In re P3 Health Group Holdings, LLC

       IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE P3 HEALTH GROUP                       )    Consol. C.A. No. 2021-0518-JTL
HOLDINGS, LLC                               )


 ORDER DENYING GREG KAZARIAN’S MOTION TO DISMISS COUNT VII

       1.     Hudson Vegas Investment SPV, LLC (“Hudson”) was a minority investor

in P3 Health Group Holdings, LLC (the “Company”). In this litigation, Hudson has

asserted various claims based on a transaction between the Company and a special

purpose acquisition company, commonly known as a SPAC.

       2.     The defendants filed a surfeit of motions to dismiss on various grounds,

including Rule 12(b)(6). The court has issued a decision addressing the breach of contract

claims that Hudson asserted. Dkt. 172 (the “Contract Opinion,” cited as “Op.”). This

order incorporates that decision by reference.

       3.     In Count VII of its complaint, Hudson has asserted a claim for breach of

fiduciary duty against Kazarian in his capacity as an officer of the Company. In Count

VII, Hudson alleges that Kazarian breached his fiduciary duties by accepting a secret,

personal, financial incentive from Foresight.

       4.     The LLC Agreement expressly preserves the fiduciary duties of the

Company’s officers. Ex. 1 § 5.6(d). The operative language states: “The Officers, in the

performance of their duties as such, shall owe to the Company and the Members duties of

the type owed by the officers of a corporation to such corporation and its stockholders

under the laws of the State of Delaware.” Id.
       5.      As described in the Contract Opinion, Chicago Pacific and the Company

pursued a de-SPAC merger with Foresight, but that transaction became far less attractive

to the Company in April 2021. Op. at 11–12.

               a.     An important aspect of the de-SPAC merger was the Company’s

ability to raise additional financing through the PIPE. Chicago Pacific principals handled

nearly every aspect of the PIPE. The letter of intent contemplated a PIPE of $400 to $500

million. Id. at 11.

               b.     In April 2021, the SPAC market began to weaken, and JPMorgan

warned Chicago Pacific that the PIPE would top out at $300 to $350 million, nearly one-

third less than the letter of intent contemplated. Id.

               c.     As April 2021 unfolded, the SPAC market declined further. By April

29, JPMorgan was telling Tolan that the maximum proceeds had fallen to $250 million.

No one provided the information to the Board. Tolan decided to continue moving forward

with the de-SPAC merger. Id. at 11–12.

               d.     To shore up Chicago Pacific’s commitment to the transaction,

Wasson gave Tolan and Kazarian the opportunity to invest personally in a follow-on

SPAC called Foresight Acquisition Corp. II (“Foresight II”). Tolan described the

invitation as “an honor.” Id. at 12. Without making any disclosure to the Board, Tolan

and Kazarian accepted, and on May 7, 2021, they invested $500,000 and $100,000 in

Foresight II. Based on historical rates of return to SPAC insiders, Tolan and Kazarian

stood to reap nearly $9 million and $5 million, respectively, if Foresight II completed an

acquisition. Id.


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       6.     It is reasonably conceivable that Kazarian acted in bad faith and breached

his duty of loyalty as an officer by accepting the opportunity to invest in Foresight II.

              a.     The Delaware Supreme Court has held that a corporate officer owes

the same fiduciary duties as a corporate director. See Gantler v. Stephens, 965 A.2d 695,

708–09 (Del. 2009). Directors of a Delaware corporation owe two fiduciary duties—

loyalty and care. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370

(Del. 2006). At a minimum, officers owe those same duties. Gantler, 965 A.2d at 708–

09.

              b.     The duty of loyalty includes a requirement to act in good faith,

which is “a subsidiary element, i.e., a condition, of the fundamental duty of loyalty.”

Stone, 911 A.2d at 370 (cleaned up). “A failure to act in good faith may be shown, for

instance, where the fiduciary intentionally acts with a purpose other than that of

advancing the best interests of the corporation.” In re Walt Disney Co. Deriv. Litig.

(Disney II), 906 A.2d 27, 67 (Del. 2006) (cleaned up).

              c.     Like directors, officers must “place the interests of the corporation

and shareholders that they serve before their own.” TVI Corp. v. Gallagher, 2013 WL

5809271, at *25 (Del. Ch. Oct. 28, 2013). And like directors, officers have a duty to act

“loyally by trying to do their job for proper corporate purposes in good faith,” rather than

disloyally by putting other interests, such as the self-interest of a superior, ahead of the

corporation’s best interest. Hampshire Gp., Ltd. v. Kuttner, 2010 WL 2739995, at *12

(Del. Ch. July 12, 2010).




