Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP
This text of Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP (Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GREAT HILL EQUITY PARTNERS IV, ) LP, GREAT HILL INVESTORS LLC, ) FREMONT HOLDCO, INC., and ) BLUESNAP, INC. (F/K/A PLIMUS), ) ) Plaintiffs, ) ) v. ) C.A. No. 7906-VCG ) SIG GROWTH EQUITY FUND I, ) LLLP, SIG GROWTH EQUITY ) MANAGEMENT, LLC, AMIR ) GOLDMAN, JONATHAN KLAHR, ) HAGAI TAL, TOMER HERZOG, ) DANIEL KLEINBERG, IRIT SEGAL ) ITSHAYEK, DONORS CAPITAL ) FUND, INC., and KIDS CONNECT ) CHARITABLE FUND, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: August 7, 2018 Date Decided: December 3, 2018
Gregory V. Varallo, Rudolf Koch, and Robert L. Burns, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Stephen D. Poss and Adam Slutsky, of GOODWIN PROCTER LLP, Boston, Massachusetts, Attorneys for Plaintiffs.
William B. Chandler III, Ian R. Liston, and Jessica A. Hartwell, of WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware; OF COUNSEL: Mark A. Kirsch, Scott A. Edelman, Aric H. Wu, Jeremy W. Stamelman, and Laura K. O’Boyle, of GIBSON, DUNN & CRUTCHER LLP, New York, New York, Attorneys for Defendants SIG Growth Equity Fund I, LLLP, SIG Growth Equity Management, LLC, Amir Goldman, Jonathan Klahr, Donors Capital Fund, Inc., and Kids Connect Charitable Fund. Lewis H. Lazarus and Meghan A. Adams, of MORRIS JAMES LLP, Wilmington, Delaware; OF COUNSEL: Peter N. Flocos and Joanna A. Diakos, of K&L GATES LLP, New York, New York, Attorneys for Defendants Tomer Herzog and Daniel Kleinberg.
David S. Eagle and Sean M. Brennecke, of KLEHR HARRISON HARVEY BRANZBURG LLP, Wilmington, Delaware; OF COUNSEL: Michael K. Coran, William T. Hill, Monica Clarke Platt, and Gregory R. Sellers, of KLEHR HARRISON HARVEY BRANZBURG LLP, Philadelphia, Pennsylvania, Attorneys for Defendants Hagai Tal and Irit Segal Itshayek.
GLASSCOCK, Vice Chancellor This matter involves the acquisition of a California company, Plimus, by a
private equity firm, Great Hill. Plimus’s business was to facilitate transactions
between online retailers of digital goods and credit card holders. Under Plimus’s
model, it operated as a “reseller;” where a retail buyer made an online purchase,
Plimus would first constructively “acquire” the product from the retailer, and receive
payment for that retailer from payment processors with whom Plimus had
contractual relationships. Those payment processors, in turn, had contractual
relationships with the credit card companies and their banks. The service or product
would be delivered directly to the credit card holder/purchaser from the online
merchant. The arrangement allowed the payment processors—PayPal being a well-
known example—to deal with a single reseller, Plimus, with which they had a
relationship, rather than trying to contract with the large number of small retailers,
known in the business as “long-tail” vendors, occupying this market. The system
works so long as the retailers deliver a satisfactory product. If they do not, the credit
card companies are responsible to their card holders for “chargebacks,” cancellation
of debt incurred by the card holder for fraudulent or misrepresented services or goods
provided by the retailers. In such cases, the banks and card companies impose
contractual “fines” on the payment processors, which, in turn, implicates the
relationship of the processors with facilitators/resellers like Plimus. In other words,
if the reseller handles transactions from retailers whose business practices engender
1 excessive chargebacks, the contractual relationship between the reseller and the
payment processor will be strained or ruptured. Without such relationships, the
reseller cannot exist.
In 2011, Great Hill bought Plimus. It valued Plimus based on diligence
performed before the sale, management projections, and representations and
warranties made in the Merger Agreement. After the purchase, Plimus’s
performance was disappointing. Great Hill sued the individual defendants,
principals and stockholders of Plimus, alleging breaches of the representations and
warranties, and fraud and fraudulent inducement, primarily relating to the
Defendants’ knowledge that excessive chargebacks endangered Plimus’s business
model. The matter was bifurcated, and trial of the Defendants’ liability ensued.
What follows is my post-trial determination of certain issues of liability.
Directly below is a full plate of facts. The litigants and their counsel will no
doubt find self-interest—pecuniary or professional—relish sufficient to the
consumption thereof. Casual readers, I fear, will strain at the swallowing.1
Following that, I address the facts in light of tort law and the contractual provisions
at issue. I find that certain of the Defendants are liable for indemnification for losses
arising from certain breaches of the representations and warranties, and that
1 As though, in Holmes’ memorable phrase, eating sawdust without butter.
2 Defendant Hagai Tal committed fraud by failing to disclose the threatened
termination of Plimus’s relationship with one payment processor, PayPal.
I. BACKGROUND
Trial took place over ten days, during which thirteen witnesses gave live
testimony. The parties submitted over two thousand exhibits and lodged fifty-eight
depositions. The following facts were stipulated by the parties or proven by a
preponderance of the evidence.2
A. Plimus Is Founded, and SGE Invests in the Company
Defendants Tomer Herzog and Daniel Kleinberg (the “Founders”) founded
Plimus in 2002.3 Before the closing of the merger that gave rise to this litigation,
Plimus was a California corporation headquartered in Fremont, California.4 Plimus
provided payment solutions that allowed online merchants to sell digital products to
buyers.5 Specifically, Plimus operated as an e-commerce reseller: the company took
title to an online merchant’s products just before a sale, serving as the merchant of
record in the transaction with the consumer.6 To process credit card transactions
with consumers, Plimus entered into contractual relationships with third-party
2 To the extent there was conflicting evidence, I have weighed the evidence and made findings based on the preponderance of the evidence. In an attempt at brevity—relatively speaking—I have often omitted from this Background discussion testimony in conflict with the preponderance of the evidence. In such cases, I considered the conflicted testimony, and rejected it. 3 Joint Statement of Undisputed Facts (“JSUF”) ¶ 44. 4 Id. ¶ 43. 5 Id. ¶ 64. 6 Id. ¶ 66.
3 payment processors, including PayPal Pro and Global Collect.7 For their part, the
payment processors maintained relationships with acquiring banks, which were
members of credit card networks and thus authorized to process transactions
involving the networks’ credit cards.8
From 2002 to 2008, Plimus did well, achieving significant revenue growth.9
For the first few years after the founding, Herzog and Kleinberg ran the company.10
Both Herzog and Kleinberg are software engineers,11 and by 2007 or 2008, they had
decided to bring in “professional help” to manage Plimus.12 Given their software
backgrounds, they felt they were not “up to the task of taking [the company] even
further.”13 Thus, in 2008, Herzog asked Defendant Hagai Tal, who served as a
consultant for a Plimus client, to help sell the company. 14 Tal met with potential
buyers, but he eventually came to the conclusion that Plimus should not yet be sold.15
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GREAT HILL EQUITY PARTNERS IV, ) LP, GREAT HILL INVESTORS LLC, ) FREMONT HOLDCO, INC., and ) BLUESNAP, INC. (F/K/A PLIMUS), ) ) Plaintiffs, ) ) v. ) C.A. No. 7906-VCG ) SIG GROWTH EQUITY FUND I, ) LLLP, SIG GROWTH EQUITY ) MANAGEMENT, LLC, AMIR ) GOLDMAN, JONATHAN KLAHR, ) HAGAI TAL, TOMER HERZOG, ) DANIEL KLEINBERG, IRIT SEGAL ) ITSHAYEK, DONORS CAPITAL ) FUND, INC., and KIDS CONNECT ) CHARITABLE FUND, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: August 7, 2018 Date Decided: December 3, 2018
Gregory V. Varallo, Rudolf Koch, and Robert L. Burns, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Stephen D. Poss and Adam Slutsky, of GOODWIN PROCTER LLP, Boston, Massachusetts, Attorneys for Plaintiffs.
