Jeffery J. Sheldon v. Pinto Technology Ventures, L.P.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JEFFERY J. SHELDON and ANDRAS )
KONYA, M.D., PH.D., )
)
Plaintiffs, )
)
v. ) C.A. No. 2017-0838-MTZ
)
PINTO TECHNOLOGY VENTURES, L.P., )
PINTO TV ANNEX FUND, L.P., PTV )
SCIENCES II, L.P., RIVERVEST VENTURE )
FUND I, L.P., RIVERVEST VENTURE FUND )
II, L.P., RIVERVEST VENTURE FUND II )
(OHIO), L.P., BAY CITY CAPITAL FUND IV, )
L.P., BAY CITY CAPITAL FUND IV CO- )
INVESTMENT FUND, L.P., REESE TERRY )
and CRAIG WALKER, M.D., )
)
Defendants.
MEMORANDUM OPINION
Date Submitted: November 1, 2018
Date Decided: January 25, 2019
Thad J. Bracegirdle and Scott B. Czerwonka, WILKS, LUKOFF &
BRACEGIRDLE, LLC, Wilmington, Delaware; Jeff Joyce, JOYCE &
MCFARLAND LLP, Houston, Texas, Attorneys for Plaintiffs.
Brian C. Ralston and Jacqueline A. Rogers, POTTER ANDERSON CORROON
LLP, Wilmington, Delaware; Danny David and Rebecca Huddle, BAKER BOTTS
LLP, Houston, Texas, Attorneys for Reese Terry and Craig Walker, M.D.
Bruce E. Jameson and Samuel L. Closic, PRICKETT, JONES & ELLIOTT,
P.A., Wilmington, Delaware; B. Russell Horton, GEORGE BROTHERS
KINCAID & HORTON, L.L.P., Austin, Texas, Attorneys for Pinto Technology
Ventures, L.P., Pinto TV Annex Fund, L.P., PTV Sciences II, L.P., RiverVest
Venture Fund I, L.P., RiverVest Venture Fund II, L.P., RiverVest Venture Fund II
(Ohio), L.P., Bay City Capital Fund IV, L.P., Bay City Capital Fund IV Co-
Investment Fund, L.P.

ZURN, Vice Chancellor.
 Plaintiffs Jeffrey J. Sheldon and Andras Konya, M.D., Ph.D, obtained stock

early in the corporate life of non-party IDEV Technologies, Inc. IDEV raised capital

to support its growth in the years that followed. In 2009, new management created

and implemented a strategic plan to secure long-term capital, supported in the short

term by secured bridge funding from existing investors. In July 2010, IDEV

converted its preferred stock to common, enacted a 100 to 1 reverse stock split, and

raised capital from new and current investors by issuing new preferred stock.

One result of that financing was that stockholders who did not invest,

including the plaintiffs, experienced severe dilution. Three years later, after Abbott

Laboratories purchased IDEV for more than $300 million, the plaintiffs tried to

increase their share by suing some of IDEV’s venture capital stockholders and

members of IDEV’s board and management in Texas state court.

The defendants in Texas, including all defendants here, responded by seeking

to enforce a Delaware forum selection clause in IDEV’s governing stockholders’

agreement. The parties litigated all the way to the Supreme Court of Texas, which

enforced the provision against the plaintiffs. The plaintiffs responded as instructed,

suing in this Court for breach of fiduciary duty, aiding and abetting of those

breaches, and unjust enrichment.

Before me are the defendants’ motions to dismiss. The defendants’ main

argument is that the plaintiffs’ claims are derivative. If the defendants are right, the

2
plaintiffs’ primary breach of fiduciary duty claims fail as a matter of law because the

plaintiffs do not satisfy the requirements of Court of Chancery Rule 23.1, and they

lost standing to pursue a derivative suit after Abbott acquired IDEV. The plaintiffs’

response is two-fold: first, that the defendants are judicially estopped from arguing

the plaintiffs’ claims are derivative because of positions the defendants took in

enforcing the forum selection clause in Texas; and second, that the plaintiffs can

assert their claims directly under Gentile v. Rossette, because of the alleged presence

of a control group.1

As explained below, the defendants are not estopped from asserting the

plaintiffs’ claims are derivative, and Gentile does not apply because the plaintiffs

failed to plead the existence of a control group. As a result, I must dismiss the

plaintiffs’ claims with prejudice.

I. BACKGROUND
I draw the facts from the allegations in, and documents incorporated by

reference or integral to, the Complaint.2

1
906 A.2d 91 (Del. 2006).
2
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (providing
that on a motion to dismiss, the Court may consider documents that are “incorporated by
reference” or “integral” to the complaint). All citations to the Complaint are to Plaintiffs’
Verified Amended Complaint, Docket Item (“D.I.”) 25 (“Compl.”).

3
 A. Parties and Relevant Non-Parties
Non-party IDEV Technologies, Inc. (“IDEV”) is a Delaware corporation with

its principal office in Webster, Texas.3 IDEV develops and manufactures devices

used in interventional radiology, vascular surgery, and interventional cardiology.4

Plaintiff Jeffrey J. Sheldon founded IDEV in December 1999.5 He served as

Chief Executive Officer of IDEV from that time until he resigned in January 2008.6

Before July 2010, Sheldon owned IDEV common stock and Series B Preferred

Stock.7 Plaintiff Andras Konya, M.D., Ph.D, was the co-inventor of certain

technology relating to vascular stents licensed to IDEV in 2000 by MD Anderson

Cancer Center.8 Konya received shares of IDEV common stock through his

licensing arrangement with IDEV.9 Konya then served as a consultant to IDEV in

3
Compl. ¶ 4.
4
Id. ¶ 4.
5
Id. ¶ 17.
6
Id. ¶¶ 4, 17.
7
Id. ¶ 18. Sheldon alleges that he owned Series A Preferred Stock, but the Schedules to
the Shareholders Agreement specify that Sheldon owned 45,998 shares of Series B
Preferred Stock. Aff. of Samuel L. Closic in Supp. of Stockholder Defs.’ Br. in Supp. of
Mot. to Dismiss Pls.’ Verified Am. Compl. (D.I. 31), Ex. 3 Schedules 1 and 2. This appears
not to matter, as Defendants did not press the point, and nothing suggests that Sheldon
would have different rights as a holder of Series A Preferred Stock rather than Series B
Preferred Stock.
8
Compl. ¶ 5.
9
Id.

4
varying roles and frequencies between 2000 and late 2012.10 I refer to Sheldon and

Konya together as “Plaintiffs.”

Defendants Pinto Technology Ventures, L.P., Pinto TV Annex Fund, L.P. and

PTV Sciences II, L.P. (together, “PTV”) are affiliated Delaware limited

partnerships.11 Defendants RiverVest Venture Fund I, L.P., RiverVest Venture Fund

II, L.P., and RiverVest Venture Fund II (Ohio), L.P. (together, “RiverVest”) are also

affiliated Delaware limited partnerships.12 And defendants Bay City Capital Fund

IV, L.P. and Bay City Capital Fund IV Co-Investment Fund, L.P. (together, “Bay

City”) are affiliated Delaware limited partnerships as well.13 I refer to PTV,

RiverVest, and Bay City collectively as the “Venture Capital Defendants.”

