SR Motion To Dismiss

1 BORIS FELDMAN (State Bar No.
128838)
boris.feldman@wsgr.com
2 DOUGLAS J. CLARK (State Bar No. 171499)
dclark@wsgr.com
3 KELLEY M. KINNEY (State Bar No. 216823)
kkinney@wsgr.com
4 L. DAVID NEFOUSE (State Bar No. 243417)
dnefouse@wsgr.com
5 WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
6 650 Page Mill Road
Palo Alto, CA 94304-1050
7 Telephone: (650) 493-9300
Facsimile: (650) 565-5100
8
Attorneys for Defendant
9 SPOT RUNNER, INC.
10
11 UNITED STATES DISTRICT COURT
12 CENTRAL DISTRICT OF CALIFORNIA
13 WPP LUXEMBOURG GAMMA Case No.: CV 09 02487 PA (PLAx)
THREE SARL, on its behalf and
14 derivatively on behalf of SPOT SPOT RUNNER, INC’S
RUNNER INC., MEMORANDUM OF POINTS
15 AND AUTHORITIES IN
Plaintiff, SUPPORT OF MOTION TO
16 DISMISS VERIFIED
v. COMPLAINT FOR SECURITIES
17 FRAUD, VIOLATIONS OF
SPOT RUNNER INC., NICK GROUF, CALIFORNIA CORPORATIONS
18 DAVID WAXMAN, DANNY RIMER, CODE, BREACH OF
ROGER LEE, ROBERT PITTMAN, FIDUCIARY DUTY,
19 PETER HUIE, BATTERY CONSTRUCTIVE TRUST, AND
VENTURES VI, LP, BATTERY BREACH OF CONTRACT
20 INVESTMENT PARTNERS VI, LLC,
BATTERY VENTURES VII, L.P.,
21 BATTERY INVESTMENT Date: September 14, 2009
PARTNERS VII, LLC, INDEX Time: 1:30p.m.
22 VENTURES III (JERSEY) L.P., Judge: Hon. Percy Anderson
INDEX VENTURES III Dept.: Courtroom 15
23 (DELAWARE) L.P., INDEX
VENTURES III PARALLEL
24 ENTREPRENEUR FUND (JERSEY)
L.P.
25 Defendants.
26
27
28
SPOT RUNNER’S MEMO OF P’S & A’S ISO MOT. 3693741_4.DOC

TO DISMISS VERIFIED COMPLAINT
CASE NO.: CV09-02487 PA (PLAX)
1 TABLE OF CONTENTS
2 Page
3 INTRODUCTION .....................................................................................................1
4 BACKGROUND .......................................................................................................3
5 The Parties .......................................................................................................3
6 Series A, B and C Investments........................................................................3
7 Right of First Refusal and Co-Sale Agreement...............................................4
8 WPP’s May 2007 Stock Purchase...................................................................5
9 Summary of the Allegations............................................................................6
10 ARGUMENT.............................................................................................................8
11 I. APPLICABLE LEGAL STANDARDS .........................................................8
12 A. State Law Claims ..................................................................................9
13 II. WPP’S SECTION 10(B) AND RULE 10B-5 CLAIM SHOULD BE
DISMISSED (COUNT ONE) .......................................................................10
14
A. The Complaint Fails to Adequately Plead Loss Causation. ...............11
15
III. WPP FAILS TO STATE A CLAIM FOR VIOLATIONS OF
16 CALIFORNIA CORPORATION CODE SECTIONS 25401 AND
25501 (COUNT TWO) .................................................................................13
17
IV. WPP’S DERIVATIVE CLAIM FOR BREACH OF FIDUCIARY
18 DUTY AGAINST SPOT RUNNER FAILS AS A MATTER OF LAW
(COUNT FIVE).............................................................................................16
19
V. WPP’S INDIVIDUAL CLAIM FOR BREACH OF FIDUCIARY
20 DUTY AGAINST SPOT RUNNER FAILS AS A MATTER OF LAW
(COUNT SIX) ...............................................................................................17
21
A. WPP Is Precluded From Asserting An Individual Breach of
22 Fiduciary Duty Claim Against Spot Runner.......................................18
23 B. In The Alternative, WPP’s Direct Claim For Breach of Fiduciary
Duty Is A Derivative Claim And Fails As A Matter of Law..............19
24
C. Spot Runner Did Not Violate the ROFR and Co-Sale Agreement.....22
25
VI. WPP’S CLAIM FOR CONSTRUCTIVE TRUST AGAINST SPOT
26 RUNNER FAILS AS A MATTER OF LAW (COUNT SEVEN) ...............23
27 CONCLUSION........................................................................................................24
28
SPOT RUNNER’S MEMO OF P’S & A’S ISO MOT. -i- 3693741_4.DOC
1 TABLE OF AUTHORITIES
2 Page(s)
3 CASES
4 Agostino v. Hicks, 845 A.2d 1110 (Del. Ch. 2004) .....................................16, 20, 21
5 Alessi v. Beracha, 849 A.2d 939 (Del. Ch. 2004) .......................................18, 19, 20
6 Arnold v. Society for Savings Bancorp, Inc., 678 A.2d 533 (Del. 1996) ..........18, 19
7 Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled on other
grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000)............................... 17
8
Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009).......................................................8, 9, 13,
9 15, 23
10 Batchelder v. Kawamoto, 147 F.3d 915 (9th Cir. 1998) ........................................... 9
11 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L.Ed.2d
929 (2007) ............................................................................................8, 9, 13,
12 15, 23
13 Bokat v. Getty Oil Co., 262 A.2d 246 (Del. 1970), overruled on other
grounds by Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845
14 A.2d 1031 (Del. 2004).......................................................................16, 17, 22
15 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
16 (9th Cir. 2002) ................................................................................................. 4
17 Communist Party v. 522 Valencia, Inc., 35 Cal. App. 4th 980, 41 Cal.
Rptr. 2d 618 (1995) ....................................................................................... 23
18
Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963 (Del. Ch.
19 2000).............................................................................................................. 23
20 Dieterich v. Harrer, 857 A.2d 1017 (Del. Ch. 2004).............................................. 20
21 Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 125 S. Ct. 1627, 161
L.Ed.2d 577 (2005) ...........................................................................11, 12, 13
22
Edgar v. MITE Corp., 457 U.S. 624, 102 S. Ct. 2629, 73 L.Ed.2d 269
23 (1982) .............................................................................................................. 9
24 Feldman v. Cutaia, 951 A.2d 727 (Del. 2008)........................................................ 20
25 First Nat’l 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
26
Gaffin v. Teledyne, Inc., 611 A.2d 467 (Del. 1992) ..........................................18, 19
27
In re Daou Systems, Inc., 411 F.3d 1006 (9th Cir. 2005)........................................ 10
28
SPOT RUNNER’S MEMO OF P’S & A’S ISO MOT. -ii- 3693741_4.DOC
1 In re Digex, Inc. S’holders Litig., 789 A.2d 1176 (Del. Ch. 2000)......................... 16
2 In re Infonet Servs. Corp. Sec. Litig., 310 F. Supp. 2d 1080 (C.D. Cal.
2003)................................................................................................................ 9
3
In re Sagent Tech., Inc. Derivative Litig., 278 F. Supp. 2d 1079 (N.D.
