Sarl v. Spot Runner Inc.

655 F.3d 1039

11 Cal. Daily Op. Serv. 10,777

2011 Daily Journal D.A.R. 12,835

WPP LUXEMBOURG GAMMA THREE SARL, on its own behalf and derivatively on behalf of Spot Runner, Inc., Plaintiff–Appellant,

v.SPOT RUNNER, INC.; Nick Grouf; David Waxman; Peter Huie, Defendants–Appellees.WPP Luxembourg Gamma Three Sarl, on its own behalf and derivatively on behalf of Spot Runner, Inc., Plaintiff–Cross–Appellee,

v.Spot Runner, Inc.; Nick Grouf; David Waxman; Peter Huie; Robert Pittman, Defendants–Cross–Appellants,andBattery Ventures VI, L.P.; Battery Investment Partners VI, LLC; Battery Ventures VII, L.P.; Battery Investment Partners VII, LLC; Index Ventures III (Jersey) L.P.; Index Ventures III (Delaware) L.P.; Index Ventures III Parallel Entrepreneur Fund (Jersey) L.P.; Roger Lee; Danny Rimer, Defendants.WPP Luxembourg Gamma Three Sarl, on its own behalf and derivatively on behalf of Spot Runner, Inc., Plaintiff–Cross–Appellee,

v.Spot Runner, Inc.; Nick Grouf; David Waxman; Peter Huie; Robert Pittman, Defendants,andBattery Ventures VI, L.P.; Battery Investment Partners VI, LLC; Battery Ventures VII, L.P.; Battery Investment Partners VII, LLC; Index Ventures III (Jersey) L.P.; Index Ventures III (Delaware) L.P.; Index Ventures III Parallel Entrepreneur Fund (Jersey) L.P.; Roger Lee; Danny Rimer, Defendants–Cross–Appellants.

Nos. 10–55401

10–55464

10–55468.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 6, 2011.Filed Aug. 23, 2011.

Paul F. Corcoran, Davis & Gilbert LLP; Ben D. Whitwell and Christopher T. Williams, Venable LLP, for plaintiff-appellant WPP.Douglas John Clark, Boris Feldman, Kelley Kinney, and Louis David Nefouse, Wilson, Sonsini, Goodrich & Rosati, for defendant-appellee Spot Runner.Alissa Branham, Robert Leo Dell Angelo, Fred Anthony Rowley, Jr., John W. Spiegel, Munger, Tolles & Olson LLP, and Robert A. Sacks, Sullivan & Cromwell, LLP, for defendants-appellees Nick Grouf and David Waxman.Alissa Branham, Robert Leo Dell Angelo, Fred Anthony Rowley, Jr., and John W. Spiegel, Munger, Tolles & Olson LLP, for defendant-appellee Peter Huie.Kevin C. Logue and Nicholas J. Begakis, Paul Hastings LLP, for defendant-appellee Robert Pittman.Michael D. Blanchard, Jordan D. Hershman, and Jennifer M. Sepic, Bingham McCutchen LLP, for defendant-appellees Battery, Index, Roger Lee, and Danny Rimer.Appeal from the United States District Court for the Central District of California, Dolly M. Gee, District Judge, Presiding. D.C. No. 2:09–cv–02487–DMG–PLA.Before: BETTY B. FLETCHER and N. RANDY SMITH, Circuit Judges, and JAMES S. GWIN, District Judge.^*

OPINION

GWIN, District Judge:

Plaintiff–Appellant and Cross–Appellee WPP Luxembourg Gamma Three Sarl (“WPP”) appeals from the district court's dismissal of the amended complaint. The district court dismissed the amended complaint under Federal Rule of Civil Procedure 12(b)(6) for having failed to state a claim. Defendant–Appellees and Cross–Appellants (“Defendant–Appellees”) cross-appeal the district court's decision to dismiss some of WPP's claims without prejudice.

WPP generally alleges that amidst large operating losses unknown to investors, Spot Runner executives solicited WPP to buy shares in Spot Runner at the same time that executives of the company were selling personally owned shares. WPP says that Spot Runner executives did not disclose their stock sales despite contractual obligations to disclose the sales and despite WPP asking whether these executives were selling. WPP brings securities claims under Section 10(b) of the Securities and Exchange Act of 1934.

The district court exercised jurisdiction over this matter pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78aa. The district court's order dismissing the Plaintiff–Appellant's claims for failure to state a claim is an appealable final determination and we have jurisdiction under 28 U.S.C. § 1291.

I. Facts and Background

In 2004, Adam Shaw and Defendant–Appellees Nick Grouf and David Waxman (collectively “Founders”) founded Spot Runner. Spot Runner developed and sold an internet-based platform to assist small businesses in creating and placing advertising on cable and broadcast television. Throughout the period relevant to this case, Spot Runner made no profit and had difficulty completing the development of its programs. Defendant–Appellee Nick Grouf is Spot Runner's Chief Executive Officer and is a director of the Company, Defendant–Appellee David Waxman is Spot Runner's Vice–President and is also a director, and Defendant–Appellee Peter Huie is Spot Runner's general counsel.

