Miller Barondess Represents Minority Shareholders in Wrongful Dilution/Breach of Fiduciary Duty Case in Delaware

Miller Barondess Represents Minority Shareholders in Wrongful Dilution/Breach of Fiduciary Duty Case in Delaware

By Vince Sullivan, Law360–Friday, April 12, 2019–A venture capital firm that made a $3 million investment in a home remodeling financing company told a Delaware Chancery Court judge Friday that a suit brought by that company’s former controlling shareholder and directors over the terms of the investment should be tossed because the plaintiffs voted to approve the deal.

During a hearing in Wilmington, WR Capital Partners LLC attorney Kenneth J. Nachbar of Morris Nichols Arsht & Tunnell LLP said his clients made a $5 million loan to Energy Efficient Equity Inc. — or E3— in May 2016 that included an option for an additional $3 million in lending at WR Partners’ discretion.

The original loan would carry a 10 percent interest rate with WR Partners receiving shares of preferred stock and warrants to acquire additional equity in the company, according to court filings. The $3 million loan option would confer on the lender additional warrants for 379,000 shares.

WR Partners never exercised that option, Nachbar said, instead making a separate $3 million loan to E3 in July 2017 in exchange for 8.5 million warrants in a deal that received the approval of E3’s board, including directors and company co-founders Jonathan Urdan and William Woodward, who are the plaintiffs in the breach of fiduciary duty suit against WR Partners.

A January 2018 bridge loan made another $2.5 million available to E3 in exchange for additional equity, though only about $500,000 was drawn on the facility.

The increased equity compensation for the $3 million loan was called for because E3 had been struggling since the initial $5 million investment, Nachbar said.

Urdan and Woodward “each approved the July 2017 transaction and as a result, the company was saved,” Nachbar said. “They acquiesced to the transaction. They approved it.”

That acquiescence extinguishes any claims brought by Urdan and Woodward in the suit, the defense argued, and dismissal of the case is warranted.

Plaintiff attorney Daniel S. Miller of Miller Barondess LLP said the breach of fiduciary duty claims should survive because WR Partners breached the original loan contract, defrauded E3 and concealed their fraudulent intent.

When agreeing to provide the $5 million loan, Miller alleged WR Partners pledged to not take their equity holding in E3 above 38 percent. After the second loan, WR Partners’ stake in the company jumped to more than 60 percent, while the plaintiffs’ holding dropped from 60 percent to about 16 percent, Miller said.

The suit alleges WR Partners never intended to limit its equity position in E3 and negotiated the second loan as part of a scheme to wrest control of the company from Urdan and Woodward, its largest shareholders.

“The real overall plan was to take control over the company; to starve it of other capital sources and then go in and take it over,” Miller argued.

Vice Chancellor J. Travis Laster said he would take the motion to dismiss under advisement, but asked for additional briefing from the parties about issues regarding the plaintiffs’ standing to bring derivative claims against WR Partners.

Urdan and Woodward sold their shares in E3 as part of a recapitalization transaction in September 2018, according to court filings, calling into question whether or not they have standing to bring derivative claims for breach of fiduciary duty on behalf of E3.

Vice Chancellor Laster said he has previously made his position on derivative standing known, explaining he believes derivative claims are attributes of shares and travel with the equity.

WR Partners is represented by Kenneth J. Nachbar and Alexandra M. Cumings of Morris Nichols Arsht & Tunnell LLP.

Urdan and Woodward are represented by Elena C. Norman and Benjamin M. Potts of Young Conaway Stargatt & Taylor LLP and Louis R. Miller, Daniel S. Miller and Jeffrey B. White of Miller Barondess LLP.

The case is Urdan, et al v. WR Capital Partners LLC, et al., case number 2018-0343, in the Court of Chancery of the State of Delaware.

–Additional reporting by Darcy Reddan. Editing by John Campbell.

For a reprint of this article, please contact reprints@law360.com.