REM OA HOLDINGS, LLC and SIFT FIXED US002, LLC, Plaintiffs and Counterclaim-Defendants, v. NORTHERN GOLD HOLDINGS, LLC, Defendant and Counterclaim-Plaintiff, and REM EQ HOLDINGS, LLC, Nominal Defendant.
C.A. No. 2022-0582-LWW
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
September 20, 2023
Date Submitted: June 20, 2023
Scott B. Czerwonka & D. Charles Vavala, III, WILKS LAW, LLC, Wilmington, Delaware; Counsel for Plaintiff SIFT Fixed US002, LLC
John D. Hendershot, Matthew W. Murphy & Angela Lam, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Counsel for Nominal Defendant REM EQ Holdings, LLC
WILL, Vice Chancellor
It was almost immediately apparent that the company would require significant capital to restore operations. Traditional financing proved unattainable. With the company burning cash, Soura pursued a loan from a Hong Kong entity called SIFT Capital Limited Partners during the spring of 2021. For a time, Italia was kept in the dark.
Soura and SIFT Capital finalized a term sheet that contemplated a $10 million loan in exchange for a warrant to purchase 2.5% of the company‘s membership interests. Four days later, Soura emailed Italia a series of documents. Soura included a draft written consent authorizing any member or officer of the company to execute the term sheet and all documents related to the term sheet without further approval. The written consent referenced the term sheet multiple times. The term sheet was not, however, sent to Italia.
Soura and the company‘s officers then negotiated definitive loan documentation with SIFT Capital‘s assignee SIFT Fixed US002, LLC. The loan transaction closed in January 2022. The company received $10 million and SIFT Fixed received a warrant.
SIFT Fixed exercised its warrant in March 2022. Soura told Italia about the exercise within days. Italia expressed surprise, refusing to accept that Northern Gold was no longer a 50% member of the company.
SIFT Fixed and REM OA filed this action to confirm SIFT Fixed‘s membership. Given Italia‘s express authorization of the loan transaction, the matter seems straightforward. The parties have made it anything but.
Northern Gold raised numerous collateral attacks on the transaction ranging from invalidity to voidness. It questions whether SIFT Capital is real, the relevant agreements are forged, and SIFT Fixed‘s representative at trial was a paid actor.
Northern Gold‘s frustration is understandable. Soura is not blameless and should have been upfront with his business partner. But ultimately, Italia authorized the SIFT transaction when he willingly signed the written consent. Italia—an experienced businessperson represented by counsel—had every chance to ask about the term sheet during weeks of review and negotiation. He opted not to.
Northern Gold does not get a do over for its failed diligence. Delaware law holds sophisticated parties to their contracts. SIFT Fixed was a 2.5% member of the company when this action was filed. Judgment is entered for the plaintiffs.
I. FACTUAL BACKGROUND
Unless otherwise noted, the following facts were stipulated to by the parties or proven by a preponderance of the evidence at trial.1 The trial record includes 1,903 exhibits and 5 deposition transcripts.2 Trial was conducted over two days during which five fact witnesses testified.3
Before recounting the factual record, I pause to provide essential framing. The testimony given by the two primary witnesses at trial—Scott Soura, the principal of plaintiff REM OA Holdings, LLC, and Richmond Italia, the principal of defendant Northern Gold Holdings, LLC—was irreconcilable. It is obvious that one or both repeatedly lied under oath.4 I have relied on documentary evidence where it is available and made careful credibility assessments of oral testimony where it is not.5
B. Remington Outdoor‘s Bankruptcy
On July 27, 2020, firearms manufacturer Remington Outdoor Company, Inc. and twelve of its affiliates filed for bankruptcy.6 Remington Outdoor was set to be broken up and sold.7 Remington Outdoor‘s Chief Executive Officer Ken D‘Arcy approached Richmond Italia about submitting a bid for the assets.8 Italia was a
Italia was interested in Remington Outdoor but lacked the funds to meet the bidding requirement of $30 million in liquid assets.11 Italia reached out to Scott Soura, a social acquaintance, about submitting a joint bid.12 Soura was also a successful businessperson who had owned and operated several companies.13
In October 2020, Soura‘s wholly-owned entity Roundhill Group, LLC submitted the winning bid of $13 million for Remington Outdoor‘s firearm division assets.14 REM EQ Holdings, LLC (the “Company“)—the nominal defendant in this action—was formed on October 2 to house the assets.15 Italia and Soura agreed that they would each contribute half of the bid in exchange for equal 50% ownership of the Company.16 They also agreed that “[a]ny future investment of capital or equity
C. The Company‘s Governance
After the asset purchase closed, Soura and Italia began formalizing the Company‘s governance. On March 24, 2021, Soura sent Italia an initial REM EQ Limited Liability Company Agreement (the “LLC Agreement“), dated as of January 15, 2021.19 Soura told Italia that the LLC Agreement was intended to be a “placeholder[] to get the accounts open” to secure a Paycheck Protection Program (PPP) loan and could be revised “to a proper detailed agreement with all the tax, controls and other terms over the next week or two.”20
The LLC Agreement was executed on March 25, 2021 by Soura on behalf of REM OA Holdings, LLC and by Italia on behalf of Northern Gold Holdings, LLC.21 REM OA is a Delaware limited liability company managed by Belum Ventures,
