HARRISON METAL CAPITAL III, L.P. v. OLOF MATHÉ and BRADFORD VOGEL, and MIXMAX, INC.
C.A. No. 2022-0261-PAF
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
March 27, 2024
Date Submitted: November 15, 2023
A. Thompson Bayliss, Eric A. Veres, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Attorneys for Plaintiff Harrison Metal Capital III, L.P.
Catherine A. Gaul, Samuel M. Gross, ASHBY & GEDDES, Wilmington, Delaware; Bruce L. Silverstein, Malibu, California; Attorneys for Defendants Olof Mathé and Bradford Vogel.
FIORAVANTI, Vice Chancellor
I. BACKGROUND
The following recitation of facts is drawn from the Verified Amended Complaint and the documents integral thereto.1
A. The Parties
Mixmax is a Delaware corporation that sells software as a service.2 Mathé, Vogel, and non-party Chanpory Rith co-founded Mixmax in June 2014.3
Defendant Mathé is the Company‘s Chief Executive Officer (“CEO“) and the chairman of the Board.13 Mathé owns approximately 15.8% of the Company‘s outstanding stock.14 The Amended Complaint alleges that “[a] number of contracts . . . vest in Mathé the ability to control the Board and the Company. For example, Mathé controls the nomination, election and removal of directors for three of the Company‘s five board seats.”15
Rith was a member of the Board from the Company‘s founding in 2014 until his removal in July 2021.18
Non-party Creandum IV, L.P. (“Creandum“) purchased Series A Preferred Stock constituting 15.6% of the Company‘s fully diluted equity in 2018.19 Creandum‘s lead role in the company‘s Series A Financing entitled it to designate a director to the Board, which was increased to five seats in conjunction with the financing.20 In 2018, Creandum appointed Carl Fritjofsson, the Creandum partner who had driven Creandum‘s Mixmax investment, as its Board designee.21 Like Plaintiff, Creandum is a party to the IRA.22
Non-party Resolute III, L.P. (“Resolute Ventures“) owns 101,010 shares of Mixmax Series Seed-1 preferred stock, constituting 0.4% of the Company‘s fully
The Board‘s composition at the relevant periods in this case was as follows:
- February 2020 through July 2021: Mathé, Vogel, Rith, and Fritjofsson;
- July 2021 through September 2021: Mathé, Vogel, and Fritjofsson;
- September 2021 through November 2022: Mathé, Vogel, Fritjofsson, and Dearing;
- November 2022 through the filing of the Amended Complaint: Mathé, Vogel, Fritjofsson, Dearing, and Bar-Cohen.
B. Factual Background
The Complaint asserts claims arising from four events, which Plaintiff seeks to connect into an overarching scheme. What follows is a brief description of the supporting allegations. Other facts are reflected in the court‘s analysis of the arguments on the motion to dismiss.
In early 2020, the Company laid off 12 of its then-68 employees to reduce expenses and put the Company on track to reach positive cashflow within three to six months.26 At the time, the Company had cash reserves to support 17 months of operations at its reduced headcount.27
In response to the COVID-19 pandemic, the Federal Government initiated a Payroll Protection Plan, or “PPP.”28 At an April 8, 2020 Board meeting, Mathé told the Board that the Company needed to apply for a PPP loan.29 Prior to the meeting, Mathé lined up support for the proposal from Vogel and Fritjofsson who, with Mathé, constituted a majority of the then-four-person Board.30
Under the terms of the IRA, the Company needed the approval of the Major Investors if the Company were to incur more than $500,000 in debt.31 On April 9,
In an April 10, 2020 email to Mathé, Bar-Cohen highlighted the requirements for PPP loans and identified significant potential legal and reputational risks that a PPP loan application posed for companies that did not fall squarely within those requirements.35 Plaintiff alleges Mixmax did not fall within those requirements.36
On April 30, 2020, Mathé filed an application on behalf of the Company for a $1.12 million PPP loan in which he certified that the loan was necessary to support the Company‘s ongoing operations and that it would be used to retain workers, maintain payroll, or make mortgage interest, lease, or utility payments.37 Plaintiff
Immediately after receiving the PPP loan, the Company laid off another 13 employees.39 Alone, this was a 23% reduction of the Company‘s then-56-person staff, and together with the prior laying off of 12 employees, this was a reduction by more than a third of the Company‘s previously 68-person workforce.
