WHEREAS
having considered Defendants Andrew J. Weidhaas, Joanne
Weidhass, and MiraDx, Inc.'s Motion for Judgment on the
Pleadings (the "Motion"),[1] the parties' briefing on
the Motion,[2] and oral argument held on April 3, 2023
it appears:[3]
A.
Defendant MiraDx, Inc. ("MiraDx" or the
"Company") is a Delaware corporation that "was
founded and continues to conduct cancer research aimed at
developing treatments based on a class of genetic
biomarkers."[4] "As a research and development
company, MiraDX was not profitable and did not provide any
returns
to its investors between 2009 and 2020."[5] In March 2020,
the Company began developing a COVID-19 PCR
test.[6]
B.
Defendant Dr. Joanne Weidhaas is a founder of MiraDx and
Chairperson of its board of directors.[7] Dr. Weidhaas is
an oncologist and professor at the David Geffen School of
Medicine at UCLA and head of translational research in its
Department of Therapeutic Radiology, where she specializes in
women's health issues.[8]
C.
Defendant Andrew J. Weidhaas is, and has been at all relevant
times, a MiraDx director.[9] Mr. Weidhaas is a partner at a
prominent international law firm.[10]Dr. and Mr. Weidhaas are
married.[11]
D.
Plaintiff Gilbert G. Menna is a senior partner and former
member of the executive and management committees at the same
prominent international law firm as Mr.
Weidhaas.[12] Mr. Menna "specializes in REITs,
M&A practice and real estate
tax."[13] Mr. Menna and Mr. Weidhaas have been
partners at their law firm for over twenty-eight
years.[14] Mr. Menna is a former stockholder of
MiraDx.[15]
E. In
2009, Mr. Menna invested $100,000 to acquire 100,000 series A
shares ("Series A Shares") of MiraDx.[16] In 2011, Mr.
Menna participated in a MiraDx bridge note financing round in
which he purchased $200,000 worth of bridge notes (the
"Bridge Notes").[17] The Bridge Notes provided for
payable-in-kind ("PIK") interest through the
issuance of additional Bridge Notes, all of which were
convertible into Series A Shares.[18] In conjunction with this
financing round, Mr. Menna also acquired a Series A warrant
that was exercisable into 93,037.50 Series A Shares at a
$1.00 per share strike price.[19]
F. Each
year, the Company provided an annual investor update to
stockholders sharing updates about its cancer research, but
little to no financial information.[20] On November 15, 2020, Dr.
Weidhaas distributed the Company's
2020 investor update (the "November 2020
Update").[21] That update reported that starting in
March 2020, the Company "pivoted all of [its] lab
operations, and invested [its] remaining capital in
additional high-throughput machinery, established and
validated [its] own COVID-19 PCR test based on CDC-provided
materials and protocols, and started offering COVID-19
testing on a commercial basis on April 9th,
2020."[22] MiraDX "operated under an FDA
emergency use authorization until August 31, 2020, when the
FDA formally authorized [the Company's]
test."[23] The update described populations using
the Company's test and the contract it secured on July 1
with the California Department of Corrections and
Rehabilitation ("CDCR").[24] The Company cautioned
investors that "[w]hile the Company has a contract with
CDCR, it is not a fixed commitment contract, and CDCR can
effectively terminate the contract at any time. While we are
not certain how long the CDCR program will continue, we have
no current indication that it will end any time
soon."[25]
G. The
November 2020 Update also summarized the progress of three
preexisting biomarker programs, and the Company's
financial position.[26]
The Company's current operational plans are to continue
COVID-19 testing for as long as commercially reasonable to do
so, while continuing the development of our numerous oncology
and other diagnostic programs. As a result of the redirection
of the Company's resources to the commercial programs
related to the pandemic, the Company estimates that the
soonest its non-COVID-19 diagnostic programs will be ready
for large scale commercial launch will be 2023. The Company
intends to use the non-dilutive funds raised through the
COVID-19 testing to fund operations and the further
development of its programs, described above.[27]
H.
Finally, the update closed with an invitation for investors
interested in selling their shares to contact Mr. Weidhaas.
