United States District Court, N.D. California, San Jose Division
PINNACLE VENTURES LLC; PINNACLE VENTURES DEBT FUND III, L.P.; and PINNACLE IV, L.P., Plaintiffs,
BERTELSMANN EDUCATION SERVICES LLC, Defendant.
ORDER DENYING MOTION TO DISMISS FIRST AMENDED
COMPLAINT, [Re: ECF 66], [REDACTED PUBLIC VERSION]
LABSON FREEMAN UNITED STATES DISTRICT JUDGE
action arises from a dispute between investors in third party
HotChalk, Inc. (“HotChalk”), a privately held
corporation that provides education technology and services.
Plaintiffs are Pinnacle Ventures LLC, a private venture
capital firm that provides debt and equity financing to early
stage companies, and two of its funds, Pinnacle Ventures Debt
Fund III, L.P. and Pinnacle IV, L.P. (collectively,
“Pinnacle”). Pinnacle provided debt financing to
HotChalk beginning in 2014 and received warrants to purchase
HotChalk stock. Defendant Bertelsmann Education Services LLC
(“BES”) provided additional financing in 2015 and
2018. Pinnacle alleges that BES took effective control of
HotChalk in 2015 and used fraudulent and unlawful means to
deprive Pinnacle of the value of its investments, first by
preventing Pinnacle from participating in the 2015 financing
round and then by diluting the value of Pinnacle's
warrants in the 2018 transaction. Plaintiff sues BES for
fraud and related state law claims.
filed a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6), seeking dismissal of Claims 1-5 of the
first amended complaint (“FAC”) only to
the extent those claims are based on the 2015 transaction.
Pinnacle argues that because Claims 1-5 are based on
BES's conduct in both 2015 and 2018, BES in essence seeks
partial dismissal of each claim. Pinnacle contends that Rule
12(b)(6) does not provide a mechanism for dismissing part of
a claim, and that in any event the FAC's allegations
regarding BES's 2015 conduct are adequate to state a
claim. The Court has considered the briefing and the
arguments presented at the hearing on August 1, 2019. For the
reasons discussed below, the motion to dismiss is DENIED.
was introduced to HotChalk in 2014. FAC ¶ 22, ECF 59-4.
HotChalk was an established start-up expected to generate
nearly $ XXXXX in revenue in 2014.
Id. XXXXX Id.
and HotChalk entered into two Loan and Security Agreements in
2014 and early 2015, under which Pinnacle provided debt
financing totaling $ XXXXX . FAC
¶¶ 23, 25, 27. As part of those transactions,
Pinnacle obtained warrants giving it the right to purchase
more than two million shares of HotChalk at an exercise price
of $ XXXXX . FAC ¶¶ 24, 26.
August 5, 2015, HotChalk circulated term sheets for an equity
deal with BES, a division of a large German conglomerate. FAC
¶ 29. The deal had three primary components: (1)
HotChalk would acquire Synergis, a BES subsidiary, through
merger; (2) BES would make an $ XXXXX
equity investment in HotChalk; and (3) BES would make a $
XXXXX secondary purchase of shares
from existing HotChalk shareholders to bring its
post-acquisition, post-investment stake in HotChalk to a
total of XXXXX . FAC ¶ 29.
Because HotChalk's share price had increased
substantially since Pinnacle obtained its HotChalk warrants,
Pinnacle stood to make millions of dollars by selling the
HotChalk shares underlying its warrants. FAC ¶ 30.
or around August 5, 2015, HotChalk's CFO Toth informed a
Pinnacle principal that Pinnacle would be able to sell
‘up to 100%' of its warrants to BES.” FAC 32.
“On August 13, 2015, Toth again confirmed that Pinnacle
could sell all of its warrants to BES and that Pinnacle could
do so ‘without too much fuss,' including without
first taking the technical step of formally exercising the
warrants to purchase the underlying shares before selling
them.” Id. Mr. Toth's statements
“could only have come on authority of BES given that it
was BES that would be purchasing the warrants.” FAC
¶ 33. Because Pinnacle understood that its ability to
sell 100% of its warrants as part of BES's direct
purchase of HotChalk shares was secure, Pinnacle did not
consider any other opportunities that might have been
available with respect to its warrants. Id.
Friday, October 16, 2015, “Toth called a Pinnacle
principal to inform Pinnacle that it would not be able to
sell its warrants (or the underlying shares) to BES at
all, as Pinnacle had been promised it could do.”
FAC ¶ 34. Mr. Toth's statement “could only
have come at the direction of BES - the purchaser of HotChalk
shares in the transaction.” Id. On Monday,
October 19, 2015, Pinnacle emailed HotChalk's CEO to
express both disappointment and hope that a solution could be
found. FAC ¶ 35. Nothing came of that email, and
BES's November 9, 2015 Offer to Purchase required that
sellers in the tender offer own HotChalk shares as of October
20, 2015. FAC ¶ 36. The Offer to Purchase precluded sale
of warrants in lieu of the underlying shares. Id.
Pinnacle had not been informed that it needed to exercise its
warrants by October 20, 2015 to sell to BES in the tender
offer. Id. Pinnacle therefore was unable to
participate in “even the economically inferior,
prorated tender offer portion of the
transaction.” Id. BES instead acquired HotChalk
shares from other large holders, ending up owning
approximately XXXXX of HotChalk's
equity and taking effective control of HotChalk. FAC
had control of HotChalk, BES changed the company's
business strategy. FAC ¶ 41. Instead of pursuing strong
revenue growth, HotChalk focused on aggressive cost
reduction. Id. When Pinnacle expressed concern, BES
assured Pinnacle that HotChalk's valuation in the next
financing round would be higher than in the last financing
round. FAC ¶ 42. In reliance on BES's
representations, Pinnacle consented to allow HotChalk to
restructure its debt multiple times and amended its own loan
agreements to extend the period in which HotChalk had to make
payments. FAC ¶ 43. Pinnacle also agreed to fund an
additional $ XXXXX loan tranche for
the benefit of HotChalk and its controlling shareholder, BES.
FAC ¶ 44.
BES deliberately dragged its feet on obtaining additional
necessary financing, putting HotChalk in a precarious
position. FAC ¶ 46. BES thereafter was able to force a
financing transaction which benefitted BES at the expense of
Pinnacle and other stakeholders in HotChalk. FAC ¶¶
47-48. In January 2018, Pinnacle received a term sheet for a
new transaction that would increase BES's equity interest
in HotChalk from XXXXX FAC ¶ 49.
At the same time, Pinnacle's warrants were converted on a
XXXXX basis, meaning that ...