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Crede CG III, Ltd. v. 22ND Century Group, Inc.

United States District Court, S.D. New York

December 28, 2017

CREDE CG III, LTD., Plaintiff,
22ND CENTURY GROUP, INC., Defendant.



         This dispute arises out of an investment arrangement in which Plaintiff Crede CG III, Ltd. (“Crede”) agreed to provide capital and other services to support the business interests of Defendant 22nd Century Group, Inc. (“22nd Century”). In return, Crede received, among other consideration, warrants giving it the rights to purchase 22nd Century stock or to exchange the warrants for 22nd Century stock. Among the terms of one of these warrants was a prohibition on Crede engaging in certain activities related to the organization of 22nd Century's Board of Directors. After Crede's principal sent a series of incendiary emails to 22nd Century Board members and shareholders, 22nd Century invoked the prohibition and declared that Crede's right to exchange the warrant for stock was null and void. Crede balked at this response, unsuccessfully attempted to exchange the warrants, and filed suit.

         In a prior opinion, this Court severed certain of Crede's claims and transferred them to the United States District Court for the Western District of New York. See Crede CG III, Ltd. v. 22nd Century Grp., Inc., No. 16 Civ. 3103 (KPF), 2017 WL 280818 (S.D.N.Y. Jan. 20, 2017). Before formal discovery could commence as to Crede's remaining claims, however, 22nd Century filed the instant motion for summary judgment. For the reasons that follow, the Court grants in part, and denies in part, 22nd Century's motion.


         A. Factual Background

         1. The Parties

         Crede is a Bermuda company with a principal place of business in Los Angeles, California. (Peizer Decl. ¶ 2). The company touts its “strong track record of identifying companies with high-growth potential and providing them with the capital needed to achieve their business objectives and create shareholder value.” (Pl. Opp. 2; see also Peizer Decl. ¶ 2). Terren Peizer serves as the company's principal; as detailed herein, his communications with 22nd Century are at the heart of this litigation. (Peizer Decl. ¶ 1).

         22nd Century is a Nevada company with a principal place of business in Clarence, New York. (Peizer Decl. ¶ 3). The company focuses on plant biotechnology, and more specifically, the commodification of genetically-engineered tobacco products through “proprietary technology and plant breeding expertise” that “allow it to regulate the levels of nicotine and nicotine alkaloids in the tobacco plant, thereby facilitating the growth of tobacco with reduced nicotine content.” (Pl. Opp. 2). The company's securities trade on the New York Stock Exchange under the symbol “XXII.” (Peizer Decl. ¶ 3).

         2. The Contracts Between the Parties

         In the summer of 2014, after taking an interest in 22nd Century's “products and its prospects for success in China, ” Peizer, on behalf of Crede, began negotiating the terms of a capital investment in the company. (Peizer Decl. ¶ 4). In September 2014, the parties entered into several contracts pursuant to which Crede was to provide financing and Peizer was to provide consulting services to 22nd Century, in exchange for certain equity interests in 22nd Century. (See Id. at ¶¶ 4-7). Those contracts, executed at two closings that were 14 days apart, are outlined in the remainder of this section.

         a. The September 15, 2014 Contract

         i. The Securities Purchase Agreement

         On September 15, 2014, the parties entered into a Securities Purchase Agreement (the “SPA”), whereby Crede agreed to purchase $10 million worth of 22nd Century's common stock. (See Pl. 56.1 Opp. ¶ 1; Def. 56.1 Ex. A). Crede's resulting equity stake in the company amounted to 3, 871, 767 shares valued at $2.58 per share. (Peizer Decl. ¶ 5). Section 4(d) of the SPA recited that 22nd Century would “use the proceeds from the sale of the Securities for general corporate purposes.” (Def. 56.1 Ex. A, at § 4(d)). In § 9(e), the SPA contained a merger clause, providing that the SPA, “the [non-disclosure agreement between the parties], the other Transaction Documents, the schedules and exhibits attached hereto and thereto and the instruments referenced herein and therein contain the entire understanding of the parties solely with respect to the matters covered herein and therein.” (Id. at § 9(d)).[2]

         b. The September 29, 2014 Contracts

         i. The Shareholders Agreement

         On September 29, 2014, the parties, along with Century Champion Investments, Ltd. (“Champion”), entered a Shareholders Agreement to form a new entity, 22nd Century Asia, Ltd. (“22nd Century Asia”). (Pl. 56.1 Opp. ¶ 2). The Shareholders Agreement purported to facilitate sales of 22nd Century's tobacco products to a state-owned tobacco company in China through 22nd Century Asia. (See Def. 56.1 Ex. B, at 1; Peizer Decl. ¶ 6). The parties to the agreement thus entered a joint venture (the “China Joint Venture”) entitling the signatories to stakes in 22nd Century Asia through the Shareholder Agreement.

