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Westminister Securities Corp. v. Uranium Energy Corp.

United States District Court, S.D. New York

March 2, 2018

WESTMINSTER SECURITIES CORP., DAVID R. HOLBROOKE, M.D., AWM HOLDINGS, LLC, and JOHN O'SHEA, Plaintiffs,
v.
URANIUM ENERGY CORP., and UEC CONCENTRIC MERGE CORP., Defendants.

          OPINION & ORDER

          KATHERINE B. FORREST, DISTRICT JUDGE

         This breach of contract action concerns whether the anti-dilution provision of the Concentric Energy Corp. Common Stock Purchase Warrant (the “Concentric Warrant” or “Warrant Agreement”) was triggered when equity was provided to corporate directors as non-cash consideration for continuing services.

         Plaintiffs argue that if Concentric Energy Corp. (“Concentric” or the “Company”)[1] issued equity at a price lower than $1 during the term of the Concentric Warrant, such issuance triggered the warrant's anti-dilution provision. Plaintiffs further argue that once the anti-dilution provision was triggered, defendants were required to issue additional shares of Concentric's successor, Uranium Energy Corp. (“UEC”). According to plaintiffs, Concentric in fact made two separate “dilutive issuances”-in August 2009 and April 2010-but failed to issue additional shares of UEC stock as contractually required. As a result, plaintiffs allege that they are entitled to millions of shares in UEC.

         Defendants tell a very different story, and present several independent bases for dismissal of plaintiffs' claims. As an initial matter, defendants contend that the anti-dilution provision was never triggered; because the issuances included additional consideration in the form of continued board service, the “effective price” was necessarily higher than $1. Separately, defendants argue that the anti-dilution provision at issue has terminated, and that plaintiffs surrendered any rights that may have existed thereunder when they exchanged their Concentric Warrants for UEC Warrant Certificates (“UEC Certificates”) in November 2011.

         The parties have now filed dueling motions for summary judgment. (ECF Nos. 107, 111.) For the reasons set forth below, the Court finds that the outcome here is not a close call, and that defendants are correct on both points: the antidilution provision was never triggered, and any rights plaintiffs may have had under the Concentric Warrant terminated in November 2011. Accordingly, defendants' motion for summary judgment is GRANTED, and plaintiffs' motion is DENIED.

         I. PROCEDURAL POSTURE

         This is one of three separate actions filed by these plaintiffs seeking relief from UEC relating to warrants issued by Concentric:

• On June 16, 2010, three of the plaintiffs-John O'Shea (“O'Shea”), David Holbrooke (“Holbrooke”), and AWM Holding, LLC (“AWM”)-together with other debenture holders, filed an involuntary Chapter 7 bankruptcy petition against Concentric in the U.S. Bankruptcy Court for the District of Arizona.
• On March 29, 2012, O'Shea, Holbrooke, and AWM filed suit in the Superior Court of Arizona (the “Arizona Suit”), alleging that Concentric had fraudulently induced them to invest in it. That complaint included allegations relating to the August 2009 and April 2010 stock issuances, but did not make any explicit claim for breach of the anti-dilution provisions of the Concentric Warrants or the UEC Exchange Warrants.2
• On June 1, 2015, Westminster Securities Corp. (“Westminster”)-which was not party in the Arizona suit-filed the instant action in the United States District Court for the Southern District of New York. Shortly thereafter, OShea, Holbrooke, and AWM filed a separate suit bringing substantially similar claims. A few weeks later, the judge who was presiding over both actions (the Hon. Victor Marrero) consolidated the two cases.

         In March 2016, the Arizona Suit settled, and as a result plaintiffs released all claims except those asserted in this action. This action was transferred to the undersigned for all purposes on August 10, 2017.

         II. FACTS RELEVANT TO DISPOSITION[3]

         A. The Issuances

         Concentric was an early-stage uranium company created to mine and sell uranium deposits. In order to commence mining operations at a mine in Arizona (the “Anderson Mine”), Concentric needed to raise capital. As part of this effort, in 2007 it recruited three independent directors to serve along with inside officers on its board, and executed retention agreements with each. Those agreements entitled the directors to monthly cash payments and a one-time issuance of restricted common stock. Under the terms of the retention agreements, the directors were entitled to purchase the stock at a “par value” of $0.001 (a tenth of a penny) per share. Concentric referred to this nominal price as the “Purchase Price” in the retention agreements.

