Urdan v. WR Capital Partners, LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

JONATHAN URDAN and WILLIAM )
WOODWARD, )
)
Plaintiffs, )
)
v. ) C.A. No. 2018-0343-JTL
)
WR CAPITAL PARTNERS, LLC, a Delaware )
limited liability company, WR E3 HOLDINGS, )
LLC, a Delaware limited liability company, )
HENRI TALERMAN, FRANK E WALSH III, )
and BRADLEY D. KNYAL, )
)
Defendants, )
)
and )
)
ENERGY EFFICIENT EQUITY, INC., a )
Delaware corporation, )
)
Nominal Defendant. )

MEMORANDUM OPINION

Date Submitted: May 24, 2019
Date Decided: August 19, 2019

Elena C. Norman, Benjamin M. Potts, YOUNG CONAWAY STARGATT & TAYLOR,
LLP, Wilmington, Delaware; Louis R. Miller, Daniel S. Miller, Jeffery B. White, MILLER
BARONDESS, LLP, Los Angeles, California; Counsel for Plaintiffs.

Kenneth J. Nachbar, Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; Counsel for Defendants.

LASTER, V.C.
 A co-founder of a company and one of its early investors sued a private equity fund,

its affiliates, and the two fund principals who served on the company’s board of directors.

The plaintiffs allege that after loaning the company funds and gaining representation on

the board, the defendants used the rights they secured in the loan agreement to cut off the

company’s other financing options. Once the company was desperate for capital, the

defendants extracted onerous terms that solidified the defendants’ control. They then

proceeded to dilute the plaintiffs through interested transactions.

The defendants moved to dismiss the complaint. They point out that after filing suit,

the plaintiffs sold their shares. They contend that the plaintiffs thereby lost the ability to

assert derivative claims. The same principle would foreclose the plaintiffs’ ability to assert

direct claims. The only remaining claims are for fraud and unjust enrichment, and the

defendants contend that the complaint fails to plead the elements of these claims.

This decision agrees with the defendants. The motion to dismiss is granted.

I. FACTUAL BACKGROUND

The facts are drawn from the plaintiffs’ complaint and the documents that are

integral to the pleading. At this stage of the proceedings, the complaint’s allegations are

assumed to be true, and the plaintiffs receive the benefit of all reasonable inferences.

A. The Company

In 2014, plaintiff Jonathan Urdan and non-party Kevin Kurka co-founded Energy

Efficient Equity, Inc. (the “Company”), which is a Delaware corporation operating in the

property-assessed, clean-energy (“PACE”) financing industry. In a PACE financing

arrangement, a financial intermediary like the Company partners with a local municipality
to loan homeowners money for energy-saving improvements, and the homeowners repay

the loans through additional tax assessments added to their property tax bills. The

municipality authorizes the financial intermediary to assess the value of the improvements

and collect the property taxes. The municipality also authorizes the financial intermediary

to issue bonds backed by the property tax assessments. The financial intermediary uses

proceeds from the bond issuances to fund the loans to homeowners.

The PACE financing industry is still young. California was the first state to approve

PACE financing for home improvements in 2008, and although over thirty states have

established PACE programs, almost all of the PACE volume is currently concentrated in

California and Florida. In most states, PACE financing is also available for commercial

properties, but this market largely remains untapped. As one of a limited number of firms

operating in a high-potential industry, the Company had significant prospects for growth.

B. The Company’s Initial Governance And Capital Structure

From the Company’s founding until May 31, 2016, the members of the Company’s

board of directors (the “Board”) were Urdan, Kurka, and plaintiff William Woodward, who

was the Company’s first outside investor. Urdan acted as president and CFO, and Kurka

acted as CEO.

From the Company’s founding until May 31, 2016, Urdan, Kurka, and Woodward

owned 100% of the Company’s equity. The following table summarizes the Company’s

capitalization as of May 30, 2016, with separate accounts for each person summed together.

2
 Stockholder Common Series A Convertible Fully
Stock Preferred Debt Diluted
Kurka 1,710,000 0 0 1,710,000
Urdan 1,710,000 80,000 170,000 1,960,000
Woodward 400,000 100,000 170,000 670,000
TOTAL 3,820,000 180,000 340,000 4,340,000

C. WR Capital And The 2016 Financing

Defendant WR Capital Partners, LLC is a private equity fund based in Morristown,

New Jersey. Defendants Henri Talerman and Frank E. Walsh III manage the fund, which

invests in companies with valuations between $50 million and $500 million.

In early 2016, Talerman and Walsh approached Urdan, Kurka, and Woodward about

investing in the Company. They touted their background and expertise in small-cap

investing and stressed that they approached investing as a partnership with management.

Walsh assured Urdan that if WR Capital invested in the Company, they would be “working

together as partners.” Compl. ¶ 51. The WR Capital website likewise represented that “[a]ll

private investments are made in cooperation with management and directors of the

portfolio company.” Compl. ¶ 49.

With the assistance of counsel, the Company negotiated with WR Capital over the

terms of a financing (the “2016 Financing”). On May 31, 2016, the 2016 Financing closed.

The centerpiece of the 2016 Financing was a loan agreement between the Company

and WR E3 Holdings, LLC (“WR Sub”), a wholly owned subsidiary of WR Capital (the

“Loan Agreement”). The Loan Agreement provided the Company with a revolving credit

line of $5 million, which the Company could draw on in increments of at least $100,000.

Drawn amounts would accrue interest at 10% per annum. As security for the loan, Urdan,

3
Kurka, and Woodward granted WR Capital a first priority security interest in all of their

holdings of Company stock, both common and preferred.

Section 5 of the Loan Agreement, titled “Negative Covenants,” identified fifteen

categories of actions that the Company could not take without the prior written consent of

WR Sub. The list included raising capital from outside investors and engaging in

significant corporate transactions.

Section 7.1 of the Loan Agreement, titled “Events of Default,” identified twelve

events that would entitle WR Sub to declare outstanding draws on the credit facility

immediately due and payable. The list included either Urdan or Kurka being terminated

for cause, using that term as defined in their respective employment agreements.

As additional consideration for the Loan Agreement, the Company issued a warrant

to WR Sub that authorized the purchase of up to 2,307,000 shares of Company common

stock at $0.01 per share, exercisable in proportion to the level of draws on the credit facility.

If fully exercised, the shares issued pursuant to the warrant would represent 31% of the

Company’s fully diluted equity. Section 1.2 of the Loan Agreement included an option for

WR Sub to increase the size of the credit facility by up to $3 million, which WR Sub could

exercise in its “sole discretion.” If WR Sub elected to exercise this option, then the number

of shares covered by the warrant would increase by 1% for each $1 million of additional

credit. If WR Sub exercised the option in full, then it would receive the right to purchase

an additional 379,034 shares. That would bring the total number of shares available under

the warrant to 2,686,034 shares, representing 34% of the Company’s fully diluted equity.

4
 The plaintiffs allege that the term sheet for the 2016 Financing made clear that the

379,034 shares that WR Sub would receive if it exercised its option to provide another $3

million of capital established an upper bound on the amount of equity that WR Capital and

its affiliates would receive for that amount of incremental financing. The plaintiffs allege

that they negotiated this point because they did not want WR Capital to be able to take

advantage of the Company if it required more capital.

As part of the 2016 Financing, the Company and WR Sub entered into a third

agreement pursuant to which WR Sub paid $500,000 to acquire 301,979 shares of Series

B Preferred Stock, reflecting a price of $1.65 per share. The Series B Preferred Stock was

convertible into common stock.

As part of the 2016 Financing, the Board was expanded to five seats, and WR Sub

received the right to appoint two members of the Board. WR Sub appointed Talerman and

Walsh.

Also in May 2016, a wholly owned subsidiary of the Company borrowed $75

million from Oaktree Capital Management (respectively, the “Oaktree Loan” and

“Oaktree”). The Oaktree Loan was secured by all of the assets of the Company, and

Oaktree also received a pledge of all of the plaintiffs’ stock and WR Sub’s stock.

The following table summarizes the Company’s capitalization after the 2016

Financing, assuming the Company drew all of $5 million authorized by the Loan

Agreement, with separate accounts for each person summed together.

5
 Stockholder Common Series A Series B Warrants Convertible Fully
Stock Pref. Pref. Debt Diluted
Kurka 1,710,000 0 0 0 0 1,710,000
Urdan 1,710,000 132,199 0 0 170,000 2,012,199
Woodward 400,000 165,249 0 0 170,000 735,249
WR Capital 0 0 301,979 2,307,033 0 2,609,012
Oaktree 0 0 0 395,311 0 395,311
TOTAL 3,820,000 297,448 301,979 2,702,344 340,000 7,461,771

D. WR Capital Exercises Effective Control.

In early 2017, WR Capital issued “New Governance and Operating Procedures” that

specified how Kurka, the Company’s CEO, was to conduct business. Compl. ¶ 71. WR

Capital refused to approve any additional draws under the Loan Agreement until Kurka

signed the document and agreed to abide by it. In an email dated March 25, 2017, Walsh

confirmed to Urdan that WR Capital would not approve draws until Kurka signed, stating:

“Consistent with our discussions last week we will not consider funding this [credit draw]

until [Kurka] signs the ‘rules of the road’ letter [Talerman] sent yesterday.” Id. WR Capital

did not have the right to impose this condition before funding a draw.

Effective April 23, 2017, WR Capital terminated Kurka’s employment for cause.

WR Capital took this action unilaterally, without any Board vote, and without having

authority to do so.

As a result of his termination, Kurka lost his seat on the Board. His departure left

the Board with just four members: Urdan, Woodward, Talerman, and Walsh. Because they

represented half of the Board, WR Capital’s two representatives could block the Board

from taking action.

