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Alarm.Com Holdings, Inc. v. ABS Capital Partners Inc.

Court of Chancery of Delaware

June 15, 2018

ALARM.COM HOLDINGS, INC., Plaintiff,
v.
ABS CAPITAL PARTNERS INC., ABS PARTNERS V, LLC, and ABS PARTNERS VII, LLC, Defendants.

          Date Submitted: April 4, 2018

          Philip A. Rovner, Jonathon A. Choa, Alan R. Silverstein, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Attorneys for Plaintiff.

          Raymond J. DiCamillo, Chad M. Shandler, Matthew W. Murphy, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Steven F. Barley, Andrea W. Trento, HOGAN LOVELLS U.S. LLP, Baltimore, Maryland; Attorneys for Defendants.

          MEMORANDUM OPINION

          LASTER, V.C.

         A private equity firm invested in a Delaware corporation through two funds that it managed. One of the firm's partners served on the corporation's board of directors. The firm later invested in one of the corporation's competitors, and a different partner joined the competitor's board of directors.

         The corporation filed suit against the firm and its two funds. The complaint alleges that the private equity firm acquired confidential information from the corporation, including its trade secrets, through the partner's service on the corporation's board of directors. The complaint alleges that the firm misused the corporation's confidential information by investing in the competitor. The complaint asserts a claim for misappropriation of trade secrets under the Delaware Uniform Trade Secrets Act ("DUTSA") and a claim for common law misappropriation of confidential information.

         The private equity firm moved to dismiss the complaint on multiple grounds. This decision reaches only one. Multiple agreements between the private equity firm and the corporation memorialized that the private equity firm could and would invest in competing businesses. The corporation's certificate of incorporation recognizes that fact. This decision concludes that in light of those agreements, the facts alleged in the complaint do not support a reasonably conceivable inference of misappropriation. The non-statutory claim is pre-empted by DUTSA. The complaint is therefore dismissed.

         I. FACTUAL BACKGROUND

         At this procedural stage, the facts are drawn from the operative complaint and the documents it incorporates by reference. As the non-movant, the plaintiff receives the benefit of all reasonable inferences.

         A. ABS Invests In Alarm.

         Defendant ABS Capital Partners, Inc. ("ABS") is a private equity firm that invests in later-stage growth companies.[1] The firm takes an active role in its investments and markets itself as a strategic partner who will work with management teams to help them achieve the next stage in growth.[2]

         Beginning in late 2008, ABS explored a potential investment in Alarm.com Incorporated ("Alarm"). As part of the due diligence process, ABS entered into a nondisclosure agreement with Alarm dated December 12, 2008 (the "2008 NDA"). Paragraph 2 both established ABS's confidentiality undertaking and recognized that ABS might invest in a competing business. It stated:

You hereby agree that you and your Representatives shall use the Confidential Information solely for the purpose of evaluating the Proposed Transaction, that the Confidential Information will be kept confidential and that you and your Representatives will not disclose any of the Confidential Information in any manner whatsoever; provided, however, that (i) you may make any disclosure of such information to which the Company gives its prior written consent; and (ii) any of such information may be disclosed only to those of your Representatives who need to know such information for the sole purpose of evaluating the Proposed Transaction, who agree to keep such information confidential and who are provided with a copy of this letter agreement and agree to be bound by the confidentiality provisions of this letter agreement.
Subject to your observance of all the terms of this letter agreement, including the confidentiality obligations, nothing in this letter agreement will prevent you from evaluating a possible investment in and/or collaboration with, or entering into any transaction with (including any investment in), a company whose business is similar or competitive with the business of the Company.
The Company acknowledges that you deal with many companies, some of which may, independently of the Company, pursue similar or competitive paths regarding their products or services, technology and/or market development plans to those which are or may be pursued by the Company.
The occurrence or existence of such similar or competitive activities shall not, by itself, be conclusive evidence that you have failed to observe your confidentiality obligations set forth herein, provided that none of the Confidential Information is provided or disclosed to any Competing Company without the Company's prior written permission. In any event, you shall be responsible for any breach of this letter agreement by any of your Representatives, and you agree, at your sole expense, to take all reasonable measures (including but not limited to court proceedings) to restrain your Representatives from prohibited or unauthorized disclosure or use of the Confidential Information.[3]

         The 2008 NDA expired in accordance with its terms on December 12, 2011.[4]

         After conducting due diligence, ABS agreed to acquire a controlling stake in Alarm. The parties formed plaintiff Alarm.com Holdings, Inc. as a new holding company that owned 100% of the equity of Alarm.com Incorporated. ABS caused two of its funds, defendants ABS Partners V, LLC and ABS Partners VII, LLC, to purchase shares of preferred stock issued by Alarm Holdings. The shares of preferred stock carried 80% of Alarm's outstanding voting power.[5]