William B. Chandler III, Ian R. Liston, and Jessica A. Hartwell, of WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware; OF COUNSEL: Mark A. Kirsch, Scott A. Edelman, Aric H. Wu, Jeremy W. Stamelman, and Laura K. O’Boyle, of GIBSON, DUNN & CRUTCHER LLP, New York, New York, Attorneys for Defendants SIG Growth Equity Fund I, LLLP, SIG Growth Equity Management, LLC, Amir Goldman, Jonathan Klahr, Donors Capital Fund, Inc., and Kids Connect Charitable Fund. Lewis H. Lazarus and Meghan A. Adams, of MORRIS JAMES LLP, Wilmington, Delaware; OF COUNSEL: Peter N. Flocos and Joanna A. Diakos, of K&L GATES LLP, New York, New York, Attorneys for Defendants Tomer Herzog and Daniel Kleinberg.
David S. Eagle and Sean M. Brennecke, of KLEHR HARRISON HARVEY BRANZBURG LLP, Wilmington, Delaware; OF COUNSEL: Michael K. Coran, William T. Hill, Monica Clarke Platt, and Gregory R. Sellers, of KLEHR HARRISON HARVEY BRANZBURG LLP, Philadelphia, Pennsylvania, Attorneys for Defendants Hagai Tal and Irit Segal Itshayek.
GLASSCOCK, Vice Chancellor This matter involves the acquisition of a California company, Plimus, by a
private equity firm, Great Hill. Plimus’s business was to facilitate transactions
between online retailers of digital goods and credit card holders. Under Plimus’s
model, it operated as a “reseller;” where a retail buyer made an online purchase,
Plimus would first constructively “acquire” the product from the retailer, and receive
payment for that retailer from payment processors with whom Plimus had
contractual relationships. Those payment processors, in turn, had contractual
relationships with the credit card companies and their banks. The service or product
would be delivered directly to the credit card holder/purchaser from the online
merchant. The arrangement allowed the payment processors—PayPal being a well-
known example—to deal with a single reseller, Plimus, with which they had a
relationship, rather than trying to contract with the large number of small retailers,
known in the business as “long-tail” vendors, occupying this market. The system
works so long as the retailers deliver a satisfactory product. If they do not, the credit
card companies are responsible to their card holders for “chargebacks,” cancellation
of debt incurred by the card holder for fraudulent or misrepresented services or goods
provided by the retailers. In such cases, the banks and card companies impose
contractual “fines” on the payment processors, which, in turn, implicates the
relationship of the processors with facilitators/resellers like Plimus. In other words,
if the reseller handles transactions from retailers whose business practices engender
1 excessive chargebacks, the contractual relationship between the reseller and the
payment processor will be strained or ruptured. Without such relationships, the
reseller cannot exist.
In 2011, Great Hill bought Plimus. It valued Plimus based on diligence
performed before the sale, management projections, and representations and
warranties made in the Merger Agreement. After the purchase, Plimus’s
performance was disappointing. Great Hill sued the individual defendants,
principals and stockholders of Plimus, alleging breaches of the representations and
warranties, and fraud and fraudulent inducement, primarily relating to the
Defendants’ knowledge that excessive chargebacks endangered Plimus’s business
model. The matter was bifurcated, and trial of the Defendants’ liability ensued.
What follows is my post-trial determination of certain issues of liability.
Directly below is a full plate of facts. The litigants and their counsel will no
doubt find self-interest—pecuniary or professional—relish sufficient to the
consumption thereof. Casual readers, I fear, will strain at the swallowing.1
Following that, I address the facts in light of tort law and the contractual provisions
at issue. I find that certain of the Defendants are liable for indemnification for losses
arising from certain breaches of the representations and warranties, and that
1 As though, in Holmes’ memorable phrase, eating sawdust without butter.
2 Defendant Hagai Tal committed fraud by failing to disclose the threatened
termination of Plimus’s relationship with one payment processor, PayPal.
I. BACKGROUND
Trial took place over ten days, during which thirteen witnesses gave live
testimony. The parties submitted over two thousand exhibits and lodged fifty-eight
depositions. The following facts were stipulated by the parties or proven by a
preponderance of the evidence.2
A. Plimus Is Founded, and SGE Invests in the Company
Defendants Tomer Herzog and Daniel Kleinberg (the “Founders”) founded
Plimus in 2002.3 Before the closing of the merger that gave rise to this litigation,
Plimus was a California corporation headquartered in Fremont, California.4 Plimus
provided payment solutions that allowed online merchants to sell digital products to
buyers.5 Specifically, Plimus operated as an e-commerce reseller: the company took
title to an online merchant’s products just before a sale, serving as the merchant of
record in the transaction with the consumer.6 To process credit card transactions
with consumers, Plimus entered into contractual relationships with third-party
2 To the extent there was conflicting evidence, I have weighed the evidence and made findings based on the preponderance of the evidence. In an attempt at brevity—relatively speaking—I have often omitted from this Background discussion testimony in conflict with the preponderance of the evidence. In such cases, I considered the conflicted testimony, and rejected it. 3 Joint Statement of Undisputed Facts (“JSUF”) ¶ 44. 4 Id. ¶ 43. 5 Id. ¶ 64. 6 Id. ¶ 66.
3 payment processors, including PayPal Pro and Global Collect.7 For their part, the
payment processors maintained relationships with acquiring banks, which were
members of credit card networks and thus authorized to process transactions
involving the networks’ credit cards.8
From 2002 to 2008, Plimus did well, achieving significant revenue growth.9
For the first few years after the founding, Herzog and Kleinberg ran the company.10
Both Herzog and Kleinberg are software engineers,11 and by 2007 or 2008, they had
decided to bring in “professional help” to manage Plimus.12 Given their software
backgrounds, they felt they were not “up to the task of taking [the company] even
further.”13 Thus, in 2008, Herzog asked Defendant Hagai Tal, who served as a
consultant for a Plimus client, to help sell the company. 14 Tal met with potential
buyers, but he eventually came to the conclusion that Plimus should not yet be sold.15
Instead, Tal offered to find an investor who would purchase a fifty percent stake in
7 Id. ¶¶ 65, 102, 104. 8 Id. ¶ 65. 9 Trial Tr. 2348:9–15 (Herzog); id. at 2469:6–22 (Kleinberg). 10 Id. at 2347:16–2348:1 (Herzog). 11 JSUF ¶¶ 7, 9. 12 Trial Tr. 2350:21–2351:2 (Herzog). 13 Id. at 2469:17–18 (Kleinberg). 14 JSUF ¶ 45. 15 Id. ¶ 46.
4 the company.16 Following that investment, Tal would run Plimus and position it for
an eventual sale.17
Around that time, Tal was introduced to Defendant Jonathan Klahr, a
managing director at Defendant SIG Growth Equity Management, LLC (“SGE”). 18
Klahr was impressed by Tal’s “vision for [Plimus],”19 and Tal identified Defendant
SIG Growth Equity Fund I, LLLP (“SIG Fund”) as a potential investor.20 Following
a sales process run by Tal,21 SIG Fund, which was managed by SGE,22 agreed in
June 2008 to purchase a forty-five percent stake in Plimus.23 SGE/SIG Fund’s
purchase of these shares valued Plimus at $41 million.24
Before it made its investment, SGE conducted due diligence on Plimus; as
part of that process, it contacted Paymentech, one of the company’s payment
processors.25 Indeed, SGE hired a “payment expert” to review Plimus’s contract
with Paymentech.26 That expert opined that the contract was “not as favorable as
we would like.”27 Among other things, the expert found that the rates were too high,
16 Id. 17 Id. 18 Id. ¶¶ 19, 22; Trial Tr. 1877:16–19 (Klahr). 19 Trial Tr. 1878:2–13 (Klahr). 20 JSUF ¶ 47. 21 Trial Tr. 2351:10–20 (Herzog). 22 Trial Tr. 1747:11-17 (Klahr). 23 JSUF ¶¶ 48, 57. 24 Id. ¶ 49. SGE also invested through a participating preferred security. Id. ¶ 50. 25 Trial Tr. 1878:14–1879:8 (Klahr). 26 Id. at 1879:1–2 (Klahr). 27 JX 6, at 2.
