Great Hill Equity Partners IV, LP

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

GREAT HILL EQUITY PARTNERS IV, )
LP, GREAT HILL INVESTORS LLC, )
FREMONT HOLDCO, INC., and )
BLUESNAP, INC. (F/K/A PLIMUS), )
)
Plaintiffs, )
)
v. ) C.A. No. 7906-VCG
)
SIG GROWTH EQUITY FUND I, )
LLLP, SIG GROWTH EQUITY )
MANAGEMENT, LLC, AMIR )
GOLDMAN, JONATHAN KLAHR, )
HAGAI TAL, TOMER HERZOG, )
DANIEL KLEINBERG, IRIT SEGAL )
ITSHAYEK, DONORS CAPITAL )
FUND, INC., and KIDS CONNECT )
CHARITABLE FUND, )
)
Defendants. )

MEMORANDUM OPINION

Date Submitted: August 13, 2014
Date Decided: November 26, 2014

Gregory V. Varallo, Rudolf Koch, and Robert L. Burns, of RICHARDS, LAYTON
& FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Stephen D. Poss,
Kathryn L. Alessi, and Adam Slutsky, of GOODWIN PROCTER LLP, Boston,
Massachusetts, Attorneys for Plaintiffs.

David J. Margules, of BALLARD SPAHR LLP, Wilmington, Delaware; OF
COUNSEL: M. Norman Goldberger, Laura E. Krabill, and William B. Igoe, of
BALLARD SPAHR LLP, Philadelphia, Pennsylvania, Attorneys for Defendants
SIG Growth Equity Management, LLC, SIG Growth Equity Fund I, LLLP, Amir
Goldman, Jonathan Klahr, Donors Capital Fund, Inc., Kids Connect Charitable
Fund, Daniel Kleinberg, and Tomer Herzog; Peter N. Flocos, of K&L GATES LLP,
New York, New York, Attorneys for Defendants Daniel Kleinberg and Tomer
Herzog.

David S. Eagle and Sean M. Brennecke, of KLEHR HARRISON HARVEY
BRANZBURG LLP, Wilmington, Delaware; OF COUNSEL: Michael K. Coran,
of KLEHR HARRISON HARVEY BRANZBURG LLP, Philadelphia,
Pennsylvania, Attorneys for Defendants Hagai Tal and Irit Segal Itshayek.

GLASSCOCK, Vice Chancellor

2
 This matter involves certain Defendants’ motion to dismiss claims against

them, arising from the Plaintiffs’ purchase of Plimus, a company in the business of

facilitating payment to sellers of goods online. Plimus’s business model was

dependent on its relationship with entities that facilitated payment from buyers—

notably Paymentech and PayPal, with which the majority of Plimus’s revenue was

associated. The Amended Complaint alleges that the Plimus executives who

negotiated the contract made fraudulent misrepresentations in connection with the

sale, withholding the information that Plimus’s relationship with Paymentech had

been terminated by Paymentech, and that its relationship with PayPal was also

about to be terminated. As a result of this fraud, argue Plaintiffs, they paid for

what they believed was a thriving company but got a near-moribund operation

instead. The Plaintiffs seek contractual damages as well as recovery from two

executives who negotiated the contract, based on fraud. The latter claims are not

the subject of this motion to dismiss, and I assume for purposes of this motion that

the complaint adequately pleads fraud against these two executives.

The Amended Complaint also seeks to recover against four members of the

board of directors, a major Plimus investor, and that investor’s registered agent,

which served as the stockholders’ representative, for fraud and/or for conspiring

with and aiding and abetting the executives in their fraudulent acts, in addition to

claims for indemnification and unjust enrichment. The Plaintiffs also seek to

3
recover from two other investors for indemnification and/or unjust enrichment.

These Defendants move to dismiss under Rule 12(b)(6), alleging, among other

things, failure to plead fraud with specificity as required under Chancery Rule 9.

For the reasons that follow, these Moving Defendants’ Motion is largely denied.

I. BACKGROUND FACTS

A. The Parties and Business

Plimus1 is an e-commerce payment processing business incorporated in

California, with its principal place of business in Waltham, Massachusetts.2

Plimus provides online tools, including a payment clearance platform, to its clients,

sellers of online goods and digital content including video games, music, and

software.3 Through this platform, Plimus acts as a payment intermediary between

its clients and purchasers of its clients’ electronic wares and services.4 Online

sellers typically use Plimus because they “lack the business experience necessary

1
Plimus has since been renamed BlueSnap, Inc., but is referred to in this Memorandum Opinion,
as it was during briefing and oral argument, by its pre-merger name. Unless otherwise noted, in
this Background Facts section I consider only those facts recounted in the Plaintiffs’ Amended
Complaint or derived from the documents incorporated by reference therein. See, e.g., Farmers
for Fairness v. Kent Cnty. Levy Court, 2012 WL 295060, at *3 n.13 (Del. Ch. Jan. 27, 2012).
2
Am. Compl. ¶¶ 2, 23; see also id. ¶ 43 (describing Plimus as “a provider of integrated e-
commerce and payment solutions that enable digital goods and content sellers . . . to sell their
products and services over the internet to consumers”). The Plaintiffs explain that Plimus is a
named plaintiff because “the Merger Agreement provides that Plimus, the Surviving Corporation
under the Merger Agreement, is among the parties entitled to indemnification . . . .” Id. ¶ 23.
3
Id. ¶¶ 2, 43–45, 51.
4
Id. ¶¶ 2, 44–45.

4
to fulfill the payment-processing function themselves, lack the infrastructure or

scale to do so, or both.”5

To deliver its payment platform, Plimus also acts as an intermediary

between its clients and payment processors that “deal directly with the major credit

card companies,” such as PayPal, Inc. (“PayPal”).6 In the Plaintiffs’ words:

For transactions where a consumer of Plimus’s clients chooses to use
a credit card, the payment processor serves as an intermediary
between the credit card association and Plimus, who in turn acts [as]
an intermediary between Plimus’s clients and the payment processor,
to process the credit card payment.7

Consequently, Plimus’s relationships with payment processors are critical to its

business model.8 These relationships are explored in further detail below.

Prior to its acquisition, Plimus was a private company, with a five-member

board of directors and a relatively concentrated ownership structure.9 Defendant

SIG Growth Equity Fund I, LLLP (“SIG Fund”), a Delaware limited liability

limited partnership with its principal place of business in Pennsylvania, was

Plimus’s largest stockholder.10 Defendant SIG Growth Equity Management, LLC

(“SIG Management,” and collectively with SIG Fund, “SIG”) is a Delaware

5
Id. ¶ 51.
6
Id. ¶ 51.
7
Id. ¶ 53.
8
See, e.g., id. ¶¶ 3, 52.
9
See, e.g., id. ¶ 40 (noting that, pre-merger, Plimus was “owned principally by Plimus’s
founders, Herzog and Kleinberg, along with SIG Fund and Tal”); id. ¶ 78 (noting that
“Defendants Herzog and Kleinberg . . . with Tal, Goldman and Klahr, comprised the entirety of
Plimus’s five-member Board of Directors”).
10
Id. ¶¶ 2, 25.

5
limited liability company also based in Pennsylvania.11 SIG Management is SIG

Fund’s authorized agent and, as described in further detail below, signed the

merger agreement as representative of the Company’s stockholders.12

At the time of the merger, SIG Fund held 7,957,977 shares of Plimus Series

A Preferred Stock.13 In connection with its large holding of Plimus stock, SIG

designated two members to the Plimus board, Defendants Amir Goldman and

Jonathan Klahr.14 Goldman, a Managing Director at SIG Management, also served

on the board of Susquehanna Growth Equity (“SGE”), the U.S.-based private

equity division of the Susquehanna International Group.15 Klahr, in addition to

serving on Plimus’s board, also served as a director of SIG Management and

SGE.16 Because of Goldman’s position with SIG Management, and both

Goldman’s and Klahr’s involvement with SGE, the Amended Complaint contends

that these individuals directed SIG’s actions.17

Plimus’s co-founders, Defendants Tomer Herzog and Daniel Kleinberg,

each owned 4,723,957 shares of Plimus common stock—a collective 44%

11
Id. ¶ 24.
12
Id. ¶¶ 24–25.
13
Id. ¶ 25.
14
Id. ¶ 41.
15
Id. ¶ 26.
16
Id. ¶ 27.
17
Id. ¶¶ 26–27.

6
ownership stake in the Company.18 Herzog and Kleinberg also served on the

Plimus board, and Herzog additionally served as the President of Plimus.19

Prior to closing, Plimus’s CEO was Defendant Hagai Tal, who also sat on

the board and owned 881,500 shares of Plimus common stock.20 Defendant Irit

Segal Itshayek served as Plimus’s Vice President of Financial Strategy and

Payment Solutions.21

Other stockholders of Plimus, prior to the closing, included Defendant

Donors Capital Fund, Inc. (“Donors Capital”), a Maryland corporation that owned

1,449,000 shares of Plimus’s Series A Preferred Stock, and Defendant Kids

Connect Charitable Fund (“Kids Connect”), a Virginia corporation that owned

351,000 shares of Series A Preferred Stock.22

B. The Merger

In late 2010, Plimus’s board and SIG decided to explore a possible sale of

the Company.23 Perkins Coie, the Company’s outside legal counsel, stepped in to

advise on the sale; the Company also retained investment banking firm Raymond

James.24 In connection with the sales process, Plimus and its investment bankers

18
Id. ¶¶ 29–30, 42.
19
Id. ¶¶ 29–30.
20
Id. ¶ 28.
21
Id. ¶ 31.
22
Id. ¶¶ 32–33.
23
Id. ¶ 60.
24
Id.

7
prepared a sales document entitled “Confidential Information Memorandum.”25

This Memorandum contained detailed information about Plimus’s business model,

leadership, historical successes, and financial projections and prospects, among

other things.26

Among those companies interested in acquiring Plimus were Great Hill

Equity Partners IV, LP, a Delaware limited partnership headquartered in Boston,

and Great Hill Investors LLC, a Massachusetts limited liability company also

headquartered in Boston (collectively, “Great Hill”). In early February 2011,

Great Hill signed a non-disclosure agreement with the Company,27 and in late

February, Plimus sent Great Hill the Confidential Information Memorandum.28

Great Hill also received access to the data room set up by Plimus to facilitate

information sharing with prospective bidders.29

On May 18, 2011, Great Hill submitted a bid letter to Plimus, indicating that

it valued the Company at approximately $115 million.30 On May 26, Great Hill

25
Id. ¶ 46; see also id. (“On information and belief, [Tal, Segal Itshayek, SIG, Klahr, Goldman,
Herzog and Kleinberg] were familiar with, approved and authorized the contents of the
Confidential Information Memorandum, were aware that the statements and information set forth
in it would be material and highly important to Great Hill and other potential buyers, and knew
that Great Hill would rely upon the information in this memorandum in submitting its bid to
purchase Plimus, in negotiating and entering into the Merger Agreements, and in closing the
Merger.”).
26
Id.; see also id. ¶¶ 47–50, 60.
27
Id. ¶ 63.
28
Id. ¶ 46.
29
Id. ¶¶ 61, 63.
30
Id. ¶ 63.

8
and Plimus entered into a letter agreement outlining the basic terms of a potential

acquisition (the “Letter Agreement”).31 The Letter Agreement reiterated that Great

Hill valued the Company at $115 million, and granted Great Hill an exclusivity

period in which the parties could negotiate the terms of a definitive agreement.32

During the negotiation process, Great Hill, aided by counsel and its expert due

diligence consultants, including PricewaterhouseCoopers LLP, engaged in

extensive due diligence, involving, among other things, exchanges of written

questions and responses as well as face-to-face meetings and telephone

conversations between Great Hill representatives and Plimus management. 33

The Plaintiffs claim that the individual Defendants were actively involved in

this sales process. The Amended Complaint alleges that Goldman and Klahr

attended board meetings and received a variety of information about the Company

in connection with their director roles and “through SIG’s information rights as a

major stockholder in Plimus;” they both also had access to the data room.34

Additionally, the Plaintiffs allege that Herzog and Kleinberg were “active

participants in Plimus’s business and the sales process;” during the sales process,

both of these co-founders “sought and obtained access to the materials in the data

room; repeatedly requested and received regular written updates from the

31
Id.
32
Id.
33
Id. ¶ 64.
34
Id. ¶¶ 41, 61.

9
Company’s investment banker and management concerning the sales process; and

participated in regular telephonic meetings with Tal, SIG directors Goldman and

Klahr, and Raymond James concerning the sales process.”35

Following extensive negotiations and diligence, Great Hill contracted to

acquire Plimus for $115 million through merger entities Fremont Holdco, Inc.

(“Fremont”), a Delaware corporation based in Massachusetts, and its wholly-

owned subsidiary Fremont Merger Sub, Inc.36 On August 3, 2011, Fremont,

Fremont Merger Sub, Inc., Plimus, SIG Management, and certain “Effective Time

Holders” (as explained below37) entered into an Agreement and Plan of Merger

(the “Original Merger Agreement”). On September 29, an Amended Agreement

and Plan of Merger (the “Amended Merger Agreement”), with substantially the

same terms, was executed among Fremont, Fremont Merger Sub, Inc., Plimus, SIG

Management, Herzog, Kleinberg, Tal, and SIG Fund.38 While Fremont Holdco,

Fremont Merger Sub, Inc., and Plimus are bound by the entire Amended Merger

Agreement, Herzog, Kleinberg, Tal, and SIG Fund only signed the Amended

Merger Agreement in connection with Section 5.06—the Agreement’s non-

35
Id. ¶ 42.
36
Am. Compl. Ex. A at 1 [hereinafter Original Merger Agreement].
37
See infra Part I.F.
38
The Plaintiffs note that “[t]he parties entered into the [Amended] Merger Agreement to reflect
certain changes in the Original Merger Agreement’s description of the structuring and mechanics
of the transaction, but did not make any substantive changes to the terms of the agreement,
including to Plimus’s representations and warranties.” Id. at 2 n.3.

