Diamond v. Shiftpixy, Inc.

• Decision Date: 19 July 2021
• Docket Number: 20-cv-7305 (LJL)
• Parties: JASON DIAMOND, Plaintiff, v. SHIFTPIXY, INC. and SCOTT ABSHER, Defendants.
• Court: U.S. District Court — Southern District of New York

JASON DIAMOND, Plaintiff, v. SHIFTPIXY, INC. and SCOTT ABSHER, Defendants.

No. 20-cv-7305 (LJL)

United States District Court, S.D. New York

July 19, 2021

AMENDED OPINION AND ORDER

LEWIS J. LIMAN, United States District Judge

Defendants ShiftPixy Inc. (“ShiftPixy”) and Scott Absher (“Absher, ” and together “Defendants”) move, pursuant to Federal Rule of Civil Procedure 12(b)(2) and (6), to dismiss the complaint filed by Plaintiff Jason Diamond (“Diamond” or “Plaintiff”) against them.

For the following reasons, the motion to dismiss the claims against ShiftPixy and against Absher is granted in part and denied in part. The claim for warrants with anti-dilution protection and all claims against Absher are dismissed with prejudice. To the extent that the complaint can be read to allege that ShiftPixy still owes Diamond warrants without dilution protection, that claim survives the motion to dismiss.

BACKGROUND

I. The Parties

Defendant ShiftPixy is a specialized staffing and human capital management service provider. Dkt. No. 1 (“Complaint” or “Compl.”) ¶ 3. It provides solutions for large contingent part-time workforce demands, primarily in the restaurant, hospital, and maintenance service trades. Id. ShiftPixy is a Wyoming corporation with its principal place of business in California. Id.

Defendant Absher has been the CEO and a director of ShiftPixy at all relevant times. Id. ¶ 4. He is a citizen and resident of California. Id.

Plaintiff Diamond is a citizen and resident of Washington. Id. ¶ 2. Diamond was an employee of, and head of investment banking with, a registered broker-dealer named Drexel Hamilton (“Drexel”), which served as financial advisor to ShiftPixy. Id. ¶ 1; see Dkt. No. 18-1 (Diamond's signature on the transaction agreement as head of investment banking at Drexel).^[1]

II. The Investment Banking Agreement

On September 26, 2018, ShiftPixy and its subsidiaries and affiliates entered into an Exclusive Investment Banking Agreement (“IBA”) with Drexel, and another firm named Stifel, Nicolaus & Company, Incorporated (“Stifel”). Compl. ¶ 9; see also Dkt. No. 18-1 (the IBA). The IBA provided for Stifel and Drexel Hamilton to act as ShiftPixy's “exclusive financial advisors and placement agents in connection with one or more capital raises (each a ‘Transaction').” Dkt. No. 18-1 at 1.

The IBA promised placement fees to each of Drexel and Stifel if ShiftPixy entered into a definitive agreement with an Investor with respect to a Transaction or consummated a Transaction with any Investor based upon the Transaction. Those fees took the form of both cash and a warrant. Specifically, Section 2 of the IBA discusses “compensation” and provides:

If during the Term or Tail Period (as defined in Section 9) of this Agreement, the Company enters into a definitive agreement with an Investor with respect to a Transaction or consummates a Transaction with any Investor, [ShiftPixy] agrees to pay Stifel and Drexel Hamilton the following fees on the closing date of each such Transaction:

B. Cash Placement Fees.

i. 7.5% of the gross proceeds paid for any equity or equity-linked securities issued by [ShiftPixy] (including without limitation, any debt plus warrant structure); and

ii. 3.75% of the face value of any non-convertible or non-equity-linked debt facility or committed line of credit, including any undrawn but committed amounts (excluding any debt plus warrant structure), dividing by the exercise price.

C. Warrant Placement Fees.

i. A number of warrants equal to 6.0% of the gross proceeds paid for any equity or equity-linked securities issued by [ShiftPixy] (including, without limitation, any debt plus warrant structure);

ii. A number of warrants equal to 3.0% of the face value of any non-convertible or non-equity-linked debt facility or committed line of credit, including any undrawn but committed amounts (excluding any debt plus warrant structure), divided by the exercise price.

The Warrants shall have a term of five-years, contain cashless exercise provisions and piggyback registration rights, providing the Agents with the right to purchase one share of [ShiftPixy]'s common stock per Warrant with an exercise price equal to (a) the implied per share valuations received by participating investors in the Transaction, or (b) in the event of no valuation mechanism in the Transaction, an exercise price equal to 110% of the 10-day VWAP [volume weighted average price] for the 10-day period immediately preceding the closing of the Transaction (the “Exercise Price”).

