In this opinion, the Court of Chancery, applying the “special facts doctrine,” rejected the plaintiffs’ claims for breach of the fiduciary duty of loyalty against the defendants arising out of sales of the plaintiffs’ stock in Wayport, Inc. (“Wayport”), finding that the defendants had no duty to disclosure information that plaintiffs failed to prove was of sufficient magnitude to constitute a “special fact.” However, the Court of Chancery found that one defendant, Trellis Partners Opportunity Fund, L.P. (“Trellis Fund”), committed fraud where it remained silent after assuming a duty to speak.
Founded in 1996, Wayport engaged in designing, developing, and enabling Wi-Fi hotspots. Following the burst of the technology bubble in 2000, plaintiff Brett Stewart (“Stewart”), who was a Wayport stockholder, Wayport’s original CEO, a member of Wayport’s board of directors (the “Board”), and a named inventor on most of Wayport’s patents, resigned from all his positions with Wayport. Defendant Trellis Fund, along with certain of its affiliates (together with Trellis Fund, “Trellis”), owned Wayport preferred stock and had the right to designate a director on the Board. Defendants New Enterprise Associates VIII L.P. and New Enterprise Associates 8A L.P. (the “NEA Funds”), along with certain of their affiliates (together with the NEA Funds, “NEA”), also owned Wayport preferred stock and had the right to designate a Board observer.
In 2005, Wayport began exploring ways to better utilize its intellectual property. Though the Board and Wayport’s management did not follow Stewart’s recommendations on how to utilize Wayport’s patents, they did reach out to him at times in 2005 to discuss the company’s patents. However, the relationship between Stewart and the Board and Wayport’s management was difficult and discussions broke off.
In March 2006, following negotiations and a dispute between Trellis and Stewart, Millennium Technology Ventures Partners, L.P. (“Millennium”) acquired a portion of Stewart’s, as well as a portion of plaintiff Brad Gray’s (“Gray”) and plaintiff Dirk Heinen’s (“Heinen”), Wayport common stock for $3.00 per share. Gordon Williams (“Williams”), Wayport’s general counsel, facilitated the transaction. In late 2006, Stewart contacted Wayport about selling more stock to Millennium for $3.00 per share. To help evaluate the proposed transaction, Millennium sought, and received from Wayport, additional financial information, resulting in Millennium lowering its potential purchase price to $2.50 per share. Concerned about information inequality, Stewart requested from Wayport, and eventually received, the same information Millennium received.
Negotiations followed, culminating with Stewart selling Wayport shares to Millennium in April 2007 and to NEA on June 13, 2007, as well as Stewart, Heinen, and Gray selling shares to Trellis on June 20, 2007. During the negotiations leading up to the June 20, 2007 sale, Stewart again expressed concern about being at an information disadvantage. Responding to that concern, on June 8, 2007, the managing member of Trellis Fund’s general partner stated that Trellis was not “aware of any bluebirds of happiness in the Wayport world” (the “Statement”).
In February 2007, after Stewart and Williams started working on the April 2007—June 2007 stock sales, Wayport began marketing certain of its patents (the “Patents”). By that time, Williams had assumed responsibility for executing Wayport’s patent strategy. By April 3, 2007, Wayport received two non-binding bids for the Patents, one of which was from Cisco Systems, Inc. (“Cisco”). On June 29, 2007, Wayport and Cisco executed a sale agreement for the Patents at a price of $9.5 million. The Board learned of the Cisco sale on July 2, 2007. However, no one informed the plaintiffs about the Cisco sale.
Stewart went on to sell additional Wayport stock to Trellis and NEA in transactions that closed in late September 2007. On October 1, 2007, Stewart acquired Wayport’s audited financial statements and, through those financial statements, Stewart first learned limited information about the sale of the Patents. After Wayport refused to supply Stewart with additional information regarding the Cisco sale, Stewart made a formal demand under Section 220 of the Delaware General Corporation Law and, subsequently, filed a books and records action.
