QUANTUM TECHNOLOGY PARTNERS IV, L.P., a Delaware limited partnership, Plaintiff,
PLOOM, INC., a Delaware corporation, Defendant.
Date Submitted: February 25, 2014
MASTER'S REPORT (Post-Trial)
Kevin G. Abrams, Esquire, John M. Seaman, Esquire and Steven C. Hough, Esquire of ABRAMS & BAYLISS LLP, Wilmington, Delaware; Attorneys for Plaintiff.
David J. Teklits, Esquire and D. McKinley Measley, Esquire of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for Defendant.
Abigail M. LeGrow, Master in Chancery
This books and records dispute highlights the difficulties that arise when a stockholder in a privately held corporation seeks to exit that investment and demands access to books and records that the stockholder intends to use both to value his stock and to allow prospective purchasers to evaluate an offer. Overlaid on this dispute, variations of which have played out many times in this Court, are additional complications associated with the competitive nature of the company's business and a complete breakdown in trust between the parties.
Although the company professes an interest in allowing the stockholder to divest his holdings, those representations ring hollow when considered in the context of the unreasonable positions taken by the company regarding both the scope of the inspection it would permit and the terms of a confidentiality order it would accept. A more tempered approach likely would have resulted in a settlement more palatable to the company than the inspection I recommend. Instead, the antagonism between parties required trial on, and resolution of, the validity of the plaintiff's purpose, the books and records the plaintiff is entitled to inspect, and the confidentiality terms attendant to the inspection.
For the reasons that follow, I conclude that the plaintiff is entitled to inspect the bulk of the books and records requested in the demand, subject to a confidentiality agreement containing the terms described in this report, and I recommend that the Court enter inspection and confidentiality orders consistent with this report. This is my final report in this matter.
The plaintiff, Quantum Technology Partners IV, L.P. ("Quantum") is a Delaware limited partnership that invests in early-stage information technology and life sciences companies and is a record holder of 1, 433, 658 shares of stock of the defendant, Ploom, Inc. ("Ploom" or the "Company"). Quantum operates as a venture capital firm structured as a "pledge fund" wherein the firm identifies and contracts to invest in projects before soliciting and securing financing from individual partners of the fund.  Quantum's general partner is Quantum Technology Management Company IV, LLC ("Quantum LLC"), which is a Delaware limited liability company whose sole managing member is Barry Dickman. Quantum LLC and two of Quantum's limited partners have interests in Quantum's Ploom shares.
Ploom is a privately held Delaware corporation incorporated in 2007, which has as its primary line of business the development, design, manufacture, sale, and distribution of "alternative" tobacco products, including handheld tobacco vaporizers or smokeless tobacco delivery systems. Ploom is part of an emerging market for such products, which includes many of the world's largest tobacco product producing companies.
A. Quantum's Initial Investment in Ploom
Following informal discussions, Quantum and Ploom executed the Series A-3 Preferred Stock Purchase Agreement (the "Purchase Agreement"), dated June 22, 2009.In the Purchase Agreement, Ploom agreed to authorize the issuance and sale of 1, 674, 460 shares of convertible Series A-3 Preferred Stock ("Preferred Stock"), with 1, 004, 675 shares earmarked for purchase by Quantum in two closings. The Purchase Agreement required Quantum to close first on 390, 707 shares of Preferred Stock for an aggregate price of $350, 000.41 (the "First Closing"),  followed by a second closing within a specified period of time for an additional 613, 968 shares of Preferred Stock for $550, 000.52.  In addition, the Purchase Agreement provided that Quantum could purchase, without obligation, remaining additional shares that Ploom had not yet sold to another investor.
In connection with the Purchase Agreement, Quantum executed the Amended and Restated Investors' Rights Agreement, also dated June 22, 2009. After completing a strategic investment transaction with JTI, however, Ploom amended this particular document, which now is the Third Amended and Restated Investors' Rights Agreement (the "IRA"), discussed below.
B. The Parties Execute the Amended Purchase Agreement
Quantum completed the First Closing, but was unable to secure sufficient funds from its partners to complete the second closing. On September 30, 2009, to facilitate further investment, the parties executed the Agreement Regarding Series A-3 Preferred Stock Purchase Agreement (the "Amended Purchase Agreement"). That agreement revised the portions of the Purchase Agreement that concerned all transactions other than the First Closing and required that, on October 1, 2009, "[Quantum] shall purchase … an additional 156, 283 shares of [Preferred Stock], for an aggregate price of $140, 000.35" (the "Second Closing") and, thereafter, required Quantum to close on Preferred Stock in two further tranches: (i) 223, 261 shares for $200, 000.11 (the "Third Closing"); and (ii) 178, 609 shares for $160, 000.27 (the "Fourth Closing"). If Quantum completed all these required closings, it could purchase up to 675, 366 additional shares, or a lesser amount if fewer shares were available.