Reese Terry and Craig Walker, M.D. (together, “Individual Defendants,” and

together with the Venture Capital Defendants, “Defendants”) were directors of

IDEV.14 Christopher Owens was IDEV’s President and CEO, as well as a director,

while William W. Burke was IDEV’s CFO.15

10
Id. ¶¶ 5, 17.
11
Id. ¶ 6.
12
Id. ¶ 7.
13
Id. ¶ 8.
14
Id. ¶¶ 9-10.
15
Id. ¶¶ 11-12.

5
 B. IDEV Grows, Completing Multiple Financing Rounds in the 2000s.
IDEV stockholders entered into a stockholders agreement in 2000.16 IDEV

required additional financing “for [its] growth and solvency.” 17 In 2004, 2006, and

2008, IDEV completed Series A, B, and C financings.18 The Series A round raised

$1.8 million, and included PTV.19 The Series B and C rounds raised $24 million

and $25 million respectively.20 Some previous investors, such as PTV, as well as

new investors, including RiverVest and Bay City, participated in the Series B and C

rounds.21 Because the Venture Capital Defendants invested in various rounds, they

“collectively controlled over 60% of the Company’s issued and outstanding

shares.”22 “Several of the amendments to the shareholders agreement coincided with

[these] financing[s].”23

In early 2010, the operative stockholders agreement was the Fourth Amended

and Restated Shareholders Agreement, dated March 4, 2008 (the “Shareholders

16
Sheldon v. Pinto Tech. Ventures, L.P., 477 S.W.3d 411, 413 (Tex. App. 2015) (“Sheldon
I”).
17
Pinto Tech. Ventures, L.P. v. Sheldon, 526 S.W.3d 428, 434 (Tex. 2017) (“Sheldon II”).
18
Sheldon II, 526 S.W.3d at 434; see also Closic Aff. Exs. 4-5.
19
Sheldon II, 526 S.W.3d at 434; Closic Aff. Ex. 3 Schedule 2.
20
Sheldon II, 526 S.W.3d at 434.
21
Closic Aff. Ex. 3, Schedule 2.
22
Compl. ¶ 23.
23
Sheldon II, 526 S.W.3d at 434.

6
Agreement”).24 At that time, Sheldon owned 1,250,000 shares of IDEV common

stock and 45,998 shares of IDEV Series B Preferred Stock, while Konya owned

650,000 shares of common stock.25 Sheldon and Konya respectively owned about

2.5% and 1.25% of the total outstanding shares of IDEV as of early 2010.26 Sheldon

was a Key Shareholder and Significant Shareholder under the Shareholders

Agreement, while Konya was only a Key Shareholder.27 There were twenty Key

Shareholders and seventy Significant Shareholders, counting affiliated funds

separately.28 The Shareholders Agreement defined “Shareholder” as “collectively,

the Key Shareholders and the Significant Shareholders.”29 The Shareholders could

amend the Shareholders Agreement by a 60% vote.30

In this case, the most relevant provision of the Shareholders Agreement is

Section 7, which comprises a voting agreement. Under Section 7, PTV, RiverVest,

and Bay City could each appoint one director to the Board.31 A majority of those

24
Closic Aff. Ex. 3.
25
Compl. ¶ 18.
26
Id.
27
Closic Aff. Ex. 3 § 1(f) & (p); see also id. Schedules 1 and 2.
28
Closic Aff. Ex. 3 Schedules 1 and 2.
29
Id. § 1(o).
30
Id. § 18(a); Compl. ¶ 20.
31
Closic Aff. Ex. 3 § 7(a).

7
directors then chose two additional directors.32 The sixth identified director was

IDEV’s CEO.33 Every Shareholder, including Sheldon and Konya, agreed to “take

all necessary or desirable actions” to elect these directors.34 Other than electing

directors, “[e]ach Shareholder [] retain[ed] at all times the right to vote the

Shareholder’s [shares] in its sole discretion on all matters.”35

C. IDEV Recapitalizes And Receives Additional Capital Through The
Financing In 2010.
In 2009, IDEV “hired a new executive management team, restructured its

sales force, secured bridge funding from its current investor group and implemented

a new strategic plan that was focused on leveraging and fully developing” its core

technologies.36 IDEV also determined that it would need “additional equity capital

. . . in order to fund significant investments . . . critical to the Company’s future

growth prospects.”37 Late in 2009, management started a financing process.

In the first half of 2010, management “met with more than fifteen venture

capital and strategic investors,” and conducted follow-up meetings and site visits

32
Id. § 7(a)(v).
33
Id. § 7(a)(iv).
34
Id. § 7(a).
35
Id. § 7(c).
36
Transmittal Aff. of Scott B. Czerwonka in Supp. of Pls.’ Combined Answering Br. in
Response to Defs.’ Mots. to Dismiss Pls.’ Verified Am. Compl. (D.I. 34), Ex. D at 3.
37
Id.

8
with interested investors.38 “After extended discussions with [the] new investors and

an evaluation of their proposed terms, the Company selected” a proposal, which

included both new and current investors.39

IDEV implemented the financing in July 2010 (the “Financing”). The

Financing consisted of several transactions that can be separated into two series. The

first series related to IDEV’s capital structure and stockholders, and set the stage for

the second series, which raised new capital.

In the first series, the Venture Capital Defendants voted to convert all of

IDEV’s preferred stock to common stock.40 The Venture Capital Defendants then

acted by written consent to amend IDEV’s Certificate of Incorporation to

accomplish two goals. The first was to effect a reverse stock split of common shares,

reducing the number of outstanding shares by turning every 100 shares into a single

share.41 The second was to authorize and issue a new class of shares, Series B-1

Preferred Stock.42 Finally, IDEV and the Venture Capital Defendants amended the

38
Id.
39
Id.
40
Compl. ¶ 29(a).
41
Id. ¶ 29(b).
42
Id.

9
Shareholders Agreement to eliminate certain preemptive rights held by Significant

Shareholders, including Sheldon.43

Having set the stage, IDEV raised new money. IDEV described its plan to

raise more than $40 million in a Confidential Information Statement.44 IDEV raised

$27 million in an initial closing by selling Series B-1 shares to new and existing

investors (including each of the Venture Capital Defendants).45 There was also an

exchange and purchase offering, in which previous holders of preferred stock could

convert their common shares into Series A-2 Preferred Stock, provided they also

purchased Series B-1 Preferred Stock.46 The Confidential Information Statement

warned stockholders that “[t]he Transactions result in substantial dilution to

Preferred Stockholders, and the dilution will be significantly increased as to

43
Id. ¶ 29(c); see also Closic Aff. Ex. 3 § 18(a).
44
Czerwonka Aff. Ex. D at 2, 3. At oral argument, counsel for the Individual Defendants
informed the Court that “a similar confidential information statement went out to the
holders of common equity” and that the document “was used in the dispositive motion
briefing in Texas.” D.I. 46 (“Tr.”) at 98. The parties then filed letters on this point,
including the referenced confidential information statement. D.I. 45 & 47. Because I
conclude Plaintiffs’ claims are derivative, I need not consider that statement.
45
Czerwonka Aff. Ex. D. at 2.
46
Id. at 4. The Confidential Information Statement described Series A-1 Preferred Stock
as being available to those “who purchased convertible promissory notes” under a 2009
Note Purchase Agreement. Id. at 2, 4. It is unclear whether that 2009 Note Purchase
Agreement was the “bridge funding” IDEV raised in 2009.

10
Preferred Stockholders that do not participate in the Financing.”47 Plaintiffs did not

participate in the Financing.