4 Cal. 2003) ..................................................................................................9, 10
5 In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999).................... 11
6 In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996)........................................ 9
7 In re Verisign, Inc. Derivative Litig., 531 F. Supp. 2d 1173 (N.D. Cal.
2007)................................................................................................................ 9
8
Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 81 Cal. Rptr. 592 (1969) ................ 17
9
Kainos Lab., Inc. v. Beacon Diagnostics, Inc., No. C-97-4618 MHP,
10 1998 WL 2016634, (N.D. Cal. Sept. 14, 1998) ............................................ 14
11 Kearns v. Ford Motor Co., 567 F.3d 1120 (9th Cir. 2009)...............................10, 14
12 Kona Enter. Inc. v. Estate of Bishop, 179 F.3d 767 (9th Cir. 1999) ....................... 17
13 Kramer v. W. Pac. Indus., 546 A.2d 348 (Del. 1988) .................................16, 20, 21
14 LaSala v. Bordier et cie, 519 F.3d 121 (3d Cir. 2008) ............................................ 20
15 Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) ................................. 11
16 Lewis v. Chiles, 719 F. 2d 1044 (9th Cir. 1983)...................................................... 17
17 MTC Elec. Tech. Co. v. Leung, 876 F. Supp. 1143 (C.D. Cal. 1995) ..................... 14
18 Malik v. Universal Res. Corp., 425 F. Supp. 350 (S.D. Cal. 1976) ..................14, 15
19 McKee v. McKee, No. Civ. A. 17773-VCN, 2007 WL 1378349 (Del.
Ch. May 3, 2007)........................................................................................... 24
20
Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 (9th Cir.
21 2008)........................................................................................................11, 13
22 Patrick v. Alacer Corp., 167 Cal. App. 4th 995, 84 Cal. Rptr. 3d 642
(2008) ............................................................................................................ 17
23
Rose Hall Ltd. v. Chase Manhattan Overseas Banking Corp., 494 F.
24 Supp. 1139 (D. Del. 1980) ......................................................................16, 17
25 Sprewell v. Golden State Warriors, 266 F.3d 979 (9th Cir. 2001)............................ 8
26 State Farm Mut. Auto. Ins. Co. v. Superior Court, 114 Cal. App. 4th
434, 8 Cal. Rptr. 3d 56 (2003)....................................................................... 10
27
Taormina v. Taormina Corp., 78 A.2d 473 (Del. Ch. 1951) .................................. 16
28
SPOT RUNNER’S MEMO OF P’S & A’S ISO MOT. -iii- 3693741_4.DOC
1 Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003).................10, 14, 15,
23
2 STATUTES
3
Cal. Civ. Code § 2224......................................................................................7, 8, 23
4
Cal. Corp. Code § 25401 ...................................................................6, 13, 14, 15, 16
5
Cal. Corp. Code § 25501 .........................................................................6, 13, 15, 16
6
RULES
7
8 Fed. R. Civ. P. 9(b) ............................................................................................10, 23
9 Fed. R. Civ. P. 23.1.................................................................................................. 17
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
SPOT RUNNER’S MEMO OF P’S & A’S ISO MOT. -iv- 3693741_4.DOC
1 INTRODUCTION
2 Spot Runner, Inc. is a private start-up company that is developing the “next
3 generation” of television advertising services by improving the entire advertising
4 process. With Spot Runner's revolutionary approach to commercial production,
5 media planning and media buying services, businesses now have access to a
6 powerful marketing tool that was previously out of their reach. Since 2006, Spot
7 Runner has received awards on eighteen different occasions for excellence in
8 technology and advertising, including recognition from Fortune Magazine,
9 Business 2.0 and Red Herring, and works with some of the top entertainment,
10 technology and advertising companies in the United States.
11 Plaintiff WPP Luxembourg Gamma Three Sarl filed this purported
12 derivative and direct action against Spot Runner and certain of its officers,
13 directors and investors for violations of Section 10(b) of the Exchange Act,
14 violations of state securities laws, breaches of fiduciary duties, constructive trust,
15 and other claims. 1 WPP seeks to get more than its initial investment back by
16 asserting a mélange of claims against Spot Runner, its officers and directors. WPP
17 dresses up its claims with sensationalized allegations concerning stock sales by
18 individual defendants and investors. However, as referenced in the Complaint,
19 these sales were in fact permitted by the governing agreements with WPP.
20 The purpose of the securities laws is to compensate investors for economic
21 losses that are actually caused by reckless and deceitful conduct – not to provide
22 insurance for investments or to otherwise provide an avenue for investors to profit
23 from their investments. No such conduct occurred here. Pointedly, WPP can point
24 to no great “revelation” about these sales coupled with a decline in Spot Runner’s
25 stock price. As a private company, Spot Runner engaged in several rounds of
26
1
References to the Verified Complaint for Securities Fraud, Violations of
27 California Corporations Code, Breach of Fiduciary Duty, Constructive Trust, and
Breach of Contract appear as “Cmpl.” or “Complaint.”
28
SPOT RUNNER’S MEMO OF P’S & A’S ISO MOT. -1-
1 financing throughout the relevant period at issue. During each round of financing,
2 the price of Spot Runner’s stock increased. WPP was able to capitalize on this
3 increase, selling almost 40% of common shares it had purchased in May 2007 at a
4 substantial profit just ten months later. As evidence of the supposed fraud, WPP
5 points to an email exchange with Spot Runner’s General Counsel. The full email
6 exchange makes clear that Mr. Huie’s statements concerning WPP’s purchase of
7 common stock from the Company were accurate and provide no basis for securities
8 claims.
9 WPP makes other allegations concerning supposed breaches of fiduciary
10 duties by Spot Runner. First, as a matter of law, WPP cannot assert a derivative
11 claim against Spot Runner itself. Second, Spot Runner owes no fiduciary duty to
12 WPP as an investor in the Company. Finally, WPP, Spot Runner and its investors
13 negotiated at arms-length an agreement that would govern the procedure
14 surrounding the purchases and sales of stock in Spot Runner. Under the
15 agreement, WPP knew that a super-majority of the preferred shareholders could
16 waive any provision in the agreement. For WPP to belatedly assert derivative and
17 direct claims based on conduct expressly permitted under the agreement on a
18 theory that the conduct was “unfair” rings hollow in the face of the plain language
19 of the agreement, and belies the level of sophistication of WPP as an investor.
20 Although the Complaint paints WPP as a victim, plaintiff is a large,
21 sophisticated and experienced communications company that took a chance on a
22 small start-up company. In the midst of a severe economic downturn, WPP filed
23 an opportunistic lawsuit seeking to eliminate any risk it faces with its investment.
24 The fiduciary and securities laws were not constructed to reimburse investors for
25 losses due to a poor economy or other normal investment risks that start-up
26 businesses face. WPP’s claims against Spot Runner should be dismissed with
27 prejudice.
28
1 BACKGROUND
2 The Parties
3 Plaintiff WPP is a Luxembourg company that is one of the world’s largest
4 communications services groups. As noted above, defendant Spot Runner is a
5 private start-up company that was founded by Nick Grouf and David Waxman.
6 See Cmpl. ¶ 22. Spot Runner is a Delaware corporation that engages in media
7 buying and is developing an internet media-buying platform that provides an
8 innovative way for businesses to purchase cable and broadcast TV advertising
9 services online. Id. ¶¶ 5, 23.
