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ChyronHego Corp. v. Wight

Court of Chancery of Delaware

July 31, 2018

CHYRONHEGO CORPORATION, VECTOR CAPITAL CORPORATION, and VECTOR CH HOLDINGS 2 (CAYMAN), L.P., Plaintiffs,
v.
CLIFF WIGHT and CFX HOLDINGS, INC., Defendants.

         Submitted: April 18, 2018

          A. Thompson Bayliss and E. Wade Houston, of ABRAMS & BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: Peter M. Stone, of PAUL HASTINGS LLP, Palo Alto, California, Attorneys for Plaintiffs.

          D. McKinley Measley and Daniel T. Menken, of MORRIS, NICHOLS, ARSHT, & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Overton Thompson, III and Joseph B. Crace, Jr., of BASS BERRY & SIMS PLC, Nashville, Tennessee, Attorneys for Defendants.

          MEMORANDUM OPINION

          GLASSCOCK, VICE CHANCELLOR.

         A few companies so dominate their field of enterprise that the name of their product enters the language, not as a proper noun, but as a regular noun or verb. This matter involves one such company, Chyron, now known as ChyronHego.[1] This action involves a dispute arising from ChyronHego's acquisition of another electronic-effects company, Click Effects. According to ChyronHego, the Defendants-the sellers of Click Effects―fraudulently misrepresented the actual condition and value of the company, damaging ChyronHego. The latter brought this suit, and the Defendants have moved to dismiss.

         This matter, in part, implicates two fundamental precepts of Delaware law, in tension. Our law supports freedom of contract, holding parties to their bargains, good and bad. The same respect for the free exchange of property from which the foregoing precept arises means that our law abhors fraud, which is inimical to free exchange, properly understood. The tension arises when parties to a contract purport in their agreement to limit the universe of facts upon which that agreement rests, when in actuality one party has made extra-contractual representations upon which the other has relied. The tension is resolved in our law thus: where the parties in language that is clear provide that they eschew reliance on any facts but those recited, they will be held to that representation, notwithstanding prior knowingly false statements made by one party to the other. Such representations, therefore, cannot form the basis for common-law fraud, because the complaining party cannot, in light of the contractual provision, have reasonably relied on the prior false statements. Reasonable reliance is an element of common-law fraud. Conversely, where the contract is ambiguous, or where it merely recites that the parties meant to integrate all their prior dealings into its terms, that contract does not preclude a party's proof of extra-contractual fraud.

         Here, the parties contest whether the contract at issue contains an effective anti-reliance clause precluding ChyronHego from proving prior extra-contractual fraud. I find that the Stock Purchase Agreement, read as a whole, does unambiguously so provide, and that claims in the Complaint alleging extra-contractual fraud must be dismissed.

         The Defendants also seek to dismiss the remainder of the Complaint, contending that allegations of fraudulent misrepresentation in the contract are insufficiently pled, and that claims for indemnification are precluded by failure of notice required by the Stock Purchase Agreement. I find that most of the Plaintiffs' allegations, under the plaintiff-friendly standards of a motion to dismiss, are sufficient to state claims.

         The Motion to Dismiss, therefore, is granted in part and denied in part. My reasoning is below.

         I. BACKGROUND[2]

         A. The Parties and Relevant Non-Parties

         Plaintiff Vector Capital Corporation ("Vector Capital") is a Delaware corporation.[3] Vector Capital owns Plaintiff ChyronHego Corporation ("ChyronHego"), a New York corporation with a principal place of business in Melville, New York, through its fund Plaintiff Vector CH Holdings 2 (Cayman), L.P., a Cayman Islands exempted limited partnership.[4] ChyronHego is a "leading creator of the graphics used in live television broadcasts and in other media," with offices around the world.[5] The Plaintiffs bought a company from the Defendants and bring this action for fraud and breach of a written stock purchase agreement.[6]

         Defendant Cliff Wight is a citizen of Tennessee.[7] Wight was the owner and President of non-party Sound & Video Creations, LLC (d/b/a Click Effects) ("Click Effects" or the "Company"), which he sold to ChyronHego for approximately $12.5 million in cash and equity.[8] Click Effects creates graphics and other media for high schools, colleges, and professional sports teams in their stadiums.[9] Wight sold Click Effects to ChyronHego by transferring ownership of Click Effects to Defendant CFX Holdings, Inc. ("CFX"), a Tennessee corporation created to facilitate the sale, which received cash and equity in the sale of Click Effects to ChryonHego.[10] Wight was the only principal of CFX.[11]

