Appriva Shareholder v. EV3, Inc.

• Decision Date: 01 November 2007
• Docket Number: No. 470, 2006.,No. 623, 2006.,470, 2006.,623, 2006.
• Citation: 937 A.2d 1275
• Parties: APPRIVA SHAREHOLDER LITIGATION COMPANY, LLC, Plaintiff Below, Appellant, v. EV3, INC., a Delaware corporation f/k/a Microvena Corporation; ev3 Sunnyvale, Inc., a California corporation, f/k/a Appriva Medical Inc., Defendants Below, Appellees. and Michael D. Lesh, M.D., Plaintiff Below, Appellant, v. Appriva Medical, Inc., a California Corporation; Microvena Corporation, a Minnesota corporation; ev3, Inc., a Delaware corporation; Warburg, Pincus Equity Partners, L.P., a Delaware limited partnership; Warburg, Pincus Netherlands Equity Partners I, C.V., a Netherlands limited partnership; Warburg, Pincus Netherlands Equity Partners II, C.V., a Netherlands limited partnership; Warburg, Pincus Netherlands Equity Partners III, C.V., a Netherlands limited partnership; Warburg, Pincus LLC, a New York limited liability company; Vertical Fund I, L.P., a Delaware limited partnership; Vertical Fund II, L.P., a Delaware limited partnership; and Paul Buckman, Defendants Below, Appellees.
• Court: Supreme Court of Delaware

937 A.2d 1275

APPRIVA SHAREHOLDER LITIGATION COMPANY, LLC, Plaintiff Below, Appellant, v. EV3, INC., a Delaware corporation f/k/a Microvena Corporation; ev3 Sunnyvale, Inc., a California corporation, f/k/a Appriva Medical Inc., Defendants Below, Appellees. and Michael D. Lesh, M.D., Plaintiff Below, Appellant, v. Appriva Medical, Inc., a California Corporation; Microvena Corporation, a Minnesota corporation; ev3, Inc., a Delaware corporation; Warburg, Pincus Equity Partners, L.P., a Delaware limited partnership; Warburg, Pincus Netherlands Equity Partners I, C.V., a Netherlands limited partnership; Warburg, Pincus Netherlands Equity Partners II, C.V., a Netherlands limited partnership; Warburg, Pincus Netherlands Equity Partners III, C.V., a Netherlands limited partnership; Warburg, Pincus LLC, a New York limited liability company; Vertical Fund I, L.P., a Delaware limited partnership; Vertical Fund II, L.P., a Delaware limited partnership; and Paul Buckman, Defendants Below, Appellees.

No. 470, 2006.

No. 623, 2006.

Supreme Court of Delaware.

Submitted: September 5, 2007.

Decided: November 1, 2007.

Court Below — Superior Court of the State of Delaware, in and for New Castle County, C.A. Nos. 05C-11-208 and 05C-05-218.

Upon appeal from the Superior Court.

REVERSED.

Jeffrey S. Goddess, Esquire, Rosenthal, Monhait & Goddess, Wilmington, Delaware; Robert A. Goodin (argued) and Francine T. Radford, Esquire, Goodin, MacBride, Squeri, Ritchie & Day, LLP, San Francisco, California; and Kirk B. Hulett, Esquire, Hulett Harper Stewart, LLP, San Diego, California, for appellant, Michael D. Lesh.

Jeffrey L. Moyer, Esquire and Kelly E. Farnan, Esquire, Richards, Layton & Finger, Wilmington, Delaware; Paul H. Dawes, Esquire, Darius C. Ogloza (argued) and Christopher W. Vincent, Latham & Watkins, San Francisco, California, for appellant, Appriva Shareholder Litigation Company, LLC.

Daniel V. Folt, Esquire and Matt Neiderman, Esquire, Duane Morris, LLP, Wilmington, Delaware; Matthew A. Taylor, Esquire (argued), James L. Beausoleil, Jr., Esquire, Seth A. Goldberg, Esquire and Christina E. Norland Audigier, Esquire, Duane Morris, LLP, Philadelphia, Pennsylvania; and Jeffrey J. Bouslog, Oppenheimer, Wolff & Donnell, LLP, Minneapolis, MN, for appellees, Appriva Medical, Inc., et al.; ev3, Inc.; and ev3 Sunnyvale, Inc.

Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGELY, Justices, constituting the Court en Banc.

HOLLAND, Justice.

This litigation arises out of the acquisition of Appriva Medical, Inc. by Microvena Corporation. Two separate lawsuits were filed in the Superior Court. One was filed by Dr. Michael Lesh, the largest former holder of Appriva Medical Shares (the "Lesh Action"). The second was filed by Appriva Shareholder Litigation Company ("ASLC"), a California LLC formed by former shareholders of Appriva, including Erik van der Burg (the "ASLC Action"). The complaints in both cases were dismissed by different judges of the Superior Court on the same ground: that the plaintiffs lacked standing to prosecute their respective actions separately and were contractually obligated to prosecute their claims jointly.¹ This Court entered an order consolidating the challenges to the two Superior Court judgments for purposes of appeal.

Issues and Holdings

In this consolidated appeal, we address four issues: first, whether ASLC's motion to dismiss was properly considered under Rule 12(b)(6) as opposed to Rule 12(b)(1); second, whether the Superior Court procedure in the ASLC Action was proper when it converted the ev3's motion to dismiss into one for summary judgment; third, whether the Rule 12(b)(6) dismissal in the Lesh Action was proper; and fourth whether under Rule 17, the plaintiffs in both actions should have been granted leave to amend their complaints before dismissal.

