M. SCOTT HARRIS, M.D., and MIDDLEBURG CONSULTANTS INC., Plaintiffs,
INNOVATE BIOPHARMACEUTICALS, INC., a Delaware Corporation, Defendant.
Submitted: July 26, 2019
Defendant Innovate Biopharmaceuticals, Inc.'s Motion to
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,
Catherine A. Gaul, Esquire, Ashby & Geddes, Wilmington,
Delaware, Attorney for Defendant Innovate Biopharmaceuticals,
RICHARD R. COOCH, RJ.
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
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. 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.
FACTS AND PROCEDURAL HISTORY
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.
The Consulting Agreement.
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.
The Stock Option Grant and Related Agreements.
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.
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").
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
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.
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
* * *
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.
5(e) of Innovate's 2015 Stock Incentive Plan (the
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 ...