The Amended Purchase Agreement provided Quantum with board observer rights and allowed it to assert information rights under Section 3 of the IRA, both rights terminable, however, if Quantum failed to complete any of the aforementioned closings or hold at least 546, 990 shares of Preferred Stock.
Quantum completed the Second and Third Closings under the Purchase Agreement, but was unable to secure sufficient financing from its partners to make the Fourth Closing. Ploom's trust in Quantum faltered.
C. Quantum's Efforts to Divest Itself of its Ploom Holdings
Since at least January 2012,  Dickman actively has sought potential buyers of Quantum LLC's interest in Quantum's Ploom stock, and, in so doing, he has made at least one express offer. In July 2013, Dickman offered to sell to a personal creditor, Rick Lazansky,  all of Quantum LLC's interests in Quantum's holdings in Ploom, in consideration for Lazansky forgiving an outstanding promissory note held by Lazansky (the "Lazansky Offer").  In addition, the Lazansky Offer gave Lazansky the right to force Quantum LLC to repurchase the shares under certain circumstances. To date, Lazansky has not agreed to the terms offered by Dickman, at least in part because Lazansky is skeptical of the price offered by Dickman. Dickman has continued exploring sell terms with Lazansky even up to November 2013. In addition to making the Lazansky Offer, Dickman solicited buy leads from his industry contacts, including those connected to the tobacco industry generally. His contacts identified several potentially interested buyers, but all the parties required additional information regarding Ploom's financials before proceeding to negotiate terms.
In March and August of 2013, Quantum requested by letter access to certain of Ploom's financial information, which Quantum claimed to need to value its interest in the Company. Ploom agreed to provide some of the requested information in response to Quantum's March 2013 request, subject to Quantum's agreement that the information it received would be subject to Section 3.4 of the IRA, which - as described below -precluded Quantum from providing any of the information to a prospective purchaser.There is no evidence in the record that, in attempting to sell Quantum LLC's interest in the Ploom shares, Dickman improperly has divulged any of Ploom's confidential or proprietary information; indeed, Dickman has informed at least one potential buy lead that he will provide confidential information only after gaining approval from this Court.
D. The Demand; Ploom's Refusal
On October 21, 2013, Quantum delivered to Ploom a demand to inspect Ploom's books and records pursuant to 8 Del. C. § 220 (the "Demand"). Citing this Court's decision in Schoon v. Troy Corp,  Quantum also attached to the Demand a proposed confidentiality agreement.
On October 27, Ploom, through Monsees, responded to the Demand, challenging the propriety of (1) Quantum's purpose, (2) the scope of documents it demanded to inspect, and (3) the proposed confidentiality agreement. As to Quantum's purpose, Ploom noted that, in prior demands, Quantum's stated purpose was to "ascertain the value of its shares" only, yet the most recent Demand states an additional purpose, i.e., to "value [Quantum's] shares for sale." In addition, Ploom suggested that the Demand was part of an "ongoing effort to make itself a nuisance so that perhaps Ploom or Ploom's investors will become frustrated and want to repurchase [Quantum's] shares." On these bases, Ploom alleged that Quantum's stated purpose was improper or illusory.
Regarding the scope of Quantum's demanded inspection, Ploom refused to produce all the documents except (1) "a list of all of [Ploom's] stockholders … with the names and addresses of the stockholders, but … [no] other information"; (2) Ploom's "last unaudited annual financial statements, those for 2012"; and (3) Ploom's "latest 409A valuation, " on the basis that the Demand exceeded the bounds of Delaware law.In addition, Ploom asserted that the 2012 409A Valuation that it already had produced sufficiently reflected all the demanded financial information, and that, in any event, the Demand could not be used to circumvent Quantum's loss of its contractual information rights under Section 3 of the IRA, the scope of which probably would have been wider than under Section 220.
Finally, Ploom rejected outright Quantum's proposed confidentiality agreement, stating affirmatively that "Ploom will not permit the disclosure of its confidential information to third parties" because "shar[ing such] information with third parties and even „Highly Confidential Information' with Ploom competitors … is absurd for a technology company, as Quantum is aware …." On this issue, Ploom also noted that Quantum already is bound by the confidentiality terms contained in Section 3.4 of the IRA. In view of this letter, Quantum commenced this suit on October 31, 2013.
In advance of trial, Ploom developed its own proposed confidentiality agreement, which differed in several significant respects from the one proposed by Quantum. The parties, however, did not engage in any substantive negotiation regarding the terms of a confidentiality agreement. In fact, the parties' pre-trial submissions did not even take the elemental step of providing a blackline showing the differences between the two proposed agreements. For that reason, at the conclusion of trial, I instructed the parties to discuss the confidentiality order and attempt to narrow their disputes. I also provided guidance regarding some of the obvious areas of disagreement, including the definitions of "competitor, " "confidential information, " and "highly confidential information, " an attorneys' fees clause, and proposed restrictions on who qualified as a potential purchaser or financial advisor. My instructions notwithstanding, the parties did not engage in the type of good faith meet and confer discussions envisioned or expected by the Court, which is all the more surprising and disappointing given the caliber of counsel representing the parties. For that reason, the parties' post-trial submissions, while containing the requested blacklines, do not otherwise reflect the type of compromise and movement that often results when counsel participate in discussions in-person. Instead, the parties merely exchanged by e-mail competing versions of a confidentiality agreement, blacklined these versions, and argued to the Court why their version should be adopted wholesale. Much of this report, therefore, is spent crafting a confidentiality agreement on the parties' behalf.