On December 11, 2021, Mathé filed an application on behalf of the Company for forgiveness of the PPP loan.40 In that application, Mathé certified that the funds had been used for payroll costs to retain employees or mortgage interest, rent, or utility expenses and that he understood the legal consequences of presenting false information on the application.41 The federal government forgave the PPP loan on March 11, 2021.42 Mathé reported this simply as “Other Income” in the Company‘s financial statements without further explanation, which Plaintiff asserts was intentionally misleading to investors.43 To date, neither the Company nor any of its
2. Mathé Increases His Compensation
Between April 23 and 29, 2020, shortly before submitting the application for the PPP loan, Mathé informed Fritjofsson that Mathé planned to increase his own salary.44 Based on these discussions, but without board or stockholder approval, Mathé began paying himself a more than 30% increased salary, reflecting a jump from $180,000 to $235,685.45 Mathé did not notify the Major Investors of executive compensation increases at that time, despite the IRA‘s requirement that Major Investors approve compensation increases to the Company‘s executive team and its founders.46
On February 4, 2021, while the PPP loan forgiveness application was pending, Mathé increased his compensation again, from a $235,685 annual salary to $320,000, plus an additional potential $80,000 in variable compensation.47 As before, he did not provide notice to the Major Investors.48 This increase placed his
3. Accounting Irregularities
Sometime before or during the second quarter of 2021, Mathé, with Vogel‘s support, inflated the Company‘s reported revenue by improperly booking voided invoices as income, treating pre-payments of multi-month contracts as being fully earned upon receipt, booking invoices the Company had deemed uncollectible as income, and otherwise booking revenue and accounts receivable invoices improperly.50
4. The SAFEs
On July 7, 2021, Mathé removed Rith from the Board.51 Mathé and Vogel informed Fritjofsson and the Company‘s counsel, but not Rith.52 Rith‘s removal left a Board consisting of Mathé, Vogel, and Fritjofsson. The day after Rith‘s removal, Mathé, Vogel, and Fritjofsson unanimously resolved to pursue financing through the sale of SAFEs.53
Resolute Ventures made the first investment in the SAFE offering, which set the terms for the remaining SAFE Investors.57 Mathé had turned down an earlier, potentially term-setting offer from Teamworthy Ventures that included a higher conversion cap and, therefore, was less dilutive to Mixmax‘s other investors in the event of a higher triggering valuation.58 Mathé forwent Teamworthy Ventures’
On August 13, 2021, the Company delivered to Plaintiff an operating update, which disclosed the Company‘s sale of SAFEs and the funds raised in the offering.60 Upon learning about the SAFEs, Dearing expressed his concerns and frustration to Fritjofsson over the Company‘s governance and communications.61 Fritjofsson agreed that “[s]urely there are many companies out there with stronger governance” and “[c]ommunications between the company and shareholders can of course improve,” and stated that “I did not think the lack of information was ok. I reminded [Mathé] of this multiple times.”62 Fritjofsson maintained that he and Mathé had discussed the plan for the SAFEs and that Fritjofsson had been assured that the Company could pursue the financing without Plaintiff‘s approval.63 After a couple of exchanges, Fritjofsson forwarded the exchange to Mathé with the message “FYI. Det börjar blåsa.”64 Plaintiff asserts that this means, idiomatically, to “it‘s starting
Plaintiff then exercised its board representation rights and appointed Dearing to the Board in September 2021.67
5. The Ensuing Litigation
Once Dearing rejoined the Board, he began demanding corporate books and records in his director capacity. On October 12, 2021, Dearing delivered a demand to inspect the Company‘s books and records pursuant to
On March 18, 2022, Plaintiff filed this action.73 The original Complaint asserted a single claim to invalidate the Board‘s approval and preferred stockholders’ ratification of certain increases to Mathé and Vogel‘s compensation pursuant to
As the 220 Action proceeded, Plaintiff retained the forensic accounting firm of Alvarez & Marsal (“A&M“) to review the company‘s financial records that were
On or around November 15, 2022, eight months after the filing of Plaintiff‘s original Complaint, Mathé appointed Bar-Cohen to fill the Board vacancy that resulted from Rith‘s removal in mid-2021.81
On December 5, 2022, Plaintiff filed an Amended Complaint.82 The Amended Complaint is much broader than the original Complaint, which was
Defendants filed a Motion to Dismiss on January 23, 2023, for failure to plead demand futility and for failure to state a claim upon which relief can be granted.85 Following briefing,86 the court heard oral argument.87 What follows is the court‘s ruling on that motion.