5 and that the termination provisions were unfavorable to Plimus.28 When Klahr
received this report in March 2008, he summarized its contents as follows: “In brief,
‘we got screwed.’”29 Plimus management was also concerned about the Paymentech
relationship, and around this time the company informed Paymentech of “a desire
among executive management to have a fresh look at the relationship.”30
In July 2008, Tal became Plimus’s CEO and a member of its Board of
Directors, which also included Herzog, Kleinberg, Klahr, and Defendant Amir
Goldman, a managing director at SGE.31 As part of its investment in Plimus, SGE
entered into an earn-out agreement with Tal, under which he would earn a
transaction bonus if Plimus was sold.32 Herzog and Kleinberg likewise entered into
an earn-out agreement with Tal, and while neither side disputes that an agreement
existed, the parties to the earn-out agreement later came to disagree about how much
Tal was owed under it.33
Consistent with SGE’s investment philosophy,34 Klahr and Goldman attended
Plimus board meetings and assisted management with strategic issues, but they did
28 Id. 29 Id. at 4. 30 JX 8, at 2. 31 JSUF ¶¶ 11, 12, 21–22. 32 Id. ¶ 55. 33 JX 18; Trial Tr. 1498:6–1499:22 (Tal); Trial Tr. 2325:4–24 (Herzog); Trial Tr. 2423:11–21 (Kleinberg). 34 Trial Tr. 1858:1–1859:18 (Klahr).
6 not manage the company on a day-to-day basis.35 Likewise, by 2009, Herzog and
Kleinberg were no longer involved in Plimus’s daily operations.36 The four directors
relied on Plimus’s management, primarily Tal, to raise issues that required their
attention.37
B. The Failed Silver Lake Deal
Plimus continued to do well under Tal’s leadership, achieving EBITDA of
$2.9 million and $4.6 million in 2009 and 2010, respectively. 38 In late-2009 and
early-2010, Tal began to express a desire to sell Plimus to a large private equity
firm.39 Tal supported a sale because he wanted personal liquidity and thought a large
private equity firm could provide Plimus, which he would continue to lead, with
“operational assistance” and “additional capital.”40
In March 2010, Plimus executed a term sheet with Silver Lake Partners
(“Silver Lake”), a private equity firm.41 Silver Lake proposed to acquire Plimus at
a valuation of $92 million, and the parties agreed to a forty-five day exclusivity
period.42 Silver Lake eventually grew concerned about Plimus’s declining
performance, which Klahr attributed to the company’s decision, in the first quarter
35 Id. at 1907:12–1909:11 (Klahr); id. at 2063:20–2065:3 (Goldman). 36 Id. at 2353:1–14 (Herzog); id. at 2469:23–2470:12 (Kleinberg). 37 Id. at 2064:20–2065:3 (Goldman); id. at 2290:2–5 (Herzog); id. at 2473:1–2474:7 (Kleinberg). 38 JX 307, at 8. 39 Trial Tr. 1864:7–9 (Klahr); id. at 1960:22–1961:5 (Goldman). 40 Id. at 1864:8–9 (Klahr); id. at 1962:7–20 (Goldman). 41 JX 59. 42 Id. at 3; JX 82.
7 of 2010, to terminate vendors that produced large numbers of chargebacks.43 A
chargeback takes place when a customer disputes a charge on her credit card directly
with her card issuer, and the card issuer charges back the transaction to the acquiring
bank.44 The acquiring bank “then deducts the value of the transaction from the
merchant’s account and refunds the amount to the issuer, so that a credit can be
issued to the consumer.”45 This contrasts to a situation where a buyer raises a dispute
directly with the merchant, leading to the merchant initiating the refund.46
Silver Lake had not completed its diligence by the end of the forty-five day
exclusivity period, and it asked Plimus for an extension.47 Klahr took this as a sign
that Silver Lake “fe[lt] no pressure” and was “not serious.”48 Klahr also thought
Silver Lake’s offer undervalued the company, writing in an e-mail that “we cannot
knowingly sell an asset for less than what we estimate to be the market price.”49
Klahr’s view rested on his perception that the market had improved since the Silver
Lake offer came in, and that “there [wa]s pressure from within SIG not to sell at this
43 Trial Tr. 1770:19–22 (Klahr); JX 121. 44 JSUF ¶ 67. 45 JX 1129 ¶ 22. 46 Trial Tr. 2870:10–19 (Moran). Sellers of digital goods may generate a relatively higher number of chargebacks because there is no physical product to return and, in many cases, no physical store to which one can return that product. Id. 47 Id. at 1865:5–10 (Klahr). 48 JX 82, at 1. 49 Id.
8 price.”50 Thus, Plimus declined to extend Silver Lake’s exclusivity period.51 Tal
disagreed with this decision,52 and Silver Lake was disappointed by Plimus’s refusal
to extend exclusivity.53 Silver Lake attempted unsuccessfully to re-engage on the
potential transaction.54
Goldman and Klahr later discussed how to present the failed Silver Lake deal
to their colleagues at SGE. Klahr initially proposed the following account: “Plimus
received firm acquisition interest from . . . Silverlake in the form of a term sheet. A
term sheet was signed however the transaction was not consummated due to drop in
revenue run rate as a result of terminating the more problematic vendors.”55
Goldman insisted on changing the story, because he did not want to say that the “deal
wasn’t consummated because of performance – want to keep it as if it was us who
killed it (the chagai version).”56 Klahr agreed with Goldman: “Worse - if we end up
doing a deal at a lower price we look like chumps - whereas if we keep the real story
we make it clear that this opportunity wasn’t real . . . .”57 Nevertheless, while Klahr
50 Id. 51 JX 97, at 1; Trial Tr. 1865:8–12 (Klahr). 52 Trial Tr. 1480:15–1841:4 (Tal); id. at 1867:19–22 (Klahr). 53 JX 97. 54 JX 97; JX 2006. 55 JX 123, at 1. 56 Id. 57 Id.
9 acknowledged that Plimus had had a disappointing second quarter in 2010, he also
believed that revenue and earnings would rebound in the third and fourth quarters.58
After the Silver Lake deal fell through, Plimus turned to a potential acquisition
of JourneyEd, an online software company.59 Therefore, in September and October
2010, Klahr did not think a sale of the company was feasible in light of the pending
transaction with JourneyEd and the disappointing second quarter results.60 But the
JourneyEd acquisition eventually fell through when a competitor of Plimus acquired
the company.61 On the bright side, Plimus’s numbers rebounded from the losses
previously caused by terminating the problematic vendors.62 Thus, in November
2010, Plimus decided to engage investment bankers to run a formal sales process.63
Three investment banks, including Raymond James, gave presentations to the
Plimus Board of Directors about a possible sale of the company.64 On November
22, 2010, Plimus selected Raymond James to serve as the company’s investment
banker for the sales process.65 A little over one week later, Plimus and Raymond
James executed a letter agreement formalizing the engagement.66
58 JX 88, at 1. 59 Trial Tr. 1971:18–23 (Goldman). 60 JX 133; JX 139. 61 Trial Tr. 1971:24–1972:7 (Goldman). 62 Id. at 1776:9–12 (Klahr). 63 Id. at 1972:8–11 (Goldman). 64 JSUF ¶ 107. 65 Id. ¶ 109. 66 Id. ¶ 111.
