Stuckey v. Online Res. Corp.

• Decision Date: 09 November 2012
• Docket Number: Case No. 2:08–CV–1188.
• Citation: 909 F.Supp.2d 912
• Parties: Kent D. STUCKEY, Plaintiff, v. ONLINE RESOURCES CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of Ohio

909 F.Supp.2d 912

Kent D. STUCKEY, Plaintiff,

v.ONLINE RESOURCES CORPORATION, Defendant.

Case No. 2:08–CV–1188.

United States District Court,

S.D. Ohio,

Eastern Division.

Nov. 9, 2012.

Thomas Walter Hill, Stephen C. Barsotti, Kegler, Brown, Hill & Ritter, Columbus, OH, for Plaintiff.

Richard W. Cline, Glenn D. Southworth, McDonald Hopkins Co. LPA, Cleveland, OH, Kevin B. Bedell, Michael R. Sklaire, Greenberg Traurig, LLP, McLean, VA, for Defendant.

BENCH OPINION

ALGENON L. MARBLEY, District Judge.

I. INTRODUCTION

Plaintiff Kent Stuckey (“Plaintiff” or “Stuckey”) brought this action against Defendant Online Resource Corporation (“Defendant” or “ORC”) in December 2008. Stuckey seeks recovery based on his remaining claims for breaches of a merger agreement, fraud, and breach of an escrow agreement. This Court presided over a bench trial on issues of liability and damages. For the reasons set forth below, the Court finds in Plaintiff's favor, and Plaintiff must submit his election of remedies within 30 days of this Bench Opinion, at which time FINAL JUDGMENT will be entered.

II. PROCEDURAL HISTORY

Stuckey's original complaint was filed against ORC on December 19, 2008. ORC filed a motion to dismiss thereafter, which was granted in part and denied in part on December 11, 2009. Stuckey v. Online Res. Corp., No. 2:08–cv–1188, 2009 WL 5030794, at *20 (Dec. 11, 2009) (“ Stuckey I ”).

With the Court's consent, Stuckey filed an amended complaint on April 16, 2010, 2010 WL 1610622, alleging: (1) breach of contract arising from failure to file a registration statement, breach of the price protection clause, breach of ORC's obligation to complete the termination of the Internet Transaction Solutions, Inc. (“ITS”) profit sharing plan, and breach of terms of the escrow agreement requiring distribution of all funds therein to ITS stockholders (Count I); (2) fraudulent misrepresentationand fraudulent non-disclosure (Count II); (3) fraudulent inducement of ITS stockholders to elect price protection on or around May 10, 2008 (Count III); and (4) securities fraud under the Ohio Securities Act, Ohio Revised Code Chapter 1707 (Count IV). ORC again filed a motion to dismiss, this time requesting that the Court dismiss all of Stuckey's claims except for breach of contract claims arising from breach of the price protection clause and breach of the escrow agreement. This Court granted the second motion to dismiss, in part, on two claims that were not incorporated by Stuckey into the enumerated counts and on the breach of contract claim resulting from ORC's obligation to terminate ITS's profit sharing plan (portion of Count I). Stuckey v. Online Res. Corp., 819 F.Supp.2d 673, 693 (2011) (“ Stuckey II ”). As to the remainder of Stuckey's claims, the motion to dismiss was denied. Id.

Before this Court ruled on the second motion to dismiss, ORC filed a summary judgment motion, asking this Court to grant summary judgment in its favor as to Stuckey's claims for breach of contract for failure to file a registration statement for ORC stock (part of Count I); breach of contract for failure to terminate the ITS profit sharing plan (part of Count I); common law fraud, including fraudulent misrepresentation, fraudulent non-disclosure, and fraudulent inducement (Counts II and III); and securities fraud under the Ohio Securities Act (Count IV). This Court denied ORC's summary judgment motion in its entirety. Stuckey v. Online Res. Corp., No. 2:08–cv–1188, 2012 WL 468510, at *20 (Feb. 13, 2012) (“ Stuckey III ”).

A seven-day bench trial ensued. This Court now issues the following findings of fact and conclusions of law.

III. FINDINGS OF FACT

A. The Parties

ORC is a publicly traded corporation that was incorporated in Delaware and has its principal place of business in Virginia. (Stip. 1.) Stuckey brought this case on behalf of the ITS stockholders, as the stockholder representative upon agency and authority established by the parties' merger agreement.¹ (P Exs. 5, 286.) Stuckey is the stockholder representative for: Internet Transaction Solutions, LLC; Value Recovery Group, Inc.; New Ridge LLC; PWI Inc.; G Tek LLC; Barry H. Fromm; Eben L. Kent; Mark S. Johnson; Robert J. Massey; John G. Ritchey; Sudhir and Anjali Sehgal; Richard and Cheryl Evans CRUT; Scott Evans CRUT; and Scott Evans GRAT (collectively referred to as “ITS Stockholders”).

ITS was founded in Columbus, Ohio in May 1999, and provided specialized electronic payment services to accounts receivable management and utilities industries. (Stip. 2; Tr. 11–12.) ITS became cash positive in approximately 2003. (Tr. 20.) It was an industry leader in the accounts receivable management industry for electronic payments in 2006. (Tr. 402, 632–33.)