The Financing had one other relevant consequence. When IDEV had offered

shares of common stock to its employees in the past, many had financed “their

purchases through full recourse promissory notes partially secured by the common

stock.”48 The notes amounted to more than $1.7 million at the end of 2009.49 The

Financing caused the value of that common stock to decrease, meaning the notes

became “substantially undersecured.”50 In November 2011, IDEV declared and

issued special bonuses to employees who had given those promissory notes.51 IDEV

received the employees’ shares and cancelled the promissory notes.52

D. After An Acquirer Purchases IDEV, Plaintiffs Sue In Texas, But
Are Sent To Delaware Pursuant To A Forum Selection Clause.
In 2013 Abbott Laboratories acquired IDEV “for $310 million net of cash and

debt.”53 IDEV’s success was bitter for Plaintiffs because the Financing had diluted

their previously significant holdings. Sheldon and Konya allege they would have

47
Id. at 4.
48
Compl. ¶ 21.
49
Id.
50
Id. ¶¶ 30(b), 39.
51
Id. ¶¶ 30(b), 39.
52
Id. ¶ 30(b).
53
Id. ¶ 31.

11
made $7.75 million and $3.875 million, respectively, in the Abbott transaction had

the Financing never occurred.54 After the Financing, however, they would “be

fortunate to receive $15,000 and $7,500, respectively, for their shares.”55 Plaintiffs

sued in Texas to obtain a different outcome.

Plaintiffs’ suit in Texas took the parties on a grand tour of the Texas court

system. Plaintiffs alleged the Venture Capital Defendants, Individual Defendants,

and Owens and Burke committed “fraud, breach of fiduciary duty, minority-

shareholder oppression, Texas Blue Sky Law violations, and conspiracy as to

[certain] parties.”56 Plaintiffs chose “not to seek a contractual remedy for violation

of the preemptive right and of anti-dilution provisions of the shareholder

agreements,”57 which contained a Delaware forum selection clause.58

Still, the defendants in Texas invoked the forum selection clause through a

motion to dismiss, which the trial court granted. Plaintiffs appealed that decision to

the Fourteenth Court of Appeals of Texas. The Court of Appeals reversed, ruling

that Plaintiffs’ claims did not “arise out of” the Shareholders Agreement.59

54
Id. ¶ 32.
55
Id.
56
Sheldon II, 526 S.W.3d at 434.
57
Id. at 441.
58
Closic Aff. Ex. 3 § 24.
59
Sheldon I, 477 S.W.3d at 421.

12
Defendants appealed to the Supreme Court of Texas. The Supreme Court of Texas

agreed with Defendants, ruling they could enforce the forum selection clause against

Plaintiffs, even though the claims sounded in tort rather than in contract.60

Plaintiffs responded by filing a complaint here. After the Individual

Defendants and the Venture Capital Defendants moved to dismiss, Plaintiffs

amended and filed their Verified Amended Complaint as allowed by Court of

Chancery Rule 15(aaa). Both sets of defendants again moved to dismiss on July 16,

2018. The parties briefed the motions and I heard oral argument on November 1,

2018. For the reasons below, I grant the motions.

II. ANALYSIS
The Complaint alleges Defendants used the Financing to unlawfully take a

large percentage of IDEV’s equity at the expense of minority common

stockholders.61 Plaintiffs allege the Venture Capital Defendants acted together as a

controlling stockholder group, using their combined share holdings and their

domination and control of the IDEV Board to complete the Financing.62 Plaintiffs

claim the Venture Capital Defendants owed fiduciary duties to Plaintiffs and

60
Owens and Burke were defendants in Texas but were not parties to the Shareholders
Agreement and so were not bound by the forum selection clause. Sheldon II, 526 S.W.3d
at 447. Accordingly, Plaintiffs’ suit against Owens and Burke remains pending in Texas.
61
Compl. ¶ 1.
62
Id. ¶ 2.

13
breached those duties.63 Plaintiffs assert a single breach of fiduciary duty count

based on these allegations, which also contains brief allegations of disclosure

violations by Sheldon individually.

Defendants moved to dismiss on several grounds. Defendants correctly

asserted that Plaintiffs’ primary claims are derivative. Plaintiffs failed to satisfy the

requirements of Rule 23.1 by not making a demand on IDEV’s Board or pleading

that a demand would have been futile. Their breach of fiduciary claim must be

dismissed. The related aiding and abetting and unjust enrichment claims, as pled,

must suffer a similar fate. Because Defendants’ Rule 23.1 arguments dispose of

those claims, I do not address their Rule 12(b)(6) arguments. As to Sheldon’s

cursory disclosure claim, those allegations fail to state a claim upon which relief can

be granted.

A. Defendants Are Not Judicially Estopped From Arguing Plaintiffs’
Claims Are Derivative.
According to Plaintiffs, Defendants are judicially estopped from arguing

Plaintiffs’ claims are derivative because Defendants prevailed in enforcing the forum

selection clause in the Shareholders Agreement.64 “Judicial estoppel applies in

Delaware when (i) ‘a litigant advances a position inconsistent with a position taken

63
Id.
64
D.I. 34 at 15-17.

14
in the same or earlier legal proceeding’ and (ii) ‘the court was persuaded to accept

the previous argument as a basis for its earlier ruling.’”65 The “persuaded to accept”

element is important: “parties raise many issues throughout a lengthy litigation” and

“only those arguments that persuade the court can form the basis for judicial

estoppel.”66 In this case, the issue is whether Defendants’ successful argument that

the forum selection clause governed Plaintiffs’ claims in Texas means Defendants

cannot now assert the claims here are derivative.

A court’s application of a forum selection clause or other procedural device

does not necessarily estop a party from arguing the claim is direct or derivative. The

most helpful precedent appears to be In re First Interstate Bancorp Consolidated

Shareholder Litigation.67 There, the plaintiffs argued the defendants could not

contest whether the plaintiffs’ claims were direct or derivative because the court had

entered the parties’ stipulation certifying a class.68 This Court rejected that

argument, stating the class certification order merely determined a procedural issue

65
In re Rural/Metro Corp. S’holders Litig., 102 A.3d 205, 246-47 (Del. Ch. 2014) (quoting
VIII–Hotel II P Loan Portfolio Hldgs., LLC v. Zimmerman, 2013 WL 5785290, at *3 (Del.
Super. Ct. Sept. 19, 2013)), aff’d sub nom., RBC Capital Mkts., LLC v. Jervis, 129 A.3d
816 (Del. 2015).
66
Motorola Inc. v. Amkor Tech., Inc., 958 A.2d 852, 859 (Del. 2008).
67
729 A.2d 851 (Del. Ch. 1998).
68
Id. at 859.