In May 2017, WR Capital hired defendant Bradley D. Knyal as CEO. The plaintiffs

wanted to hire a new CEO with experience in technology or green energy financing and

6
had lined up a qualified candidate. WR Capital rejected the plaintiffs’ candidate and hired

Knyal because he was Walsh’s golfing buddy, even though he had no experience in

technology or green energy financing. WR Capital then negotiated the terms of Knyal’s

employment without input from the Board and installed him as CEO without complying

with the Company’s bylaws. As part of Knyal’s compensation package, WR Capital caused

the Company to grant Knyal equity representing 12% of the fully diluted shares. The

plaintiffs’ candidate, by contrast, was prepared to accept only a 2% equity stake. The

plaintiffs allege that WR Capital gave Knyal a much larger stake to ensure his loyalty to

WR Capital. According to the complaint, when Urdan objected to Knyal, Walsh screamed

at him, “Brad Knyal is going to be CEO of [the Company], period, full stop.” Compl. ¶ 74.

By June 2017, through these steps, WR Capital had established working control

over the Company. Through the Loan Agreement, WR Capital controlled the Company’s

sole source of cash, and on at least one occasion, WR Capital had threatened to shut off

access unless management did what WR Capital wanted. The negative covenants in the

Loan Agreement enabled WR Capital to block the Company from accessing other sources

of financing and gave WR Capital extensive veto rights over the Company’s operations.

With Kurka gone, WR Capital’s representatives comprised one half of the Board, giving

them the ability to block action at the board level. Through Knyal, WR Capital controlled

the Company’s day-to-day operations and management team.

WR Capital did not yet possess hard mathematical control at the stockholder level,

falling just short even with Knyal’s shares added to what WR Capital owned. But with the

multiple levers of power that WR Capital had at its disposal, WR Capital wielded effective

7
control. Even in terms of representation on the Board, WR Capital’s lack of an outright

majority of the voting power mattered little, because its representatives served pursuant to

contractual director-designation rights. Consequently, they could not be removed by the

holders of a majority of the voting power.

E. WR Capital Manufactures A Financing Crisis.

During 2017, WR Capital used its governance rights to block the Company from

pursuing strategic alternatives. In early 2017, a prominent PACE financing company

expressed interest in acquiring the Company for at least $15 million. After the two firms

entered into a non-disclosure agreement and engaged in preliminary talks, WR Capital

asserted that it would exercise its right under the Loan Agreement to block any transaction.

WR Capital also turned down requests by Oaktree and the plaintiffs to raise financing from

third-party investors.

By June 2017, the Company needed capital. Talerman played up the sense of

urgency, telling the plaintiffs that the Company risked missing payroll and could have to

file for bankruptcy. He told Urdan that the Company needed a new injection of capital to

stay in business.

Under the terms of the 2016 Financing, WR Capital had the option to provide

another $3 million in credit under the Loan Agreement in return for warrants to purchase

379,034 shares. Rather than exercising its option, WR Capital offered to provide the

Company with an additional $3 million in revolving credit in return for warrants to

purchase 8,524,478 shares (the “2017 Financing”). That amount of equity represented an

increase of 2249% over the number of shares that WR Capital would have received for

8
exercising its option under the 2016 Financing. WR Capital also insisted on the right to fill

three of the Company’s five seats on the Board as part of the 2017 Financing.

In an email dated May 6, 2017, Walsh told the plaintiffs that the 2017 Financing

was “by design expensive and not priced at ‘arms length.’” Compl. ¶ 81. The financing

valued the Company at approximately $4 million, even though a third-party acquirer had

expressed interest just three months earlier in purchasing the Company for $15 million.

Three months later, after solidifying its control, WR Capital would seek new financing at

a proposed valuation of $30–$50 million, and one third-party investor would propose a

valuation of $60 million.

The plaintiffs attempted to negotiate with WR Capital, but Walsh and Talerman

refused to budge. Instead, Talerman threatened that if the plaintiffs did not accept WR

Capital’s terms, then WR Sub would declare an event of default based on Kurka’s

termination, accelerate the amounts due under the Loan Agreement, and exercise its rights

as a secured creditor, which included the right to levy on all of the equity owned by the

plaintiffs and Kurka.

With WR Capital having cut off all other financing alternatives, and facing the threat

of the complete loss of their investment, the plaintiffs agreed to WR Capital’s terms. The

2017 Financing closed in July 2017. The following table summarizes the Company’s

capitalization after the transaction, assuming the Company drew the full $8 million

provided by WR Capital, with separate accounts belonging to each stockholder summed

together. Unlike prior tables, this table includes shares in the employee pool. It lists options

in the employee pool in the “Warrants” column.

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 Stockholder Common Series Series Warrants Convert. Fully Diluted
Stock A Pref. B Pref. Debt
Knyal 2,312,000 0 0 0 0 2,312,000
Urdan 1,710,000 322,046 0 0 170,000 2,202,046
Woodward 400,000 402,557 0 0 170,000 972,557
WR Capital 0 0 301,979 11,831,511 0 12,133,490
Oaktree 0 0 0 395,311 0 395,314
Employee Pool 800,300 0 0 444,444 0 1,244,744
TOTAL 5,222,300 724,603 301,979 12,671,266 340,000 19,260,151

F. WR Capital Consolidates Control And Pursues Self-Interested Transactions.

After securing mathematical control at the stockholder level and board level through

the 2017 Financing, WR Capital fired the Company’s longstanding outside counsel and

hired a new firm. Then, on January 31, 2018, they notified Urdan that he was terminated

from his positions with the Company, effective May 31, 2018.

In February 2018, WR Capital caused the Company to engage in an interested

bridge financing (the “2018 Financing”). WR Capital sponsored the financing and gave

Oaktree and Knyal the right to participate as co-sponsors. As consideration for providing

the 2018 Financing, the sponsors received millions of additional shares. Through the 2018

Financing, the Company received an incremental credit facility of $2.5 million, with only

$500,000 provided at closing.

Later in 2018, WR Capital and Knyal pursued an investment from a third party that

would provide them with side benefits. WR Capital and Knyal also explored a sale of the

Company that would provide them with side benefits. The complaint describes these events

as the “Spring 2018 Capital Raise.” The complaint does not allege that any transaction

resulted from these efforts.

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G. This Litigation

In May 2018, the plaintiffs filed this lawsuit. The complaint asserted eight counts:

 Count I contends that WR Capital, WR Sub, Talerman, and Walsh owed fiduciary
duties to the Company and its minority stockholders, which they breached by
extracting the 2017 Financing and the 2018 Financing, by engaging in the events
leading up to those transactions, and by pursuing the Spring 2018 Capital Raise.

 Count II contends that Knyal owed fiduciary duties to the Company and its
stockholders, which he breached by extracting personal benefits from the 2018
Financing and by pursuing the Spring 2018 Capital Raise.

 Count III contends that Knyal aided and abetted WR Capital’s breach of its fiduciary
duties to the Company and its stockholders by helping WR Capital extract the 2017
Financing and the 2018 Financing as well as by pursuing the Spring 2018 Capital
Raise.

 Count IV contends that WR Capital, WR Sub, Talerman, and Walsh fraudulently
induced the plaintiffs to cause the Company to enter into the 2016 Financing.

 Count V contends that WR Capital, WR Sub, Talerman, and Walsh engaged in
fraudulent concealment when they induced the plaintiffs to cause the Company to
enter into the 2016 Financing.

 Count VI contends that WR Capital, WR Sub, Talerman, and Walsh breached the
Loan Agreement from the 2016 Financing by extracting the right to acquire 2249%
more shares in return for providing an additional $3 million in credit as part of the
2017 Financing.

 Count VII contends that WR Capital, WR Sub, Talerman, and Walsh were unjustly
enriched by the 2017 Financing.

 Count VIII contends that WR Capital, WR Sub, Talerman, and Walsh breached the
implied covenant of good faith and fair dealing that inhered in the Loan Agreement
from the 2016 Financing by fabricating an Event of Default and then extracting the
right to acquire 2249% more shares in return for providing an additional $3 million
in credit as part of the 2017 Financing.

H. The Plaintiffs Sell Their Shares.

In August 2018, while this action was pending, the Company completed a

recapitalization with an unaffiliated investment fund, and the Company used the proceeds

11
to repurchase the plaintiffs’ shares. As part of that transaction, the plaintiffs entered into a

Settlement Agreement and Release dated August 31, 2018, with the defendants, Oaktree,

the Company, and the third-party investor (the “Settlement Agreement”). The effectiveness

of the Settlement Agreement was conditioned on the prior completion of the repurchases.

Those antecedent transactions took place pursuant to two separate agreements, one

between the Company and Urdan (the “Urdan Repurchase Agreement” or “URA”), and

another between the Company and Woodward (the “Woodward Repurchase Agreement”

or “WRA”; jointly, the “Repurchase Agreements”).1

In accordance with the Urdan Repurchase Agreement, Urdan sold to the Company

“all of [his] right, title, and interest in and to the Repurchased Securities, free and clear of

any mortgage, pledge, lien, charge, security interest, claim, or other encumbrance.” URA

§ 1.01. The agreement defined the “Repurchased Securities” as (i) 1,710,000 shares of

Company common stock, (ii) 80,000 shares of Company Series A Preferred Stock, (iii) a

convertible note with a face amount of $170,000, and (iv) any shares issuable upon

conversion of the note or Series A Preferred Stock. Id. Ex. A. In return, Urdan received

$1,128,916.03 plus interest due through closing on the note. Id. § 1.02.

In accordance with the Woodward Repurchase Agreement, Woodward sold to the

Company “all of [his] right, title, and interest in and to the Repurchased Securities, free

1
Woodward owned some of his securities through two entities. For simplicity, this
decision ignores the distinction between Woodward and his entities, which is not relevant
for purposes of its conclusions.