10
compete, non-solicit, and confidentiality provisions.39 Further, SIG Management,

which executed the Amended Merger Agreement on behalf of the Effective Time

Holders as Stockholders’ Representative, only entered into certain sections of the

Amended Merger Agreement.40

The parties closed the merger on September 29, 2011. The Plaintiffs allege

that, in connection with the transaction, SIG Fund received over $50.17 million,

Donors Capital received over $9 million, Kids Connect received over $2.2 million,

Herzog and Kleinberg each received over $21.1 million, and Tal received over

$5.2 million.41

C. Plimus’s Payment Processing Relationships

The current dispute between the parties revolves around material

information that was allegedly withheld from the Plaintiffs during the sales

process, concerning the status and cause of Plimus’s deteriorating relationships

with its major payment processors. The Amended Complaint explains that

Plimus’s relationships with payment processors are critical to its payment platform.

As a May 2010 PowerPoint presentation prepared by Company management and

sent to Great Hill on August 29, 2011—after the parties entered into the Original

39
See Am. Compl. Ex. B [hereinafter Am. Merger Agreement] (Signature Pages).
40
Am. Compl. ¶ 24. Specifically, SIG Management executed the Amended Merger Agreement
in connection with Sections 2.09, 2.10, 2.15, 5.06(c), 5.06(d), 6.02, 7.01, 7.03, 7.08, 9.02, 10.05,
10.12, 11.02, 11.04, 11.05, and Article 12. Am. Merger Agreement at 1.
41
Id. ¶¶ 163–68.

11
Merger Agreement—noted, Plimus’s relationships with payment processors were

“one of the most significant and material relationships our company has.”42 This

presentation further reiterated that “[w]ithout these relationships our business

cannot exist. They are our gateway to all credit card issuers and additional

payment methods outside the U.S.”43 As of early 2011, Plimus had agreements

with several payment processors, including “key payment processor” Paymentech,

LLC (“Paymentech”) and PayPal, “Plimus’s most important payment processor.”44

However, the Plaintiffs allege that, unbeknownst to them, these integral business

relationships were in disrepair leading up to the merger—Paymentech already

having unilaterally terminated its agreement prior to the merger’s closing and

PayPal preparing to do the same eight days after the closing—due to Plimus’s

violations of contractual terms and the credit card association rules, as described

below.

1. Paymentech

Prior to Great Hill’s acquisition of Plimus, Paymentech was one of Plimus’s

“key payment processor[s].”45 On February 4, 2011, however, Paul Hankins,

Paymentech’s Associate General Counsel and Vice President, notified Plimus that

42
Id. ¶ 3; see also id. ¶ 52.
43
Id. ¶ 52.
44
Id. ¶ 3.
45
Id.

12
Paymentech intended to terminate the parties’ processing agreements on May 5,

2011.46 This notice provided that:

Paymentech has previously informed Plimus, on multiple occasions,
of Plimus’ breach of the Agreements. Those breaches include,
without limitation, submitting cross border transactions from countries
which Paymentech has no license, acting as an aggregator without a
license to do so, and violations of Association rules regarding the
unauthorized sale of Intellectual Property (as defined by the
Associations). As you are also aware, Plimus has failed to cure such
breaches for a period of time in excess of 30 days.47

On February 9, David Romano, a Paymentech account executive, sent an email to

Tal and Segal Itshayek urging Plimus to “cease all activity for any (and all) client,

vendor, supplier, author, sponsored merchant, etc. in India immediately,” and

warning that “[p]otential fines could be in the millions of dollars.”48 On February

11, 2011, Tal sent a letter to Hankins, noting that Paymentech’s “sudden

termination puts an unreasonable stress on several aspects of our business for

which we need to make transition [sic].”49 Tal, on behalf of Plimus, requested a

two-month extension, such that the relationship would not be terminated until July

5, 2011.50 On February 14, in his response to Tal, Hankins agreed to postpone the

termination until June 20, 2011, to give Plimus the opportunity to transition to a

new provider, but conditioned the extension on Plimus being compliant with

46
Id. ¶ 72.
47
Id. ¶ 72.
48
Id. ¶ 73 (emphasis omitted).
49
Id. ¶ 74 (emphasis omitted).
50
Id.

13
“merchant agreements and association rules.”51 Hankins’s letter noted that Plimus

was, at that time, still not in compliance with the processing agreements, as had

been expressed in his previous February 4, 2011 letter.52

The Plaintiffs allege that because Plimus “continued to violate the

Agreements and Association Rules,” Paymentech rescinded its extension on March

1, 2011 and stated its intent to terminate the parties’ agreements as of March 7,

2011.53 Despite providing a March 7 termination date, however, on March 3,

Roger Hart, Paymentech’s General Counsel, wrote to Tal that Paymentech would

extend the termination date to March 21, 2011.54 In his letter, though, “Hart

warned Plimus to ‘immediately and permanently cease submitting to Paymentech

any transactions representing new sales.’”55 Hart further conveyed that Plimus

would be liable for any fines or penalties associated with Plimus transactions that

were levied by the credit card companies, including those “substantial fines” that

“MasterCard has indicated it intends to impose . . . against Paymentech for Plimus’

noncompliance with MasterCard rules.”56

On March 7, Goldman emailed Tal and requested correspondence between

Plimus and Paymentech “to be sure we [i.e., SIG, Goldman, and Klahr] are up to

51
Id. ¶ 75.
52
Id.
53
Id. ¶ 7; see also id. ¶ 76.
54
Id. ¶ 77.
55
Id. (emphasis omitted).
56
Id. (emphasis omitted).

14
speed on that here.”57 Tal responded to Goldman’s request on or around March

18.58 On March 20, Klahr emailed Tal, requesting that he provide the same

correspondence to Herzog and Kleinberg, “who, with Tal, Goldman and Klahr,

comprised the entirety of Plimus’s five-member Board of Directors;” Klahr also

noted that he and Goldman had “questions we would like to ask [Perkins Coie]

about the deal and also about Paymentech.”59 Meanwhile, on March 18, Plimus’s

counsel at Perkins Coie had sent an email to Paymentech’s General Counsel,

copying Goldman, Klahr and Tal, informing Paymentech that Perkins Coie had

“been retained by [Plimus] to represent it in connection with Paymentech’s

unilateral termination of the agreements between Plimus and Paymentech and the

attendant winding down process.”60 Plimus counsel also expressed that the

withholding of funds by Paymentech in connection with the termination “has and

will continue to have a detrimental effect on Plimus’ business—especially during

this time of intensive transition.”61

The Plaintiffs allege that on March 21, 2011, per Paymentech’s General

Counsel’s notice, Paymentech terminated its relationship with Plimus.62 The

following day, “Klahr forwarded to Herzog and Kleinberg the Company’s

57
Id. ¶ 78.
58
Id.
59
Id.
60
Id. ¶ 79 (emphasis omitted). See generally Margules Affirmation Ex. 1.
61
Am. Compl. ¶ 7 (emphasis omitted); see also id. ¶ 79. See generally Margules Affirmation
Ex. 1.
62
Id. ¶ 7.

15
correspondence with Paymentech, including Perkins Coie’s March 18 letter to

Paymentech.”63 Through a separate email, Klahr requested that Herzog and

Kleinberg provide him a time they could speak by telephone.64 The Plaintiffs

believe that “at least Klahr, Herzog and Kleinberg spoke by telephone on March 22

regarding Paymentech’s termination of the Plimus relationship.”65

2. PayPal

According to the Plaintiffs, by the time of the merger, the same problems

that led to the termination of the Paymentech relationship were already destroying

Plimus’s even more important relationship with PayPal. Leading up to the merger,

the Plaintiffs allege, PayPal served as the Company’s “most important payment

processor.”66 In the third quarter of 2011, for instance, PayPal processed

approximately 66% of Plimus’s total payments.67 Through its agreement with

PayPal, Plimus could offer to its clients “the PayPal payment mechanism,”68 which

includes both PayPal credit card payment processing services and the PayPal

Wallet, an e-commerce payment mechanism with 132 million users in 133

63
Id. ¶ 80.
64
Id.
65
Id.
66
Id. ¶ 5(b).
67
Id. ¶ 9; see also id. ¶ 53.
68
Id. ¶ 59.

16
countries.69 The Plaintiffs describe the symbiotic business relationship between

Plimus and PayPal as follows:

Plimus maintained several of its own PayPal accounts, which
functioned as master accounts. Plimus then assigned its clients
individual sub-accounts organized underneath Plimus’s master
accounts. Because those clients maintained sub-accounts to Plimus’s
master accounts, rather than separate accounts of their own directly
with PayPal, Plimus was able to deduct and add monies to those sub-
accounts and fully administer its clients’ sales with no legwork
necessary by those clients—one of the reasons the clients sought
Plimus as a business partner.70

Beginning in June 2011, however—shortly after the Company’s relationship

with Paymentech had been terminated—the relationship between Plimus and

PayPal became similarly strained by Plimus’s violations of the credit card

association rules and related breaches of the parties’ agreements. The Plaintiffs

claim that “[t]he same inability or unwillingness of the Defendants to comply with

the chargeback rules and other card association rules that led to the March 2011

Paymentech termination soon led to a crisis with PayPal.”71 In fact, the Plaintiffs

claim, rather than attempt to remedy the underlying breaches and “[d]espite

Paymentech’s March 2011 termination of Plimus due to Plimus’s repeated

breaches of the Paymentech agreement and the card association rules due to

69
Id. ¶ 56.
70
Id. ¶ 59.
71
Id. ¶ 89.

17
excessive chargebacks, in April 2011 Tal caused Plimus to take on numerous new

high risk clients.”72

a. The MasterCard BRAM Program

MasterCard has developed a business risk-monitoring program, the Business

Risk Assessment & Mitigation Programs (the “BRAM Program”),

whereby MasterCard monitors and enforces compliance with its rules
and regulations by sellers and seeks to identify transactions that may
cause legal, risk, and regulatory problems to the MasterCard brand.
Through the program, MasterCard also monitors sellers who it knows
have a history of violations, and further monitors those entities
choosing to do business with such sellers.73

According to the Amended Complaint, violations of the BRAM Program are taken

“extremely serious[ly]” within the payment processing industry, as they “can often

result in MasterCard terminating its relationships with a credit card payment

processor or MasterCard ordering a credit card payment processor to cease doing

business with sellers and entities related to those sellers.”74 Under this Program,

MasterCard retains sole discretion to terminate its relationship with a
credit card payment processor in the event of a BRAM violation. . . .
MasterCard may also impose significant fines, fees, or penalties for

72
Id. ¶ 88 (contending that “[t]his was a classic scheme to attempt to maintain the illusion of
Plimus’s continued growth and profitability while Great Hill was considering how much to offer
for Plimus,” and that it was “directly contrary to the financial picture of stable, recurring and
growing clients, revenues and profits the Defendants had portrayed to Great Hill”).
73
Id. ¶ 86.
74
Id. ¶ 87.

18
 participation tied to BRAM violations upon payment processors who
pass on such fees to Plimus and similar entities.75

The Company, as a result of its contractual relationship with PayPal, was

subject to the rules and regulations promulgated by MasterCard, including the

BRAM Program; Plimus was also prohibited from engaging in any business

activity resulting in fraudulent transactions.76 According to the Amended

Complaint, “Plimus’s relationship with PayPal was preconditioned on Plimus’s

compliance with the MasterCard BRAM program, and PayPal retained the right to

terminate that relationship based on any violations of that program.”77

b. Plimus’s June 2011 BRAM Violation

On June 16, 2011, three months after Paymentech terminated its relationship

with Plimus, the Plaintiffs allege that Rick Lancaster, a PayPal employee who

managed Plimus’s account, contacted Segal Itshayek by phone, notifying her that

one of Plimus’s clients had “violated the MasterCard BRAM program’s

prohibitions against fraudulent get-rich-quick schemes.”78 The same day, allegedly

“immediately recogniz[ing] the ramifications of the June 2011 BRAM Violation,”

Plimus’s COO emailed Segal Itshayek that “[w]e don’t want the word to spread

75
Id.; see also id. ¶ 9 (“[E]ven a single violation of [the BRAM Program] . . . can cause
MasterCard to sever its relationships with those entities and will, at the very least, result in
substantial fines and penalties.”).
76
Id. ¶ 92.
77
Id.
78
Id. ¶ 89(a).

19
out,”79 and Plimus’s Assi Itshayek80 and Tal emailed Klahr and Goldman to

schedule a conference call “to put adjustments to the agreement that in my eyes

have [a] material financial impact.”81 Goldman responded that he and SIG’s in-

house counsel would participate in the call.82 The evening of June 16, at 11:34

p.m., Tal emailed a PayPal contact, requesting a call.83

On June 17, Segal Itshayek sent Lancaster a letter that stated:

Following our conversation yesterday, I would like to inform you, on
behalf of Plimus, the account “[Client Y]” was suspended yesterday
and is being terminated from our system. . . . In addition, we have
launched an internal investigation to determine if we have any similar
“get rich quick” scheme accounts that will require suspension as well.
We will update you on the results of this investigation early next
week.84

On June 23, Lancaster requested a status update on Plimus’s investigation.85 Segal

Itshayek responded that most of the get-rich-quick clients had already been

suspended, but that “[t]here are a few that we are still investigating and most

probably finalize [sic] our conclusions by the end of this week.”86 In total, Plimus

terminated sixteen other accounts as a result of its internal investigation.87

79
Id. ¶ 89(b).
80
To prevent confusion with Defendant Irit Segal Itshayek, I will refer to Assi Itshayek by first
name, as was done in the Amended Complaint. No disrespect is intended.
81
Am. Compl. ¶ 89(b).
82
Id.
83
Id.
84
Id. ¶ 89(c) (emphasis omitted).
85
Id. ¶ 89(d).
86
Id.
87
Id.