In this opinion, we hold that where the issue of standing is related to the merits, a motion to dismiss is properly considered under Rule 12(b)(6) rather than 12(b)(1). In the ASLC Action, we hold that the Superior Court committed reversible error by converting the Rule 12(b)(6) motion to dismiss into a Rule 56 motion for summary judgment without giving ASLC notice and an opportunity to present pertinent evidentiary material. In the Lesh Action, we hold that the Superior Court committed reversible error because, in deciding a Rule 12(b)(6) motion to dismiss, the trial court cannot choose between two differing interpretations of ambiguous documents. Finally, if after considering extrinsic evidence upon remand, the Superior Court still determines that van der Burg and Lesh do not have standing unless they act in concert, we hold that the plaintiffs in both actions are entitled to an opportunity to cure any defects pursuant to Superior Court Rule 17.

Background

Appriva Medical, Inc. ("Appriva"), developed the Percutaneous Left Atrial Appendage Transcatheter Occlusion device ("PLAATO"), to prevent strokes in certain atrial fibrillation patients. On July 15 2002, Appriva and Microvena Corporation ("Microvena") entered into an Agreement and Plan of Merger (the "Merger Agreement"), whereby Microvena acquired all the rights and interests in PLAATO. The defendant, ev3, Inc., a Delaware corporation, later assumed the obligations of Microvena.

Under the Merger Agreement, and the related Shareholder Representative Agreement dated August 10, 2002 (the "Shareholder Agreement" or "SRA"), Lesh and another former Appriva shareholder, Erik van der Burg ("van der Burg"), were appointed the "Shareholders' Agent" by the shareholders of Appriva, to jointly act as their agent and attorney-in-fact. Sections 1.1 and 2.3 of the Shareholder Agreement each contain language that requires the defendants Lesh and van der Burg to act jointly in their capacity as shareholder representatives. Those provisions, among others, are the subject of this dispute and are argued by both plaintiffs to be ambiguous concerning their entitlement to pursue their separate litigation tracks.

The Lesh Action

On May 20, 2005, Lesh, unilaterally commenced the Lesh Action in the Superior Court of Delaware, New Castle County, C.A. 05C-05-218, on his own behalf as a shareholder, and on behalf of certain other shareholders as a Shareholder Representative. On August 8, 2005, the defendants in the Lesh Action moved to dismiss Lesh's complaint under Rule 12(b)(6). Besides arguing that Lesh's allegations of breach of contract and common law and statutory fraud were deficient, the defendants asserted that the plain terms of the Merger Agreement and the SRA precluded Lesh's standing: (i) as an individual shareholder of Appriva, because the shareholders had irrevocably relinquished the right to "act independently and other than through the Shareholder Representatives" in bringing an action under the Agreement, and (ii) as a Shareholder Representative, because Lesh did not act "jointly" and "together" with van der Burg in filing the Lesh Action.

In an opinion dated June 15, 2006, a Superior Court judge granted the defendants' motion to dismiss the Lesh Action.² The Superior Court held that Lesh, "as the party invoking the jurisdiction of a court, has the burden of proof and persuasion as to the existence of standing," and that Lesh fell "far short of carrying his burden demonstrating that he has standing to sue either as a shareholder representative or in his individual capacity." The Superior Court explained:

The Merger Agreement, explicitly and unambiguously states that Lesh and van der Burg are to jointly act as the agent for all shareholders with respect to the taking of any and all actions and the making of any decisions required or permitted to be taken by the Shareholders' Agent under the Merger Agreement. The claims asserted in this action arise under the Merger Agreement. Therefore, the Court finds that Lesh cannot sue as a shareholder representative without van der Burg.

Moreover, the Court finds that Lesh cannot sue in his individual capacity. At the hearing, Lesh never claimed that the Defendants fraudulently induced him to agree specifically to Section 1.1(c) of the SRA or Section 15.5 of the Merger Agreement. Rather, he claimed that the entire document was the product of fraudulent behavior and that but for the fraud the Agreements would not have been entered. In short, the Court finds that the claim of fraud actually bears upon the entire agreement and upon the activities of the Defendants' in general, not upon a particular clauses within the Merger Agreement or the SRA.

On June 28, 2006, Lesh filed a motion for reargument, asserting that the Superior Court had erroneously held that Lesh's pleading of "a contract claim was fatal to his ability, or standing, to assert the tort/fraud claims individually." By order dated October 31, 2006, the Superior Court denied Lesh's motion for reargument, explaining that it "did not grant Defendants' motion because Plaintiff's pleadings contained `alternate theories,'" but rather because "[t]he documents that control the rights of the former Shareholders of Appriva Medical, Inc. and that govern the authority of the Shareholder Representatives preclude Plaintiff from establishing standing."³ The Superior Court reasoned:

The Shareholder Representatives, Lesh and van der Burg, were fully empowered by the Shareholder Representative Agreement ("SRA"). However, both the [Merger] Agreement and the SRA prohibit Lesh from acting independently from van der Burg. As Lesh and van der Burg each filed his own lawsuit, the Shareholder Representatives have not acted jointly as authorized by the Agreement and SRA. Thus, after a careful review of this matter, the Court determines that it will not hear reargument limited to the issue of Plaintiff's standing to sue in his individual capacity.

Relying upon Sections 15.5 of the Agreement and Sections 1.1(a)-(c) and 2.3 of the SRA, the Superior Court concluded that "[t]he former Shareholders of Appriva,...