10 C. The Formal Sales Process Begins, and Great Hill Enters the Picture
The same day that Plimus and Raymond James executed the engagement
letter, Jonathan Steele of Raymond James received the “first buyer call” for Plimus
from Great Hill, a private equity firm that in 2011 managed over $2.7 billion in
capital.67 The call came from Nicholas Cayer, who told Steele that he had “been
pursuing Hagai [Tal] for a while and really likes the business.”68
Cayer was one of five members of the Great Hill team for the Plimus
transaction; the others were Matthew Vettel, Christopher Busby, Daniel Madden,
and William Hurley.69 Busby served as the “deal quarterback,” overseeing the due
diligence and analyzing the Plimus investment opportunity.70 Cayer ran diligence
projects and was the primary author of the deal team’s diligence memo.71 Vettel was
the only Great Hill partner on the deal, though his role in the diligence was
minimal.72 Finally, Madden and Hurley were the junior members of the deal team;
they conducted financial and business analyses of Plimus.73
Once Raymond James was formally engaged, it began working with Plimus
management to prepare marketing materials, including a confidential information
67 JX 161, at 2; JX 429, at 2. I refer to Plaintiffs Great Hill Equity Partners IV, LP, and Great Hill Investors LLC collectively as “Great Hill.” 68 JX 161, at 2. 69 JSUF ¶ 119. 70 Id. ¶ 120. 71 Id. ¶ 121. 72 Trial Tr. 785:18–20 (Vettel). 73 Id. at 843:7–13 (Cayer).
11 memorandum (“CIM”).74 Tal, Goldman, and Klahr provided information on Plimus
to Raymond James to be used in the CIM and other materials.75 Raymond James
also worked with Plimus management to compile a list of potential buyers. 76 One
of those potential buyers was Great Hill, which signed a non-disclosure agreement
with Plimus around February 2, 2011.77 Over fifty other potential buyers signed
non-disclosure agreements with the company.78
On February 23, 2011, Raymond James sent Great Hill the Plimus CIM.79
The CIM claimed that Plimus was “experiencing robust growth across its seller base,
transactions, revenue and EBITDA driven by favorable market trends and its
defensible position.”80 The CIM also touted the company’s “strong visibility into its
future revenue growth.”81 The information in the CIM was important to Great Hill,
which was impressed by (among other things) the company’s strong revenue
growth.82
74 Steele Dep. 49:22–51:3. 75 Steele Dep. 50:4–50:23; Trial Tr. 1482:12–19, 1488:20–1489:3 (Tal); Trial Tr. at 1784:3– 1786:2 (Klahr); JX 213, at 1; JX 230, at 1. 76 Steele Dep. 51:13–22. 77 JSUF ¶ 118. 78 JX 304, at 2. 79 JX 241, at 1. 80 Id. at 8. 81 Id. at 19. 82 Trial Tr. 41:1–13, 61:1–62:16, 62:17–63:2 (Busby).
12 On March 15, 2011, Great Hill submitted a non-binding preliminary bid for
Plimus.83 The bid valued Plimus at between $95 million and $105 million.84 Sixteen
other potential buyers submitted preliminary bids,85 and each bidder was invited to
meet in-person with Plimus management and perform additional due diligence.86
Around this time, Raymond James created a virtual data room containing
information and documents related to Plimus.87
Plimus management made a presentation to Great Hill on March 30, 2011.88
In the presentation, Plimus claimed that it “carefully monitor[ed] the performance
of [its] seller base and w[ould] ‘cleanse’ any that have a negative perception,
consistent issues with buyers or high chargeback ratios.”89 The presentation also
noted that in the second quarter of 2010, the company had removed several sellers
that generated above-average numbers of chargebacks.90 According to the
presentation, while the removals “decreased total sales,” they led to an “increase[]
[in] EBITDA as [Plimus] avoided any future negative impact from consistently
having chargebacks.”91
83 JSUF ¶ 122. 84 Id. 85 JX 324, at 3–5. 86 Trial Tr. 64:6–65:4 (Busby). 87 JSUF ¶¶ 124–25. 88 Id. ¶ 123. 89 JX 307, at 52. 90 Id. 91 Id.
13 In mid-April, Great Hill (along with the other bidders) received access to the
data room,92 and continued to meet with Plimus management.93 On April 13, 2011,
Great Hill submitted a revised bid for Plimus at a valuation range of $110 million to
$115 million.94 Only five of the seventeen preliminary bidders submitted revised
bids; of those five, three reduced their bids, one made the same bid, and one (Great
Hill) increased its bid.95 General Atlantic, which reduced its bid, appeared
concerned that Plimus was “just a way in which the smaller/long-tail ‘grimier’ guys
can find a merchant account and get their higher chargebacks bundled into a
portfolio.”96 “Long-tail” vendors are defined in the CIM as “single proprietor,
home-based businesses.”97 Another potential purchaser that reduced its bid thought
Plimus’s recent numbers were “inflated by lower quality . . . clients that ultimately
might get purged if chargebacks creep up.”98
The deadline for final bids was May 18, 2011.99 Before it made its final bid,
Great Hill analyzed the top 400 sellers on Plimus’s platform. 100 Cayer asked Madden
and Hurley to evaluate the “quality / sustainability of the sellers you profiled,” asking
92 JSUF ¶ 125. 93 Id. ¶ 130; Trial Tr. 64:6–65:4 (Busby). 94 JSUF ¶ 129. 95 JX 324, at 3. 96 JX 378. 97 JX 241, at 8. 98 JX 387. 99 JSUF ¶ 131. 100 JX 347.
14 whether they were “real businesses with real websites in real industries.”101 Hurley
reported that most of the websites he examined “seemed either very sketchy or
small/outdated.”102 Madden agreed with Hurley that “there were plenty of sketchy
sites,” but he also found “plenty of legit ‘long-tail’ business such as Fx trading
strategies, language translation, high-tech programming tools, and run of the mill
utility software.”103 At trial, Cayer testified that these analyses focused on whether
Plimus’s clients had sustainable business models, and not on whether they complied
with credit card association rules.104 The credit card associations, such as Visa and
MasterCard,105 issue three broad categories of rules: brand rules to protect the card
association’s reputation; chargeback rules to protect consumers (and merchants)
from fraudulent transactions; and compliance rules to ensure compliance with
government and regulatory rules, such as anti-money laundering rules, prohibitions
on the sale of illegal goods and services, and protection of intellectual property
rights.106
Great Hill submitted a final bid for Plimus on May 18, 2011, which valued
the company at $115 million.107 No other party submitted a final bid by the May 18
101 Id. at 1. 102 Id. 103 Id. 104 Trial Tr. 862:4–13 (Cayer). 105 JX 1129, ¶ 15. 106 Id. ¶ 23. 107 JSUF ¶ 132.
15 deadline.108 Two days after submitting its final bid, Great Hill learned from
Raymond James that Plimus had missed its projected EBITDA for the first quarter
of 2011 by over $200,000 (approximately thirteen percent of the projected
EBITDA).109 Raymond James reassured Great Hill that “confidence in the
projections for the remainder of 2011 has never been higher.”110 Busby told
Raymond James that the EBITDA miss did not “change [Great Hill’s] proposal,”
because Great Hill was “more buying into the vision and the larger picture.”111
Furthermore, Raymond James reported that Busby expressed these views without
Raymond James having to “put any of this in focus for [Busby].” 112 Along with the
financial results for the first quarter of 2011, Plimus also shared with Great Hill a
draft disclosure schedule,113 intended to accompany the prospective merger
agreement. Busby told Raymond James that “on first review [Great Hill] didn’t
envision any show stoppers or items that couldn’t be structured around.”114
On May 26, 2011, Great Hill signed a letter of intent (the “Letter of Intent”)
to acquire Plimus for $115 million.115 Great Hill conditioned the acquisition on
108 JX 397, at 1. 109 JX 413, at 22–23; JX 415. 110 JX 413, at 22. 111 JX 415. 112 Id. 113 JX 413, at 2–20. 114 JX 415. 115 JSUF ¶ 133.
16 “completion of customer calls and customary legal, accounting, technology and
insurance due diligence on Plimus.”116
D. The Paymentech Saga
The Plimus acquisition did not close until September 29, 2011.117 Many
events relevant to this case took place between the signing of the Letter of Intent and
closing. Before turning to the remainder of the sales process, however, I pause to
describe one component of the purported fraudulent scheme—Plimus’s disclosure
on the end of the company’s relationship with Paymentech—which primarily
involved events that took place before the Letter of Intent was signed.
