In Diem-II, LLC and Diem-III, LLC v. Maisonette (Mar. 4, 2026), the Delaware Court of Chancery, at the pleading stage of litigation, rejected dismissal of the plaintiffs’ claims that they had been fraudulently induced to invest in the Series C and D financing rounds of Maisonette Inc. (the “Company”). The Company had provided the plaintiffs with unaudited financial statements and, after the plaintiffs invested, they learned that, while they were conducting due diligence, the Company had restated its financial statements. The restatement reflected lower earnings-based results than were reflected in the financial statements that had been provided to the plaintiffs. The plaintiffs claimed that the Company, its directors, its CFO, and the private equity fund that was its largest stockholder (the “Stockholder”), in order to induce the plaintiffs to invest, had intentionally provided financial statements that they knew were “not entirely accurate.”
The court ruled that the plaintiffs’ waiver of claims in the stock purchase agreements for the financings may not have covered fraud claims. The court rejected dismissal of the plaintiffs’ claims that the Company, its directors and its CFO had fraudulently induced the plaintiffs to invest; that the Stockholder, through its designee (the “Designee”) on the Company’s board (the “Board”), had engaged in a conspiracy to commit the fraud; and that all of the defendants had been unjustly enriched.
Key Points
- Difficulty of obtaining dismissal of fraud claims at the pleading stage of litigation. At every turn, the court refused to dismiss the plaintiffs’ various claims, citing pleading-stage requirements (i.e., that, at the pleading stage, the court must not make factual determinations and must reach all reasonable inferences in the plaintiffs’ favor). Particularly where the alleged facts may suggest potentially blatant or egregious misconduct, these pleading-stage standards can provide a ready route to non-dismissal of claims before a trial.
- Materiality of the allegedly inaccurate information. The court held that, at the pleading stage, it could not make the factual determination whether the alleged inaccuracies in the financial statements provided to the plaintiffs were material to their investment decision. The court rejected the defendants’ argument that the allegedly inaccurate information could not have been material as it related to earnings-based results and decisions whether to invest in startups (which the Company was) are not based on earnings.
- CFO’s potential liability. The court stated that, at the pleading stage, the allegations that the financial statements provided to the plaintiffs had been “prepared by” the CFO, and “reviewed, adopted and approved” by the directors, were “sufficiently specific to ascribe the misleading statements in those documents to all of those parties”—including the CFO (who was hired in the midst of the financings and was directed by the Board to deliver the financial statements to the plaintiffs).
- Stockholder’s potential liability. The court held that, at the pleading stage, the court could not make the factual determinations whether the Designee was acting at the Stockholder’s behest and in the Stockholder’s interests rather than the Company’s. The court rejected the Stockholder’s argument that its continued investment in the Company based on the same financial statements that were provided to the plaintiffs indicated that it did not believe the financial statements were inaccurate. The court credited the plaintiffs’ “alternative narrative” that the Stockholder may have continued to invest, even though knowing that the Company’s financial condition was “dire,” as a means of getting the plaintiffs to invest “substantial new money” into the Company.
- Unjust enrichment. The court held that, at the pleading stage, it could not make the factual determinations whether the directors, the CFO and the Stockholder, although they did not receive proceeds of the plaintiffs’ investment, may have received benefits such that they were unjustly enriched. The court credited the plaintiffs’ contention that the plaintiffs’ investment may have benefitted these defendants by “extend[ing] the runway on their investments” in the Company (i.e., provided more time for the Company’s financial condition to improve).
- Waiver of claims. In the financing documents, the plaintiffs waived any claims “in respect of” the investment. The court held that, at the pleading stage, it was not clear whether the waiver provision relinquished the right to make a fraud claim—as it did not specifically reference “fraud claims” or “unknown claims.”
Background. The Company, a children’s fashion e-commerce startup, was founded in 2016. In July 2021, the Board discussed the Company’s cash position and plans to pursue a “Series C” financing round by the end of the year. In September 2021, the Company’s President contacted the plaintiffs to solicit their participation in the financing. She provided the plaintiffs with a PowerPoint presentation (the “Pitch Deck”) that presented historical and prospective financial information for the Company. Based on the Pitch Deck, the plaintiffs decided to pursue an investment in the Company.
In October 2021, the Company’s CFO (who had been recently hired) provided the plaintiffs with the Company’s “unaudited financial statements” for 2020 and the first three quarters of 2021, along with financial projections for the remainder of 2021 (the “2021 Financial Statements”). In November 2021, while the plaintiffs were conducting due diligence (but unbeknownst to them) the Board met to discuss the Company’s financing developments. At that meeting, the Board received a PowerPoint presentation (the “Board Deck”) that included a slide entitled “Assessment of Finance Capabilities” (the “Financing Slide”), which identified needed “improvements” with respect to the Company’s financial information.