20
According to the Plaintiffs, Tal and Segal Itshayek communicated this information

regarding the termination of clients to Great Hill in June 2011, including the

representation that “Plimus did not need to terminate any additional clients due to

excessive chargeback ratios, and that the termination of this small group of clients

fixed the problem.”88 The Amended Complaint alleges that “[d]uring this period

of back-and-forth between Plimus and PayPal, Tal and SIG were communicating

by telephone, including an eighteen-minute call on June 22, a sixteen-minute call

on June 26, and a fifteen-minute call on June 28.”89

As a result of Plimus’s client’s violation, PayPal charged Plimus a $200,000

fine, passing on the fine MasterCard had charged PayPal for breaching its brand

integrity rules.90 Segal Itshayek became aware of the fine on September 22,

2011.91 The Amended Complaint contends that “[t]he fine was clearly recognized

by several of the [] Defendants as a major problem,” and that “[d]uring the two-day

period following PayPal’s notification of the fine . . . Tal emailed Goldman to call

him, and Tal (and others at Plimus) exchanged at least seven phone calls with SIG,

including Klahr.”92

c. August 2011 BRAM/Aggregation Violation

88
Id. ¶ 104.
89
Id. ¶ 89(e).
90
Id. ¶¶ 5(b), 138.
91
Id. ¶ 138.
92
Id.

21
 The Plaintiffs contend that concurrent with Plimus’s June 2011 BRAM

violation, PayPal began expressing concern that Plimus was also violating another

of MasterCard’s BRAM rules by acting as an aggregator, instead of a reseller.93

To be acting as an aggregator, which is prohibited by the BRAM Program, meant

that “Plimus was using its own merchant account in an unauthorized manner to

aggregate and process transactions for its clients, rather than acting as a reseller by

purchasing is clients’ products and re-selling those products to end-users.”94 On

June 21, Lancaster, PayPal’s account representative for Plimus, informed Segal

Itshayek that:

PayPal needs to obtain a letter from you outlining the business model
for Plimus that we can provide to the Card Association. In that letter
you need to explain why you are not aggregating and how you
purchase the product from the merchant and resell it to the end user.95

Segal Itshayek responded later that day.96 In August 2011, PayPal communicated

to Segal Itshayek and Plimus employee Jason Edge that MasterCard considered

Plimus in violation of its aggregation rules, and was levying a $500,000 fine

against the Company; Plimus eventually negotiated this fine down to $400,000.97

d. Chargeback Violations

93
Id. ¶ 10. Notably, by this time Paymentech had allegedly previously conveyed that Plimus had
breached its agreements by “acting as an aggregator without a license to do so.” Id. ¶ 72.
94
Id. ¶ 5(b).
95
Id. ¶ 90 (internal quotation marks omitted).
96
Id. ¶ 91.
97
Id. ¶¶ 10, 157.

22
 In the wake of the June 2011 BRAM violation, PayPal additionally required

Plimus “to submit a written plan to reduce chargebacks.”98 As defined by the

Amended Complaint, “chargebacks” are “reversals by credit card associations of

credit card charges that consumers successfully dispute.”99 Credit card

associations and their sponsor banks set maximum thresholds for the percentage of

chargeback transactions that are tolerated; for U.S.-based transactions, the

chargeback threshold is typically 1.0%.100 Notably here, “[c]redit card associations

and payment processors regularly monitor chargeback ratios for transactions

originating from Plimus and similar companies, which are subject to penalties—

including termination—for exceeding that 1.0% threshold.”101

During the summer of 2011, Plimus’s chargeback ratio exceeded the

permissible thresholds.102 On August 4, 2011, PayPal’s account representative

Lancaster contacted Plimus’s Edge, notifying him that the Company had exceeded

the 1.0% chargeback threshold in both June and July 2011; Edge forwarded this

98
Id. ¶ 102.
99
Id. ¶ 5(b); see also ¶ 102 (“Chargebacks occur when a consumer who has charged a purchase
on a credit card contacts the issuing bank and successfully disputes one or more transactions on
the credit card statement. The transaction is ‘charged back,’ meaning it is reversed by the credit
card association so that the consumer is not responsible for the payment on that transaction.”).
100
Id. at 12 & n.5.
101
Id. ¶ 12; see also id. ¶ 102 (“Processors—such as PayPal and Paymentech—that process Visa
and MasterCard U.S. transactions require that Plimus and other similar companies maintain
chargeback ratios within the 1.0% chargeback threshold set by the U.S. credit card
associations.”).
102
Id. ¶ 5(b).

23
email to Segal Itshayek that same day.103 Thereafter, PayPal monitored the

chargebacks of Plimus’s clients on a weekly basis, while representatives of Plimus

and PayPal held weekly meetings to address PayPal’s concerns with excessive

chargebacks.104

On August 11, Lancaster and Edge spoke on the telephone about Plimus’s

chargeback violations.105 That same day, Edge sent Tal and Segal Itshayek a draft

email ultimately intended for PayPal, describing the content of the call. This draft

email noted that:

1. Plimus has had MasterCard Violations above 1% in June and
July 2011. If after the August numbers are finalized and if Plimus
exceeds 1% the 3rd month in a row PayPal will issue a 30 day notice
to potentially shut down Plimus’ ability to process on the [PayPal] Pro
account unless numbers improve.

2. PayPal also received notice from Visa regarding a specific
violator, [Client X], as Plimus previously discussed with PayPal this
vendor was shut down July 11 . . . .106

Segal Itshayek responded to Edge with the following feedback: “[R]emove

[paragraphs] 1 and 2 . . . . Just keep the steps we r [sic] taking . . . . The rest will

be communicated verbally.”107

103
Id. ¶ 117.
104
Id.
105
Id. ¶ 118.
106
Id. ¶ 120 (emphasis omitted).
107
Id.

24
 Primus communicated the issue regarding Client X, contained in the second

paragraph of Edge’s draft email, to Great Hill on September 23 in connection with

the Amended Merger Agreement’s Supplemental Disclosure; that disclosure

followed a September 21 email by Klahr to Segal Itshayek asking her for “the Visa

non-compliance notice dated from August 10.”108 However, according to the

Plaintiffs, Plimus failed to disclose to Great hill pre-closing the larger issue

contained in the first paragraph of Edge’s draft email—PayPal potentially

terminating its payment-processing relationship with Plimus if chargeback ratios

did not improve.109 Even without this information, though, Great Hill appeared

concerned by the information that Plimus did disclose concerning Client X’s

chargebacks; on the heels of the supplemental disclosure regarding Client X, Great

Hill principal Christopher Busby asked Tal to “describe what happened and any

potential consequences,” and Great Hill counsel also asked Plimus’s counsel to

describe “the risk to Plimus” stemming from PayPal’s inquiry into Client X’s

108
Id. ¶ 139; see also id. ¶ 140 (noting that that disclosure read: “On August 16, 2011, the
company’s account manager at PayPal contacted the Company following a request made by Visa
of information regarding [Client X], entity that used the Company’s platform. The basis for such
request was a chargeback ratio level for [Client X] of 1.65%. The Company provided responsive
information to PayPal’s request.”).
109
See, e.g., id. ¶ 142 (“Plimus intended the narrow, incomplete and intentionally deceptive
disclosure about Client X to conceal the truth from Great Hill as it omitted the most important
facts—that Plimus had received notice of the June 2011 BRAM Violation, that Plimus had
exceeded the PayPal 1.0% chargeback ratio in July, that PayPal had threatened to terminate its
payment processing relationship if Plimus again exceeded the ration during August, that Plimus
in fact exceeded the ratio in August, and that termination of the PayPal account was imminent.”).

25
violations.110 The Company’s counsel emailed Great Hill’s counsel,

acknowledging that the violation from Client X was “arguably responsive” to

Plimus’s representations in the Amended Merger Agreement “as an exception to

compliance with the PayPal contract terms,” but assuring Great Hill that “Plimus is

taking steps to mitigate any further violations.”111

e. Plimus Reacts to the Chargeback Violations

The Plaintiffs allege that, to remedy these chargeback issues and thus retain

its relationship with PayPal, Plimus would have had “to terminate broad categories

of clients that offered services and products that credit card associations considered

high-risk.”112 However, according to the Amended Complaint, in August of 2011,

Plimus management instead implemented a three-pronged strategy, “many of the

plan components” of which were merely “a continuation of activities that Plimus

had begun in June and July,” to “hide the PayPal problems long enough to keep

them from becoming known to Great Hill prior to the September 29 closing of the

Merger.”113

First, the Plaintiffs allege that Plimus engaged in “client trimming,” meaning

that, instead of severing Plimus’s relationship with high-risk clients—i.e. those that

yielded excessive chargebacks—“Tal instructed Plimus employees to keep some

110
Id. ¶ 141
111
Id. (emphasis omitted).
112
Id. ¶ 5(c).
113
Id. ¶ 124.

26
high-risk (but revenue generating) clients active until after the closing.”114 Second,

the Plaintiffs allege that Tal and Segal Itshayek directed Plimus employees to issue

mass refunds that “preemptively refunded money to consumers who had purchased

from Plimus clients expected to generate high chargebacks, thus preempting those

consumers from disputing the transaction and thereby covering up the reality of

chargebacks.”115 Third, the Plaintiffs allege that Tal and Segal Itshayek engaged in

“volume shifting” by “identify[ing] ‘clean’ transactions on payment processors

other than PayPal and shift[ing] those transactions to PayPal,” while

contemporaneously “shift[ing] high-chargeback volumes from PayPal onto another

processor.”116 Volume shifting would have likely involved shifting high

chargeback volumes onto European payment processors because the chargeback

ratios for European payment processers are generally higher than those in the

United States.117 According to the Amended Complaint, this three-pronged

approach was designed “to hold the company’s payment processors at bay” while

“fraudulently maintain[ing] the appearance of Plimus’s revenues and profits and

avoid[ing] the inevitable need to terminate broad categories of high-risk clients . . .

until Plimus could close the Merger.”118

114
Id. ¶ 14(a); see also id. ¶¶ 125–26.
115
Id. ¶ 14(b); see also id. ¶ 128.
116
Id. ¶ 14(c); see also id. ¶ 129.
117
Id. ¶ 129.
118
Id. ¶ 14.

27
 f. PayPal Terminates the Relationship

Plimus management’s three-pronged plan to stave off another payment

processor termination was briefly successful, but the Amended Complaint alleges

that in August 2011 PayPal renewed its threat “to terminate its relationship with

Plimus because of the Company’s repeated violations of the credit card

associations’ rules,” including those breaches described above—Plimus’s BRAM

violations and the excessive client chargebacks during the summer of 2011.119 As

mentioned above, PayPal had allegedly already notified the Company that it

“would terminate its relationship with Plimus if Plimus, having violated the

permissible ratios in both June and July 2011, failed yet again to reduce

chargeback levels below the acceptable threshold in August 2011.”120 On August

17, a PayPal employee notified Segal Itshayek and Tal that the Company was “on

pace to exceed [in August] the total number of chargebacks that you had last

month.”121

The Plaintiffs allege that, in light of the notice of another looming violation,

both Tal and Segal Itshayek requested extensions from PayPal on behalf of

119
Id. ¶ 5(b).
120
Id. ¶ 5(c); see also id. ¶ 131 (describing an employee’s “August 15, 2012 post-mortem to
Plimus’s new CEO regarding PayPal’s dissatisfaction with Plimus’s excessive chargebacks:
‘Once Paymentech closed us (prior to PayPal) we move [sic] a lot of the US [credit card]
processing to PayPal. This plus the fact that we were processing shady sellers increased our
charge back ratio to be over 1% for at least 6 month [sic]. MasterCard and Visa did not like it
and PayPal were [sic] very unhappy.” (emphasis omitted)).
121
Id. ¶ 122 (internal quotation marks omitted).

28
Plimus,122 while others at Plimus worked to foster an arrangement with another

payment processor.123 On September 9, Segal Itshayek wrote to PayPal, admitting

that the 1% chargeback ratio had been exceeded for June, July, and August.124 In

this email, Segal Itshayek requested a one-month extension before its relationship

with PayPal was terminated:

As we see PayPal as one of our strategic partners and would like to
continue working together, we would highly appreciate receiving one
additional month to prove the actions taken by Plimus to reduce and
control the [chargeback] ratio and general risk.125
PayPal agreed to the extension.126 On September 26, a Plimus employee recounted

a conversation he had with a PayPal representative in an email to Segal Itshayek,

noting that this representative “went over the list of vendors and products . . . and

identified the following product types prohibited by PayPal and considered as high

risk by the association and that we should shut down if we want to keep our

122
See, e.g., id. ¶ 123 (noting that, on August 18, Tal emailed a PayPal employee,
communicating “that Plimus needed help with PayPal in the form of a 30 day extension for the
account, because Tal feared that he would receive a letter at the end of the month under which
Plimus would have 30 days to disconnect”).
123
Id. ¶ 133 (noting that, on August 30, Perach Raccah, Plimus’s Chief Operating Officer, sent
an email to another Plimus employee that “task number 1 is integration to [Litle, another
payment processor]. Basically we need to make sure we are on production with that no later than
the end of [September] . . . just in case Paypal decides to cut the relationship with us,” and that,
on September 5, he sent an email that noted “I need you to ensure we are on track to finish the
work before the end of the month. It is critical it will be working on production before Paypal
surprise us [sic].” (emphasis omitted)).
124
Id. ¶ 134; see also id. ¶ 5(c) (noting that the chargeback threshold was violated in September
as well).
125
Id. ¶ 134 (emphasis omitted); see also id. ¶ 5(d).
126
See id. ¶¶ 5(d); 16(a).

29
relationship with [PayPal].”127 The Plimus employee further noted that “we are not

sure the relationship [with PayPal Pro] will continue.”128 According to Plimus

telephone records, Tal and Klahr spoke on both September 26 and 27.129

PayPal began terminating its payment-processor relationship with Plimus

eight days after the merger closed, on October 7, 2011; by mid-December 2011,

Plimus had no remaining PayPal accounts.130 The Amended Complaint alleges

that Plimus became unable to use PayPal’s credit card processing services or offer

the PayPal Wallet, and, consequently, “Plimus’s revenues plummeted as it lost

both a substantial portion of its existing customers and a vast swath of the e-

commerce market that requires access to the PayPal wallet.”131

3. The Search for a Replacement Processor

Following PayPal’s termination, in October 2011, Plimus contracted with

another payment processor. This new processor, however, terminated its

relationship with Plimus only three months later, in January 2012, “citing as a basis

for the termination the June 2011 BRAM Violation and August 2011

BRAM/Aggregation Violation and the resulting significant fines from

MasterCard.”132

127
Id. ¶ 143 (emphasis omitted).
128
Id.
129
Id.
130
Id. ¶¶ 5(d); 16(a), 154.
131
Id. ¶ 16(a); see also id. ¶¶ 154–55 (describing the injury caused by the PayPal termination).
132
Id. ¶ 156 (internal quotation marks omitted); see also id. ¶16(b).