As a result of the cash generated by the COVID-19 testing
program, the fact that many of you have been stockholders of
the Company for over a decade, and the potential for tax law
changes in 2021, the Company is open to the potential for
liquidity to interested stockholders, although there is
absolutely no obligation on this front. If you are interested
in selling your shares back to the Company, please contact
A.J. Weidhaas at aweidhaas"goodwinlaw.com.[28]
I. On
November 18, Mr. Menna emailed Mr. Weidhaas asking if the
November 2020 Update was "an issuer tender
offer."[29] Mr. Weidhaas responded that while the
Company had considered a tender offer, it decided against it,
and that
the liquidity event "is pretty open and
flexible."[30] Mr. Menna pressed Mr. Weidhaas: "So
what do you know that I should know? Can we chat, and is it
all holders best price?"[31]
J. Mr.
Weidhaas responded the next day attaching the Company's
most recent financials, summarizing Mr. Menna's
investment, and offering to discuss those topics with Mr.
Menna the next day.[32] His email did not address taxes. Mr.
Menna replied, again pressing for more information:
Can I have a sense of who is staying in (or is that
confidential), and is this an all or none proposition for
each investor? I wonder whether the entire equity amount is
subject to qualified small business gain exclusion? Copying
in my wonderful BDO advisor Jessi who can help answer the tax
question once we learn a little more.[33]
K. On
November 24, Mr. Menna emailed Mr. Weidhaas again, asking for
the conversion documents and stating: "I am going to
take advantage of the liquidity event and favorable tax
treatment by year end but leave some amount in the company
with the rock star doctor. Just do not know what that will
be. Either $100,000 or
$200,000 likely."[34] The next day, Mr. Weidhaas sent Mr.
Menna "the Conversion Notice and form of Repurchase
Agreement."[35]
L. On
November 28, Mr. Menna responded,
I recognize that you don't know who is going to tender,
but based on your best thinking now, approximately what
percentage of the equity in the company would each retained
$100,000 interest represent? Can you give a rough estimate?
Lastly, will all the retained common equity be participating
pari passu going forward following the
recapitalization?[36]
Mr.
Weidhaas replied: "Each 100,000 should represent about
[0].8% going forward. All of the securities are now in the
money given current value, so yes, they will be participating
pro rata unless there is a significant deterioration in
value."[37] Mr. Menna wrote back with more
questions, including one about the release in the stock
repurchase agreement (the "Stock Repurchase
Agreement"): "Lastly, for those staying in, should
the release in the stock [re]purchase agreement read
differently so as not to foreclose future claims as a
continuing equity investor?"[38] Mr. Weidhaas emailed
later that morning agreeing to "adjust the release
language as you suggest if you are leaving some
in."[39]
M. Mr.
Menna executed a "Bridge Note Conversion Notice"
electing to convert his "Convertible Promissory Notes .
. . in the original principal amount(s) of $200,000.00 . . .
into 372,150 shares of Series A Preferred
Stock."[40]
N. On
December 3, Mr. Menna emailed his tax advisor and Mr.
Weidhaas to return his executed Stock Repurchase Agreement,
"mak[ing] note of the change expected in section 7
(release) in the event [he] le[ft] the original 2009
investment in the Company."[41] Mr. Menna shared that he
was "leaning on" keeping his original 2009
investment in the Company "if it is clear that [he] will
be reducing [his] voting position by significantly more than
20% following the completion of the tender offer," but
asked Mr. Weidhaas if he was available "to ask a few
additional questions about the capitalization of the Company
following the tender offer."[42] He closed the email with
a note to his advisor: "Jessi, I will explain this
package to you when we next speak as it creates a Qualified
Small Business Stock [("QSBS")] exemption form
[sic] gain in 2020."[43] Mr. Weidhaas responded to Mr.
Menna's questions about any holdings he was "leaving
in" the Company, confirming that Mr. Menna's
"voting interest will go down by more than 20%, even if
[he kept] 100,000 shares."[44]
O. Mr.
Menna emailed back:
The only other questions I have relate to understanding (I)
who the remaining investors are following the tender, and
(II) whether, with the other cofounder liquidating, Joanne
would be the only reminding [sic] knowledgeable doctor and
researcher (expert if you will) running the Company.
So I can chat with you about these last questions at your
convenience, whenever that might work for you.
I have moved my charitable conservation restriction to
January of next year as I will receive the tax benefits from
that event in 2021 when making my estimated tax payments. I
have therefore eliminated that concern for the 2020 tax
year.[45]
Mr.
Weidhaas replied:
1. The other co-founder, Frank Slack, is retaining 100,000
shares (selling about 1mm). Note that he is a PhD, not MD
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