In December 2021, the plaintiffs purchased a convertible promissory note (the “Note”), governed by New York law, with a face value of $8 million, that would automatically convert into Series C preferred stock of the Company (the “Series C Preferred Stock”) upon successful completion of the Series C financing round. In January 2022, the CFO provided the plaintiffs with new unaudited financial statements (the “Updated Financial Statements”). In February 2022, the plaintiffs executed a stock purchase agreement (the “Series C SPA”), pursuant to which they converted their initial $8 million investment under the Note into Series C Preferred Stock and invested an additional $2.4 million in Series C Preferred Stock. The Series C SPA set forth standard representations and warranties by the Company relating to its financial statements. It also set forth a waiver by the plaintiffs of any and all claims “in respect of each of the Note Documents.”
In 2024, the plaintiffs participated in the Company’s next (“Series D”) financing round and secured the right to designate one member to the Board. With its designee on the Board, the plaintiffs learned that, in 2022, the Company had restated its financial statements (the “Restated Financial Statements”). The Restated Financial Statements reflected lower net revenue, gross profit, gross profit margin, and EBITDA figures than those that had been disclosed in the 2021 Financial Statements and the Updated Financial Statements that had been provided to the plaintiffs before they invested.
The plaintiffs brought suit, claiming, among other things, that the Company, its directors, and its CFO had fraudulently induced them into investing in the Company, through misrepresentations in the 2021 Financial Statements and the Updated Financial Statements. Following briefing and oral argument, Vice Chancellor Bonnie David declined to dismiss almost all of the plaintiffs’ claims.
Discussion
The plaintiffs’ waiver may not have included fraud claims. Under Delaware law, a waiver of fraud or unknown claims is enforceable if it unambiguously indicates that the party voluntarily and intentionally relinquished the right to pursue such claims. In the Series C SPA, the plaintiffs waived all claims “in respect of” the Note. The court noted that this section of the SPA, first, extinguished the Company’s ongoing obligations under the Note after its conversion, and then waived “present and past failures under the Note,” including defaults. The court wrote: “While [this section] releases claims ‘in respect of’ the Notes—such as…‘default,’” at least “one reasonable reading” of the provision is that the parties did not waive the right to pursue “unknown claims for fraud.” if the parties’ intention had been “to broadly release unknown fraud claims,” the court wrote, “they could have done so explicitly, but they did not.” The court cited cases where the court has held a waiver to include a waiver of fraud claims—with language specifying that the waiver was of all claims “known and unknown” or “including fraud.”
Earnings-based inaccuracies were not necessarily immaterial to an investment decision in a startup company. The defendants argued that, as startup businesses frequently have negative earnings in the first several years of their existence, potential investors do not view common metrics like EBITDA multiples as material. Instead, they focus on “unit economics”—like LTV/CAC, a ratio that measures the relationship between the “lifetime value” of a customer and the “cost to acquire” it. The court found that this argument “makes little sense” because “the unit economics on which Plaintiffs relied were derived from [the Company]’s historical performance.” Therefore, whether the allegedly inaccurate historical information in the 2021 Financial Statements and the Pitch Deck was or was not material to the plaintiffs was a factual issue that could not be determined at the pleading stage.
The Complaint adequately alleged scienter against the directors. The plaintiffs contended that the directors either knew that the 2021 Financial Statements and the Updated Financial Statements misstated the Company’s historical financial performance or they acted with reckless indifference to the truth of the financial information reported in those documents. The plaintiffs pointed to the Finance Slide, which stated that: the Company’s financial reporting relied on QuickBooks, a software with “limited capabilities”; “data sources for reporting were directionally correct but not entirely accurate”; “private label accounting was non-existent”; and the Company had not yet undergone an audit. The court responded that the inference of scienter from “this single slide” was “weak,” as the Slide itself described the Company’s reporting as “directionally correct” and, further, as the directors had personally invested tens of millions of dollars in the financing based on the same financial information that was provided to the plaintiffs. The court stressed, however, that, at the pleading stage, it had to draw all reasonable inferences in the plaintiffs’ favor. The court thus found it reasonably conceivable (“if only barely so”) that the directors disseminated the 2021 Financial Statements and the Updated Financial Statements “knowing that the financial information therein was not entirely accurate.”