1. The Paymentech Relationship Prior to February 2011
As noted above, by early 2008, Plimus had begun to have reservations about
its relationship with Paymentech, one of the company’s payment processors.
Between 2008 and 2010, Plimus entered into contractual relationships with several
other payment processors, including Global Collect, Payvision, PayPal Pro, and
Moneybookers.118 During this period, Plimus continued to be dissatisfied with
Paymentech. For example, Defendant Irit Segal Itshayek, Plimus’s Vice President
of Financial Strategy and Payment Solutions, testified that Paymentech’s fees did
not reflect the number of transactions Plimus was actually routing through
116 JX 429, at 4. 117 JSUF ¶ 152. 118 Id. ¶¶ 102–05.
17 Paymentech.119 Indeed, in September 2010, Plimus met with a Paymentech
representative and discussed, among other things, “Fee Increases – What can be done
to reduce the impact on Plimus.”120 According to Klahr, Plimus management’s
unhappiness with Paymentech was “a constant theme” in Plimus management’s
discussions with him.121
In November 2010, at the beginning of the formal sales process, Plimus told
Steele of Raymond James that the company “was looking to move away from
Paymentech to Wells Fargo.”122 Later, on January 19, 2011, Steele told one of his
colleagues to refrain from reaching out to Paymentech as part of the auction process,
because Tal had “been moving processing away from them real-time.”123 The
breaking point for the Plimus-Paymentech relationship came in the same time
period, when Paymentech informed Plimus that it would stop processing Plimus
transactions outside the United States, Canada, and the European Union, including
areas in which Plimus did significant business.124 When he learned this, Tal told
Itshayek, “[b]asically they don’t support our model anymore.”125 Tal and Itshayek
119 Trial Tr. 1381:11–24 (Itshayek); see also, e.g., JX 147. 120 JX 136, at 2. 121 Trial Tr. 1922:12–21 (Klahr). 122 Steele Dep. 280:5–9. 123 JX 207, at 1; see also Steele Dep. 541:9–545:12. 124 JX 212, at 3–6; Trial Tr. 1388:5–20 (Itshayek); Trial Tr. 1925:11–17 (Klahr). 125 JX 212, at 6.
18 thus concluded that Plimus needed to end its relationship with Paymentech.126 The
then-current contract with Paymentech was to terminate in September 2011.127
Paymentech had its own reasons to be frustrated with Plimus. Paymentech
had informed Plimus on multiple occasions in 2010 alone that Plimus was failing to
comply with various credit card association rules.128 Indeed, in January 2011,
Paymentech informed Itshayek and Tal that while it was “committed to providing
you will [sic] new pricing . . . at this time we need to remain focused on resolution
of existing compliance concerns.”129 Paymentech explained that “these issues could
result in large fines to Plimus and can also put Chase Paymentech at risk.”130
2. The Paymentech Relationship Ended
On February 4, 2011, Paymentech sent a letter to Tal informing him that it
was terminating its processing relationship with Plimus.131 The letter explained the
decision as follows:
As you are aware, Paymentech has previously informed Plimus, on multiple occasions, of Plimus’[s] breach of the Agreements [with Paymentech]. Those breaches include, without limitation, submitting cross border transactions from countries for which Paymentech has no license, acting as an aggregator without a license to do so, and violations of Association rules regarding the unauthorized sale of Intellectual Property (as defined by the Associations). As you are also
126 Trial Tr. 1390:15–1391:7 (Itshayek); Trial Tr. 1611:7–1612:8 (Tal); JX 3055. 127 JX 1, at 3; see also JX 413, at 7. 128 E.g., JX 49; JX 50; JX 57; JX 63; JX 67; JX 78; JX 112; JX 115. 129 JX 198, at 2. 130 Id. at 1. 131 JX 218.
19 aware, Plimus has failed to cure such breaches for a period of time in excess of 30 days.132
The letter indicated that Paymentech would establish a reserve account of
approximately $535,000 from funds otherwise payable to Plimus, to cover Plimus’s
anticipated liability.133
Of the specific reasons Paymentech gave for termination, at least one was
inaccurate: Paymentech had fined Plimus in 2010 for failing to register as a Member
Service Provider in relation to MasterCard.134 Thereafter, Plimus registered and was
approved on January 27, 2011, which cured the aggregator issue before February 4,
2011.135
The same day the termination letter was sent (or shortly before), Tal spoke to
a Paymentech representative on the phone.136 The Paymentech representative told
Tal that Paymentech needed to terminate the relationship; Tal responded that “we
also have the same interest, and it’s fine with us not to continue working together.”137
Tal responded in writing to Paymentech’s termination letter on February 11, 2011.138
He expressed “surprise[] at [the] suggested termination date” of May 5, and he
complained about the “abrupt letter and demand to terminate the agreement with
132 Id. 133 Id. 134 JX 143; JX 148. 135 JX 214; Trial Tr. 1347:4–23 (Itshayek). 136 Trial Tr. 1611:3–17 (Tal). 137 Id. at 1611:20–1612:4 (Tal). 138 JX 227.
20 such short notice.”139 According to Tal, Paymentech’s actions would “have a
dramatic negative impact on Plimus.”140 Thus, Tal asked Paymentech for a sixty-
day extension on the termination date and assistance in “mak[ing] the transition as
smooth as possible.”141 Notably, Tal did not request in this letter that Paymentech
reverse its decision to end its processing relationship with Plimus; instead, he sought
only additional time to prepare for the transition away from Paymentech.142
Paymentech responded by letter on February 14, 2011.143 It agreed to extend
the termination date to June 20, but it emphasized that Plimus was “still not in
compliance with respect to the issues surrounding cross-border acquiring and India
transactions.”144 Paymentech did not reference the previous allegations of acting as
an unlicensed aggregator or unauthorized sales of intellectual property.145 “Cross-
border acquiring,” in this context, is the processing of transactions that are wholly
internal to a foreign country; in other words, both the buyer and the seller (but not
the processor) reside in the foreign country. The “cross-border acquiring” issues had
begun in December 2010, when Visa told Paymentech that the Reserve Bank of India
had informed Visa that Paymentech was engaged in cross-border acquiring in India
139 Id. at 1. 140 Id. 141 Id. 142 Id. 143 JX 231. 144 Id. 145 Id.
21 without a license, relating to its processing of Plimus transactions involving Indian
vendors and Indian customers.146 Plimus argued that there was no cross-border
acquiring because Plimus was the merchant of record; therefore, the transactions
should be considered to be between Plimus, which was based in the United States,
and the Indian customers.147 Itshayek believed that this issue led Paymentech to
cease processing any Plimus transactions outside the United States, Canada, and the
European Union.148
Apparently unsatisfied with Plimus’s progress in remedying the cross-border
acquiring issues, Paymentech informed Plimus in another letter on March 1, 2011
that, despite its agreement to extend its relationship with Plimus through the end of
June, it would now terminate the agreement effective March 7.149 After further
discussions between the two parties, Paymentech agreed in a letter dated March 3,
2011 to extend the termination date to March 21.150 Paymentech also wrote in this
letter that “MasterCard has indicated it intends to impose substantial fines against
Paymentech for Plimus’[s] noncompliance” and therefore Paymentech planned to
hold “all of Plimus’[s] settlement proceeds in a reserve account.”151 Tal responded
on March 4, 2011. While noting appreciation for Paymentech’s flexibility on the
146 JX 174; JX 194. 147 JX 172; Trial Tr. 1385:15–1387:2 (Itshayek). 148 Trial Tr. 1389:17–1390:9 (Itshayek). 149 JX 250. 150 JX 257. 151 Id.