The LLC Agreement established that REM OA and Northern Gold each held a 50% membership interest in the Company.24 It listed Soura as the Company‘s manager.25 This designation was in name only. Soura told Italia on March 24 that he was “listed as the manager of EQ Holdings for now so that [he] c[ould] execute the documents [for the PPP loan] over the next week.”26 On the day Italia signed the LLC Agreement, Soura sent Italia a letter resigning as manager of the Company, effective April 2, 2021.27
Soura and Italia decided to divide responsibilities, with Soura handling financial and legal matters and Italia handling day-to-day operations.28 D‘Arcy was
The purchased assets were eventually transferred from Roundhill to the Company and the Company‘s subsidiaries through agreements dated June 2, 2021.31
D. The Company‘s Financing Needs
The Remington Outdoor firearm assets were not operational, and the Company had negative cashflow upon its formation.32 Italia and Soura recognized that the Company needed substantial capital to restart operations and become competitive.33 They estimated the Company‘s long-term funding needs to exceed
Soura led the Company‘s financing efforts, consistent with the division of labor he and Italia had agreed upon. On January 21, 2021, Soura told Italia that he was “working on raising $25-30 m[illion]” structured “as a combination of preferred and common equity with a non-controlling stake.”36 Italia replied with a thumbs up emoji.37 At the same time, Soura (with Anderson‘s assistance) worked towards securing the PPP loan.38 Italia approved of Soura‘s efforts to close the PPP loan but did not involve himself in the process.39
The Company received $10 million from the PPP loan on March 29, 2021 but needed additional capital to execute on its plans and meet its financing goals.40 The
The Company‘s financing needs were partly driven by plans to relocate its headquarters.45 In October 2020, Italia had begun exploring incentives to open a manufacturing facility in the State of Georgia.46 About a year later, around October
Italia, Soura, and D‘Arcy understood that traditional bank loans were not a viable option given the Company‘s financial struggles and involvement in the firearms industry.49 The Company approached traditional lenders but was turned away.50 Consequently, Soura searched for alternative sources of funding.
E. The Potential SIFT Transaction
In late March 2021, Soura mentioned the Company‘s financing challenges to an attorney assisting him with an unrelated matter.51 The attorney introduced him to SIFT Capital Limited Partners, a Hong Kong company.52 SIFT Capital is an asset
During the introductory call between Soura and Zhang, Zhang described SIFT Capital, its investment criteria, and the types of loans it typically provided.55 Soura told Zhang that the Company “was looking for a [$]10 to $15 million loan” with “a five-year maturity that would be interest only and would subordinate to a senior bank facility that [it] intended to get in the near future.”56 After the call, Soura researched Zhang and SIFT Capital by reviewing SIFT Capital‘s website and regulatory filings.57
By the end of April 2021, SIFT Capital‘s potential investment in the Company had solidified.61 SIFT Capital would provide a $10 million interest-only loan with a three-year maturity.62 SIFT Capital would also receive a warrant to purchase 2.5% of the Company‘s units at a nominal exercise price.63 These conditional terms were subsequently memorialized.64
SIFT Capital sent Soura the first draft of a term sheet for its investment on May 7, 2021.65 Soura sent SIFT Capital revisions to the term sheet the same day.66 Two days later, on May 9, SIFT Capital sent an updated term sheet incorporating Soura‘s revisions.67 An hour later, Soura sent further revisions addressing minor
The Commitment Letter is eight pages long. The first two pages consist of SIFT Capital‘s cover letter, signed by Zhang;70 the third page is a signature page for the Company and several subsidiaries;71 and the last five pages are the term sheet that Soura and SIFT Capital negotiated.72 The document provided that SIFT Capital would purchase a promissory note with a warrant for a total of $10 million.73 The note would have a three-year maturity, accrue interest at 7.5%, and be subordinate to any senior bank debt.74 The warrant would allow SIFT Capital to purchase 2.5% of the Company‘s units at an exercise price of $0.01 per unit.75 The Commitment Letter also contemplated definitive documentation to consummate the transaction:
Upon receipt by the undersigned [SIFT Capital] of an executed counterpart of this commitment letter, our obligation to purchase from
Around this time, Soura told D‘Arcy about the SIFT Capital investment.77 Soura relayed high-level details of the transaction to D‘Arcy, leaving out the warrant and the lender‘s identity.78 D‘Arcy expected that the deal would involve a warrant, which he believed was commonplace in such transactions.79 Soura also told D‘Arcy that he planned to give Italia a copy of the Commitment Letter during an upcoming meeting in Ilion, New York.80
On May 10, 2021—the day after Soura received the Commitment Letter from SIFT Capital—Soura and Italia met at the Company‘s factory in Ilion, New York.81 By this point, Soura‘s and Italia‘s relationship had become strained.82 Italia was frustrated because Soura had yet to transfer the Remington Outdoor assets from Roundhill to the Company, though the bankruptcy sale had closed seven months earlier.83
On the morning of May 10, Italia and a small entourage took a private flight from Fort Lauderdale, Florida to Ilion,84 while Soura drove by himself from his home in Newtown, Pennsylvania.85 Italia arrived at the factory first.86 He set up in a conference room, met with several senior staff at the factory, and briefly walked through the facility.87 When Soura arrived in the afternoon, Italia guided him to the conference room for lunch.88