         Specifically, the Shareholders Agreement stated,

The parties agree that [22nd Century Asia] … will use commercially reasonable, good faith efforts to secure a long-term contract with [China Tobacco International (“China Tobacco”), an affiliate of China National Tobacco Company, ] or any entity controlled by China Tobacco in the People's Republic of China for the sale to that entity by [22nd Century Asia] of tobacco products produced by [22nd Century] outside of the People's Republic of China[.]

(See Def. 56.1 Ex. B, at § 2.1(a)). In furtherance of this plan, the Shareholders Agreement required 22nd Century to contribute $10 million to 22nd Century Asia as a capital investment to form a wholly foreign-owned enterprise (“WFOE”) in China to distribute 22nd Century's tobacco. (See Id. at 1).[3] That investment was contingent, however, on China Tobacco licensing “certain of [22nd Century]'s intellectual property on a nonexclusive basis” at an aggregate license fee of at least $8.4 million. (Id. at § 2.6). And “if the WFOE fail[ed] to secure an acceptable contract with China Tobacco, the Company [would] be wound up.” (Id. at 2).

         Under the Shareholders Agreement, 22nd Century acquired a 51% stake in 22nd Century Asia, Crede acquired a 20% stake in 22nd Century Asia, and Champion acquired a 29% stake in 22nd Century Asia. (See Def. 56.1 Ex. B, at 2; see also Id. at § 3.2(b)).[4] In addition, the Shareholders Agreement granted Crede certain management and distribution fees calculated as a portion of shareholder dividends or distributions. (Id. at §§ 2.9, 2.10). The Shareholders Agreement also envisioned further contracts between the parties whereby Crede and Peizer would provide consulting services in exchange for rights to acquire securities from 22nd Century:

[22nd Century], Terren Peizer and Crede are entering into a consulting agreement relating to services to be performed for the Company that provides for the grant of warrants to acquire certain securities of [22nd Century], a portion of which vest upon revenue targets to be achieved by [22nd Century] from the sales of [its] tobacco to China Tobacco[.]

(Id. at 2).

         ii. The Consulting Agreement

         As the Shareholder Agreement anticipated, 22nd Century, Crede, and Peizer entered a Consulting Agreement that required Crede

to devote [its] efforts, business time and attention to providing consulting services to [22nd Century] related to [22nd Century]'s involvement in the China [Joint Venture] and maximizing the amount of proprietary tobacco of [22nd Century] that is purchased by the China [Joint Venture], with Peizer being the member-manager of [Crede] who will be primarily responsible for the performance of the duties of [Crede] under th[e] Agreement, but in no event will [Crede] be required to provide the services for more than five (5) hours in any week.

(Def. 56.1 Ex. C, at § 3). The Consulting Agreement also provided that once 22nd Century, Crede, and Champion “executed documentation evidencing an equity interest in 22nd Century Asia, ” i.e., the Shareholder Agreement, then 22nd Century would issue certain warrants to Crede, referred to as the Tranche 1A Warrant, the Tranche 1B Warrant, the Tranche 2 Warrant, and the Tranche 3 Warrant. (Id. at § 1). Collectively, the Warrants “covered 4.25 million shares of 22[nd] Century common stock at exercise prices ranging from $2.58 to $3.37 per share.” (Peizer Decl. ¶ 6).

         iii. The Tranche 1A Warrant

         This case revolves around Crede's attempted exercise of the Tranche 1A Warrant, under which Crede was entitled to purchase from 22nd Century 1, 250, 000 fully paid, non-assessable shares of Common Stock at an exercise price of $3.36 at any time on or after the Warrant's issuance date and before its expiration date. (See Def. 56.1 Ex. D, at 1, § 1(b)). Alternatively, Crede could exchange the Warrant for shares of common stock instead of cash, in part or in full, based on then-current market prices. (See Id. at § 5). Crede was entitled to do so “at any time and from time to time from and after the date that is sixty-one (61) days after the closing of the purchase of shares of Common Stock by [Crede] pursuant to the [SPA] … and prior to the Expiration Date, by written notice to the Company.” (Id. at § 5(a)). The first sentence of § 5 states that this Exchange Right is “subject to the limitations set forth in [§] 1(h)(ii).” (Id. at § 5).