         B. Factual Background

         1. Deal Proposal and Due Diligence

         The Complaint is silent about how or when ChyronHego became interested in acquiring Click Effects. At some point, ChyronHego explored an acquisition of Click Effects due to Click Effects' "cutting-edge products and stable customer base" in the same industry as ChryonHego.[12] ChyronHego began a due diligence process: Wight and Click Effects uploaded documents to a data room from March through June 2016, including details about customers, contracts, and financial projections.[13]In addition, the Defendants provided certain financial information in connection with a "quality of earnings report" prepared by the Plaintiffs.[14] The Plaintiffs and the Defendants entered into a stock purchase agreement (the "SPA") on July 1, 2016, which included certain representations by the Defendants.[15]

         The Plaintiffs allege that, in addition to truthful data, the data room contained misleading documents and projections.[16] The Plaintiffs also contend that the Defendants provided misleading information in connection with the Plaintiffs' preparation of the quality of earnings report.[17] Lastly, the Plaintiffs argue that the Defendants knowingly made false representations in the SPA.[18] The Plaintiffs allege that the following disclosures or submissions were false or misleading.

         a. Earnings

         The Plaintiffs contend that Wight intentionally manipulated sales data to inflate the apparent value of Click Effects. In support of this allegation, the Plaintiffs point to particular communications between Wight and his employees. In a series of emails entitled "Moving Invoices Around" on May 19, 20, and 23, 2016, Wight allegedly instructed certain finance personnel that "we'll need to do some maneuvering with some of the current invoices that are in the books as well as some of the un-invoiced sales orders."[19] Wight purportedly told members of management that he was "maneuvering" invoices to "smooth earnings" and move April sales from approximately $117, 000 to "somewhere around $700K to 850K [sic]" and to "have May [sales] be close if not over" $1 million.[20] Wight purportedly caused May invoices to be moved to April and invoiced open sales orders at the end of May instead of when they would ship in June, which the Plaintiffs argue was a deviation from Click Effects' normal practice.[21] This "earnings bridge" was communicated to Wight's bankers.[22] According to the Plaintiffs, these emails indicate that Wight intentionally manipulated sales data and submitted false information, resulting in inaccurate projections.[23]

         b. Atlanta Braves and Florida State University

         The Plaintiffs next contend that Wight omitted critical information about designated material customers that he was required to disclose under the SPA. The SPA requires that the Defendants inform the Plaintiffs if a material customer communicates to the Company that, among other things, "it will, or intends to, materially reduce its purchases from or sales or provisions of services to the Company."[24]

         First, the Plaintiffs allege that documents in the data room indicated that Click Effects would receive revenue through several agreements with the Atlanta Braves.[25]However, according to the Plaintiffs, Wight learned from one of his managers, before the sale, that the "Atlanta Braves [were] backing out of the purchase that they made in favor of [a key competitor]."[26] This information, the Plaintiffs argue, triggered a disclosure obligation under the SPA, which was not made. The Plaintiffs allege that Wight knew of this information by June 12, 2016 and communicated it to one of the Company's bankers, but did not inform the Plaintiffs.[27]

         Second, the Plaintiffs contend that "on May 21, 2016, Defendant Wight learned that a competitor had beaten out Click Effects for the business of a major customer, Florida State University ('FSU')" but instead "represented to Plaintiffs that the FSU contract was 100% certain" through "projections placed in the data room."[28] The facts concerning FSU were, according to the Plaintiffs, omitted in breach of the SPA.

         Third, the Plaintiffs allege that during the pendency of the sale, adverse business conditions became apparent to Wight. They point to an email from a Click Effects manager about "product reliability, lack of meaningful progress on currently unusable products . . . and a growing criticism of the way [Click Effects] support[s] [its] customers."[29] This situation, the email states, "will take well over a year to turn IF we immediately address."[30] The Plaintiffs contend that this information should have been disclosed prior to signing the SPA and breached multiple sections of the SPA.[31]

         c. The Lease

         The Plaintiffs argue that the lease agreement, as disclosed to the buyers, for the property on which Click Effects' corporate headquarters is located, was fraudulent and in breach of representations made in the SPA. Wight leased real estate to Click Effects for its corporate headquarters.[32] The Plaintiffs point to an undisclosed internal email from March 17, 2016, in which Wight stated that the Company "never did an official lease" because "[i]t has always been a handshake between me & me."[33] Nonetheless, Wight submitted a lease signed "as of" January 1, 2016, but in reality created in March 2016.[34] The lease amounted to approximately $1 million over five years.[35] The Plaintiffs contend that the lease was fraudulent and misled the buyers as to the existing lease obligations of Click Effects. The Plaintiffs also argue that the lease breached the SPA because it was not a "true, correct and complete" copy of an existing lease.[36]