Soura testified that after lunch, he was shown the factory by an employee before returning to the conference room with Italia and Italia‘s group.90 He said that, at some point after the tour, he and Italia “broke off” to a separate room where he showed Italia a copy of the Commitment Letter that he had printed earlier in the day.91 According to Soura, Italia reviewed the Commitment Letter and was “happy with it” because it “was consistent with what [they] had spoke[n] about before.”92 Afterward, Italia, his guests, several factory employees, and Soura went to dinner at a local restaurant.93
By Italia‘s account, his group, several factory employees, and Soura toured the facility together after lunch.94 After the tour, he recalled that the group returned to the conference room to discuss dinner plans and then went to a local restaurant.95 Italia testified that he and Soura were never alone on March 10, that they did not
Soura and Italia adamantly stick to their stories, but one of them is lying.98 The May 10 meeting was not Schrödinger‘s cat: either Soura gave Italia the Commitment Letter in Ilion, or he did not. The timing generally supports Soura‘s account since the Ilion meeting came a few days after the Commitment Letter was signed and before Italia was given documents to authorize the Commitment Letter.99 Yet Soura‘s version of the day‘s events is both illogical and inconsistent.100 Thus, I
cannot find that Soura gave Italia a printed copy of the Commitment Letter during the Ilion meeting. On balance, Italia‘s account seems (slightly) more plausible, consistent, and in line with the meeting‘s overall purpose.101
Despite the intrigue surrounding the day in Ilion, it plays a minor role in the overall story. That is because four days later, SIFT Capital‘s commitment to invest $10 million in the Company was explicitly disclosed to Italia.
H. The May 14 Materials
On May 14, 2021, Soura sent Italia an email attaching 56 documents prepared by Company counsel (collectively, the “May 14 Materials“), including:102
- draft agreements transferring or assigning the Remington Outdoor assets from Roundhill to the Company and its subsidiaries;103
- a draft amended LLC Agreement dated May 14, 2021;104
- a draft written consent of the Company‘s members (the “May 2021 Consent“);105
fourteen draft written consents for the Company‘s subsidiaries (the “Subsidiary Consents“);106 and - additional copies of signature pages for the draft documents in the package.107
The draft amended LLC Agreement attached a Schedule A reflecting that REM OA and Northern Gold were both 50% members of the Company.108 It also contemplated that the Company was managed “solely and exclusively” by its members,109 that members could delegate authority to the Company‘s officers,110 that the agreement could be amended by written consent,111 and that new members would be automatically admitted upon the issuance of membership units.112
the Members [REM OA and Northern Gold] have each reviewed the . . . Commitment Letter, and have determined that it is in the best interests of the Company and its stakeholders for the Company to enter into the . . . Commitment Letter and to perform all its obligations contemplated thereby.115
Accordingly, the May 2021 Consent authorized:
any Member or Officer acting alone . . . to execute and deliver . . . the Commitment Letter and all documents relating thereto or contemplated thereby, with such changes as the Member or Officer, as applicable, deems in his sole discretion advantageous to the Company, all without any further act, vote or approval of any Member, Officer or other person or entity.116
Italia testified that he noticed the references to the Commitment Letter in the May 2021 Consent and understood them to mean that the Company had secured a loan from SIFT Capital.120 Italia “didn‘t pay much attention to it” because he “didn‘t know about [the Commitment Letter] . . . [and] didn‘t know one existed.”121 Because he neither received nor reviewed the Commitment Letter, he was unaware that the SIFT transaction contemplated a warrant.122 He never asked.
Shortly after receiving the May 14 Materials, Italia sent them to his accountant and attorney for review.123 His accountant promptly provided comments on the documents.124 But due to a potential conflict of interest, Italia‘s attorney was unable to assist him.125 On May 17, Italia turned Justin Vineberg of Davies Ward Phillips & Vineberg LLP—Italia‘s “oldest and trusted lawyer/friend“—for guidance.126
Over the next two weeks, Vineberg reviewed the May 14 Materials.127 Vineberg and Italia had multiple email and phone discussions about the documents with Soura and Company counsel at Shulman Bastian Friedman & Bui LLP.128 Though tensions ran high at times, the parties and their counsel engaged in productive discussions.129
One area of negotiation concerned a right of first refusal (ROFR) for the sale of a member‘s interests. Italia had considered selling his units or onboarding other investors since the Company‘s infancy.130 But the original LLC Agreement prohibited all transfers of membership interests.131 Italia pushed for an amendment to the LLC Agreement providing for a ROFR exception to the transfer prohibition.132 Soura agreed.133 Italia also made certain that the May 14 Materials effectuated the transfer of the Remington Outdoor assets from Roundhill to the Company and its subsidiaries.134
Additionally, Italia was also focused on ensuring that the May 14 Materials maintained Northern Gold‘s rights in and ownership of the Company relative to REM OA.135 Soura and Italia asked counsel to confirm that the May 14 Materials
Throughout the parties’ discussions and negotiations, neither Italia nor his counsel inquired about the Commitment Letter, asked for a copy of the Commitment Letter, or proposed any changes to the May 2021 Consent.138
J. Italia Executes the May 14 Materials.
On June 2, 2021, Italia executed the May 14 Materials.139 He did not sign under duress.140 He sent his completed signature pages to Shulman Bastian.