12
and clear of any mortgage, pledge, lien, charge, security interest, claim, or other

encumbrance.” WRA § 1.01. The agreement defined the “Repurchased Securities” as (i)

400,000 shares of Company common stock, (ii) 100,000 shares of Company Series A

Preferred Stock, (iii) a convertible note with a face amount of $170,000, and (iv) any shares

issuable upon conversion of the note or Series A Preferred Stock. Id. Ex. A. In return,

Woodward received $656,390.02 plus interest due through closing on the note. Id. § 1.02.

Under the Settlement Agreement, the plaintiffs received additional consideration of

$150,000 each. In return, the plaintiffs released all of their claims against Knyal and

Oaktree. With exceptions not pertinent here, the plaintiffs also released their claims against

the Company. As to WR Capital, WR Sub, Talerman, and Walsh, defined as the “WR

Parties,” the Settlement Agreement provided as follows:

Preservation of Certain Claims, Defenses and Counterclaims. Nothing in
this Agreement shall affect any claims any of the Delaware Plaintiffs may
have against any of the WR Parties or the defenses or counterclaims that any
of the WR Parties may have to the claims of the Delaware Plaintiffs.

Nothing in the releases contemplated by this Agreement shall release any
claims that any of the Delaware Plaintiffs has asserted or may assert against
any of the WR Parties, whether derivative or otherwise;

provided that, notwithstanding the foregoing, the WR Parties hereby waive
and agree not to assert or otherwise raise any defense related to the Delaware
Plaintiffs’ agreement to sell their shares in the Company, including without
limitation any defense that the Delaware Plaintiffs lack standing to assert any
claim that has been brought or could have been brought in the Delaware
Action.

Settlement Agreement ¶ 10 (formatting altered). The first two paragraphs of this provision

carve out claims and defenses from the scope of the Settlement Agreement and the releases

it contained. This decision refers to these two paragraphs as the “Release Carveout.” In the

13
third paragraph, the provision attempts to prevent the defendants from relying on any of

the legal consequences that might follow from the plaintiffs’ selling their shares. This

decision refers to the third paragraphs as the “Waiver Provision.”

After entering into the Settlement Agreement, the plaintiffs dismissed their claims

against Knyal. Counts II and III are therefore no longer part of the case.

II. LEGAL ANALYSIS

The defendants have moved to dismiss the complaint under Rule 12(b)(6) for failing

to state a claim on which relief can be granted. When considering a motion to dismiss for

failure to state a claim, this court (i) accepts as true all well-pleaded factual allegations in

the complaint, (ii) credits vague allegations if they give the opposing party notice of the

claim, and (iii) draws all reasonable inferences in favor of the plaintiffs. Central Mortg.

Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011). When

applying this standard, dismissal is inappropriate “unless the plaintiff would not be entitled

to recover under any reasonably conceivable set of circumstances.” Id.

A. The Effect Of The Stock Sales

The plaintiffs’ decision to sell their shares had significant consequences for their

ability to maintain derivative claims. Recognizing this fact, the plaintiffs argued at length

about whether the sole remaining claim for breach of fiduciary duty in Count I was

derivative or direct. During oral argument, I asked why the distinction mattered, given

Delaware authority establishing that the right to maintain a direct claim for breach of

fiduciary duty is a property right associated with the shares that passes to the buyer in a

sale, such that by selling their shares, the plaintiffs divested their right to assert both types

14
of claims. The parties submitted supplemental briefing on this issue.

In the supplemental briefing, the plaintiffs contended that in the Settlement

Agreement, they retained the right to assert both derivative and direct claims, effectively

carving out that right from the bundle they otherwise sold. Unfortunately for the plaintiffs,

the Repurchase Agreements clearly and unambiguous transferred all rights associated with

the shares. Although the Release Carveout in the Settlement Agreement created an

exception to the release of claims that the plaintiffs granted, it did not purport to exclude

from the transfer of shares and retain for the plaintiffs any subset of rights associated with

the shares. Nor could it, because the Release Carveout appeared in the Settlement

Agreement, and the share transfers were governed by the Repurchase Agreements. The

effectiveness of the Settlement Agreement was conditioned on the effectiveness of the sales

pursuant to the Repurchase Agreements, which had already taken place in the conceptual

microsecond before the Settlement Agreement became effective. Once the Repurchase

Agreements became effective, the plaintiffs transferred all of their rights, including their

ability to assert derivative and direct claims, regardless of what the Settlement Agreement

might have contemplated.

In a different version of this argument, the plaintiffs say that the Release Carveout

expressly preserved their claims. That argument fails because the Release Carveout only

limited the scope of the releases in the Settlement Agreement. The Release Carveout did

not address or limit the effect of the transactions governed by the Repurchase Agreements.

As their fallback argument, the plaintiffs cite the Waiver Provision and insist that

the defendants cannot invoke any of the legal consequences resulting from the plaintiffs’

15
sale of the shares. The Waiver Provision appears in the Settlement Agreement, but its

language is broad enough to encompass the transactions governed by the Repurchase

Agreements. Nevertheless, on the facts of this case, the plaintiffs cannot rely on it to

foreclose the legal effect of the transfers. Having sold all of their shares, they no longer

have any interest in the derivative and direct claims that they want to continue litigating.

The dispute has become non-justiciable, and any decision on the merits would be an

impermissible advisory opinion.

1. Derivative Claims

The right to sue derivatively is a property right associated with share ownership.

When a share of stock is sold, the property rights associated with the shares pass to the

buyer. 6 Del. C. § 8-302(a). Having transferred the property right that gives rise to the

ability to sue derivatively, a plaintiff can no longer maintain a derivative action.

The development of two similarly sounding doctrines that both affect the ability of

stockholders to bring derivative claims—the contemporaneous ownership requirement and

the continuous ownership requirement—illustrates and confirms the settled nature of the

rule that the right to sue derivatively passes to the buyer in a sale of shares. Generally

speaking, a derivative claim is a cause of action belonging to a corporation that another

party, typically a stockholder, seeks to litigate on the entity’s behalf.2 Although

2
In limited circumstances, a creditor can assert derivative claims. See N. Am.
Catholic Educ. Programming Found. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007) (“[T]he
creditors of an insolvent corporation have standing to maintain derivative claims . . . .”). In
rarer circumstances, a director can assert derivative claims. See Schoon v. Smith, 953 A.2d

16
contemporary derivative actions most often involve stockholder plaintiffs attempting to

assert claims for breach of fiduciary duty against corporate officers or directors, the

biosphere of claims that can be pursued derivatively contains a multitude of species. “‘Any

claim belonging to the corporation may, in appropriate circumstances, be asserted in a

derivative action,’ including claims that do—and claims that do not—involve corporate

mismanagement or breach of fiduciary duty.”3

Derivative actions originally proliferated during the nineteenth century, not because

of stockholders pursuing breach of fiduciary duty claims against management, but because

management encouraged supportive stockholders to assert corporate claims against third-

party defendants, frequently challenging taxes or other forms of regulation that a state or

196, 208 (Del. 2008) (en banc) (indicating that director could sue if necessary “to prevent
a complete failure of justice on behalf of the corporation”).
3
3 Stephen A. Radin, The Business Judgment Rule 3612 (6th ed. 2009) (quoting
Midland Food Servs., LLC v. Castle Hill Hldgs. V, LLC, 792 A.2d 920, 931 (Del. Ch.
1999)); accord 1 R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of
Corporations & Business Organizations § 13.10, at 13-24 (3d ed. 2019) (explaining that a
derivative action can be used to assert any “corporate right that the corporation has refused
for one reason or another to assert”); see, e.g., First Hartford Corp. Pension Plan & Trust
v. United States, 194 F.3d 1279, 1293 (Fed. Cir. 1999) (permitting “contract actions
brought derivatively by shareholders on behalf of the contracting corporation”); Slattery v.
United States, 35 Fed. Cl. 180, 183–84 (1996) (same); Suess v. United States, 33 Fed. Cl.
89, 93–94 (1995) (denying motion to dismiss a derivative claim for breach of contract
against the United States); see also Ross v. Bernhard, 396 U.S. 531, 542 (1970) (holding
right to jury trial existed for breach of contract claim asserted by stockholder derivatively
because “[t]he corporation, had it sued on its own behalf, would have been entitled to a
jury’s determination”).

17
municipality had imposed on the corporation’s business.4 Federal courts were perceived to

be more hospitable to these claims, and to establish diversity jurisdiction, management

would encourage a stockholder domiciled in a different state than the corporation, its

directors, and the prospective defendant to assert the corporation’s claim derivatively in

federal court. See 7C Charles Alan Wright et al., Federal Practice and Procedure § 1830

(3d ed.), Westlaw (database updated Apr. 2019). The board would opt not to oppose the

stockholder’s pursuit of the litigation, enabling the case to proceed. Id. “If an

accommodating stockholder could not be found, one could be created by transferring stock

to an individual whose citizenship enabled that person to bring the suit.” Id.; accord

Dennis, supra, at 1486–1511. This technique worked precisely because the right to sue was

an attribute of the shares that passed to the buyer along with ownership. See Robert C.

Clark, Corporate Law § 15.4, at 651 (1986) (citing the practice of buying shares “in order

to create diversity of citizenship and thereby gain access to the federal courts”).

To prevent corporations from using this technique to manufacture diversity

jurisdiction, the United States Supreme Court created the contemporaneous ownership

requirement. See Hawes v. Oakland, 104 U.S. 450, 461 (1881) (subsequent history

4
See Donna I. Dennis, Contrivance and Collusion: The Corporate Origins of
Shareholder Derivative Litigation in the United States, 67 Rutgers U. L. Rev. 1479, 1486–
1517 (2015); Bert S. Prunty, Jr., The Shareholders’ Derivative Suit: Notes on Its
Derivation, 32 N.Y.U. L. Rev. 980, 994 (1957); see also Edward J. Grenier, Jr., Prorata
Recovery by Shareholders on Corporate Causes of Action as a Means of Achieving
Corporate Justice, 19 Wash. & Lee L. Rev. 165, 166 (1962).