         2. The Closing and Indemnification Claims

         The Plaintiffs and the Defendants signed the SPA on July 1, 2016.[37]ChyronHego paid Wight and CFX $775, 000 in closing cash and $7, 528, 000 in upfront cash.[38] The Defendants deposited $975, 000 into an escrow account.[39] Wight remained president of the newly acquired company.[40]

         The Company's performance proved disappointing to the Plaintiffs. For instance, Click Effects produced $500, 000 in profits by the end of 2016, contrary to an expected profit of $2-3 million.[41]

         The Plaintiffs delivered a written notice (the "Claim Notice") on June 5, 2017 for an indemnification claim against the Defendants for alleged breaches under the SPA.[42] The Defendants responded by letter on June 20, 2017, objecting to the Claim Notice.[43]

         C. Procedural Posture

         The Plaintiffs filed their first Complaint on July 27, 2017 and an Amended Complaint on November 15, 2017. The Defendants filed this Motion to dismiss the Amended Complaint, and I heard argument on April 18, 2018.

         The Plaintiffs bring two counts. Count I alleges that the Defendants committed fraud through misrepresentations in the SPA and via misleading documents submitted to the data room.[44] Count II is an additional or alternative claim for breach of representations and warranties made by the Defendants in the SPA.[45] The Plaintiffs seek damages and equitable relief.[46]

         II. ANALYSIS

         The Defendants have moved to dismiss the Complaint under Court of Chancery Rule 12(b)(6). When reviewing such a motion,

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are well-pleaded if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.[47]

         I need not, however, "accept conclusory allegations unsupported by specific facts or . . . draw unreasonable inferences in favor of the non-moving party."[48]

         A. Extra-Contractual Fraud Claims

         The Plaintiffs' extra-contractual fraud claims must be dismissed. An element of common-law fraud is that a plaintiff must have acted in justifiable reliance on the misrepresentation of the defendant.[49] I find that Section 4.7 of the SPA functions as an anti-reliance clause and that the Plaintiffs could not have acted in justifiable reliance on any extra-contractual representations or warranties in light of this contractual provision. Because the Plaintiffs cannot show justifiable reliance on extra-contractual representations, the fraud claims that rely on those representations fail.[50]

         "Delaware law enforces clauses that identify the specific information on which a party has relied and which foreclose reliance on other information."[51] This allows parties to "define those representations of fact that formed the reality upon which [they] premised their decision to bargain," which "minimizes the risk of erroneous litigation outcomes by reducing doubts about what was promised and said."[52] However, "murky integration clauses, or standard integration clauses without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations."[53] As with any contractual analysis, the contract must be read as a whole.[54] For anti-reliance language to be enforceable, however, "the contract must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract's four corners in deciding to sign the contract."[55]

         Here, the SPA contains several provisions relevant to a determination of the scope of the parties' agreed-upon sources of reliance: a standard integration clause in Section 9.6, [56] an exclusive remedies provision in Section 7.8, [57] a definition of excluded liabilities in an indemnification provision, [58] and, significantly, the following language in Section 4.7, quoted in full:

Holdings and the Buyer agree that neither the Company, any Seller nor any of their respective Affiliates or advisors have made and shall not be deemed to have made any representation, warranty, covenant or agreement, express or implied, with respect to the Company, its business or the transactions contemplated by this Agreement, other than those representations, warranties, covenants and agreements explicitly set forth in this Agreement. Without limiting the generality of the foregoing, the Buyer agrees that no representation or warranty, express or implied, is made with respect to any financial projections or budgets; provided, however, that this Section 4.7 shall not preclude the Buyer Indemnified Parties from asserting claims for Fraud[59] or indemnification in accordance with ARTICLE VII.[60]

         Read in conjunction with the integration clause, this is a clear statement that no extra-contractual representations were relied upon by the parties. The first sentence is an explicit anti-reliance clause. The first clause of the second sentence preserves that clause, and emphasizes that no reliance is made on financial projections or budgets. The second clause of the second sentence makes clear that nothing in Section 4.7 precludes claims under Article VII for fraud or indemnification.

         Article VII, in turn, provides generally for the availability of, the limits to, and the procedure for, indemnification. Section 7.8 is a specific exclusive remedies provision, and limits recovery to indemnification, damages for fraud, and related equitable relief. To my mind, reading these Sections in harmony, the intent of the parties is clear. The parties have not relied on extra-contractual representations, but may seek recovery in indemnification and for fraud damages for contractual misrepresentations.

         The Plaintiffs argue that the second sentence of Section 4.7 should be read to the contrary, as preserving a right to sue for fraud based on extra-contractual projections, rather than precluding it.[61] According to the Plaintiffs, "Section 4.7's last clause would be rendered meaningless if a party could not bring fraud claims based on projections."[62] To my mind, this is unpersuasive; the last clause is not mere surplusage. It clarifies the intent to preserve the remedies provided in Article VII. In other words, interpreting Section 4.7 as an anti-reliance provision, the last clause signifies careful lawyering, not surplusage or meaningless verbiage.