The next day, Shulman Bastian circulated the fully executed May 14 Materials.141 The Remington Outdoor assets were transferred from Roundhill to
On June 4, Soura executed the Commitment Letter on the Company‘s behalf.146 Soura testified that he returned the countersigned copy to SIFT Capital through the data room.147
K. The Ault Letter of Intent
Shortly after executing the Commitment Letter, Soura learned that Italia was negotiating a potential sale of Northern Gold‘s interests in the Company to Ault Global Holdings, Inc.148 Soura “slow-walk[ed]” negotiating the definitive
On July 7, Italia and Ault executed a letter of intent for Ault to purchase an option to acquire some of Northern Gold‘s membership interests in the Company.150 The option would allow Ault to obtain a 44% equity interest and a 50% voting interest, with Northern Gold retaining a 6% equity interest.151 On July 12, Italia shared the letter of intent with Soura and sent Soura a ROFR notice.152 Soura and Italia discussed the Ault offer.153 Soura did not mention the warrant contemplated by the Commitment Letter to Italia.154
On July 9, SIFT Capital‘s counsel Jade Kobeissi (a foreign attorney barred in Beirut, Lebanon and Paris, France) contacted Soura for additional legal and financial
Meanwhile, Italia‘s talks with Ault stalled.158 By the fall of 2021, Soura—believing that the Ault deal “was truly . . . dead“—renewed his engagement with SIFT Capital.159
L. The Definitive Loan Materials
Around October 2021, Soura had several calls with SIFT Capital. Soura testified that during one call, he was introduced to Zakaria Abou Issa, who later played a role in finalizing the SIFT transaction.160 Negotiations intensified.161
On November 2 and 3, Soura emailed SIFT Capital‘s counsel (Kobeissi) legal diligence materials, including “the consents of the entities consenting to all of the terms of the SIFT commitment letter” (i.e., May 2021 Consent and Subsidiary
A few days later, Soura enlisted Joseph Kavan (the Company‘s transactional and compliance counsel and a partner at Kutak Rock LLP) to lead negotiations.164 On November 8, Soura shared Kavan‘s contact information with Kobeissi.165 The next day, SIFT Capital‘s Delaware counsel (Matthews) sent Kavan the Loan Materials.166
Negotiations continued over the next month, with Kavan and Matthews exchanging various comments on and revisions to the Loan Materials.167 By early December 2021, the Loan Materials reached near-final form.168 But the deal was delayed while the parties secured an escrow agent and prepared perfection certificates describing the collateral for the promissory note.169
On January 25, 2022, as authorized by the Commitment Letter, SIFT Capital assigned its rights and obligations to SIFT Fixed US002, LLC.170 SIFT Fixed is a Delaware limited liability company formed on January 21, 2022.171 SIFT Master Limited, a Samoan company, is the sole member of and source of funding for SIFT Fixed.172 SIFT Master has three stockholders, who were existing clients of SIFT Capital and received the investment opportunity directly from SIFT Capital.173 Issa served as SIFT Fixed‘s manager until he resigned on November 1, 2022.174 Issa was replaced by Joseph Sabeh Afaki, who owns a consulting firm specializing in
On January 28, 2022, Matthews circulated Word and PDF versions of the finalized Loan Materials. He asked Kavan that the Company “execute [two] originals of each (except the promissory note - just one) and send them to [his] attention, and send [him] PDFs of all executed documents.”177 Matthews also “asked [his] client [SIFT Fixed] [to] provide [two] originals so that [he could] collate, date, and distribute fully-executed and dated originals to both parties.”178 On January 31, Anderson executed the Loan Materials on behalf of the Company.179 Issa did the
On February 22, 2022, Pinnacle informed SIFT Fixed and the Company by email that it had received the loan proceeds and executed Loan Materials.182 Pinnacle attached signature pages to each of the Loan Materials signed by SIFT Fixed and the Company.183 This included signature pages to a Loan Agreement in which SIFT Fixed agreed to provide the Company and its related entities with a $10 million loan.184 It also included signature pages to the Warrant Agreement, which granted SIFT Fixed a warrant to purchase 2.565 units (or 2.5% of the Company‘s outstanding units).185
N. The February 2022 Consent
In late February 2022, Italia and Soura learned that they had “signed the wrong version” of the amended LLC Agreement since it lacked a ROFR provision.189 Italia asked that the parties execute another amendment to the LLC Agreement with a ROFR. Soura agreed.190
On February 25, Soura sent Italia a draft revised LLC Agreement, along with an “associated resolution.”191 Soura‘s cover email confirmed that the only change to the LLC Agreement related “to the transferability of units” and that “[a]ll prior consents and resolutions remain[ed] effective.”192 The attached LLC Agreement
The “resolution” was a draft written consent of the Company‘s members dated February 25, 2022 (the “February 2022 Consent“).194 The document referenced the May 2021 Consent four times. It confirmed that “any written consent and/or written resolution adopted by [Northern Gold and REM OA] (including, without limitation, the written consent of the Members dated as of May 14, 2021) was validly entered into.”195 It also “approved, confirmed and ratified . . . any and all actions taken by [the Company] in connection with, related to, or in furtherance of any written consent and/or written resolution,” including the May 2021 Consent and “executing any agreements or otherwise entering into any transactions.”196