15
and was “not a finding by the Court as to the nature of the underlying claims.” 69 In

the absence of a specific judicial determination that plaintiffs’ claims were direct or

derivative, defendants could argue the claims were derivative and should be

dismissed.70

In Huffington v. T.C. Group, LLC, the defendants persuaded the District of

Massachusetts to enforce a forum selection clause.71 When the case was filed in

Delaware Superior Court, the defendants moved to dismiss the claims as time-

barred.72 The plaintiff argued that by persuading the District of Massachusetts that

the plaintiff could sue in Delaware and that Delaware courts could properly apply

Massachusetts law, the defendants had implied to the District Court that the claims

were not time-barred.73 The Superior Court rejected plaintiffs’ argument, noting

“[n]othing in the District Court’s opinion addresse[d] the statute of limitations in

Delaware,” because “the [e]ffect the statute ha[d] on [the plaintiff’s] claim in

Delaware should have been of no consequence to the District Court’s determination

69
Id.
70
Id.
71
2012 WL 1415930, *2 (Del. Super. Ct. Apr. 18, 2012).
72
Id. at *5.
73
Id.

16
in this matter. The forum selection clause was either enforceable or not

enforceable.”74

These decisions, and others in different contexts,75 show that an estoppel

analysis requires a careful and literal reading of the arguments and decision in the

earlier matter. Any preclusive effect flowing from a court’s application of a

procedural measure is circumscribed by that court’s reasoning and the parties’

arguments before it. In this case, the context and explanation for the Supreme Court

of Texas’s enforcement of the forum selection clause makes clear that court did not

decide whether Plaintiffs’ claims are direct or derivative.76

The direct/derivative issue does not appear at all in the Texas opinion.77 The

Texas Court did not hold that Plaintiffs’ claims were contractual, which might

74
Id.
75
See In re Rural/Metro Corp S’holders Litig., 102 A.3d at 247 (plaintiffs could argue
defendants were not joint tortfeasors, despite earlier arguing to the contrary, because
settlement stipulation with the defendants entered by Court did not contain admission of
liability); Daniels v Opteck Tech., Inc., 2013 WL 6913270, at *2 (Del. Super. Ct. Dec. 30,
2013) (court’s previous decision on motion for summary judgment “did not depend on”
issues implicated by later motion for leave to amend complaint).
76
In briefing, Plaintiffs provided one filing Defendants submitted in Texas. Czerwonka
Aff. Ex. B. Defendants argue I cannot consider the filing, though they also provided filings
Plaintiffs submitted in Texas. Closic Aff. Exs. 1 & 2. Even though both sides have
submitted Texas filings, I cannot take judicial notice of filings in other courts “for the truth
of [their] contents.” In re Rural Metro Corp. S’holders Litig., 2013 WL 6634009, at *9
(Del. Ch. Dec. 17, 2013). I consider the decision by the Supreme Court of Texas, which is
the basis for Plaintiffs’ estoppel argument. Compl. ¶ 34.
77
At oral argument, Plaintiffs’ counsel conceded “the direct/derivative distinction” was
not at issue before the Supreme Court of Texas. Tr. at 81-82.

17
implicate the Delaware decisions Plaintiff cites.78 To the contrary, the Supreme

Court of Texas painstakingly made clear that Plaintiffs were asserting claims

sounding in tort, not contract. Exemplary language includes:

 References to “the statutory and common-law tort claims alleged in this
lawsuit”79 and “the shareholders’ extracontractual claims.”80

 Framing whether Plaintiffs “noncontractual claims” fell within the forum
selection clause.81

 Describing how federal courts determine “whether such a clause extends to
noncontractual claims.”82

 “Additionally, we note that many of the statutory and common-law tort claims
involve the same operative facts that would be implicated in a parallel breach-
of-contract claim, had one been pursued.”83

 “Notably, the factual allegations giving rise to the noncontractual claims are
integral to the dispute’s resolution.”84

 “A contract claim or defense implicating these issues would involve the same
operative facts as statutory and common-law tort claims addressing the same
matters. Sheldon acknowledges this fact, stating [he] chose, as was his right,
not to seek a contractual remedy for violation of the preemptive right and of
anti-dilution provisions of the shareholder agreements. Although Sheldon has

78
See D.I. 34 at 16-17 (citing Citigroup Inc. v. AHW Inv. P’ship, 140 A.3d 1125 (Del.
2016); NAF Hldgs., LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175 (Del. 2015)).
79
Sheldon II, 526 S.W.3d at 437.
80
Id. at 432.
81
Id. at 437 (emphasis added).
82
Id. at 438 (emphasis added).
83
Id. at 441 (emphasis added).
84
Id. (emphasis added).

18
 that right, he cannot ‘evade enforcement of forum selection agreements
through artful pleading of tort claims in the context of a contract dispute.’”85

 Addressing an alternative argument that even if Plaintiffs “statutory and
common-law tort claims” fell under the forum selection clause Konya did not
have to litigate in Delaware.86

Having decided Plaintiffs were asserting tort claims, rather than contract

claims, the Texas Court turned to Defendants’ attempt to enforce the forum selection

clause and concluded the clause applied. The Texas Court focused on the fact that

the forum selection clause encompassed any “dispute arising out of” the

Shareholders Agreement.87 The Texas Court explained the forum selection clause

covered any “dispute,” rather than any “claim,” and therefore was “necessarily

broader than claims based solely on rights originating exclusively from the

contract.”88 This key distinction meant Plaintiffs’ tort claims “ar[ose] out of the []

Shareholders Agreement” and Plaintiffs needed to file in Delaware.

In my view, the Supreme Court of Texas decided whether Plaintiffs’ tort

claims arose out of the Shareholders Agreement for the limited purpose of whether

it should enforce the forum selection clause. The Texas Court concluded Plaintiffs’

dispute arose out of the Shareholders Agreement, and did not consider or decide

85
Id. (internal quotation marks omitted).
86
Id. at 442.
87
Id. at 437.
88
Id. at 439.

19
whether the claims were direct or derivative. Therefore, because the Supreme Court

of Texas did not accept that Plaintiffs’ claims were direct, or even contractual, in

enforcing the forum selection clause, Defendants are not judicially estopped from

claiming Plaintiffs’ claims are derivative.

B. Standard of Review
Plaintiffs argue they have “a direct claim under the well-established rule of

Gentile v. Rossette.”89 They have not pled or argued that if Gentile does not apply,

they could still pursue their resulting derivative claims under Rule 23.1’s heightened

pleading standard.90 Accordingly, if Gentile does not apply, I must dismiss

Plaintiffs’ claims.

On Defendants’ motion to dismiss, I apply the reasonable conceivability

standard of Rule 12(b)(6) to evaluate Plaintiffs’ allegations that a control group

89
Pls.’ Answering Br. 18. Claims under Gentile are not purely direct, but have a “dual
character” and are “both derivative and direct.” Gentile, 906 A.2d at 99-100. Because
Plaintiffs have focused only on their direct claims, “to the extent any aspect of [their] claims
could be considered partially derivative, Plaintiff[s] ha[ve] abandoned or waived such
claims.” CMS Inv. Hldgs., LLC v. Castle, 2015 WL 3894021, at *8 n.32 (Del. Ch. June
23, 2015).
90
See Cumming v. Edens, 2018 WL 992877, at *11 (Del. Ch. Feb. 20, 2018) (“Rule 23.1
places a heightened pleading burden on the plaintiff to meet ‘stringent requirements of
factual particularity that differ substantially from the permissive notice pleadings’
embodied in Court of Chancery Rule 8 and that animate Court of Chancery Rule 12(b)(6).”
(quoting Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000))). The Independent Director
Defendants argued in their Opening Brief that the “Plaintiffs also do not allege any well-
pleaded facts suggesting demand would have been futile.” Independent Director Defs.’
Opening Br. 23. Plaintiffs remained silent in briefing and at argument on this point.