Each of Stifel and Drexel Hamilton shall receive 50% of each of the case placement fee set forth in Section 2(B) and the warrant placement fee set forth in Section 2(C). At each Agent's option and upon such Agent's written instructions to the Company, the Company shall issue all or a portion of any warrants due to such Agent under this Agreement directly to specified employees of such Agent.

Id. § 2.

The IBA defines “Agent” as either Stifel or Drexel. Id. at 1. It defines “Investors” as “persons or entities (and their affiliates) introduced by the Agents to [ShiftPixy], ” “persons or entities (and their affiliates) introduced by [ShiftPixy] to the Agents during the Term of this Agreement[, ] and any person or entity (and their affiliates that seeks to enter into, or actually enters into any Transaction with [ShiftPixy] during the Term of this Agreement.” Id. § 1(c). The IBA defines “Term” as the twelve-month anniversary of its date. Id. § 8.

Aside from the terms set forth in Section 2C, the IBA contains no provision defining the required terms of the warrants. It does not require Defendants to include with the warrants any anti-dilution provisions or full-ratchet anti-dilution. See Dkt. No. 18 at 8; Dkt. No. 24 at 1 (acknowledging that the IBA “does not otherwise define or describe the terms of the warrants to be issued as part of the placement fees”).^[2] Drexel and Stifel's protection is in the ability, upon issuance, to immediately convert the warrants into common stock.

The IBA also contains an integration and non-modification clause under Section 15, which provides:

This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements, both written and oral, with respect to the subject matter hereof, and no modification of this Agreement or waiver of the terms and conditions contained herein shall be binding upon the parties hereto unless approved in writing by each party.

Dkt. No. 18-1 § 15.

The IBA contains a forum selection clause and consent to provision jurisdiction clause under Section 16:

All aspects of the relationship created by this Agreement or the engagement hereunder, any other agreements relating to the engagement hereunder and all claims or causes of action (whether in contract, tort or otherwise) that may be based upon, arise out of or relate to this Agreement or the engagement hereunder shall be governed by and construed in accordance with the laws of the State of New York, applicable to contracts made and to be performed therein and, in connection therewith. The parties consent to the exclusive jurisdiction of the courts located in New York County, New York, in connection with any claim or dispute relating to this Agreement or any services or advice provided hereunder. The prevailing party in any such litigation shall be entitled to recover its attorney's fees and costs. Notwithstanding the foregoing, solely for purposes of enforcing [ShiftPixy]'s obligations under Annex A or Annex B, [ShiftPixy] consents to personal jurisdiction, service and venue in any court proceeding in which any claim or cause of action relating to or arising out of this agreement or the engagement hereunder is brought by or against any Indemnified Person.

Id. § 16.

Diamond signed the IBA on behalf of Drexel as its head of investment banking, John Lanza (“Lanza”) signed on behalf of Stifel as its managing director, and Absher signed on behalf of ShiftPixy as its CEO. Id. at 13.

III. The Securities Purchase Agreement

In March 2019, Drexel, through Diamond, introduced ShiftPixy to institutional investors who could provide it bridge financing. Compl. ¶ 11. On March 11, 2019, during the term of the IBA, ShiftPixy entered into a Securities Purchase Agreement (“SPA”) with institutional investors introduced to it by Drexel for the sale and issuance by ShiftPixy of $4.75 million of senior convertible notes (the “Notes”) due September 12, 2020. Id. ¶ 12. Concurrently with the sale of the Notes, pursuant to the SPA, ShiftPixy agreed to issue and sell to the same investors immediately exercisable warrants to purchase 2, 840, 909 shares of its common stock at an exercise price of $1.75 per share (subject to adjustments provided under the terms of the warrants). Id. Specifically, the SPA required ShiftPixy to sell and each of the institutional investors to buy a Note in the aggregate original principal amount set forth in a schedule to the SPA and “a warrant to initially acquire up to that aggregate number of additional shares of Common Stock set forth opposite such Buyer's name [on a schedule to the SPA], substantially in the form [of Exhibit B attached to the SPA].” Dkt. No. 18-2 § C. The parties agree that the Form of Warrant contained a full-ratchet anti-dilution provision that would “adjust the exercise price of a warrant so that the holder of the warrant is protected against dilution by reason of subsequent share issuances or other triggering events.” Dkt. No. 18 at 5. Specifically, the Form of Warrant provided, in part:

2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price [(i.e., $1.75)] and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set

...