18
omitted). From that point on, for a stockholder to sue in federal court, the plaintiff had to

have been a stockholder at the time of the wrong. See id.

The problem of corporations collusively manufacturing jurisdiction did not confront

state courts, and the concept of a stockholder buying shares but not being able to exercise

one of the rights associated with share ownership made little conceptual sense absent the

need to address that overriding policy concern.5 Consequently, a majority of states refused

to adopt the contemporaneous ownership requirement, typically reasoning that the rule

deprived the buyer of one of the rights associated with his shares.6 Delaware stood with the

5
Commentators across the centuries have criticized the illogic of the
contemporaneous ownership requirement. See Clark, supra, § 15.4, at 651 (describing the
rule as “difficult to justify”); 2 George D. Hornstein, Corporation Law and Practice § 712,
at 195 (1959) (arguing that “[r]ejection of the contemporaneous ownership doctrine
appears logically sound”); Henry Winthrop Ballantine, Ballantine on Corporations § 148,
at 353 (rev. ed. 1946) (arguing against the contemporaneous ownership requirement
because “[a] shareholder has an interest in all assets and all causes of action belonging to
the corporation, whether they arose before or after he purchased his shares”); 1 Victor A.
Morawetz, The Law of Private Corporations § 266, at 253–54 (2d ed. 1886) (finding “no
good reason” for denying a buyer the right “to sue on account of causes of action which
arose before he purchased his shares”). Although I respect that the General Assembly has
imposed the contemporaneous ownership requirement by statute, see infra, and it therefore
reflects the law of Delaware that I am bound to apply, my sympathies lie with the critics.
See generally J. Travis Laster, Goodbye to the Contemporaneous Ownership Requirement,
33 Del. J. Corp. L. 673 (2008)
6
See Ballantine, supra, § 148, at 352–53; Note, Corporations—Uniform Stock
Transfer Act—Effect on Minnesota Law—Negotiability of Shares—Right of Subsequent
Transferee to Sue, 23 Minn. L. Rev. 484, 488 n.30 (1939) (explaining that “a subsequent
transferee of shares in a corporation should be able to maintain a derivative suit” and
observing that “[t]his appears to be the majority position”); Note, Stockholder’s Suit for
Wrong Which Occurred Before Complainant Acquired Stock, 68 U.S. L. Rev. 169, 169
(1934) (noting that “[i]n most of the jurisdictions in which the question has been presented,
it has been held that in the absence of special circumstances a stockholder’s suit may be

19
majority and “did not follow the rule of the Hawes case.” Rosenthal v. Burry Biscuit Corp.,

60 A.2d 106, 111 (Del. Ch. 1948).

It was not until 1945, seventy-four years after Hawes, that the General Assembly

altered Delaware law by imposing the contemporaneous ownership requirement. The

statute provides that “[i]n 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.” 8 Del.

C. § 327.

The enactment of Section 327 “effected a substantial change” in Delaware law.

Burry Biscuit, 60 A.2d at 110. Before the statute, “in order to maintain a derivative action,

a stockholder was not required to be the owner of the shares at the time of the transaction

of which he complained.” Id. (collecting cases). This was because the right to bring a

derivative action passed to the buyer with the shares, and the buyer could assert that right.

Since the adoption of Section 327, the right to sue continues to pass with the shares, but

brought by one who was not a stockholder at the time of the transaction of which he
complains”); see id. at 172–75 (drawing on reasoning of cases to criticize contemporaneous
ownership requirement); 6 Seymor D. Thompson & Joseph W. Thompson, Commentaries
on the Law of Corporations § 4638, at 538 (3d ed. 1927) (“The general rule in the state
courts undoubtedly is that the stockholder who pleads a good cause of action may maintain
the same, although he was not an owner of the stock at the time the breach of duty was
committed . . . .”). For a representative decision rejecting the imposition of a
contemporaneous ownership requirement at common law, see Pollitz v. Gould, 94 N.E.
1088 (N.Y. 1911).

20
the buyer cannot assert that right. Both before and after the adoption of Section 327, the

seller could no longer assert the derivative claim, precisely because she had sold her shares.

See Hutchinson v. Bernhard, 220 A.2d 782, 783–84 (Del. Ch. 1965).

In 1984, the Delaware Supreme Court broadened the requirements for maintaining

a derivative action by stating expansively 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.” Lewis v.

Anderson, 477 A.2d 1040, 1046 (Del. 1984). Applying this rule after the closing of a

reverse triangular merger in which the stockholder plaintiffs had their shares converted into

shares of the acquiring company, the Delaware Supreme Court held that “a corporate

merger destroys derivative standing of former shareholders of the merged corporation from

instituting or pursuing derivative claims” that were the property of the acquired company.

Id. at 1047. The high court later restated the rule as follows: “A plaintiff who ceases to be

a shareholder, whether by reason of a merger or for any other reason, loses standing to

continue a derivative suit.” Id. at 1049.

The obligation of a derivative plaintiff to maintain stockholder status throughout the

derivative action has been described as the “continuous ownership requirement.” Ark.

Teacher Ret. Sys. v. Countrywide Fin. Corp., 75 A.3d 888, 894 (Del. 2013). Because of its

capacious framing, the continuous ownership requirement has largely displaced the more

specific, antecedent understanding that a stockholder’s right to assert a derivative claim is

a right associated with the shares that passes with the shares when sold. But the earlier and

foundational proposition remains good law. Indeed, a close look at the citations in Lewis

21
v. Anderson suggests that the Delaware Supreme Court’s broad formulation grew from an

imprecise restatement of the antecedent rule. The transitional precedent appears to be Heit

v. Tenneco, Inc., where the court stated that “[u]nder Delaware law, a plaintiff, bringing a

derivative suit on behalf of a corporation, must be a stockholder of the corporation at the

time he commences the suit and must maintain that status throughout the course of the

litigation.” 319 F. Supp. 884, 886 (D. Del. 1970). For this proposition, the Heit decision

cited Hutchinson, where Chancellor Seitz had agreed that the plaintiff lost standing because

she voluntarily sold her shares to a third-party buyer and the right to sue passed with the

shares. Hutchinson, 220 A.2d at 783–84. Subsequent decisions, including the trial court

decision in Lewis v. Anderson, adopted the Heit court’s reframing.7 On appeal, the

Delaware Supreme Court adopted and affirmed the trial court’s statement of the law. Lewis

v. Anderson, 477 A.2d at 1041, 1046.

In this case, the expansive continuous ownership requirement and the antecedent

rule on the effect of selling shares lead to the same result: dismissal of the breach of

fiduciary duty claim in Count I to the extent the claim is derivative. Although this decision

7
There was an intervening decision (Harff) that followed Heit. See Harff v.
Kerkorian, 324 A.2d 215, 219 (Del. Ch. 1974) (“But Delaware law seems clear that
stockholder status at the time of the transaction being attacked and throughout the litigation
is essential.” (citing Hutchison and Heit)), aff’d in part, rev’d in part on other grounds,
347 A.2d 133 (Del. 1975). The trial court decision in Lewis v. Anderson followed Harff.
See Lewis v. Anderson, 453 A.2d 474, 476 (Del. Ch. 1982) (“Stated as a general principle
it is well established under Delaware law that a plaintiff bringing a derivative suit on behalf
of a corporation must be a stockholder of the corporation at the time that he commences
the suit and that he must maintain that status throughout the course of the litigation.” (citing
Harff, Hutchison, and Heit)) (subsequent history omitted).

22
could have simply cited Lewis v. Anderson for the continuous ownership requirement, the

discussion of the antecedent rule provides helpful background for understanding why the

same rule applies to direct claims.

Both doctrines also require dismissal of Counts VI and VIII, which are similarly

derivative. In Count VI, the plaintiffs assert a claim for breach of the express provisions of

the Loan Agreement. On the facts alleged in the complaint, that claim is derivative: The

Company was a party to the Loan Agreement, and the plaintiffs seek to assert the

Company’s claim on its behalf. Having sold their shares, they can no longer assert that

claim.

The same is true for Count VIII, where the plaintiffs assert a claim for breach of the

implied covenant of good faith and fair dealing that inheres in the Loan Agreement.

Although that claim relies on implied terms rather than express provisions, it is a claim for

breach of the Loan Agreement. That is a right held by the Company, which the plaintiffs

seek to assert derivatively. Having sold their shares, they can no longer assert that claim

either.

2. Direct Claims

Both during the initial briefing and in the supplemental briefing, the parties debated

whether, by transferring their shares, the plaintiffs lost their ability to assert direct claims.

The parties’ discussion of this issue explored the ever-fertile fields of the derivative-versus-

direct distinction. If the plaintiffs had been deprived of their shares by merger, then that

distinction would matter, because the plaintiffs could challenge the transaction that

deprived them involuntarily of their property rights. But in this case, the plaintiffs sold their

23
shares voluntarily. By selling their shares, the plaintiffs transferred the rights to sue that

depended on ownership of their shares.