On February 28, Italia signed and returned the revised LLC Agreement without changes.197 But he told Soura that he needed time to “review the written consent” and would “get back to [Soura] with any proposed changes.”198 Italia asked
After review, Italia asked Soura whether the February 2022 Consent exculpated or released claims against the Company‘s officers.201 On March 2, Soura sent Italia a revised document “with the added language [he and Italia] discussed” and asked Italia to call him with any further concerns.202 Satisfied, Italia signed the February 2022 Consent later that day and sent it to Soura.203 Soura then circulated executed copies of the revised LLC Agreement and the February 2022 Consent.204
O. The LaGrange Meeting
While the SIFT transaction was being finalized, Italia was pressing Soura and D‘Arcy to facilitate a sale of Italia‘s equity to the Mechanical and Chemical Industry Corporation (“MKE“)—a defense contractor affiliated with the Turkish
The offer raised red flags for D‘Arcy.207 Just six months earlier, Ault had valued the Company at roughly $38 million.208 By contrast, MKE‘s bid valued the Company at approximately $300 to $325 million. The Company‘s officers and counsel were also concerned by Italia‘s diligence requests.209
On March 8, 2022, Soura, Italia, and MKE‘s counsel met in LaGrange, Georgia to discuss the MKE deal and visit the Company‘s new manufacturing facility.210 Soura recorded their conversation—unbeknownst to the other participants.211 The recording includes suggestions that the deal was a “kickback”
P. The Warrant Exercise
After the meeting in LaGrange, Soura relayed the discussion about the potential MKE transaction to D‘Arcy and SIFT Fixed‘s representatives (Kobeissi and Issa).214 Soura also reported that Italia had taken firearms, ammunition, and other Company property worth millions of dollars.215 Issa told Soura that SIFT Fixed intended to exercise its warrant.216
Q. The Dallas Meeting
On March 31, 2022, Italia, Soura, and D‘Arcy met at the Dallas airport to discuss the potential MKE transaction and corporate governance issues.221 By this point, Italia and Soura‘s relationship had soured and D‘Arcy acted as an intermediary.222 The meeting began with Soura telling Italia that he would not
After the Dallas meeting, on April 4, Italia emailed D‘Arcy to express his “surprise” that the Company had “taken a loan from an offshore entity in Hong Kong.”225 Italia requested documentation on the SIFT transaction and asked D‘Arcy to forward him the “loan documents.”226 That afternoon, D‘Arcy sent Italia the Loan Materials, including the Warrant Agreement.227 D‘Arcy did not include the Commitment Letter.228
R. The Books and Records Action
The next day, Northern Gold filed a books and records action in this court, seeking documents pertaining to the Commitment Letter, the May 2021 Consent,
On May 9, RLF informed Northern Gold that SIFT Fixed had executed its warrant, was a member of the Company, and was a party to the LLC Agreement.232 RLF also attached a copy of the revised Schedule A to the LLC Agreement reflecting SIFT Fixed‘s membership in the Company.233
S. This Litigation
This action was commenced by plaintiffs REM OA and SIFT Fixed on June 30, 2022.234 The plaintiffs seek a declaration under
On August 1, Northern Gold filed a counterclaim seeking declarations that the warrant and units issued to SIFT Fixed were unauthorized and invalid, that SIFT Fixed is not a member of the Company, and that Northern Gold owns 50% of the Company‘s units.237
On August 5, I entered an order to maintain the status quo during the pendency of the litigation.238 On November 3, Northern Gold moved to enforce the status quo order to prevent the Company‘s proposed $5 million capital raise through a pro rata equity issuance (the “Capital Raise“).239 The Company asserted that additional capital was urgently needed to fund the Company‘s relocation to Georgia.240 Given the Company‘s professed financial straits, I declined to bar it from proceeding with the Capital Raise. I did so provided that while the status quo order remained in
Subsequently, REM OA and SIFT Fixed subscribed to the Capital Raise.242 After Northern Gold declined to participate, REM OA purchased the units Northern Gold passed on.243 On December 6, Anderson circulated an updated capitalization table for the Company with the following ownership breakdown: REM OA, 56.8737%; Northern Gold, 40.6256%; and SIFT Fixed, 2.5007%.244
A two-day trial was held on January 24 and 25, 2023.245 Post-trial briefing followed, and a post-trial argument was held on May 10, 2023.246 After additional
II. LEGAL ANALYSIS
Under
Northern Gold authorized the Commitment Letter and SIFT transaction when it signed the May 2021 Consent after weeks of review and advice from counsel. It provided further authorization through the February 2022 Consent. Although Northern Gold lacked actual knowledge of the transaction‘s terms, it could have learned them through basic diligence. None of Northern Gold‘s challenges invalidate its consent, the SIFT transaction, or the admittance of SIFT Fixed as a member of the Company.
