Sunil M. Malkani v. Gemma Cunningham

Citation: Not availableDocket: CA No. 2020-1004-SG

Court: Court of Chancery of Delaware; January 30, 2023; Delaware; State Appellate Court

Original Court Document: View Document

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The case involves a contract dispute between investors Sunil M. Malkani and Red Dragon Partners, LLC, and the Delaware LLC TruthMD, founded by Gemma Cunningham, Dr. Charles Rosen, and Dr. Kourosh Maddahi. TruthMD aggregates healthcare data and is managed by a board including Cunningham, Rosen, and Gary Wilson. Malkani, an ophthalmologist, was introduced to TruthMD in 2016 and invested $498,000 in three Series E preferred units.

From April 2017 to November 2018, discussions between Malkani and Cunningham centered on securing additional funding through a line of credit. Cunningham was authorized by the board in May 2017 to negotiate on TruthMD's behalf. As the negotiations for a $1 million revolving line of credit stalled, Malkani advanced TruthMD $166,000, referred to as the "2017 Advance," with the understanding that the terms, including a future warrant, would be determined later. The negotiations for the credit line ultimately failed, yet TruthMD did not repay the 2017 Advance, leading to the current legal proceedings.

In October 2018, Cunningham initiated discussions with Malkani about the Company’s issuance of Series-F preferred units, proposing to consolidate a 2017 Advance of $166,000, its accrued interest of $22,132, and an additional $311,868 advance into a note convertible into two Series-F preferred units at a total price of $250,000 (referred to as the '2018 Note'). Between December 2018 and March 2020, Malkani advanced an additional $980,000 to the Company through seven transactions. During this period, both parties, along with their attorneys, attempted unsuccessfully to formalize loan agreements amid Malkani's demands for investment protections.

On April 9, 2019, Malkani’s attorney proposed governing documents that included three key protective provisions: a change-in-control provision (CIC Provision), requiring Malkani's consent for ownership changes; a most-favored nation provision (MFN Provision), which mandates notification of new debt issuances and allows Malkani to amend his note with favorable terms; and a debt-to-equity conversion formula (Conversion Formula) detailing the conversion process under certain conditions. However, revised drafts sent by Cunningham on April 13 omitted these provisions, leading to a negotiation stalemate.

In November 2019, Cunningham indicated potential acquisition plans for the Company and urged Malkani to organize his investments. On January 29, 2020, Malkani’s counsel reintroduced drafts containing the Disputed Provisions without highlighting them. Subsequent discussions between Malkani and Cunningham indicated a willingness to negotiate control issues, although Cunningham maintained that Malkani could not have approval rights over the sale of the Company. Following further discussions, Crivelli sent updated drafts, which included warrants tied to milestones that would grant Malkani rights to purchase additional equity units, marking a new area of contention alongside the Disputed Provisions.

On March 4, Barwick sent Crivelli revised drafts of a purchase agreement, note, and initial warrants, stating that the changes were minor clarifications. The revised purchase agreement included CIC and MFN provisions, while the note draft featured an updated Conversion Formula. Crivelli highlighted three unresolved business/legal points in a follow-up, including a request to revert the Conversion Formula to a previous version. Barwick confirmed that Cunningham and St. John approved all three points and requested execution versions.

A phone call occurred the following Monday, after which Cunningham summarized that the Company planned to issue warrants for 12 units based on the loan consolidation and Malkani achieving $2,000,000 in loans. Crivelli sent updated drafts, including disputed provisions and two draft warrants, one for nine units linked to the loan consolidation and another for three units contingent upon additional funding. Barwick indicated general agreement but noted an exception regarding a warrant provision that Malkani later agreed to remove.

Crivelli then proposed a side letter that sought to protect Malkani's interests by limiting Cunningham and Rosen's ability to issue equity or grant adverse rights. Cunningham countered that the side letter deviated from prior agreements and later expressed readiness to sign the warrant and related documents, requesting a discussion about the side letter, which was never executed.

On March 12, Barwick emailed a revised nine-unit warrant and suggested that if it was acceptable, the process could conclude. Cunningham texted Malkani, indicating they were close to finalizing the deal. On March 13, she emailed signed copies of the note, purchase agreement, and nine-unit warrant to Malkani, expressing excitement over the completion. Malkani noted that further document cleanup was needed and that additional sign-offs remained. That day, Malkani wired $162,132 to TruthMD, which Cunningham confirmed.

Following the March 13 agreement, which coincided with the U.S. declaring a COVID-19 national emergency, Cunningham and Rosen pressured Malkani for further financial support. Malkani subsequently provided seven additional advances from March to April 2020, raising the total loan balance to $1,980,000.

On April 29, Crivelli contacted Barwick to finalize funding and insisted that all loan documents be properly executed, rejecting Cunningham's signature on incomplete documents. Malkani made three demands: a board seat, a three-unit warrant contingent on reaching $2 million in funding, and read-only access to bank accounts. Following this, Cunningham and Malkani engaged in extensive text exchanges, with Malkani requesting documentation for his advances and necessary disclosures, while Cunningham believed the paperwork from March was complete except for the warrant. This disagreement led to a prolonged impasse.