Like the right to assert a derivative claim, the right to assert a direct claim is a

property right associated with the shares. In re Sunstates Corp. S’holder Litig., 2001 WL

432447, at *3 (Del. Ch. Apr. 18, 2001). Consequently, unless the seller and buyer agree

otherwise, the ability to assert a direct claim and the ability to benefit from any remedy

pass with the shares.8 If a seller wishes to retain a subset of the rights associated with the

transferred shares, such as the right to assert a direct claim, then the parties to the

transaction must provide specifically for that outcome.9 Otherwise, when the shares are

8
See In re Prodigy Commc’ns Corp. S’holders Litig., 2002 WL 1767543, at *4 (Del.
Ch. July 26, 2002) (“[W]hen Beoshanz sold his shares in the marketplace, the claim relating
to the fairness of the then-proposed transaction passed to his purchaser, who enjoyed the
benefits of the settlement.”); In re Triarc Cos., Inc. Class & Deriv. Litig., 791 A.2d 872,
878–79 (Del. Ch. 2001) (explaining owners of stock who sell their shares are “viewed as
having sold their interest in the claim with their shares”); see also Sunstates, 2001 WL
432447, at *3 (“I can see little reason why the claim for breach of the preferred stock charter
provisions would not ordinarily transfer with the shares.”).
9
The converse proposition is also true: If a seller wishes to transfer only certain
rights associated with the shares, such as the right to assert a direct claim, then the parties
must contract for that result. See In re Emerging Commc’ns, Inc. S’holders Litig., 2004 WL
1305745, at *29 (Del. Ch. May 3, 2004, revised June 4, 2004) (permitting the assertion of
breach of fiduciary duty claims transferred separately from the underlying shares); see also
Puma v. Marriott, 294 F. Supp. 1116, 1119 (D. Del. 1969) (holding that claim for breach
of fiduciary duty is assignable under 10 Del. C. § 3701).

24
sold, the rights to assert and benefit from direct claims pass with the shares to the new

owner.10

The concept of a right to enforce a cause of action associated with the ownership of

property passing to the buyer when the property is sold is not something unique to shares.

The owner of a debt instrument can enforce the right to receive payments of principal and

interest, plus any other rights granted to the owner by the instrument, but transfers those

rights to a subsequent holder through a sale or assignment of the instrument.11 The owner

10
See Prodigy, 2002 WL 1767543, at *4; Sunstates, 2001 WL 432447, at *3; Triarc,
791 A.2d at 878–79. The obligations arising from stockholder status likewise transfer to
the new owner. See Webster v. Upton, 91 U.S. 65, 70 (1875) (“[I]t would be absurd to say,
upon general reasoning, that, if the original subscribers have the power of assigning their
shares, they should, after disposing of them, be liable to the burdens which are thrown upon
the owners of the stock.”).

There are references in two decisions that cloud the issue of whether direct claims
for breach of fiduciary duty pass with the shares or should be regarded as personal claims
that remain with the seller. See Schultz v. Ginsburg, 965 A.2d 661, 667 n.12, 668 (Del.
2009); In re Celera Corp. S’holder Litig., 2012 WL 1020471, at *14 (Del. Ch. Mar. 23,
2012), aff’d in part, rev’d in part on other grounds, 59 A.3d 418 (Del. 2012). Having
elsewhere explained why I believe it would run contrary to the weight of Delaware law to
interpret these comments to mean that direct claims for breach of fiduciary duty are actually
personal claims that remain with the sellers, I will forego repeating that discussion here.
See In re Activision Blizzard, Inc. S’holder Litig., 124 A.3d 1025, 1055 (Del. Ch. 2015).
11
This result flows from the general doctrine of privity of contract. Privity of
Contract, BLACK’S LAW DICTIONARY (11th ed. 2019) (“The relationship between the
parties to a contract, allowing them to sue each other but preventing a third party from
doing so.”). Under this doctrine, once a party assigns its rights under the contract, it no
longer is in privity with the other parties and cannot enforce the contractual rights against
them. See 17A AM. JUR. 2D Contracts § 405, Westlaw (database updated Aug. 2019) (“The
doctrine of privity of contract requires that only parties to a contract may bring suit to
enforce it. Privity of contract is essential and a necessary predicate to a suit on a contract.”
(footnotes omitted)); 17B C.J.S. Contracts § 836, Westlaw (database updated June 2019)

25
of real property likewise holds a bundle of rights derived from ownership, but transfers

those rights and the ability to enforce them when the property is sold.12 So too with a tenant

under a lease.13 “No mode of terminating an equitable interest can be more perfect than a

voluntary relinquishment . . . of all rights under the contract, and a voluntary surrender of

the possession . . . .” Jennisons v. Leonard, 88 U.S. 302, 310 (1874).

(“As a general rule only the parties and privies to a contract may enforce it. A party to a
contract who has not parted with his or her interest in the contract may sue on the contract.
Only a person who is a party or in privity may sue on the contract as a direct proceeding in
equity.” (footnotes omitted)). There are, of course, many exceptions to the doctrine of
privity of contract that are implicated by more complex factual scenarios, but they do not
apply to a plain-vanilla assignment like the one in this case. See, e.g., 17B C.J.S. Contracts
§ 836, Westlaw (database updated June 2019) (identifying exceptions).
12
The force of the transfer principle is so strong that when there is a delay between
signing and closing, equity treats the rights associated with ownership as having been
transferred to the purchaser at signing. See, e.g., Lawyers Title Ins. Corp. v. Wolhar & Gill,
P.A., 575 A.2d 1148, 1153 n.2 (Del. 1990) (“It is settled law in Delaware (and in those
other jurisdictions which recognize the doctrine [of equitable conversion]) that the
execution of a contract for the sale of real property effectively transfers the seller’s
equitable interest in the land to the purchaser, and thereafter the seller merely retains a
legal interest in the proceeds of the sale.”).
13
This result flows from the general doctrine of privity of estate. See Privity of
Estate, BLACK’S LAW DICTIONARY (11th ed. 2019) (“A mutual or successive relationship
to the same right in property, as between grantor and grantee or landlord and tenant.”); 49
AM. JUR. 2D Landlord & Tenant § 916, Westlaw (database updated Aug. 2019) (“A lessee
who assigns the lease divests itself of the privity of estate, although not of the privity of
contract. The assignment thus divests the lessee of any interest in the property and transfers
it to the assignee . . . .” (footnotes omitted)); 52 C.J.S. Landlord & Tenant § 50, Westlaw
(database updated June 2019) (“Upon an assignment by the lessee, the privity of estate
between the lessee and lessor is destroyed, and a new privity of estate is created between
the assignee and the lessor.”). As with the doctrine of privity of contract, there are
exceptions to the doctrine of privity of estate, but the basic principle is illustrative. See,
e.g., 49 AM. JUR. 2D Landlord & Tenant § 922, Westlaw (database updated August 2019)
(identifying exceptions).

26
 In this case, Count I of the complaint asserted a claim for breach of fiduciary duty

that the plaintiffs characterized as direct and the defendants as derivative. There is no need

to parse the derivative-versus-direct distinction because, assuming for the sake of argument

that the claim was direct, the plaintiffs lost their ability to assert it when they voluntarily

sold their shares. The right to assert Count I, like the right to assert the other rights

associated with the shares, passed to the buyer. Unless the plaintiffs somehow contracted

to retain those rights, they lost their ability to sue.

3. The Release Carveout

To escape the implications of selling their shares, the plaintiffs argue that they

retained the right to assert the claims in this case when they sold their shares. They stitch

together a series of provisions in the Repurchase Agreements and the Settlement

Agreement. Although there are two Repurchase Agreements, they operate in parallel and

are substantively identical for purposes of the provisions discussed in this section. For

simplicity, therefore, this decision refers to a singular Repurchase Agreement and only

cites the Urdan Repurchase Agreement. The same analysis applies to the Woodward

Repurchase Agreement.

To argue that they retained the right to sue when they sold their shares, the plaintiffs

start with Section 1.01 of the Repurchase Agreement, which states:

Purchase and Sale. Subject to the terms and conditions set forth herein, at
the Closing (as defined herein), Seller shall sell to the Company, and the
Company shall purchase from Seller, all of Seller’s right, title, and interest
in and to the Repurchased Securities, free and clear of any mortgage, pledge,
lien, charge, security interest, claim, or other encumbrance
(“Encumbrance”), for the consideration specified in Section 1.02.

27
Stressing the language “[s]ubject to the terms and conditions set forth herein,” the plaintiffs

say that the Repurchase Agreement incorporated the Settlement Agreement by reference,

making the Settlement Agreement part of the “terms and conditions set forth herein.”

Because the Release Carveout was a term of the Settlement Agreement, the plaintiffs

contend that the transfer of their shares was subject to the Release Carveout. The plaintiffs

then rely on the Release Carveout as purportedly excluding their claims from the universe

of rights that the plaintiffs transferred.

This argument has two critical steps. First, the Repurchase Agreement must

incorporate and be subject to the Settlement Agreement. Second, the Release Carveout

must withhold litigation rights that the Repurchase Agreement otherwise would have

transferred. Neither step withstands close examination.

The first step in the argument fails because the Repurchase Agreement did not

incorporate the Settlement Agreement by reference. To support their contrary assertion, the

plaintiffs cite the first page of the Repurchase Agreement, where the recitals state:

WHEREAS, concurrently herewith, Seller is entering into a Settlement
Agreement and Release (the “Settlement Agreement”) with [the other
parties to the Settlement Agreement] pursuant to which, among other things,
the parties thereto are releasing certain claims against each other.

Although the recitals mention the Settlement Agreement, they do not incorporate it by

reference. Moreover, recitals are not substantive provisions of an agreement: “Generally,

recitals are not a necessary part of a contract and can only be used to explain some apparent

doubt with respect to the intended meaning of the operative or granting part of the

instrument. If the recitals are inconsistent with the operative or granting part, the latter

28
controls.”14

There is a clause in the Repurchase Agreement that addresses its relationship to the

Settlement Agreement, but it cuts against the plaintiffs’ argument. Section 8.06 of the

Repurchase Agreement contains an integration clause, which states:

This Agreement, the Settlement Agreement, the [other Repurchase]
Agreement and the documents to be delivered hereunder and thereunder
constitute the sole and entire agreement of the parties to this Agreement with
respect to the subject matter contained herein . . . . In the event of any
inconsistency between the terms and provisions in the body of this
Agreement and those in the documents delivered in connection herewith, the
terms and provisions in the body of this Agreement shall control.

