      IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

 CHYRONHEGO CORPORATION,                )
 VECTOR CAPITAL                         )
 CORPORATION,                           )
 and VECTOR CH HOLDINGS 2               )
 (CAYMAN), L.P.,                        )
                                        )
                                        )
                 Plaintiffs,            )
                                        )
      v.                                ) C.A. No. 2017-0548-SG
                                        )
CLIFF WIGHT and CFX HOLDINGS,           )
INC.,                                   )
                                        )
                 Defendants.            )

                       MEMORANDUM OPINION

                       Date Submitted: April 18, 2018
                        Date Decided: July 31, 2018

A. Thompson Bayliss and E. Wade Houston, of ABRAMS & BAYLISS LLP,
Wilmington, Delaware; OF COUNSEL: Peter M. Stone, of PAUL HASTINGS LLP,
Palo Alto, California, Attorneys for Plaintiffs.

D. McKinley Measley and Daniel T. Menken, of MORRIS, NICHOLS, ARSHT, &
TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Overton Thompson, III
and Joseph B. Crace, Jr., of BASS BERRY & SIMS PLC, Nashville, Tennessee,
Attorneys for Defendants.




GLASSCOCK, Vice Chancellor
      A few companies so dominate their field of enterprise that the name of their

product enters the language, not as a proper noun, but as a regular noun or verb. This

matter involves one such company, Chyron, now known as ChyronHego.1 This

action involves a dispute arising from ChyronHego’s acquisition of another

electronic-effects company, Click Effects.         According to ChyronHego, the

Defendants—the sellers of Click Effects―fraudulently misrepresented the actual

condition and value of the company, damaging ChyronHego. The latter brought this

suit, and the Defendants have moved to dismiss.

      This matter, in part, implicates two fundamental precepts of Delaware law, in

tension. Our law supports freedom of contract, holding parties to their bargains,

good and bad. The same respect for the free exchange of property from which the

foregoing precept arises means that our law abhors fraud, which is inimical to free

exchange, properly understood. The tension arises when parties to a contract purport

in their agreement to limit the universe of facts upon which that agreement rests,

when in actuality one party has made extra-contractual representations upon which

the other has relied. The tension is resolved in our law thus: where the parties in

language that is clear provide that they eschew reliance on any facts but those recited,

they will be held to that representation, notwithstanding prior knowingly false



1
  According to research done via another company whose name has become part of English
vocabulary, Google, Chyron took its name from the centaur of Greek myth.
                                           1
statements made by one party to the other. Such representations, therefore, cannot

form the basis for common-law fraud, because the complaining party cannot, in light

of the contractual provision, have reasonably relied on the prior false statements.

Reasonable reliance is an element of common-law fraud. Conversely, where the

contract is ambiguous, or where it merely recites that the parties meant to integrate

all their prior dealings into its terms, that contract does not preclude a party’s proof

of extra-contractual fraud.

         Here, the parties contest whether the contract at issue contains an effective

anti-reliance clause precluding ChyronHego from proving prior extra-contractual

fraud.     I find that the Stock Purchase Agreement, read as a whole, does

unambiguously so provide, and that claims in the Complaint alleging extra-

contractual fraud must be dismissed.

         The Defendants also seek to dismiss the remainder of the Complaint,

contending that allegations of fraudulent misrepresentation in the contract are

insufficiently pled, and that claims for indemnification are precluded by failure of

notice required by the Stock Purchase Agreement. I find that most of the Plaintiffs’

allegations, under the plaintiff-friendly standards of a motion to dismiss, are

sufficient to state claims.

         The Motion to Dismiss, therefore, is granted in part and denied in part. My

reasoning is below.

                                           2
                                    I. BACKGROUND2

       A. The Parties and Relevant Non-Parties

       Plaintiff Vector Capital Corporation (“Vector Capital”) is a Delaware

corporation.3        Vector     Capital    owns     Plaintiff    ChyronHego        Corporation

(“ChyronHego”), a New York corporation with a principal place of business in

Melville, New York, through its fund Plaintiff Vector CH Holdings 2 (Cayman),

L.P., a Cayman Islands exempted limited partnership.4 ChyronHego is a “leading

creator of the graphics used in live television broadcasts and in other media,” with

offices around the world.5 The Plaintiffs bought a company from the Defendants

and bring this action for fraud and breach of a written stock purchase agreement.6

       Defendant Cliff Wight is a citizen of Tennessee.7 Wight was the owner and

President of non-party Sound & Video Creations, LLC (d/b/a Click Effects) (“Click

Effects” or the “Company”), which he sold to ChyronHego for approximately $12.5

million in cash and equity.8 Click Effects creates graphics and other media for high




2
  The facts, drawn from the Plaintiffs’ Amended Complaint and from documents incorporated by
reference therein, are presumed true for purposes of evaluating the Defendants’ Motion to Dismiss.
3
  Verified Amended Complaint (the “Complaint” or the “Compl.”) ¶ 11.
4
  Id. ¶¶ 4, 13–14.
5
  Id. ¶¶ 4, 17.
6
  Id. ¶ 1.
7
  Id. ¶ 15.
8
  Id. ¶¶ 5–6, 15.
                                                3
schools, colleges, and professional sports teams in their stadiums.9 Wight sold Click

Effects to ChyronHego by transferring ownership of Click Effects to Defendant CFX