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              d.     By accepting the opportunity to invest in Foresight II, Kazarian

engaged in self-interested conduct. Because he acted unilaterally, Kazarian bears the

burden of proving that his actions were entirely fair. It is reasonably conceivable that it

was not entirely fair to the Company for Kazarian to accept a personal benefit from the

Company’s counterparty in the midst of a deal process.

         7.   It is reasonably conceivable that Kazarian acted in bad faith and breached

his duty of loyalty as an officer by failing to disclose the Foresight II investment to the

Board.

              a.     An officer’s duty of loyalty has additional dimensions beyond a

director’s duty of loyalty because officers act as agents for the entity. See Lebanon Cnty.

Empls.’ Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752, at *21 (Del. Ch. Jan.

13, 2020) (“Officers also are fiduciaries in their capacities as agents who report to the

board of directors.”), aff’d, 243 A.3d 417 (Del. 2020). “Under a particularly well-

developed body of fiduciary law, agents owe additional and more concrete duties to their

principal.” Metro Storage Int’l LLC v. Harron, 275 A.3d 810, 843–44 (Del. Ch. 2022).

              b.     “An agent owes the principal a duty to provide information to the

principal that the agent knows or has reason to know the principal would wish to have.”

Restatement (Third) of Agency § 8.11 cmt. b (Am. Law Inst. 2006), Westlaw, (database

updated Oct. 2022). “That duty exists because a principal’s decisions may also be

affected by information about an agent and the agent’s conduct once the agent has been

retained by the principal.” Metro Storage, 275 A.3d at 851 (cleaned up). Officers, as

agents, “owe a duty to disclose relevant information if they have notice of facts which


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they should know may affect the decisions of their principals as to their conduct.” Triton

Constr. Co., Inc. v. E. Shore Elec. Servs., Inc., 2009 WL 1387115, at *14 (Del. Ch. May

18, 2009), aff’d, 2010 WL 376924 (Del. Jan. 14, 2010) (ORDER). An officer of a

Delaware entity has “the responsibility to disclose to their superior officer or principal

material information relevant to the affairs of the agency entrusted to them.” Hampshire

Gp., 2010 WL 2739995, at *13 (internal quotations omitted).

              c.     In his role as an officer of the Company, Kazarian was an agent of

the Board. In that capacity, Kazarian had a duty to provide the Board with the

information it needed during the year-long process leading to the de-SPAC merger. As

detailed in the Contract Opinion, Kazarian played a key role in the negotiations with

Foresight. See Op. at 5, 9. Kazarian voiced support for the letter of intent with Foresight.

Id. at 9. When Hudson raised concerns about the Board’s narrow focus on Foresight, it

was Kazarian who addressed their objections. Id. at 5. When Hudson expressed a desire

to exercise the Preemptive Option, it was Kazarian who orchestrated the Company’s

response. Id. at 9. Kazarian advocated strongly for Foresight to be the SPAC to help the

Company access the public markets.

              d.     It is reasonably conceivable that Kazarian had a duty to provide the

Board with information about an interest that gave him an incentive to favor Foresight. It

is reasonably conceivable that Kazarian’s receipt of a side benefit in the form of the

opportunity to invest in Foresight II was information that Kazarian had an obligation to

disclose to the Board.




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              e.     In their capacity as members of the Board, the Hudson Managers

were entitled to know about Kazarian’s side deal. As explained in the Contract Opinion,

Kazarian actively worked to limit the information the Hudson Managers received. Id. at

11.

              f.     Kazarian did not disclose to the Board or to the Hudson Managers

that he had received a side benefit from Foresight.

              g.     Hudson’s claim for breach of fiduciary duty against Kazarian in his

capacity as an officer states a claim on which relief can be granted.

       8.     To negate Hudson’s claim, Kazarian argues that he had transitioned out of

his role as Chief Strategic Officer by the time he accepted the opportunity to invest in

Foresight II. That is a fact issue that cannot be decided on a motion to dismiss.