II. ANALYSIS
All of the claims alleged in the Amended Complaint are asserted on behalf of the Company. Defendants have moved to dismiss under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted and under Rule 23.1 for failure to plead demand futility. The court concludes that the Amended
The Plaintiff in this action did not make a pre-suit demand. Therefore, Plaintiff must persuade the court that demand is excused as futile. Demand is futile if at least half of the members of the Demand Board are unable to consider a demand for one of the three reasons outlined in Zuckerberg:
(i) [T]he director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
(ii) [T]he director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; [or]
(iii) [T]he director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
Id. at 1059. “To comply with Rule 23.1, the plaintiff must meet ‘stringent requirements of factual particularity that differ substantially from . . . permissive notice pleadings.‘” Id. at 1048 (alteration in original) (quoting Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000)). “When considering a motion to dismiss a complaint for failing to comply with Rule 23.1, the Court does not weigh the evidence, must accept as true all of the complaint‘s particularized and well-pleaded allegations, and must draw all reasonable inferences in the plaintiff‘s favor.” Id. “This analysis is fact-intensive and proceeds director-by-director and transaction-by-transaction.” Khanna v. McMinn, 2006 WL 1388744, at *14 (Del. Ch. May 9, 2006).
The parties agree that the Demand Board consists of five members: Dearing, Mathé, Vogel, Fritjofsson, and Bar-Cohen. Therefore, to excuse demand, Plaintiff must make particularized allegations giving rise to a reasonable inference that three members of the Demand Board were unable to consider demand under Zuckerberg. If Plaintiff cannot carry that burden, then the Amended Complaint must be dismissed under Rule 23.1.
It is undisputed that Dearing—the principal of the Plaintiff—is capable of considering a demand. For purposes of this opinion, the court also assumes that Mathé is a controlling stockholder and that demand is excused as to Mathé and Vogel. Thus, the issue of demand futility turns on whether Bar-Cohen and Fritjofsson are capable of considering a demand to pursue the claims alleged in the Amended Complaint against Mathé and Vogel.
A. The Focus of the Inquiry
The Amended Complaint does not specifically state that demand is excused or that Bar-Cohen or Fritjofsson are incapable of considering a demand. Nor does the Amended Complaint allege that either Bar-Cohen or Fritjofsson received a material personal benefit from any of the challenged misconduct. The Amended Complaint does, however, contain allegations that Fritjofsson faces a substantial likelihood of liability for his role in some of the claims asserted against Mathé and Vogel.89
Defendants argue in their opening brief that neither Fritjofsson nor Bar-Cohen face a substantial likelihood of liability for a variety of reasons, including that Fritjofsson and Bar-Cohen are exculpated under Mixmax‘s certificate of incorporation.90 Plaintiff chose not to address that argument in its answering brief. Plaintiff‘s failure to brief that argument constitutes waiver. See Emerald P‘rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.“); Larkin v. Shah, 2016 WL 4485447, at *2 n.5 (Del. Ch. Aug. 25, 2016) (“Plaintiffs
In its answering brief, Plaintiff pivoted, arguing that demand was excused because Fritjofsson and Bar-Cohen each lack independence from Mathé.91 Thus, the focus of the analysis will be whether the Amended Complaint contains particularized allegations which create reason to doubt that Bar-Cohen and Fritjofsson are independent of Mathé.
B. Bar-Cohen
Bar-Cohen was appointed to the board in November 2022. He is a partner of Resolute Ventures, which is both a Mixmax stockholder and an investor in the SAFEs.92 The only allegations connecting Bar-Cohen to Mathé concern his service on the Mixmax board and his leading Resolute Ventures’ investments in the Company. There are no allegations that Mathé has any investment in or managerial position at Resolute Ventures or that he possesses any ability to influence Bar-Cohen‘s position or compensation at Resolute Ventures. There are no allegations that Mathé and Bar-Cohen have any social or familial connections or that Bar-Cohen
Plaintiff‘s theory as to Bar-Cohen‘s lack of independence relies on two facts. The first is Mathé‘s prior removal of Rith as a director, which, according to Plaintiff, shows that Mathé is willing and able to take retributive action against directors that disagree with him. The second is the timing of Bar-Cohen‘s appointment by Mathé during this litigation. Those facts do not create reason to doubt Bar-Cohen‘s independence.
