In re Nine Systems Corp. S’holders Litig., C.A. No. 3940-VCN (Del. Ch. July 31, 2013) (Noble, V.C.)
In this memorandum opinion, the Court of Chancery granted in part and denied in part a motion to dismiss as time-barred the claims of three distinct sets of plaintiffs asserted in a complaint filed October 22, 2013, challenging certain transactions (the “Transactions”) that preceded the acquisition of Nine Systems Corporation (the “Corporation”) by Akamai Technologies Inc. in 2006 (the “Acquisition”).
The first set of plaintiffs (the “Shareholder Plaintiffs”) were founders of, or original investors in, the Corporation. They complained that their equity interest in the Corporation was diluted significantly prior to the Acquisition as a result of the Transactions. Defendants moved to dismiss the Shareholder Plaintiffs’ claims as time-barred because there was a six year delay between when the Shareholder Plaintiffs allegedly received inquiry notice through receipt of the Acquisition proxy materials (the “Merger Proxy”) and the filing of the complaint. The Shareholder Plaintiffs sought to invoke the tolling doctrine, alleging that they were part of the putative class defined in a complaint filed in August 2008 by separate plaintiffs challenging the Transactions (the “Class Action Complaint”). The Court held that the Shareholder Plaintiffs fell within the initial definition of the proposed class in the Class Action Complaint, but that such status only allowed the Shareholder Plaintiffs’ claims to be tolled until class certification was denied, which occurred in August 2010. The Court explained that Delaware courts have not strictly endorsed suspension or renewal as a rule for class action tolling and emphasized that the laches analysis required an inquiry into the equitableness of permitting a claim to be enforced. The Court held that the Shareholder Plaintiffs had more than two years and two months after class certification was denied to bring their claims and there was no reason justifying the delay in filing. Notwithstanding, the Court noted that in analyzing a laches defense, the Court must evaluate whether Defendants suffered any prejudice from the passage of time. The Court held that resolving that factual question and exercising the discretion called by the doctrine of laches precluded a definitive resolution of the Defendants’ laches defense at the motion to dismiss stage.
The second plaintiff set (the “Stock Sale Plaintiff”) sold 44,000 shares of stock of the Corporation for $1 per share several months before the Acquisition allegedly in reliance on false and misleading statements made by Defendants that posited that the Corporation was not prospering and that the $1 per share price was fair. Defendants, however, failed to inform the Stock Sale Plaintiff that the Corporation was involved in negotiations regarding the Acquisition. The Stock Sale Plaintiff alleged that had he known about the Acquisition, he would not have sold his shares and would have received approximately $13 per share as a result of the Acquisition. The Court rejected Defendants’ argument that the Stock Sale Plaintiffs’ claims were time-barred. The Court held that the Stock Sale Plaintiff was not put on inquiry notice in November 2006 through receipt of the Merger Proxy because it falsely disclosed that the discussions regarding the Acquisition started after the Stock Sale Plaintiff sold his shares, when such negotiations actually occurred before the stock sale. The Stock Sale Plaintiff did not discover that he had been financially harmed by the allegedly false, misleading, and incomplete statements until he received non-confidential discovery in 2012. The Court held that Defendants’ failure to advise the Stock Sale Plaintiff about the Acquisition discussions prior to the stock sale in response to direct questions coupled with the false Merger Proxy statement that such discussions did not begin until after the stock sale sufficiently rose to the level of fraudulent concealment at the motion to dismiss stage. The Stock Sale Plaintiff also alleged fraud against the Defendants for remaining silent when they had a duty to speak and making false statements and/or actively concealing the truth. Defendants countered that the Stock Sale Plaintiff represented in the stock purchase agreement governing the stock sale (the “SPA”) that he did not rely on any of the alleged statements. The Court held that whether the anti-reliance language in the SPA was enforceable against the Stock Sale Plaintiff’s claims of fraud and breach of fiduciary duty depended on whether the Stock Sale Plaintiff was a sophisticated party who negotiated that language and required factual considerations such as whether the Stock Sale Plaintiff was advised by legal counsel, whether the anti-reliance language was negotiated between the parties, and whether the Stock Sale Plaintiff possessed relevant experience and knowledge, which, the Court held, could not be made at the motion to dismiss stage of the proceedings.
The final set of plaintiffs (the “Options Plaintiffs”) alleged that their pre-2002 options were cancelled as part of the Transactions, and the cancellation was fraudulently concealed from them. Defendants again argued that the claims were time-barred. The Court agreed, holding that the Options Plaintiffs were put on inquiry notice in January 2005 when one of the Defendants falsely informed them that the pre-2002 options never existed and that the board of directors of the Corporation never authorized them. The Court explained that inquiry notice does not require actual discovery of the reason for the injury and does not require plaintiffs’ awareness of all of the aspects of the alleged wrongful conduct. Rather, the statute of limitations is only tolled until such time that persons of ordinary intelligence and prudence would have facts sufficient to put them on inquiry, which, if pursued, would lead to the discovery of the injury. Because the Options Plaintiffs should have further investigated the 2005 statements, the Court held that the claims regarding the pre-2002 options were time-barred.