20
exists such that their claims are direct.91 Under that standard, I must “accept all well-

pleaded factual allegations in the Complaint as true, accept even vague allegations

in the Complaint as ‘well-pleaded’ if they provide the defendant notice of the claim,

draw all reasonable inferences in favor of the plaintiff, and deny the motion unless

the plaintiff could not recover under any reasonably conceivable set of

circumstances susceptible of proof.”92

C. Plaintiffs’ Claims Are Solely Derivative.
Whether a claim is direct or derivative is governed by Tooley v. Donaldson,

Lufkin & Jenrette, Inc.93 My decision “must turn solely on the following questions:

(1) who suffered the alleged harm (the corporation or the suing stockholders,

individually); and (2) who would receive the benefit of any recovery or other remedy

(the corporation or the stockholders, individually)?”94 “[A] court should look to the

nature of the wrong and to whom the relief should go. The stockholder’s claimed

direct injury must be independent of any alleged injury to the corporation.”95 “The

stockholder must demonstrate that the duty breached was owed to the stockholder

91
See Thermopylae Capital P’rs, L.P. v. Simbol, Inc., 2016 WL 368170, at *14 (Del. Ch.
Jan. 29, 2016) (applying the reasonable conceivability standard in determining whether
controlling stockholder existed for Gentile analysis).
92
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del.
2011).
93
845 A.2d 1031 (Del. 2004).
94
Id. at 1033.
95
Id. at 1039.

21
and that he or she can prevail without showing an injury to the corporation.”96

Dilution claims, like the ones Plaintiffs advance here, are classically derivative.97

Plaintiffs do not argue that a Tooley analysis leads to a different conclusion here.

Instead, Plaintiffs argue their breach of fiduciary duty claim is direct under Gentile

v. Rossette.98 Dilution claims are treated as “both derivative and direct” if:

(1) a stockholder having majority or effective control causes the
corporation to issue “excessive” shares of its stock in exchange for
assets of the controlling stockholder that have a lesser value; and (2)
the exchange causes an increase in the percentage of the outstanding
shares owned by the controlling stockholder, and a corresponding
decrease in the share percentage owned by the public (minority)
shareholders.99

Plaintiffs assert the Venture Capital Defendants constituted a control group.100

A group of stockholders “can collectively form a control group where those

shareholders are connected in some legally significant way—e.g., by contract,

common ownership, agreement, or other arrangement—to work together toward a

96
Id.
97
See Green v. LocatePlus Hldgs., Corp., 2009 WL 1478553, at *2 (Del. Ch. May 15,
2009) (“Classically, Delaware law has viewed as derivative claims by shareholders
alleging that they have been wrongly diluted by a corporation’s overpayment of shares.”);
see also El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1251 (Del. 2016)
(noting the “traditional rule that dilution claims are classically derivative”).
98
Pls.’ Answering Br. 18-22.
99
Gentile, 906 A.2d at 100.
100
See In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *15 (Del. Ch. Oct.
24, 2014) (“Under Delaware law, in appropriate circumstances, multiple stockholders
together can constitute a control group, with each of its members being subject to the
fiduciary duties of a controller.”).

22
shared goal.”101 But because “even a majority stockholder is entitled to vote its

shares as it chooses, including to further its own interest,”102 Plaintiffs “must allege

more than mere concurrence of self-interest among certain stockholders to state a

claim based on the existence of a control group.”103

Plaintiffs allege the Venture Capital Defendants (i) “collectively controlled

over 60% of the Company’s issued and outstanding shares”;104 (ii) were parties to a

voting agreement that gave them the right to appoint three directors to the IDEV

Board,105 with those directors choosing two additional directors; (iii) “had a long and

close relationship of investing together for their mutual benefit”;106 and (iv) acted in

concert to complete the Financing to “extract economic benefit for their own selfish

gain while unfairly diluting the economic and voting interests of Plaintiffs.”107

Plaintiffs analogize these facts to those supporting a control group in In re Hansen

Medical, Inc. Stockholders Litigation.108

101
Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009).
102
Emerson Radio Corp. v. Int’l Jensen Inc., 1996 WL 483086, at *17 (Del. Ch. Aug. 20,
1996).
103
In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *15.
104
Compl. ¶ 23.
105
Id. ¶ 24.
106
Id. ¶ 25.
107
Id. ¶ 26.
108
2018 WL 3030808, at *3 (Del. Ch. June 18, 2018).

23
 Plaintiffs’ allegations fall short of those in Hansen, and are more akin to those

in van der Fluit v. Yates, in which this Court found the complaint failed to adequately

allege a control group.109 The control group in Hansen, which consisted of two

individuals and their affiliated entities, had worked together for more than twenty

years, going back to an investment in which they had “entered into a voting

agreement and declared themselves to the SEC as a ‘group’ of stockholders.” 110 In

the two decades after that pronouncement, those investors “coordinate[d] their

investment strategy in at least seven different companies.”111 When they invested in

the acquired company in Hansen, the investors “were the only participants in a

private placement that made them the largest stockholders.”112

In the squeeze-out merger at issue in Hansen, the purchaser identified the

investors as “Key Stockholders” and “entered into agreements that allowed [them,

and only them,] to negotiate directly with” the acquirer.113 The agreements also

obligated the investors to vote for the merger.114 And finally, the investors could

109
2017 WL 5953514, at *6 (Del. Ch. Nov. 30, 2017).
110
In re Hansen Med., Inc., 2018 WL 3030808, at *3.
111
Id.
112
Id. at *7.
113
Id.
114
Id.

24
roll their shares over into stock of the acquirer, while the minority stockholders

received only cash.115 The Court concluded that

[a]lthough each of these factors alone, or perhaps even less than all
these factors together, would be insufficient to allege a control group
existed, all of these factors, when viewed together in light of the
[defendants’] twenty-one year coordinated investing history, ma[d]e it
reasonably conceivable that [they] functioned as a control group during
the Merger.116

The Venture Capital Defendants in this case were not as intertwined,

collaborative, or exclusive as the members of the Hansen control group. Plaintiffs

allege that subsets of the Venture Capital Defendants have invested in four other

companies.117 But they have not alleged that all of the Venture Capital Defendants

have invested together in any other company, that they coordinated their

investments, or that they have declared themselves as a group of investors to the

SEC or any other authority. Plaintiffs’ allegations merely indicate that venture

capital firms in the same sector crossed paths in a few investments. That is different

from the “long history of cooperation and coordination” in Hansen.118

The Venture Capital Defendants were not the only participants in the pre-

Financing Series A, B, or C rounds, or the Series B-1 involved in the Financing.

115
Id. at *4, *7, *9.
116
Id. at *7.
117
Compl. ¶ 25.
118
In re Hansen Med., Inc., 2018 WL 3030808, at *7.

25
Other investors participated in those rounds and received the same securities, but are

not alleged to be part of the control group.119 For example, Covidien Group S.A.R.L.

did not own IDEV stock before the Financing, but invested more in the Financing

than RiverVest.120 These facts distinguish Hansen, in which the members of the

control group gained majority voting control through an exclusive private placement

that involved no outside investor.121

In further distinction from Hansen, the Venture Capital Defendants in this

case were not contractually bound to pursue the Financing. Plaintiffs make much of

the voting agreement in the Shareholders Agreement. That provision did ensure

PTV, RiverVest, and Bay City could each appoint one director to the Board.122 But

its details undercut Plaintiffs’ claims. First, the voting agreement only governed

selecting directors for IDEV’s Board. Each Shareholder otherwise “retain[ed] at all

times the right to vote [their] Restricted Shares in [their] sole discretion on all matters

presented to the Corporation’s Shareholders for a vote.”123

119
Closic Aff. Ex. 3 Schedules 1 & 2 (lists of Key and Significant Shareholders showing
owners of Series A, B, and C Preferred Shares); Czerwonka Aff. Ex. A, Ex. A (schedule
of purchasers in Financing).
120
Czerwonka Aff. Ex. A, Ex. A (schedule of purchasers in Financing); Tr. at 14, 30,
32-33.
121
2018 WL 3030808, at *7.
122
Closic Aff. Ex. 3 § 7(a)(i)-(iii).
123
Id. § 7(c).