30
 D. The Alleged Fraud

1. Paymentech

The Amended Complaint avers that, pre-closing, Plimus failed to disclose

that it was in violation of the credit card association rules and instead

misrepresented to Great Hill during diligence that “Plimus had wanted and initiated

the termination of the payment-processor relationship with Paymentech”133 The

Amended Complaint further avers that the data room was devoid of any

information about Paymentech’s unilateral termination of the parties’ relationship

“because Plimus’s counsel had ‘scrubbed the dataroom to remove any documents

pertaining to the dispute.’”134

Instead of maintaining information related to the Paymentech dispute in the

data room, the Plaintiffs claim that Plimus chose to draft a disclosure that

misinformed the remaining bidders of the situation.135 In early May 2011, Plimus

began to internally circulate a draft disclosure schedule for review addressing the

Paymentech termination.136 As of May 13, the draft version, in relevant part,

provided:

133
Id. ¶ 71.
134
Id. ¶ 8 (quoting Margules Affirmation Ex. 3 P_0000018, an internal email exchanged among
Plimus’s counsel).
135
See, e.g., Margules Affirmation Ex. 3 at P_0000017.
136
The Amended Complaint retraces in detail the draft disclosure schedule’s path as it was
traded among the Defendants as follows: On May 9, Klahr received a draft, which he forwarded
to SIG’s in-house counsel; on May 11, Klahr notified Perkins Coie that he was “fine” with the
draft he had received; on May 12, Klahr emailed Tal and Goldman to schedule a call to discuss

31
 In February and March 2011, Paymentech notified Plimus that it was
terminating the agreements governing the Paymentech transaction-
processing services for Plimus. Paymentech’s stated basis for the
termination was Plimus’ alleged breach of the agreements and the
related rules promulgated by payment brands Visa and MasterCard.
The termination became effective on March 21, 2011. In connection
with the winding down of Paymentech’s services to Plimus,
Paymentech established a Reserve Account under Sections 4.6 and
10.3 of the Merchant Agreement between Paymentech and Plimus. In
that Reserve Account, Paymentech withheld approximately $2.7
million of Plimus funds. Paymentech confirmed in communications
in March and April 2011 that the basis for withholding these funds
was as follows: (a) to satisfy any forthcoming fines or penalties from
Visa or MasterCard; (b) to cover any charge backs (and associated
fees) that occur post-termination; and (c) to cover any post-
termination electronic check processing.137

Assi sent this version to Tal for review and to “confirm [he felt] OK with it.”138

Tal, upon receiving the disclosure, amended it heavily.139 On May 18, Assi

emailed the updated draft, incorporating Tal’s edits, to Klahr, who made minor

revisions “but otherwise did not question or revise the Paymentech disclosure, and

signed off on that disclosure.”140 On May 18, 2011, Plimus posted this updated

the draft; on May 12, Assi Itshayek emailed Klahr with a copy of the draft with his annotations,
indicating that he wanted “[to discuss with [a Perkins Coie attorney] how to present
Paymentech;”; on May 13, SIG’s in-house counsel circulated a draft to Klahr, Assi, and a
Perkins Coie attorney with his comments and incorporating Assi’s notation. See Am. Compl. ¶
82; Margules Affirmation Ex. 2 at P_0000037.
137
Id. ¶ 82(e).
138
Id. ¶ 82(f).
139
Id. ¶ 82(g).
140
Id. ¶ 82(j).

32
disclosure in the data room for Great Hill to review.141 The updated disclosure

read, in relevant part:

[I]n early 2011, [Plimus] decided that it did not want to continue
working with [Paymentech] under the then negotiated terms of the
Paymentech Agreement. [Plimus] then attempted to negotiate
modified terms with [Paymentech] on several occasions. However,
[Paymentech] refused to enter into such discussions or modify the
terms of the [Paymentech] Agreement. In February and March 2011,
[Paymentech] encountered issues related to the Royal Bank of India
and its ability to continue processing payments for [Plimus’s] vendors
then operating within India. [Paymentech] asked [Plimus] to make
specific changes to the [Plimus’s] platform. Since [Plimus] did not
feel this would be in its best interests, [Plimus] and [Paymentech]
instead mutually agreed to terminate the agreement governing the
transaction-processing services provided by [Paymentech], effective
March 21, 2011.142

According to the Plaintiffs, Plimus’s disclosure was “deliberately false,” and

concealed “crucial facts concerning Paymentech that were material to Great Hill’s

decision to negotiate with Plimus, enter into the Original Merger Agreement, and

close the Merger.”143

2. PayPal

The Amended Complaint likewise alleges that, prior to closing the merger,

Plimus misrepresented the state of its relationship with PayPal. The Plaintiffs

141
Id. ¶ 83.
142
Id. ¶ 83 (emphasis omitted).
143
Id. ¶ 8; see also id. ¶ 83 (“[W]ith knowledge and calculated approval from Tal, SIG, Klahr,
and Goldman, Plimus posted in the data room for Great Hill’s review on May 18, 2011, a
deliberately false and misleading Paymentech disclosure, which was a dramatic and complete
departure from the language that Tal, SIG, Klahr, and Goldman had reviewed just days earlier . .
. .”).

33
acknowledge that Plimus informed Great Hill that it had violated the chargeback

ratio for June 2011, but the Plaintiffs claim that no one informed Great Hill that the

Company had also violated this threshold for July and August.144 Instead, the

Amended Complaint avers that Great Hill “continue[d] to rely on Tal’s and Segal

Itshayek’s representations that Plimus’s PayPal chargeback ratio was below the

1.0% threshold for July 2011 and that Plimus’s termination of the sixteen clients

had cured the excessive chargeback problem.”145

Further, the Plaintiffs allege that Plimus concealed PayPal’s intention to

terminate its payment-processing relationship with Plimus.146 The Amended

Complaint conveys that:

Before Great Hill’s entry into the Original Merger Agreement in
August 2011, Great Hill directed numerous diligence requests to
Plimus regarding Plimus’s relationship with its payment processors,
including PayPal and Paymentech, in view of the central importance
of payment processing, and PayPal in particular, to Plimus’s business.
In fact, during the very same week that Plimus received notice of the
June 2011 BRAM Violation (and a few months after Paymentech’s
unilateral termination of its relationship with Plimus), Great Hill
asked Plimus in due diligence to describe any communications from
specifically identified companies, including PayPal and MasterCard,
reporting noncompliance with their rules.147

In addition to these specific diligence requests, the Plaintiffs allege that between

June 7 and June 9, Great Hill Vice President Nicholas Cayer, Great Hill’s due

144
Id. ¶ 12.
145
Id. ¶ 106.
146
See, e.g., id. ¶ 12.
147
Id. ¶ 94 (emphasis omitted).

34
diligence advisors from PricewaterhouseCoopers LLP, met with Plimus

representatives, including Tal and Segal Itshayek, to discuss, among other things,

Plimus’s relationships with its payment processors.148 During these discussions,

Plimus failed to disclose the pertinent information regarding Plimus’s relationship

with PayPal, including the June 2011 BRAM Violation of which Plimus had been

aware shortly before Great Hill’s applicable diligence request.149 Instead, Tal and

Segal Itshayek again conveyed that Plimus had initiated the termination of its

relationship with Paymentech.150

The Amended Complaint additionally details a variety of other fraudulent

tactics Plimus allegedly engaged in during the negotiation process. Among them,

the Plaintiffs allege that “Tal instructed other Plimus employees to funnel all

communications to Great Hill relating to payment processors through Tal and

Segal Itshayek only, to ensure that lies, and only those lies, were communicated to

Great Hill;”151 that Plimus failed to disclose that it “had no choice but to terminate

certain client categories to have a chance of preserving payment-processor

relationships,” or that it “instead selectively terminated certain clients and engaged

in volume shifting and issued mass refunds in order to maintain fictitious revenues

148
Id. ¶ 95.
149
Id. ¶ 101.
150
Id. ¶¶ 95–96.
151
Id. ¶ 94.

35
and profits so that Great Hill would close the merger;152 and that Plimus, primarily

through Tal and Segal Itshayek, purposefully failed to fully disclose material

information in response to diligence requests.153

E. The Side Letter

During the merger negotiations, Great Hill requested that Tal, as Plimus’s

CEO, “roll over” his equity interest in the Company,154 which was at the time

subject to a 2008 compensation agreement between Tal, Herzog, and Kleinberg

(the “Compensation Agreement”).155 In connection with Great Hill’s request, Tal

began to indicate that he did not want to re-invest his equity, which would require

him to stay with the Company, and in the United States, for longer than he had

planned or wanted.156 In mid-May, Tal emailed Herzog, Kleinberg, and SIG that

he wanted to be “compensate[d] . . . for the roll-over requirement.”157 Tal further

stated, “I also have to commit for 18 month and more so deal will take place [sic],”

and communicated to Herzog and Kleinberg that “this [money pursuant to the

152
Id. ¶ 18.
153
See, e.g., id. ¶¶ 97–100.
154
See id. ¶ 17(b) (explaining that private equity buyers, such as Great Hill, often “require a CEO
to ‘roll over’ his or her own equity into the post-deal company in order to have ‘skin in the
game,’ demonstrate faith in the future of the business, and as a guard against executives who
might be tempted to over-state a company’s financial prospects to the acquiror”).
155
Answer of Def. Hagai Tal ¶ 68; see also Am. Compl. ¶ 68. The specific terms of the
Compensation Agreement are not stated in the Amended Complaint, except that there was
apparently some provision under which Tal was to receive a “bonus” for hitting certain revenue
targets. See Margules Affirmation Ex. 4.
156
See, e.g., Am. Compl. ¶ 69 (indicating that, in a June 28 email, Tal wrote “I also need to stay
in the company and in the US for longer time than I had planned, and all this for you guys to get
your money”).
157
Id. ¶¶ 68, 17(b).

36
Compensation Agreement] will be my only income from this deal and . . . without

it I have limited interest in this deal at all.”158 Herzog responded that “a ‘black-

mail’ style sentence like ‘if you don’t give me money I don’t want the deal’ is

something that the entire board needs to hear[;] it certainly affects everyone.”159

Aside from seeking extra-contractual payments, Tal also adopted an interpretation

of the Compensation Agreement contrary to that held by the other parties to the

Agreement, resulting in a dispute over the amount due.160 Eventually, Herzog and

Tal scheduled a time to speak on the phone about these concerns.161

The Plaintiffs allege that the Defendants feared Tal’s “wavering on the

reinvestment requirement would alert Great Hill that Tal did not believe in the

future prospects of the business, and thus lead to price degradation or possibly risk

the entire $115 million deal.”162 Out of this fear, the Amended Complaint avers,

the Defendants began taking steps to suppress Tal’s resistance, through warnings

and bribery. On May 24, Goldman, on behalf of SIG, sent Tal an email cautioning

him to “not do anything that could signal to Great Hill that Tal was not a believer

158
Margules Affirmation Ex. 4.
159
Id.
160
See, e.g., id (showing Tal emailing Kleinberg and Herzog that “I have to say that I understand
the contract differently from you . . . . I do believe that you 2 [sic] have to reimburse me base
[sic] on Plimus value [sic] and not on any other calculations,” and Kleinberg responding that
“[t]he Excel we sent you represents our understanding of our agreement[;] it is unfortunate that
you miscalculated and we’ll be happy to go through it with you to ensure we’re on the same
page”).
161
Id.
162
Am. Compl. ¶ 17(b).

37
in the future of the business,” which could jeopardize the deal; in his email,

Goldman noted that “[w]hatever we get is better than zero.”163 On June 12, Klahr,

on behalf of SIG, emailed Tal, warning him to “be very thoughtful and careful

about what you ask for from a rollover perspective. . . . A big emphasis on

liquidity is generally a big indication that [management] aren’t believers.”164 On

June 26, Goldman emailed Tal, indicating “he would work with Tal and Plimus’s

other directors to ‘improve the situation’ for Tal, through the use of ‘contractual

side letters that are very clear.’”165 He also reiterated, at this time, that “the

alternative of no deal was ‘not great’ for any of Plimus’s directors.”166

Eventually, the Plaintiffs allege, Tal did reach an agreement with the other

director Defendants whereby Tal would roll over his equity as Great Hill requested

in return for 30% more compensation than what was provided for under his 2008

Compensation Agreement (the “Side Letter”); the Amended Complaint cites as

proof a July 21, 2011 email from Goldman to a Perkins Coie attorney that noted,

“If you speak to [Tal] you should let him know that SGE’s position is that it’s [sic]

additional funds to his side letter (the extra 30%) was contingent on him agreeing

to roll $3m. The founders [Herzog and Kleinberg] also take the same position.”167

163
Id. ¶ 66.
164
Id. ¶ 67.
165
Id.
166
Id.
167
Id. ¶ 68.

38
In furtherance of the alleged deception, the Amended Complaint claims that the

Defendants also misrepresented the circumstances surrounding the Side Letter on

Tal’s compensation, leading Great Hill “to believe that the total payment they were

to make to Tal was owed to him under a pre-existing agreement with Tal from

2008.”168 In reality, the Amended Complaint alleges, SIG, Herzog, and Klahr paid

and then concealed the additional compensation—akin to a bribe—that they used

to “conceal Tal’s concerns about the future of the company,” preserve the deal, and

secure their subsequent buyout.169 In other words, the Plaintiffs’ allegation is that

Tal knew a roll-over into the new entity was a bad deal; the board compensated

him for this loss but mislead Great Hill to preserve the illusion that Tal was willing

to buy into its acquisition of Plimus.

F. Post-Merger Fines and Indemnification

According to the Amended Complaint, as a result of the Defendants’ fraud,

Great Hill purchased an ailing company that continued to accumulate hundreds of

thousands of dollars in fines following the merger:

To date, Great Hill has discovered that credit card association(s), card-
issuing bank(s), other credit card issuer(s) or third-party payment
processor(s) have assessed fines, penalties or similar assessments
resulting from violating applicable credit card association policies,

168
Id.
169
Id.; see also id. ¶ 17(b) (“SIG (through Goldman and Klahr), Herzog & Kleinberg concealed
from Great Hill that additional side payments to Tal would work to offset the equity commitment
that Tal was making to Great Hill, thereby misleading Great Hill into believing that Tal was
committed to, and had a large stake in, the post-merger company.”).