On August 5, TruthMD entered an exclusivity agreement for a potential $180 million acquisition. During due diligence, the company recognized the validity of the March 13 Consolidation, prompting Crivelli to request the missing documents again. Subsequent communications involved multiple revisions to the purchase agreement, including the removal of certain provisions and reversion of the conversion formula to a fixed valuation. However, negotiations stalled when Malkani expressed concerns about potential dilution of his equity interest and sought better terms, which Cunningham deemed impossible.

On October 1, 2020, Malkani's legal counsel alleged breaches of fiduciary duties by the Board and demanded postponement of the transaction, leading to litigation. The plaintiffs filed their initial complaint on November 21, 2020, seeking expedited relief and a temporary restraining order against the acquisition. The court granted expedition, imposing a restriction that the company could not change control or management without notifying the plaintiffs’ counsel 60 days in advance, which was later reinforced by a preliminary injunction.

Plaintiffs were granted permission to amend their complaint, which they submitted on June 28, 2021, dropping derivative claims and naming the Company as a defendant. The amended complaint reduced the original seven causes of action to four: (1) breach of fiduciary duty against Cunningham, Rosen, and Wilson; (2) specific performance for a warrant for three additional equity units; (3) a declaratory judgment regarding the validity and enforceability of the March 13 note and purchase agreement; and (4) breach of contract related to the CIC Provision. Defendant Wilson's motion for summary judgment on the fiduciary duty claim was denied due to a genuine factual dispute, and the case was bifurcated, delaying the trial on Count I.

A two-day trial for Counts II-IV took place in April 2022, after which the judge took the matter under advisement. The analysis began with Count III for declaratory judgment, where the judge found the March 13 Consolidation valid and enforceable. Count II for specific performance was denied because Malkani had not met the $2,000,000 principal requirement, while Count IV for breach of contract was deemed unripe, leading to the discharge of a preliminary injunction. Additionally, requests for attorneys’ fees were found to be untimely.

The analysis confirmed that the March 13 Consolidation is valid, focusing on the requirement for a valid contract under Delaware law, which includes parties' intent, definite terms, and legal consideration. Defendants argued that Malkani had rejected the terms and failed to establish a meeting of the minds, yet the judge determined that all relevant documents were negotiated as part of a single transaction, thereby validating the purchase agreement, note, and warrant.

Defendants argue that a contract could not be formed due to a lack of a meeting of the minds regarding all material terms. Delaware law requires agreement on all essential terms for a binding contract. While a signed contract typically serves as strong evidence of intent, the court can also consider prior negotiations. Defendants claim that ongoing negotiations after the March 13 Consolidation indicate no consensus, while Plaintiffs argue that Malkani's subsequent demands were attempts to negotiate additional agreements rather than a continuation of unresolved terms. The debate centers on whether certain documents, such as a security agreement and guaranty, contained material terms, with Defendants asserting they did, but the parties did not treat them as such.

In Count II, Malkani seeks specific performance for a three-unit warrant linked to achieving $2,000,000 in aggregate funding. A party must prove a valid contract, readiness to perform, and a favorable balance of equities to obtain specific performance. Defendants do not dispute Malkani’s entitlement to the warrant, but the interpretation of the $2,000,000 figure is contested. Malkani argues it includes total outstanding loans plus accrued interest, while Defendants maintain that the milestone referred strictly to $2,000,000 in advances, asserting Malkani’s interpretation lacks support in their communications.

In the week leading up to the March 13 Consolidation, communications between the parties focused on the 9- and three-unit warrants. Both parties' calculations matched Malkani's total advances but excluded the accrued interest now claimed by the Plaintiffs. Malkani's counsel's October 1, 2020, letter calculated the total loan principal without referencing the Plaintiffs' current calculation method. The court found that the Plaintiffs did not prove their claim by clear and convincing evidence and concluded that the obligation for the three-unit warrant had likely not been fulfilled. Malkani sought specific performance but failed to demonstrate compliance with his investment obligation.

Count IV of the Plaintiffs' amended complaint alleged breach of contract regarding the CIC Provision related to an acquisition. The court determined that this claim was unripe, as it depended on uncertain future events. The CIC Provision prevents a change in control without Malkani's consent but does not prohibit the Defendants from pursuing potential buyers. Malkani acknowledged that no imminent acquisition constituted a breach, making the claim hypothetical and thus unripe, leading to its dismissal.

The court found that requests for attorneys' fees were premature and deferred their consideration until the resolution of Count I and any other disputes. Consequently, Counts II and IV were denied, while Count III was granted. The preliminary injunction associated with Count IV was also lifted, ensuring that Malkani retains rights under the March 13 Consolidation for future changes in control. An order reflecting these decisions was issued by Vice Chancellor Sam Glasscock III.