Tang Capital Partners, LP. v. BRC Inc.

661 F.Supp.3d 48

TANG CAPITAL PARTNERS, LP., Plaintiff, v. BRC INC., Defendant.

22-CV-3476 (RWL)

United States District Court, S.D. New York

Signed March 8, 2023

Andrew Freire, David Philip Salant, Reed Michael Brodsky, Gibson, Dunn & Crutcher LLP, New York, NY, for Plaintiff.

Stefan H. Atkinson, Byron De Angelo Mille Pacheco, Jacob Rae, Kirkland & Ellis LLP, New York, NY, for Defendant.

DECISION AND ORDER: MOTION TO DISMISS

ROBERT W. LEHRBURGER, United States Magistrate Judge.

Plaintiff Tang Capital Partners, LP ("Tang") purchased and attempted to exercise certain warrants to purchase shares in Defendant BRC Inc. ("BRC"). After being refused twice and only permitted to exercise its warrants after BRC's stock price had fallen, Tang commenced the instant action seeking damages for breach of contract. Tang also seeks a declaration that "the Warrants and the shares of common stock underlying the Warrants were registered within the meaning of the Securities Act of 1933 as of January 13, 2022, when [BRC's] Form S-4 was declared effective" by the Securities and Exchange Commission (the "SEC") and that, "therefore, the Warrants should have been exercisable on March 11, 2022." (Compl. ¶ 48.¹) BRC moves to dismiss with prejudice both the breach of contract claim and the declaratory judgment claim under Federal Rule of Civil Procedure 12(b)(6) ("Rule 12(b)(6)"). For the reasons that follow, the Court GRANTS the motion as to the declaratory judgment claim and DENIES the motion as to the breach of contract claim.

FACTUAL BACKGROUND

The following facts are drawn from the Complaint, exhibits attached thereto, and public filings with the SEC. As required on a motion to dismiss, the Court accepts as true all well-pled allegations of the Complaint and draws all reasonable inferences in favor of Tang as the non-moving party.

The warrants at the heart of this dispute were first issued by SilverBox Engaged Merger Corp I ("SilverBox") pursuant to a February 25, 2021 warrant agreement (the "Warrant Agreement").² (Compl. ¶ 2.) SilverBox was a public special purpose acquisition company ("SPAC") formed to identify and combine with a merger target. (Compl. ¶ 13.) Ultimately, SilverBox combined with Black Rifle Coffee Company, LLC ("Black Rifle Coffee"), forming the new company BRC Inc. (Compl. ¶ 19.)

A. The Warrant Agreement

Several key provisions of the Warrant Agreement are summarized below.

1. Parties And Beneficiaries

Section 9.5 of the Warrant Agreement defines which parties have rights and obligations under the Agreement (and which do not) as follows:

Nothing in this Agreement shall be construed to confer upon, or give to, any person or corporation other than the parties hereto and the Registered Holders of the Warrants any right, remedy, or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise, or agreement hereof. All covenants, conditions, stipulations, promises, and agreements contained in this Agreement shall be for the sole and exclusive benefit of the parties hereto and their successors and assigns and of the Registered Holders of the Warrants.

Ownership of warrants is tracked by registration with the "Warrant Agent," identified in the Agreement as Continental Stock Transfer & Trust Company. (Warrant Agreement at 1.) Per the Warrant Agreement:

The Warrant Agent shall maintain books (the "Warrant Register") for the registration of original issuance and the registration of transfer of the Warrants. . . . Ownership of beneficial interests in the Public Warrants shall be shown on, and the transfer of such ownership shall be effected through, records maintained by (i) the Depositary or its nominee for each book-entry certificate or (ii) institutions that have accounts with The Depository Trust Company . . . .

(Warrant Agreement § 2.3.1). "Registered Holder" is defined as "the person in whose name such Warrant is registered in the Warrant Register." (§ 2.3.2.)

The original signatories to the Warrant Agreement are SilverBox and Continental Stock Transfer & Trust Company. (Warrant Agreement at 23.) The Warrant Agreement explicitly binds and benefits successors. (Warrant Agreement §§ 4.4, 9.1, 9.5.)

2. Exercise Of Warrants

The Warrant Agreement provides that each warrant entitles the Registered Holder thereof to purchase a share of common stock for $11.50 per share (the "Warrant Price"), subject to provisions allowing adjustments. (Warrant Agreement § 3.1.)

Section 3.2 establishes the duration of warrants and provides that warrants may only be exercised during the "Exercise Period" which begins on the later of "the date that is thirty (30) days after the first date on which the Company completes a merger, share exchange, asset acquisition, share purchase, reorganization or similar transaction, involving the Company and one or more businesses (a "Business Combination"), and . . . the date that is twelve (12) months from the date of the closing of the Offering" provided, however, "that the exercise of any Warrant shall be subject to the satisfaction of any applicable conditions, as set forth in subsection 3.3.2 . . . with respect to an effective registration statement or a valid exemption therefrom being available."