10 Mr. Grouf is the current Chief Executive Officer and a member of the Board.
11 Id. ¶ 6. Mr. Waxman is a co-founder and a member of Spot Runner’s Board of
12 Directors. Id. ¶ 7. Collectively they are referred to as the “Founders.” Mr. Grouf
13 and Mr. Waxman, together with Robert Pittman, Roger Lee and Danny Rimer,
14 comprise Spot Runner’s Board of Directors (the “Board Defendants”). The
15 Complaint also names as a defendant Peter Huie, the general counsel for Spot
16 Runner, and Series A and Series B investors Battery Ventures, and its affiliated
17 entities (“Battery”), and Index Ventures, and its affiliated entities (“Index”). Id. ¶¶
18 11-18. The Founders, the Board Defendants, Mr. Huie and Battery and Index are
19 collectively referred to as “Defendants.”
20 Series A, B and C Investments
21 Spot Runner’s capital structure is like that of many high-risk/high-reward
22 start-ups. The Company was initially financed by Mr. Grouf and later venture
23 capitalists invested money in it. Battery and Index each invested approximately $6
24 million in Spot Runner through early 2006, buying preferred stock in the
25 Company’s Series A and Series B financing rounds. Id. ¶ 25. Battery and Index
26 are preferred stockholders of Spot Runner, collectively representing more than
27 sixty percent (60%) of shares held by preferred investors. Id. ¶ 26. In August
28 2006, Spot Runner held the Series C financing round, in which WPP purchased
1 approximately 2.7 million shares for approximately $10 million. Id. ¶¶ 31-32.
2 WPP and Spot Runner entered into a Board Observer Rights Agreement, which
3 provided that Spot Runner and WPP would mutually agree on a WPP
4 representative who would be entitled to attend Spot Runner’s meetings of the
5 Board of Directors. Id. ¶¶ 34-36; see Declaration of L. David Nefouse in Support
6 of Spot Runner’s Motion to Dismiss (“Nefouse Decl.”), Exhibit (“Ex.”) A. 2
7 On September 1, 2006, the holders of the Series A, Series B, and Series C
8 preferred stock entered the Second Amended and Restated Right of First Refusal
9 and Co-Sale Agreement (“ROFR and Co-Sale Agreement” or the “Agreement”)
10 with the Company and the Founders. Id. ¶ 38; Nefouse Decl. Ex. B.
11 Right of First Refusal and Co-Sale Agreement
12 Under the ROFR and Co-Sale Agreement, before any common stock can be
13 sold by a Founder, the Company has a right of first refusal to purchase those
14 shares. Id. ¶ 39; Nefouse Decl. Ex. B at § 1.1. The Agreement provides that if the
15 Company does not exercise its right to purchase shares from the Founder, each
16 preferred investor has the right to purchase its pro rata share, or a lesser amount, of
17 those shares not purchased by the Company. Cmpl. ¶ 40; Nefouse Decl. Ex. B at §
18 1.7.
19 If the right of first refusal to purchase shares from the Founders is not
20 exercised by the Company and the purchase right is not exercised by the preferred
21 investors, the Agreement provides a co-sale right where each preferred investor
22
23
2
24 Under the incorporation by reference doctrine, the Court may consider on a
motion to dismiss documents that a plaintiff relies upon in its Complaint and
25 whose 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 complaint
26 and whose authenticity no party questions, but which are not physically attached to
the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss”),
27 overruled in part on other grounds by Galbraith v. County of Santa Clara, 307
F.3d 1119 (9th Cir. 2002).
28
1 shall have the right to participate in any sale on the same terms and conditions.
2 Cmpl. ¶ 41; Nefouse Decl. Ex. B at § 2.1.
3 Importantly, the ROFR and Co-Sale Agreement also contains a proviso that
4 states “the holders of sixty percent (60%) of the Shares held by the Investors
5 voting together may waive, discharge, terminate, modify or amend, on behalf of
6 all Investors, any provisions hereof.” Cmpl. ¶ 44 (emphasis added); Nefouse
7 Decl. Ex. B § 3.9. Added together, Battery and Index hold more than sixty percent
8 (60%) of the shares held by preferred investors, and they have the right to waive
9 any provision in the Agreement on behalf of all the preferred investors. Cmpl. ¶
10 26.
11 WPP’s May 2007 Stock Purchase
12 In April 2007, Spot Runner sent WPP a letter offering WPP the opportunity
13 to purchase stock from the Company on the same terms as a recent institutional
14 investor. Cmpl. ¶ 63. Approximately a month later, on May 10, 2007, Spot
15 Runner sent WPP a second letter informing WPP that the institutional investor
16 desired to purchase additional common stock and giving WPP a separate
17 opportunity to sell stock to this institutional investor. Cmpl. ¶ 66; Nefouse Decl.
18 Ex. C. The letter informed WPP that the investor “has expressed a desire to
19 purchase additional shares of common stock. The Company currently does not
20 need additional capital but has offered to help facilitate sales of common stock by
21 existing stockholders (if possible).” Id. The letter went on to state that, “we are
22 notifying all preferred stockholders and the founders of the Investor’s desire to
23 purchase additional shares.” Cmpl. ¶ 67 (emphasis added). The letter further
24 added that “[i]n order to ensure an orderly and efficient process, we will facilitate
25 by allocating, on a pro rata basis, the Investor’s demand among the notified
26 stockholders who have indicated an interest to sell.” Id. (emphasis added). WPP
27 chose not to participate in this separate secondary sale opportunity. The sales by
28
1 existing stockholders related to this separate secondary offering closed in June
2 2007.
3 Following WPP’s decision and commitment to purchase stock as part of the
4 Company’s offering, Alexander Barry, counsel for WPP, emailed Mr. Huie on
5 May 21, 2007 asking questions about the logistics of WPP’s share purchase. Id. ¶
6 70; Nefouse Decl. Ex. D. The two were discussing WPP’s purchase of stock from
7 the Company, as supported by the subject line of Mr. Barry’s email, “WPP Share
8 Purchase.” Nefouse Decl. Ex. D. Mr. Barry then asked what WPP’s ownership
9 percentage would be after these purchases, and also asked “is there an existing
10 investor and/or founder selling existing shares related to this offering? If so, who
11 is selling shares and how many shares are they selling?” Id. Because this purchase
12 was directly from the Company, wholly separate from the opportunity to sell
13 shares, and thus did not involve secondary shares, Mr. Huie appropriately and
14 accurately responded that “[t]his offering does not involve the sale of any existing
15 shares. It is an entirely new issuance by the Company.” Cmpl. ¶ 71. On May 24,
16 2007, WPP purchased approximately 383,111 shares of common stock, as part of
17 the offering outlined in the April 17, 2007 offering letter, for a total investment of
18 approximately $1.7 million. Id. ¶ 73. This purchase was wholly unrelated to the
19 separate offering to participate in a secondary sale of shares that was outlined in
20 the May 10, 2007 letter. Id. ¶ 66; Nefouse Decl. Ex. C.
21 Summary of the Allegations
22 On April 9, 2009, WPP filed this purported derivative and direct lawsuit
23 against Spot Runner, the Board Defendants, Mr. Huie, Battery and Index. The
24 Complaint alleges nine causes of action, five of which are directed against Spot
25 Runner. WPP asserts direct claims for violation of the Securities Exchange Act
26 Section 10(b) and rule 10b-5 (Count One), violation of California Corporations
27 Code Sections 25401 and 25501 (Count Two), and purported derivative and direct
28 claims against Spot Runner itself for breach of fiduciary duty to itself and breach
1 of fiduciary duty to WPP (Counts Five and Six). Lastly, plaintiff seeks a
2 constructive trust under California Civil Code Section 2224 (Count Seven).