         Concentric ultimately made four rounds of private offerings: the first in 2007, two rounds in 2008, and a final round in 2009. In mid-2007, Concentric retained Westminster to act as placement agent for the first round of financing. That round offered stock to investors at a price of $7.00 per share and closed on July 16, 2007. A year later, in July 2008, Westminster acted as placement agent for a second private offering priced at $3.00 per share.

         In August 2008, Concentric was nearly out of cash. No longer able to pay the directors as outlined in the retention agreements, Concentric's board resolved to pay the directors in stock for a period of approximately one year, from October 2008- November 2009. In addition, the board authorized the issuance of additional shares of restricted stock to retain the continued services of various employees, including inter alia certain officers and directors. Again, as in 2007, the directors were entitled to purchase their allocated shares at par value. In connection with both the 2007 and 2008 stock-based compensation awards, Concentric recorded expenses relating to the issued shares at prices consistent with those of the most recent private placement offerings; that is, $7.00 and $3.00 per share, respectively.

         In December 2008, Concentric completed a third round of private placement financing. This time it issued debentures, and Westminster again acted as placement agent. The Warrant Agreement that is at issue in this case came into existence at this time. In connection with plaintiffs' investments in the debentures in December 2008, they received warrants for the purchase of Concentric stock pursuant to a “Concentric Energy Corp. Common Stock Purchase Warrant (“Concentric Warrant” or “Warrant Agreement”). By its terms, each Concentric Warrant had a termination date of December 31, 2012.

         Concentric completed its fourth and final private placement on May 21, 2009. This offering included both stock and debentures, and the debentures were convertible to stock at a price of $1.22 per share.

         In August 2009, Concentric was still unable to pay the directors' monthly cash fees (as called for by their retainer agreements), and it was additionally unable to pay the salaries of two executive officers. The record contains evidence supporting the inference that the independent board members were disinclined to continue serving without payment. In consideration for continued service, Concentric's board agreed to pay them in stock. As it had in connection with prior stock-based payments, Concentric recorded its expenses in connection with this stock issuance based on the price of the most recent private placement. In this case, that issuance was the fourth and final placement in August 2009, which was made a price of $1.22 per share. Using that price, the number of shares provided to the directors was associated with an expense of $718, 580.

         One of plaintiffs' core arguments in this action concerns the terms of the 2009 stock issuance to the directors. It is undisputed that the stock issued pursuant to a “Restricted Stock Purchase Agreement” (“RSPA”) that called for a per share purchase price of $0.001 (a tenth of a penny). According to plaintiffs, that amount is equivalent to the “effective price” referenced in the Concentric Warrants. As discussed below, plaintiffs' argument is incorrect.

         In April 2010, Concentric entered into an agreement with a former executive to return to the Company. As a condition of his return, he required that he be able to reconstitute the board, and the Company agreed. As part of this arrangement, the board resolved to satisfy any issues that might exist relating to unpaid fees to directors and officers through March 31, 2010 by issuing additional shares of stock. The record reflects that the total amount owed to this group was $774, 666.67. The company recorded the shares at a cost per share based on the year for which the compensation was owed. Thus, for instance, shares for 2008 compensation were associated with a cost of $3.00 per share, and shares for 2009 compensation were associated with a cost of either $1.22 or $1.25 per share. Concentric settled the entirety of the outstanding compensation debt by issuing a total of 556, 027 shares.

         Another of plaintiffs' core arguments in this action concerns the April 12, 2010 board resolution that authorized the above stock issuance. These issuances were made for no further consideration by the directors. According to plaintiffs, there is no evidence that the directors provided “additional” services in connection with the 2010 issuance, and they were already obligated to provide director services at that time. Thus, according to plaintiffs, no additional price component should be considered ...


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