Section 3.3 governs the exercise of warrants. Under § 3.3.1, a Registered Holder may exercise a warrant by surrendering the warrant with an executed election to purchase form and payment in full. Section 3.3.2 governs the issuance of shares of common stock once the warrant is exercised, including conditions precedent to issuance.

Section 7 sets forth other provisions relating to the rights of warrant holders. Section 7.4.1 concerns the registration of shares of common stock "issuable upon exercise of the Warrants."

B. SilverBox And Black Rifle Coffee Merge To Create BRC And File SEC Form S-4

In late 2021, SilverBox identified Black Rifle Coffee as a merger target and sought to merge and form BRC Inc.³ (Compl. ¶ 19.) On November 10, 2021, BRC filed-with the SEC a Form S-4, which is used for "[r]egistration of securities issued in business combination transactions."⁴ BRC filed amended versions of the Form S-4 on December 14, 2021, January 4, 2022, and January 11, 2022, in response to comments from the SEC. (Compl. ¶ 20.)

The January 11, 2022 Form S-4 lists three securities "to be registered" by the form and for which fees were calculated and paid: 1) 41,883,740 "Shares of Class A Common Stock, par value $.0001 per share"; 2) 17,766,667 "Warrants to purchase shares of Class A Common Stock" and 3) 17,766,667 "Shares of Class A Common Stock issuable upon exercise of warrants." (Form S-4 at ECF 2.) The Preliminary Proxy Statement and Prospectus provided to SilverBox stockholders and filed as part of the Form S-4 states in bold and capital letters that it is a "Prospectus for 40,725,250 shares of Class A common stock[;]⁵ 17,766,667 warrants to purchase shares of Class A Common Stock[;] and 17,766,667 shares of Class A common stock underlying warrants of BRC Inc. (Form S-4 at ECF 3.) The Prospectus further states that "[p]ursuant to the Business Combination [i.e., the Silverbox - Black Rifle Coffee merger], among other things . . . each warrant of SilverBox outstanding immediately prior to the effectiveness of the SilverBox Merger [will be] converted into the right to receive one warrant of PubCo [i.e., BRC], . . . with PubCo assuming SilverBox's obligations under the existing warrant agreement." (Form S-4 at ECF 3.)

The amended Form S-4 became effective on January 13, 2022 at 9:00 A.M. (Compl. Ex. C.) SilverBox and Black Rifle Coffee completed their merger on February 9, 2022, creating BRC. (Compl. ¶ 22.) The same day, BRC registered "Class A common stock" and "Redeemable warrants, each whole warrant exercisable for one share of Class A common stock at an exercise price of $ 11.50" on the New York Stock Exchange (NYSE). (BRC Form 8-A (Dkt. 34-3) at 1.) BRC's Form 8-A regarding this registration on the NYSE incorporated by reference the Form S-4's "description of the shares of Class A common stock and warrants" to describe the securities to be registered.⁶ (BRC Form 8-A at 2.)

In response to an investor inquiry, Tanner Doss, BRC's Vice President of Investor Relations, stated on March 8, 2022 "[a]fter going back and forth with outside counsel" that, as to public warrant holders, "those underlying shares have already been registered through the [SilverBox] transaction and you should be able to exercise those warrants 30 days post-transaction." (Compl. ¶ 37.)

C. Tang Purchases And Attempts To Exercise Its Warrants

Tang purchased 1,035,364 warrants in open market transactions between March 7, 2022 and April 6, 2022, relying on the Form S-4, BRC's other SEC filings, and BRC's public statements. (Compl. ¶ 39.) While the Complaint does not describe which warrants were purchased when, the gross cost of the purchases totaled more than $3.76 million. (Compl. ¶ 39.)

On March 11, 2022, thirty days after the February 9, 2022 merger, Tang submitted a notice to exercise its then-held warrants, but was told that the warrants were not exercisable. (Compl. ¶ 41.) Tang's counsel requested an explanation from BRC's counsel, who "asserted that the Form S-4 did not register an ongoing offering covering the exercise of the [w]arrants, on the theory that a Form S-4 cannot be used for a 'continuous' offering under SEC Rule 415." (Compl. ¶ 42.) Tang's counsel responded that the instructions for Form S-4 and the SEC's adopting release indicate that a continuous offering under Rule 415 can be registered using Form S-4. (Compl. ¶ 42.) Neither BRC nor its counsel responded to Tang's explanation. (Compl. ¶ 42.)

D. BRC's Form S-1 And Tang's Additional Exercise Attempts

On March 16, 2022, BRC filed with the SEC a Form S-1, which is the "[g]eneral form of registration statement for all companies including face amount certificate companies."⁷ The Form S-1 contemplated a primary offering of "17,766,641 Shares of Class A Common Stock...