when the cause of action is based on analleged fraud or misrepresentation. Vess , 317 F.3d at 1103-04; Kearns , 567 F.3d at
1125; see also MTC Elec. Tech. Co. v. Leung , 876 F. Supp. 1143, 1147 (C.D. Cal.
1995); Kainos Lab., Inc. v. Beacon Diagnostics, Inc. , No. C-97-4618 MHP, 1998
WL 2016634, at *16 (N.D. Cal. Sept. 14, 1998). Lastly, a plaintiff must
demonstrate it suffered actual damages from the alleged misrepresentation or
omission in order to sustain a claim under Section 25401. Malik v. Universal Res.
Corp. , 425 F. Supp. 350, 361 (S.D. Cal. 1976).
WPP alleges that Defendants engaged in acts of fraud and deceit because
they misrepresented that Grouf, Waxman, Battery and Index were not selling
stock. See Cmpl. 91, 93-95. However, as noted supra at 6 and 12-13, and
explained more fully in the Management Motion at 4-12, plaintiff has failed to
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demonstrate how Defendants made a misrepresentation concerning stock sales by
the Founders, Battery and Index. In contrast to WPPs allegation that Defendants
represented that the Founders, Battery and Index were not selling shares, the
Defendantsnever
made such a representation to WPP.Compare
Cmpl. 70-71(Is there an existing investor and/or founder selling existing shares related to this
offering? If so, who is selling shares and how many shares are they selling? . . .
[T]his offering does not involve the sale of any existing shares. It is an entirely
new issuance by the Company .) with 89-91 (WPP reasonably relied on
Defendants representations that Grouf, Waxman, Battery and Index were not
selling their shares of the Company . . . .) (emphasis added); see also
Management Motion at 4-12. To the contrary, as stated in the Complaint, Spot
Runner informed WPP that the Founders, Battery and Index would have the
opportunity to sell. See Cmpl. 67; Nefouse Decl. Ex. C (Please note that we are
notifying all preferred stockholders and the founders of the Investors desire to
purchase additional shares of common stock. In order to ensure an orderly and
efficient process, we will facilitate by allocating, on a pro rata basis, the Invetsors
demand among the notified stockholders, who have indicated an interest to sell .)(emphasis added). As such, WPP has failed to plead with particularity let alone
any factual basis how any alleged untrue statement of material fact by
Defendants misled them into purchasing additional shares of Spot Runner. See
Vess , 317 F.3d at 1103-04; see also Iqbal , 129 S. Ct. at 1949-50; Twombly , 550
U.S. at 555-556.
WPP has also failed to demonstrate how it suffered actual damages from any
alleged misrepresentation. See also supra at 11-13. The absence of evidence
demonstrating actual damages is fatal to WPPs claims under Sections 25401 and
25501. See Malik , 425 F. Supp at 361 ([T]he complete absence of competent
evidence demonstrating actual damage to plaintiffs from the debenture conversions
prevents any recovery with respect [to claims under Section 25401].). In sum,
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other grounds by Tooley v. Donaldson, Lufkin, & Jenrette, Inc ., 845 A.2d 1031
(Del. 2004). 5
Here, under Count Five, plaintiff has asserted a Derivative Suit Against All
Defendants for breach of fiduciary dutyto Spot Runner
. Cmpl. at 20. Despitethis attempt to include Spot Runner as a defendant, WPP is precluded from
asserting this particular derivative claim and all derivative claims against Spot
Runner itself, the very same company on whose behalf plaintiff brings the
derivative action. Rose Hall , 494 F. Supp. at 1151; Aronson v. Lewis , 473 A.2d
805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner , 746 A.2d
244 (Del. 2000); Bokat , 262 A.2d at 249. Accordingly, the Court should dismiss
Count Five as to Spot Runner, as well as the remaining derivative allegations
brought against Spot Runner itself.
V. WPPS INDIVIDUAL CLAIM FOR BREACH OF FIDUCIARY DUTYAGAINST SPOT RUNNER FAILS AS A MATTER OF LAW (COUNTSIX)
In addition to the derivative claim brought against All Defendants for
breach of fiduciary duty to Spot Runner, plaintiff has also asserted an individual
claim for breach of fiduciary duty to WPP against All Defendants. Cmpl. at 20.As demonstrated below, WPP is precluded from asserting a breach of fiduciary
duty claim directly against Spot Runner. 6
5 Courts in California also hold that a plaintiff cannot bring derivative claims
against the same company on whose behalf the claims are brought for in the first place. See Patrick v. Alacer Corp., 167 Cal. App. 4th 995, 1004, 84 Cal. Rptr. 3d642, 651 (2008) (The complaint in a derivative action is filed on the corporations
behalf; not against it.) (citing Jones v. H.F. Ahmanson & Co ., 1 Cal. 3d 93, 106,81 Cal. Rptr. 592 (1969)).