         In connection with the investment, ABS, Alarm, and Alarm's other stockholders entered into a stockholders agreement dated March 6, 2009 (the "2009 Stockholders Agreement").[6] They agreed that Alarm would have a five-member board of directors (the "Alarm Board"), and they agreed that ABS could designate individuals to fill three of the five seats. ABS named Ralph Terkowitz, a partner with the firm, as one of its designees.[7]

         Terkowitz served as Chairman of the Board and regularly attended Alarm Board meetings. As a director, Terkowitz was involved in many major business decisions, including determining Alarm's business model, its go-to market strategy, and its pricing strategy. Terkowitz also participated as a director in overseeing Alarm's marketing efforts and its research and development pipeline.[8] Terkowitz spoke regularly with Alarm's CEO about Alarm's business.[9]

         Two other ABS partners, Bobby Goswami and Tim Weglicki, served on the Alarm Board. They also participated in Alarm Board meetings and learned confidential information about Alarm. [10]

         The 2009 Stockholders Agreement contemplated that investors might own equity in companies with businesses that were similar to Alarm's. The 2009 Stockholders Agreement also provided that holders of more than 5% of Alarm's equity could have an observer attend Alarm Board meetings, but that right terminated if the equity holder invested "in any entity engaging . . . in the business of selling residential or commercial alarm security products or services, or independent living, health or environmental monitoring products or services."[11] This limitation did not apply to ABS or its representatives on the Alarm Board.

         B. The 2012 Recapitalization

         In 2012, Alarm raised additional capital by creating a new series of preferred stock and issuing shares to investors.[12] As part of this transaction, Alarm adopted an Amended and Restated Certificate of Incorporation (the "Amended Charter").[13] Alarm and its stockholders also entered into an Amended and Restated Stockholders Agreement dated July 11, 2012 (the "2012 Stockholders Agreement").[14] The 2012 Stockholders Agreement superseded the 2009 Stockholders Agreement.

         In the 2012 Stockholders Agreement, the parties agreed to increase the size of the Alarm Board to seven members. ABS agreed to reduce its number of designees from three to two.[15] The parties agreed that Terkowitz would continue to serve as Chairman of the Board.[16]

         The remaining director seats were allocated among the parties to the 2012 Stockholders Agreement.[17] In addition, the preferred stockholders received Board observer rights. Section 2.2(f) stated that

[e]ach Observer shall have the right to attend meetings of the Board of Directors and to receive advance notice thereof (but shall not have any rights to any information or materials otherwise provided to members of the Board of Directors or its committees); provided that each Observer shall execute a confidentiality agreement in form and substance reasonably acceptable to the Board of Directors: provided, further, that the Company reserves the right to exclude any Observer from a meeting if the Observer's presence at such meeting would jeopardize any privilege of the Company or involve highly confidential or sensitive information of the Company or otherwise be deemed by a majority of the Board of Directors of the Company to be detrimental to the Company or the Board of Directors' deliberations.[18]

         The complaint does not allege that Alarm ever took the step of excluding an observer from the Alarm Board's deliberations.

         More importantly for present purposes, Section 12.16 of the 2012 Stockholders Agreement addressed the use of Alarm's confidential information. In the first part of Section 12.16, the parties agreed to protect information that the Company had identified in writing as being confidential or proprietary:

Each Stockholder agrees, severally and not jointly, to use the same degree of care as such Stockholder uses to protect its own confidential information for any information obtained pursuant to Section 8.1 or Section 8.2 hereof which the Company identifies in writing as being proprietary or confidential and such Stockholder acknowledges that it will not, unless otherwise required by law or the rules of any national securities exchange, association or marketplace, disclose such information without the prior written consent of the Company except such information that
(a) was in the public domain prior to the time it was furnished to such Stockholder,
(b) is or becomes (through no willful improper action or inaction by such Stockholder) generally available to the public,
(c) was in its possession or known by such Stockholder without restriction prior to receipt from the Company,
(d) was rightfully disclosed to such Stockholder by a third party without restriction or
(e) was independently developed without any use of the Company's confidential information. [19]

         However, Section 12.16 allowed ABS and other investors to share Alarm's information to a limited extent:

Notwithstanding the foregoing; each of ABS Capital Partners, TCV, Egis and Backbone may disclose such proprietary or confidential information to any former partners or members who retained an economic interest in such Stockholder, current or prospective partner of the partnership or any subsequent partnership under common investment management, limited partner, general partner, member or management company of such Stockholder (or any employee or representative of any of the foregoing) (each of the foregoing persons, a "Permitted Disclosee") or legal counsel, accountants or representatives for such Stockholder;
provided, however, that such Stockholder shall ensure that such Permitted Disclosees have signed a non-use and non-disclosure agreement in content similar to the provisions of this provision or are otherwise legally obligated not to disclose such confidential information (subject to customary exceptions), prior to disclosure of any such confidential information to such persons.[20]

         Alarm also agreed that ABS and another investor could, among other things, "invest[] in . . . any other company (whether or not competitive with the Company), " as long as they did not "disclose or otherwise make use of any proprietary or confidential information of the Company in connection with such activities." In full, this aspect of Section 12.16 stated:

Furthermore, nothing contained herein shall prevent ABS Capital Partners or TCV or any of their respective Permitted Disclosees from (x) entering into any business, entering into any agreement with a third party, or investing in or engaging in investment discussions with any other company (whether or not competitive with the Company), provided that such Stockholder or Permitted Disclosee does not, except as permitted in accordance with this Section 12.16, disclose or otherwise make use of any proprietary or confidential information of the Company in connection with such activities, or (y) making any disclosures required by or reasonably necessary to comply with law, rule, regulation or court or other governmental order or other legal or regulatory process.[21]

         Finally, and most importantly for present purposes, the Amended Charter included a provision authorized by Section 122(17) of the Delaware General Corporation Law (the "DGCL"), which exempts stockholders such as ABS from any duty not to pursue corporate opportunities that otherwise might arguably belong to Alarm.[22] Article 8 of the Amended Charter states:

To the fullest extent permitted by the DGCL, the Corporation acknowledges that:
(i) each stockholder (subject to the proviso below) and each Preferred Director (each an "Exempted Person") shall have no duty (contractual or otherwise) not to, directly or indirectly, engage in the same or similar business activities or lines of business as the Corporation or any of its subsidiaries, including those deemed to be competing with the Company or any of its subsidiaries; and
(ii) in the event that any Exempted Person acquires knowledge of a potential transaction or matter that may be a corporate opportunity for the Corporation, then such Exempted Person shall have no duty (contractual or otherwise) to communicate or present such corporate opportunity to the Company or any of its subsidiaries, as the case may be, and shall not be liable to the Company or its affiliates or stockholders for breach of any duty (contractual or otherwise) by reason of the fact that such Exempted Person, directly or indirectly, pursues or acquires such opportunity for itself, directs such opportunity to another person, or does not present such opportunity to the Company or any of its subsidiaries;

         provided, however, that this Article 8 shall not apply to Backbone Partners, LLC or stockholders who are also officers or employees of the Corporation or any subsidiary of the Corporation (other than officers affiliated with any Preferred Director) or who are permitted transferees of any such person.[23]

         C. The 2015 IPO

         In June 2015, Alarm completed an initial public offering, and its shares began trading on the NASDAQ. With the completion of the IPO, the 2012 Stockholders Agreement expired, and all of the preferred stock that ABS had issued converted into common stock.

         In connection with its IPO, Alarm adopted a Code of Business Conduct that addressed conflicts of interest that might arise as a result of funds like ABS having representatives on the Alarm Board. In pertinent part, it stated:

In the interest of clarifying the definition of "conflict of interest, " if any member of the Board who is also a partner or employee of an entity that is a holder of Alarm Common Stock, or an employee of an entity that manages such an entity (each, a "Fund"), acquires knowledge of a potential transaction (investment transaction or otherwise) or other matter other than in connection with such individual's service as a member of the Board (including, if applicable, in such individual's capacity as a partner or employee of the Fund or the manager or general partner of a Fund) that may be an opportunity of interest for both the Company and such Fund (a "Corporate Opportunity"), then, provided that such director has acted reasonably and in good faith with respect to the best interests of the corporation, such an event shall be deemed not to be a "conflict of interest" under this policy.[24]

         After the IPO, Terkowitz continued to serve on the Alarm Board and to serve on various committees. He ultimately resigned in August 2016.[25] No representative of ABS has held a position with Alarm since then.

         According to Alarm, Terkowitz attended many meetings of the Alarm Board during his years of service as a director, including meetings on March 19, 2014; June 4, 2014; September 17, 2014; December 3, 2014; February 26, 2015; May 6, 2015; August 5, 2015; November 5, 2015; February 23, 2016; May 3, 2016; and July 29, 2016.[26] The complaint alleges that Terkowitz obtained confidential information during these meetings, including information that "was too sensitive to ever be placed in writing or be included in the board decks."[27] Alarm believes that Terkowitz passed this information along to his partners at ABS in oral and written reports.

         D.ABS Invests In ...


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