Royzenshteyn v. Onyx Enters. Can.

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STANISLAV ROYZENSHTEYN, et al., Plaintiffs, v. ONYX ENTERPRISES CANADA, INC., et al., Defendants.

Civil Action No. 22-07514 (GC) (JBD)

United States District Court, D. New Jersey

May 31, 2024

NOT FOR PUBLICATION

OPINION FILED UNDER TEMPORARY SEAL

GEORGETTE CASTNER UNITED STATES DISTRICT JUDGE

This matter comes before the Court upon five fully briefed motions filed by all Defendants to dismiss Plaintiffs Stanislav Royzenshteyn and Roman Gerashenko's Complaint.^[1] (ECF Nos. 82, 85, 87, 88, 92.) The Court has carefully considered the parties' submissions and decides the motions without oral argument pursuant to Federal Rule of Civil Procedure (Rule) 78(b) and Local Civil Rule 78.1(b). For the reasons set forth below, and other good cause shown Defendants' motions are GRANTED in part and DENIED in part.

I. BACKGROUND

A. Factual Allegations

In 2008, Plaintiffs founded Onyx Enterprises Int'l Corp. (Onyx or the Company), a New Jersey-based e-commerce retailer of specialty automotive products. For years, Plaintiffs were Onyx's sole owners and directors. In 2014, Plaintiffs began searching for outside investors. (Compl. ¶¶ 4, 24, 36-40.)

Their search led them to Prashant Pathak, the owner of the Canadian private equity firm Ekagrata, Inc., who then introduced Plaintiffs to Carey Kurtin and his father, J. William Kurtin. Impressed with Pathak's promises of a venture with a large Canadian tire retailer, Plaintiffs brought Pathak and C. Kurtin into Onyx through the “2015 Transaction.”^[2] (Id. ¶¶ 40-41, 45.)

To facilitate the 2015 Transaction, Pathak and C. Kurtin formed Onyx Enterprises Canada, Inc. (OEC), which used $5 million that it received from J.W. Kurtin through his Canadian company In Colour Capital, Inc. (ICC) to invest in Onyx.^[3] The transaction is memorialized in several contracts (the “2015 Transaction Documents”): the Stockholders Agreement, Stock Purchase Agreement, Amended and Restated Certificate of Incorporation, and Amended and Restated Bylaws. (Id. ¶¶ 45-55.)^[4] The Complaint focuses on five terms across those documents.

The Stock Purchase Agreement includes two key terms in exchange for the $5 million investment in Onyx: first, OEC received one million preferred shares of Onyx and a warrant to purchase 52% of the common shares of Onyx, which OEC exercised in late 2015, making Plaintiffs minority shareholders of Onyx; and second, Pathak and C. Kurtin became two of the four members of Onyx's board of directors, the other two being Plaintiffs. (Id. ¶¶ 46-49, 57; Stock Purchase Agreement §§ 1.2, 2.3.)

The Stockholders Agreement includes two more key terms. First, a “Drag-Along” clause provides that if OEC accepts an offer to sell Onyx for at least $45 million, OEC can issue a “Drag Notice” and require Plaintiffs to sell their stock. Second, the Stockholders Agreement appointed OEC as Plaintiffs' “irrevocable proxy” to “vote the Voting Shares in accordance with this [Stockholders Agreement] . . . and to execute all appropriate instruments consistent with the provisions of this Agreement on behalf of such Stockholder.” (Compl. ¶¶ 50-51; Stockholders Agreement §§ 4.5(a), 5.1.)

Finally, the Amended Certificate of Incorporation (COI) provides that if a merger involving Onyx resulted in its stockholders' losing a “majority of the voting power in substantially the same proportions” as they held before the merger, OEC would be entitled to the “Liquidation Preference”: the sum of (i) “four times the Original Issue Price”-that is, four times OEC's $5 million investment, or $20 million-plus (ii) “any accrued but unpaid Accruing Dividends.” Any remaining assets would “be distributed ratably to the holders of the Common Stock.” (Compl. ¶¶ 52-54; COI, Art. IV, §§ 3(a)-(b), 4(b) (cleaned up).)

Over time, disputes arose between Plaintiffs and Pathak and C. Kurtin. Plaintiffs say Pathak and C. Kurtin abandoned their pre-transaction promises. And frequent deadlocks of a divided board (Plaintiffs on one side, Pathak and C. Kurtin on the other) paralyzed decision-making and strained Onyx's business. (Compl. ¶¶ 57-58, 60.)

In March 2018, Plaintiffs sued OEC, Pathak, C. Kurtin, J.W. Kurtin, ICC, and their affiliates in the Superior Court of New Jersey, Monmouth County, Chancery Division, over allegations of fraud in the 2015 Transaction. To keep Onyx functioning, the parties asked the court to appoint a provisional fifth director to the board to settle the board's deadlocks. For that position, the parties chose Kailas Agrawal, who had served as Onyx's de facto chief financial officer since December 2015 before becoming Onyx's official CFO in January 2018. Though Agrawal was Pathak's long-time friend and a high-level employee with ICC, he assured Plaintiffs-deceptively so, Plaintiffs allege-that he would not be controlled by Pathak. (Id. ¶¶ 19, 59, 61-62.)