Notably, the integration clauses provides that “[i]n the event of any inconsistency” between

the Repurchase Agreement and the Settlement Agreement, “the terms and provisions in the

body of [the Repurchase] Agreement shall control.” The plaintiffs’ contention that the

Settlement Agreement withheld litigation rights associated with the shares conflicts with

14
New Castle Cty. v. Crescenzo, 1985 WL 21130, at *3 (Del. Ch. Feb. 11, 1985)
(citation omitted); accord Llamas v. Titus, 2019 WL 2505374, at *16 (Del. Ch. June 18,
2019); Glidepath Ltd. v. Beumer Corp., 2019 WL 855660, at *16 (Del. Ch. Feb. 21,
2019); Creel v. Ecolab, Inc., 2018 WL 5778130, at *4 (Del. Ch. Oct. 31, 2018); UtiliSave,
LLC v. Miele, 2015 WL 5458960, at *7 (Del. Ch. Sept. 17, 2015); see 17A AM. JUR.
2D Contracts § 373, Westlaw (database updated May 2019) (“‘Whereas clauses’ are
generally viewed as being merely introductory and since recitals indicate only the
background of a contract, that is, the purposes and motives of the parties, they do not
ordinarily form any part of the real agreement.” (footnote omitted)); see also United States
v. Cmty. Health Sys., Inc., 666 Fed. App’x 410, 417 (6th Cir. 2016) (holding that a recital
“does not itself create a binding obligation” but nevertheless “may guide interpretation of
the binding obligation in [a substantive provision], but only if [the substantive provision]
is ambiguous in the first place”); Simpson v. City of Topeka, 383 P.3d 165, 178 (Kan. Ct.
App. 2016) (“[A] court cannot rely on a general statement of contractual purpose to alter
the plain meaning of the operative terms of a particular substantive provision of the
agreement.” (collecting authorities)).

29
the all-encompassing transfer of rights contemplated by the Repurchase Agreement,

discussed next. To the extent the plaintiffs were reading the Settlement Agreement

correctly, a conflict would exist, and the provisions of the Repurchase Agreement would

control. The emphasis on terms and provisions “in the body of” the Repurchase Agreement

provides another reason to reject the plaintiffs’ arguments that are based on the recitals.

The second step in the plaintiffs’ argument is no more successful. The Release

Carveout did not withhold any claims from the scope of the sale. Its function was to carve

out claims against the WR Parties from the broad releases that the plaintiffs granted in

favor of the other parties to the Settlement Agreement. The Release Carveout addressed

the releases. It did not address the scope of the rights that the plaintiffs transferred when

they sold their shares pursuant to the Repurchase Agreement.

For purposes of analyzing this aspect of the plaintiffs’ argument, two sentences in

the Release Carveout are relevant. The first states: “Nothing in this Agreement shall affect

any claims any of the Delaware Plaintiffs may have against any of the WR Parties or the

defenses or counterclaims that any of the WR Parties may have to the claims of the

Delaware Plaintiffs.” For purposes of this provision, the term “this Agreement” means the

Settlement Agreement. The plain language of this provision confirms that nothing in the

Settlement Agreement affected “any claims any of the Delaware Plaintiffs may have

against any of the WR Parties.” And that is true. The plaintiffs did not lose their ability to

assert claims as a result of anything in the Settlement Agreement. The plaintiffs lost their

ability to assert claims as a result of selling their shares pursuant to the Repurchase

Agreements.

30
 The second sentence in the Release Carveout has a more targeted scope and effect.

It says: “Nothing in the releases contemplated by this Agreement shall release any claims

that any of the Delaware Plaintiffs has asserted or may assert against any of the WR Parties,

whether derivative or otherwise.” The plain language of this provision confirms that

nothing in the “releases contemplated by this [Settlement] Agreement” released any of the

plaintiffs’ claims against the WR Parties. And that too is true. The plaintiffs did not give

up their claims in the releases in the Settlement Agreement. They gave up their claims by

selling their shares pursuant to the Repurchase Agreements.

Elsewhere, the language of the Settlement Agreement makes clear that the parties

understood that the plaintiffs were selling all of their shares pursuant to the Repurchase

Agreements. Most notably, Section 2 of the Settlement Agreement recited that the plaintiffs

were selling “all” of their equity interests in the Company as a condition precedent to the

Settlement Agreement. It states:

Sale of Delaware Plaintiffs’ Interests in the Company. As conditions to
this Agreement, (i) Jonathan Urdan shall sell to the Company all of his
interests in common stock of the Company and Series A Preferred Stock of
the Company and all of his interests in a 1.5% Convertible Promissory Note
issued by the Company (including all shares of common stock issuable upon
conversion thereof) pursuant to the Urdan Repurchase Agreement and (ii)
the Woodward Parties shall sell to the Company all of their interests in
common stock of the Company and Series A Preferred Stock of the Company
and all of William Woodward’s interests in a 1.5% Convertible Promissory
Note issued by the Company (including all shares of common stock issuable
upon conversion thereof) pursuant to the Woodward Repurchase Agreement.

The Settlement Agreement thus recognized that as a condition to the effectiveness of the

Settlement Agreement, the plaintiffs had sold “all” of their shares to the Company.

Consistent with this understanding, Section 1.01 of the Repurchase Agreement stated that

31
the seller agreed to sell, and the Company agreed to purchase, “all of Seller’s right, title,

and interest in and to the Repurchased Securities.” Nothing was carved out. And in Section

3.4 of the Repurchase Agreement, the seller represented that “[t]he Repurchased Securities

constitute all of the outstanding equity interests in the Company and its subsidiaries owned

by Seller and its Affiliates.” Once again, nothing was carved out.

The recitals in the Settlement Agreement and the Repurchase Agreement reflect the

same understanding. Although the recitals are not substantive provisions, they provide

background and can offer insight into the intent of the parties. See TA Operating LLC v.

Comdata, Inc., 2017 WL 3981138, at *23 (Del. Ch. Sept. 11, 2017).

 A recital in the Settlement Agreement stated: “WHEREAS, as part of the resolution
of claims against certain of the parties, the Delaware Plaintiffs will sell their
interests in the Company back to the Company on terms set forth in separate
Repurchase Agreements . . . .”

 A recital in the Repurchase Agreement described each seller as “the owner of, or
has the right to acquire, the securities of the Company identified on Exhibit A (the
‘Repurchased Securities’).” Neither Exhibit A nor this definition carved rights out
of the scope of the Repurchased Securities.

 Another recital in the Repurchase Agreement stated that “the Company wishes . . .
to purchase the Repurchased Securities, subject to the terms and conditions set forth
herein.” Again, no rights were carved out of the scope of the Repurchased
Securities.

In this case, the recitals confirm that the plaintiffs sold all of their shares and did not exclude

any rights from the sale.

Section 1 of the Settlement Agreement conditioned the closing of the Settlement

Agreement on the closing of the stock sales. The same provision stated that Sections 3

through 11 of the Settlement Agreement, which included the releases and the Release

32
Carveout, “shall be effective upon the closings under the Repurchase Agreements.”

Consequently, the Release Carveout did not become effective until the conceptual

microsecond after the share transfers were complete. At that point, the Company owned

the shares, and the Release Carevout could not modify the completed aspect of the

transaction.

When the plaintiffs sold their shares pursuant to the Repurchase Agreement, they

sold all of the Repurchased Securities, including all of the rights associated with them.

They did not hold anything back. At best for the plaintiffs, the Release Carveout is

inconsistent with the transfer of all “right, title, and interest in and to” their shares pursuant

to Section 1.01 of the Repurchase Agreement, but in that event, under the integration

clause, the terms of the Repurchase Agreement control.

In theory, the plaintiffs could have contracted not to sell all of the Repurchased

Securities and to retain certain rights associated with their shares. See, e.g., 6 Del. C. § 8-

302(b). But they did not do that. They sold all of their shares, and their right to assert direct

and derivative claims passed to the buyer.

4. The Waiver Provision

The plaintiffs finally argue that even if the Repurchase Agreements had the effect

that the law requires, the defendants could not reveal that fact to the court. In support of

this proposition, they cite the Waiver Provision, which states:

[N]otwithstanding the foregoing, the WR Parties hereby waive and agree not
to assert or otherwise raise any defense related to the Delaware Plaintiffs’
agreement to sell their shares in the Company, including without limitation
any defense that the Delaware Plaintiffs lack standing to assert any claim that
has been brought or could have been brought in the Delaware Action.

33
If enforced on the facts of this case, the Waiver Provision would result in the plaintiffs

pursuing claims from which they could not benefit, resulting in the Delaware courts issuing

advisory opinions that will help no one.

“The concept of standing, in its procedural sense, refers to the right of a party to

invoke the jurisdiction of a court to enforce a claim or redress a grievance.” Schoon v.

Smith, 953 A.2d 196, 200 (Del. 2008) (en banc) (quoting Stuart Kingston, Inc. v. Robinson,

596 A.2d 1378, 1382 (Del. 1991)) (internal quotation marks omitted). “Accordingly, ‘[a]s

a preliminary matter, a party must have standing to sue in order to invoke the jurisdiction

of a Delaware court.’” El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248,

1256 (Del. 2016) (quoting Ala. By-Prods. Corp. v. Cede & Co., 657 A.2d 254, 264 (Del.