Holdings, Inc. (“CFX”), a Tennessee corporation created to facilitate the sale, which

received cash and equity in the sale of Click Effects to ChryonHego.10 Wight was

the only principal of CFX.11

       B. Factual Background

               1. Deal Proposal and Due Diligence

       The Complaint is silent about how or when ChyronHego became interested in

acquiring Click Effects. At some point, ChyronHego explored an acquisition of

Click Effects due to Click Effects’ “cutting-edge products and stable customer base”

in the same industry as ChryonHego.12 ChyronHego began a due diligence process:

Wight and Click Effects uploaded documents to a data room from March through

June 2016, including details about customers, contracts, and financial projections.13

In addition, the Defendants provided certain financial information in connection

with a “quality of earnings report” prepared by the Plaintiffs.14 The Plaintiffs and




9
  Id. ¶¶ 5, 18.
10
   Id. ¶¶ 1, 16.
11
   Id. ¶ 16.
12
   Id. ¶¶ 5, 19.
13
   Id. ¶¶ 19–20.
14
   Id. ¶ 24.
                                         4
the Defendants entered into a stock purchase agreement (the “SPA”) on July 1, 2016,

which included certain representations by the Defendants.15

       The Plaintiffs allege that, in addition to truthful data, the data room contained

misleading documents and projections.16         The Plaintiffs also contend that the

Defendants provided misleading information in connection with the Plaintiffs’

preparation of the quality of earnings report.17 Lastly, the Plaintiffs argue that the

Defendants knowingly made false representations in the SPA.18 The Plaintiffs allege

that the following disclosures or submissions were false or misleading.

                    a. Earnings

       The Plaintiffs contend that Wight intentionally manipulated sales data to

inflate the apparent value of Click Effects. In support of this allegation, the Plaintiffs

point to particular communications between Wight and his employees. In a series

of emails entitled “Moving Invoices Around” on May 19, 20, and 23, 2016, Wight

allegedly instructed certain finance personnel that “we’ll need to do some

maneuvering with some of the current invoices that are in the books as well as some

of the un-invoiced sales orders.”19 Wight purportedly told members of management

that he was “maneuvering” invoices to “smooth earnings” and move April sales from



15
   Id. ¶ 45.
16
   Id. ¶¶ 19–20.
17
   Id. ¶ 23.
18
   Id. ¶¶ 33–37.
19
   Id. ¶ 26.
                                            5
approximately $117,000 to “somewhere around $700K to 850K [sic]” and to “have

May [sales] be close if not over” $1 million.20 Wight purportedly caused May

invoices to be moved to April and invoiced open sales orders at the end of May

instead of when they would ship in June, which the Plaintiffs argue was a deviation

from Click Effects’ normal practice.21 This “earnings bridge” was communicated to

Wight’s bankers.22 According to the Plaintiffs, these emails indicate that Wight

intentionally manipulated sales data and submitted false information, resulting in

inaccurate projections.23

                     b. Atlanta Braves and Florida State University

       The Plaintiffs next contend that Wight omitted critical information about

designated material customers that he was required to disclose under the SPA. The

SPA requires that the Defendants inform the Plaintiffs if a material customer

communicates to the Company that, among other things, “it will, or intends to,

materially reduce its purchases from or sales or provisions of services to the

Company.”24




20
   Id.
21
   Id. ¶¶ 26–28. This was purportedly done to maximize the sale price of Click Effects in July
2016.
22
   Id. ¶ 29.
23
   Id. ¶ 71.
24
    Id. Ex. A (SPA) § 2.14 (representations and warranties of the Company regarding certain
customers); ¶ 83.
                                              6
       First, the Plaintiffs allege that documents in the data room indicated that Click

Effects would receive revenue through several agreements with the Atlanta Braves.25

However, according to the Plaintiffs, Wight learned from one of his managers,

before the sale, that the “Atlanta Braves [were] backing out of the purchase that they

made in favor of [a key competitor].”26 This information, the Plaintiffs argue,

triggered a disclosure obligation under the SPA, which was not made. The Plaintiffs

allege that Wight knew of this information by June 12, 2016 and communicated it

to one of the Company’s bankers, but did not inform the Plaintiffs.27

       Second, the Plaintiffs contend that “on May 21, 2016, Defendant Wight

learned that a competitor had beaten out Click Effects for the business of a major

customer, Florida State University (‘FSU’)” but instead “represented to Plaintiffs

that the FSU contract was 100% certain” through “projections placed in the data

room.”28 The facts concerning FSU were, according to the Plaintiffs, omitted in

breach of the SPA.

       Third, the Plaintiffs allege that during the pendency of the sale, adverse

business conditions became apparent to Wight. They point to an email from a Click

Effects manager about “product reliability, lack of meaningful progress on currently




25
   Id. ¶ 33.
26
   Id. ¶ 34.
27
   Id. ¶¶ 36–37.
28
   Id. ¶ 23.
                                           7
unusable products . . . and a growing criticism of the way [Click Effects] support[s]

[its] customers.”29 This situation, the email states, “will take well over a year to turn

IF we immediately address.”30 The Plaintiffs contend that this information should

have been disclosed prior to signing the SPA and breached multiple sections of the

SPA.31

                       c. The Lease

       The Plaintiffs argue that the lease agreement, as disclosed to the buyers, for

the property on which Click Effects’ corporate headquarters is located, was

fraudulent and in breach of representations made in the SPA. Wight leased real

estate to Click Effects for its corporate headquarters.32 The Plaintiffs point to an

undisclosed internal email from March 17, 2016, in which Wight stated that the

Company “never did an official lease” because “[i]t has always been a handshake

between me & me.”33 Nonetheless, Wight submitted a lease signed “as of” January

1, 2016, but in reality created in March 2016.34                       The lease amounted to

approximately $1 million over five years.35 The Plaintiffs contend that the lease was

fraudulent and misled the buyers as to the existing lease obligations of Click Effects.