3 The crux of the Complaint’s allegations under Section 10(b) and the state
4 securities claim relates to WPP’s May 2007 purchase of additional Spot Runner
5 shares for approximately $1.7 million. WPP alleges Mr. Huie misrepresented that
6 there were no secondary sales occurring by the Founders or existing investors. 3
7 Cmpl. ¶ 53. As set out in the Motion to Dismiss filed on behalf of Messrs. Grouf,
8 Waxman, and Huie (“Management Motion”), which the Company joins, WPP has
9 not sufficiently alleged a misrepresentation by the Defendants. See Management
10 Motion at 4-12. As such, the securities claims fail because Mr. Huie’s email
11 contained no misrepresentation, as the title of the email itself makes clear that he
12 was discussing “WPP[’s] Share Purchase” from the Company. Moreover, WPP
13 has not and cannot allege that this email caused its supposed loss. In fact, Spot
14 Runner’s stock price went up through the relevant period. For this additional
15 reason, the Section 10(b) claim also fails.
16 The remaining direct and derivative allegations against Spot Runner concern
17 stock sales by individual defendants that took place at various times from 2006-
18 2008. The allegations include sales from the period before WPP had even invested
19 in Spot Runner, and center around claims that the Founders, Battery and Index sold
20 certain of their holdings in the Company without notice to WPP. Id. ¶ 47. The
21 Complaint acknowledges Defendants waived certain notice rights concerning these
22 sales and other rights of investors pursuant to the ROFR and Co-Sale Agreement.
23 Id. ¶¶ 47-48. Plaintiff alleges that these waivers of rights breached fiduciary
24 obligations to the Company, despite being permissible by the plain language of the
25 Agreement. Id. ¶ 47. Indeed, the Complaint acknowledges that Battery and Index
26
3
27 WPP acknowledges it was informed of secondary sales that occurred in
28 March 2008. Id. ¶ 58.
1 collectively held more than requisite number shares to waive any provision under
2 the ROFR and Co-Sale Agreement. Id. ¶ 55; see also Nefouse Decl. Ex. B at § 3.9.
3 The Complaint fails to state a claim against Spot Runner.
4 ARGUMENT
5 I. APPLICABLE LEGAL STANDARDS
6 To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must provide “more
7 than labels and conclusions, and a formulaic recitation of the elements of a cause of
8 action;” rather, a plaintiff must provide the grounds upon which its claim rests
9 through factual allegations sufficient “to raise a right to relief above the speculative
10 level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555,127 S. Ct. 1955, 1964-65,
11 167 L.Ed.2d 929 (2007). A 12(b)(6) motion to dismiss should be granted if the
12 complaint fails to proffer enough facts to state a claim for relief that is “plausible”
13 on its face. Id. at 556-561, 570-572.
14 Recently, the United States Supreme Court reaffirmed its discussion in
15 Twombly of the pleading requirements under Rule 8, and removed any doubt that
16 those requirements apply to all civil actions. See Ashcroft v. Iqbal, 129 S. Ct. 1937,
17 1944, 1949-52 (2009). The Court in Iqbal emphasized that the “plausibility”
18 standard is not akin to a probability requirement, but asks for more than a sheer
19 possibility that defendant has acted unlawfully, and requires the pleading of facts
20 that would make a claim plausible and not just conceivable. Id. at 1949. While all
21 allegations of material fact are taken as true, mere legal conclusions couched as
22 factual allegations are insufficient and are “disentitle[d] . . . to the presumption of
23 truth.” Id. at 1951 (“[T]he Federal Rules do not require courts to credit a
24 complaint’s conclusory statements without reference to its factual context.”). See
25 also Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001) (holding
26 that a Court is not “required to accept as true allegations that are merely conclusory,
27 unwarranted deductions of fact, or unreasonable inferences.”).
28
1 To assess plausibility, courts reject labels and plaintiffs’ conclusions that
2 parrot the elements of the claims. Twombly, 550 U.S. at 556-561; Iqbal, 129 S. Ct.
3 at 1950. This is especially true where such allegations are contradicted by
4 documents referenced in the complaint or in other information that may be
5 judicially noticed. See, e.g., In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1403-1405
6 (9th Cir. 1996); In re Infonet Servs. Corp. Sec. Litig., 310 F. Supp. 2d 1080, 1088
7 (C.D. Cal. 2003). The Complaint fails to state a claim that is plausible on its face.
8 A. State Law Claims
9 Spot Runner is incorporated in Delaware. Cmpl. ¶ 5. Under the internal
10 affairs doctrine, a corporation’s internal affairs are governed by the law of the state
11 of incorporation. See First Nat’l City Bank v. Banco Para El Comercio Exterior
12 de Cuba, 462 U.S. 611, 621, 103 S. Ct. 2591, 77 L.Ed.2d 46 (1983). A
13 corporation’s internal affairs are those “matters peculiar to the relationships among
14 or between the corporation and its current officers, directors, and shareholders.”
15 Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S. Ct. 2629, 2643, 73 L.Ed.2d 269
16 (1982). Because Spot Runner is a Delaware corporation, plaintiff’s claims for
17 breach of fiduciary duty, constructive trust, and breach of contract are evaluated
18 under Delaware law. See In re Sagent Tech., Inc. Derivative Litig., 278 F. Supp.
19 2d 1079, 1086-87 (N.D. Cal. 2003) (“In general, courts in California follow this
20 rule and apply the law of the state of incorporation in considering claims relating to
21 internal corporate affairs.”); In re Verisign, Inc. Derivative Litig., 531 F. Supp. 2d
22 1173, 1214-15 (N.D. Cal. 2007) (“Thus, Delaware law, the law of the state of
23 VeriSign’s incorporation, applies to all causes of action that implicate the
24 Company’s internal affairs, including the claims for breach of fiduciary duty,
25 accounting, unjust enrichment, rescission, constructive fraud, corporate waste,
26 breach of contract, gross mismanagement, and restitution.”).
27 Both federal and state courts in California routinely follow this maxim. See
28 Batchelder v. Kawamoto, 147 F.3d 915, 920 (9th Cir. 1998) (in a derivative suit,
1 the jurisdiction of incorporation determines issues relating to the internal affairs of
2 the corporation); Sagent, 278 F. Supp. 2d at 1090-92 (applying Delaware law to
3 claims of breach of fiduciary duty and insider trading asserted against directors of a
4 Delaware corporation headquartered in California); State Farm Mut. Auto. Ins. Co.
5 v. Superior Court, 114 Cal. App. 4th 434, 446, 8 Cal. Rptr. 3d 56, 67 (2003)
6 (applying Illinois law to claims by policy holders challenging Board decision about
7 dividends, finding that such claims of breach of contract and breach of the
8 covenant of good faith and fair dealing “involve ‘matters peculiar to the
9 relationships among or between the corporation and its current officers, directors,
10 and shareholders.’”) (citation omitted).
11 Moreover, as WPP’s complaint sounds in fraud, its claims must also be
12 pleaded with particularity under Federal Rule of Civil Procedure 9(b). See Vess v.
13 Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106-1107 (9th Cir. 2003) (holding that to
14 the extent a plaintiff relies upon allegations of fraudulent conduct to support state
15 law claims, a plaintiff must plead particularized facts detailing the “who, what,
16 when, where and how” required by Rule 9(b)); Kearns v. Ford Motor Co., 567
17 F.3d 1120, 1125 (9th Cir. 2009) (applying Rule 9(b) to California state law
18 claims); see also In re Daou Systems, Inc., 411 F.3d 1006, 1027 (9th Cir. 2005).