39
 procedures, guidelines or rules with respect to excessive chargebacks
or similar recurring payments, as described in this complaint, during
the period between the [Amended Merger] Agreement Effective Date
and the one year anniversary of the closing Date, totaling
approximately $788,000.170

The Plaintiffs argue that certain Defendants agreed to indemnify the Plaintiffs for

these costs under the terms of the Amended Merger Agreement. Under the terms

of that Agreement, certain “Effective Time Holders” are obligated to indemnify

Fremont, Plimus (as the surviving corporation), their affiliates and other

indemnified parties against losses in connection with, among other things, breaches

of representations or warranties of the Company.171 The Agreement defines

“Effective Time Holders” as:

collectively, (i) each holder of Company Capital Stock as of
immediately prior to the Effective Time that does not perfect such
holder’s appraisal rights under the CGCL, and (ii) each holder of a
Qualifying Company Option; provided, that, solely for purposes of
Sections 5.06(a), 5.06(b), 5.06(c) of this Agreement, only Persons that
are included in the preceding clause (i) of this definition shall be
deemed to be Effective Time Holders.172

The Plaintiffs contend that Moving Defendants SIG Fund, Tal, Segal Itshayek,

Herzog, Kleinberg, Donors Capital, and Kids Connect qualify as Effective Time

170
Id. ¶ 227.
171
Am. Compl. ¶ 225.
172
Am. Merger Agreement at 7. But see Original Merger Agreement at 7 (providing that the
Delaware General Corporation Law shall govern appraisal rights, instead of the California
General Corporation Law). “Effective Time” is defined under the Agreement as ‘the later of (i)
the date of the filing of the Certificates of Merger with the Secretary of State of the State of
Delaware and the Secretary of State of the State of California, and (ii) the date set forth in the
Certificates of Merger.” Am. Merger Agreement § 2.04.

40
Holders according to this definition.173 Consequently, the Plaintiffs argue, these

Defendants are liable for the post-merger fines, penalties, and assessments,

according to the indemnification and representations and warranties provisions of

the Amended Merger Agreement.

1. Indemnification

Section 10.02(a) of the Amended Merger Agreement contains an

indemnification provision, whereby:

Subject to the terms of this Article 10, after the Effective Time, each
Effective Time Holder, individually as to himself, herself or itself
only and not jointly as to or with any other Effective Time Holder,
shall indemnify [Fremont] and the Surviving Corporation and each of
their respective Subsidiaries and Affiliates, and each of their
respective directors, officers, managers, members, partners,
stockholders, subsidiaries, employees, successors, heirs, assigns,
agents and representatives (each a “Parent Indemnified Person”)
against such Effective Time Holder’s Pro Rata Share of any actual
loss, liability, damage, obligation, cost, deficiency, Tax, penalty, fine
or expense, whether or not arising out of third party claims (including
interest, penalties, reasonable legal fees and expenses, court costs and
all amounts paid in investigation, defense or settlement of any of the
foregoing) . . . which such Parent Indemnified Person suffers, sustains
or becomes subject to, as a result of, in connection with or relating to:
(i) any breach by [Plimus] of any representation or warranty of
[Plimus] set forth herein, in any Disclosure Schedule or in the
Company Closing Certificate; (ii) any breach by [Plimus] of any of
the covenants or agreements of [Plimus] set forth herein to be
performed on or before the Effective Time or any breach by such
Effective Time Holder of any of the covenants or agreements of such
Effective Time Holder set forth herein to be performed after the
Effective Time; or (iii) any fines, penalties or similar assessments
imposed against [Plimus] or any of its Subsidiaries for violating

173
Am. Compl. ¶ 34.

41
 applicable credit card association policies, procedures, guidelines or
rules with respect to excessive chargebacks or similar recurring
payments during the period between the Agreement Effective Date
and the one year anniversary of the Closing Date, by a credit card
association, card-issuing bank, other credit card issuer or third-party
payment processor with respect to, and only to the extent of,
transactions occurring prior to the Closing Date. . . .174

Among other limitations outlined in the Amended Merger Agreement, Section

10.03(b) provides that “[t]he Escrow Amount will be the sole source of funds from

which to satisfy the Effective Time Holders’ indemnification obligations” that

arise under Section 10.02(a)(i) for representations and warranties.175 Section

10.03(c), however, provides that, for claims not subject to the cap, such payments

shall first be made to the extent possible from the Escrow Account
and thereafter shall be made directly by an Effective Time Holder
individually as to himself, herself or itself only and not jointly as to or
with any other Effective Holder, based on such Effective Time
Holder’s Pro Rata Share of the applicable Loss.176

The Escrow Account established under the Agreement holds $9.2 million.177

2. Representations and Warranties

The Amended Merger Agreement contained several representations and

warranties that relate to Plimus’s relationships with payment processors and card

associations and thus are relevant here. Four such relevant provisions, and the

Plaintiffs’ related arguments, are described below.

174
Am. Merger Agreement § 10.02(a).
175
Id. § 10.03(b).
176
Id. § 10.03(c).
177
Id. at 8.

42
 First, Section 3.09(c) of the Amended Merger Agreement represents that:

Neither [Plimus] nor any of its Subsidiaries, taken as a whole, have
any material liabilities or obligations . . . except for (i) liabilities that
are expressly reflected or reserved against on the liabilities side of the
Most Recent Balance Sheet, (ii) liabilities under the Contracts and the
Employee Benefit Plans set forth in Section 3.16 and 3.19 of the
Disclosure Schedule or under Contracts entered into in the Ordinary
Course of Business which are not required to be disclosed in Section
3.16 of the Disclosure Schedule due to specified dollar thresholds or
other limitations (but not liabilities for breaches thereof), (iii)
liabilities set forth in Section 3.09(c) of the Disclosure Schedule, (iv)
liabilities which have arisen in the Ordinary Course of Business since
the date of the Most Recent Balance Sheet (none of which is a liability
for breach of contract, breach of warranty, tort or infringement or a
claim or lawsuit or an environmental liability), and (v) liabilities
under this Agreement, the Other Transaction Documents and the
Transactions.178

The Plaintiffs argue that Tal, Segal Itshayek, SIG, Klahr, Goldman, Herzog and

Kleinberg caused Plimus to breach this representation because they “never

disclosed that Plimus was facing material fines, fees, and penalties as a result of

the June 2011 BRAM Violation, August 2011 BRAM/Aggregation Violation, and

recurring excessive chargeback ratios,” and because they “never disclosed

Plimus’s materially reduced revenues and profits and liabilities resulting from the

need to eliminate numerous clients because of Plimus’s violations of the credit

card association rules and regulations and the risk of termination of its processor

relationships.”179

178
Id. § 3.09(c).
179
Am. Compl. ¶ 15(a).

43
 Further, the Plaintiffs allege that the Defendants’ fraud caused Plimus to

breach the representation in Section 3.16, which provides, in relevant part, that:

Neither [Plimus] nor any Subsidiary of [Plimus], nor, to [Plimus’s]
Knowledge, any of the other parties thereto, is in default in complying
with any material provisions [of the Contracts required to be disclosed
in Section 3.16 of the Disclosure Schedule], nor has [Plimus] or any
of its Subsidiaries received written notice of any such default, and, to
the Knowledge of [Plimus], no condition or event or facts exist which,
with notice, lapse of time or both, would constitute a default thereof
on the part of [Plimus] or such Subsidiary of [Plimus]. There is no
material dispute under any Contract required to be disclosed in
Section 3.16 of the Disclosure Schedule.180

The Plaintiffs contend that Tal, Segal Itshayek, SIG, Klahr, Goldman, Herzog and

Kleinberg “caused Plimus to represent and warrant falsely in Section 3.16 of the

Merger Agreement that Plimus was in compliance with its contracts,” even though,

“Plimus was in fact in default of material provisions in its contracts with

PayPal.”181

Thirdly, Plimus further represented in Section 3.23, in relevant part, that:

[Plimus] and each of its Subsidiaries is and has been in compliance
with the bylaws and operating rules of any Card System(s), the
Payment Card Industry Standard (including the Payment Card
Industry Data Security Standard), the operating rules of the National
Automated Clearing House Association, the applicable regulations of
the credit card industry and its member banks regarding the collection,
storage, processing, and disposal of credit card data, and any other
industry or association rules applicable to [Plimus] or any of its
Subsidiaries in connection with their respective operations.182

180
Am. Merger Agreement § 3.16.
181
Am. Compl. ¶ 15(b).
182
Am. Merger Agreement § 3.23.

44
According to the Amended Complaint, Tal, Segal Itshayek, SIG, Klahr, Goldman,

Herzog and Kleinberg “caused Plimus to represent and warrant falsely in Section

3.23 . . . that Plimus was in compliance with credit card rules and regulations,”

when, in fact, because of Plimus’s BRAM violations and excessive chargebacks,

“Plimus was not in compliance with the applicable operating rules of PayPal,

MasterCard, and/or other payment processors and credit card associations.”183

Lastly, Plimus represented in Section 3.26(b) that:

There are no suppliers of products or services to [Plimus] or any of its
Subsidiaries that are material to its business with respect to which
alternatives sources of supply are not generally available on
comparable terms and conditions in the marketplace. No supplier of
products or services to [Plimus] or any of its Subsidiaries has notified
[Plimus] or such Subsidiary that it intends to terminate its business
relationship with [Plimus] or such Subsidiary.184

In connection with this representation, Plimus “disclose[d] that PayPal provided

services to the company that were ‘material to the company’s business’ and that

‘alternative sources of supply are not generally available on comparable terms and

conditions.’”185 The Plaintiffs allege that the Company’s representation in Section

3.26(b) was false because “PayPal had notified Plimus that it intended to terminate

its business relationship with the company,” a fact that was concealed from Great

183
Am. Compl. ¶ 15(c).
184
Am. Merger Agreement § 3.26(b).
185
Am. Compl. ¶ 111.

45
Hill.186 According to the Amended Complaint, Tal, Segal Itshayek, SIG, Klahr,

Goldman, Herzog and Kleinberg caused Plimus to make this false representation in

the Agreement.187

Plimus disclosed exceptions to these representations and warranties in an

accompanying schedule.188 In the Disclosure Schedule to the Original Merger

Agreement, Plimus did not disclose the June 2011 BRAM Violation despite its

alleged impact on the representation and warranties in Sections 3.09(c), 3.16, and

3.23.189 In connection with the Amended Merger Agreement, Plimus provided a

Supplemental Disclosure Schedule. The Plaintiffs allege that this Supplemental

Disclosure Schedule further “failed to disclose the imminent termination of the

PayPal relationship (and, again, did not disclose either the June 2011 BRAM

Violation or the August 2011 BRAM/Aggregation Violation), and did not

otherwise qualify the Merger Agreement’s representations and warranties to

account for these facts.”190

II. PROCEDURAL HISTORY

On September 27, 2012, Great Hill Equity Partners IV, LP, Great Hill

Investors LLC, Fremont Holdco, Inc., and BlueSnap, Inc. (F/K/A Plimus)

186
Id. ¶ 15(d).
187
See id.
188
Id. ¶ 112.
189
Id. ¶ 113.
190
Id. ¶ 148.

46
(collectively, the “Plaintiffs”), filed their Verified Complaint against the

Defendants in this action, SIG Growth Equity Fund I, LLLP, SIG Growth Equity

Management LLC, Amir Goldman, Jonathan Klahr, Hagai Tal, Tomer Herzog,

Daniel Kleinberg, Irit Segal Itshayek, Donors Capital Fund, Inc., and Kids Connect

Charitable Fund (the “Defendants”).

In September 2012, approximately one year after the merger, the Plaintiffs

notified the Defendants that, “among the files on the Plimus computer systems that

the Buyer acquired in the merger, it had discovered certain communications

between the Seller and Plimus’s then-legal counsel at Perkins Coie regarding the

transaction.”191 The Amended Merger Agreement did not provide that pre-merger

attorney-client communications were excluded in the assets transferred to the

Plaintiffs.192 When the Plaintiffs notified the Defendants, however, the Defendants

“asserted the attorney-client privilege over those communications on the ground

that it, and not the surviving corporation, retained control of the attorney-client

privilege that belonged to Plimus for communications regarding the negotiation of

the merger agreement.”193 Then-Chancellor Strine characterized the question at

issue as one “of statutory interpretation in the first instance,” noting that

191
Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP, 80 A.3d 155, 156 (Del.
Ch. 2013).
192
Id.
193
Id.

47
 Section 259 of the DGCL provides that following a merger, “all
property, rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectually the property of the
surviving or resulting corporation . . . .” 194

The Court reasoned that “[i]f the General Assembly had intended to exclude

the attorney-client privilege, it could easily have said so. Instead, the statute uses

the broadest possible language to set a clear and unambiguous default rule: all

privileges of the constituent corporation pass to the surviving corporation in a

merger.”195 Thus, the privilege relating to pre-merger communications between

Perkins Coie and the Defendants passed to the surviving entity following the

merger. This meant that the Plaintiffs had access to these privileged documents in

drafting their Amended Complaint. Such access, however, does not change the

standards of review, which are discussed below.196

The Plaintiffs filed their Verified Amended Complaint on April 7, 2014,

which includes the following: Count I alleges fraudulent inducement against Tal,

Segal Itshayek, Goldman and Klahr; Count II alleges fraud against Tal, Segal

Itshayek, Goldman and Klahr; Count III alleges aiding and abetting against SIG
194
Id.
195
Id. at 159.
196
This Court’s decision in Trenwick, despite the Moving Defendants’ assertion to the contrary,
does not suggest that a plaintiff with greater access to information is subject to a higher pleading
standard than that provided by Rule 9(b). See Mem. of Law in Supp. of Mot. to Dismiss at 26–
27. Rather, Trenwick provided that the standard required by Rule 9(b) would not be lowered in
that case, particularly where the plaintiff had, in the Court’s view, “far more access to
information than the typical plaintiff.” Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906
A.2d 168, 212 (Del. Ch. 2006) aff'd sub nom. Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438
(Del. 2007).

48
Fund, SIG Management, Goldman, Klahr, Herzog, and Kleinberg; Count IV

alleges civil conspiracy against Tal, Segal Itshayek, SIG Fund, SIG Management,

Goldman, Klahr, Herzog and Kleinberg; Count V is a Count for indemnification

against the Effective Time Holders and SIG Management; Count VI alleges unjust

enrichment against all of the Defendants; and Count VII is a Count for a

declaratory judgment. The Plaintiffs seek, among other relief, indemnification,

damages, and rescission of the merger. On May 27, 2014, Defendants SIG Fund,

SIG Management, Goldman, Klahr, Herzog, Kleinberg, Donors Capital and Kids

Connect (the “Moving Defendants”) moved to dismiss Counts I-IV, VI and VII of

the Amended Complaint, as well as the requested recession remedy, and to limit

the indemnification remedy sought under Count V.