1995)). Questions of standing must be addressed to “ensure that the litigation before the

tribunal is a ‘case or controversy’ that is appropriate for the exercise of the court’s judicial

powers.” Dover Historical Soc’y v. City of Dover Planning Comm’n, 838 A.2d 1103, 1110

(Del. 2003). In ruling on the implications of the continuous ownership rule for purposes of

standing, the Delaware Supreme Court held that “the question of derivative standing is

properly a threshold question that the [c]ourt may not avoid.” El Paso, 152 A.3d at 1257

(internal quotation marks omitted; alteration in original). “Once standing is lost, the court

lacks the power to adjudicate the matter . . . .” Id. at 1256. If a court lacks the power to hear

a dispute, then parties cannot bestow jurisdiction on the court by agreement or through

34
related doctrines like estoppel or waiver.15

Based on these Delaware Supreme Court precedents, it appears that, at least for

purposes of derivative standing, the question of whether the plaintiffs lost standing to

maintain their claims by selling their shares is a jurisdictional issue that cannot be avoided.

As to the derivative claims at a minimum, the Waiver Provision could not prevent the

defendants from mentioning the Repurchase Agreements and their implications for

justiciability. To do otherwise would permit the parties to establish jurisdiction by

agreement, which is contrary to law. Arguably, an agreement to this effect would permit

the parties to maintain a fraud on the court, in which limited judicial resources would be

devoted to overseeing a non-justiciable case.

At least for purposes of the derivative claims, the Waiver Provision cannot insulate

the plaintiffs from the consequences of their actions. On the facts of this case, the plaintiffs

voluntarily chose to divest themselves of their shares. By doing so, they gave up any basis

on which to claim that they could maintain derivative claims on behalf of the Company.

They also gave up any basis on which to receive the benefit of any recovery, because the

recovery would flow to the Company, and the plaintiffs no longer had any interest in the

Company. By transferring all of their shares, they transformed themselves into “empty

plaintiff[s],” pursuing claims that at most would result in an impermissible advisory

See Thompson v. Lynch, 990 A.2d 432, 434 (Del. 2010); Sternberg v. O’Neil, 550
15

A.2d 1105, 1109 (Del. 1988) (subsequent history omitted); Bruce E.M. v. Dorothea A.M.,
455 A.2d 866, 871 (Del. 1983).

35
opinion. Parfi Hldg. AB v. Mirror Image Internet, Inc., 954 A.2d 911, 940 (Del. Ch. 2008)

(internal quotation marks omitted).

The same policies prevent the plaintiffs from relying on the Waiver Provision as a

basis for maintaining a direct claim. Once they transferred their shares, the plaintiffs were

no longer beneficiaries of the fiduciary duties that they sought to invoke, and they would

not receive the benefit of any recovery, which would go to the then-current owners of the

shares. Having transferred their shares, the plaintiffs no longer had any interest in the

dispute.

There are decisions in which this court has declined to enforce the full consequences

of a plaintiff’s decision to sell its shares. In one instance, a named plaintiff in a derivative

action sold its shares, but the court permitted the law firm who represented that plaintiff to

continue as part of the committee of the whole, recognizing that there were other plaintiffs

who had standing to sue. See In re New Valley Corp. Deriv. Litig., 2004 WL 1700530, at

*6–7 (Del. Ch. June 28, 2004). In another instance, this court approved a class action

settlement during the pre-Trulia era, even though the named plaintiffs had sold their shares.

See In re Celera Corp. S’holder Litig., 2012 WL 1020471, at *1–2 (Del. Ch. Mar. 23,

2012), aff’d in part, rev’d in part, 59 A.3d 418 (Del. 2012). Both rulings appear to be

pragmatic decisions that reflect the counsel-driven nature of representative litigation and

the ability of lead counsel to substitute a new stockholder plaintiff. Other decisions have

discussed the concept of waiver and found that the facts did not support its potential

application to the case, avoiding the need to address the more difficult question of

justiciability. See, e.g., Weingarten v. Monster Worldwide, Inc., 2017 WL 752179, at *3

36
(Del. Ch. Feb. 27, 2017); In re First Interstate Bancorp Consol. S’holder Litig., 729 A.2d

851, 859–60 (Del. Ch. 1998). These cases do not imply that the Waiver Provision will force

the defendants to litigate, and the Delaware courts to adjudicate, the plaintiffs’ claims.

After their voluntary decision to sell their shares, the plaintiffs lacked any legally

cognizable interest in claims that relied on rights associated with the shares they had

transferred. Allowing a party to litigate a claim that it has no real interest in is contrary to

Delaware law. The plaintiffs cannot rely on the Waiver Provision to convert non-justiciable

claims into justiciable ones.

B. The Fraud Claims

In Counts IV and V of the complaint, the plaintiffs have asserted claims for fraud.

In both counts, the plaintiffs assert that WR Capital, WR Sub, Talerman, and Walsh

fraudulently induced them to enter into the 2016 Financing. In Count IV, they assert that

the defendants accomplished this through fraudulent representations. In Count V, they say

that the defendants accomplished this through fraudulent concealment. In their answering

brief, the plaintiffs claimed that the fraudulent concealment actually occurred in connection

with the 2017 Financing and the Spring 2018 Capital Raise. These claims fail on the

merits.16

16
The plaintiffs’ transfer of their shares pursuant to the Repurchase Agreements had
no effect on their fraud claims, which were personal claims belonging to the plaintiffs. One
of the “[q]uintessential examples” of a personal claim is “a tort claim for fraud in
connection with the purchase or sale of shares.” Citigroup Inc. v. AWH Inv. P’ship, 140
A.3d 1125, 1140 n.76 (Del. 2016) (quoting In re Activision Blizzard, Inc. S’holder Litig.,
124 A.3d 1025, 1056 (Del. Ch. 2015)). The cause of action arises out of the information

37
 To state a claim for fraud, a complaint must plead the following elements:

1) a false representation, usually one of fact, made by the defendant;

2) the defendant’s knowledge or belief that the representation was false, or
was made with reckless indifference to the truth;

3) an intent to induce the plaintiff to act or to refrain from acting;

4) the plaintiff’s action or inaction taken in justifiable reliance upon the
representation; and

5) damage to the plaintiff as a result of such reliance.

Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983). The first element can

also be satisfied if a defendant deliberately conceals a material fact or remains silent about

a material fact in the face of a duty to speak. Id.; accord Nicolet, Inc. v. Nutt, 525 A.2d 146,

149 (Del. 1987).

“[T]he circumstances constituting fraud” must be pled “with particularity.” Ct. Ch.

R. 9(b). Pertinent circumstances include “(1) the time, place, and contents of the [fraud];

(2) the identity of the person [committing fraud]; and (3) what the person intended to gain

. . . .” ABRY P’rs V, L.P. v. F&W Acq., LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006). The

allegations need not resemble a written transcript. Rather, the complaint must provide

“detail sufficient to apprise the defendant of the basis for the claim.” Id. “Malice, intent,

that was provided or not provided in connection with the sale. It is not a right associated
with the underlying shares. See Activision, 124 A.3d at 1056. As a result, the right to assert
or benefit from the claim is not attached to and does not accompany the sale of the
underlying shares. The claim belongs to and remains with the person who was defrauded.

38
knowledge and other condition of mind of a person may be averred generally.” Ct. Ch. R.

9(b).

1. Overt Misrepresentations

The plaintiffs attempt to plead fraud based on two instances of overt

misrepresentations in connection with the 2016 Financing. Neither provides the necessary

predicate for a fraud claim.

The first set of overt misrepresentations related to the parties’ relationship. The

plaintiffs contend that the defendants induced them to enter into the 2016 Financing by

falsely stating in an early 2016 email that the defendants and plaintiffs would be “working

together as partners.” Compl. ¶ 51. In addition, the plaintiffs allege that the same email

falsely represented that WR Capital only sought “minority” ownership. Id. The plaintiffs

say that the defendants reinforced these representations in other ways, such as through the

WR Capital website, where the defendants held themselves out as making investments “in

cooperation with management and directors.” Compl. ¶ 49. According to the plaintiffs, the

defendants actually intended to obtain control of the Company and to dilute and replace its

management team.

Along similar lines, the plaintiffs allege that the defendants touted their ability to

raise capital for the Company from outside sources if they were given a seat at the table.

Compl. ¶¶ 5, 50. According to the plaintiffs, the defendants in fact planned to use their

blocking rights to deprive the Company of access to outside capital so that the Company

would be forced to accept onerous and unfair terms from the defendants.

39
 Statements like this are puffery, and a plaintiff cannot reasonably rely on them for

purposes of a fraud claim. See Airborne Health, Inc. v. Squid Soap, LP, 2010 WL 2836391,

at *4, *8 (Del. Ch. July 20, 2010); Solow v. Aspect Res., LLC, 2004 WL 2694916, at *3

(Del. Ch. Oct. 19, 2004). Perhaps the plaintiffs in fact relied on these statements. Academic

literature supports the importance of trust between entrepreneurs and investors,17 making

it conceivable that a deceitful party could induce detrimental reliance by falsely signaling

trustworthiness. But for purposes of a fraud claim, the plaintiffs could not reasonably rely

on these statements. If the plaintiffs had wanted specific protections, then they or their

counsel should have included express commitments in the transaction documents. See

Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1035 (Del. Ch. 2006); H-M

Wexford LLC v. Encorp, Inc., 832 A.2d 129, 141–42 (Del. Ch. 2003).