         In point of fact, the Warrant contains no § 1(h)(ii). 22nd Century maintains, and Crede contests, that this cross-reference leads to § 1(h), entitled “Activity Restrictions, ” which provides as follows:

(i) For so long as [Crede] or any of its Affiliates holds any Warrants or any Warrant Shares, neither [Crede] nor any Affiliate will: (i) vote any shares of Common Stock beneficially owned by it, solicit any proxies, or seek to advise or influence any Person with respect to any voting securities of the Company; (ii) engage or participate in any actions, plans or proposals which relate to or would result in (A) acquiring additional securities of the Company, alone or together with any other Person, which would result in [Crede] or its Affiliates beneficially owning (within the meaning of Section 13(d) under the 1934 Act) more than 9.9% of the Common Stock, (B) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving [22nd Century] or any of its Subsidiaries, (C) a sale or transfer of a material amount of assets of [22nd Century] or any of its Subsidiaries, (D) any change in the present board of directors or management of [22nd Century], including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the board, (E) any material change in the present capitalization or dividend policy of [22nd Century], (F) any other material change in [22nd Century]'s business or corporate structure, including but not limited to, if [22nd Century] is a registered closed-end investment company, any plans or proposals to make any changes in its investment policy for which a vote is required by Section 13 of the Investment Company Act of 1940, (G) changes in [22nd Century]'s charter, bylaws or instruments corresponding thereto or other actions which may impede the acquisition of control of [22nd Century] by any Person, (H) causing a class of securities of [22nd Century] to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national securities association, (I) a class of equity securities of [22nd Century] becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Act, or (J) any action, intention, plan or arrangement similar to any of those enumerated above; or (iii) request [22nd Century] or its directors, officers, employees, agents or representatives to amend or waive any provision of this paragraph. The restrictions contained in this paragraph (h) shall not limit [Crede]'s rights to enforce its rights or exercise its rights as to the Securities or under this Warrant.

(Def. 56.1 Ex. D, at § 1(h) (emphases added)).

         The Tranche 1A Warrant also contained a choice-of-law clause providing that it “shall be governed by and construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Warrant shall be governed by, the internal laws of the State of New York.” (Def. 56.1 Ex. D, at § 12). The same provision stated that each of Crede and 22nd Century “irrevocably waive[d] any right it may have to, and agree[d] not to request, a jury trial for the adjudication of any dispute hereunder or in connection with or arising out of this warrant or any transaction contemplated hereby.” (Id. (emphasis omitted)).

         3. The Peizer Emails

         22nd Century claims that six emails from Peizer to 22nd Century breached the Activity Restrictions, and thus invalidated Crede's ability to exercise the Exchange Right. (See Def. Br. 5-7). Those emails are detailed in the remainder of this section.

         a. The February 18, 2015 Email

         On February 18, 2015, Peizer sent an email with the subject line, “Why your stock is where it is, and heading lower, ” to James Cornell, 22nd Century's Board Chairman; Henry Sicignano, 22nd Century's President and Chief Executive Officer; and representatives of 22nd Century's investment bank. (Def. 56.1 Ex. H; see Pl. 56.1 Opp. ¶ 5). The email, as its title suggested, was critical of 22nd Century's efforts toward the China Joint Venture, stating that the company “botched China.” (Id.). The email also complained that “no one in the company of the Board has ANY experience in the MicroCap space, ” and that the Board “refuse[d] to listen to anyone, ” and “fail[ed] to communicate with [the] largest shareholder and most influential shareholder.” (Id.). Peizer warned that if the Board did not “change the above immediately, ” the company's “stock will go lower___, and change will necessarily come about.” (Id.).

         b. The March 19, 2015 Email

         Relations between the parties did not improve. On March 19, 2015, Peizer sent an email with the subject line, “Can't say I didn't warn you!!!” to Cornell and Sicignano. (Def. 56.1 Ex. I). The email ...

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