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Roth v. Perseus

July 28, 2006

ANDREW E. ROTH DERIVATIVELY ON BEHALF OF, BEACON POWER CORPORATION, PLAINTIFF,
v.
PERSEUS, L.L.C., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Robert P. Patterson, Jr., U.S.D.J.

OPINION AND ORDER

Plaintiff is the owner of Common Stock of Beacon Power Corporation ("Beacon"). Plaintiff's Amended Complaint alleges that Defendants, Perseus, L.L.C. ("Perseus"); Perseus Capital, L.L.C. ("Perseus Capital"); Perseus 2000 Expansion, L.L.C. ("Perseus Expansion");*fn1 Perseus Investors Group,*fn2 L.L.C. ("Perseus Investors"); Frank Pearl (Chairman and CEO of Perseus and member of Perseus Investors); and John Does 1-20 (members of or investors in Perseus, Perseus Capital, Perseus Expansion, or Perseus Investors), as a group beneficially owned greater than ten percent of the Beacon common stock, and acting as a group as defined under SEC Rule 16a-1 garnered short-swing profits disgorgeable to Beacon under Section 16(b) of the Securities and Exchange Act of 1934 ("the Exchange Act"). Defendants filed a motion on March 20, 2006 moving to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6), or in the alternative for summary judgment asserting that the transactions are exempt under SEC Rule 16b-3(d)(1). Plaintiff opposes Defendants' motion and has asked that the Court not consider Defendants' summary judgment motion until the Plaintiff has had discovery pursuant to Fed. R. Civ. P. 56(f). See Ostrager Aff., attached to Pl. Mem. in Opp. For the reasons set forth below, Plaintiff's request for discovery pursuant to Fed. R. Civ. P. 56(f) is denied and Defendants' motion to dismiss is granted.

I. BACKGROUND

The following facts are taken from Plaintiff's Amended Complaint dated February 8, 2006:

1.*fn3 On April 22, 2005, Beacon entered into an Investment Agreement with Perseus Captial and Perseus Expansion ("the Investment Agreement"). Pursuant to the Investment Agreement: (i) Perseus Expansion agreed to purchase 1,666,667 shares of Beacon Common Stock; (ii) Perseus Expansion agreed to grant Beacon an option to sell to Perseus Expansion up to $1,500,000 of additional shares of Beacon Common Stock at a price of $0.84 per share (which amount of $1,500,000 of additional shares was subject to an additional increase of up to $1,500,000 of shares); (iii) Perseus Expansion committed to invest $1,500,000 in NxtPhase T&D Corporation ("NxtPhase"), a company controlled by affiliates of Perseus, which Beacon had agreed to acquire; Perseus Expansion was granted an option to make its investment in NxtPhase by acquiring additional shares and warrants of Beacon; (iv) Beacon granted Perseus Expansion a warrant to acquire 800,000 additional shares of Beacon Common Stock at an exercise price of $1.008 per share; (v) Perseus Expansion agreed to pay Beacon $1,400,000; and (vi) Perseus Capital agreed to pay $100,000 to Beacon in exchange for a two year extension (until May 23, 2007) of the expiration date of an outstanding warrant to acquire 1,333,333 shares of Beacon Common Stock at an exercise price of $2.25 per share.

2. On April 22, 2005, Beacon and NxtPhase entered into an Arrangement Agreement (the "Arrangement Agreement") pursuant to which Beacon agreed to acquire all of the outstanding shares of NxtPhase. Beacon acquired the option to acquire NxtPhase from Perseus 2000, L.L.C., an affiliate of the defendants. Perseus 2000, L.L.C. was the largest shareholder of NxtPhase.

3. On April 25, 2005, Beacon filed a Current Report on Form 8-K reporting the Arrangement Agreement. On May 2, 2005, Perseus Capital and Pearl filed an Amendment No. 3 to Schedule 13D ("Amendment No. 3") reporting the Investment Agreement. In Amendment No. 3, each of Perseus Capital and Pearl reported beneficial ownership of 9,410,944 shares of Beacon Common Stock, representing 21.6 % of Beacon's outstanding shares.

4. On May 24, 2005, pursuant to the Investment Agreement, (i) Perseus Expansion acquired 1,666,667 shares of Beacon Common Stock; (ii) Perseus Expansion acquired a warrant to acquire 800,000 additional shares of Beacon Common Stock at an exercise price of $1.008 per share; (iii) Perseus Expansion paid Beacon $1,400,000; and (iv) Perseus Capital paid $100,000 to Beacon in exchange for a two year extension (until May 23, 2007) of the expiration date of an outstanding warrant to acquire 1,333,333 shares of Beacon Common Stock at an exercise price of $2.25 per share.

