E-Gaming Company FaZe Clan Subject to Potential Successor Liability  

Nutter McClennen & Fish LLP
In Crashfund LLC v. FaZe Clan, investors in Wanderset Inc. sued successor e-gaming company, FaZe Clan. Wanderset investors claimed that their agreements with Wanderset granted them conditional rights to obtain stock proportionate to their investment upon a “change of control.” The investors also claimed that FaZe Clan refused to issue stock to them after a de facto merger with Wanderset in violation of the agreements. FaZe Clan was sued for, among other things, breach of contract. The investors alleged two theories:
  • that the investors’ conditional right to stock in the event of a change of control entitled them to FaZe Clan stock after the de facto merger, or alternatively,
  • that FaZe Clan, as the successor entity, was liable for consequential damages caused by Wanderset’s alleged breach of the investor agreements.

FaZe Clan disputed that a de facto merger occurred, contending that Wanderset was dissolved. FaZe Clan also argued that it had no relationship to Wanderset and that the investor agreements related to shares in Wanderset only, not FaZe Clan.

FaZe Clan moved to dismiss the investors’ complaint. Judge Salinger allowed the motion only in part.

To start, Judge Salinger rejected the investors’ first breach of contract theory. The plain language of the Wanderset agreements, Judge Salinger noted, granted the investors only a conditional right to obtain shares of Wanderset stock if Wanderset were to be legally merged with or into another company. The alleged de facto merger between the companies did not trigger this conditional right, Judge Salinger ruled.

But Judge Salinger did not dismiss the investors’ second breach of contract theory. The investors, according to Judge Salinger, pleaded facts sufficient to show that FaZe Clan, as the successor entity under a de facto merger, could be liable for Wanderset’s prior liabilities, including alleged breach of the investor agreements. In doing so, Judge Salinger allowed the investors to maintain the following claims:

  • that Wanderset breached the agreements by failing to issue Wanderset stock before the merger;
  • that if Wanderset had issued stock to the investors, FaZe Clan would have allowed investors to convert their interests into Faze Clan stock; and
  • that FaZe Clan is subject to successor liability for consequential damages.

Judge Salinger also allowed the investors’ claim for Wanderset’s breach of the implied covenant of good faith and fair dealing to go forward. Pursuing that claim, the investors alleged that the merger was intentionally designed as a de facto merger, rather than a legal merger, to deprive the investors of their ability to convert their ownership rights under the agreements and that FaZe Clan could have successor liability for Wanderset’s alleged breach.

Docket Number: 2084CV00254-BLS2

Case Name: Crashfund LLC v. FaZe Clan, Inc.

Date of Decision: June 8, 2020

Judge’s full name: Kenneth W. Salinger

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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