I heard oral argument on the Moving Defendants’ Motion to Dismiss on

August 13, 2014. For the reasons below, the Moving Defendants’ Motion is

granted in part and denied in part.

III. STANDARD OF REVIEW

The Moving Defendants have moved to dismiss pursuant to Court of

Chancery Rule 12(b)(6). When addressing such a Motion, I must accept all well-

pled facts as true and draw all reasonable inferences in favor of the plaintiff.197

197
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 535 (Del.
2011).

49
Such a motion will be denied “unless the plaintiff would not be entitled to recover

under any reasonably conceivable set of circumstances.”198

This Court imposes a heightened pleading standard to claims of fraud. Court

of Chancery Rule 9(b) provides that “[i]n all averments of fraud or mistake, the

circumstances constituting fraud or mistake shall be stated with particularity.”199

To satisfy this heightened pleading standard, “a complaint for fraud must include

the time, place, contents of the false representations, the facts misrepresented, as

well as the identity of the person making the misrepresentation and what he

obtained thereby.”200 “Essentially, the plaintiff is required to allege the

circumstances of the fraud with detail sufficient to apprise the defendant of the

basis for the claim.”201 Knowledge, however, “may be averred generally.”202 But,

“where pleading a claim of fraud . . . that has at its core the charge that the

defendant knew something, there must, at least, be sufficient well-pleaded facts

from which it can reasonably be inferred that this ‘something’ was knowable and

that the defendant was in a position to know it.”203

198
Id.; see also In re Ebix, Inc. S’holder Litig., 2014 WL 3696655, at *7 (Del. Ch. July 24,
2014).
199
Ct. Ch. R. 9(b).
200
Ruffalo v. Transtech Serv. Partners Inc., 2010 WL 3307487, at *16 (Del. Ch. Aug. 23, 2010)
(internal quotation marks omitted).
201
ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006).
202
Ct. Ch. R. 9(b).
203
Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *11 (Del. Ch. Aug. 26, 2005);
Iotex Commc'ns, Inc. v. Defries, 1998 WL 914265, at *4 (Del. Ch. Dec. 21, 1998).

50
 IV. ANALYSIS

A. Fraud Counts

In addition to the fraud claims against Tal and Segal Itshayek—which are

not the subject of the Motion to Dismiss and the sufficiency of which at this

pleading stage is uncontested—the Plaintiffs have also alleged fraud and fraudulent

inducement against Goldman and Klahr, in connection with the fraudulent acts of

Tal and Segal Itshayek, as well as civil conspiracy and aiding and abetting fraud

against Goldman, Klahr, Herzog, Kleinberg (the “Director Defendants”) and SIG.

To briefly reiterate the basis for the direct and secondary fraud claims at

issue, the Plaintiffs allege three distinct sets of circumstances that involved

fraudulent actions taken largely by Tal and Segal Itshayek. First, relating to

Paymentech, it is alleged that Goldman and Klahr, as well as Tal and Segal

Itshayek, concealed the true reason for the termination of that relationship—that

Plimus had breached agreements and had violated credit card association rules,

both of which “signaled core issues” with Plimus—and allowed Tal to rewrite the

disclosure relating to Paymentech in such a way as to mislead the Plaintiffs into

thinking that Plimus had instigated the termination of the Paymentech

relationship.204 As to PayPal, the Plaintiffs allege that Goldman and Klahr, as well

as Tal and Segal Itshayek, concealed from the Plaintiffs the MasterCard BRAM

204
Am. Compl. ¶ 5(a).

51
and Aggregation Violations, as well as excessive chargeback ratios, which

ultimately led PayPal to terminate its relationship with Plimus205 and affected

subsequent payment processor relationships.206 The Plaintiffs also allege that

Goldman and Klahr concealed a “deceptive and fraudulent three-pronged strategy”

undertaken by Tal that prevented the Plaintiffs from discovering the fraudulent

activities described above, by “attempt[ing] to hold the company’s payment

processors at bay—ultimately to no avail—all while Plimus’s management

fraudulently maintained the appearance of Plimus’s revenues and profits . . . .”207

Finally, as to the Side Letter, the Plaintiffs allege that Goldman, Klahr, SIG,

Herzog and Kleinberg made extra-contractual “black-mail” payments to Tal to

encourage him to roll-over equity into the new company post-merger and avoid

raising any red flags as to Tal’s confidence in the continuing entity, an effort which

misled and caused damage to the Plaintiffs.208

In Counts I and II, the Amended Complaint pleads direct fraud on the part of

Goldman and Klahr for their involvement, along with Tal and Segal Itshayek, in

the allegations outlined above. The Plaintiffs also allege that Goldman and Klahr

conspired to commit the same acts of fraud and aided and abetted these fraudulent

205
See, e.g., id. ¶ 5(b)–(c).
206
See, e.g., id. ¶ 16(b).
207
Id. ¶ 14.
208
See, e.g., id. ¶ 68. Despite the allegations against Herzog and Kleinberg, the Plaintiffs seek to
hold them liable for conspiracy and/or aiding and abetting, not fraud.

52
acts, in Counts III and IV of the Amended Complaint. Because the facts

underlying the direct and secondary fraud Counts with respect to Goldman and

Klahr are the same and any damages would be the same,209 recovery is only

appropriate under either a direct fraud theory or a theory of secondary participation

in the fraud. There is no utility in requiring the Plaintiffs to choose which theory to

pursue at this stage in the litigation, however. Accordingly, for the same reasons,

discussed below, that I am denying the Motion to Dismiss Counts III and IV as to

Goldman and Klahr, I also decline to dismiss Counts I and II at this stage.210

1. Civil Conspiracy

The Plaintiffs have alleged that the Director Defendants and SIG, along with

Tal and Segal Itshayek “knowingly entered into a confederation or combination to

fraudulently induce Great Hill” to enter into the Letter Agreement, the Original

Merger Agreement, and the Amended Merger Agreement, and to close the

209
See, e.g., Nicolet, Inc. v. Nutt, 525 A.2d 146, 150 (Del. 1987) (“Under Delaware law, a
conspirator is jointly and severally liable for the acts of co-conspirators committed in furtherance
of the conspiracy.”)
210
The Moving Defendants challenged the fraud claims against Goldman and Klahr alleging a
failure to plead facts supporting an inference of their knowledge. I find that it is sufficiently pled
that, as SIG’s designees on the Plimus board, Goldman and Klahr had an interest in the merger
and the ability, together with the other directors, to control Tal, the Company’s CEO. The
Amended Complaint also adequately alleges that these directors were aware of the proposed,
accurate Paymentech disclosure, as well as the allegedly fraudulent disclosure as altered by Tal.
As directors, it is conceivable that Goldman and Klahr were aware that those same problems also
doomed the PayPal relationship. These allegations are sufficient to withstand the Moving
Defendants’ 12(b)(6) challenge, in light of the fact that Rule 9(b) does not apply its specificity
requirement to averments of knowledge.

53
merger.211 “The elements for civil conspiracy under Delaware law are: (i) a

confederation or combination of two or more persons; (ii) an unlawful act done in

furtherance of the conspiracy; and (iii) damages resulting from the action of the

conspiracy parties.”212 “Where a complaint alleges fraud or conspiracy to commit

fraud, the Rules of this court call for a higher pleading standard, requiring the

circumstances constituting the fraud or conspiracy to ‘be pled with

particularity.’”213 Knowledge, however, may be averred generally; all that is

required to show that a defendant knew something are “sufficient well-pleaded

facts from which it can reasonably be inferred that this ‘something’ was knowable

and that the defendant was in a position to know it.”214 The purpose of the

particularity requirement is to consider whether “[a] reading of the Complaint as a

whole . . . gives the defendants adequate notice of the basis of their alleged

wrongdoing.”215

Here, the unlawful acts were the misleading of Great Hill concerning the

true nature of the Paymentech termination and the impending PayPal termination,

as well as the fraudulent Side Letter payment to Tal. At least with respect to Tal

and Segal Itshayek, the adequacy of the fraud pleading is unchallenged, and I find

211
Am. Compl. ¶ 212 (emphasis added).
212
Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *10 (Del. Ch. Aug. 26, 2005).
213
Id. at *11.
214
Iotex Commc'ns, Inc. v. Defries, 1998 WL 914265, at *4 (Del. Ch. Dec. 21, 1998).
215
Norman v. Paco Pharm. Servs., Inc., 1989 WL 110648, at *10 (Del. Ch. Sept. 22, 1989).

54
it sufficient here under Rule 9(b). Additionally, the Plaintiffs have adequately

alleged damages. The remaining element, a confederation or combination between

the Director Defendants, SIG, and the fraudsters is the only element that remains

for the Moving Defendants to challenge here. The existence of a confederation

may be pled by inference; it is not subject to the specificity requirement of Rule

9(b).216 This element is analyzed below.

The Moving Defendants suggest that the Plaintiffs have failed to adequately

allege a confederation to advance the fraud because they have failed to plead

“knowing participation.”217 But the Plaintiffs are only required to allege well-

pleaded facts from which I can infer that the alleged fraud “was knowable” and

that the Director Defendants and SIG were “in a position to know it.”218

The Amended Complaint adequately alleges that Goldman and Klahr

reviewed the proposed, accurate Paymentech disclosure, as well as the allegedly

fraudulent disclosure as altered by Tal. Herzog and Kleinberg are alleged to have

“sought and obtained access to the materials in the data room,” in which the

fraudulent disclosure was displayed to Great Hill, and to have participated in the

216
See, e.g., In re Am. Int'l Grp., Inc., 965 A.2d 763, 806 (Del. Ch. 2009) aff'd sub nom.
Teachers' Ret. Sys. of Louisiana v. PricewaterhouseCoopers LLP, 11 A.3d 228 (Del. 2011) (“[A]
conspiracy can be inferred from the pled behavior of the alleged conspirators.”)
217
Reply Mem. of Law in Supp. of Mot. to Dismiss at 29 (citation omitted).
218
See Iotex, 1998 WL 914265, at *4.

55
sales process.219 They also, as Plaintiffs pled, were told by Tal that “Paymentech

are closing our account,”220 from which they could then know that the data room

representation that alleged a mutual termination of the Paymentech relationship

was false.221

According to the Plaintiffs, these four directors’ involvement in the sales

process supports an inference that they “were aware of the catastrophic problems

with PayPal and of Plimus’s deeply misleading disclosures.”222 Further, as

directors, it strikes me as unlikely that they were unaware of the impending and

allegedly catastrophic loss of the relationship with PayPal. Taking all reasonable

inferences in the Plaintiffs’ favor, I agree that these pleadings adequately allege

facts from which I may infer knowing participation in the underlying wrong by

Goldman, Klahr, Herzog, and Kleinberg, so as to meet the minimal requirements to

survive a motion under Rule 12(b)(6).

219
Am. Compl. ¶ 42; see also id. ¶ 80 (alleging that Herzog and Kleinberg received, from Klahr,
the March 18 letter to Paymentech from Perkins Coie that represented the termination as
“unilateral” and noted the “substantial detrimental effect” the termination would have and that
“at least Klahr, Herzog, and Kleinberg spoke by telephone on March 22 [the day that Klahr
emailed the correspondence to Herzog and Kleinberg] regarding Paymentech’s termination of
the Plimus relationship”).
220
See id. ¶ 42(a) (emphasis added).
221
See id. ¶ 83 (representing that the termination was mutual upon an unwillingness by
Paymentech to renegotiate certain terms of the parties’ contract).
222
Answering Br. in Opp’n to Moving Defs.’ Mot. to Dismiss at 41.

56
 As to knowledge on the part of SIG Fund and SIG Management, it is

reasonable to infer at the pleading stage that Goldman and Klahr, two principals of

SIG, had knowledge that was imputed to these entities under Delaware law.223

Given the finding above, I determine that the Plaintiffs have adequately pled

that a confederation or agreement to further the underlying wrong existed among

the Moving Defendants and Tal and Segal Itshayek. I can infer that Herzog and

Kleinberg, together with Goldman and Klahr, as Plimus directors, collectively had

control over the Company’s CEO, the apparent ringleader of the alleged fraud

relating to payment processors. As large blockholders within the Company,224 they

also had a financial motive not to exercise that control to stop him. Since I infer,

as found above, that the Director Defendants and SIG had knowledge of Tal’s

fraud, it is also reasonable to infer that there was at least a tacit agreement among

them to perpetrate that fraud.

In fact, the Amended Complaint alleges that each of the Director Defendants

and SIG “committed unlawful acts in furtherance of the conspiracy, including

making or causing to be made false representations and concealing material facts

that they had a duty to disclose.”225 Most of these alleged misrepresentations or

223
ABRY Partners V, L.P. v. F & W Acquisition LLP, 891 A.2d 1032, 1051 n.35.
224
Collectively, Kleinberg and Herzog owned 44% of the Company’s outstanding stock.
Goldman and Klahr were principals of SIG Fund, which was a major stockholder of the
Company.
225
Am. Compl. ¶ 217.

57
concealments involve Tal, Segal Itshayek, Goldman, and Klahr alone.226 But on

the part of SIG Fund, SIG Management, Herzog, and Kleinberg, the Plaintiffs

allege that each concealed the unilateral termination by Paymentech “due to,

among other things, Plimus’s repeated violations of credit card association rules”

and concealed that the extra-contractual payment to Tal was made to offset his

equity commitment, which “misl[ed] Great Hill into believing that Tal was

committed to, and had a large stake in, the post-merger company.”227 These

concealments furthered the fraud, it is alleged, because had the Plaintiffs known

the truth, they would not have entered into the Merger Agreement for $115 million.

Upon drawing all inferences in Plaintiffs’ favor, as is appropriate at this

stage, I find that they have pled sufficient facts to withstand the present Motion as

it relates to the civil conspiracy claims.