5. On June 2, 2005, Perseus Capital, Perseus Expansion and Pearl filed an Amendment No. 4 to Schedule 13D ("Amendment No. 4") reporting the closing of the transactions under Investment Agreement on May 24, 2005. In Amendment No. 4, Perseus Capital reported beneficial ownership of 9,155,684 shares of Beacon Common Stock, Perseus Expansion reported beneficial ownership of 2,466,667 shares of Beacon Common Stock, and Pearl reported beneficial ownership of 11,622,351 shares of Beacon Common Stock, representing 26.6% of Beacon's outstanding shares. Amendment No. 4 further discloses that "The members of Perseus Capital and Perseus 2000 Expansion have the right to participate in the receipt of dividends from, or proceeds from the sale of, the shares of Common Stock held for the account of Perseus Capital and Perseus 2000 Expansion, respectively, in accordance with their membership interests in Perseus Capital and Perseus 2000 Expansion."

6. On June 13, 2005, pursuant to the Investment Agreement, (i) Perseus Expansion acquired 595,238 shares of Beacon Common Stock; (ii) Perseus Expansion acquired a warrant to acquire 138,636 additional shares of Beacon Common Stock at an exercise price of $1.008 per share; and (iii) Perseus Expansion paid Beacon $500,000. These transactions were first reported by Beacon in a Current Report on Form 8-K filed on June 17, 2005.

7. On July 21, 2005, pursuant to the Investment Agreement, (i) Perseus Expansion acquired 595,238 shares of Beacon Common Stock; (ii) Perseus Expansion acquired a warrant to acquire 138,636 additional shares of Beacon Common Stock at an exercise price of $1.008 per share; and (iii) Perseus Expansion paid Beacon $500,000. These transactions were first reported by Beacon in a Current Report on Form 8K filed on July 26, 2005.

8. On July 26, 2005, pursuant to the Investment Agreement, (i) Perseus Expansion acquired 1,785,714 shares of Beacon Common Stock; and (ii) Perseus Expansion paid Beacon $1,500,000. These transactions were first reported by Beacon in a Current Report on Form 8-K filed on July 29, 2005.

9. On August 24, 2005, Perseus Capital distributed 4,000,000 shares of Beacon Common Stock to its members. Perseus Investors, as a member of Perseus Capital, received 332,549 shares of the 4,000,000 shares in the distribution. On August 25, 2005, Perseus Investors sold 332,549 shares at price per share of $4.5885. The distribution by Perseus Capital of 4,000,000 Beacon shares and the sale by Perseus Investors were reported by Perseus Capital, Perseus Expansion and Pearl in an Amendment No. 5 to Schedule 13D ("Amendment No. 5") filed on August 30, 2005. In Amendment No. 5, Perseus Capital reported beneficial ownership of 5,155,684 shares of Beacon Common Stock, Perseus Expansion reported beneficial ownership of 5,720,129 shares of Beacon Common Stock, and Pearl reported beneficial ownership of 10,875,813 shares of Beacon Common Stock, representing 21.1% of Beacon's outstanding shares. Amendment No. 5 further discloses that "The members of Perseus Capital and Perseus 2000 Expansion have the right to participate in the receipt of dividends from, or proceeds from the sale of, the shares of Common Stock held for the account of Perseus Capital and Perseus 2000 Expansion, respectively, in accordance with their membership interests in Perseus Capital and Perseus 2000 Expansion."

10. From January 1, 2005 through July 31, 2005, the high and low closing prices of Beacon Common Stock on the Nasdaq SmallCap Market were $1.45 and $0.62, respectively. From August 1, 2005 through August 31, 2005, the high and low closing prices were $4.74 and $1.66, respectively. The highest intraday price was $5.35, which occurred on August 24, 2005, the day that Perseus Capital distributed 4,000,000 shares to its members. On December 7, 2005, the closing price of Beacon Common Stock was $2.09. On August 24, 2005 and August 25, 2005, the daily trading volumes for Beacon Common Stock were in excess of 40 million shares, multiples higher than the historical trading volume for the stock.

11. On September 29, 2005, Beacon filed a preliminary proxy statement with the Securities and Exchange Commission. The proxy statement was to be issued to Beacon's shareholders in order to obtain shareholder approval of Beacon's acquisition of NxtPhase under the Arrangement Agreement. In the preliminary proxy statement, Beacon disclosed the following:

Some of NxtPhase's directors, executive officers and shareholders have agreements or arrangements that provide them with interests in the plan of arrangement that are different from, or in addition to, your interests.