22 termination date, Tal stated that “implementing both the disconnect from
[Paymentech’s] services as well as the move to a new processor” in the time frame
provided meant that Plimus would be “expending tremendous engineering
resources,” which represented a “huge challenge,” even with the time extension.152
Tal also wanted to state, for the record, “that it is still not very clear why Plimus is
being thrust into this sudden disconnect . . . we are doing nothing differently than
what we did for the last 4.5 years . . . . Thus we cannot accept the unilateral
declaration that we are in breach of our agreement.”153 Despite this, Tal concluded
that Plimus would be “happy to re-engage with Paymentech in the future.”154 The
processing relationship between Paymentech and Plimus ended on March 21,
2011.155
As part of its termination of Plimus, Paymentech put Plimus on the Master
Card Alert to Control High-Risk Merchant list or “MATCH” list on February 25,
2011, providing the reason code “Violation of MasterCard Standards.”156 The
MATCH list serves as a system to alert processors to problematic merchants, and
when processors terminate merchants, they often place them on the list.157 When, in
152 JX 260, at 1. 153 Id. at 2. 154 Id. 155 JSUF ¶ 89. 156 JSUF ¶ 94; JX 244. 157 Trial Tr. 2561:10–2561:20, 2570:12–19, 2574:4–2575:22 (Layman); id. at 2882:19–2883:18 (Moran).
23 turn, processors add merchants, MasterCard recommends that the processor check
the MATCH list; if the merchant appears on the MATCH list, that is a red flag that
the merchant may present a high risk.158 Processors generally conduct more detailed
review of a merchant as a result of finding it on the list.159 However, appearing on
the MATCH list does not preclude a merchant from being added by a processor;160
indeed, Plimus added new processor relationships after being added to the list by
Paymentech.161 Plimus, like all other merchants, does not have access to the
MATCH list.162 Plimus was unaware that it had been added to the list by
Paymentech, and was unaware of the reason given: violation of MasterCard
standards.
3. The Plimus Board Learned of the End of the Paymentech Relationship and Plimus Recovered Its Reserve Account
The Plimus Board first learned of the end of the Paymentech relationship in
early-March 2011. Tal called Klahr in early March to inform him of the end of the
Paymentech relationship.163 Tal cited problems with processing transactions in India
and noted that Paymentech was holding a substantial sum of money in a reserve
account.164 Goldman also knew by March 7, 2011, on which date he e-mailed Tal
158 Id. at 2561:10–15, 2653:13–21 (Layman); id. at 2883:11–18 (Moran). 159 Id. at 2562:1–15 (Layman); id. at 2883:7–2885:19 (Moran). 160 Id. at 2652:2–6 (Layman); id. at 2883:19–2884:14 (Moran). 161 JSUF ¶¶ 178, 179. 162 Trial Tr. 2882:9–12 (Moran). 163 Id. at 1925:5–22 (Klahr). 164 Id.
24 asking for the relevant Paymentech correspondence.165 Plimus’s legal counsel,
Perkins Coie, become involved, and on March 18, 2011, Ralph Arnheim of Perkins
Coie sent Paymentech a letter addressing the reserve account that Paymentech was
holding, which at that time totaled approximately $2.7 million.166 Perkins Coie also
served as Plimus’s deal counsel throughout the sale process.167
On March 18, 2011 Tal subsequently provided Goldman and Klahr with
copies of the letters dated February 4, February 11, February 14, and March 1.168 On
March 20, Klahr asked Tal to forward relevant documents to Herzog and Kleinberg,
and also asked Tal to set up a call for Goldman and Klahr to speak with Arnheim.169
Goldman and Klahr had several conversations regarding Paymentech with Tal
throughout March; after the March 20 call, Goldman and Klahr waited for Perkins
Coie to report back on the end of the Paymentech relationship.170
Klahr provided the Paymentech letters to Herzog and Kleinberg on March 22,
2011.171 Herzog and Kleinberg initially discussed the Paymentech termination
among themselves.172 They were worried that the termination could drive up costs
165 JSUF ¶ 85; JX 262. 166 JSUF ¶ 87; JX 284. 167 JSUF ¶¶ 114, 137. 168 JSUF ¶ 86; JX 283. 169 JX 285. 170 Trial Tr. 1787:22–1791:20, 1792:21–24, 1926:10–1927:19, 1934:13–19 (Klahr); id. at 2197:22–2198:15 (Goldman); JX 268; JX 285. 171 JSUF ¶ 90. 172 JSUF ¶ 92.
25 and depress Plimus’s financial performance.173 This initial worry was based in part
on a misunderstanding of the other processing relationships Plimus had in place.174
After talking to Tal later on March 22, 2011, Herzog reported to Kleinberg that Tal
had said there was nothing to worry about and that Plimus had other processors.175
At that point, Herzog and Kleinberg felt their duty as directors had been satisfied
and that no further inquiry was necessary.176
In his initial letter on March 18, 2011 to Paymentech, Arnheim noted that he
represented Plimus “in connection with Paymentech’s unilateral termination” and
that he was seeking a return of the $2.7 million reserve account that Paymentech was
holding.177 In their March 30, 2018 response, Paymentech explained the amount of
the reserve account; roughly $500,000 was for estimated chargeback exposure, and
the remaining amount, over $2 million, was for threatened fines by the credit card
associations and a “substantial fine” threatened by the Reserve Bank of India.178
During April 2011, Perkins Coie continued to engage with Paymentech, in one
instance reporting back that when asked for specifics, the Paymentech representative
“wasn’t entirely sure” of the reason fines were threatened.179 By mid-April,
173 JX 179, at 205–208 (lines 2272–2280). 174 Trial Tr. 2306:13–2307:1 (Herzog). 175 JX 179, at 51 (line 2295). 176 Trial Tr. 2391:19–2392:15 (Herzog); id. at 2421:11–2422:14, 2486:22–2488:3 (Kleinberg). 177 JX 284. 178 Paymentech wrote that the fine threatened by the Reserve Bank of India alone could exceed $1 million. JX 305. 179 JX 312.
26 Paymentech agreed to release all the amounts held for threatened fines, leaving
$500,000 to $600,000 in the reserve account for chargeback exposure.180 In an April
18, 2011 e-mail, Klahr commented to Goldman that the return of the majority of the
reserve account is “a positive outcome[, which] [s]hows that they are backtracking
and indicates the issue is relatively minor.”181
In a May 11, 2011 e-mail, Arnheim wrote to Klahr that the Paymentech
termination “is looking increasingly ‘ordinary course’” and that Paymentech had
“confirmed the associations (Visa and [MasterCard]) are not asserting fines as
previously suggested.”182 Therefore, by the time Great Hill signed the Letter of
Intent on May 26, the Paymentech relationship had officially terminated, and
Paymentech had returned the majority of the reserve account and confirmed there
would be no fines.
E. Great Hill Conducts Due Diligence: The Paymentech Disclosure, Vendor Terminations, and Plimus Chargebacks
After signing the Letter of Intent on May 26, 2011,183 Great Hill began its due
diligence. Great Hill hired Kirkland & Ellis LLP (“K&E”) to serve as its deal
counsel in connection with the merger.184 K&E conducted due diligence,
180 JX 318; JX 325. Paymentech used a formula based on historical data to calculate the reserve amount necessary to cover chargeback exposure and held this amount for 180 days, which was the amount of time that customers had to claim a chargeback. JX 318. 181 JX 325. 182 JX 366. 183 JSUF ¶ 133. 184 Id. ¶ 136.
27 interviewed Plimus management, drafted legal documents, and maintained contact
with Plimus’s deal counsel, Perkins Coie.185 Great Hill also hired several consultants
to aid in the due diligence process. PricewaterhouseCoopers LLP (“PwC”) was
hired to conduct financial, tax, and information technology due diligence.186 PwC
also had a division of payment processing experts who conducted due diligence on
Plimus’s policies, procedures, and payment processing relationships.187 Greenwich
Strategies was hired to conduct due diligence on Plimus’s vendor clients.188 And the
Gerson Lehrman Group was hired to locate industry experts for Great Hill to consult
during due diligence.189
Plimus maintained its company counsel, Perkins Coie, as its deal counsel.190
Perkins Coie, Raymond James, and Plimus management together were responsible
for responding to due diligence requests.191 Within Plimus management, Plimus’s
CFO Assi Itshayek (“Assi”)192 was largely in charge of responding to diligence
requests because the majority of requests related to information controlled by his
office; Assi would ensure that the portions of diligence requests outside his control
185 Id. ¶ 137. 186 Id. ¶ 134. 187 Id. ¶ 135. 188 Id. ¶ 138. 189 Id. ¶ 139. 190 Id. ¶¶ 114, 137. 191 Trial Tr. 1887:13–19 (Klahr). 192 I refer to Assi Itshayek (“Assi”) by first name to avoid confusion with Defendant Irit Segal Itshayek (“Itshayek”); no disrespect is intended.
