Matrix Parent, Inc. v. Audax Mgmt. Co.

319 A.3d 909

MATRIX PARENT, INC.; H.I.G. Mobile, L.P.; H.I.G. Europe Middle Market LBO Fund, L.P.; H.I.G. Middle Market LBO Fund III, L.P.; H.I.G. Technology Partners A, L.P.; H.I.G. Technology Partners B, L.P.; and H.I.G. Matrix Coinvestors, L.P., Plaintiffs,

v.AUDAX MANAGEMENT COMPANY, LLC; AG Mobile Holdings, LP; Audax Private Equity Fund V-A, L.P.; Audax Private Equity Fund V-B, L.P.; Aff Co-Invest L.P.; Audax Trust Co-Invest, L.P.; Audax PE V Co-Invest, a Series of Audax Co-Invest Series, LLC; Iveshu Bhatia; Daniel Doran; and Timothy Mack, Defendants.

C.A. No. N23C-10-212 MAA CCLD

Superior Court of Delaware.

Submitted: March 22, 2024

Decided: June 27, 2024

Defendants’ Motion to Dismiss: GRANTED in Part, and DENIED in Part.

Elena C. Norman, Esquire, Daniel M. Kirshenbaum, Esquire, and Michael A. Laukaitis, II, Esquire, of YOUNG, CONAWAY, STARGATT, and TAYLOR LLP, Wilmington, DE, and Michael S. Shuster, Esquire, and Vincent Levy, Esquire, of HOLWELL SHUSTER & GOLDBERG LLP, New York, NY, Attorneys for Plaintiffs.

Kevin R. Shannon, Esquire, of POTTER ANDERSON & CORROON LLP, Wilmington, DE, and Kevin B. Huff, Esquire, of KELLOGG, HANSEN, TODD, FIGEL & FREDERICK, P.L.L.C., Washington, DC, Attorneys for Defendants, and Michael Kendall, Esquire, of WHITE & CASE LLP, Boston, MA, Attorneys for Defendants Iveshu Bhatia, Daniel Doran, and Timothy Mack.

OPINION

Adams, J.

INTRODUCTION

Plaintiff Matrix Parent, Inc. ("Matrix Parent"), along with Plaintiffs H.I.G. Europe Middle Market LBO Fund, L.P., H.I.G. Middle Market LBO Fund III, L.P., H.I.G. Technology Partners A, L.P., H.I.G. Technology Partners B, L.P., Matrix CoInvestors, L.P., and H.I.G. Mobile, L.P. (together, the "H.I.G. Plaintiffs," and together with Matrix Parent, "Plaintiffs"), bring this suit to recover hundreds of millions of dollars that Plaintiffs allegedly overpaid for Mobileum, Inc. ("Mobileum") and connected entities. Plaintiffs allege that Mobileum’s purchase price was artificially inflated by a fraudulent scheme to overstate the growth of Mobileum’s new bookings and revenue.

Plaintiffs bring their claims against Defendants Audax Management Company, LLC ("Audax"), AG Mobile Holdings, L.P., Audax Private Equity Fund V-A, L.P., Audax Private Equity Fund V-B, L.P., AFF Co-Invest, L.P., Audax Trust Co-invest, L.P., and Audax PE V Co-invest, a Series of Audax Co-Invest Series, LLC (together with Audax, the "Audax Defendants"), as well as Defendants Iveshu Bhatia, Daniel Doran, and Timothy Mack (together, the "Individual Defendants," and together with the Audax Defendants, "Defendants"). Plaintiffs allege that Defendants are accountable for the fraud because Defendants controlled Mobileum and the selling entity, Mobile Acquisition Holdings, LP ("Mobile Acquisition Holdings"), while the fraudulent scheme was carried out.

Defendants now move to dismiss Plaintiffs’ Complaint. Defendants argue that the Complaint fails to state a viable claim under Superior Court Civil Rule 12(b)(6) because Plaintiffs’ theories of liability are, in large part, barred by the relevant Stock Purchase Agreement (the "SPA") and are otherwise inadequately pled. Defendants also assert under Rule 12(b)(2) that this Court lacks personal jurisdiction over the Individual Defendants. Defendants alternatively move under Rule 12(f) to strike Plaintiffs’ request for a jury trial because the SPA contains a provision waiving the right to the same. This is the Court’s decision on these issues. For the reasons stated herein, Defendants’ Motion is GRANTED in part, and DENIED in part.

FACTS¹

I. The Parties

A. Plaintiffs

Matrix Parent is the designated "Buyer" under the SPA.² It is a Delaware corporation with its principal place of business in New York.³

The H.I.G. Plaintiffs are a group of investment funds that, together, contributed $285 million towards Matrix Parent’s purchase of Mobileum.⁴ H.I.G. Europe Middle Market LBO Fund, L.P. is a Cayman Islands exempted limited partnership with its principal place of business in Florida.⁵ H.I.G. Middle Market LBO Fund III, L.P. is a Delaware limited partnership with its principal place of business in Florida.⁶ H.I.G. Technology Partners A, L.P. is a Delaware limited partnership with its principal place of business in Florida.⁷ H.I.G. Technology Partners B, L.P. is a Delaware limited partnership with its principal place of business in Florida.⁸ H.I.G. Matrix CoInvestors, L.P. is a Delaware limited partnership with its principal place of business in Florida.⁹ H.I.G. Mobile, L.P. is a Delaware limited partnership with its principal place of business in New York.¹⁰