2. Aiding and Abetting

As noted, civil conspiracy and aiding and abetting are quite similar. Indeed,

this Court has noted that civil conspiracy claims are “sometimes called aiding and

abetting.”228 These two causes of action have been characterized as “concerted

action by agreement,” (conspiracy) and “concerted action by substantial

226
See id. ¶ 217(B)–(I).
227
Id. ¶ 217(A), (J).
228
Weinberger v. Rio Grande Indus., Inc., 519 A.2d 116, 131 (Del. Ch. 1986); Albert v. Alex.
Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *10 (Del. Ch. Aug. 26, 2005) (“While the
plaintiffs caption their claim as aiding and abetting breach of fiduciary duty, the court treats it as
a claim for civil conspiracy. Claims for civil conspiracy are sometimes called aiding and
abetting.”)

58
assistance” (aiding and abetting).229 From this characterization, it seems likely to

me that civil conspiracy is, in many cases, to borrow a term, a “lesser-included”

claim within an aiding and abetting claim; an “agreement” and act in furtherance

does not necessarily rise to the level of “substantial assistance,” while “substantial

assistance,” if shown, normally includes an “agreement,” even if implicit, and act

in furtherance thereof.230

The similarity of aiding and abetting a breach of fiduciary duty and civil

conspiracy has not gone unobserved by this Court, which has noted that

a court ultimately might find after trial that “any relief granted for the
civil conspiracy claims . . . would be redundant of the relief for aiding
and abetting [a breach of fiduciary duty],” and, on that basis, decline
to consider one claim or the other. Yet, despite their similarities, the
claims are different: “[a]iding and abetting is a cause of action that
focuses on the wrongful act of providing assistance, unlike civil
conspiracy that focuses on the agreement.231

It is not clear to me that—in the fraud context here, to be distinguished from the

breach of fiduciary duty context applicable in the quotation above—a litigant

would be likely to show aiding and abetting without incidentally having shown the

elements of civil conspiracy were satisfied. This suggests that the aiding and

abetting fraud claim may be duplicative of the civil conspiracy count. I also note,

229
Anderson, 2004 WL 2827887, at *2.
230
While I note the duplicity of these causes of action, the Moving Defendants actually argued
that the civil conspiracy claim was duplicative of the aiding and abetting claim, not the other way
around, as I contemplate.
231
Hospitalists of Delaware, LLC v. Lutz, 2012 WL 3679219, at *15 (Del. Ch. Aug. 28, 2012)
(alterations in original) (footnotes omitted).

59
however, that dismissing the aiding and abetting claim will confer no benefit in

terms of litigants’ economy, since the underlying tort is the same, and the evidence

that will show agreement and assistance will require similar discovery. In that

regard, there is little utility at this stage in dismissing the aiding and abetting claim

as redundant of civil conspiracy, although motion practice on a more developed

record may well lead to this result. In this light, I examine the allegations of aiding

and abetting below.232

Delaware courts have set out the elements for aiding and abetting a tort as:

(i) underlying tortious conduct, (ii) knowledge, and (iii) substantial assistance.233

The underlying tortious conduct here is the fraud, pled in Counts I and II of the

Amended Complaint, and uncontested at this stage with respect to Tal and Segal

Itshayek.

232
See id. (declining to dismiss similar counts on grounds that it was “conceivable” for purposes
of a motion to dismiss that evidence could support one or the other, but not both, claims).
233
Anderson, 2004 WL 2827887, at *4; see also Patton v. Simone, 1992 WL 183064, at *8 (Del.
Super. June 25, 1992) (citing the Restatement (Second) of Torts). But see In re Rural/Metro
Corp. Stockholders Litig., 2014 WL 5280894, at *7 n.1 (Del. Ch. Oct. 10, 2014) (citing the
Restatement (Second) of Torts but noting that “[a]s a caveat, it is not clear that the Restatements
apply directly to the facts of this case,” because, in part, “[t]he Restatement (Second) generally
applies to torts involving injury to persons and tangible property, but it also contains sections on
negligent misrepresentation and fraud, which frequently result in economic loss alone, as well as
sections addressing harm to intangible property interests, like a person's reputation, which do not
involve physical harm” and concluding that “the Restatements are at least persuasive authority
on the questions presented”).
Logically, in the tort as opposed to the breach of fiduciary duty context, damages must be
a necessary element of aiding and abetting as well. Since damages are adequately pled here, I
need not address this factor further.

60
 As to the knowledge element, I find that the Amended Complaint states with

the requisite particularity that Goldman, Klahr, Herzog, Kleinberg, and SIG knew

of the fraud carried out by Tal and Segal Itshayek with respect to Paymentech,

PayPal, and the Side Letter, for the reasons outlined above in connection with the

civil conspiracy claim. I thus turn to the remaining element, substantial assistance.

The Plaintiffs pled substantial assistance on the part of Goldman and Klahr

in that they allowed Tal and Segal Itshayek to conceal the truth regarding

Paymentech and PayPal and encouraged them to close the merger even though it

had been procured through fraud.234 Additionally, the Plaintiffs allege that

Goldman, Klahr, Herzog, Kleinberg and SIG’s role in the Side Letter payments to

Tal to rollover his equity show substantial assistance. While the Moving

Defendants cite a number of cases holding that inaction, without more, does not

constitute substantial assistance, the Plaintiffs are not relying on such a theory—

rather, they are alleging that the “black-mail” payment to Tal consisted of

substantial assistance in that it encouraged him to rollover his equity, “conceal[ing]

Tal’s concerns about the future of the company.”235 The Plaintiffs quote an email

from SIG to Plimus’s counsel, stating that the “side letter (the extra 30%) was

contingent on [Tal] agreeing to roll $3m. The founders [Herzog and Kleinberg]

234
See, e.g., Am. Compl. ¶ 206.
235
Id. ¶ 68.

61
also take the same position.”236 The Plaintiffs also pled that Tal emailed Kleinberg

and Herzog that he had “limited interest in this deal” without the side payments

and, in attempting to obtain additional payments, wrote “I also have to commit for

18 month [sic] and more so deal will take place.”237 The Amended Complaint

alleges that the Side Letter payment was designed to and did conceal Tal’s lack of

confidence in his positive—and false—representations concerning the future of

Plimus.

Having drawn all reasonable inferences from the pleadings in Plaintiffs’

favor and concluding that it is reasonably conceivable that the Director Defendants

and SIG knew of the fraud, I similarly find that it is reasonably conceivable that

they agreed to the “black-mail” payment to Tal to minimize suspicion on the part

of Great Hill and close the deal in spite of the Paymentech misrepresentations.238 I

emphasize again that this is not the only, and perhaps not the strongest, conclusion

to be drawn from the pleadings, but it is not beyond the bounds of reasonable

conceivability at the motion to dismiss stage.

The Moving Defendants argue that “collateral agreements can only serve as

the basis for aiding and abetting claims where they are ‘so grossly excessive’ as to

236
Id.
237
Id. ¶ 69 (internal quotation marks omitted).
238
I note the Moving Defendants contention that the side deal was negotiated before the PayPal
issues arose. See Defs.’ Mem. of Law in Supp. of Mot. to Dismiss at 46. However, the
Paymentech issues had occurred. See, e.g., Am. Compl. ¶¶ 7, 72–80.

62
be ‘inherently wrongful,’” relying on this Court’s decision in McGowan;239 that

reliance, in my opinion, is misplaced. The allegation in McGowan that this Court

found wanting was that an acquiring company had made side payments to certain

directors to induce them to breach their fiduciary duties. The Court in McGowan

was considering whether it could infer knowing participation when confronted

with a complaint that did not plainly allege a conspiracy to breach fiduciary duties;

thus, the Court had to look for a breach of duty sufficiently flagrant to imply

knowledge on the part of the abetter.240 Here, for the reasons set out above, facts

from which I can infer knowing participation in the alleged fraud on the part of the

Director Defendants have been adequately pled.

As to SIG Management, the Stockholders’ Representative, and SIG Fund, a

major stockholder, the Defendants argue that “[s]imply agreeing to merger terms

does not amount to substantial assistance in fraud.”241 However, as discussed, the

Plaintiffs have pled that much of the email correspondence with Tal regarding the

Side Letter was on behalf of SIG.242 The Plaintiffs are not suggesting that SIG’s

only role was agreeing to the merger terms. It is reasonably conceivable that SIG’s

involvement, through Goldman and Klahr, amounted to substantial assistance.

239
McGowan v. Ferro, 2002 WL 77712, at *3 (Del. Ch. Jan. 11, 2002) (footnotes omitted).
240
Id. at *2.
241
Defs.’ Mem. of Law in Supp. of Mot. to Dismiss at 46.
242
See Am. Compl. ¶¶ 66, 67 (“SIG, through Goldman . . . .”; “SIG, through Klahr . . . .”).

63
 Finally, with respect to the contention that the either the aiding and abetting

claim or the conspiracy claim should be dismissed as duplicative, I note that it is

conceivable that, at least with respect to the Side Letter, there was not a tacit

agreement to pay off Tal, which is required to support a conspiracy claim, but

instead financial motivation on the part of Goldman, Klahr, Herzog, and Kleinberg

to further Tal’s fraud for reasons of their own; thus, the payment could have been

made without an agreement, conceivably supporting an aiding and abetting claim

without satisfying the requisites of conspiracy.

For the reasons above, I decline to dismiss Counts III and IV.

B. Remaining Counts

The Moving Defendants seek to limit the scope of the indemnification

remedy sought by the Plaintiffs and to dismiss the Plaintiffs’ allegations that the

Moving Defendants were unjustly enriched and that the Plaintiffs are entitled to a

declaratory judgment or rescission. These arguments are addressed below.

1. Indemnification

The Plaintiffs, in Count V of their Amended Complaint, seek

indemnification from the Effective Time Holders—SIG Fund, Tal, Segal Itshayek,

Herzog, Kleinberg, Donors Capital, and Kids Connect—as well as SIG

Management pursuant to Sections 10.02(a)(i) and (iii). Pursuant to Section

10.02(a)(i), the Plaintiffs argue that Plimus was caused by Segal Itshayek, SIG,

64
Klahr, Goldman, Herzog and Kleinberg to breach the representations and

warranties in Sections 3.09(c), 3.16, 3.23, and 3.26(b), resulting in losses which the

Effective Time Holders must indemnify. In addition, pursuant to Section

10.02(a)(iii), the Plaintiffs argue that the Effective Time Holders are responsible

for the approximately $788,000 in fines levied against Plimus during this

applicable contractual period.243 The latter amount, while subject to proof at a later

stage of the litigation, is not at issue in this motion.

The indemnification provision provides:

Subject to the terms of this Article 10, after the Effective Time, each
Effective Time Holder, individually as to himself, herself or itself only
and not jointly as to or with any other Effective Time Holder, shall
indemnify [Fremont Holdco, Inc.] and the Surviving Corporation and
each of their respective Subsidiaries and Affiliates, and each of their
respective directors, officers, managers, members, partners,
stockholders, subsidiaries, employees, successors, heirs, assigns,
agents and representatives (each a “Parent Indemnified Person”)
against such Effective Time Holder’s Pro Rata Share of any actual
loss, liability, damage, obligation, cost, deficiency, Tax, penalty, fine
or expense, whether or not arising out of third party claims (including
interest, penalties, reasonable legal fees and expenses, court costs and
all amounts paid in investigation, defense or settlement of any of the
foregoing) . . . which such Parent Indemnified Person suffers, sustains
or becomes subject to, as a result of, in connection with or relating to:
(i) any breach by [Plimus] of any representation or warranty of
[Plimus] set forth herein, in any Disclosure Schedule or in the
Company Closing Certificate; (ii) any breach by [Plimus] of any of
the covenants or agreements of [Plimus] set forth herein to be
performed on or before the Effective Time or any breach by such
Effective Time Holder of any of the covenants or agreements of such
Effective Time Holder set forth herein to be performed after the

243
Am. Compl. ¶ 227.

65
 Effective Time; or (iii) any fines, penalties or similar assessments
imposed against [Plimus] or any of its Subsidiaries for violating
applicable credit card association policies, procedures, guidelines or
rules with respect to excessive chargebacks or similar recurring
payments during the period between the Agreement Effective Date
and the one year anniversary of the Closing Date, by a credit card
association, card-issuing bank, other credit card issuer or third-party
payment processor with respect to, and only to the extent of,
transactions occurring prior to the Closing Date. . . .244

There is no doubt that the Amended Complaint states a claim for indemnification.

Hotly debated by the parties, however, is whether the parties intended the

contractual limitation on indemnification to be operative in case of fraud. The

Agreement is structured such that claims for indemnification in connection with

representations and warranties—the contractual remedy offered for claims brought

under Section 10.02(a)(i)—are subject to a $500,000 deductible and capped at $9.2

million, the amount in escrow.245

The Amended Merger Agreement also contains an “Exclusive Remedy”

clause:

Following the closing, except (a) in the case of fraud or intentional
misrepresentation (for which no limitations set forth herein shall be
applicable) . . . the sole and exclusive remedies of the parties hereto
for monetary damages arising out of, relating to or resulting from any

244
Am. Merger Agreement § 10.02(a)(emphasis added).
245
Id. § 10.03(c)(i), (ii); see also id. § 10.03(b). Although this cap is not applicable to claims
brought under Section 10.02(a)(iii), claims brought under that Section are limited such that “in
no event shall any Effective Time Holder’s individual liability for Losses pursuant to Section
10.02(a)(iii) exceed such Effective Time Holder’s Pro Rata Share of $5,000,000.” Id. §
10.03(a)(iv). In their Amended Complaint, the Plaintiffs seek approximately $788,000 for
damage due to fines and penalties from the Effective Time Holders pursuant to Section
10.02(a)(iii). Am. Compl. ¶ 227.