6 To the extent WPP relies on allegations of stock sales prior to WPPs initialinvestment in Spot Runner on August 29, 2006 in support of its claims for breachfiduciary duty, such claims must be dismissed for failure to meet Federal Rules of Civil Procedure, Rule 23.1s continuous ownership requirement. See Fed. R. Civ.P. 23.1; Lewis v. Chiles, 719 F. 2d 1044, 1047 (9th Cir. 1983); Kona Enter. Inc. v.
Estate of Bishop , 179 F.3d 767, 769-70 (9th Cir. 1999); Cmpl. 31; 59-60; 106-107; 111-112.
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A. WPP Is Precluded From Asserting An Individual Breach of
Fiduciary Duty Claim Against Spot Runner.
Spot Runner owes no fiduciary duty to WPP as an investor in Spot Runner.
Delaware law holds that fiduciary duties are not owed by a corporation to itsstockholders. See Arnold v. Society for Savings Bancorp, Inc. , 678 A.2d 533, 539
(Del. 1996) (Plaintiff has not cited a single case in which Delaware courts have
held a corporation directly liable for breach of the fiduciary duty of disclosure);
Gaffin v. Teledyne, Inc. , 611 A.2d 467, 472 (Del. 1992) (The only defendant is the
corporate entity, Teledyne, so there are no fiduciary duty claims.); Alessi v.
Beracha , 849 A.2d 939, 950 (Del. Ch. 2004) (holding that [f]iduciary duties are
owed by the directors and officers to the corporation and its stockholders. In other
words, [the company] owes no fiduciary duty to [the stockholder]. I will not
require [the company] to remedy [the stockholders] injury without a valid legal
theory for holding [the company] liable .) (emphasis added) (citation omitted).
The Delaware Supreme Courts holding in Arnold is instructive. In that
matter, following a merger, a company stockholder brought suit against the former-
company (that became a subsidiary of the surviving parent corporation), thesurviving parent corporation, and directors, alleging damages arising out of
claimed disclosure violations in the merger proxy statement. Arnold , 678 A.2d at
534-35. Included in the claims brought against the former-company was a breach
fiduciary duty claim for failure to disclose. Id. at 539. In recognizing that a
corporation does not have a fiduciary disclosure duty to shareholders in Delaware,
the Court held:
Plaintiff has not cited a single case in which Delaware courts have held
a corporation directly liable for breach of the fiduciary duty of
disclosure . . . This Court has stated: The only defendant is the
corporate entity . . . so there are no fiduciary duty claims. . . . We see
no legitimate basis to create a new cause of action.
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Id. (citation omitted).
Similarly, Spot Runner does not owe a fiduciary duty to WPP, as no such
fiduciary relationship exists between the Company and its investors. See Gaffin ,
611 A.2d at 472; Arnold
, 678 A.2d at 539; Alessi
, 849 A.2d at 950. Moreover, plaintiffs own allegations undermine any argument that Spot Runner owes WPP a
fiduciary duty under Delaware law. See Cmpl. 111 (As directors and majority
shareholders of Spot Runner, Defendants are fiduciaries toward Spot Runner and
its stockholders and owe to them the duty . . . As fiduciaries, they are bound to act
toward and deal with Spot Runner and its other stockholders with the utmost
fidelity. . . .) (emphasis added). For these reasons, this cause of action should be
dismissed against Spot Runner as a matter of law.
B. In The Alternative, WPPs Direct Claim For Breach of Fiduciary
Duty Is A Derivative Claim And Fails As A Matter of Law.
Even if WPP may bring a cause of action against Spot Runner for breach of
fiduciary duty to WPP and it cannot as it stands, Count Six is a derivative
claim. WPP attempts to bring this claim as a direct cause of action under the
erroneous presumption that its interests as a minority shareholder have allegedly been damaged. Cmpl. 113. WPP is incorrect. The Complaint alleges that
Defendants should not have allowed Messrs. Grouf, Waxman and Pittman, along
with Battery and Index, to sell stock directly to investors through secondary sales,
and instead should have allowed continued dilution of Spot Runner by issuing and
selling stock directly from the Company. Id. 79, 112-13. Even taking its
allegations as true, WPP has only alleged harm to the Company, as the damages
WPP discusses relate to a supposed missed opportunity for the Company to have
sold additional shares to investors. As such, merely alleging that its interests as a
minority shareholder have been affected will not convert a quintessentially
derivative claim into a direct one, as the alleged lost opportunity belonged to Spot
Runner, not WPP.
