Aronson v. Advanced Cell Tech., Inc.

• Decision Date: 19 September 2013
• Docket Number: Civil Action Nos. 11–11492–NMG, 11–11515–NMG.
• Citation: 972 F.Supp.2d 123
• Parties: Gary D. ARONSON, Plaintiff, v. ADVANCED CELL TECHNOLOGY, INC., Defendant. and John S. Gorton, as Trustee of the John S. Gorton Separate Property Trust, Dated 3/3/1993, Plaintiff, v. Advanced Cell Technology, Inc., Defendant.
• Court: U.S. District Court — District of Massachusetts

972 F.Supp.2d 123

Gary D. ARONSON, Plaintiff,

v.ADVANCED CELL TECHNOLOGY, INC., Defendant.andJohn S. Gorton, as Trustee of the John S. Gorton Separate Property Trust, Dated 3/3/1993, Plaintiff,

v.Advanced Cell Technology, Inc., Defendant.

Civil Action Nos. 11–11492–NMG, 11–11515–NMG.

United States District Court, D. Massachusetts.

Sept. 19, 2013.

Matthew R. Alsip, Venable, LLP, Towson, MD, James O. Fleckner, Brenda R. Sharton, Ai Tajima, Goodwin Procter, LLP, Jonathan L. Kotlier, Benjamin L. Mack, Nutter, McClennen & Fish, LLP, Boston, MA, Andrew Gendron, Venable, LLP, Baltimore, MD, for Defendant.

Lauren J. Coppola, Daniel C. Reiser, Craig & Macauley, P.C., Boston, MA, Robert M. Steele, Miller & Steele, Oceanside, CA, for Plaintiff.

ORDER

NATHANIEL M. GORTON, District Judge.

“After consideration of Defendant's Objection thereto (Docket No. 93) (and with assurance to all parties that this judicial officer is not related to the defendant of the same surname), Report and Recommendation is accepted and adopted.”

REPORT AND RECOMMENDATION ON DEFENDANT'S PARTIAL MOTION TO DISMISS AND ORDER ON DEFENDANT'S MOTION FOR SANCTIONS

DEIN, United States Magistrate Judge.

I. INTRODUCTION

These consolidated actions arise out of Warrants to Purchase Securities (the “Warrant Agreements”), which the defendant, Advanced Cell Technology, Inc. (“ACT”), issued to the plaintiffs, Gary D. Aronson (“Aronson”) and John S. Gorton, as Trustee of the John S. Gorton Separate Property Trust, Dated 3/3/1993 (“Gorton”). Under the Warrant Agreements, the plaintiffs were entitled to purchase shares of ACT stock at a set price, and also were entitled to certain adjustments in the share price and number of shares they would receive in the event ACT issued, or agreed to issue, lower priced shares to a third party during the time period known as the Pricing Period. By their claims in this action, the plaintiffs assert that ACT violated its obligations under the Warrant Agreements by concealing the existence of transactions with third parties that occurred during the Pricing Period and should have triggered adjustments to the number and price of the plaintiffs' shares.

Following the court's ruling on the defendants' ¹ motions to dismiss the plaintiffs' First Amended Complaints, Aronson and Gorton sought leave to amend their complaints. Those motions were allowed without opposition, and the plaintiffs each filed Second Amended Complaint asserting four claims against ACT for breach of its obligations under the Warrant Agreements. Specifically, by their First Claims for Relief, the plaintiffs have restated their earlier claims (which were not dismissed) that ACT breached the Warrant Agreements by failing to notify Aronson and Gorton regarding its issuance of a warrant to William Woodward (the “Woodward Warrant”), and by failing to make adjustments to the plaintiffs' shares as a result of the Woodward Warrant. By their Second, Third and Fourth Claims for Relief, Aronson and Gorton have added allegations that ACT breached the Warrant Agreements by failing to notify them of additional transactions that should have triggered adjustments to their shares.² The additional transactions include the issuance of a warrant to Deron Colby (the “Colby Warrant”) and the extension of exercise periods contained in warrants that were issued to Andwell, LLC (the “Andwell Warrant”) and Nancy Burrows (the “Burrows Warrant”). They also include sales of stock to entities known as Outboard, Ice Cap Holdings (“Ice Cap”) and Tuxedo Holdings (“Tuxedo”), which ACT allegedly agreed to make in exchange for the cancellation of debt.

The matter is presently before the court on “Advanced Cell Technology's Partial Motion to Dismiss Plaintiffs' Second Amended Complaints” (Docket No. 63), by which ACT is seeking the dismissal of the plaintiffs' Second, Third and Fourth Claims for Relief, with prejudice, for failure to state a claim under Fed.R.Civ.P. 12(b)(6). For all the reasons detailed herein, this court recommends to the District Judge to whom this case is assigned that ACT's partial motion to dismiss be ALLOWED IN PART and DENIED IN PART. Specifically, this court finds that Aronson and Gorton have failed to state claims for breach of contract based on ACT's alleged sales of stock to Outboard, Ice Cap and Tuxedo, but that their allegations relating to the Colby Warrant and the extension of the exercise periods contained in the Andwell and Burrows Warrants are sufficient to withstand the motion to dismiss. Therefore, this court recommends that the Fourth Claims for Relief be dismissed, but that the motion be denied with respect to the Second and Third Claims for Relief. Furthermore, because this court finds that the pleading defect concerning the alleged sales of stock to Outboard, Ice Cap and Tuxedo can be quickly and easily remedied, this court recommends that the plaintiffs have an opportunity promptly to amend their Fourth Claims for Relief following the court's final ruling on the motion to dismiss.