The LLC Agreement requires that the Company‘s “Members” authorize the issuance of units and warrants.250 The “Members” are those “holding, in the aggregate, a majority of more of the total issued and outstanding Units.”251 Because neither Northern Gold nor REM OA held more than 50% of the units, they were both required to consent to the Company‘s execution of the Commitment Letter and the issuance of the warrant to SIFT Fixed.
The LLC Agreement permits the members to act by written consent.252 The May 2021 Consent was signed by REM OA and Northern Gold.253 They expressly
The members also authorized the Company‘s entry into the Loan Materials (including the Warrant Agreement). The May 2021 Consent provided that “any Member or Officer” was “fully authorized to execute and deliver” and to cause the Company “to perform its obligations under . . . all documents relating [to] or contemplated [by]” the Commitment Letter.255 The final Loan Materials relate to and are contemplated by the Commitment Letter. They conformed to the Commitment Letter‘s key business terms, including that SIFT Capital or its designee would receive a warrant for 2.5% of the Company‘s outstanding equity.256
Delaware is a “contractarian” state.258 Our law recognizes that “parties have a right to enter into good and bad contracts” and “enforces both.”259 “As a matter of ordinary course, parties who sign contracts and other binding documents, or authorize someone else to execute those documents on their behalf, are bound by the obligations that those documents contain.”260 “The presumption that the parties are bound by the language of the agreement” they signed “applies with even greater force when the parties are sophisticated” and “engaged in arms-length
Italia is a sophisticated businessperson. He founded, ran, and sold two businesses for substantial profits.263 He was advised by counsel in negotiating and executing the May 2021 Consent—the same counsel who has represented him in “dozens” of corporate transactions.264 He was represented by counsel again in connection with the February 2022 Consent, even negotiating for the inclusion of a provision.265 He is presumptively held to his agreements.
B. Whether Northern Gold‘s Authorization Is Valid
Northern Gold avers that it should not be bound by the May 2021 Consent (and the agreements it authorized) for numerous reasons. These include that: (1) Northern Gold was not given a copy of the Commitment Letter to approve; (2) Northern Gold was mistaken or misled about the terms of the SIFT transaction; and (3) information about the dilutive terms of the SIFT transaction was withheld
1. Ignorance of the Commitment Letter‘s Terms
The plaintiffs did not prove that Northern Gold was shown the Commitment Letter before Italia signed the May 2021 Consent.266 But Italia was admittedly aware that he was signing a document authorizing a Commitment Letter for SIFT Fixed to provide a $10 million loan to the Company.267 Even if he were not, a review of the May 2021 Consent would have made it obvious. The May 2021 Consent emphasized and repeatedly mentioned the Commitment Letter.268
A contracting party must “stand by the words of his contract.”269 Avoidance is not justified by “a party‘s failure to read a contract” or insistence that she “had not been informed of [its] stated terms.”270 This is especially so where the contracting
The fact that the warrant was unmentioned in the May 2021 Consent does not require a different outcome.273 The May 2021 Consent referenced the Commitment Letter that, in turn, addressed the warrant. “The obligation of a contracting party to read any contract it signs extends to documents incorporated by reference, which become part of the terms of the parties’ agreement at the time of execution.”274
2. Mistake or Fraud
Northern Gold suggests that its authorization of the Commitment Letter was ineffective because Soura and Company counsel led it to believe that the May 2021 Consent preserved Northern Gold‘s 50% membership interest.276 Insofar as this argument invokes the doctrines of mistake or fraudulent inducement, neither applies.277
Fraudulent inducement is likewise “not available as a defense when one had the opportunity to read the contract and by doing so could have discovered the misrepresentation.”281 Italia had known since January 2021 that Soura was looking
3. Breach of Fiduciary Duty
Northern Gold also contends that its consent is negated by “REM OA‘s violation of its fiduciary duty of disclosure” regarding the Commitment Letter.286 REM OA did not, however, owe fiduciary duties to Northern Gold.
Section 4.1(A) of the LLC Agreement provides that the Company‘s management rests with the “Members” (i.e., a majority of the members).287 Section 4.4(B) states that “[e]xcept as otherwise provided herein . . . each Member shall have
C. Whether the Relevant Agreements Are Valid
Next, Northern Gold asserts that the agreements effectuating the SIFT transaction are invalid.292 It makes two main arguments. First, that the Commitment Letter, Loan Materials, and Notice of Exercise are inauthentic or forged. And
1. Authenticity
Northern Gold contends that the plaintiffs failed to prove the authenticity of the Commitment Letter, Warrant Agreement, and Notice of Exercise.293 It asserts that the signatories for SIFT Capital and SIFT Fixed—Zhang and Issa—are imaginary and that their signatures are “forger[ies].”294 These arguments are without factual or legal support.
Under Rule 901 of the Delaware Rules of Evidence, authentication requires “evidence sufficient to support a finding that the item is what the proponent claims it is.”295 This “lenient burden” is “easily met.”296 “The proponent need not conclusively prove the evidence‘s authenticity, but merely provide a ‘rational basis’
The authenticity inquiry under Rule 901 is distinct from the question of whether a document is a forgery. Authenticity is the threshold matter.299 Once the court is satisfied that the requirements of Rule 901 are met, the factfinder must determine whether the admitted evidence is credible.300 The record provides a sufficient evidentiary basis to authenticate the various agreements with SIFT entities. I reject Northern Gold‘s contentions that the documents are fake or forged.