19 The Complaint fails to plead the fraud allegations with particularity. See, e.g. ¶¶
20 45-49, 53, 55, 65, 79, 91.
21 II. WPP’S SECTION 10(B) AND RULE 10B-5 CLAIM SHOULD BE
DISMISSED (COUNT ONE)
22
23 In the interest of avoiding duplication of arguments, Spot Runner joins in the
24 Management Motion to the extent it argues that the Complaint fails to plead a false
25 statement, fails to create a strong inference of scienter and fails to adequately plead
26 reliance under Section 10(b) of the Securities Exchange Act. Management Motion
27
28
1 at 4-18. 4 The Complaint fails to state a Section 10(b) claim for the additional
2 reason that plaintiff has not pleaded loss causation.
3 A. The Complaint Fails to Adequately Plead Loss Causation.
4 WPP has not alleged and cannot establish that the alleged fraud caused any
5 loss. The Complaint does not allege any decline in the value of Spot Runner
6 common stock that WPP purchased in May 2007. In fact, WPP sold a portion of
7 this stock for a substantial profit less than a year later. This is a separate and
8 independent basis for dismissal of the Section 10(b) claim against Spot Runner. A
9 securities fraud plaintiff must prove both “reliance” (also known as “transaction
10 causation”) and “loss causation.” Dura Pharms., Inc. v. Broudo, 544 U.S. 336,
11 341-42, 125 S. Ct. 1627, 161 L.Ed.2d 577 (2005). Loss causation is akin to
12 proximate causation, and requires the complaint to provide a causal connection
13 between a loss and the alleged misrepresentation. Id. at 342; see also Lentell v.
14 Merrill Lynch & Co., 396 F.3d 161,171 (2d Cir. 2005).
15 Under Dura, the misrepresentation that allegedly caused the inflated
16 purchase price must also have caused the economic loss, not just the potential for
17 one. Dura, 544 U.S. at 345-46 (finding the complaint must provide “defendants
18 with notice of what the relevant economic loss might be or what the causal
19 connection might be between that loss and the [alleged] misrepresentation”); see
20 also Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1062-63 (9th
21 Cir. 2008) (affirming dismissal of securities case holding that loss causation
22 requires more than an allegation that a stock was purchased at an inflated price, the
23 complaint must allege that the company’s stock price fell significantly after the
24 truth became known).
25
4
Plaintiff’s Section 10(b) claim is subject to the stringent requirements of the
26 Private Securities Litigation Reform Act of 1995 (“PSLRA”), which was enacted
“to deter opportunistic private plaintiffs from filing abusive securities fraud claims,
27 in part, by raising the pleading standards for private securities fraud plaintiffs.” In
re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 973 (9th Cir. 1999).
28
1 Indeed, the price of a company stock can decline for a number of reasons,
2 including, “changed economic circumstances, changed investor expectations, new
3 industry-specific or firm specific facts, conditions or other events, which taken
4 separately or together account for some or all of that lower price.” Dura, 544 U.S.
5 at 343. The Complaint fails to allege, as it must, that the alleged misrepresentation
6 caused a loss. The Supreme Court reaffirmed in Dura that the securities laws
7 operate “not to provide investors with broad insurance against market losses, but to
8 protect them against those economic losses that misrepresentations actually cause.”
9 Dura, 544 U.S. at 345. WPP has failed to plead loss causation.
10 The Section 10(b) claim solely hinges on an email from May 2007, where
11 Mr. Huie allegedly misrepresented that there were no secondary sales occurring by
12 the Founders, Battery, Index or existing investors prior to the purchase of common
13 stock by WPP. Cmpl. ¶¶ 53, 88-89. Specifically, the Complaint alleges that on
14 May 21, 2007, Alexander Barry, counsel to WPP, emailed Mr. Huie following
15 WPP’s decision to purchase additional shares of Spot Runner. Id. ¶ 70. Mr. Barry
16 asked, “[i]s there an existing investor and/or founder selling existing shares related
17 to this offering? If so, who is selling shares and how many shares are they
18 selling?” Id. Mr. Huie responded stating, among other things, “[t]his offering does
19 not involve the sale of any existing shares. It is an entirely new issuance by the
20 Company.” Id. ¶ 71. As explained in the Management Motion at 4-12, Mr. Huie’s
21 email response was in response to WPP’s question regarding its purchase of stock
22 from the Company, and was wholly separate and distinct from secondary sales that
23 occurred in June 2007.
24 The Complaint bases its entire loss causation theory on this one email.
25 According to the Complaint, “[i]n purchasing an additional 383,111 shares of Spot
26 Runner stock in May 2007, WPP reasonably relied on Defendants’ representations
27 that Grouf, Waxman, Battery and Index were not selling their shares of the
28 Company, and WPP would not have acquired the additional Company stock had
1 they known of these sales.” Id. ¶ 90. WPP then claims that as a result of the email,
2 it has suffered damages under Section 10(b), no less than the total purchase price
3 of the stock it purchased in May 2007. Id. ¶ 92.
4 The Complaint entirely misses the point of loss causation. The securities
5 laws are not intended to provide insurance against losses, “but to protect them
6 against those economic losses that misrepresentations actually cause.” Dura, 544
7 U.S. at 345. WPP has not and cannot allege that Mr. Huie’s email caused it any
8 loss. The allegations in the Complaint refute this claim. There is not a single
9 allegation that once the fact that the Founders, Battery and Index sold stock had
10 supposedly been “revealed,” Spot Runner’s stock price dropped. Indeed, WPP
11 cannot allege this.
12 WPP alleges that it purchased common stock in May 2007, for a per share
13 price of $4.66. Cmpl. ¶ 73. Later, in March 2008, WPP was given yet another
14 opportunity to sell a portion of its stake in Spot Runner. Id. ¶ 77. This time WPP
15 sold approximately 150,000 of its common shares in Spot Runner at $6.00 a share,
16 or $1.34 higher than the common stock it had purchased in May 2007 when it was
17 supposedly misled. Id. ¶ 82. Moreover, the allegations in the Complaint establish
18 that for the entire period at issue, the price of Spot Runner stock went up, not
19 down. Id. ¶¶ 59, 61, 64, 76. Nowhere in the Complaint does WPP point to a
20 “revelation” that the Defendants were selling stock, coupled with a decline in share
21 price. This alone defeats loss causation. Metzler, 540 F.3d at 1062-63. Because
22 the Complaint on its face establishes that there is no plausible basis to establish
23 loss causation, the Complaint should be dismissed on this further ground. Iqbal,
24 129 S. Ct. at 1949-50; Twombly, 550 U.S. at 555-556.
