This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
Delaware’s high court has reversed the dismissal of charges that Jive Communications Inc. fraudulently duped KnighTek LLC’s owner into accepting a million-dollar discount in its payment for his telecom business by falsely claiming Jive was short of cash and concealing its imminent acquisition by LogMeIn in KnighTek, LLC. v. Jive Communications Inc., No. 570-2018, (Del. Jan. 27, 2020).
The high court’s Jan. 27 ruling found that Erik Knight’s Superior Court complaint sufficiently alleged fraud and stated a fraudulent misrepresentation claim under Utah law by charging Jive Vice President Samuel Simmons and other company representatives falsely told Knight he would have to wait five years for full payment if he didn’t immediately accept a heavily discounted cash-out.
Writing for the court en banc, Chief Justice Collins J. Seitz Jr. said Jive’s representatives intentionally concealed their $342 million sale to cloud-based connectivity company LogMeIn because that would entail a change-of-control at Jive that would entitle Knight to an immediate $2.7 million payout under his sale agreement.
Knight’s complaint charged that years after Jive bought his telecom equipment and services business for $100,000 upfront and a revenue-based payment stream capped at $4.6 million, Jive offered to cash him out for $1.75 million — a substantial discount from the remaining cap amount.
An unpleasant surprise
Knight said he took the Jan. 18, 2018 offer only because Jive vowed that if he did not accept by the end of the month, it would use its limited funds elsewhere and he would have to wait five years for his buy-out; but two days after he accepted, Jive announced the LogMeIn merger and he filed suit.
The Superior Court granted Jive’s motion to dismiss for failing to allege fraud and misrepresentation with particularity under Utah law—which governed the KnighTek sale agreement — and Knight appealed. KnighTek, LLC. v. Jive Communications Inc., No. N18C-04-260-JRJ opinion(Del. Super. Oct. 23, 2018).
The Superior Court held that Simmons’ statements were only “forward-looking predictions, opinion statements or subjective opinions” rather than presently existing material fact and that the complaint did not allege his statements were knowingly or recklessly false.
The high court disagreed, finding that under Superior Court Civil Rule 9(b), Knight sufficiently alleged that Simmons falsely told him Jive had limited buyout funds and would use them on a first-come, first served basis.
The justices said it was sufficient for Knight to attribute to “Jive” — rather than a specific individual — the statement that he would have a five-year wait for final payment if he passed up the discounted cash-out, because it was one of the misrepresentations Simmons allegedly made on behalf of the defendant company.
The high court said the complaint satisfies Rule 9(b)’s requirement because it adequately specifies the speaker, time and place of the alleged misrepresentations — which Knight claims happened during a two-week negotiation period with Simmons and Jive’s General Counsel.
The justices said they reversed and remanded because:
- Alleging that Jive “misrepresented” facts is the same as making the required claim that “this representation was false” and “to hold otherwise would be to elevate form over substance.”
- The complaint reasonably infers that Jive was not short of cash and made misrepresentations “to dupe KnighTek into a discounted payment” when it knew KnighTek would soon be entitled to $1 million more because of the LogMeIn merger.
- Utah and most other jurisdictions normally expect that a party engaged in arms-length negotiations will make reasonable inquiries of its counter-party, but the high court said “a party need not make inquiry when the counter-party knows [certain facts] to be necessary to prevent” a statement from being misleading, citing a Utah Supreme Court ruling in First Sec. Bank N.A. v. Banberry Dev. Corp.,786 P.2d 1326, 1330-31 (Utah 1990).
- If the plaintiff can prove its allegations, it would have been justified in relying on Jive’s statements as inferring that no change-of-control was imminent — “especially under Jive’s manufactured deadline.”
- KnighTek’s acceptance of the cash-out did not waive its right to sue because under Utah law “a release will be voidable if it was an integral part of a scheme to defraud” and Jive knew the release was necessary to benefit from the merger, the high court said, citing Ong Intern. (U.S.A.) Inc. v. 11thAve Corp., 850P.2d 447, 453 (Utah 1993).