Fisk Ventures, LLC v. Segal

2008 WL 1961156 (Del. Ch. 2008)

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Nature of the Case

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Facts

Fisk Ventures, LLC (P) initiated this action to dissolve Genitrix, LLC. Dr. Andrew Segal, the president, and sole officer of Genitrix, answered the petition and filed counterclaims and third-party claims. Fisk and third-party respondents H. Fisk Johnson, Stephen Rose, and William Freund then moved to dismiss Segal’s claims. Segal answered Johnson’s motion to dismiss for lack of personal jurisdiction, but, in lieu of answering the motion to dismiss for failure to state a claim, Segal filed an amended counterclaim/third-party complaint. Genitrix, LLC, is a Delaware limited liability company founded by Dr. Segal in 1996. Equity in Genitrix is divided into three classes of membership. In exchange for the patent rights he obtained from the Whitehead Institute, Segal’s capital account was credited with $500,000. He retained approximately 55% of the Class A membership interest. The remainder of the Class A interest was granted to other individuals not involved in this suit. Johnson contributed $843,000 in return for a sizeable portion of the Class B membership interest. The remainder of the Class B interest is held by Fisk Ventures, LLC, and Stephen Rose. Various other investors contributed over $1 million for membership interests in Class C. The power in the LLC is essentially divided by the LLC Agreement (the “Agreement”) between the Class A and Class B members. Under the Agreement, the Board of Member Representatives manages the business and affairs of the Company. The Board consisted of four members: two of whom were appointed by Johnson and two of whom were appointed by Segal. In early 2007, however, the balance of power seemingly shifted. Because the Company failed to meet certain benchmarks, the Board expanded to five seats and the Class B members were able to appoint a representative to the newly created seat. The Agreement requires the approval of 75% of the Board for most actions, the combined 60% stake of Fisk Ventures and Johnson is insufficient to control the Company. In other words, the LLC Agreement was drafted in such a way as to require the cooperation of the Class A and B members. The Company was financially unstable. It was always strapped for cash. The Company hobbled along on grants from the National Institutes of Health and a series of relatively small financing transactions. Johnson and Fisk Ventures agreed to contribute another $2 million in convertible debt if the Company agreed to try to raise an additional $5 million from other investors over the following two years. Segal proposed that the “Put Right” of the Class B investors be suspended to allow him to more easily woo other investors. Pursuant to Section 11.5 of the LLC Agreement, the Class B Members may, at any time, force the Company to purchase any or all of their Class B membership interests at a price determined by an independent appraisal. If the purchase price exceeds 50% of the Company’s tangible assets, the Members who exercised the Put Right would receive notes secured by all of the assets of the Company. The Class B Members refused to suspend or relinquish their contractual rights. Efforts failed to generate any investment. Dr. Segal turned his attention to individual, high-net-worth investors. The potential investors complained about the Class B Put Right, one of whom called it a “deal killer.” The Class B members again refused to subrogate that right. Segal was removed as CEO and Pugh took over. In March 2006, the company ran out of operating cash. In August Pugh left and Genitrix had just two employees left. That other employee left in May 2007. The Company has no office, no capital funds, no grant funds, and generates no revenue. The Board has not met since the fall of 2006 because the Class A representatives have refused to participate in any meetings. Class B members rejected an offer to buy Segal's shares. Fisk Ventures initiated this suit, seeking dissolution of Genitrix. In his counterclaim, Segal contends that the counterclaim/third-party defendants breached the LLC Agreement, breached the implied covenant of good faith and fair dealing implicit in the LLC Agreement, breached their fiduciary duties to the Company, and tortiously interfered with the Segal Employment Agreement. The counterclaim/third-party defendants seek to dismiss Segal’s claims and reduce this suit to its original form as a petition for judicial dissolution. Johnson moves under Rule 12(b)(2), claiming that, regardless of the merits of Segal’s claims, the suit should be dismissed with respect to him because the Court has no personal jurisdiction over him. All counterclaim/third-party defendants move under Rule 12(b)(6), claiming that Segal has failed to state a claim upon which relief can be granted because his allegations reflect little more than the exercise of their contractual rights.