25 III. WPP FAILS TO STATE A CLAIM FOR VIOLATIONS OF
CALIFORNIA CORPORATION CODE SECTIONS 25401 AND 25501
26 (COUNT TWO)
27 Similar to the Section 10(b) claim, WPP’s claim under Sections 25401 and
28 25501 solely hinges on Mr. Huie’s email from May 21, 2007, which exclusively
1 deals with WPP’s purchase of common stock in May 2007. Id. ¶¶ 53, 88-89, 93-
2 95. As explained more fully in the Management Motion at 4-12, Defendants did
3 not misrepresent that the individual defendants were not selling their shares. See
4 also Cmpl. ¶¶ 91, 93-95. Read in context, the May 21, 2007 email clearly
5 concerns WPP’s purchase of common stock from the primary offering and cannot
6 be construed to mean that there was not a secondary offering involving the
7 opportunity to sell by existing shareholders. Id.; see also supra at 6, 12-13. In
8 addition, the response by Mr. Huie to Mr. Barry was true – the shares WPP
9 committed to purchase were from the Company. Id. Given that the email said that
10 the offering round was an entirely new issuance of shares, WPP could not have
11 reasonably interpreted that statement to have meant that no existing shareholders
12 were selling in the secondary round. Id.
13 Moreover, to have a valid cause of action under Section 25401, a plaintiff
14 must allege that there was a sale or purchase of stock in California by fraudulent
15 untrue statements or by omitting material facts that would by omission make the
16 statements misleading. See Cal. Corp. Code § 25401. Such claims must also be
17 pleaded with particularity under Rule 9(b) when the cause of action is based on an
18 alleged fraud or misrepresentation. Vess, 317 F.3d at 1103-04; Kearns, 567 F.3d at
19 1125; see also MTC Elec. Tech. Co. v. Leung, 876 F. Supp. 1143, 1147 (C.D. Cal.
20 1995); Kainos Lab., Inc. v. Beacon Diagnostics, Inc., No. C-97-4618 MHP, 1998
21 WL 2016634, at *16 (N.D. Cal. Sept. 14, 1998). Lastly, a plaintiff must
22 demonstrate it suffered actual damages from the alleged misrepresentation or
23 omission in order to sustain a claim under Section 25401. Malik v. Universal Res.
24 Corp., 425 F. Supp. 350, 361 (S.D. Cal. 1976).
25 WPP alleges that Defendants “engaged in acts of fraud and deceit” because
26 they misrepresented that Grouf, Waxman, Battery and Index were not selling
27 stock. See Cmpl. ¶¶ 91, 93-95. However, as noted supra at 6 and 12-13, and
28 explained more fully in the Management Motion at 4-12, plaintiff has failed to
1 demonstrate how Defendants made a misrepresentation concerning stock sales by
2 the Founders, Battery and Index. In contrast to WPP’s allegation that Defendants
3 represented that the Founders, Battery and Index were not selling shares, the
4 Defendants never made such a representation to WPP. Compare Cmpl. ¶¶ 70-71
5 (“Is there an existing investor and/or founder selling existing shares related to this
6 offering? If so, who is selling shares and how many shares are they selling? . . .
7 [T]his offering does not involve the sale of any existing shares. It is an entirely
8 new issuance by the Company.”) with ¶¶ 89-91 (“WPP reasonably relied on
9 Defendants’ representations that Grouf, Waxman, Battery and Index were not
10 selling their shares of the Company . . . .”) (emphasis added); see also
11 Management Motion at 4-12. To the contrary, as stated in the Complaint, Spot
12 Runner informed WPP that the Founders, Battery and Index would have the
13 opportunity to sell. See Cmpl. ¶ 67; Nefouse Decl. Ex. C (“Please note that we are
14 notifying all preferred stockholders and the founders of the Investor’s desire to
15 purchase additional shares of common stock. In order to ensure an orderly and
16 efficient process, we will facilitate by allocating, on a pro rata basis, the Invetsor’s
17 demand among the notified stockholders, who have indicated an interest to sell.”)
18 (emphasis added). As such, WPP has failed to plead with particularity – let alone
19 any factual basis – how any alleged untrue statement of material fact by
20 Defendants misled them into purchasing additional shares of Spot Runner. See
21 Vess, 317 F.3d at 1103-04; see also Iqbal, 129 S. Ct. at 1949-50; Twombly, 550
22 U.S. at 555-556.
23 WPP has also failed to demonstrate how it suffered actual damages from any
24 alleged misrepresentation. See also supra at 11-13. The absence of evidence
25 demonstrating actual damages is fatal to WPP’s claims under Sections 25401 and
26 25501. See Malik, 425 F. Supp at 361 (“[T]he complete absence of competent
27 evidence demonstrating actual damage to plaintiffs from the debenture conversions
28 prevents any recovery with respect [to claims under Section 25401].”). In sum,
1 WPP fails to plead particularized facts demonstrating that Spot Runner
2 misrepresented through an untrue statement that the individual defendants were not
3 selling stock and that WPP suffered actual damages because of any alleged
4 misrepresentation. Accordingly, the claim under Sections 25401 and 25501 fails
5 as a matter of law.
6 IV. WPP’S DERIVATIVE CLAIM FOR BREACH OF FIDUCIARY
DUTY AGAINST SPOT RUNNER FAILS AS A MATTER OF LAW
7 (COUNT FIVE)
8 Under Delaware law, a shareholder derivative claim is brought on behalf of
9 a corporation to address injuries done to the corporation by third parties. See Rose
10 Hall Ltd. v. Chase Manhattan Overseas Banking Corp., 494 F. Supp. 1139, 1151
11 (D. Del. 1980) (“In a derivative action the plaintiff stockholder sues on behalf of
12 the corporation against third parties who are alleged to be wrongdoers.”)
13 (emphasis added); Kramer v. W. Pac. Indus., 546 A.2d 348, 351-52 (Del. 1988)
14 (“In [a shareholder’s derivative suit], the shareholder sues on behalf of the
15 corporation for the harm done to it.”).
16 The nature of the derivative action is such that the injured corporation is
17 considered to be suing the defendants. See Agostino v. Hicks, 845 A.2d 1110, 1116
18 (Del. Ch. 2004) (“Generally a cause of action belonging to a corporation can be
19 asserted only by the corporation . . . whenever a corporation possesses a cause of
20 action which it either refuses to assert or, by reason of circumstances, is unable to
21 assert, equity will permit a stockholder to sue in his own name for the benefit of
22 the corporation.”) (citing Taormina v. Taormina Corp., 78 A.2d 473, 475 (Del. Ch.
23 1951)); In re Digex, Inc. S’holders Litig., 789 A.2d 1176, 1190 (Del. Ch. 2000)
24 (“[D]erivative actions are those that seek relief for injuries done to the
25 corporation”) (citation omitted). Thus, a derivative action brought on behalf of a
26 company cannot be brought against the same company, “for if this were not so, the
27 anomalous situation of a corporation suing itself for its own benefit would be
28 presented.” Bokat v. Getty Oil Co., 262 A.2d 246, 249 (Del. 1970), overruled on
1 other grounds by Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031
5
2 (Del. 2004).
3 Here, under Count Five, plaintiff has asserted a “Derivative Suit Against All
4 Defendants” for breach of fiduciary duty to Spot Runner. Cmpl. at 20. Despite
5 this attempt to include Spot Runner as a defendant, WPP is precluded from
6 asserting this particular derivative claim – and all derivative claims – against Spot
7 Runner itself, the very same company on whose behalf plaintiff brings the
8 derivative action. Rose Hall, 494 F. Supp. at 1151; Aronson v. Lewis, 473 A.2d
9 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d
10 244 (Del. 2000); Bokat, 262 A.2d at 249. Accordingly, the Court should dismiss
11 Count Five as to Spot Runner, as well as the remaining derivative allegations
12 brought against Spot Runner itself.
