Applied Energetics, Inc.
George Farley and AnneMarieCo., LLC
Submitted: August 10, 2018
C. Jowers, Esquire, Meghan A. Adams, Esquire, Morris James
Kathleen M. Miller, Esquire, Clarissa R. Chenoweth, Esquire,
Smith, Katzenstein & Jenkins LLP
letter opinion addresses the amount of the bond Plaintiff
must post in connection with the Stipulation and Status Quo
Order entered on July 20, 2018.
of Chancery Rule 65(c) provides that "[n]o restraining
order or preliminary injunction shall issue except upon the
giving of security by the applicant, in such sum as the Court
deems proper, for the payment of such costs and damages as
may be incurred or suffered by any party who is found to have
been wrongfully enjoined or restrained." "The
security, usually a bond, fixes the maximum amount that an
enjoined party may recover. . . . Because actual damages are
uncertain, and because a wrongfully enjoined party has no
recourse other than the security, the court should 'err
on the high side' in setting the bond." Guzzetta
v. Serv. Corp. of Westover Hills, 7 A.3d 467, 470 (Del.
2010). The party seeking the bond, however, must support its
application with "facts of record or . . . some
realistic as opposed to a yet-unproven legal theory from
which damages could flow to the party enjoined."
Id. (quoting Petty v. Penntech Papers,
Inc., 1975 WL 7481, at *1 (Del. Ch. Sept. 24, 1975)).
"[T]he amount of a bond is a matter of discretion,"
but there must be a "credible basis for the estimated
damages." Id. at 471.
George Farley ("Farley") and AnneMarieCo., LLC
("AMC") argue that they will suffer damages if the
price of Applied Energetics stock drops between the date they
could have sold the 25, 000, 000 shares at issue in this
litigation and the date they actually sell those
shares. Stated differently, Defendants will incur damages if
they could have and would have sold the shares at a higher
price but for the injunction. Defendants seek a bond
representing 50% of the value of the 25, 000, 000 shares on
July 5, 2018, or $1, 750, 000. This amount is equivalent to a
per-share price of $0.07. Defendants use this $0.07 price
because it is near the stock's August 6 intraday low
price of $0.058.
provide no convincing explanation for why 50% of the total
value of their 25, 000, 000 shares on July 5, 2018, provides
a credible basis for their estimated damages. Defendants
merely assume that they will incur losses at a rate of $0.07
per share. But since the date of the injunction, Applied
Energetics stock has traded at an average price of
$0.11-0.12. On only one day, August 6, was the price
of the stock less than $0.07. On that date, Applied
Energetics, Inc. issued a press release announcing the recent
death of its President and Acting Chief Executive Officer.
The lowest price of Applied Energetics stock that day was
$0.058, but the stock closed at $0.09. Additionally,
Defendants' estimated damages ignore trading restrictions
that seemingly apply to a large majority of their shares, as
explained more fully below. Defendants, therefore, do not
provide a credible basis for estimated damages of $1, 750,
argues that the Court should award a nominal bond because
Defendants face little risk of damages due to the strength of
Plaintiff's claims. Plaintiff adds that even if the Court
awards more than nominal damages, Defendants' alleged
damages are speculative and exaggerated. Plaintiff asserts
that Defendants could not legally or practically sell all of
their 25, 000, 000 shares before the preliminary injunction
particular, Plaintiff argues that SEC Rule 144 limits the
number of shares Defendants can sell to one percent of
Applied Energetics' issued and outstanding shares every
quarter. Applied Energetics has 191, 194, 896 shares issued
and outstanding. One percent of the outstanding shares is 1,
911, 949 shares. Plaintiff argues that even if the price
dropped to $0, Defendants' maximum damages would be $162,
515.67 (1, 911, 949 shares multiplied by $0.085, the market
price of the stock on August 10, 2018).
method of estimating damages also has problems. Plaintiff
applies the trading restrictions of SEC Rule 144 to the
shares of both Farley and AMC. AMC acknowledges that the
trading restrictions of SEC Rule 144 apply to its 20, 000,
000 shares. Farley, however, alleges that these
trading restrictions would no longer apply to his 5, 000, 000
shares on and after July 6, 2018.
appropriate measure of damages for both sets of shares is the
difference between (1) the price of Applied Energetics stock
on the date Defendants could have and would have sold their
shares at a higher price but for the injunction, which
Defendants assert is $0.14,  and (2) the as-yet-unknown price
of Applied Energetics stock on the date Defendants sell the
shares, if that price is less than $0.14. To estimate this
unknown price, I analyze the historical prices of Applied
Energetics stock since the date the injunction was issued. To
"err on the high side," I calculate the average of
the daily intraday low prices of the stock from July 5, 2018,
through August 10, 2018. This calculation yields an average
intraday low price of $0.111 per share. The per-share
damages estimate is the difference between $0.14 and $0.111,
trading restrictions apply to AMC's 20, 000, 000 shares,
AMC cannot sell more than 1, 911, 949 shares per quarter.
Therefore, estimated damages can be applied to only 1, 911,
949 of AMC's 20, 000, 000 shares. AMC's estimated
damages are $55, 446.52, or 1, 911, 949 multiplied by $0.029.
trading restrictions of SEC Rule 144 likely would not apply
to Farley's 5, 000, 000 shares. I therefore apply the
same per-share damages estimate of $0.029 to all 5, 000, 000
shares. This calculation yields $145, 000. I therefore set a