The analysis starts with the presumption that Bar-Cohen is independent. Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984), overruled on other grounds by
A derivative plaintiff cannot successfully rebut the presumption of a director‘s independence by simply alleging the director was elected or appointed by an interested party. Aronson, 473 A.2d at 816; see Zuckerberg, 262 A.3d at 1063–64
To be sure, a director‘s appointment by a controller “is not necessarily irrelevant.” In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *41 (Del. Ch. Jan. 25, 2016); see also In re Viacom Inc. S‘holders Litig., 2020 WL 7711128, at *22 (Del. Ch. Dec. 29, 2020), as corrected (Dec. 30, 2020) (“threats of removal, even in circumstances where the directorship is not demonstrably material, cannot be ignored in the independence analysis“). But “[t]here must be coupled with the allegation of control such facts as would demonstrate that through personal or other relationships the directors are beholden to the controlling person.”
Plaintiff argues that Mathé‘s prior removal of Rith and the timing of Bar-Cohen‘s appointment in November 2022 create an inference that Bar-Cohen lacks independence from Mathé.95 Plaintiff points to Ezcorp, 2016 WL 301245, and Viacom, 2020 WL 7711128, as drawing such an inference under analogous circumstances. Those cases are readily and materially distinguishable on their facts.
Ezcorp was a derivative action challenging three multi-million-dollar advisory contracts between EZCORP, Inc. (“EZCORP“) and a consulting firm affiliated with EZCORP‘s controller, Phillip Cohen. 2016 WL 301245, at *1. In 2014, EZCORP‘s two-member audit committee terminated the renewal of one of these agreements, and two months later, Cohen used his voting power to remove three directors, including the two audit committee members. Id. at *6. A fourth director resigned the same day. Id. Cohen filled one of the vacancies with the
Ultimately, the court concluded that there were sufficient well-pleaded allegations to doubt the independence of six of the seven directors, and the court did not reach the seventh. Id. at *35. Three of the directors had a paid employment or consulting relationship with the company or its affiliates, and the company identified them as not being independent under the NASDAQ listing standards. Id. at *35–39. In finding reason to doubt the independence of these directors, the court did not need to consider Cohen‘s prior removal of directors. A fourth director‘s family owned a minority stake in an EZCORP affiliate, where Cohen had the “ability as a majority holder to take action to reduce the value of the minority stake or eliminate it.” Id. at *39. Some of the director‘s family members were employed by the same subsidiary, so Cohen also had the “ability to influence the future employment of members of
The fifth director, Roberts, was a named defendant. The court previously concluded the complaint stated a claim against that director for breach of fiduciary duty. Id. at *31. He approved two of the challenged agreements while serving as a member of the audit committee and had approved prior, similar agreements between the company and another Cohen affiliate in his former capacity as the audit committee‘s chair. Id. at *3, *39. Roberts had retired from board service, but Cohen brought him out of retirement and appointed him just an hour after the plaintiff had filed his complaint—circumstances that “suggest the director might be an easy tool, deferential, glad to be of use.” Id. at *41 (internal quotation marks omitted). It was those circumstances, combined with Cohen‘s demonstrated willingness to take retributive action, that created reason to doubt Roberts‘s independence from Cohen. Id. at *42; see id. at *39 (explaining that the court “holds only that when these factors are viewed in their totality and not in isolation from each other, a good reason exists to doubt Roberts’ independence” (internal quotation marks omitted)).
The sixth director, Rotunda, was EZCORP‘s former CEO and, like Roberts, appointed by Cohen immediately after the filing of the complaint. Id. at *7, *42.