28 were received by the proper member of Plimus management.193 While Klahr and
Goldman had no role in responding to diligence requests, they, along with SGE in-
house counsel Jason Wolfe, did review and comment on documents related to the
merger.194 Herzog and Kleinberg played no role in the due diligence process or the
drafting of merger documents.195
Between May 26, 2011 and August 3, 2011, when the initial merger
agreement was signed, the Great Hill deal team and its representatives conducted
on-site visits to Plimus’s headquarters in Fremont, California and Plimus’s office in
Israel, had in-person meetings with Plimus management at Great Hill’s offices in
Boston, and were in contact with Plimus management via phone and e-mail.196
Based on its due diligence investigation, the Great Hill deal team prepared a due
diligence memo that it presented to Great Hill’s partners on July 11, 2011.197
The events significant to this litigation related to due diligence of Plimus’s
business during this time period were: a legal disclosure on the end of the
Paymentech relationship; on-site meetings at Plimus’s offices where Plimus’s
policies and payment processor relationships were reviewed; PayPal’s notice to
193 E.g., Trial Tr. 1268:5–1272:14, 1280:18–24, 1283:22–1285:20 (Itshayek); id. at 1456:19– 1458:20 (Tal). 194 E.g., id. at 1781:19–1786:2, 1806:23–1808:8 (Klahr); id. at 1950:1–1951:4, 2107:6–2117:24 (Goldman). 195 Id. at 2284:14–2286:6 (Herzog); id. at 2340:13–24 (Kleinberg). 196 JSUF ¶ 140. 197 Id. ¶ 141.
29 Plimus to terminate a vendor and the subsequent termination of an additional sixteen
vendors; Plimus’s responses to Great Hill’s diligence requests; and Great Hill’s due
diligence presentation to the Great Hill Partners.
1. The Paymentech Disclosure
On May 3, 2011, another Perkins Coie attorney wrote to Arnheim that both
SGE and Assi had asked Perkins Coie why the correspondences related to the end
of the Paymentech relationship (the “Paymentech Termination Letters”) were not in
the data room.198 In a May 4, 2011 e-mail to Tal, Arnheim wrote, “I am fine
disclosing it now. I think its been contained to a small enough issue that I don’t feel
its material,” but Arnheim wanted to make sure he and Tal were in synch.199 Tal
responded “I am also fine with this, I need to think about ways to communicate
this.”200 Arnheim maintained in his deposition that the Paymentech Termination
Letters were subsequently placed in the data room.201 Tal, Goldman, and Klahr all
testified that they believed the Paymentech Termination Letters had been released to
the data room.202 While Itshayek had posted materials to the data room early in the
bidding process, she was asked to stop in April 2011.203 Itshayek did not visit the
198 JX 343, at 1. I note that the attorney referred to them as “the correspondence with Paymentech regarding the payment dispute.” Id. 199 Id. 200 Id. 201 Arnheim Dep. 354:19–356:10, 357:2–361:11, 362:25–364:12, 367:24–370:7. 202 Trial Tr. 1612:9–1613:17 (Tal); id. at 1931:5–1932:3 (Klahr); id. at 2198:22–2199:14 (Goldman); 203 Id. at 1229:2–1230:6 (Itshayek).
30 data room after that time and had no subsequent knowledge of its contents.204 As an
objective fact, the Paymentech Termination Letters were not in the data room.205
As part of the sales process, Perkins Coie drafted a disclosure schedule to
accompany the prospective merger agreement. This draft disclosure schedule
included a disclosure on Paymentech’s termination of Plimus in the “Legal
Proceedings” section; Plimus had deployed its legal counsel to obtain release of the
Paymentech reserve account, and Paymentech still retained the amount held for
chargeback exposure. Arnheim circulated the draft to Klahr on May 11, 2011.206
This draft legal disclosure stated that “Paymentech notified Plimus that it was
terminating the agreements governing” the relationship, and that “Paymentech’s
stated basis for the termination was Plimus’[s] alleged breach of the agreements and
the related rules promulgated” by Visa and MasterCard.207 It went on to detail the
initial large reserve account, the subsequent release of the majority of this account,
and the confirmation that the card associations would not be assessing any fees.208
Klahr approved this draft legal disclosure, writing “[t]his feels fine to me.”209
Perkins Coie then shared the draft legal disclosure with Assi and Raymond James in
204 Id. 205 Id. at 1496:19–24 (Tal). 206 JX 365. 207 Id. 208 Id. 209 JX 366.
31 a May 13, 2011 e-mail.210 Assi forwarded this e-mail to Tal and asked “Di[d] you
go over it? Please confirm you feel OK with it.”211
Tal and Charlie Born, Plimus’s Vice President of Marketing, discussed the
legal disclosure related to Paymentech, and other disclosures in the disclosure
schedule on May 13, 2011.212 Born then prepared for Tal a new draft disclosure on
Paymentech based on their discussions.213 This alternative disclosure, with some
insignificant edits, replaced Perkins Coie’s original draft disclosure in the draft
disclosure schedule, which was then shared with Great Hill on May 20, 2011.214
Therefore, the legal disclosure that Great Hill received read, in pertinent part, that:
[Plimus] and Paymentech . . . entered into an exclusive . . . Agreement . . . . [which] was scheduled to be renewed in September 2011. However, in early 2011, [Plimus] decided that it did not want to continue working with [Paymentech] under the then negotiated terms . . . . [Plimus] then attempted to negotiate modified terms . . . . However, [Paymentech] refused . . . . In February and March 2011, [Paymentech] encountered issues related to the Royal Bank of India . . . . [Paymentech] asked Plimus to make specific changes to the Company’s platform . . . . Since [Plimus] did not feel this would in its best interests, [Plimus] and [Paymentech] instead mutually agreed to terminate the agreement . . . . As of May 13, 2011, [Paymentech] continues to hold a reserve of approximately $500,000 to cover future potential refunds and chargebacks . . . .215
210 JX 370. 211 JX 374. 212 JX 379. 213 Id. 214 JX 379; JX 381; JX 413. 215 JX 413, at 7–8.
32 The legal disclosure on the Paymentech termination was later removed and did not
appear in the disclosure schedule that accompanied the initial merger agreement.216
Great Hill was aware that Plimus’s relationship with Paymentech had ended
in March 2011.217 When Great Hill and its representatives conducted on-site due
diligence at Plimus’s offices, they discussed the end of the Paymentech relationship
with Tal and Itshayek,218 and reviewed Plimus’s contract with Paymentech.219 These
discussions were consistent with the description of the end of the Paymentech
relationship in the legal disclosure, i.e. that a decision to leave Paymentech had been
made prior to the expiration of their relationship, that pricing had consistently been
an issue, and that the inability to process transactions in India was the primary reason
the relationship ended when it did.220 Itshayek did not provide the Paymentech
Termination Letters directly to PwC during these discussions, nor did anyone else
from Plimus.221 Based on her discussions with PwC during on-site diligence,
Itshayek had the impression that PwC had not seen the Paymentech Termination
Letters. 222 As a result, Itshayek gave hard copies to Tal to show PwC, which Tal in
216 JX 648, at 9. 217 JSUF ¶ 95. 218 Trial Tr. 138:4–139:16, 140:10–142:1 (Busby); id. at 894:6-18, 907:6–18 (Cayer). 219 JX 582, at 46. 220 Trial Tr. 138:4–139:16 (Busby); id. at 894:6–18, 907:6–18 (Cayer); id. at 1395:11–1396:18 (Ithshayek); id. at 1497:1–17 (Tal). 221 Id. at 112:8–113:1 (Busby); id. at 943:6–15 (Cayer); id. at 1165:17–1166:10, 1228:18–1230:8 (Itshayek). 222 Id. at 1228:3–17 (Itshayek).