In particular, Perseus, L.L.C. and its affiliates are significant stockholders of both Beacon and NxtPhase, and have representatives on both companies' boards of directors. Entities affiliated with Perseus, L.L.C. own, as of the respective NxtPhase and Beacon record dates, approximately 48% of NxtPhase's outstanding common stock, 52% of NxtPhase's outstanding Class A preferred stock, and % [sic] of Beacon's outstanding common stock. Following the consummation of the plan of arrangement, these Perseus entities will receive approximately 8.9 million shares of Beacon common stock, or approximately 47% of the total Beacon shares expected to be issued in the plan of arrangement to NxtPhase stockholders, not including the Beacon restricted stock units to be issued to NxtPhase employees. Perseus will own approximately % [sic] of Beacon's outstanding common stock after the plan of arrangement is completed.

Based on the one-day volume weighted average price of Beacon common stock on April 22, 2005, the date the arrangement agreement was signed, or $0.8548, the value of the shares to be issued to entities affiliated with Perseus, L.L.C. for its ownership of approximately 48% of NxtPhase's outstanding common stock and 52% of NxtPhase's outstanding Class A preferred stock will be approximately $7.6 million. Based on the closing price of Beacon stock of $3.67 on September 12, 2005, the value of the shares to be issued to entities affiliated with Perseus, L.L.C. for its ownership interest of NxtPhase stock is approximately $32.7 million. According to an independent valuation report of NxtPhase prepared on March 18, 2005 by Evans & Evans, Inc., the fair market value of 100% of the issued and outstanding shares of NxtPhase as of December 31, 2004 is in the range of $7,760,000 to $8,930,000. See "Beacon and NxtPhase Proposal No. 1-The Plan of Arrangement-Opinions of Beacon's Financial Advisors-Evans & Evans, Inc.-Valuation Report on NxtPhase T&D Corporation" on page [sic] of this joint proxy statement.

Preliminary Proxy Statement at pages 10-11.

12. On November 21, 2005, Perseus Capital distributed 3,502,351 shares of Beacon Common Stock to its members. Perseus Investors, as a member of Perseus Capital, received 291,177 shares of the 3,502,351 shares in the distribution. The distribution by Perseus Capital of 3,502,351 Beacon shares was reported by Perseus Capital, Perseus Expansion and Pearl in an Amendment No. 6 to Schedule 13D ("Amendment No. 6") filed on November 23, 2005. Amendment No. 6 further reports the unwinding of the Arrangement Agreement and the return to Beacon of 1,190,476 Beacon shares and warrants to purchase an additional 277,272 shares from Perseus Expansion in exchange for preferred stock of NxtPhase that Beacon had purchased pursuant to the Arrangement Agreement. Amendment No. 6 further discloses that "The members of Perseus Capital and Perseus 2000 Expansion have the right to participate in the receipt of dividends from, or proceeds from the sale of, the shares of Common Stock held for the account of Perseus Capital and Perseus 2000 Expansion, respectively, in accordance with their membership interests in Perseus Capital and Perseus 2000 Expansion."

13. On November 23, 2005, Beacon issued a press release disclosing that Beacon and NxtPhase had terminated the Arrangement Agreement. Beacon states the following in its press release:

The arrangement agreement [sic] specified that the transaction would automatically terminate if not completed by December 31, 2005. Considering the status of the SEC review process and the limited time remaining until December 31, as well as the increase in Beacon's stock price since the signing of the agreement, it was determined that the transaction was unlikely to be completed.

14. On November 28, 2005, Pearl filed a Statement on Form 4 reporting the sale on November 23, 2005 of 145,000 shares of Beacon Common Stock at a price per share of $1.8275.

The Amended Complaint then alleges that the Group Members acted in concert as a group to further their collective investment in the Company, and that the Group Members constitute a group for purposes of Sections 13(d)(3) and 16(b) of the Exchange Act. See Am. Compl. ¶ 28. According to the Amended Complaint, the Group Members used Perseus Capital and Perseus Expansion as their vehicle for their investment in the Company; certain Group Members joined in the filing of the Schedule 13D and Amendments Nos. 3 through 6; certain Group Members reported their beneficial ownership on Form 4s reflecting their group status; and certain Group Members were party to the Perseus Capital and Perseus Expansion limited liability company agreements governing their collective investment in the Company. See id.

The Amended Complaint contains two claims for relief. Plaintiff first requests that Perseus Investors disgorge to Beacon $408,852 in short-swing profits earned from Perseus Investors' August 25, 2005 sale of Beacon Common Stock. Am. Comp. ΒΆ33. Plaintiff also requests that Defendant Pearl disgorge to Beacon$186,325 in short-swing profits earned from ...


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