On September 7, 2021, in BMA LLC, et. al. v. HDR Global Trading Limited, et. al., Judge William H. Orrick of the U.S. District Court for the Northern District of California dismissed with prejudice a suit brought by traders against HDR Global Trading (“HDR”), the owner and operator of the cryptocurrency derivatives trading platform Bitcoin Mercantile Exchange (“BitMEX”), and its co-founders. The court found that plaintiffs not only lacked standing, but also failed to plead any plausible claim for relief.
In their 33-count complaint, plaintiffs alleged that HDR and its co-founders violated federal and state law in their deliberately designing BitMEX “with the purpose to engage in, facilitate, aid, abet, counsel, induce and/or procure a myriad of illegal activities” including racketeering, wire fraud, money laundering, and market manipulation. In dismissing the suit, the court found the plaintiffs’ 378-page, 33-count complaint contained only conclusory, speculative, and implausible allegations that failed to plausibly plead claims of market manipulation and fraudulent inducement upon which plaintiffs’ suit principally relied. Moreover, the court likewise found that plaintiffs failed to sufficiently plead Article III standing by not including any factual allegations that their claimed losses were “fairly traceable” to the defendants’ alleged conduct — rather than acts by third parties or independent market forces — and dismissed plaintiffs’ claims on this additional ground.
The court’s dismissal was with prejudice as a result of plaintiffs’ failure to address the same deficiencies the court identified in its prior order dismissing plaintiffs’ original complaint.
Delaware Supreme Court Upholds Chancery Court Ruling That Stockholder Appraisal Rights Can Be Waived by Contract
On September 13, 2021, in Manti Holdings, LLC et al. v. Authentix Acquisition Company, Inc., the Delaware Supreme Court upheld the Court of Chancery’s ruling that Delaware stockholders can contractually waive their Section 262 statutory appraisal rights. The decision, which drew a dissenting opinion from Justice Valihura, reaffirms Delaware’s policy favoring private ordering and the enforcement of contracts among sophisticated parties.
The dispute arises out of Authentix’s September 2017 merger with third party Blue Water Energy. As a result of the merger, cash was distributed to stockholders pursuant to a waterfall provision. Plaintiff common stockholders were to receive little to no consideration and filed a petition for appraisal with the Court of Chancery under Delaware General Corporation Law (“DGCL”) Section 262, which allows dissenting minority stockholders to receive the fair market value of their shares in lieu of the consideration they would have received from the transaction. In October 2018, the Court of Chancery entered summary judgment in favor of Authentix on plaintiffs’ appraisal claim on the basis that their claims were barred by their stockholder agreements, entered into in 2009, containing a provision requiring that plaintiffs “refrain from the exercise of appraisal rights with respect to” transactions of this kind.
Plaintiffs appealed the Court of Chancery’s ruling to the Delaware Supreme Court, arguing that Section 262 appraisal rights are “fundamental features of the corporate entity’s identity” that cannot be waived by contract. In affirming the Court of Chancery ruling, the Delaware Supreme Court rejected plaintiffs’ argument, holding instead that appraisal rights — as contrasted with “certain rights designed to police corporate misconduct or to preserve the ability of stockholders to participate in corporate governance” — are not “so fundamental to the corporate form that they cannot be waived ex ante.”
Specifically, the court held that (1) the DGCL “reflects Delaware’s public policy favoring private ordering,” (2) the plain language of Section 262 does not prohibit stockholders from agreeing to waive their appraisal rights, and (3) “the public policy concerns underlying Section 262 do not prohibit sophisticated and informed stockholders from voluntarily waiving their appraisal rights in exchange for valuable consideration.” The court found the waiver was enforceable because plaintiffs “were sophisticated investors, represented by counsel, that agreed to a clear waiver of their appraisal rights in exchange for valuable consideration.”
Justice Valihura dissented from the ruling, arguing that Section 262 appraisal rights should be considered mandatory under the statute, and further arguing that even if appraisal rights could theoretically be waived then (1) they should only be waived in the corporate charter and (2) the agreement in this case was not sufficiently unambiguous.
The Delaware Supreme Court’s decision makes clear that sophisticated common stockholders may waive appraisal rights in a stockholder agreement, provided that the stockholder agreement is unambiguous.
Alternative Data Provider App Annie Settles SEC Fraud Investigation for $10 Million
On September 14, 2021, in In the Matter of App Annie Inc. and Bertrand Schmitt, the U.S. Securities and Exchange Commission announced a $10 million settlement with App Annie to resolve allegations that App Annie and its co-founder and former CEO Bertrand Schmitt violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by “making material misrepresentations about how App Annie’s alternative data was derived ... in order to induce trading firms to become and remain subscribers for the purpose of using App Annie’s data in their decisions to purchase and sell securities.”
App Annie specializes in aggregating and selling “alternative data” — i.e., information about companies or investments that is not routinely provided in financial disclosures, mandatory regulatory filings, and similar traditional sources — concerning the mobile app market, including the number of times companies’ apps are downloaded, how often companies’ users are using their app and the amount of revenue companies’ apps are generating. During the relevant period, more than 100 trading firms paid for App Annie’s Intelligence subscription products.
According to the SEC, between late 2014 and mid-2018, App Annie made a series of misrepresentations to its customers regarding the data it collected and sold in connection with its Intelligence subscriptions. App Annie, the SEC alleged, misrepresented to its Intelligence customers that the estimates they were purchasing did not constitute material nonpublic information under the federal securities laws and that App Annie was using the data it collected in a way that was consistent with users’ consent.
As part of the settlement, without admitting any wrongdoing, App Annie and Schmitt agreed to pay civil monetary penalties totaling $10 million and $300,000, respectively. In addition, Schmitt agreed to a three-year ban from serving as an officer or director of any public company.
Following the settlement, SEC Commissioner Hester Peirce publicly commented on the settlement on Twitter, stating, “This settlement stretches the ‘in connection with the purchase and sale of securities’ requirement under 10b/10b-5 beyond where I think it should go[.]”
Kate E. MacLeman