29
   Id. ¶ 35 (citing a June 12, 2016 email from Click Effects manager Greg Stock to Wight).
30
   Id.
31
   Id. ¶ 83.
32
   Id. ¶ 38.
33
   Id. ¶¶ 39–40.
34
   Transmittal Aff. of Daniel T. Menken, Ex. G (Lease), at 1, 10. I find that the lease is incorporated
into the Plaintiffs’ Complaint.
35
   Compl. ¶ 43.
                                                  8
The Plaintiffs also argue that the lease breached the SPA because it was not a “true,

correct and complete” copy of an existing lease.36

               2. The Closing and Indemnification Claims

        The Plaintiffs and the Defendants signed the SPA on July 1, 2016.37

ChyronHego paid Wight and CFX $775,000 in closing cash and $7,528,000 in

upfront cash.38 The Defendants deposited $975,000 into an escrow account.39 Wight

remained president of the newly acquired company.40

        The Company’s performance proved disappointing to the Plaintiffs. For

instance, Click Effects produced $500,000 in profits by the end of 2016, contrary to

an expected profit of $2–3 million.41

        The Plaintiffs delivered a written notice (the “Claim Notice”) on June 5, 2017

for an indemnification claim against the Defendants for alleged breaches under the

SPA.42 The Defendants responded by letter on June 20, 2017, objecting to the Claim

Notice.43




36
   Id. ¶ 42.
37
   Id. ¶ 45.
38
   Id.
39
   Id.
40
   Id.
41
   Id. ¶ 64.
42
   Id. ¶ 66.
43
   Id. ¶ 67.
                                           9
       C. Procedural Posture

       The Plaintiffs filed their first Complaint on July 27, 2017 and an Amended

Complaint on November 15, 2017. The Defendants filed this Motion to dismiss the

Amended Complaint, and I heard argument on April 18, 2018.

       The Plaintiffs bring two counts.            Count I alleges that the Defendants

committed fraud through misrepresentations in the SPA and via misleading

documents submitted to the data room.44 Count II is an additional or alternative

claim for breach of representations and warranties made by the Defendants in the

SPA.45 The Plaintiffs seek damages and equitable relief.46

                                      II. ANALYSIS

       The Defendants have moved to dismiss the Complaint under Court of

Chancery Rule 12(b)(6). When reviewing such a motion,

       (i) all well-pleaded factual allegations are accepted as true; (ii) even
       vague allegations are well-pleaded if they give the opposing party
       notice of the claim; (iii) the Court must draw all reasonable inferences
       in favor of the non-moving party; and (iv) dismissal is inappropriate
       unless the plaintiff would not be entitled to recover under any
       reasonably conceivable set of circumstances susceptible of proof.47




44
   Id. ¶¶ 68–78.
45
   Id. ¶¶ 79–94.
46
   Id. ¶ 93.
47
   Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (citations and internal quotation
marks omitted).
                                              10
I need not, however, “accept conclusory allegations unsupported by specific facts or

. . . draw unreasonable inferences in favor of the non-moving party.”48

          A. Extra-Contractual Fraud Claims

          The Plaintiffs’ extra-contractual fraud claims must be dismissed. An element

of common-law fraud is that a plaintiff must have acted in justifiable reliance on the

misrepresentation of the defendant.49 I find that Section 4.7 of the SPA functions as

an anti-reliance clause and that the Plaintiffs could not have acted in justifiable

reliance on any extra-contractual representations or warranties in light of this

contractual provision. Because the Plaintiffs cannot show justifiable reliance on

extra-contractual representations, the fraud claims that rely on those representations

fail.50

          “Delaware law enforces clauses that identify the specific information on

which a party has relied and which foreclose reliance on other information.”51 This

allows parties to “define those representations of fact that formed the reality upon

which [they] premised their decision to bargain,” which “minimizes the risk of

erroneous litigation outcomes by reducing doubts about what was promised and




48
   Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011).
49
   Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006).
50
   Because I find that the Plaintiffs forewent reliance on extra-contractual representations or
warranties, I need not address whether these claims are pled with the particularity required under
Rule 9(b).
51
   Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 50 (Del. Ch. 2015).
                                               11
said.”52    However, “murky integration clauses, or standard integration clauses

without explicit anti-reliance representations, will not relieve a party of its oral and

extra-contractual fraudulent representations.”53 As with any contractual analysis,

the contract must be read as a whole.54 For anti-reliance language to be enforceable,

however, “the contract must contain language that, when read together, can be said

to add up to a clear anti-reliance clause by which the plaintiff has contractually

promised that it did not rely upon statements outside the contract’s four corners in

deciding to sign the contract.”55

       Here, the SPA contains several provisions relevant to a determination of the

scope of the parties’ agreed-upon sources of reliance: a standard integration clause

in Section 9.6,56 an exclusive remedies provision in Section 7.8,57 a definition of

excluded liabilities in an indemnification provision,58 and, significantly, the

following language in Section 4.7, quoted in full:



52
   Abry Partners V, L.P., 891 A.2d at 1058.
53
   Id. at 1059.
54
   See, e.g., Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396 (Del. 2010).
55
   Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004).
56
   Compl. Ex. A (SPA) § 9.6.
57
   Id. § 7.8 (Remedies Exclusive) (“No Buyer Indemnified Party or Seller Indemnified Party shall
bring any claim with respect to this Agreement or the transactions contemplated hereby, whether
in contract, tort or otherwise, except to bring a claim for (i) Fraud against the party that committed
such Fraud, (ii) indemnification against the Sellers in accordance with Section 7.2, (iii)
indemnification against a particular Seller in accordance with Section 7.3, or (iv) indemnification
against the Buyer in accordance with Section 7.4.”).
58
   Id. § 7.2 (excluding “any Fraud by the Company or the Sellers (in the case of Company, prior
to Closing)” from the definition of indemnifiable liabilities). Under this provision, “any Fraud”
actionable is not subject to the limitations and procedures applicable to indemnification.
                                                 12
       Holdings and the Buyer agree that neither the Company, any Seller nor
       any of their respective Affiliates or advisors have made and shall not
       be deemed to have made any representation, warranty, covenant or
       agreement, express or implied, with respect to the Company, its
       business or the transactions contemplated by this Agreement, other than
       those representations, warranties, covenants and agreements explicitly
       set forth in this Agreement. Without limiting the generality of the
       foregoing, the Buyer agrees that no representation or warranty, express
       or implied, is made with respect to any financial projections or budgets;
       provided, however, that this Section 4.7 shall not preclude the Buyer
       Indemnified Parties from asserting claims for Fraud59 or
       indemnification in accordance with ARTICLE VII.60

Read in conjunction with the integration clause, this is a clear statement that no extra-

contractual representations were relied upon by the parties. The first sentence is an

explicit anti-reliance clause. The first clause of the second sentence preserves that

clause, and emphasizes that no reliance is made on financial projections or budgets.

The second clause of the second sentence makes clear that nothing in Section 4.7

precludes claims under Article VII for fraud or indemnification.

       Article VII, in turn, provides generally for the availability of, the limits to, and

the procedure for, indemnification. Section 7.8 is a specific exclusive remedies

provision, and limits recovery to indemnification, damages for fraud, and related

equitable relief. To my mind, reading these Sections in harmony, the intent of the

parties is clear. The parties have not relied on extra-contractual representations, but



59
   “Fraud” is a defined term in the SPA, meaning fraud against a party as defined by common law
and determined by a court of competent jurisdiction. The definition specifically includes scienter.
Id. Art. X.
60
   Id. § 4.7.
                                                13
may seek recovery in indemnification and for fraud damages for contractual

misrepresentations.

       The Plaintiffs argue that the second sentence of Section 4.7 should be read to

the contrary, as preserving a right to sue for fraud based on extra-contractual

projections, rather than precluding it.61 According to the Plaintiffs, “Section 4.7’s

last clause would be rendered meaningless if a party could not bring fraud claims

based on projections.”62 To my mind, this is unpersuasive; the last clause is not mere

surplusage. It clarifies the intent to preserve the remedies provided in Article VII.

In other words, interpreting Section 4.7 as an anti-reliance provision, the last clause

signifies careful lawyering, not surplusage or meaningless verbiage.

       In Prairie Capital, this Court considered similar anti-reliance language in

light of alleged pre-contractual fraud.63 The parties’ stock purchase agreement, as

here, contained an integration clause, an “exclusive representations clause,”64 and an


61
   Pls.’ Answering Br. 5.
62
   Id. at 40–41 (interpreting Section 4.7 to mean “(1) Defendants did not make representations or
warranties outside the SPA that can form the basis for a basic breach of contract claim (i.e., one
that does not require proof of scienter); but (2) Plaintiffs may bring a Fraud claim against
Defendants for knowing misrepresentations or omissions arising from information not subject to
a representation or warranty (i.e., projections)”).
63
   Prairie Capital III, L.P., 132 A.3d at 43.
64
   Id. at 50 (“The Buyer acknowledges that it has conducted to its satisfaction an independent
investigation of the financial condition, operations, assets, liabilities and properties of the Double
E Companies. In making its determination to proceed with the Transaction, the Buyer has relied
on (a) the results of its own independent investigation and (b) the representations and warranties
of the Double E Parties expressly and specifically set forth in this Agreement, including the
Schedules. SUCH REPRESENTATIONS AND WARRANTIES BY THE DOUBLE E PARTIES
CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES
OF THE DOUBLE E PARTIES TO THE BUYER IN CONNECTION WITH THE
                                                 14
“exclusive remedies provision.”65 The plaintiffs argued that these provisions did not

affirmatively disclaim reliance, allowing them to sue for fraud based on extra-

contractual representations. They noted that the contract provided for fraud damages

as well as indemnification for misrepresentations, and argued that such was

inconsistent with an effective anti-reliance clause, because the indemnification

sections did “not operate as the sole and exclusive remedy ‘in the case of fraud.’”66

The Prairie Capital Court disagreed, holding that the exclusive remedies section

       recognizes that a party is not limited to the indemnification framework
       when it sues for fraud, but [the exclusive remedies provision] does not
       address the representations that a party can rely on in those
       circumstances. Other provisions in the SPA, such as the Exclusive
       Representations Clause, perform that function. [The exclusive remedies
       provision] does not alter the contractual universe of information on
       which a fraud-claim [sic] can be based.67

I find this rationale persuasive here. The Plaintiffs here are free to sue for fraud, but

the anti-reliance language of Section 4.7 dictates what representations may form the

basis for such fraud.