26
 Second, all of the Key and Significant Shareholders identified in the

Shareholders Agreement agreed to vote for the Venture Capital Defendants’

nominees. These groups total more than seventy stockholders, including

Plaintiffs.124 As in van der Fluit, Plaintiffs offer “no explanation for why [the

Venture Capital Defendants] are members of an alleged control group while the

numerous other signatories to these agreements are not.”125

Hansen, citing van der Fluit, noted that where agreements with “no relation

to the actual transaction” were “entered into by the entirety of the stockholders

instead of just the control group,” those agreements do not create a control group.126

The Shareholders Agreement bound not only the Venture Capital Defendants, but

all Shareholders, and it did not bear on the Financing or bind the Venture Capital

Defendants beyond selecting directors. The Shareholders Agreement does not

compel a finding that the Venture Capital Defendants were a control group.127

124
Closic Aff. Ex. 3 Schedules 1 & 2 (lists of Key and Significant Shareholders showing
owners of Series A, B, and C Preferred Shares). Plaintiffs also claim that the Venture
Capital Defendants enjoyed “greater rights and protections” because they were “Significant
Shareholders.” Pls.’ Answering Br. 26. Because there were seventy Significant
Shareholders, and Sheldon was himself a Significant Shareholder, that status did not carry
the clout Plaintiffs contend it does.
125
2017 WL 5953514, at *6.
126
In re Hansen Med., Inc., 2018 WL 3030808, at *6 n.79.
127
See van der Fluit, 2017 WL 5953514, at *6 (“The Investor Rights Agreement to which
[the stockholders] are signatories contains no voting, decision-making, or other agreements
that bear on the transaction challenged in the instant case.”); In re Crimson Expl. Inc.

27
 I conclude this case more closely resembles van der Fluit than Hansen, and

therefore find Plaintiffs have failed to allege the Venture Capital Defendants

functioned as a control group. In van der Fluit, the supposed members of the control

group were (a) two of the company’s founders, who were directors and owned about

30% of the company’s stock, (b) a venture capital investor who owned 16.8% of the

company’s stock and appointed a member to the company’s board, and (c) another

venture capital investor who owned about 3% of the company’s stock.128 The

alleged control group thus owned just under 50% of the company’s stock as of the

time of the merger.129 As in this case, the alleged controllers held three of the seven

board seats.130 This Court rejected the idea that those individuals and investors were

S’holder Litig., 2014 WL 5449419, at *15 (noting plaintiff did “not plead that [the party]
signed any voting agreement regarding the Merger” at issue).
128
2017 WL 5953514, at *6; see also van der Fluit, C.A. 12553-VCMR, D.I 28, Ex. D at
23 (Schedule 14A).
129
The combined ownership here is alleged to be over 60%, but that threshold is not
dispositive without indicia of coordination. See Zimmerman v. Crothall, 62 A.3d 676, 700
(Del. Ch. 2013) (stating two large stockholders who together owned 66% of the company’s
voting shares and appointed two of the board’s five directors were not controlling
stockholders because there was “no showing that they acted as one unit or that one exerted
control over the other”); Dubroff, 2009 WL 1478697, at *4 (granting motion to dismiss
and ruling entities that owned 56% of voting stock and controlled four of the five directors
were not a control group because they were not “tied together in some legally significant
way”); Feldman v. Cutaia, 956 A.2d 644, 657-58 (Del. Ch. 2007) (finding no control group
when complaint only alleged that the board members and their families controlled 60% of
the company’s equity but alleged no agreement between them), aff’d, 951 A.2d 727 (Del.
2008).
130
2017 WL 5953514, at *11.

28
members of a control group, noting the entities “simply appear[ed] to be early

venture capital investors selected by Plaintiff as an attempt to increase the stock

ownership of the purported group.”131 Those entities’ participation in an investor

rights agreement, which gave “registration and informational rights to early stage

investors,” did not compel a finding that they were a control group because it

contained no voting or decision-making agreement “that [related to] the transaction

challenged in the instant case.”132 The same is true here for the Venture Capital

Defendants as bound by the Shareholders Agreement, which in no way related to the

Financing.

Plaintiffs seek a charitable reading of their allegations based on Hansen’s

explanation that determining “whether a control group exists is fact intensive” and

“particularly difficult to ascertain at the motion to dismiss stage.” 133 But van der

Fluit makes clear the Court can decide the issue at the motion to dismiss stage, and

a plaintiff must still plead facts that make the conclusion reasonably conceivable.134

Plaintiffs have not done so.

131
Id. at *6.
132
Id. at *6.
133
Pls.’ Answering Br. 24-25 (quoting In re Hansen Med., Inc., 2018 WL 3030808, at *6).
134
van der Fluit, 2017 WL 5953514, at *7; see also In re Crimson Expl. Inc. S’holder
Litig., 2014 WL 5449419, at *15 (“Plaintiffs must allege more than mere concurrence of
self-interest among certain stockholders to state a claim based on the existence of a control
group.”); id. at *15 (refusing to “pile up [the] questionable inferences” plaintiffs requested
“until such a conclusion is reached”).

29
 1. Recent Authority Suggests Gentile Does Not Apply In
Situations Without A Controlling Stockholder.
Plaintiffs also argue they need not plead the existence of a controlling

stockholder to assert a Gentile claim. Plaintiffs cite Carsanaro v. Bloodhound

Technologies, Inc.,135 and In re Nine Systems Corp. Shareholders Litigation136 to

argue Gentile permits stockholders to pursue claims where “the board effectuating

the transaction lacks a disinterested and independent majority.”137 Plaintiffs’

argument suffers from two problems: one doctrinal, the other factual.

As to doctrine, Carsanaro and Nine Systems do support Plaintiffs’ argument.

But our Supreme Court’s ruling in El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff138

and later decisions by this Court have cast doubt on whether Carsanaro and Nine

Systems are good law on this point. In El Paso the Supreme Court “decline[d] the

invitation to further expand the universe of claims that can asserted” dually.139

Recently, Vice Chancellor Glasscock stated that “El Paso thus implicitly rejected

the reasoning of decisions such as Carsanaro and Nine Systems, which had extended

135
65 A.3d 618 (Del. Ch. 2013).
136
2014 WL 4383127 (Del. Ch. Sept. 4, 2014).
137
Pls.’ Answering Br. 20.
138
152 A.3d 1248 (Del. 2016).
139
Id. at 1264.

30
Gentile to any dilutive issuance approved by a conflicted board.”140 I too decline to

extend Gentile as Carsanaro and Nine Systems did.