Later in 2018, Plaintiffs drew up a “three-year strategic roadmap” for Onyx. The plan, which focused on growing the business, would require more funds-at least $25 million, by the board's estimation. So the board set out to find an investment bank to help with fundraising. (Id. ¶¶ 64-66.)

In February 2019, after pursuing several investment banks, Onyx heard a presentation from Canaccord Genuity Group Inc. (Canaccord Inc.),^[5] an investment bank who was recommended by Pathak and C. Kurtin and had ties to J.W. Kurtin. In its presentation, Canaccord made clear that it understood, “based on discussions with stakeholders,” that the “current primary objective” was to sell Onyx. With that understanding, Canaccord presented a preliminary valuation for Onyx of between $400 and $600 million, footnoting that its valuation “assume[d] a sale on 12/31/19.” (Id. ¶¶ 68-73.)

Though Plaintiffs were open to selling Onyx at an appropriate valuation, they preferred to grow the company, not sell it. And they worried that Canaccord was too focused on selling Onyx. Despite Plaintiffs' concerns, Onyx engaged Canaccord as the “exclusive financial advisor in connection with [Onyx]'s review of its strategic and financial alternatives,” including possible business combinations or a financing transaction. (Id. ¶¶ 72-74, 78.)

Plaintiffs allege that from the start, Canaccord-directed by Pathak, C. Kurtin, and Agrawal^[6]-sought to sell Onyx rather than secure financing. Canaccord's fee arrangement, Plaintiffs contend, made selling Onyx more lucrative for Canaccord. (Id. ¶¶ 75-79.)

By March 2020, after a year of searching, Canaccord had fielded only two “low-ball offers” to purchase Onyx, which created more dysfunction and hostility among the already divided board members. As Plaintiffs allege, private equity firms like ICC aim to enter a company and exit with a profit within five years-and ICC's five-year window was closing in 2020. With the deadline looming, Pathak and C. Kurtin became desperate to find their exit that would trigger the Liquidation Preference. (Id. ¶¶ 80-95.)

In July 2020, Canaccord contacted Legacy Acquisition Corp. (Legacy), a special purpose acquisition company (SPAC), as a potential acquirer of Oynx. (Id. ¶ 97.)

Legacy, like most SPACs, was a shell with no operations of its own; it existed to raise funds and then find a privately held operating company and take that company public by merger. The typical life of a SPAC, as Plaintiffs describe it, is this: A sponsor (typically an investment firm) creates the SPAC, the SPAC raises funds through an initial public offering (typically at $10 per share, sold to institutional investors), the IPO proceeds are placed into a trust account for expenses and consideration for a merger, and the sponsor then has a set period (typically two years) to find a target company and complete the merger. Once a sponsor finds a suitable target, the sponsor and the target negotiate the terms of a merger, reach an agreement, and file a proxy statement memorializing the deal. The SPAC's investors then decide whether to (1) vote in favor of approving the merger, and (2) stay invested in the SPAC or instead redeem their shares and receive back their $10-per-share investment. If the merger is approved, the business combination is completed (the “de-SPAC transaction”), the SPAC funds are invested in the target, and the combined company trades under a new ticker symbol. But if a merger is never completed, the SPAC funds are returned to the investors, and the sponsor loses its entire investment. (Id. ¶¶ 98102, 104, 106.)

Here, Legacy was formed and taken public by its sponsor, Legacy Acquisition I LLC (the Sponsor), in 2017. By mid-2020, the Sponsor still had not found a target company, despite receiving several deadline extensions. At that point, Legacy's investors had redeemed $242 million of the $300 million originally raised, leaving Legacy with only $64.5 million in trust. If the Sponsor could not close a deal by November 20, 2020, the latest deadline, it faced losing its entire investment. (Id. ¶¶ 106, 109-110.)

The urgency felt by both ends led to what Plaintiffs say was a rushed, unfair merger to the detriment of Onyx's minority shareholders. Within two months, the Controller Defendants and Legacy negotiated the material terms of the deal, with Canaccord's help, and with Plaintiffs sidelined and kept in the dark. (See id. ¶¶ 112, 115, 118, 120-122, 156.)

In early negotiations, Legacy and Onyx exchanged a letter of intent in July 2020 and a revised version in August 2020. (Compl. Exs. E (July LOI), F (Aug. LOI).) The August LOI valued Onyx at least at $250 million, an increase from the July LOI's low-end valuation of $175 million. (Compl. ¶¶ 119, 121.) The August LOI also contemplated the following terms:

• approximately $20 million of Legacy's cash would go to OEC for the Liquidation Preference payment;

• “the remaining

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