TRANSACTION, AND THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES
THAT ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR
NATURE EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY RELATING
TO THE FUTURE OR HISTORICAL FINANCIAL CONDITION, RESULTS OF
OPERATIONS, ASSETS OR LIABILITIES OR PROSPECTS OF DOUBLE E AND THE
SUBSIDIARIES) ARE SPECIFICALLY DISCLAIMED BY THE DOUBLE E PARTIES.”)
65
   Id. at 55 (quoting clause titled “Exclusion of Other Remedies” as saying that “[e]xcept as
provided in [sections relating to post-closing covenants and the payment of a specific note],
equitable remedies that may be available, or in the case of fraud, the remedies set forth in this
Article X [relating to indemnification] constitute the sole and exclusive remedies for recovery of
Losses incurred after the Closing arising out of or relating to this Agreement and the Transaction”).
66
   Id.
67
   Id.
                                                15
       I find the Plaintiffs’ reliance on Anvil Holding Corp.68 to argue to the contrary

misplaced. In that case, the Court was unable to find an enforceable anti-reliance

clause from the language pointed to in briefing on a motion to dismiss. The

defendants cited additional contractual language, apparently for the first time, at oral

argument:

       Section 6.5 contains a lengthy representation and warranty by the Buyer
       that states, in part, that the Sellers neither made any representation or
       warranty, express or implied, beyond those expressly given in the
       Purchase Agreement nor made any representation “as to the accuracy
       or completeness of any information” regarding the Company or the
       transactions contemplated by the Purchase Agreement.69

       However, the Anvil Court declined to consider the quoted provision without

briefing, and considered it waived for consideration on the motion to dismiss, which

was denied.70 The Court did, however, comment that “[t]his representation, in

combination with [the two provisions mentioned], appears to strengthen Defendants’

argument that the Buyer could not reasonably have relied on extra-contractual

representations.”71 I do not find Anvil contrary to my reasoning here.

       Finally, I note the Plaintiffs attempt to bootstrap a dog’s breakfast of extra-

contractual fraud claims onto contractual misrepresentations under Section 2.9(a) of

the SPA. That Section represents that:



68
   Anvil Holding Corp. v. Iron Acquisition Co., Inc., 2013 WL 2249655 (Del. Ch. May 17, 2013).
69
   Id. at *7 n.29.
70
   Id.
71
   Id.
                                             16
       Since the date of the Most Recent Balance Sheet . . . , except as set forth
       on Schedule 2.9 and except for the transactions contemplated by this
       Agreement, (a) the Company has conducted its business in all material
       respects in the ordinary course of business consistent with past
       practice.72

Essentially, the Plaintiffs argue that extra-contractual misrepresentations are not in

the ordinary course of business. To the extent not addressed below, these claims are

dismissed.

       B. Claims for Fraud Under the SPA

       The Plaintiffs allege a number of misrepresentations made by the Defendants

in the SPA. I examine each in turn, below.73 I first note that satisfying Rule 9(b)74

for allegations based on a contract is simplified:

       When a party sues based on a written representation in a contract . . . it
       is relatively easy to plead a particularized claim of fraud. The plaintiff
       can readily identify who made what representations where and when,
       because the specific representations appear in the contract. The
       plaintiff likewise can readily identify what the defendant gained, which
       was to induce the plaintiff to enter into the contract. Having pointed to
       the representations, the plaintiff need only allege facts sufficient to
       support a reasonable inference that the representations were knowingly
       false.75



72
   Compl. Ex. A (SPA) § 2.9(a).
73
   Abry Partners V, L.P., 891 A.2d at 1050 (“To state a claim [for common law fraud], the plaintiff
must plead facts supporting an inference that: (1) the defendant falsely represented or omitted facts
that the defendant had a duty to disclose; (2) the defendant knew or believed that the representation
was false or made the representation with a reckless indifference to the truth; (3) the defendant
intended to induce the plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable
reliance on the representation; and (5) the plaintiff was injured by its reliance.”).
74
   Ct. Ch. R. 9(b) (“In all averments of fraud or mistake, the circumstances constituting fraud or
mistake shall be stated with particularity.”).
75
   Prairie Capital III, L.P., 132 A.3d at 62.
                                                 17
Here, the Plaintiffs must allege facts that make it reasonably conceivable that the

representations allegedly given by the Defendants were knowingly false when made.

               1. Misrepresentations Regarding Material Customers.

        The Defendants disclosed Click Effects’ “Material Customers” in the SPA.

Both FSU and the Atlanta Braves are so disclosed.76

                      a. The Braves

        Section 2.14 of the SPA concerns “material customers” and warrants, in part,

that:

        Since the date of the Most Recent Balance Sheet, (a) no customer has
        given written notice or, to the knowledge of the Company, otherwise
        informed the Company that (i) it will or intends to terminate or not
        renew its contract with the Company before such contract’s scheduled
        expiration date, (ii) it will otherwise terminate its relationship with the
        Company (except in connection with the completion of an installation)
        or (iii) it will, or intends to, materially reduce its purchases from or sales
        or provisions of services to the Company (except in connection with the
        completion of an installation).77

        The Complaint states that “[o]n June 12, 2016, Defendant Wight learned from

Company management (Greg Stocker) that the ‘Atlanta Braves [were] backing out

of the purchase that they made in favor of [a key competitor].’”78 The Plaintiffs

allege that the “Defendants knew by June 12, 2016 that their relationship with the

Atlanta Braves was lost” and this development was material.79


76
   Compl. ¶ 71.
77
   Id. Ex. A (SPA) § 2.14 (emphasis added).
78
   Id. ¶ 25 (emphasis added).
79
   Id. ¶¶ 26, 37.
                                              18
       The Defendants point out that the Complaint does not specify how Company

management learned about the relationship change with the Atlanta Braves. They

note that Section 2.14 of the SPA is triggered by certain communications from a

material customer to the Company, a circumstance not specifically alleged.