This matter is also before the court on “ACT's Motion for Sanctions Against Plaintiffs” (Docket No. 69), by which ACT is seeking an award of attorneys' fees and costs that it has incurred in connection with its defense of the Second, Third and Fourth Claims for Relief. The defendant contends that such sanctions are warranted, pursuant to Fed.R.Civ.P. 11, because the claims at issue are frivolous. For the reasons described below, this court finds that the plaintiffs' claims are not frivolous and that sanctions would not be appropriate. Accordingly, ACT's motion for sanctions against Aronson and Gorton is DENIED.

II. STATEMENT OF FACTS

When ruling on a motion to dismiss brought under Fed.R.Civ.P. 12(b)(6), the court must accept as true all well-pleaded facts, and give the plaintiff the benefit of all reasonable inferences. See Cooperman v. Individual, Inc., 171 F.3d 43, 46 (1st Cir.1999). “Ordinarily, a court may not consider any documents that are outside of the complaint, or not expressly incorporated therein, unless the motion is converted into one for summary judgment.” Alt. Energy, Inc. v. St. Paul Fire & Marine Ins. Co., 267 F.3d 30, 33 (1st Cir.2001). “There is, however, a narrow exception ‘for documents the authenticity of which are not disputed by the parties; for official public records; for documents central to plaintiffs' claim; or for documents sufficiently referred to in the complaint.’ ” Id. (quoting Watterson v. Page, 987 F.2d 1, 3 (1st Cir.1993)). Applying this standard to the instant case, the facts relevant to ACT's motion to dismiss are as follows. ³

The Parties

Defendant ACT is an early stage biotechnology company that is incorporated in Delaware and has its principal place of business in Marlborough, Massachusetts. (Compl. ¶ 1).⁴ Its common stock is registered with the Securities and Exchange Commission (“SEC”), and its shares are traded under the symbol “ACTC.” ( Id.). Plaintiff Aronson is a citizen of Nevada, and an investor in early stage start-up biotechnology companies. ( Id. ¶ 2). He has owned shares of ACT common stock for over six years. ( Id.). Plaintiff Gorton is a citizen of California. (G. Compl. ¶ 2). Like Aronson, Gorton is a shareholder of ACT, and has owned shares of ACT common stock during the time period that is relevant to this case. ( Id.).

The Plaintiffs' Warrant Agreements

The Warrant Agreements at the center of this litigation arose out of a legal dispute that began in 2004, when Aronson and Gorton brought a collection action against ACT's predecessors and two of their officers in Worcester Superior Court. (Compl. ¶ 4). Following a year of litigation, during which time ACT's predecessors allegedly violated or sought to avoid the state court's orders, the parties reached a settlement, which was memorialized in a Settlement Agreement dated September 14, 2005. ( Id.). Pursuant to the terms of that Agreement, ACT was required to issue a Warrant to Purchase Shares (“Warrant Agreement”) to each of the plaintiffs. ( Id. ¶ 5; G. Compl. ¶ 6). Accordingly, ACT executed Warrant Agreements on September 14, 2005, and delivered them to Aronson and Gorton. (Compl. ¶ 5; G. Compl. ¶ 6).

Pursuant to Aronson's Warrant Agreement, Aronson had the initial right to purchase, at any time through January 15, 2009, 375,756 shares of ACT common stock at a price of $2.20 per share (the “Warrant Purchase Price”). (Compl. ¶ 6). Similarly, under his Warrant Agreement, Gorton was granted the initial right to purchase, at any time through January 15, 2009, 46,970 shares of ACT common stock at the Warrant Purchase Price of $2.20 per share. (G. Compl. ¶ 7). Additionally, the plaintiffs were entitled to automatic adjustments in the number and purchase price of their shares in the event ACT issued or agreed to issue lower priced shares to a third party during the time period between May 1, 2005 and January 15, 2009 (the “Pricing Period”). (Compl. ¶ 7; G. Compl. ¶ 8). As detailed below, the plaintiffs claim that during the Pricing Period, ACT issued, or agreed to issue, lower priced shares to various third parties without notifying the plaintiffs of those transactions or making the automatic adjustments called for under their Warrant Agreements.

Section 3 of the plaintiffs' Warrant Agreements governed the circumstances under which adjustments were to be made before the plaintiffs exercised their purchase rights. (Compl. ¶ 8; G. Compl. ¶ 9). Specifically, the relevant portions of Section 3 provided:

3. ADJUSTMENT OF WARRANT PURCHASE PRICE AND NUMBER OF SHARES. The Warrant Purchase Price shall be subject to decrease and the number of shares purchasable upon the exercise of this Warrant shall be subject to increase from time to time upon the occurrence of certain events and/or price determinations described in this Section 3. Upon each decrease of the Warrant Purchase Price per share of Common Stock, if any, the Holder of this Warrant shall thereafter be entitled to...