Even if I were to apply Nine Systems and Carsanaro to the facts here,

dismissal would still be warranted. To succeed on this theory, Plaintiffs must plead

that a majority of IDEV’s Board was not disinterested and independent.141 They

must do so in their complaint, not their answering brief, because “it is impermissible

to attempt to amend one’s pleading through a brief.”142

Plaintiffs’ Complaint fails to plead the Board lacked a disinterested and

independent majority. Plaintiffs do not identify four of the Board members by name

in the Complaint.143 The Complaint does not allege whether or how the Venture

140
Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *10 (Del. Ch. July
26, 2018); see also Klein v. H.I.G. Capital, L.L.C., 2018 WL 6719717, at *7 (Del. Ch. Dec.
19, 2018) (noting “this court has exercised caution in applying the Gentile framework”);
Cirillo Family Tr. v. Moezinia, 2018 WL 3388398, at *16 (Del. Ch. July 11, 2018)
(“the Gentile paradigm only applies when a stockholder already possessing majority or
effective control causes the corporation to issue more shares to it for inadequate
consideration”); Carr, 2018 WL 1472336, at *9 (“to invoke the dual dynamic recognized
in Gentile, a controlling stockholder must exist before the challenged transaction”); see
also Almond for Almond Family 2001 Tr. v. Glenhill Advisors LLC, 2018 WL 3954733, at
*24 (Del. Ch. Aug. 17, 2018) (noting the Supreme Court in El Paso “recently construed
the [Gentile] doctrine narrowly” and that “[i]n the wake of El Paso, this court has exercised
caution in applying the Gentile framework”).
141
Carsanaro, 65 A.3d at 658.
142
Standard Gen. L.P. v. Charney, 2017 WL 6498063, at *25 (Del. Ch. Dec. 19, 2017).
143
Plaintiffs allege the board consisted of six directors in their Complaint, but in their
Answering Brief state there were seven directors. Compare Compl. ¶ 24 with Pls.’
Answering Br. 7-8. Defendants seem to agree there are seven directors, and so I assume
there are seven.

31
Capital Defendants control those unnamed individuals. The only allegation of

control is that the Venture Capital Defendants chose three directors, who then, by a

majority vote, selected two additional directors.144

From this, and nothing else, Plaintiffs request “a pleadings-stage inference of

disloyalty.”145 This request conflicts with “well-settled Delaware law that a

director’s independence is not compromised simply by virtue of being nominated to

a board by an interested stockholder.”146 Plaintiffs have not pled that it is reasonably

conceivable that a majority of the board was not disinterested or independent, and

so cannot benefit from an inference of disloyalty. Even if Gentile extended to claims

in the context of a board lacking a disinterested and independent majority, the

Complaint does not plead the facts necessary to survive dismissal.

2. Plaintiffs Cannot Pursue Their Derivative Breach Of
Fiduciary Duty Claim.
“The consequences of classif[ying] [] a claim as either direct or derivative

can be outcome determinative.”147 This distinction is particularly consequential

“here because [Plaintiffs] did not make a demand upon the Board to bring the claim

144
Compl. ¶ 24.
145
Pls.’ Answering Br. 34.
146
In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 996 (Del. Ch. 2014), aff’d
sub nom., Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).
147
Rhodes v. Silkroad Equity, LLC, 2007 WL 2058736, at *4 (Del. Ch. July 11, 2007).

32
and ha[ve] made no effort in [their] Complaint to plead that demand would have

been futile.”148 Plaintiffs’ derivative claims must be dismissed for two reasons.

First, because Plaintiffs’ claims are derivative, their “Complaint must comply

with Court of Chancery Rule 23.1.”149 Plaintiffs do not argue they satisfied Rule

23.1’s requirements. Rule 23.1(a) requires Plaintiffs to “allege with particularity the

efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the

directors or comparable authority and the reasons for the plaintiff’s failure to obtain

the action or for not making the effort.”150 Plaintiffs did not make a demand on

IDEV’s Board, and do not argue they are excused from doing so.

Second, the continuous ownership rule requires that “a derivative shareholder

must not only be a stockholder at the time of the alleged wrong and at [the] time of

commencement of suit but that he must also maintain shareholder status throughout

the litigation.”151 “It is well established under our Supreme Court’s decision in Lewis

v. Anderson and its progeny that, as a general matter, a merger extinguishes a

148
Akrout v. Jarkoy, 2018 WL 3361401, at *7 (Del. Ch. July 10, 2018).
149
Sciabacucchi, 2018 WL 3599997, at *10.
150
Ct. Ch. R. 23.1(a).
151
Lewis v. Anderson, 477 A.2d 1040, 1046 (Del. 1984); see also 8 Del. C. § 327 (“In any
derivative suit instituted by a stockholder of a corporation, it shall be averred in the
complaint that the plaintiff was a stockholder of the corporation at the time of the
transaction of which such stockholder complains or that such stockholder’s stock thereafter
devolved upon such stockholder by operation of law.”).

33
plaintiff’s standing to maintain a derivative suit.”152 There are two limited

exceptions to this rule,153 but Plaintiffs do not claim either applies. When Abbott

acquired IDEV for cash, Plaintiffs lost standing to assert derivative claims on

IDEV’s behalf.

Plaintiffs’ derivative claim for breach of fiduciary duty must be dismissed.

D. Plaintiffs’ Aiding and Abetting and Unjust Enrichment Claims Fall
With Their Fiduciary Duty Claim.
Plaintiffs alternatively plead that even if the Venture Capital Defendants did

not owe fiduciary duties, they aided and abetted IDEV’s directors in breaching their

fiduciary duties.154 The elements of an aiding and abetting a breach of fiduciary duty

claim are “(i) the existence of a fiduciary relationship, (ii) a breach of the fiduciary’s

duty, (iii) knowing participation in that breach by the defendants, and (iv) damages

proximately caused by the breach.”155 “Prior decisions of this court have validated

the unsurprising proposition that an aiding and abetting claim premised on a

152
Almond, 2018 WL 3954733, at *23; see also Lewis v. Ward, 852 A.2d 896, 899 (Del.
2004) (“The effect of a merger, such as the one that took place in this case, is normally to
deprive a shareholder of the merged corporation of standing to maintain a derivative
action.”).
153
See Lewis, 852 A.2d at 899 (“That general rule is, however, subject to two limited
exceptions: (1) Where the merger itself is the subject of a claim of fraud, being perpetrated
merely to deprive shareholders of the standing to bring a derivative action; and (2) Where
the merger is in reality a reorganization which does not affect plaintiff’s ownership of the
business enterprise.”).
154
Compl. ¶ 43.
155
RBC Capital Markets, LLC, 129 A.3d at 861.

34
derivative cause of action is necessarily derivative itself.”156 Plaintiffs’ aiding and

abetting claim thus fails for the same reasons as its fiduciary duty claim.

Plaintiffs’ unjust enrichment claim also fails. “To state a claim, the complaint

must allege sufficient facts plausibly to show: (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.”157

Plaintiffs’ unjust enrichment claim alleges the same “severe and unlawful

dilution of Plaintiffs’ shares of IDEV stock” at the heart of their fiduciary duty

claim.158 I therefore reach the same conclusion as I did for the breach of fiduciary

duty claim: Plaintiffs’ unjust enrichment claim is derivative under Tooley.159 It must

also be dismissed.

156
Feldman, 956 A.2d at 662; see also In re Alloy, Inc., 2011 WL 4863716, at *14 (Del.
Ch. Oct. 13, 2011) (“As a matter of law and logic, there cannot be secondary liability for
aiding and abetting an alleged harm in the absence of primary liability.”).
157
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *16 (Del. Ch. Dec.
22, 2010). Plaintiffs cited only Delaware law in support of their unjust enrichment claim
and I therefore assume Delaware law governs this claim.
158
Compl. ¶ 48.
159
See Reiter v. Fairbank, 2016 WL 6081823, at *14 (Del. Ch. Oct. 18, 2016) (dismissing
derivative breach of fiduciary duty and unjust enrichment claims under Rule 23.1); Metro.
Life Ins. Co. v. Tremont Grp. Hldgs., Inc., 2012 WL 6632681, at *9 (Del. Ch. Dec. 20,
2012) (classifying unjust enrichment claim as derivative and dismissing along with breach
of fiduciary duty claim); MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *23-24
(Del. Ch. May 5, 2010) (ruling unjust enrichment claim was derivative and dismissing for
failure to make demand).