Assuming, for purposes of this Motion, that Section 2.14 is triggered only when a

disclosing party is notified by the customer directly, the question is whether I can

draw the inference that the information came from the Atlanta Braves to the

Company before the signing of the SPA, rendering the representation in Section 2.14

knowingly false. At this stage, I find, such an inference is reasonable, and the other

elements for fraud are met. Whether the Defendants’ representation in Section 2.14

regarding the Atlanta Braves was knowingly false when made must be addressed on

a more complete record. This claim survives.

                      b. The Seminoles

       Next, the Complaint alleges that:

       [O]n May 21, 2016, Defendant Wight learned that a competitor had
       beaten out Click Effects for the business of a major customer, Florida
       State University (“FSU”). In projections placed in the data room
       preclosing, Defendants had represented to Plaintiffs that the FSU
       contract was 100% certain. After Wight learned on May 21, 2016 that
       FSU was not going to contract with Click Effects, Defendants failed to
       inform Plaintiffs.80



80
  Id. ¶ 23. As mentioned above, I find that the SPA includes an anti-reliance clause in Section 4.7
that explicitly precludes reliance upon “financial projections or budgets.” Id. Ex. A (SPA) § 4.7.
                                                19
As before, the Complaint does not specify from whom Wight learned this

information. However, at this pleading stage, the question is whether it is reasonably

conceivable that the representation made by the Defendants in Section 2.14 was

knowingly false as to FSU as of the time of signing the SPA. I may readily infer

that such is the case, and was material to the Plaintiffs. I also find it reasonably

conceivable that Wight learned this information from FSU. As with the Braves, the

specificity requirements of Rule 9(b) are met. The Motion to dismiss this claim must

be denied.

             2. Fraudulent Representations Regarding “Smoothing” of Financial
             Records

      According to the Complaint, the financial disclosures made by the Defendants

manipulated or “smoothed” Click Effects’ financial records for April and May,

2016, to move revenue back in time in deviation from past accounting practices. The

intent was to fraudulently pad April and May financials to mislead the buyers. To

the extent that the Complaint implies reliance on the financial statements or

projections, separate from contractual representations, the Plaintiffs’ attempt to state

a claim fails for lack of reasonable reliance, for the reasons detailed above.

      The Plaintiffs, however, note that Section 2.9(a) of the SPA warrants that

“[s]ince the date of the Most Recent Balance Sheet . . . , except as set forth on

Schedule 2.9 and except for the transactions contemplated by this Agreement, (a)

the Company has conducted its business in all material respects in the ordinary
                                          20
course of business consistent with past practice.”81 It is a permissible inference that

the “smoothing” made this representation knowingly false, because this practice is

purportedly not in the ordinary course of the Company’s business, and was

materially misleading to the Plaintiffs. This claim survives.

              3. Failure to Disclose Company Material Adverse Effects

       A contractual material adverse effect (“MAE”) is like a Delaware tornado—

frequently alleged but rarely shown to exist. The Plaintiffs allege here that the

Defendants failed to disclose that a “change, event, development, effect or

circumstance” had occurred during the pendency of the SPA “that would reasonably

be expected” to have a material adverse effect, in breach of a condition of closing.82

According to the Plaintiffs, this failure to disclose was knowingly and materially

misleading. An MAE is triggered by “the occurrence of unknown events that

substantially threaten the overall earnings potential of the target in a durationally

significant manner.”83 “A short-term hiccup in earnings should not suffice; rather

the Material Adverse Effect should be material when viewed from the longer-term

perspective of a reasonable acquirer.”84




81
   Id. § 2.9(a).
82
   Id. § 2.9(h) (“[T]o the Company’s knowledge, there has been no event or circumstance relating
specifically to the Company that has caused a [MAE].”); § 6.1(c) (setting out “No [MAE]” as a
closing condition).
83
   In re IBP, Inc. S’holders Litig., 789 A.2d 14, 68 (Del. Ch. 2001).
84
   Id.
                                              21
         The Plaintiffs allege that “the loss of business from the Atlanta Braves and

FSU”; a decline in product reliability and customer service; and the “loss of business,

failure to win new business, and dire [financial] forecasts,” all occurring in close

proximity to the sale, amount to an MAE.85 The Plaintiffs allege that the financial

impact of the purported MAE is “set to last at least two years.”86 To support these

allegations, the Plaintiffs point to Click Effects’ internal emails, from which the

inferences to be drawn are hotly disputed.

         At this pleading stage, the Plaintiffs have met their burden to allege a

knowingly false representation of the absence of an MAE, the proof of which is

inherently fact-intensive. The claim is minimally sufficient, and the Motion to

dismiss this claim is denied.

                 4. The Lease

         The Plaintiffs seek damages for fraud resulting from the provision by the

Company of a lease for its headquarters that was misleadingly backdated to make it

appear that it was binding before they contemplated the purchase of Click Effects.