Founders Grouf and Waxman originally held almost all of Spot Runner's common stock. In early 2006, Spot Runner sold preferred equity interests to Battery Ventures VI, L.P.; Battery Investment Partners VI, LLC; Battery Ventures VII, L.P.; and Battery Investment Partners VII, LLC (collectively “Battery”); and Index Ventures III (Jersey) L.P.; Index Ventures III (Delaware) L.P.; and Index Ventures III Parallel Entrepreneur Fund (Jersey) L.P. (collectively “Index”).

In August 2006, WPP invested $10 million in Spot Runner by purchasing newly-issued Series C preferred shares. In purchasing their shares, WPP received the right under a Board Observer Agreement to attend all meetings of Spot Runner's Board of Directors in a non-voting capacity and to receive all materials distributed to Board members. WPP also obtained rights under a Second Amended and Restated Right of First Refusal and Co–Sale Agreement (“ROFR/Co–Sale Agreement” or the “Agreement”). The ROFR/Co–Sale Agreement gave WPP together with Index and Battery—but not Founders Grouf and Waxman—separate rights to match offers to invest in Spot Runner and a right to receive notice if the Founders intended to transfer any of their shares. The Agreement also gave each investor a right to sell its own shares in Spot Runner pro rata with any disposition of common stock by the Founders in a co-sale. Finally, the Agreement included a provision allowing the rights in the Agreement to be waived if sixty percent of the investors voted together, so long as written evidence of the waiver was provided to all the investors. The amended complaint alleges that on several occasions the Founders sold their own shares of Spot Runner but did not disclose the sales to WPP. WPP alleges that the Founders surreptitiously sold their Spot Runner shares, while at the same time encouraging WPP's investment in Spot Runner by keeping those sales secret. WPP claims that the Defendant–Appellants kept the sales secret because WPP enjoyed a strong reputation for technology investments and because Spot Runner used WPP's Spot Runner investments to solicit other investments, which were needed because Spot Runner was losing significant amounts of money.

WPP alleges that in October 2006, shortly after WPP made its initial investment, Founders Grouf and Waxman sold approximately $4 million in shares without disclosing this sale to WPP. WPP says this sale violated the ROFR/Co–Sale Agreement because Grouf and Waxman were under a contractual duty to disclose the sale to WPP.

In the transaction that is the focal point of this suit, WPP alleges that in the spring of 2007, the Founders again sold shares without proper notice and also wrongly induced WPP to purchase additional shares of Spot Runner by failing to disclose the Founders' sales. In March 2007, Spot Runner sold $32 million in common stock in a new primary offering to an institutional investor. On April 17, 2007, Spot Runner informed WPP of the offering; it also asked WPP and other investors if they wanted to purchase their pro rata portion of this offering to maintain their ownership percentage in Spot Runner.

On May 10, 2007, before WPP had responded to the offer to purchase shares as part of the primary offering, Spot Runner sent WPP a letter stating that the same institutional investor wanted to buy existing shares in a secondary offering. Spot Runner said it was soliciting shares to fill this sale from “all preferred stockholders and the founders.” The letter instructed WPP to return an attached “Indication of Interest and Waiver” form and it also included a waiver notice, saying that signing the form acknowledged that the rights of co-sale and first refusal under the ROFR/Co–Sale Agreement were being waived by and among the investors.

On May 14, 2007, Founder Nick Grouf sent WPP an email discussing WPP's potential investment options in light of the primary and secondary offerings. Ultimately, in a May 15 email to Nick Grouf, which also carbon copied Peter Huie (Spot Runner's general counsel), WPP told Grouf that WPP would purchase additional shares in the primary offering to maintain its ownership level. On May 18, 2007, WPP sent an email to Huie to confirm that the purchase of new shares would adequately maintain WPP's ownership percentage in Spot Runner. Huie replied on the same day, confirming that the purchase would slightly increase WPP's ownership stake. Huie also asked if WPP was passing on the option to sell shares as part of the secondary offering. WPP confirmed that it was not going to sell any shares and also stated that the waiver form was being returned.

On the next business day—May 21, 2007—WPP began a new email chain with Huie, with the subject line “WPP Share Purchase.” In this May 21 email chain, WPP asked Huie whether there was “an existing investor and/or founder selling existing shares related to this offering? If so, who is selling shares and how many shares are they selling[.]” Huie replied that “[t]his offering does not involve the sale of any existing shares. It is an entirely new issuance by the Company.”

On May 23 and 24, 2007, WPP purchased 383,111 additional shares of common stock from Spot Runner at $4.66 per share, for a total new investment of $1,785,297; WPP also executed a waiver form declining to sell its own shares as part of the secondary offering. While WPP was purchasing shares and...