Viacom was a class action challenging the merger of Viacom, Inc. (“Viacom“) and CBS Corporation (“CBS“)—sister companies controlled by National Amusements, Inc. (“NAI“), and, ultimately, Shari Redstone. 2020 WL 7711128, at *2. The complaint asserted claims against NAI and Redstone as controllers, and against the directors who served on the Viacom special committee for breaches of the duty of loyalty. Id. The court held that a combination of well-pleaded allegations required denial of the motion to dismiss. Id. at *10–25. Among those allegations was a detailed history of Redstone‘s retributive actions and threats at NAI, Viacom, and CBS. Id. at *21–22 (analyzing what the court described as “Ms. Redstone and NAI‘s Demonstrated History of Ouster“). Notably among them was NAI‘s removal of several independent Viacom directors shortly after they sent a letter warning NAI
Both Ezcorp and Viacom explained that a director‘s appointment by an interested controller who had previously removed directors is not, standing alone, dispositive. In each case, the court concluded there was reason to doubt the director‘s independence from the controller when considered together with additional significant factors that are not present here. Ezcorp, 2016 WL 301245, at *39, *43; Viacom, 2020 WL 7711128, at *22. Plaintiff‘s only proffered additional factor is the timing of Bar-Cohen‘s appointment—but it is not on par with the allegations in Ezcorp or the “unsettling circumstances” of Viacom. 2020 WL 7711128, at *6.
Unlike in Ezcorp and Viacom, the Amended Complaint does not attribute Rith‘s removal to a specific dispute over a self-interested act by the controller. The circumstances leading to Rith‘s removal, which are relegated to a couple of sentences, lack in detail. See Compl. ¶ 59 (alleging that Rith “was a likely dissenter” to the SAFE offering and that in the year before his removal “Rith had vocally opposed various of Mathé‘s actions, including his approach to growth, hiring, terminations, employee equity grants, and even Vogel‘s lavish spending on personal
The Amended Complaint‘s allegations that seek to undermine Fritjofsson‘s independence from Mathé are even weaker than those asserted against Bar-Cohen.98
Plaintiff‘s argument that Fritjofsson is not independent from Mathé is grounded in two theories: that Fritjofsson faced a risk of retaliation if he dissented and that Fritjofsson acted to promote Mathé‘s self-interest. The court can dispense with the first argument summarily. Plaintiff ignores that Mathé did not have the power to remove Fritjofsson as a director of Mixmax.100 Mathé‘s purported control is over the three common director seats.101 Fritjofsson is not a common director; he is Creandum‘s designee and, therefore, Mathé could not remove him.102
The second argument is also unpersuasive and lacks particularized allegations to support it.
To create a reasonable doubt about an outside director‘s independence, a plaintiff must plead facts that would support the inference that because of the nature of a relationship or additional circumstances other
than the interested director‘s stock ownership or voting power, the non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director.
Beam, 845 A.2d at 1052 (Del. 2004).
The Amended Complaint does not present particularized allegations giving rise to a reasonable inference that such a relationship existed between Fritjofsson and Mathé. There are no allegations that Fritjofsson and Mathé had any business or personal relationship outside of Mixmax. There are no allegations that Mathé had any authority or influence over Fritjofsson‘s position at Creandum.
By contrast, in In re Straight Path Communications Inc. Consolidated Stockholder Litigation, upon which Plaintiff relies, this court found it reasonably conceivable that a fiduciary lacked independence from and acted “to advance the self-interest of” his father with whom he had a close personal relationship. 2022 WL 484420, at *15 (Del. Ch. Feb. 17, 2022). Specifically, the fiduciary had weekly phone calls and visits with his father for a number of years, received the balance of his down payment for his home from his father, and the two were generally “actively involved in each other‘s lives and maintained a familial relationship.” Id. There are no such allegations here.
Finally, Plaintiff argues that Fritjofsson “operated under a controlled mindset” in executing Mathé‘s bidding with the knowledge that any disapproval might result
Plaintiff‘s particularized allegations, considered in context and in their totality, fall far short of creating a reasonable inference that Fritjofsson lacked independence from Mathé. Accordingly, the court concludes that Plaintiff has failed to allege facts that create reason to doubt Fritjofsson‘s ability to consider a demand.
III. CONCLUSION
The Amended Complaint does not allege with particularity facts that would create reason to doubt that three of the five members of the Demand Board—Dearing, Bar-Cohen, and Fritjofsson—are capable of considering a demand to pursue the claims alleged against Mathé and Vogel. Accordingly, demand was not futile, and the Amended Complaint must be dismissed because demand was not excused as of the filing of the Amended Complaint. For the foregoing reasons, the motion to dismiss is granted in full.