Section 2.11 of the SPA states:

         The Company neither owns nor has ever owned any real property.
         Schedule 2.11 describes the real property leased by the Company,
         including the lessor of such leased property, which is an Affiliate of
         certain of the Sellers, and the lease under which such property is leased
         (the “Lease”). There is no default under the Lease or other circumstance

85
     Compl. ¶¶ 83–84; Pls.’ Answering Br. 35–36.
86
     Pls.’ Answering Br. 36; Compl. ¶ 35 (alleging that MAE impact would be more than one year).
                                                22
       that would enable the lessor to cancel or terminate the Lease. The
       Company does not sublease any leased real property to any Person. The
       Company has made available to Buyer true, correct and complete
       copies of the Lease.87

The Plaintiffs allege that the lease provided was “created . . . out of whole cloth” and

was not “true, correct and complete” when made.88 The Plaintiffs point to the lease

itself, which states that “the parties have executed this Lease as of . . . this 1st day of

January, 2016.”89 The Plaintiffs point to emails from which they infer that the lease

was in fact executed no earlier than March 2016, and not in January 2016.90 Whether

the Defendants made a material and knowingly false representation in Section 2.11,

upon which the Plaintiffs relied, is a factual question that must be determined on a

more complete record.

       The Defendants point out that it may be difficult for the Plaintiffs to prove any

damages resulting from this misrepresentation, if it occurred. It is sufficient at this

stage that the Plaintiffs generally aver damages or entitlement to equitable relief,

however. The Motion to dismiss this claim is denied.

       C. CFX and the Fraud Count

       Finally, the Defendants argue that the fraud claim against CFX fails as a

matter of law. They point out that the alleged misrepresentations in the SPA were


87
   Compl. Ex. A (SPA) § 2.11 (emphasis added).
88
   Id. ¶ 42.
89
   Defs.’ Mot. to Dismiss Ex. K (Click Effects Lease) (emphasis added). I find that the Plaintiffs
incorporated this into the Complaint.
90
   Compl. ¶¶ 39–44.
                                               23
made by the Company, not by CFX.               Indeed, CFX made a separate set of

representations and warranties in the SPA,91 and the Plaintiffs do not premise their

fraud claim on any of those statements. Thus, in the Defendants’ view, because CFX

did not make any of the representations and warranties at issue in this case, it cannot

be held liable for fraud. I disagree. In my view, CFX is a proper defendant for the

fraud count.

       CFX was the selling stockholder in the transaction that transferred ownership

of the Company to ChyronHego. Specifically, before the transaction closed on July

1, 2016, Wight transferred his interest in the Company to CFX, which then sold the

interest to ChyronHego. Wight was CFX’s sole principal. The question, then, is

whether CFX, as the selling stockholder, can be held liable for the Company’s

representations in the SPA.

       This Court confronted a similar situation in Prairie Capital. There, the stock

purchase agreement “distinguished between representations made by the company

and a different set of representations made by selling stockholders.”92 The buyer

adequately alleged that three of the company’s representations in the stock purchase

agreement were false.93 The question was thus whether the sellers could face




91
   Id. Ex. A (SPA) Art. III.
92
   Prairie Capital, 132 A.3d at 60.
93
   Id. at 59.
                                          24
liability for fraudulent representations made by the company.94 Relying on Abry

Partners, the Court held that, while “the company made the representations, . . . the

scope of a claim for contractual fraud swept more broadly.”95 The Court then quoted

the following passage from Abry Partners:

       To the extent that the Stock Purchase Agreement purports to limit the
       Seller’s exposure for its own conscious participation in the
       communication of lies to the Buyer, it is invalid under the public policy
       of this State. That is, I find that the public policy of this State will not
       permit the Seller to insulate itself from the possibility that the sale
       would be rescinded if the Buyer can show either: 1) that the Seller knew
       that the Company’s contractual representations and warranties were
       false; or 2) that the Seller itself lied to the Buyer about a contractual
       representation and warranty.96

In other words, a selling stockholder may face liability for representations made by

the company if the stockholder either (i) knew that the company’s representations

were false or (ii) lied to the buyer about those representations.

       Applying these principles, the Prairie Capital Court found it reasonably

conceivable that the private equity funds that sold the company to the buyer could

be held liable for the company’s fraudulent contractual representations.97            In

reaching this conclusion, the Court relied on well-pled allegations that the private

equity firm’s principals knew the company’s representations were false.98 The Court



94
   Id.
95
   Id.
96
   Id. at 61 (quoting Abry Partners V, L.P., 891 A.2d at 1064).
97
   Id.
98
   Id.
                                               25
also pointed to allegations that the private-equity principals actively participated in

the fraudulent scheme by directing company officers to provide falsified sales

numbers to the buyer.99

       Here, the SPA distinguishes between representations made by the Company

and representations made by the sellers, including CFX. Thus, under Prairie

Capital, CFX can be held liable for the Company’s contractual representations only

if it either knew those representations were false or lied to the buyers about the

representations. CFX’s sole principal was Wight, so his knowledge may be imputed

to CFX.100 According to the Complaint, Wight orchestrated the fraudulent scheme

that led to the alleged misrepresentations in the SPA. At the very least, then, Wight

knew that the Company’s contractual representations were false. Because that

knowledge may be imputed to CFX, CFX also knew that the representations were

false. Accordingly, CFX can be held responsible for the Company’s fraudulent

contractual representations. That is sufficient under Prairie Capital to keep CFX as

a Defendant for the fraud count at this stage of the litigation.