         In Prairie Capital, this Court considered similar anti-reliance language in light of alleged pre-contractual fraud.[63] The parties' stock purchase agreement, as here, contained an integration clause, an "exclusive representations clause, "[64] and an "exclusive remedies provision."[65] The plaintiffs argued that these provisions did not affirmatively disclaim reliance, allowing them to sue for fraud based on extra-contractual representations. They noted that the contract provided for fraud damages as well as indemnification for misrepresentations, and argued that such was inconsistent with an effective anti-reliance clause, because the indemnification sections did "not operate as the sole and exclusive remedy 'in the case of fraud.'"[66]The Prairie Capital Court disagreed, holding that the exclusive remedies section

recognizes that a party is not limited to the indemnification framework when it sues for fraud, but [the exclusive remedies provision] does not address the representations that a party can rely on in those circumstances. Other provisions in the SPA, such as the Exclusive Representations Clause, perform that function. [The exclusive remedies provision] does not alter the contractual universe of information on which a fraud-claim [sic] can be based.[67]

         I find this rationale persuasive here. The Plaintiffs here are free to sue for fraud, but the anti-reliance language of Section 4.7 dictates what representations may form the basis for such fraud.

         I find the Plaintiffs' reliance on Anvil Holding Corp.[68] to argue to the contrary misplaced. In that case, the Court was unable to find an enforceable anti-reliance clause from the language pointed to in briefing on a motion to dismiss. The defendants cited additional contractual language, apparently for the first time, at oral argument:

Section 6.5 contains a lengthy representation and warranty by the Buyer that states, in part, that the Sellers neither made any representation or warranty, express or implied, beyond those expressly given in the Purchase Agreement nor made any representation "as to the accuracy or completeness of any information" regarding the Company or the transactions contemplated by the Purchase Agreement.[69]

         However, the Anvil Court declined to consider the quoted provision without briefing, and considered it waived for consideration on the motion to dismiss, which was denied.[70] The Court did, however, comment that "[t]his representation, in combination with [the two provisions mentioned], appears to strengthen Defendants' argument that the Buyer could not reasonably have relied on extra-contractual representations."[71] I do not find Anvil contrary to my reasoning here.

         Finally, I note the Plaintiffs attempt to bootstrap a dog's breakfast of extra-contractual fraud claims onto contractual misrepresentations under Section 2.9(a) of the SPA. That Section represents that:

Since the date of the Most Recent Balance Sheet . . ., except as set forth on Schedule 2.9 and except for the transactions contemplated by this Agreement, (a) the Company has conducted its business in all material respects in the ordinary course of business consistent with past practice.[72]

         Essentially, the Plaintiffs argue that extra-contractual misrepresentations are not in the ordinary course of business. To the extent not addressed below, these claims are dismissed.

         B. Claims for Fraud Under the SPA

         The Plaintiffs allege a number of misrepresentations made by the Defendants in the SPA. I examine each in turn, below.[73] I first note that satisfying Rule 9(b)[74] for allegations based on a contract is simplified:

When a party sues based on a written representation in a contract . . . it is relatively easy to plead a particularized claim of fraud. The plaintiff can readily identify who made what representations where and when, because the specific representations appear in the contract. The plaintiff likewise can readily identify what the defendant gained, which was to induce the plaintiff to enter into the contract. Having pointed to the representations, the plaintiff need only allege facts sufficient to support a reasonable inference that the representations were knowingly false.[75]

          Here, the Plaintiffs must allege facts that make it reasonably conceivable that the representations allegedly given by the Defendants were knowingly false when made.

         1. Misrepresentations Regarding Material Customers.

         The Defendants disclosed Click Effects' "Material Customers" in the SPA. Both FSU and the Atlanta Braves are so disclosed.[76]

         a. The Braves

         Section 2.14 of the SPA concerns "material customers" and warrants, in part, that:

Since the date of the Most Recent Balance Sheet, (a) no customer has given written notice or, to the knowledge of the Company, otherwise informed the Company that (i) it will or intends to terminate or not renew its contract with the Company before such contract's scheduled expiration date, (ii) it will otherwise terminate its relationship with the Company (except in connection with the completion of an installation) or (iii) it will, or intends to, materially reduce its purchases from or sales or provisions of services to the Company (except in connection with the completion of an installation).[77]

         The Complaint states that "[o]n June 12, 2016, Defendant Wight learned from Company management (Greg Stocker) that the 'Atlanta Braves [were] backing out of the purchase that they made in favor of [a key competitor].'"[78] The Plaintiffs allege that the "Defendants knew by June 12, 2016 that their ...


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