Northern Gold‘s attacks on the documents’ authenticity stem from its insistence that Zhang and Issa do not “even exist.”301 Although neither Zhang nor Issa testified in this action, there is ample evidence confirming their existences and roles at SIFT Capital and SIFT Fixed, respectively.302 Soura, D‘Arcy, and Anderson each had multiple conversations with Issa;303 Afaki met him in person.304 There is documentary evidence that SIFT Fixed‘s Delaware counsel (Matthews) worked with Issa to obtain his signature for the loan documents.305 Regarding Zhang, Soura testified to numerous conversations with him.306 Self-authenticating filings with the Securities and Exchange Commission further confirm Zhang‘s background and role at SIFT Capital.307
Circumstantial evidence provides adequate grounds to authenticate the Commitment Letter and reject the argument that it was forged. At trial, Soura testified to conversations with Zhang about terms of the SIFT transaction that were later documented in the Commitment Letter.308 He explained that drafts of the term sheet portion of the Commitment Letter were exchanged through the data room.309 Soura credibly testified that the data room was controlled by SIFT Capital on its eponymous website and bore SIFT Capital‘s unique logo.310 The Commitment
The metadata produced to Northern Gold with draft and final versions of the Commitment Letter confirms the authenticity of the documents. The first draft of the Commitment Letter was created on May 7, 2021, and subsequent drafts were created over the next few days.312 The final Commitment Letter bearing Zhang’s signature was created on May 9—the day before the Ilion meeting.313 Soura countersigned the Commitment Letter on June 4, after Northern Gold and REM OA executed the May 2021 Consent.314
c. The Warrant Agreement
The record also supports the Warrant Agreement’s authenticity. The Warrant Agreement was part of the Loan Materials, which were negotiated between the Company’s and SIFT Fixed’s counsel.315 There is evidence that drafts of the Warrant Agreement and signature pages to the contract were transmitted by email.
Northern Gold raises concerns about the credibility of the Warrant Agreement because there are two different versions of the fully executed document, each with a slightly different signature by Issa.318 One version is redlined,319 and the other is clean.320 Based on the record, it is more likely that the two versions exist because SIFT Fixed’s counsel was acting expeditiously, rather than due to nefarious
d. The Notice of Exercise
Lastly, the Notice of Exercise is admissible under
2. Enforceability
Northern Gold also argues that the plaintiffs failed to show that the Warrant Agreement is a valid and enforceable contract.327 A party seeking to enforce a contract “bears the burden of proving the existence of a contract by a preponderance of the evidence.”328 “The elements necessary to prove the existence of an enforceable contract are: (1) the intent of the parties to be bound; (2) sufficiently definite terms; and (3) consideration.”329 The plaintiffs have proven these elements.
First, the Warrant Agreement reflects the Company’s and SIFT Fixed’s intent to be bound.330 “Whether a party manifested an intent to be bound is a question of
Anderson overtly manifested the Company’s intent when she signed the Warrant Agreement on its behalf.333 “That act alone is the strongest evidence of an intent to be bound.”334 To be sure, “a wet ink, signed version of a contract . . . is not evidence so powerful that it negates all other evidence to the contrary.”335 The weight of the evidence, however, lends further support to the Warrant Agreement’s enforceability.
The Warrant Agreement was negotiated by Soura as authorized by the May 2021 Consent signed by the Company’s members.336 He engaged in arm’s-length negotiations over several months.337 Company counsel advised on those
SIFT Fixed manifested its intent to be bound when Issa signed the Warrant Agreement. Northern Gold argues otherwise because there are two different executed versions of the Warrant Agreement.340 That is because SIFT’s Delaware counsel “never heard back from SIFT concerning the clean version” of the Warrant Agreement and “in the interest of time” sent the Company a signed redlined version of the document that he deemed “the final version.”341
Second, the Warrant Agreement contains sufficiently definite terms.342 It details the number of shares to be issued, the issuance price, and the manner of
Northern Gold contends that the Warrant Agreement is unenforceable because its terms differ from the Commitment Letter.346 The Commitment Letter provides for the application of Hong Kong law.347 The Warrant Agreement includes a Delaware choice of law provision.348 But the Commitment Letter says nothing about which law governs future Loan Materials. Its choice of law provision is limited to ”this Commitment Letter.”349
In any event, “where a new, later contract between the parties covers the same subject matter as an earlier contract, the new contract supersedes and controls that issue, if the two agreements conflict.”350 The parties’ intent that a later contract supersede an earlier one may be evidenced by language to that effect, such as an integration clause in the later contract.351 The Commitment Letter was expressly subject to future “[d]efinitive documentation” and “ancillary documents . . . to be executed prior to disbursement of proceeds.”352 The parties entered into the superseding Warrant Agreement, which contains an integration clause.353
D. Whether the Issuance of Units to SIFT Fixed is Enforceable
Northern Gold also contends that the SIFT transaction is invalid, void, or otherwise unenforceable because: (1) the primary purpose of the transaction was to dilute Northern Gold; (2) the plaintiffs did not prove the transaction’s compliance with the federal law as required by the LLC Agreement; and (3) the transaction violates public policy. To the extent that I have jurisdiction to decide them, none of these arguments invalidate the Warrant Agreement or SIFT Fixed’s acquisition of units.