In November 2008, Wayport announced that it would be acquired by AT&T Inc. (“AT&T”) and its common stock would be converted into the right to receive $7.20 per share. The AT&T transaction closed in December 2008.
In November 2008, Stewart initiated litigation in connection with the Wayport stock sales. At the motion to dismiss stage of the litigation, the Court of Chancery dismissed all of the plaintiffs’ claims with respect to any stock sales that took place before 2007, and all other claims except for (a) breach of the fiduciary duty of loyalty and common law fraud against Wayport, Williams, Trellis Fund, and the NEA Funds, and (b) aiding and abetting breach of fiduciary duty against Wayport. The plaintiffs later amended their complaint to add claims for equitable and constructive fraud.
In its post-trial opinion, the Court of Chancery first rejected the plaintiffs’ claim that Trellis Fund, the NEA Funds, Williams, and Wayport breached their fiduciary duty of loyalty by failing to disclose material information when Trellis Fund and the NEA Funds purchased the plaintiffs’ shares. Noting that the duty of disclosure is not an independent fiduciary duty, and that its scope and requirements depend on context, the Court of Chancery concluded that the “special facts doctrine” applied in this case. Under the “special facts doctrine,” the Court of Chancery explained, Trellis Fund and the NEA Funds were free to purchase stock from Wayport stockholders without any duty to disclose information about Wayport, unless the information was of sufficient magnitude to constitute a “special fact.” The Court of Chancery further explained that a “special fact” must be a substantial transaction, such as an offer for the whole company. Though finding that the Cisco sale was material, the Court of Chancery found that the plaintiffs failed to prove that the Cisco sale substantially affected the value of their stock. Thus, the sale of the Patents did not constitute a special fact.
Because Trellis Fund and the NEA Funds did not know of any special facts, the Court of Chancery found that they had no duty of disclosure. Further, assuming, without deciding, that Williams undertook a duty of disclosure based on his status as an officer of Wayport and his substantial role in the stock sales, the Court of Chancery found that Williams’ duty to speak would not exceed the duty imposed on Trellis Fund and the NEA Funds. Thus, because no special fact was present, the Court of Chancery found that Williams did not have a duty to speak. Because Wayport, as a corporate entity, did not owe fiduciary duties to its stockholders and because there was no finding of an underlying breach of fiduciary duty, the Court of Chancery found that the fiduciary duty claims and aiding and abetting claims against Wayport failed.
Next, the Court of Chancery addressed the plaintiffs’ claim that Trellis Fund, the NEA Funds, and Williams were each liable for common law fraud, based on the breach of the duty to speak where a speaker learns of information that makes a previous statement materially misleading. The Court of Chancery found that the Statement, which was imputed to Trellis Fund, became materially misleading on July 2, 2007, when the Board learned of the Cisco sale, and that Trellis Fund had assumed a duty to update it. By not updating the Statement, Trellis Fund was in the same position as if Trellis Fund knowingly made a false representation in the first instance. Further finding that (a) Trellis Fund made the Statement to induce Stewart to sell his shares, (b) Stewart reasonably relied on the Statement in connection with the September 2007 stock sale to Trellis Fund, (c) Trellis Fund acted with scienter, (d) Stewart would have reconsidered the September 2007 stock sale to Trellis Fund and requested information about the Cisco sale, and (e) if Stewart had requested more information about the Cisco sale, Stewart would still have been holding his shares when Wayport announced the AT&T deal, the Court of Chancery entered judgment against Trellis Fund on Stewart’s common law fraud claim. However, the Court of Chancery found that the NEA Funds never spoke and that Williams never made any representation that became untrue. Therefore, the Court of Chancery concluded that neither had a duty to speak and, thus, neither committed a breach.
Last, the Court of Chancery found that the plaintiffs’ constructive fraud claim was redundant and superfluous in light of the fiduciary duty claims and that an equitable fraud theory of liability would have the same outcome as the plaintiffs’ common law fraud theory of liability.
The full opinion is available here.