B. Defendants

The Audax Defendants are a group of entities that indirectly owned Mobileum prior to the at-issue sale.¹¹ Audax is a Delaware limited liability company with its principal place of business in Massachusetts.¹² AG Mobile Holdings, L.P. is a Delaware limited partnership with its principal place of business in Massachusetts.¹³ Audax Private Equity Fund V-A, LP is a Delaware limited partnership with its principal place of business in Massachusetts.¹⁴ Audax Private Equity Fund V-B, LP is a Delaware limited partnership with its principal place of business in Massachusetts.¹⁵ AFF Co-Invest LP is a Delaware limited partnership with its principal place of business in Massachusetts.¹⁶ Audax Trust Coinvest LP is a Delaware limited partnership with its principal place of business in Massachusetts.¹⁷ Audax PE V Co-invest, a Series of Audax Co-Invest Series, LLC is a Delaware limited liability company with its principal place of business in Massachusetts.¹⁸

The Individual Defendants—Bhatia, Doran, and Mack—are natural persons affiliated with the Audax Defendants and employed by Audax.¹⁹ Each of the Individual Defendants is a Massachusetts resident.²⁰

C. Relevant Non-Parties

Mobile Acquisition Holdings is the designated "Seller" under the SPA.²¹ Mobile Acquisition Holdings directly owned Mobile Acquisition Corp.²² Mobile Acquisition Corp. directly owned Mobileum.²³ Mobile Acquisition Corp. is the designated "Company" under the SPA, but Mobileum was the principal operating company.²⁴ Plaintiffs allege that Mobile Acquisition Holdings is a shell company controlled by the Audax Defendants.²⁵

Andrew Warner was Mobileum’s Chief Financial Officer and a member of Mobileum’s Board at all relevant times.²⁶ Plaintiffs allege that Warner was also Audax’s employee and the Audax Defendants’ agent for purposes of managing Mobileum.²⁷

Orathi "Bobby" Srinivasan co-founded Mobileum.²⁸ Srinivasan was Mobileum’s Chief Executive Officer and a member of Mobileum’s Board at all relevant times.²⁹

II. The Sale of Mobileum

Mobileum provides a suite of services to mobile-network providers and other telecommunications companies.³⁰ Audax is a private equity firm that acquires, grows, and then resells portfolio companies.³¹ In November 2016, Audax acquired Mobileum.³² Audax kept Srinivasan in place as Mobileum’s CEO, but installed Warner as Mobileum’s new CFO.³³ Plaintiffs allege that Audax had twice before placed Warner in an executive role at a portfolio company.³⁴

From 2017 to 2020, Mobileum—under Audax’s control—acquired six new companies.³⁵ Then, in late 2020, Audax put the augmented Mobileum up for sale.³⁶ Mobileum retained Jefferies LLC ("Jeffries") to serve as a financial advisor and to market Mobileum.³⁷ In September 2021, Jeffries contacted H.I.G.³⁸ and provided a Confidential Information Memorandum ("CIM") detailing Mobileum’s financial position and projections.³⁹

The CIM indicated Mobileum was financially sound and steadily growing.⁴⁰ Most pertinent to this case, the CIM projected that Mobileum’s 2021 EBITDA would reach $84 million, its revenue would grow at a rate of 15%, and its bookings would grow at a rate of 18%.⁴¹ Those estimates and other promising figures prompted H.I.G. to begin due diligence in late September 2021.⁴² In November 2021, H.I.G. submitted a non-binding offer valuing Mobileum (on an Enterprise Value basis) between $860 million and $920 million.⁴³

The parties then engaged in "Phase 2" of due diligence.⁴⁴ During this phase, the Audax Defendants and Mobileum shared more detailed information about Mobileum with H.I.G.⁴⁵ H.I.G. retained the services of PricewaterhouseCoopers to help analyze Mobileum’s financials.⁴⁶ Sold on Mobileum’s potential, on December 9, 2021, H.I.G. submitted a binding offer that placed Mobileum’s Enterprise Value at $890 million.⁴⁷

Following additional diligence and negotiation, H.I.G. agreed to purchase a majority stake in Mobileum based on a "headline" Enterprise Value of $915 million.⁴⁸ Accordingly, on December 25, 2021, the parties gifted each other executed copies of the SPA.⁴⁹ The transaction closed on March 1, 2022.⁵⁰

As for the mechanics of the transaction, H.I.G. formed Matrix Parent to be the buyer.⁵¹ Matrix Parent then bought Mobile Acquisition Holdings’ shares in Mobile Acquisition Corp., which directly owns Mobileum.⁵² The H.I.G. Plaintiffs contributed $285 million in cash to partially fund the purchase, and Matrix Parent covered the rest through debt.⁵³ Additionally, the Audax Defendants and key members of Mobileum’s management received around $141 million worth of rollover shares in Matrix Topco LP, which indirectly owns Matrix Parent.⁵⁴

III. The Alleged Fraud

The crux of this case is Plaintiffs’ allegation that Mobileum’s attractive EBITDA, revenue growth, and bookings numbers were based on fraud and not actual business performance. According to Plaintiffs, Mobileum’s revenue was actually in decline during the relevant period and Mobileum’s 2021 EBITDA was at least $20 million less than advertised.⁵⁵ Plaintiffs highlight three "pillars" of fraud to describe the recipe Mobileum allegedly used to cook its books.

Each pillar is described more fully below but to summarize, Plaintiffs allege that, under Defendants’ guidance, Mobileum: (1) improperly accelerated its revenue recognition by acting as if it had performed more work than it had; (2) covered up its...