1. Primary Purpose
Northern Gold contends that the SIFT transaction is invalid because its “primary purpose” was to dilute Northern Gold rather than to provide financing.354 Northern Gold cites no legal basis for applying a “primary purpose” test to invalidate a contract, much less a contract approved by the challenging party. Instead, it relies on precedent in the inapposite contexts of director entrenchment and stockholder disenfranchisement.355
2. Compliance with Section 5.3 of the LLC Agreement
Northern Gold also avers that the plaintiffs failed to prove that the issuance of units to SIFT Fixed complies with Section 5.3 of the LLC Agreement.359 Section 5.3 provides that “no Units shall be Transferred unless such Transfer is in compliance with all foreign, federal and state laws.”360 Northern Gold questions whether the transaction violated federal regulations. The SIFT transaction did not,
Article V of the LLC Agreement governs the “Transferability of Units.”361 Section 5.1(A) provides that “no Member has the right or power to [ ] endorse, sell, give, pledge, encumber, assign, or transfer (a ‘Transfer‘) all or part of his or her Units.”362 Section 5.1(C) allows a member to unilaterally transfer her units subject to a right of first refusal process.363 The plain terms of these provisions concern the transfer of a member’s existing units.364
Article III, by contrast, addresses the Company’s issuance of new membership interests.365 Section 3.1(A) authorizes members, “in their sole and absolute discretion . . . to issue Units” and “to cause the Company to issue warrants.”366
Article III and Article V address separate matters. To apply Article V to the issuance of new membership interests would render the relevant provisions of Article III surplusage.369 Because SIFT Fixed’s receipt of the warrant falls under Article III, the requirements of Section 5.3 do not apply.
Northern Gold similarly argues that Section 5.3 governs SIFT Capital’s transfer of membership interests to SIFT Fixed through the Assignment Agreement.370 But at the time of the Assignment Agreement, SIFT Capital was not
3. Public Policy
Relatedly, Northern Gold argues that the SIFT transaction is void as a matter of public policy because it violated regulations imposed by the International Traffic in Arms Regulations (ITAR) and the Committee on Foreign Investment in the United
Bargains are “unenforceable on grounds of public policy if legislation provides that [they are] unenforceable.”377 Yet, I do not know—and cannot determine—whether federal law was violated. There is no indication in the record that the relevant federal authorities have flagged the SIFT transaction, pursued an investigation, or begun enforcement proceedings. I lack the subject matter jurisdiction to resolve a challenge to the transaction’s compliance with ITAR or CFIUS.378 Both ITAR and CFIUS contemplate a comprehensive review process and provide for administrative remedies.379 The agencies tasked with administering these regulatory regimes are best suited to address potential violations.
E. Whether SIFT’s Admittance as a Member Complied with the LLC Agreement
Section 4.1(A) of the LLC Agreement permits the Company’s members to act “without a meeting,” “vote to authorize any action in writing,” and to “by the[ir] written consent” give “a single Member, acting alone” the power “to act on behalf of or to bind the Company.”382 Sections 3.1 and 3.2 permit the members to issue “Units [] and any related warrants” and “cause the Company to admit an additional Member.”383 Consistent with these provisions, the May 2021 Consent authorized “any Member or Officer, acting alone” to execute “the Commitment Letter and all documents relating thereto or contemplated thereby . . . without any further act, vote
The LLC Agreement’s definition of “Member” contemplates that “a Person will automatically be admitted as a Member when they are issued Unit(s).”385 Section 3.2(A) provides that, once the members have “cause[d] the Company to admit an additional Member,” “[n]o such admission . . . shall require the consent or approval of any Member.”386 SIFT Fixed was therefore a member as soon as it was issued units irrespective of when and whether Soura updated Schedule A to the LLC Agreement.
F. Whether the Plaintiffs Are Entitled to a Remedy
Accordingly, the plaintiffs are entitled to a declaration that before the Capital Raise, SIFT Fixed was a 2.5% member of the Company, REM OA was a 48.75% member, and Northern Gold was a 48.75% member.387
The plaintiffs also seek an award of their fees and costs under Section 11.7 of the LLC Agreement, which provides:
In any proceeding by which a Member or the Company either seeks to enforce its rights under this Agreement (whether in contract, tort, or otherwise) or seeks a declaration of any rights or obligations under this Agreement, if the Company and/or the Members are the prevailing party, to the fullest extent permitted by law, they shall be awarded reasonable costs and expenses (which shall be payable by the non-prevailing party), including reasonable outside attorneys’ fees and expert witness fees incurred to resolve the dispute and enforce the final judgment.388
The plaintiffs each brought this suit as a “Member,”389 seeking a declaration under the LLC Agreement about the membership of the Company. Because SIFT Fixed was a 2.5% member of the Company and REM OA was a 48.75% member
III. CONCLUSION
Judgment is entered for the plaintiffs under