II. Legal Analysis
A. Evidentiary Objections
Before turning to the substantive issues, I must address briefly Quantum's evidentiary objections and Ploom's motion to seal or redact portions of the trial exhibits and the trial transcript.
1. Quantum's Objections
At trial, Ploom moved to admit Exhibits 48, 50, 51, and 52 for the purpose of demonstrating that Section 3.4 of the IRA governs - or, more aptly, limits - Quantum's ability to share any information that might be produced as a result of this action. Exhibit 48 is the inspection demand made by Quantum on March 15, 2013. Exhibits 50, 51, and 52 are responsive letters sent by or on behalf of Quantum agreeing, in pertinent part, that Section 3.4 of the IRA would govern Quantum's use of any confidential information provided to it by Ploom pursuant to the relevant demands.
Essentially, Ploom asserted at trial that these documents demonstrate that Section 3.4 of the IRA governs any inspection of books and records compelled in this action solely because they show that Quantum has agreed to that in the past. For its part, Quantum objects to the admission of these documents on the basis that Section 3.4 of the IRA, by its plain meaning, does not govern any inspection compelled in this action, and, therefore, Exhibits 48, 50, 51, and 52 are irrelevant and should not be admitted for that purpose.
Ploom's reliance on this extrinsic evidence to support its proffered interpretation of the IRA is not permitted under settled Delaware law. In interpreting a contract, the overriding principle is the parties' intent. Delaware courts adhere to the objective theory of contract construction, i.e., courts first will look to the terms of the agreement, ascribing to the words "their common or ordinary meaning, and interpret[ing] them as would an objectively reasonable third-party observer." Thus, courts admit extrinsic evidence only if the contract at issue is ambiguous.
Here, I find that Section 3.4 of the IRA is not ambiguous. That Section reads:
The Company shall not be required to comply with any information rights of Section 3 in respect to any [holder of registerable Ploom securities ("Holder")] whom the Company reasonably determines to be a direct competitor or an officer, employee, director or holder of more than 5% of the outstanding capital stock of a direct competitor. Each Holder acknowledges that the information received by it from the Company may be confidential and for its use only, and it will use reasonable care not to use any such information that the Company labels as being confidential in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information, and its attorneys), except (i) in connection with the exercise of rights under this Agreement, (ii) if the Company has made such information available to the public generally, (iii) if such Holder is required to disclose such information by a governmental authority pursuant to legal process, (iv) to any partner, subsidiary or parent of such Holder for the purpose of evaluating its investment in the Company as long as such partner, subsidiary or parent is advised and agrees to be bound by the confidentiality provisions of this Section 3.2; (v) at such time as it enters the public domain through no fault of such Holder; (vi) that is communicated to it free of any obligation of confidentiality; or (vii) that is developed by such Holder or its agents independently of and without reference to any confidential information communicated by the Company.
By its terms, Section 3.4 unambiguously refers and applies only to confidential information that is produced by Ploom pursuant to Section 3 of the IRA, which, in broad stroke, outlines specific inspection rights granted to certain investors. In this action, Quantum seeks to compel inspection of certain information under 8 Del. C. § 220, a right it possesses independent of the IRA and which Quantum expressly retained even after it lost its rights under Section 3 of the IRA. Because Section 3.4 is not ambiguous, I need not and cannot consider extrinsic evidence of its application.
The conclusion that Section 3.4 of the IRA does not limit Quantum's rights under Section 220 of the Delaware General Corporation Law ("DGCL") separately is compelled by this Court's decision in Schoon v. Troy Corp.,  wherein the Court held that a waiver of a statutory right must be expressed "clearly and affirmatively" in the relevant document.  Interpreting Section 3.4 as Ploom suggests effectively would limit Quantum's rights under 8 Del. C. § 220, but the IRA does not do so clearly or affirmatively. Accordingly, even if Section 3.4 were ambiguous, it cannot, as a matter of law, govern any statutory inspection of Ploom's books and records. As discussed below, and under established Delaware law interpreting Section 220(c), this Court may condition inspection on execution of a confidentiality agreement, but one as restrictive as Section 3.4 would not be a proper exercise of the discretion afforded this Court by the statute.
Although I will not consider Exhibits 48, 50, 51 and 52 as parol evidence relevant to the interpretation of Section 3.4, those exhibits may bear on the Court's consideration of (1) Quantum's purpose, (2) whether Quantum's conduct supports a particular confidentiality restriction, and (3) what information ...