The Complaint adequately alleged scienter against the CFO. The CFO argued that she was differently situated than the director defendants because she had joined the Company as CFO in the midst of the fundraising efforts. She asserted that it was not “reasonable to infer that [she] should have conducted a complete audit of [the Company’s] historical financials months into the job.” She stressed that she had “transmitted” the financial statements with the authorization and full knowledge of the Board. She had done “exactly what a CFO should,” she argued—that is, she had “review[ed] the Company’s historical reporting processes and suggest[ed] improvements.” She also stressed that she had believed that the financial statements were “directionally correct.” The court responded that the plaintiffs’ allegation was that the CFO, as CFO, had prepared financial statements and provided them to the plaintiffs while knowing that the information in them was “not entirely accurate.” At the pleading stage, the court stated, the allegations that the financial statements were “prepared by” the CFO, and then “reviewed, adopted and approved by” the directors, were “sufficiently specific to ascribe the misleading statements in those documents to all of those parties.”
It was reasonably inferable that the Stockholder entered into a conspiracy with the Company’s fiduciaries to commit the alleged fraud. The plaintiffs alleged that, when the Company faced a “dire financial condition,” the Stockholder, to “bail out [its] existing investments and preserve [its] existing roles” in the Company, conspired with the Company’s fiduciaries to induce the plaintiffs to invest “substantial new money” in the Company. The Stockholder argued that the alleged facts did not support a reasonable inference that there was a “meeting of the minds” between or among the alleged co-conspirators. The court, however, noted plaintiffs’ allegations that: (i) some weeks before the plaintiffs received the 2021 Financial Statements, two employees of the Stockholder participated in a closed-door session with the Company to discuss fundraising; (ii) the Company touted the Stockholder’s participation in the Series C and D financing rounds to convince the plaintiffs to invest; (iii) the Stockholder, through its Designee on the Board, negotiated the terms of the Series C financing directly with the plaintiffs; (iv) the Designee, acting to advance the Stockholder’s interests, oversaw the Company’s fundraising efforts and approved the Pitch Deck, the Updated Financial Statements, and the SPAs; and (v) the Designee did not disclose that he was a defendant in litigation that was the subject of another of the plaintiffs’ claims relating to the Company’s representation and warranty about the absence of pending litigation. The court wrote: “[T]he Court cannot determine on the pleadings that Florence acted solely on behalf of [the Company], rather than at the behest of [the Stockholder].”
There was a reasonable inference that all of the defendants were unjustly enriched. The court held that the plaintiffs alleged sufficient facts to demonstrate that the Company may have induced the plaintiffs’ investment through misstatements, which enriched the Company to the plaintiffs’ detriment. The court held, further, that it was also reasonably inferable that the directors, the CFO and the Stockholder were enriched by the plaintiffs’ investments, although they did not receive the investment funds. The court credited the plaintiffs’ allegation that the investment “extended the runway” on the defendants’ investments—that is, bought time for the Company’s financial position to turn around or for the defendants to “offload their equity on some other, unsuspecting investor.”
Practice Points
- Drafters should ensure that a waiver or release of claims is unambiguous as to whether fraud or other unknown claims are or are not waived or released. For the broadest waiver or release, the language should state that the party waives or releases any and all claims, whether known or unknown, including claims of fraud. Parties also could consider defining “fraud”—including whether to exclude or modify any of the common law elements of fraud, such as reliance and scienter.
- Directors should be on alert if they receive information that the company’s financial reporting may need improvement. They should consider the potential impact, if any, on the accuracy of the company’s financial statements and any need for restatement. They also should consider whether new financial statements, or supplemental information, should be provided to potential investors who have received company financial information.
- Parties could consider establishing upfront the material factors on which the investor relied in valuing the company—in order to be able to establish later, in the event of dispute, whether particular allegedly inaccurate information was or was not material. For example, a startup company may want to seek a representation and warranty from investors that earnings-based information, although provided to them and considered to some extent, was not material to them. The interaction of such a provision with an anti-reliance provision and/or waiver of claims provision would have to be made clear.
- Stockholder-designees on a company’s board must keep in mind their dual-fiduciary role. Consideration must be given to avoiding potential liability for the stockholder and/or the designee based on the designee’s actual and potential conflicts of interest. Depending on the facts and circumstances, the following could be considered: appointment of a special committee of independent directors to consider and approve the transaction; obtaining the advice of outside advisors and/or a fairness opinion; full disclosure to the board of the designee’s conflicts; recusal of the designee from discussions concerning the matter; and/or abstention by the designee from voting on the matter. In the case of a public corporation, approval by a special committee of independent directors will provide safe harbor protection under the 2025 DGCL amendments for conflicted transactions. A dual fiduciary designee should consider maintaining a contemporaneous record reflecting his or her consideration of the interests of the company when taking action on a matter that may present a conflict with the designating stockholder.