The next set of overt misrepresentations related to the number of warrants that the

defendants could demand in exchange for extending the Company’s credit line under the

terms of the 2016 Financing. The plaintiffs claim that the defendants represented that they

would provide the Company with up to $3 million more in credit in return for warrants for

17
See generally Gillian K. Hadfield & Iva Bozovic, Scaffolding: Using Formal
Contracts to Support Informal Relations in Support of Innovation, 2016 Wis. L. Rev. 981
(2016) (discussing role of trust as a substitute for contractual enforcement for small and
innovative companies); Brad Bernthal, Investment Accelerators, 21 Stan. J. L. Bus. & Fin.
139 (2016); Jason M. Gordon & David Orozco, Trust and Control: The Value Effect of
Venture Capital Term Sheet Provisions as Risk Allocation Tools, 4 Mich. Bus. &
Entrepreneurial L. Rev. 195 (2015); Laura Bottazzi et al., The Importance of Trust for
Investment: Evidence from Venture Capital, 29 R. Fin. Studs. 2283 (2016); Ronald J.
Gilson, Engineering a Venture Capital Market: Lessons from the American Experience, 55
Stan. L. Rev. 1067 (2003).

40
another 379,034 shares. In support of this contention, the plaintiffs cite the term sheet for

the 2016 Financing, which stated: “For avoidance of doubt, if the LOC is drawn to the full

extent . . . and WR Convertible Debt is converted, it is possible that WR’s ownership could

be as much [as] 38% of the Holding company.” Compl. ¶ 64 (internal quotation marks

omitted; alteration in original). The plaintiffs also cite Section 1.2 of the Loan Agreement,

which gave the defendants the option to increase the credit facility and receive warrants for

another 379,034 shares. And they cite a schedule to the warrant certificate, which stated

that if the Company drew down all of the original $5 million credit line, plus the optional

$3 million extended credit line, then defendants would own only 34% of the Company’s

fully diluted equity. Compl. ¶¶ 9, 58, 64. The plaintiffs allege that the defendants misled

them to believe that the defendants would not receive more than 34% of the Company for

a loan package of up to $8 million, when instead the defendants planned to refuse to fund

the second tranche of the credit facility unless they received a majority of the equity.

The plaintiffs have not cited a false representation. Instead, they appear to have

misinterpreted the agreements. The term sheet gave the defendants an option and capped

what the defendants would receive if they exercised it. The term sheet did not say what the

defendants would receive if they declined to exercise the option and bargained for different

terms. In any event, the Loan Agreement superseded the term sheet. Loan Agreement §

10.1 (“This Agreement and the other Loan Documents constitute the complete agreement

between the parties . . . [and] supersede all prior agreements . . . .”). Once the Loan

Agreement was in place, the plaintiffs could no longer rely on the term sheet.

41
 The Loan Agreement did not cap the amount of equity that the defendants could

receive, nor did it give the plaintiffs an option to demand $3 million in additional financing

in exchange for a set number of warrants. The option ran the other way. WR Capital could

exercise its option for a set number of warrants, or it could decline to exercise its option

and ask for other consideration.

Neither of the plaintiffs’ theories of overt fraud supports a claim. In the first

instance, the plaintiffs pinned their hopes on puffery. In the second, they misunderstood

how the financing worked. In neither case were they defrauded.

2. Fraudulent Concealment

The plaintiffs next claim that the defendants fraudulently concealed material

information in connection with the Spring 2018 Capital Raise. The plaintiffs contend that

the defendants refused to turn over a support agreement detailing side benefits that the

defendants sought in the Spring 2018 Capital Raise and information about the negotiations

that took place during the Spring 2018 Capital Raise.

This claim fails for multiple reasons. For one, the plaintiffs have not alleged that the

defendants fraudulently concealed information. They have alleged that the defendants

openly refused to provide it. If the plaintiffs thought they had a right to the information,

then they could have sued to enforce it.

For another, the plaintiffs have not alleged how they detrimentally relied on the

defendants’ failure to provide this information. WR Capital controlled the Company, and

it could have engaged in any transaction with or without the support of the plaintiffs. The

42
complaint does not explain how the fraudulent concealment induced action by the

plaintiffs.

Most fundamentally, the Spring 2018 Capital Raise did not lead to a transaction.

The complaint does not explain how the plaintiffs were harmed by a transaction that never

took place.

3. Silence In The Face Of A Duty To Speak

Invoking the third species of fraud, the plaintiffs contend that the defendants

remained silent in the face of a duty to speak. In their answering brief, the plaintiffs argue

that the defendants failed to disclose “their scheme to take control of [the Company] by (a)

shutting out capital sources; (b) controlling the [C]ompany’s business affairs; (c) diluting

[the] [p]laintiffs’ equity through [the 2017 Financing]; (d) undercutting management; and

(e) installing Knyal and rewarding him with outsized equity to ensure loyalty.” Dkt. 36 at

38–39.

As the basis for the defendants’ duty to speak, the plaintiffs cite the duty of

disclosure that the defendants’ owed as directors and controlling stockholders. The “duty

of disclosure is not an independent duty, but derives from the duties of care and loyalty.”

Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009) (internal quotation marks omitted). The

duty of disclosure arises because of “the application in a specific context of the board’s

fiduciary duties . . . .” Malpiede v. Townson, 780 A.2d 1075, 1086 (Del. 2001). A claim for

breach of the duty of disclosure is thus a claim for breach of fiduciary duty, which the

plaintiffs transferred when they sold their shares. And a claim for breach of fiduciary duty

fails when it asks the defendants to engage in self-flagellation. See, e.g., Loudon v. Archer-

43
Daniels-Midland Co., 700 A.2d 135, 143 (Del. 1997). As framed by the plaintiffs, the

disclosures they seek would have required self-flagellation.

C. The Unjust Enrichment Claim

The last claim is Count VII, where the plaintiffs contend that the defendants unjustly

enriched themselves through the 2017 Financing. On the facts of this case, the plaintiffs

cannot maintain a claim for unjust enrichment.

The elements of unjust enrichment are deceptively simple to state: (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. Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010). These straightforward

elements mask a more flexible and free-flowing doctrine.

Unjust enrichment is “a very broad and flexible equitable doctrine that has as its

basis the principle that it is contrary to equity and good conscience for a defendant to retain

a benefit that has come to him at the expense of the plaintiff.” Cobalt Multifamily Inv’rs I,

LLC v. Shapiro, 9 F. Supp. 3d 399, 411 (S.D.N.Y. 2014) (internal quotation marks

omitted)). It “seems to be the tool that allowed law to move from the old medieval world

of property and things to the modern world of contracts and by intangibles.” Dan B. Dobbs,

Law of Remedies: Damages—Equity—Restitution 375 (2d ed. 1993). “[T]he gist of this

kind of action is, that the defendant, upon the circumstances of the case, is obliged by the

ties of natural justice and equity to refund the money.” Restatement (Third) of Restitution

and Unjust Enrichment § 1 cmt. b, Westlaw (database updated June 2019). Claims for

unjust enrichment do “not fit comfortably into either the category of contract or that of

44
tort.” E. Allen Farnsworth, Farnsworth on Contracts § 2.24, at 2-150 to -151 (4th ed.

2019). “[U]njust enrichment can be characterized as a ‘legal principle’ incorporating a

broad ideal of justice, from which courts can deduce solutions to particular restitution

problems.” Emily Sherwin, Restitution and Equity: An Analysis of the Principle of Unjust

Enrichment, 79 Tex. L. Rev. 2083, 2084 (2001).

The difficulty with unjust enrichment is a corollary to its strength. Because it is

flexible and free-flowing, unjust enrichment can encroach on other areas of the law and

upset settled frameworks. That is the problem with the claim here. According to the

plaintiffs, the defendants unjustly enriched themselves to the plaintiffs’ detriment “when,

without justification, [the defendants] shut out new investors and then leveraged [the

Company]’s need for capital to demand millions of new warrants for extending the agreed-

upon credit line.” Dkt. 36 at 41. That is the same theory that the plaintiffs seek to litigate

through their claims for breach of fiduciary duty and breach of contract.

When an unjust enrichment theory duplicates a breach of fiduciary duty claim, it is

typically dismissed in favor of the breach of fiduciary duty claim so that the more settled

doctrine can govern. See Calma ex rel. Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 591–

92 (Del. Ch. 2015); Monroe Cty. Empls.’ Ret. Sys. v. Carlson, 2010 WL 2376890, at *1–2

(Del. Ch. June 7, 2010). The same is true for an unjust enrichment claim that duplicates a

claim for breach of contract. See PharmaThene, Inc. v. SIGA Techs., Inc., 2011 WL

4390726, at *27 (Del. Ch. Sept. 22, 2011), aff’d in part, rev’d in part on other grounds, 67

A.3d 330 (Del. 2013); MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *24 (Del. Ch.

45
May 5, 2010). In both situations, permitting the theory to proceed would upset the settled

outcomes generated by the established legal frameworks. Those principles apply here.

On the facts of this case, the unjust enrichment theory also depends on the plaintiffs’

status as stockholders. In essence, the plaintiffs contend that the Company was

impoverished when it issued more warrants in the 2017 Financing than it should have been

required to issue. Because the Company was harmed, and because any remedy would go

to the Company, the unjust enrichment claim is derivative. Having sold their shares, they

can no longer assert that claim.

Just as a breach of fiduciary duty claim that is derivative can be reframed as direct,

so too can the plaintiffs cast their unjust enrichment claim as direct. Recast in this light, the

plaintiffs argue that the voting power of their shares was diluted when the Company issued

more warrants in the 2017 Financing than it should have been required to issue. The

reframing does not help the plaintiffs, because the detriment still affected their shares. Just

as they gave up their ability to assert a direct claim for dilution when they sold their shares,

they likewise gave up a parallel claim for unjust enrichment based on harm to their shares.

For each of these reasons, Count VII is dismissed.

III. CONCLUSION

The complaint originally contained eight counts. The plaintiffs failed to state a claim

for fraud in either Count IV or V. They also failed to state a claim for unjust enrichment in

Count VII. The plaintiffs released the claims asserted in Counts II and III and dismissed

the defendant who was the subject of their claims. By selling their shares, the plaintiffs

46
gave up their rights to assert their other claims. The defendants’ motion to dismiss is

granted.

47