66
 claim for breach of any covenant, agreement, representation or
warranty set forth in this Agreement, the Disclosure Schedule or any
certificate delivered by a party with respect hereto will be limited to
those contained in this Article 10.246

Because the Exclusive Remedy clause excepts fraud and intentional

misrepresentation from the limitations set forth in Article 10, and due to the

fraudulent conduct allegedly perpetrated by Tal, Segal Itshayek, SIG, Klahr,

Goldman, Herzog and Kleinberg, the Plaintiffs contend that “any purported

limitation on the Effective Time Holders’ indemnification obligations, including

those set forth in Section 10.03 of the Merger Agreement, is inapplicable.”247

Instead, according to the Plaintiffs, because there was fraud, the Effective Time

Holders are jointly and severally liable, and “must indemnify Great Hill for the full

amount of its losses,” not limited by the $9.2 million set aside in escrow.248 The

Moving Defendants argue that the only reasonable reading of Section 10 of the

Merger Agreement is that the Plaintiffs may seek tort damages for fraud outside

the limits of the indemnification provisions, but not unlimited indemnification

from innocent Effective Time Holders. Although their contentions are brought as a

246
Id. § 10.10.
247
Am. Compl. ¶ 226.
248
Id.; see also Answering Br. in Opp’n to Moving Defs.’ Mot. to Dismiss at 51; Am. Compl. ¶
17(c) (“Because the $9.2 million Escrow Amount available following the Merger would not be
adequate to cover losses in the event that Great Hill was defrauded in the transaction, Great Hill
bargained for and received the further protection from the Effective Time Holders that, in the
event of fraud or intentional misrepresentation, or cases where injunctive or equitable relief were
sought, Great Hill’s remedies would not be limited to indemnification up to the $9.2 million
Escrow Amount. Rather, under those circumstances, Great Hill is entitled, without limitation, to
indemnification from the Effective Time Holders.”); id. ¶ 110.

67
part of the Motion to Dismiss, the Moving Defendants do not seek dismissal of

Count V. Instead, the Moving Defendants seek a ruling limiting the scope of the

indemnification remedy sought here to funds in escrow, that is, under the cap.

The Effective Time Holders contracted to indemnify, pro rata to their

ownership interests, for damages caused by breaches of contract, and only up to the

amount provided in the Agreement. Looked at in context, the indemnification

provision provides benefits to both buyers and sellers. For the purchasers, the

provision provided them with a fund from which losses could be indemnified

without a showing of fault on the part of the individual Effective Time Holders.

For the stockholders, it provided a cap on contractual damages and limited their

liability to a pro rata share; in other words, it provided certainty as to what their

liability for losses from the sale of the Company would be. This cap on liability,

and indemnification scheme in general, was specifically inapplicable to fraud,

however. The Plaintiffs argue that the language at issue makes unlimited

indemnification available in case of fraud, or at least that the language is

ambiguous and can be read in that manner; the Moving Defendants ask me to rule

as a matter of law that the language simply exempts from the indemnification

limitations in Section 10 any recovery in tort from fraudsters.

Given the purposes described above, I tend to agree that the Moving

Defendants’ reading is commercially reasonable. I decline to address the language

68
here, however, because my decision would not dismiss Count V. Further, the

Plaintiffs might never prove fraud, or, if they do, they might never prove damages

exceeding the indemnification cap, rendering a decision here, in that case, merely

advisory. In any event, an interpretation of the language at issue would be

helpfully illuminated by evidence of the parties’ intent. Without finding whether

or not the language is ambiguous on its face, I decline to address the Moving

Defendant’s request for a ruling on the meaning of Section 10 as premature.

The discussion of the related question as to whether innocent Effective Time

Holders may be liable for restitution follows.

2. Unjust Enrichment

The Plaintiffs allege that the Moving Defendants were unjustly enriched as a

result of Great Hill being fraudulently induced to participate in the merger and

acquire Plimus for $115 million, an “unfair and highly inflated purchase price” due

to the fraud and breaches of representations and warranties that occurred.249 The

Plaintiffs thus seek restitution, in an amount to be determined at trial, so that they

can be equitably and properly reimbursed of “all monies received by Defendants in

excess of a true and fair valuation of Plimus at the time the Merger closed.”250

“Unjust enrichment is defined as the unjust retention of a benefit to the loss

of another, or the retention of money or property of another against the

249
Id. ¶ 235.
250
Id. ¶¶ 236–37.

69
fundamental principles of justice or equity and good conscience.”251 It was

developed “as a theory of recovery to remedy the absence of a formal contract.”252

To plead a claim for unjust enrichment, a plaintiff must plead “(1) an enrichment,

(2) an impoverishment, (3) a relation between the enrichment and impoverishment,

(4) the absence of justification, and (5) the absence of a remedy provided by

law.”253 “Restitution serves to deprive the defendant of benefits that in equity and

good conscience he ought not to keep, even though he may have received those

benefits honestly in the first instance . . . .”254 In other words, “[r]estitution is

permitted even when the defendant retaining the benefit is not a wrongdoer.”255

In evaluating unjust enrichment claims, Courts conduct a threshold inquiry

“as to whether a contract already governs the parties’ relationship.”256 “If a

contract comprehensively governs the parties’ relationship, then it alone must

provide the measure of the plaintiff’s rights and any claim of unjust enrichment

will be denied.”257 If the validity of that agreement is challenged, however, claims

251
Schock v. Nash, 732 A.2d 217, 232 (Del. 1999) (internal quotation marks omitted).
252
Bakerman v. Sidney Frank Importing Co., Inc., 2006 WL 3927242, at *18 (Del. Ch. Oct. 10,
2006).
253
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
254
Schock, 732 A.2d at 232–33 (internal quotation marks omitted).
255
Id.
256
Vichi v. Koninklijke Philips Electronics N.V., 62 A.3d 26, 58 (Del. Ch. 2012).
257
BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp., 2009 WL 264088, at
*7 (Del. Ch. Feb. 3, 2009); see also Bakerman, 2006 WL 3927242, at *18 (“When the complaint
alleges an express, enforceable contract that controls the parties’ relationship, however, a claim
for unjust enrichment will be dismissed.”); ID Biomedical Corp. v. TM Technologies, Inc., 1995
WL 130743, at *15 (Del. Ch. Mar. 16, 1995) (“It is undisputed the Letter Agreement governs the
parties’ relationship. This case is essentially a contract case accompanied by a request for

70
of unjust enrichment may survive a motion to dismiss.258 Further, this Court has

recognized that, “[i]n some situations, . . . both a breach of contract and an unjust

enrichment claim may survive a motion to dismiss when pled as alternative

theories of recovery.”259 This may be the case where a plaintiff pleads a right to

recovery “not controlled by contract”260 or where “it is the [contract], itself, that is

the unjust enrichment.”261 However, the “right to plead alternative theories does

not obviate the obligation to provide factual support for each theory.”262

Here, if the Plaintiffs prevail on their tort claims, unjust enrichment is

unavailable, because an element of unjust enrichment is lack of a remedy at law,

and should the Plaintiffs otherwise prevail, that element would be lacking. Seen in

this way, unjust enrichment is an alternative pleading: assuming the Plaintiffs can

prove that the Moving Defendants profited, and the Plaintiffs were impoverished,

as the result of the non-moving Defendants’ fraud; and assuming that Plaintiffs are

unable to implicate the Moving Defendants in that fraud, unjust enrichment would

be invoked. The question then is whether the underlying contract, through its

equitable remedies because money damages alone will not provide complete relief.
Consequently, IDB cannot seek recovery under a claim of unjust enrichment.”).
258
Bakerman, 2006 WL 3927242, at *18.
259
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at * (Del. Ch. Dec. 22, 2010);
see also BAE Sys. Info., 2009 WL 264088; McPadden v. Sidhu, 964 A.2d 1262, 1276–77 (Del.
Ch. 2008).
260
BAE Sys. Info., 2009 WL 264088, at *8.
261
McPadden, 964 A.2d at 1276.
262
Narrowstep., 2010 WL 5422405, at *16; see also BAE Sys. Info., 2009 WL 264088;
McPadden, 964 A.2d at 1276–77.

71
indemnification provisions, was meant to preclude such relief. The Moving

Defendants argue that the Plaintiffs’ unjust enrichment claim against Plimus’s pre-

merger stockholders does not pass the threshold inquiry because the parties’

relationship is governed by a valid contract; specifically, the pre-merger

stockholders “either executed the Amended Merger Agreement or, Plaintiffs assert,

are bound to its indemnification provisions.”263 As to Goldman and Klahr, who

did not sign the Amended Merger Agreement, the Moving Defendants argue that

the existence of this contract also destroys the Plaintiffs claims, as “Plaintiffs,

having bargained for the contractual remedy of indemnification, cannot seek quasi-

contractual relief from non-parties to the merger contract through an unjust

enrichment claim.”264

I have discussed above the contractual provisions providing indemnification

in certain circumstances and amounts under the Agreement. By limiting

indemnification rights to a fund, did the parties mean to preclude a remedy for

unjust enrichment arising from fraud against innocent stockholders? This matter

has not been adequately addressed in briefing, and I cannot say based on the record

before me that the existence of a contract precludes recovery from innocent

stockholders of benefits wrongfully obtained through the fraud of those acting on

their behalf as fiduciaries. Accordingly, I decline to dismiss Count VI at the

263
Defs.’ Mem. of Law in Supp. of Mot. to Dismiss at 50 (citing Am. Compl. ¶ 225).
264
Id.

72
pleading stage on the ground that an adequate remedy otherwise exists or that

restitution is precluded by the contract.

The Moving Defendants also argue that SIG Management and its associated

board representatives, Goldman, and Klahr, were not enriched through the merger

because they did not receive any merger consideration, and their “mere association

with [SIG] Fund, which received merger proceeds, is insufficient for an unjust

enrichment claim.”265 The Plaintiffs, for their part, argue that it is “hyper-

technical” to suggest that “Klahr, Goldman, and SIG Management could not have

been enriched because they were not Plimus stockholders in their individual

capacities and thus did not receive merger consideration.”266 The Plaintiffs

reiterate that Goldman and Klahr, “who controlled and directed SIG Fund as its

principals”267 used their control to cause SIG Fund to vote in favor of or consent to

the merger, “which had been procured through fraud.”268 If the Plaintiffs can

implicate these defendants in a fraud, they obviously have a remedy at law in

damages. A restitution remedy such as unjust enrichment, however, requires the

party subject to the claim to hold the funds resulting from the Plaintiff’s

impoverishment.269 Because the Plaintiffs have not alleged that SIG Management,

265
Id. at 51.
266
Answering Br. in Opp’n to Moving Defs.’ Mot. to Dismiss at 47.
267
Id. at 48 (citing Am. Compl. ¶¶ 24, 26–27, 41) (internal quotation marks omitted).
268
Id. (citing Am. Compl. ¶ 206) (internal quotation marks omitted).
269
SIG Fund, as a recipient of merger proceeds, could be subject to restitution if warranted after
trial.

73
Goldman or Klahr received funds resulting from the fraud, restitution, as opposed

to damages at law, is unavailable from those parties, and Count VI is dismissed as

to them.

3. Declaratory Judgment

The Moving Defendants also move to dismiss Count VII, which is the

Plaintiffs’ request for a declaratory judgment. More specifically:

As a result of the wrongful and fraudulent conduct alleged herein,
Plaintiffs request a declaratory judgment that [Tal, Segal Itshayek,
SIG, Klahr, Goldman, Herzog and Kleinberg] have no right or
entitlement to and should not receive or retain any merger proceeds, in
whatever form held, and that any such merger proceeds being held in
whatever form by any individual or entity, whether party to this
complaint or not, should be paid to or retained by Plaintiffs. Plaintiffs
further request a declaratory judgment ordering that Defendant Tal
surrender any stock immediately to Plimus or that, in the alternative,
such stock be canceled with no recourse, relief, or other entitlement
owed to Defendant Tal by Plaintiffs. Plaintiffs further request a
declaration that Fremont is not obligated to pay the amounts that
would otherwise be due under the promissory notes described
herein.270

The Moving Defendants’ argued that this Count sought “a declaration that

mimics each substantive count of the Amended Complaint.”271

Declaratory Judgment is a statutory action;272 it is meant to provide relief in

situations where a claim is ripe but would not support an action under common-law

pleading rules.

270
Am. Compl. ¶ 245.
271
Defs’ Mot. to Dismiss at 29 n.6.

74
 A comparatively recent innovation in Anglo-American law, the
declaratory judgment action is designed to promote preventive justice.
The notion laying behind the innovation is that legitimate legal
interests are sometimes cast into doubt by the assertion of adverse
clams and that, when this occurs, a party who suffers practical
consequences ought not be required to wait upon his adversary for a
judicial resolution that will settle the matter.273

Here, however, the Plaintiffs assert immediate entitlement to a complete set of

common-law and equitable affirmative remedies, in contract, tort and equity,

including rescission of the contract. Because the declaratory judgment count is

completely duplicative of the affirmative counts of the complaint, Count VII is

dismissed.

4. Rescission

The Moving Defendants also moved to dismiss the Plaintiffs’ request for

rescission. As I communicated to the parties at oral argument, I find it

inappropriate to dismiss this requested remedy at the motion to dismiss stage of

litigation, because—although I find the chances vanishingly small that I would

order such a remedy at this late date—whether rescission is available properly

involves a fact-specific inquiry.274

272
See 10. Del. C. § 6501.
273
Schick Inc. v. Amalgamated Clothing and Textile, 533 A.2d 1235, 1237-28 (Del. Ch. 1987)
(citations omitted).
274
See, e.g., ENI Holdings, LLC v. KBR Grp. Holdings, LLC, 2013 WL 6186326, at *24 (Del.
Ch. Nov. 27, 2013) (“Rescission is not a cause of action but a remedy available only where facts
indicate equity so requires. Because such an inquiry is fact specific, I decline to address it in
connection with this Motion to Dismiss, except to say that KBR’s burden to establish an
entitlement to rescission, in light of the likely change in circumstances due to the passage of time

75
 V. CONCLUSION

For the reasons explained above, the Moving Defendants’ Motion to Dismiss

is granted in part and denied in part. The parties should submit an appropriate

form of order.

here, is heavy.”) (citation omitted); Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 991
(Del. Ch. 2000) (“In response to a motion to dismiss, I simply determine whether plaintiff has
stated a claim for which relief might be granted. If I find that plaintiffs have stated cognizable
claims, then the nature of that relief is not relevant and need not be addressed. Because the
determination of relief is beyond the scope of this motion and premature without an established
evidentiary record, I will not address this issue.” (citations and internal quotation marks
omitted)); but see Winston v. Mandor, 710 A.2d 831, 831 (Del. Ch. 1996) (dismissing the
plaintiff’s request for rescission, and “conclud[ing] that where the circumstances of a challenged
transaction make rescission infeasible, and where the plaintiff is not unfairly prejudiced, a
motion to dismiss that remedy may be granted”).

76