99
  Id.
100
   See, e.g., In re Dole Food Co., Inc. S’holder Litig., 110 A.3d 1257, 1262 (Del. Ch. 2015) (“For
multitudinous purposes the knowledge and actions of a corporation’s human decision-makers and
agents may be imputed to it.”).
                                               26
       D. Indemnification Claims

               1. The Claim Notice

       The pleadings involving fraudulent misrepresentations generally also state

breaches of the SPA sufficient to survive a motion to dismiss. The Defendants point

out, however, that the SPA limits such claims to an indemnification procedure,

which they argue the Plaintiffs did not meet.

       Section 7.5 of the SPA requires that a party making a claim for

indemnification undertake certain actions, including delivery of “a written notice

describing the claim in reasonable specificity, the amount thereof (if known), and

the basis therefor (a ‘Claim Notice’).”101 The Plaintiffs gave the Defendants explicit

notice regarding alleged breaches of Sections 2.9 and 2.14 of the SPA and discussed

certain facts underlying other claims.102 I assume for purposes of this Motion that

the requirements of Section 7.5 of the SPA are mandatory, and that failure to comply

precludes a successful action for indemnification. Nonetheless, the Motion to

Dismiss based on failure of a sufficient Claim Notice must be denied.

       “Reasonable specificity” depends on the circumstances and the allegations; in

other words, it involves questions of fact.103 I note that, despite their argument here


101
    Compl. Ex. A (SPA) § 7.5(a) (emphasis added).
102
    See Defs.’ Opening Br. Exs. E–F (including Claim Notice and subsequent correspondence). I
find that the Claim Notice and correspondence is incorporated by the Plaintiffs into their
Complaint.
103
    Impact Invs. Colorado II, LLC v. Impact Holding, Inc., 2012 WL 3792993, at *8 (Del. Ch. Aug.
31, 2012) (“In that regard, the parties raise two questions that the Court cannot resolve on summary
                                                27
that the Claim Notice was insufficient, the Defendants responded to it in some detail,

implying that the Notice was specific to at least some aspects of the Plaintiffs’

claims.104 Questions of the required scope and resulting sufficiency of the Plaintiffs’

Claim Notice are mixed questions of fact and law, and await a developed record.

The Motion to dismiss the indemnification claim based on insufficiency of notice is

denied.

               2. GAAP Compliance

       The Plaintiffs also raise an indemnification claim that does not mirror one of

their fraud claims. They allege that the Defendants made misrepresentations about

GAAP compliance for the statements submitted by the Defendants to aid the

Plaintiffs’ preparation of the quality of earnings statement in March 2016, as it

pertains to (a) revenue recognition, (b) EBITDA, and (c) working capital.105

       Section 2.8 of the SPA states that the Company provided the buyers with

balance sheets from December 31, 2014, December 31, 2015, and March 31, 2016,

as well as other financial statements from that time.106 Section 2.8 warrants that the

submitted statements were prepared in accordance with GAAP as “consistently

applied . . . except as otherwise stated therein” and except for other exceptions set


judgment. The first is the legal question as to the proper meaning of ‘with reasonable particularity.’
The second is the factual question of whether Buyer's Claim Notice satisfied the ‘reasonable
particularity’ requirement.”).
104
    Defs.’ Opening Br. Ex. G (Objection to Claim Notice Dated June 5, 2017).
105
    Compl. ¶¶ 31–32; Pls.’ Answering Br. 48–50.
106
    Compl. Ex. A (SPA) § 2.8(a).
                                                 28
out in a schedule.107 The Plaintiffs argue that the statements from December 2014

through March 2016 were not prepared in accordance with GAAP as “consistently

applied.” The Defendants seek to dismiss for failure to state a claim. They argue

strenuously that deviations from GAAP in the statements are adequately disclosed.

This raises factual issues that await a developed record, and this claim survives

pending such record.108

               3. CFX

       CFX and the other sellers agreed to “jointly & severally” indemnify buyers109

against any claims made pursuant to Article VII.110 Consequently, CFX is properly

included as a Defendant in the indemnification claims.




107
    Id. § 2.8(a).
108
     The Plaintiffs appear to argue that the “smoothing” of earnings from April–June of 2016,
discussed in Section II(B)(2) of this Memorandum Opinion, renders fraudulent Defendants’
representation, in Section 2.8(a) of the SPA, that the Company had not provided false information
in connection with the buyer’s quality of earnings report. They point to the same “smoothing”
with respect to this indemnification claim. They argue that the subsequent “smoothing” renders,
or is evidence that, the documents referenced were not GAAP compliant as “consistently applied.”
The documents in question in both of these assertions, and the quality of earnings report itself,
cover a period ending in March 2016, before any “smoothing.” These specific claims, therefore,
are fatally anachronistic, and (to the extent Plaintiffs attempt to assert them) are dismissed. But
see, e.g., Stephen Hawking, A Brief History of Time (1998).
109
    At oral argument, the Defendants asked that I dismiss the Vector entities as party plaintiffs.
Because this issue was not briefed, I do not address it here, other than to note that this decision is
without prejudice to any argument that these entities are not proper parties to this litigation.
110
    Compl. Ex. A (SPA) § 7.2 (“From and after the Closing, the Sellers shall jointly and severally
indemnify and hold the Buyer, Holdings, the Company and their directors, officers, members,
partners, employees and Affiliates (the ‘Buyer Indemnified Parties’) harmless from and against all
Losses which the Buyer Indemnified Parties may suffer, sustain, incur, accrue or become subject
to . . . [the grounds for indemnification].”).
                                                 29
                                 III. CONCLUSION

         The Motion to Dismiss is granted to the extent described herein. Otherwise,

the Motion to Dismiss is denied. The parties should provide an appropriate form of

order.




                                          30