B. The Sale of ITS

ITS decided to explore whether to sell the business in 2006. (Tr. 634; Stip. 3.) The company retained an investment banking firm, Lane Berry, to seek advice on whether it was a good time to sell. (Tr. 21–22.) After consulting with Lane Berry, the ITS board decided to have Lane Berry conduct a competitive bid auction process for potential sale of ITS. (Tr. 23–24.) Forty-five companies expressed interest in ITS, management presentations were made by ITS to eighteen of the forty-five companies, and the sale eventually came down to three bidders: ORC, Jack Henry, and TransFirst. (Tr. 23–25.)

ORC initially proposed a merger for $40 million that would allow ITS Stockholders to elect to accept a minimum of 40% and a maximum of 90% of the purchase price in “registered Online common stock with any remainder paid in cash at closing.” (Tr. 32, 756–60; P Ex. 2.) ORC also offered price protection for twelve months after the closing “such that selling shareholders will have the opportunity to achieve at least the cash purchase equivalent price for the stock portion of their consideration.” (P Ex. 2.) In addition to the benefits to the ITS Stockholders in the proposed merger, ORC would benefit from offering ORC stock as part of the consideration because, the more ORC stock the ITS Stockholders took, the less cash drain would be imposed on ORC. (Tr. 255–56, 761.) ORC later increased its offer to $45 million. (Tr. 115; D Ex. 1.)

The ITS Stockholder selected ORC as the winning bidder. (Tr. 256–57; P Ex. 5.) Certain ITS Stockholders testified credibly at trial that they liked the upside potential of registered ORC stock, coupled with the downside price protection, and that ORC was willing to agree to impose certain terms and representations contained in the draft stock purchase agreement, subject to necessary changes to convert the deal from a stock purchase to a merger transaction. (Tr. 35–37, 117, 635–36.)

C. The Merger Agreement

Stuckey and ITS Stockholders' legal counsel, Scot Crow, worked with ORC's general counsel, Michael Bisignano; chief financial officer, Catherine Graham; and outside counsel, Mark Wishner of Greenberg Traurig, to negotiate and close the transaction. (P Ex. 5; Tr. 256–57.) The merger agreement was entered into and signed on July 26, 2007. (Tr. 145; Stip. 5.)

The merger consideration was a combination of cash and shares of ORC's common stock (“Buyer Stock”) in the amount of $45 million, subject to certain adjustments. (P Ex. 5 § 1.5.) At closing, each ITS share was converted into a right to receive a combination of cash and Buyer Stock in specified amounts and percentages. (P Ex. 5 § 2.3(d).) Section 2.7(a) of the merger agreement set up the procedures by which each ITS Stockholder was entitled to elect what portion of the purchase price to receive in cash or Buyer Stock, but nothing in the merger agreement set forth the 40% to 90% range of Buyer Stock consideration referenced in ORC's original offer. (P Ex. 5 § 2.7(a); Tr. 115.) A minimum of approximately 40% of Buyer Stock, however, was necessary to achieve tax deferral on the Buyer Stock received. (Tr. 255–56.)

The share price to be utilized to determine the number of shares issued to those ITS Stockholders who elected Buyer Stock in lieu of cash was the volume weighted average price (“VWAP”) per share, calculated as of the date of the merger agreement, July 26, 2007. (P Ex. 5 § 1.5.) The VWAP of the Buyer Stock as of the date of the merger agreement was $11.1488 per share. (Stip. 7.)

Under section 10.6 of the merger agreement, ORC unconditionally promised to “file with Securities and Exchange Commission (the ‘ SEC ’) a registration statement covering the resale of the Buyer Stock (the ‘ Registration Statement ’) within 90 days after the Closing and to have the Registration Statement declared effective by the SEC as soon as practicable thereafter.” (P Ex. 5 § 10.6; Tr. 764) (emphasis in original). The merger agreement transaction closed on August 10, 2007, and 90 days from August 10 was November 8, 2007. (Stip. 6, 9.)

ORC's promise to register the Buyer Stock was important to the ITS Stockholders, as was made evident by testimony from Stuckey (owner of ITS Stockholder New Ridge LLC), Gregory Salvato (owner of ITS Stockholder GTek LLC), and Fromm at the trial. (Tr. 38, 637, 690–91.) It was an important factor in the ITS Stockholder's decision to enter into the merger agreement with ORC, rather than take an all-cash offer from one of the other bidders. (Tr. 39.) Registered Buyer Stock gave ITS Stockholders control and discretion as to when to sell their Buyer Stock and for what price. (Tr. 39.) Graham knew that ORC's promise to register Buyer Stock was an important and material provision of the merger agreement, and that the ITS Stockholders were relying on ORC's promise to register. (Tr. 764–65, 769–70.)

Section 2.6 of the merger agreement contains the price protection provisions, which gave any ITS Stockholder who had not sold any of his or her Buyer Stock the right to put it all back to ORC six, nine, or twelve months after closing. (P Ex. 5 § 2.6.) When an ITS Stockholder exercised his or her put right, ORC would, at its option, either (a) buy the Buyer Stock back...