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Delaware law is clear: a claim is not direct simply because it is pleaded
that way. Dieterich v. Harrer , 857 A.2d 1017, 1027 (Del. Ch. 2004). Rather,
[i]n determining the nature of the wrong alleged, a court must look to the body of
the complaint, not to the plaintiffs designation or stated intention.Kramer
, 546
A.2d at 352. Whether a stockholders claim is derivative or direct turn[s] solely
on the following questions: (1) who suffered the alleged harm (the corporation or
the suing stockholders individually); and (2) who would receive the benefit of any
recovery or other remedy (the corporation or the stockholders, individually)?
Tooley , 845 A.2d at 1033 (emphasis in original); see also Agostino, 845 A.2d at
1122-23.
In analyzing these questions, courts look to the nature of the injury alleged
and who would receive the benefit of the remedy. Tooley , 845 A.2d at 1033. To
maintain a direct action, the stockholder must be able to show an injury
independent of any alleged injury to the corporation. Id . at 1039; see also LaSala
v. Bordier et cie , 519 F.3d 121, 130 n.9 (3d Cir. 2008) (holding that Delaware law
generally does not allow shareholders to assert breach-of-fiduciary-duty claims
directly, unless the shareholders can show damage distinct from the damage to thecorporation) (citing Tooley , 845 A.2d at 1034). The stockholder must also
demonstrate that it suffered a unique harm, not suffered by all stockholders. See
Feldman v. Cutaia , 951 A.2d 727, 733 (Del. 2008). If the stockholder does not
meet both prongs of this test, then its claim even if characterized as direct
cannot survive as a direct claim. Tooley , 845 A.2d at 1039.
In particular, when analyzing whether a breach of fiduciary duty claim is a
derivative or direct action, the test may be stated as follows: Looking at the body
of the complaint and considering the nature of the wrong alleged and the relief
requested, has the plaintiff demonstrated that he or she can prevail without
showing an injury to the corporation? Agostino , 845 A.2d at 1122. Moreover,
[s]ince the fiduciary duty of officers and directors runs to the corporation and the
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shareholder . . . the shareholder will always be able to assert a breach of duty owed
to it, but plainly not all fiduciary duty claims are individual claims. As such, in the
context of fiduciary duty claims, the focus should be on the nature of the injury.
Id.at 1122 n.54.
The allegations in Count Six (Breach of Fiduciary Duty to WPP) essentially
mirror the claims set out in Count Five (Breach of Fiduciary Duty to Spot Runner).
Compare Cmpl. 104-109 with 110-114. Moreover, in looking at both the
language of Count Six and the Complaint as a whole, the cause of action is clearly
a derivative claim describing a lost opportunity for Spot Runner as opposed to a
direct claim on behalf of WPP. In reading the language of Count Six together with
the remainder of the Complaint, as mandated by the Delaware Supreme Court in
Kramer , 546 A.2d at 352, WPP essentially contends that [t]he Board had secretly
permitted the Founders and the favored Defendant Investors to sell their shares
even though the Company would have greatly benefited from additional capital .
Id. 79 (emphasis added); see also Cmpl. 113. Any argument that WPP suffered
any harm by an alleged breach of fiduciary duty is contradicted by plaintiffs own
allegations, which explicitly state that [t]he Defendants, as members of the Boardand majority Investors, breached their fiduciary duties to the Company by taking
this opportunity to raise capital away from the Company so that they could profit
from the sales of their own shares . Id. 80 (emphasis added); see also Agostino ,
845 A.2d at 1122 (Looking at the body of the complaint and considering the
nature of the wrong alleged and the relief requested, has the plaintiff demonstrated
that he or she can prevail without showing an injury to the corporation?).
As demonstrated above, the nature of the alleged breach of fiduciary duty
injury described by WPP throughout its Complaint relates solely to an alleged lost
opportunity to Spot Runner. Any recovery from this claim would go directly to the
Company because WPP contends that the Defendants should not have profited
from their secondary sales, but instead that the investment should have gone to the
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Company. See also Cmpl. 115-118. WPP offers no facts to show how it
individually suffered any direct injury due to an alleged breach of fiduciary duty by
the Defendants. As Count Six is a derivative claim, the Court should dismiss
Count Six against Spot Runner for the same reasons demonstratedsupra
at 16-17; Bokat , 262 A.2d at 249.
