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Fares v. Lankau

United States District Court, Third Circuit

June 19, 2013

JIM FARES, Plaintiff,
v.
PETER LANKAU, et al., Defendants.

Seth D. Rigrodsky, Esquire, Brian D. Long, Esquire, and Gina M. Serra, Esquire of Rigrodsky & Long, P.A, Wilmington, Delaware. Counsel for Plaintiff. Of Counsel: Patrick W. Powers, Esquire and Peyton J. Healey, Esquire of Powers Taylor LLP.

Dominick T. Gattuso, Esquire of Proctor Heyman LLP, Wilmington, Delaware. Counsel for Defendants. Of Counsel: Jonathan K. Cooperman, Esquire and Nicole M. Hudak, Esquire of Kelley Drye & Warren LLP.

MEMORANDUM OPINION

SUE L. ROBINSON, District Judge.

I. INTRODUCTION

Plaintiff Jim Fares ("Fares") alleges that Peter Lankau, Douglas Karp, Eric Liebler, William Maichle, Neil Milano, Geoffrey Raker, Frank Sica, Zubeen Shroff, David Azad, John Groom, Galen Partners V, L.P., Galen Partners International V, L.P., Tailwind Capital Partners LP, Tailwind Holdings (Cayman), L.P., Tailwind Management, L.P., Tailwind Capital Partners (AI), L.P., Tailwind Capital Partners (PP), L.P., Tailwind Capital Partners (ERISA), L.P., and Nautilus Neurosciences, Inc. ("Nautilus") (collectively, "defendants") wrongfully diluted the value of Nautilus and, therefore, either breached their fiduciary duty to him or aided and abetted a breach of fiduciary duty. (D.I. 12 at 1) Fares demands a jury trial and requests damages from defendants. ( Id. at ¶ 70, Prayer for Relief at ¶¶ 1-6)

Currently before the court is defendants' motion to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(3), 12(b)(6), and 23.1. (D.I. 16)[1] The court has jurisdiction pursuant to 28 U.S.C. § 1332(a)(2).

II. BACKGROUND

Fares founded Nautilus and was responsible for identifying, negotiating, and acquiring the flagship product of the company, "Cambia, " a migraine medication. (D.I. 12 at ¶ 26) Fares invested $750, 000 into Nautilus and has been a shareholder continuously throughout the relevant time period. ( Id. at ¶ 27) Cambia was a successful venture, achieving a sales run rate of $12 million between spring 2010 and spring 2011. ( Id. at ¶ 29) Fares then left Nautilus in April 2011 but remained a shareholder. ( Id. at ¶ 30) In 2010, while still an employee, Fares was issued his shares of stock at $1, 000 per share and, upon termination, Tailwind Investor, [2] the controlling shareholder, offered Fares a 10% premium over his purchase price, amounting to $1, 100 per share. ( Id. at ¶ 36)

Fares alleges that after his departure, Tailwind Investor continued to cause Nautilus to issue shares in order to dilute the value of Fares' shares. ( Id. at ¶ 32) To this end, on May 9, 2012, defendants allegedly caused Nautilus to issue a "Notice of Proposed Issuance of Notes" (the "May 9 notice"). ( Id. at ¶ 33) On May 11, 2012 defendants caused Nautilus to issue a "Notice of Proposed Issuance of Series C Preferred Stock" (the "May 11 notice"), which superceded the May 9 notice. ( Id. at ¶ 34) The Series C Convertible Stock was offered at par value $0.01 per share, at a price of $345 per share. ( Id. at ¶ 34)

Fares maintains that the offering price in the May 11 notice was unjustifiably low relative to the value of Nautilus. ( Id. at ¶ 36) To support his assertion that the company has been devalued, Fares cites a valuation of the company made in 2011 based on sales run rate or yearly sales and states that Nautilus is expected to have a run rate of between $23 and $25 million. ( Id. at ¶¶ 38-39) In contrast, when Fares was issued his previous shares, the run rate was only $12 million, yet Fares paid a higher purchase price of $1, 000 than the $345 purchase price offered in the May 11 notice. ( Id. at ¶ 38)

After Fares received the notices, he sent a letter through counsel on June 4, 2012 to defendant Maichle, CEO of Nautilus, objecting to the proposed issuance because it would dilute the interests of minority shareholders. ( Id. at ¶ 41) On June 13, 2012, Fares sent another letter requesting access to Nautilus' books and records. (/d.) His requests were denied. ( Id. at ¶ 42) Nautilus, by way of defendant Milano, Chief Financial Officer, Secretary and Treasurer, sent out a July 20 "Notice to Minority Stockholders of Nautilus Neurosciences, Inc., " which explained the amendment of the certificate of incorporation to reflect the addition of the new class of shares. ( Id. at ¶ 43)

Defendants contend that the dilution of Fares' equity was due to his refusal to buy his proportionate share of the Series C Preferred Stock rather than defendants' actions. (D.I. 17 at 1) Furthermore, they make several arguments for the dismissal of Fares' claims. First, his claims should be dismissed because they are plainly derivative and Fares failed, under Rule 23.1, to make a demand on Nautilus' board of directors or claim demand futility before filing this lawsuit. ( Id. at 9-12) Second, defendants aver that, pursuant to the Stockholders Agreement, Fares can only bring suit in New York courts and waived the right to a jury trial, thereby seeking dismissal pursuant to Rules 12(b)(3) and 12(b)(6). ( Id. at 12-14) Defendants also allege that Fares released all claims against them in his Separation Agreement and Release, which would allow dismissal pursuant to Rule 12(b)(6). ( Id. at 14-15) Finally, defendants claim that Fares' breach of fiduciary duty and aiding and abetting claims both fail to state a claim and are pled improperly pursuant to Rule 12(b)(6). ( Id. at 15-20) As the Rule 23.1 grounds for dismissal are dispositive, the court does not address the Rule 12(b)(3) or 12(b)(6) grounds.

III. STANDARD OF REVIEW

Pursuant to Federal Rule of Civil Procedure 23.1 (b)(3), a shareholder bringing a derivative action must file a verified complaint ...


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