35
 E. Sheldon’s Disclosure Claims Also Fail.
In the same count as Plaintiffs’ derivative breach of fiduciary duty claim,

Sheldon alleges Defendants breached their fiduciary duties by failing to disclose

material facts related to the Financing.160 “An omitted fact is material if there is a

substantial likelihood that a reasonable shareholder would consider it important in

deciding how to vote.”161 “Framed differently, an omitted fact is material if there is

‘a substantial likelihood that the disclosure of the omitted fact would have been

viewed by the reasonable investor as having significantly altered the ‘total mix’ of

information made available.’”162

160
This claim is brought only by Sheldon. Compl. ¶ 39. The parties’ briefing left two
aspects of this claim unclear. The first is whether the claim is direct or derivative, or if the
relief requested is proper for a disclosure claim. See In re J.P. Morgan Chase & Co.
S’holder Litig., 906 A.2d 766, 772 (Del. 2006). I assume the claim is direct and do not
reach the relief issue. Second, the “scope and requirements [of a fiduciary’s obligation to
disclose information] depend on context.” In re Wayport, Inc. Litig., 76 A.3d 296, 314
(Del. Ch. 2013); compare Independent Director Defs.’ Opening Br. 36-37 (discussing
disclosures as part of a request for stockholder action) with Stockholder Defs.’ Opening
Br. 21-22 (arguing defendants had no fiduciary duties in providing information). At
argument, Sheldon’s counsel focused on whether the information statement contained
“sufficient disclosures” to allow Sheldon “to actually make an informed decision as to
whether to participate.” Tr. at 86-87; see also Tr. 66-67 (referencing disclosure statement).
I apply the standard for disclosing information to stockholders as part of a request for
stockholder action. I analyze this claim only against the Individual Defendants because of
my conclusion that the Venture Capital Defendants were not controlling stockholders who
owed fiduciary duties.
161
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus., Inc.
v. Northway, Inc., 426 U.S. 438, 449 (1976)).
162
Morrison v. Berry, 191 A.3d 268, 283 (Del. 2018) (quoting Rosenblatt, 493 A.2d at
944).

36
 Sheldon’s first disclosure claim relates to a release of claims in the Series B-1

Preferred Stock Purchase Agreement. Sheldon complains the disclosure did not

“explain exactly why the[] [released] person should be released or exactly what

claims were being released.”163 But “‘asking why’ does not state a meritorious

disclosure claim.”164 And as to the scope of the release, the document stated a

participant

hereby waives and releases and promises never to assert any claim or
cause of action or liabilities of any nature whatsoever, whether or not
now known, that he, she or it has or might have against the Company
or any of its predecessors, successors, subsidiaries, parents, affiliates or
related entities, or their officers, directors, employees, stockholders,
consultants, agents, attorneys or assigns (collectively, the “Released
Parties”), with respect to any matter arising out of facts, circumstances
or actions occurring in connection with the sale of shares of Series B-1
Preferred Stock, including, without limitation, the conversion of
preexisting Preferred Stock into Common Stock, the subsequent
reverse stock split as set forth in the Certificate (as defined below), the
issuance of the Shares, and the exchange of Common Stock for shares
of Series A-1 or Series A-2 Preferred Stock pursuant to the Exchange
Agreement.165

This provision is very broad. Companies need not disclose every potential or

hypothetical application or outcome.166 More information on the breadth of the

163
Compl. ¶ 30(a).
164
In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d at 1001.
165
Czerwonka Aff. Ex. A § 1.8.
166
See In re Best Lock Corp. S’holder Litig., 845 A.2d 1057, 1074 (Del. Ch. 2001)
(companies “need not include information that is prospective or hypothetical in nature”);
see also IRA Tr. FBO Bobbie Ahmed v. Crane, 2017 WL 7053964, at *17 (Del. Ch. Dec.
11, 2017) (dismissing claim that hypothetical scenario had to be disclosed).

37
release would not have “significantly altered the ‘total mix’ of information”

available to stockholders.167

Sheldon’s second disclosure claim also fails. By 2010, IDEV had given

employees stock in exchange for $1.7 million of promissory notes.168 The stock

served as security for the notes.169 The Financing diluted the value of those shares,

and with them the collateral supporting the notes IDEV held.170 Sheldon complains

that one of the disclosure schedules to the Series B-1 Preferred Stock Purchase

Agreement improperly listed the full face value of the notes.

I conclude the Individual Defendants did not need to spell out that the

collateral underlying the notes would be affected in the same manner as other stock.

The reverse stock split converted every 100 shares of common stock into 1 share of

common stock. The Confidential Information Statement stated the Financing would

dilute the common stockholders.171 Because IDEV disclosed “the relevant facts . . .

and their effects were obvious,”172 Sheldon fails to state a claim for relief.173

167
Morrison, 191 A.3d at 283 (quoting Rosenblatt, 493 A.2d at 944).
168
Czerwonka Aff. Ex. E, § 2.11; Compl. ¶ 21.
169
Compl. ¶ 21.
170
Id.
171
Czerwonka Aff. Ex. D. at 4 & Schedule 2.
172
Solomon v. Armstrong, 747 A.2d 1098, 1131 (Del. Ch. 1999), aff’d, 746 A.2d 277 (Del.
2000).
173
See Crane, 2017 WL 7053964, at *18 (“Although the eventual loss of voting control
would occur only after a very large amount of equity issuances, that fact should have been

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 Sheldon also complains that “[i]n connection with the” Financing, IDEV did

not disclose that “at the time of [the Financing] Defendants had determined to grant

special bonuses to employees to eliminate their note obligations.”174 Sheldon has

explained no connection between the decision to invest in the Financing and IDEV’s

decision about compensating its employees who were affected by the Financing.175

Sheldon has failed to demonstrate why a stockholder would consider IDEV’s

handling of the employee notes and bonuses important in deciding whether to

participate in the Financing.

Further, the bonuses “were declared in November 2011,”176 sixteen months

after the Financing. Sheldon provides no support for his bare allegation that IDEV

had decided to make the grants by the time of the Financing.177 Nor has Sheldon

explained why IDEV waited sixteen months to implement the supposed plan. In

light of this timing, it is difficult to accept Sheldon’s allegation that the Individual

intuitively obvious given that the new Class C shares would have only 1/100 of a vote per
share.”); In re Family Dollar Stores, Inc. S’holder Litig., 2014 WL 7246436, at *20 (Del.
Ch. Dec. 19, 2014) (“Because it is obvious that Family did not have the pricing information
of General—its competitor, after all—a disclosure to that effect would not significantly
alter the total mix of information available in the Proxy.”).
174
Compl. ¶¶ 30, 39.
175
Approximately 100 employees owned the shares, many in amounts as small as $336.
Czerwonka Aff. Ex. E. Schedule 2.11.
176
Compl. ¶ 30(b).
177
The court need not accept “conclusory allegations that lack factual support.” In re
Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *12 (Del. Ch. Mar. 28, 2018).

39
Defendants conceived of the bonuses as part of the Financing, and yet did not

disclose that information at the time of the Financing. Sheldon has not adequately

pled that anyone had made any decision about the bonuses or notes that could be

disclosed to stockholders at the time of the Financing. I conclude Sheldon failed to

allege a material omission.

III. CONCLUSION
For these reasons, Defendants’ motions to dismiss the Complaint are

GRANTED. The Complaint is dismissed with prejudice.

IT IS SO ORDERED.

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