243 Cal. App. 4th 969
Cal. Ct. App.2015Background
- Plaintiffs (James G. Speirs and son) held 5,740,741 BlueFire warrants exercisable at $2.90 until Dec. 14, 2012; warrants contained a “full-ratchet” anti-dilution clause subject to five enumerated exclusions.
- In Jan. 2011 BlueFire entered a Purchase Agreement with Lincoln Park (an equity line/standby equity distribution) that provided up to $10M in future purchases; at signing BlueFire issued 600,000 “commitment” shares (no cash) and sold 428,571 shares plus warrants to Lincoln for $150,000.
- Plaintiffs demanded that BlueFire adjust (ratchet) the warrant exercise price downward; BlueFire refused claiming the Lincoln issuances fell within the warrants’ excluded categories (e.g., strategic partner / similar transaction).
- Plaintiffs sued for breach of contract and declaratory relief (seeking adjustment and immediate exercise) and sued officers Klann and Scott for breach of fiduciary duty; bench trial found breach of contract/declaratory relief for plaintiffs but granted nonsuit on fiduciary duty. Court ordered exercise price reduced to $0 and permitted immediate exercise; no monetary damages awarded.
- On appeal the court affirmed rejection of fiduciary duty claim and that the anti-dilution clause covered the Lincoln issuances, but held there was insufficient evidence to set the exercise price at $0; remanded for retrial limited to remedy.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether corporate officers owed fiduciary duties to warrant holders | Warrantholders (and minority shareholders) were harmed by officers’ refusal to honor anti-dilution rights; officers breached fiduciary duty | Officers owe fiduciary duties only to shareholders; warrantholders have contractual rights, not fiduciary ones | Officers did not owe fiduciary duties to warrantholders; nonsuit affirmed (claim limited to contract remedies) |
| Whether Lincoln issuances were excluded from anti-dilution protection | Lincoln was an equity investor; issuances triggered full-ratchet protection (exceptions do not apply) | Lincoln’s equity line was a “credit line”/similar transaction or part of a strategic relationship (exceptions (ii)/(iii)) | Anti-dilution clause applies; exceptions (ii)/(iii) do not reasonably cover Lincoln’s equity line; warrant holders entitled to adjustment |
| Proper method/value for adjusting exercise price (was $0 appropriate?) | The 600,000 commitment shares had no cash consideration so “consideration paid per” share = $0; therefore exercise price should be $0 | Consideration includes contractual/intangible value (e.g., present value of $10M commitment, cash $150k, marketplace values); adjustment must be calculated on evidence | Court erred in setting price at $0; substantial evidence did not support $0; valuation requires retrial on remedy/quantification (may yield nonzero per-share value) |
| Whether plaintiffs could recover monetary damages in addition to specific performance | Plaintiffs sought damages for lost profit if they would have sold shares after exercising in Jan. 2011 | Defendants argued plaintiffs elected specific performance and cannot also recover duplicative damages; plaintiffs’ damages speculative | Trial court permissibly denied damages: plaintiffs obtained specific relief (exercise) and their damages theory was speculative; retrial limited to remedy for breach (not duplicative recovery) |
Key Cases Cited
- Amtower v. Photon Dynamics, Inc., 158 Cal.App.4th 1582 (Cal. Ct. App. 2008) (existence of fiduciary duty is a question of law; officers do not owe fiduciary duties to warrantholders)
- Daly v. Yessne, 131 Cal.App.4th 52 (Cal. Ct. App. 2005) (option/warrantholder is not a shareholder and is not owed fiduciary duties pre-exercise)
- Aspen Advisors LLC v. United Artists Theatre Co., 861 A.2d 1251 (Del. 2004) (warrantholder rights are contractual; do not create shareholder fiduciary status)
- Mathews v. Kidder, Peabody & Co., Inc., 260 F.3d 239 (3d Cir. 2001) (modern financing structures can blur debt/equity labels; court should look to substance)
- Kenford Co., Inc. v. County of Erie, 67 N.Y.2d 257 (N.Y. 1986) (contract damages cannot be awarded where they are merely speculative)