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HARGER v. PRICE

May 30, 2002

D. SCOTT HARGER, PLAINTIFF
V.
JAMES PRICE, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.

  MEMORANDUM OPINION

This action is the result of a falling out among founders of an Internet or "dot com" business that was sold for more than $30 million during the heyday of the technology boom. Plaintiff, one of the original principals, claims that his former colleagues effectively did him out of his equity interest in their company in order to gain for themselves the benefits of the merger that produced the large economic reward. The matter is before the Court on the motions of the individual defendants and the acquiring company and its corporate parent to dismiss the third amended complaint on the ground that it fails to state a claim upon which relief may be granted.

Facts

The Court assumes the truth of the well pleaded factual allegations of the complaint. In addition, as plaintiff has placed before the Court documents that effectively were incorporated by reference in the third amended complaint, the Court considers those as well.*fn1

The Inception of DWWC

Plaintiff and four of the five individual defendants — Messrs. Price, Pezaris, Gersh and Matar — were employed in 1995 in the computer industry as computer programmers and/or technicians. In September of that year, they incorporated Daedalus World Wide Corporation ("DWWC") for the purpose of designing and operating computer programs, software and web sites to be used, operated by or sold to themselves or others. Each contributed $2,000 in capital, received twenty shares of DWWC common stock, and began working for the company,*fn2 although it appears that that none of the principals worked full time for DWWC until considerably later.*fn3 The group expanded on April 4, 1996 when defendant Fortnow acquired twelve DWWC shares in exchange for a contribution of $2,040.*fn4

1996 through January 1999

Plaintiff Surrenders Half His Interest

By September 1996, Pezarus, Gersh, and Price were working for the company at reduced or no salary.*fn5 Pezaris and Gersh approached plaintiff and Matar on behalf of DWWC and asked that each surrender ten of his shares on the theory that they were not working for DWWC and that it would be unfair for them to have the same equity interests as those who were. Both complied, although Matar at some later date was permitted to subscribe to ten new shares, thus restoring his equity interest.*fn6

The Development Agreement With SportsLine

In May 1998, DWWC entered into a contract with SportsLine USA, Inc., now known as SportsLine.com, Inc. ("SportsLine"), to develop software for SportsLine's Internet sports fantasy online service.*fn7 The Development Agreement required that the 1998-99 National Football League Product, one of the subjects of the contract, be delivered no later than August 15, 1998.*fn8 It granted SportsLine an option to purchase, and a right of first refusal with respect to, all of the assets of DWWC as well as certain preemptive rights with respect to DWWC stock.*fn9

Plaintiff Becomes a Full Time DWWC Employee

The conclusion of the Development Contract put a good deal of pressure on DWWC to meet its obligations. In May 1998, Pezaris and Gersh asked plaintiff to leave his job and join DWWC to assist with the SportsLine project.*fn10 Plaintiff agreed to accept employment with DWWC at a salary of less than half that paid by his then current job. According to plaintiff, he was to receive an additional ten shares of DWWC stock "upon certain terms and conditions which would, after two years of employment with DWWC, raise his interest to one-half the respective interests of Price, Fortnow, Pezaris, and Gersh," the ten shares being a first step toward that objective.*fn11 With plaintiff on board, Price and Fortnow became full time employees of the company in June 1998.*fn12

On June 15, 1998, plaintiff entered into two agreements, the first an employment agreement with DWWC (the "Employment Agreement") and the second a stockholders' agreement among plaintiff, Price, Fortnow, Pezaris, Gersh, Matar and DWWC (the "Stockholders' Agreement").*fn13

1. The Employment Agreement

Although the Employment Agreement allegedly was an executed document, its text does not appear of record. The complaint alleges that it provided that plaintiff would receive ten new shares of DWWC common stock, but that the shares would be voidable if he failed to complete one year of employment to June 15, 1999.*fn14

2. The Stockholders' Agreement

The Stockholders' Agreement began with a recital that each of the individual signatories owned the number of shares listed on an attached Schedule A. The copy of the agreement that plaintiff has produced to the Court contains the schedule, which shows that defendants Price, Fortnow, Pezaris and Gersh each owned eighty DWWC shares and that plaintiff and defendant Matar each owned twenty.*fn15 Plaintiff, however, alleges that the schedule was not a part of the Shareholders' Agreement when he signed it and that the fact that the Price, Fortnow, Pezaris and Gersh each owned eighty rather than forty shares was concealed from him.*fn16 Whatever the fact in that regard, the Shareholders' Agreement did provide that the shareholders could not transfer their DWWC shares except in accordance with the agreement. It went on to give what amounted to a option to buy to DWWC followed, in the event DWWC declined to exercise the option, by an option to non-selling shareholders to buy in the event any of the shareholder parties wished to sell his shares. If in that event neither the corporation nor the non-selling shareholders exercised the options, the selling shareholder would be free to sell to an outsider within a period of thirty days.*fn17

Plaintiff Leaves DWWC

In January 1999, plaintiff left DWWC and moved to Texas to accept other employment.*fn18 As he left DWWC's employ prior to June 15, 1999, the additional ten shares that were issued to him in June 1998 were cancelled, leaving plaintiff with the ten shares he had acquired upon the formation of the company.*fn19 Plaintiff offered these to DWWC pursuant to the Stockholders' Agreement but no agreement was reached on price, so plaintiff continued to hold those shares.*fn20

The DWWC — SportsLine Deal

On December 6, 1999, DWWC, Price, Gersh, Fortnow, Pezaris, Commissioner.com, Inc.,*fn21 and SportsLine entered into an agreement and plan of merger pursuant to which DWWC was merged with and into Commissioner.com, Inc. The outstanding shares of DWWC were converted into a right to receive (a) cash equal to $4 million divided by the total number of fully diluted DWWC shares, (b) SportsLine common stock, and (c) additional compensation based on future revenues attributable to certain activities of the surviving company.*fn22 The complaint asserts that the total compensation received by Price, Fortnow, Pezaris and Gersh was $31 million in cash and stock.*fn23 Plaintiff's principal grievance is that he was cut out of this deal.

The complaint alleges — on information and belief — that DWWC and the individual defendants began negotiating with SportsLine with a view to the latter acquiring all of DWWC's shares "shortly after [plaintiff] left [DWWC's] employment" without notifying plaintiff.*fn24 Subsequently, and in anticipation of such a sale, these defendants on November 15, 1999 sent plaintiff an e-mail purportedly cancelling his remaining shares. When plaintiff disputed this purported cancellation, DWWC is said to have represented to SportsLine that plaintiff's shares were voidable pursuant to an oral agreement in view of the fact that he left DWWC's employ.*fn25

This latter assertion is not borne out, at least directly, by the merger agreement, which contains no such representation. In relevant part, it represents only that there were and, at the closing would be, 355.555 shares of DWWC common stock outstanding.*fn26 Further, the agreement characterizes Price, Gersh, Fortnow and Pezaris as "Principal Shareholders," not as the "Shareholders" or with some other form of words implying that they were all of DWWC's shareholders.*fn27 Nevertheless, the Court infers, in plaintiff's favor, that the shares were cancelled.*fn28

The Complaint

The third amended complaint, which now is the fourth iteration of plaintiff's claims, asserts ten claims for relief, all stemming from plaintiff's underlying contention that he was done out of any ...


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