13 V. WPP’S INDIVIDUAL CLAIM FOR BREACH OF FIDUCIARY DUTY
AGAINST SPOT RUNNER FAILS AS A MATTER OF LAW (COUNT
14 SIX)
15 In addition to the derivative claim brought against “All Defendants” for
16 breach of fiduciary duty to Spot Runner, plaintiff has also asserted an individual
17 claim for breach of fiduciary duty to WPP against “All Defendants.” Cmpl. at 20.
18 As demonstrated below, WPP is precluded from asserting a breach of fiduciary
6
19 duty claim directly against Spot Runner.
20
5
21 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
22 place. See Patrick v. Alacer Corp., 167 Cal. App. 4th 995, 1004, 84 Cal. Rptr. 3d
642, 651 (2008) (“The complaint in a derivative action is filed on the corporation’s
23 behalf; not against it.”) (citing Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 106,
81 Cal. Rptr. 592 (1969)).
24 6
To the extent WPP relies on allegations of stock sales prior to WPP’s initial
25 investment in Spot Runner on August 29, 2006 in support of its claims for breach
fiduciary duty, such claims must be dismissed for failure to meet Federal Rules of
26 Civil Procedure, Rule 23.1’s 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.
27 Estate of Bishop, 179 F.3d 767, 769-70 (9th Cir. 1999); Cmpl. ¶¶ 31; 59-60; 106-
107; 111-112.
28
1 A. WPP Is Precluded From Asserting An Individual Breach of
2 Fiduciary Duty Claim Against Spot Runner.
3 Spot Runner owes no fiduciary duty to WPP as an investor in Spot Runner.
4 Delaware law holds that fiduciary duties are not owed by a corporation to its
5 stockholders. See Arnold v. Society for Savings Bancorp, Inc., 678 A.2d 533, 539
6 (Del. 1996) (“Plaintiff has not cited a single case in which Delaware courts have
7 held a corporation directly liable for breach of the fiduciary duty of disclosure”);
8 Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992) (“The only defendant is the
9 corporate entity, Teledyne, so there are no fiduciary duty claims.”); Alessi v.
10 Beracha, 849 A.2d 939, 950 (Del. Ch. 2004) (holding that “‛[f]iduciary duties are
11 owed by the directors and officers to the corporation and its stockholders.’ In other
12 words, [the company] owes no fiduciary duty to [the stockholder]. I will not
13 require [the company] to remedy [the stockholder’s] injury without a valid legal
14 theory for holding [the company] liable.”) (emphasis added) (citation omitted).
15 The Delaware Supreme Court’s holding in Arnold is instructive. In that
16 matter, following a merger, a company stockholder brought suit against the former-
17 company (that became a subsidiary of the surviving parent corporation), the
18 surviving parent corporation, and directors, alleging damages arising out of
19 claimed disclosure violations in the merger proxy statement. Arnold, 678 A.2d at
20 534-35. Included in the claims brought against the former-company was a breach
21 fiduciary duty claim for failure to disclose. Id. at 539. In recognizing that a
22 corporation does not have a fiduciary disclosure duty to shareholders in Delaware,
23 the Court held:
24 Plaintiff has not cited a single case in which Delaware courts have held
25 a corporation directly liable for breach of the fiduciary duty of
26 disclosure . . . This Court has stated: ‘The only defendant is the
27 corporate entity . . . so there are no fiduciary duty claims.’ . . . We see
28 no legitimate basis to create a new cause of action.
1 Id. (citation omitted).
2 Similarly, Spot Runner does not owe a fiduciary duty to WPP, as no such
3 fiduciary relationship exists between the Company and its investors. See Gaffin,
4 611 A.2d at 472; Arnold, 678 A.2d at 539; Alessi, 849 A.2d at 950. Moreover,
5 plaintiff’s own allegations undermine any argument that Spot Runner owes WPP a
6 fiduciary duty under Delaware law. See Cmpl. ¶ 111 (“As directors and majority
7 shareholders of Spot Runner, Defendants are fiduciaries toward Spot Runner and
8 its stockholders and owe to them the duty . . . As fiduciaries, they are bound to act
9 toward and deal with Spot Runner and its other stockholders with the utmost
10 fidelity. . . .”) (emphasis added). For these reasons, this cause of action should be
11 dismissed against Spot Runner as a matter of law.
12 B. In The Alternative, WPP’s Direct Claim For Breach of Fiduciary
13 Duty Is A Derivative Claim And Fails As A Matter of Law.
14 Even if WPP may bring a cause of action against Spot Runner for breach of
15 fiduciary duty to WPP – and it cannot – as it stands, Count Six is a derivative
16 claim. WPP attempts to bring this claim as a direct cause of action under the
17 erroneous presumption that its “interests” as a minority shareholder have allegedly
18 been damaged. Cmpl. ¶ 113. WPP is incorrect. The Complaint alleges that
19 Defendants should not have allowed Messrs. Grouf, Waxman and Pittman, along
20 with Battery and Index, to sell stock directly to investors through secondary sales,
21 and instead should have allowed continued dilution of Spot Runner by issuing and
22 selling stock directly from the Company. Id. ¶¶ 79, 112-13. Even taking its
23 allegations as true, WPP has only alleged harm to the Company, as the damages
24 WPP discusses relate to a supposed missed opportunity for the Company to have
25 sold additional shares to investors. As such, merely alleging that its interests as a
26 minority shareholder have been affected will not convert a quintessentially
27 derivative claim into a direct one, as the alleged lost opportunity belonged to Spot
28 Runner, not WPP.
1 Delaware law is clear: “a claim is not ‘direct’ simply because it is pleaded
2 that way.” Dieterich v. Harrer, 857 A.2d 1017, 1027 (Del. Ch. 2004). Rather,
3 “[i]n determining the nature of the wrong alleged, a court must look to ‘the body of
4 the complaint, not to the plaintiff’s designation or stated intention.’” Kramer, 546
5 A.2d at 352. Whether a stockholder’s claim is derivative or direct “turn[s] solely
6 on the following questions: (1) who suffered the alleged harm (the corporation or
7 the suing stockholders individually); and (2) who would receive the benefit of any
8 recovery or other remedy (the corporation or the stockholders, individually)?”
9 Tooley, 845 A.2d at 1033 (emphasis in original); see also Agostino, 845 A.2d at
10 1122-23.
11 In analyzing these questions, courts look to the nature of the injury alleged
12 and who would receive the benefit of the remedy. Tooley, 845 A.2d at 1033. To
13 maintain a direct action, the stockholder must be able to show an injury
14 independent of any alleged injury to the corporation. Id. at 1039; see also LaSala
15 v. Bordier et cie, 519 F.3d 121, 130 n.9 (3d Cir. 2008) (holding that “Delaware law
16 generally does not allow shareholders to assert breach-of-fiduciary-duty claims
17 directly, unless the shareholders can show damage distinct from the damage to the
18 corporation”) (citing Tooley, 845 A.2d at 1034). The stockholder must also
19 demonstrate that it suffered a unique harm, not suffered by all stockholders. See
20 Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008). If the stockholder does not
21 meet both prongs of this test, then its claim – even if characterized as “direct” –
22 cannot survive as a direct claim. Tooley, 845 A.2d at 1039.
