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Harris v. Innovate Biopharmaceuticals, Inc.

Superior Court of Delaware

October 15, 2019

M. SCOTT HARRIS, M.D., and MIDDLEBURG CONSULTANTS INC., Plaintiffs,
v.
INNOVATE BIOPHARMACEUTICALS, INC., a Delaware Corporation, Defendant.

          Submitted: July 26, 2019

          On Defendant Innovate Biopharmaceuticals, Inc.'s Motion to Dismiss.

          David W. deBruin, Esquire, Gawthrop Greenwood, PC, Wilmington, Delaware, and Jarod Bona, Esquire and Steven Levitsky, Esquire, Bona Law PC, New York, New York, Attorneys for Plaintiffs M. Scott Harris, M.D. and Middleburg Consultants, Inc..

          Catherine A. Gaul, Esquire, Ashby & Geddes, Wilmington, Delaware, Attorney for Defendant Innovate Biopharmaceuticals, Inc..

          MEMORANDUM OPINION

          RICHARD R. COOCH, RJ.

         I. INTRODUCTION[1]

         This is Innovate Biopharmaceuticals, Inc.'s ("Defendant") Motion to Dismiss the complaint filed by Plaintiffs, M. Scott Harris, M.D. and Middleburg Consultants Inc. Plaintiffs in the complaint assert claims for breach of contract (Counts I and II), negligent misrepresentation (Count III), breach of the implied covenant of good faith and fair dealing (Count IV), and fraud (Count V). Defendant argues that the complaint should be dismissed for failure to state any claims for which relief can be granted.

         After review of the parties' contentions and the record, the Court concludes that Plaintiffs have failed to sufficiently assert claims upon which relief can be granted.[2] Plaintiffs sought to impose duties upon Defendant that were not contemplated by the plain language of the relevant contracts. The Consulting Agreement expressly contemplated delay in completion of an Initial Public Offering (IPO), provided consideration for such delay, and obligated Defendant to deliver unrestricted shares to Plaintiff after Plaintiff exercised the stock options. These terms have been satisfied by Defendant. Defendant rendered compensation for the delay and delivered the unrestricted shares two weeks after Plaintiff exercised the stock options at issue. Further, the undisputed facts do not reflect any instances of fraud.

         II. FACTS AND PROCEDURAL HISTORY

The Parties..

         Innovate is a Delaware corporation with its principal place of business in Raleigh, North Carolina. It is a clinical stage biotechnology company that focuses on developing novel medicines for autoimmune and inflammatory diseases. (Compl. ¶ 3).

         B. The Consulting Agreement.

         In exchange for providing these services, the Consulting Agreement provides that "[t]he Company shall pay Consultant, and Consultant hereby agrees to accept, as compensation for all services to be rendered to the Company, the compensation set forth in this Section 3." (Motion Ex. A § 3). Under Section 3.1, entitled "Stock Options," the agreement provides:

The Company will issue Consultant options equivalent to 0.5% of the Company on a fully diluted basis as of Sept 13, 2016. The strike price will be set at the next round of financing of the Company, but is expected to be $0.83 per share, but is subject to change. The initial 40% of the shares will vest immediately: with the remaining 60% will vest upon completion of the End of Phase 2 meeting with the U.S. FDA for INN-202, Larazotide Acetate. The option exercise period will be 4 years after the expiration or termination of this Agreement. If the Company has not completed an underwritten initial public offering by June 30, 2017, the Company will make a one-time payment of $ 15, 000 (fifteen thousand U.S. dollars) to Consultant in consideration of the delay to asset liquidity on public markets.

         C. The Stock Option Grant and Related Agreements.

Id.

         The Stock Option Notice and the Nonstatutory Stock Option Agreement Granted Under 2015 Stock Incentive Plan (the "Option Agreement") contains the following statement in bold at the top of the agreement:

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR APPLICABLE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

         Section 1 of the Option Agreement states that it:

evidences the grant by Innovate Biopharmaceuticals Inc., a Delaware corporation (the "Company"), on the Grant Date to the Participant, a consultant/advisor of the Company, of an option to purchase, in whole or in part, on the terms provided herein and in the Plan, the Total Number of Shares of Common Stock at the Exercise Price Per Share, all as defined and set forth in the accompanying Notice of Nonstatutory Stock Option (the "Notice").

         Section 9 of the Option Agreement, entitled "Entire Agreement; Governing Law," provides:

The Plan and the Notice are incorporated herein by reference. This Agreement, the Notice and the Plan constitute the entire agreement between the Company and the Participant with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof. This Agreement shall be governed by and construed in accordance with the General Corporation Law of the State of Delaware, as to matters within the scope thereof, and the internal laws of the State of North Carolina (without reference to conflict of law provisions), as to all other matters.

         Exhibit A to the Option Agreement, prepared by Innovate, contains the form of notice that Harris would need to execute in order to exercise his option. (See Motion Ex. B at Exhibit A). Included with that notice are certain representations and warranties that would be made by the Participant upon exercise, including in pertinent part:

4. I can afford a complete loss of the value of the Shares and am able to bear the economic risk of holding such Shares for an indefinite period.

         5. I acknowledge that I am acquiring the Shares subject to all other terms of the Plan, including the Notice of Nonstatutory Stock Option and related Nonstatutory Stock Option Agreement.

* * *

         8. I understand that (i) the Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act or an exemption from registration is then available; (iii) in any event, the exemption from registration under Rule 144 will not be available for at least six months or one year (depending on whether the Company is subject to the reporting obligations of the Securities Exchange Act of 1934, as amended) and even then will not be available unless applicable terms and conditions of Rule 144 are complied with; and (iv) there is now no registration statement on file with the Securities and Exchange Commission with respect to any stock of the Company and the Company has no obligation or current intention to register the Shares under the Securities Act.

         Section 5(e) of Innovate's 2015 Stock Incentive Plan (the "Plan") states:

Exercise of Option. Options may be exercised by delivery to the Company of a written notice of exercise signed by the proper person ... together with payment in full as specified in Section 5(f) for the number of shares of Common Stock for which the Option is exercised. Shares of Common Stock subject to the Option will be delivered by the Company following exercise either as soon as practicable ...

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