       9.     Kazarian also responds that he could accept the Foresight II investment

opportunity because the LLC Agreement authorized the significant members and their

affiliates to pursue other business interests, even if those interests competed with the

Company. The relevant language states:

       The Members expressly acknowledge and agree that . . . (i) each of the
       [Chicago Pacific] Members, Leavitt, the Class D Members, and each of
       their respective Affiliates are permitted to have, and may presently or in the
       future have, investments or other business relationships with entities
       engaged in the Business other than through the Company or any of its
       Subsidiaries (an “Other Business”), . . . (iii) none of the [Chicago Pacific]
       Members, Leavitt, the Class D Members, nor any of their respective
       Affiliates will be prohibited by virtue of their respective investments in the
       Company or its Subsidiaries or their service as Managers or service on the
       Company’s or its Subsidiaries’ board of managers or directors from
       pursuing and engaging in any such activities, (iv) none of the [Chicago
       Pacific] Members, Leavitt, the Class D Members, nor any of their
       respective Affiliates will be obligated to inform or present the Company or


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      its Subsidiaries or the Board of any such opportunity, relationship or
      investment, . . . and (vi) the involvement of any of the [Chicago Pacific]
      Members, Leavitt, the Class D Members, and/or any of their respective
      Affiliates in any Other Business will not constitute a conflict of interest by
      such Persons with respect to the Company or its Members or any of the
      Company's Subsidiaries.

Ex. 1 § 6.6(a). This is a standard provision designed to eliminate the entity opportunity

doctrine that otherwise would apply by default and could limit the ability of fund

investors to own businesses or pursue business opportunities that could compete with the

company. See Martin I. Lubaroff, Paul M. Altman, Srinivas M. Raju, & Joshua J. Novak,

Delaware Limited Partnerships § 14.05 at 14-114 (Supp. 2022) (discussing an analogous

provision in a limited partnership agreement allowing a partner the “ability to pursue

business opportunities for itself or otherwise compete with the business of the

partnership”). It does not say anything about an officer accepting a personal benefit from

the counterparty in an ongoing negotiation.

      10.    Kazarian also relies on an exculpation provision in the LLC Agreement that

eliminates liability for managers across a wide class of claims. The pertinent provision

provides:

      Except for any liability arising out of or resulting from a Manager’s act of
      fraud as determined by a final judgment, order or decree of an arbitrator or
      a court of competent jurisdiction . . ., the personal liability of a Manager to
      any other Manager, the Company, or to any Member for any loss suffered
      by the Company or any monetary damages for breach of contract or breach
      of any duty (including any fiduciary duties, any and all such fiduciary
      duties having been eliminated pursuant to Section 5.6(b)) is hereby
      eliminated to the fullest extent permitted by the Delaware Act and any other
      applicable law. In furtherance of the foregoing and not in limitation thereof,
      each Manager shall not be liable for errors in judgment and may consult
      with and rely on counsel and accountants and any Member, Manager,
      Officer, employee or committee of the Company or any of its subsidiaries


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       or other professional in respect of the affairs of the Company and shall in
       no event have any personal liability in respect thereof.

Ex. 1 § 5.7. Kazarian argues that he is entitled to receive exculpation in his capacity as a

manger unless Hudson can specifically plead facts showing that he took action solely in

his capacity as an officer.

              a.      At the pleading stage, Hudson need only plead facts indicating that it

is reasonably conceivable that Kazarian acted in an officer capacity. See In re MultiPlan

Corp. S’holders Litig., 268 A.3d 784, 819 (Del. Ch. 2022) (denying motion to dismiss

where the complaint was “replete with allegations regarding [an officer]” even though

“the capacity in which he was acting” was not clearly specified); Malca v. Rappi, Inc.,

2021 WL 2044268, at *6 (Del. Ch. May 20, 2021) (ORDER) (“If a plaintiff reasonably

alleges facts that suggest such an agency relationship is present and the alleged fiduciary

acted contrary to that core principle, the plaintiff has successfully stated a claim upon

which relief may be granted.”).

              b.      The complaint meets that burden. The vast majority of Kazarian’s

actions took place outside of board meetings. It is reasonably conceivable that Kazarian

was acting as an officer when he was not attending board meetings or otherwise

responding to requests for board action.

       11.    Count VII states a claim on which relief can be granted. The motion to

dismiss Count VII is denied.

                                                  /s/ J. Travis Laster
                                                  Vice Chancellor Laster
                                                  November 3, 2022



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