23 In particular, when analyzing whether a breach of fiduciary duty claim is a
24 derivative or direct action, “the test may be stated as follows: Looking at the body
25 of the complaint and considering the nature of the wrong alleged and the relief
26 requested, has the plaintiff demonstrated that he or she can prevail without
27 showing an injury to the corporation?” Agostino, 845 A.2d at 1122. Moreover,
28 “[s]ince the fiduciary duty of officers and directors runs to the corporation and the
1 shareholder . . . the shareholder will always be able to assert a breach of duty owed
2 to it, but plainly not all fiduciary duty claims are individual claims. As such, in the
3 context of fiduciary duty claims, the focus should be on the nature of the injury.”
4 Id. at 1122 n.54.
5 The allegations in Count Six (Breach of Fiduciary Duty to WPP) essentially
6 mirror the claims set out in Count Five (Breach of Fiduciary Duty to Spot Runner).
7 Compare Cmpl. ¶¶ 104-109 with ¶¶ 110-114. Moreover, in looking at both the
8 language of Count Six and the Complaint as a whole, the cause of action is clearly
9 a derivative claim describing a lost opportunity for Spot Runner as opposed to a
10 direct claim on behalf of WPP. In reading the language of Count Six together with
11 the remainder of the Complaint, as mandated by the Delaware Supreme Court in
12 Kramer, 546 A.2d at 352, WPP essentially contends that “[t]he Board had secretly
13 permitted the Founders and the favored Defendant Investors to sell their shares
14 even though the Company would have greatly benefited from additional capital.”
15 Id. ¶ 79 (emphasis added); see also Cmpl. ¶ 113. Any argument that WPP suffered
16 any harm by an alleged breach of fiduciary duty is contradicted by plaintiff’s own
17 allegations, which explicitly state that “[t]he Defendants, as members of the Board
18 and majority Investors, breached their fiduciary duties to the Company by taking
19 this opportunity to raise capital away from the Company so that they could profit
20 from the sales of their own shares.” Id. ¶ 80 (emphasis added); see also Agostino,
21 845 A.2d at 1122 (“Looking at the body of the complaint and considering the
22 nature of the wrong alleged and the relief requested, has the plaintiff demonstrated
23 that he or she can prevail without showing an injury to the corporation?”).
24 As demonstrated above, the nature of the alleged breach of fiduciary duty
25 injury described by WPP throughout its Complaint relates solely to an alleged lost
26 opportunity to Spot Runner. Any recovery from this claim would go directly to the
27 Company because WPP contends that the Defendants should not have profited
28 from their secondary sales, but instead that the investment should have gone to the
1 Company. See also Cmpl. ¶¶ 115-118. WPP offers no facts to show how it
2 individually suffered any direct injury due to an alleged breach of fiduciary duty by
3 the Defendants. As Count Six is a derivative claim, the Court should dismiss
4 Count Six against Spot Runner for the same reasons demonstrated supra at 16-17;
5 Bokat, 262 A.2d at 249.
6 C. Spot Runner Did Not Violate the ROFR and Co-Sale Agreement
7 Should the Court determine that WPP may bring a direct breach of fiduciary
8 duty claim against Spot Runner and that the claim is not a derivative cause of
9 action, Spot Runner did not breach any fiduciary duty owed to WPP because Spot
10 Runner did not violate the ROFR and Co-Sale Agreement. As the Complaint
11 acknowledges, section 3.9 of the ROFR and Co-Sale Agreement contains a proviso
12 that “the holders of sixty percent (60%) of the Shares held by the Investors voting
13 together may waive, discharge, terminate, modify or amend, on behalf of all
14 Investors, any provisions hereof.” Cmpl. ¶ 44; Nefouse Decl. Ex. B at § 3.9. As
15 demonstrated in more detail in the Management Motion, the Defendants fully
16 abided by the terms of the ROFR and Co-Sale Agreement. See Management
17 Motion at 23-24.
18 Moreover, as WPP bases its breach of fiduciary duty claim on allegations
19 that the Defendants allegedly were “engaging in a scheme”, “conspiring” and
20 acting with other deliberate misconduct (see supra at 10), WPP’s breach of
21 fiduciary duty claim sounds in fraud and must satisfy the stringent pleading
22 requirements of Federal Rule of Civil Procedure 9(b). WPP’s Complaint,
23 however, includes nothing more than conclusory allegations that fall far short of
24 satisfying Rule 9(b). See Cmpl. ¶ 113 (“Defendants have done so for self-serving,
25 improper and bad-faith reasons . . . [t]he Defendants have acted willfully, wantonly
26 and with reckless disregard”); see also id. ¶¶ 79-80 (“[t]he Board had secretly
27 permitted the Founders and the favored Defendant Investors to sell their shares
28
1 even though the Company would have greatly benefited from additional capital.”)
2 (emphasis added); Vess, 317 F.3d at 1103-04.
3 Furthermore, WPP fails to plead any particularized facts regarding how or
4 when the Company perpetrated the alleged scheme through the secondary sales by
5 the Founders, Battery and Index. Additionally, nowhere in Count Six does WPP
6 specify – let alone mention – how the Company breached any fiduciary duty to
7 WPP. To the contrary, WPP recognizes and claims that Spot Runner is in fact
8 owed a fiduciary duty. See Cmpl. ¶ 111. WPP’s conclusory allegations thus fail to
9 provide the “‘who, what, when, where, and how’” required by Rule 9(b). See Vess,
10 317 F.3d at 1106 (citation omitted). The Complaint’s failure to plead facts
11 regarding the Company’s alleged misconduct is insufficient to satisfy the
12 requirements of Federal Rule of Civil Procedure 8, much less Rule 9(b). See
13 Twombly, 550 U.S. at 556-561; Iqbal, 129 S. Ct. at 1949-50. In sum, WPP has
14 failed to plead any facts, much less particularized facts, demonstrating that the
15 Company breached any fiduciary duties to WPP.
16 VI. WPP’S CLAIM FOR CONSTRUCTIVE TRUST AGAINST SPOT
RUNNER FAILS AS A MATTER OF LAW (COUNT SEVEN)
17
18 In support of its constructive trust claim under California Civil Code Section
19 2224, WPP contends that Defendants “violated their fiduciary duties to the
20 Company by misappropriating those opportunities for themselves.” Cmpl. ¶ 117.
21 However, under both Delaware and California law, a constructive trust is an
22 equitable remedy, not a cause of action. See McKee v. McKee, No. Civ. A. 17773-
23 VCN, 2007 WL 1378349, at *3 (Del. Ch. May 3, 2007) (“Constructive and
24 resulting trusts are not causes of action; they are equitable remedies”);
25 Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 991 (Del. Ch. 2000) (“A
26 constructive trust is simply one of many conceivable alternative remedies which
27 might be available after trial should plaintiffs prevail on one or more of their
28 theories of recovery.”); Communist Party v. 522 Valencia, Inc., 35 Cal. App. 4th
1 980, 990, 41 Cal. Rptr. 2d 618 (1995) (holding that a constructive trust is an
2 equitable remedy, not a substantive claim for relief). Accordingly, WPP’s claim
3 for constructive trust should be dismissed as a matter of law for failure to state a
4 claim. Id.
5 CONCLUSION
6 For the foregoing reasons, Spot Runner, Inc. respectfully requests that the
7 Court grant its motion to dismiss with prejudice.
8 Dated: July 15, 2009 WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
9
10 By: /s/ Boris Feldman
BORIS FELDMAN
11
Attorneys for Defendant
12 SPOT RUNNER INC.
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SR Motion To Dismiss

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1 BORIS FELDMAN (State Bar No.

SPOT RUNNER’S MEMO OF P’S & A’S ISO MOT. 3693741_4.DOC

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