C. Spot Runner Did Not Violate the ROFR and Co-Sale Agreement
Should the Court determine that WPP may bring a direct breach of fiduciary
duty claim against Spot Runner and that the claim is not a derivative cause of
action, Spot Runner did not breach any fiduciary duty owed to WPP because Spot
Runner did not violate the ROFR and Co-Sale Agreement. As the Complaint
acknowledges, section 3.9 of the ROFR and Co-Sale Agreement contains a proviso
that the holders of sixty percent (60%) of the Shares held by the Investors voting
together may waive, discharge, terminate, modify or amend, on behalf of all
Investors, any provisions hereof. Cmpl. 44; Nefouse Decl. Ex. B at 3.9. As
demonstrated in more detail in the Management Motion, the Defendants fully
abided by the terms of the ROFR and Co-Sale Agreement. See Management
Motion at 23-24.Moreover, as WPP bases its breach of fiduciary duty claim on allegations
that the Defendants allegedly were engaging in a scheme, conspiring and
acting with other deliberate misconduct ( see supra at 10), WPPs breach of
fiduciary duty claim sounds in fraud and must satisfy the stringent pleading
requirements of Federal Rule of Civil Procedure 9(b). WPPs Complaint,
however, includes nothing more than conclusory allegations that fall far short of
satisfying Rule 9(b). See Cmpl. 113 (Defendants have done so for self-serving,
improper and bad-faith reasons . . . [t]he Defendants have acted willfully, wantonly
and with reckless disregard); see also id. 79-80 ([t]he Board had secretly
permitted the Founders and the favored Defendant Investors to sell their shares
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28SPOT R UNNER S MEMO OF PS & A S ISO MOT . TO DISMISS VERIFIED COMPLAINT
CASE NO.: CV09-02487 PA (PLA X)
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even though the Company would have greatly benefited from additional capital.)
(emphasis added); Vess , 317 F.3d at 1103-04.
Furthermore, WPP fails to plead any particularized facts regarding how or
when the Company perpetrated the alleged scheme through the secondary sales bythe Founders, Battery and Index. Additionally, nowhere in Count Six does WPP
specify let alone mention how the Company breached any fiduciary duty to
WPP. To the contrary, WPP recognizes and claims that Spot Runner is in fact
owed a fiduciary duty. See Cmpl. 111. WPPs conclusory allegations thus fail to
provide the who, what, when, where, and how required by Rule 9(b). See Vess ,
317 F.3d at 1106 (citation omitted). The Complaints failure to plead facts
regarding the Companys alleged misconduct is insufficient to satisfy the
requirements of Federal Rule of Civil Procedure 8, much less Rule 9(b). See
Twombly , 550 U.S. at 556-561; Iqbal , 129 S. Ct. at 1949-50. In sum, WPP has
failed to plead any facts, much less particularized facts, demonstrating that the
Company breached any fiduciary duties to WPP.
VI. WPPS CLAIM FOR CONSTRUCTIVE TRUST AGAINST SPOTRUNNER FAILS AS A MATTER OF LAW (COUNT SEVEN)
In support of its constructive trust claim under California Civil Code Section
2224, WPP contends that Defendants violated their fiduciary duties to the
Company by misappropriating those opportunities for themselves. Cmpl. 117.
However, under both Delaware and California law, a constructive trust is an
equitable remedy, not a cause of action. See McKee v. McKee , No. Civ. A. 17773-
VCN, 2007 WL 1378349, at *3 (Del. Ch. May 3, 2007) (Constructive and
resulting trusts are not causes of action; they are equitable remedies);
Crescent/Mach I Partners, L.P. v. Turner , 846 A.2d 963, 991 (Del. Ch. 2000) (A
constructive trust is simply one of many conceivable alternative remedies which
might be available after trial should plaintiffs prevail on one or more of their
theories of recovery.); Communist Party v. 522 Valencia, Inc ., 35 Cal. App. 4th
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980, 990, 41 Cal. Rptr. 2d 618 (1995) (holding that a constructive trust is an
equitable remedy, not a substantive claim for relief). Accordingly, WPPs claim
for constructive trust should be dismissed as a matter of law for failure to state a
claim. Id.
CONCLUSION
For the foregoing reasons, Spot Runner, Inc. respectfully requests that the
Court grant its motion to dismiss with prejudice.
Dated: July 15, 2009 WILSON SONSINI GOODRICH & ROSATIProfessional Corporation
By: /s/ Boris Feldman
BORIS FELDMANAttorneys for DefendantSPOT RUNNER INC.