33 turn offered to PwC before PwC left. 223 However, PwC did not accept the hard
copies at that time because PwC believed that the letters could be otherwise
obtained.224 Great Hill did not attempt to reach out to Paymentech as part of the due
diligence process.225
2. The Due Diligence Request and On-Site Meetings
On June 2, 2011, Great Hill sent Tal a written due diligence request, which
listed, among other things, requests under the title “Compliance.” Great Hill’s
“Compliance” due diligence requests included a request for “any communications
received from any of the Major Credit Card Companies reporting any
noncompliance,” and another request for a description of any fines or penalties paid
in connection with such communications.226 Plimus had disclosed that it paid
$610,000 in “One-Time Expenses” in 2010, including a $250,000 for “Credit Card
Association Fines.”227 On June 9, 2001, Cayer told Busby that “the company was
charged $250k last year by V/M through Paymentech for excessive chargebacks;”
Cayer had asked Tal for documentation but had been told “the amount was deducted
from the Paymentech invoice directly and [Tal] did not have additional
documentation.”228 The June 2, 2011 diligence request also asked for information
223 Id. at 1230:7–1232:14 (Itshayek); id.at 1496:24–1496:18 (Tal). 224 Id. at 1230:7–1232:14 (Itshayek); id.at 1496:24–1496:18 (Tal). 225 Cayer Dep. 36:21–24; Vettel Dep. Tr. 113:3–6. 226 JX 447, at 11–12. 227 JX 463. 228 JX 463, at 1.
34 on the eight hundred vendors terminated by Plimus in the first quarter of 2011, as
disclosed in Plimus’s CIM.229
During their June 2011 on-site diligence meetings, PwC met with Tal and
Itshayek on-site at Plimus’s office in California. In October 2010, Itshayek had been
given responsibility over Plimus’s processor relationships; as such, she was the
appropriate person to discuss processor relationships with PwC.230 Itshayek
provided PwC with several recent monthly processor statements and went through
them with PwC during these meetings, but Itshayek did not provide processor
statements for all months of 2010.231 The processor statements contained all the
granular information on Plimus’s processor relationships; they included data on
processed transactions and on fines Plimus paid, including the amount, where it
came from, and the reason for the fine.232 These processor statements that Itshayek
provided reflected that Plimus had paid $250,000 in fines to Paymentech in 2010,
229 Plimus’s CIM noted that Plimus had terminated a group of eight hundred “underperforming sellers,” who generated high chargebacks and engaged in business models that “were not attractive to the Company’s . . . payment processing partners.” JX 241, at 59 n.4. Great Hill’s June 2, 2011 diligence request asked for Plimus to “describe the types of activities that caused the 800 referenced sellers to be removed from the Company’s platform, how the Company became aware of such activities, and whether the Company has had or expects to have any liability in connection with such sellers/activities.” JX 447, at 12. 230 Trial Tr. 1142:24–1145:18, 1156:5–12, 1300:6–20 (Itshayek). Itshayek had worked for Great Hill since March 2008; she served as Chief Financial Officer from July 2008 until October 2010, and took on the role of Vice President of Financial Strategy and Payment Solutions from April 2010 until she left Plimus in January 2012. JSUF ¶ 13. However, the overlap in positions from May 2010 to October 2010 was a technicality, as Itshayek was on leave during that time, and she actually assumed her new role when she returned. Trial Tr. 1142:24–1144:2 (Itshayek). 231 JX 582, at 23; Trial Tr. 1158:11–6, 1161:6–7 (Itshayek). 232 Trial Tr. 1157:23–1158:6 (Itshayek).
35 primarily related to Visa. Approximately $225,000 was for excessive chargebacks
related to Visa, and the remaining $25,000 was for a failure to register as a Member
Service Provider (“MSP”) related to MasterCard.233 Plimus had also paid fines in
addition to the described $250,000 for excessive chargebacks in relation to
MasterCard in 2010.234 During these in-person meetings, Itshayek “went through
whatever happened with Visa and MasterCard throughout the years [sic] of 2010”
and “showed . . . PwC that [Plimus was] over the excessive chargeback program
both in MasterCard and in Visa.”235
The credit card associations had “excessive chargeback monitoring programs”
for merchants designed to incentivize these merchants to reduce their
chargebacks.236 Generally, merchants entered the programs when their chargeback
ratio exceeded a certain threshold for a number of consecutive months.237 After that
point, the merchant would be charged a fine per chargeback (on top of already paying
the amount of the chargeback and a fee), and the amount of the fine per chargeback
would increase the longer the merchant remained in the program.238 Once the
233 Id. at 1106:4–1133:22 (Itshayek). 234 Id. at 1152:12–1155:8 (Itshayek). 235 Id. at 1165:21–1166:4 (Itshayek). 236 Id. at 2557:15–23 (Layman). 237 Id. at 1412:17–1417:12 (Itshayek); id. at 2557:15–23 (Layman); JX 582, at 23; JX 601, at 38; JX 1129 ¶¶ 34, 35; JX 1130 ¶¶ ¶18, 19. 238 Trial Tr. 1412:17–1417:12 (Itshayek); Trial Tr. at 2557:15–23 (Layman); JX 582, at 23; JX 601, at 38. In fact, MasterCard’s fine remained flat over time. Romano Dep. 299:14–18, 301:11– 17.
36 chargeback ratio fell below the threshold, the merchant would generally be removed
from the excessive chargeback program.239 The key metric was the chargeback ratio,
which was generally calculated by dividing the number of chargebacks in a month
by the total number of transactions in the same month.240 Visa and MasterCard
calculated the chargeback ratio slightly differently; MasterCard used the previous
month’s transaction volume to calculate the chargeback ratio.241 Visa and
MasterCard would place merchants in excessive chargeback monitoring programs if
the merchant’s chargeback ratio for United States transactions exceeded one percent
for two consecutive months.242
Technically, Plimus’s vendors generated the chargebacks, but under Plimus’s
reseller model, Plimus was the merchant of record. As a result, from the viewpoint
of the credit card associations and processors, the chargebacks were generated by
Plimus, and they calculated a chargeback ratio for Plimus as a whole. Paymentech
notified Plimus of excessive chargebacks for Visa and MasterCard in February
2010.243 Plimus subsequently entered both Visa and MasterCard’s excessive
chargeback monitoring programs in April 2010.244 Plimus exited both programs in
239 Romano Dep. 300:17–301:23; JX 582, at 23; JX 1129 ¶ 35. 240 Trial Tr. 1356:7–16, 1408:10–24 (Itshayek); JX 601, at 38; JX 1129 ¶¶ 34, 35; JX 1130 ¶¶ 18, 19. 241 Trial Tr. at 1356:7–16, 1408:10–24 (Itshayek); JX 601, at 38; JX 1129 ¶ 34; JX 1130 ¶ 18. 242 JSUF ¶ 68. 243 Id. ¶¶ 69, 70. 244 Id. ¶ 71.
37 July 2010.245 Plimus, as it disclosed to Great Hill, passed all the fines and fees
associated with chargebacks to the vendors who had generated them, and Plimus
even made a profit in the process.246 Part of Plimus’s value proposition was
proprietary software that automated the routing of transactions through different
processors to minimize processing costs.247 During PwC’s visit, Itshayek told PwC
that in order to lower chargebacks, it would sometimes proactively refund their
vendor’s customers so they would not ask for chargebacks, and it would also route
transactions to spread out chargebacks among different processors.248
On June 10, 2011, PwC followed up on the previous day’s conversations with
Assi and Itshayek, and asked that certain documents be added to the data room,
including a specific request for Itshayek to add “all information related to the $250k
MC fine, as well as any other association related warnings/fines.”249 The processor
statements that Itshayek had reviewed with PwC reflected the fines that Plimus had
paid but not did not necessarily include all relevant detail. Plimus did not
communicate directly with the card companies or the acquiring banks; instead, those
institutions communicated with Paymentech, which in turn communicated with
Plimus. When Paymentech notified Plimus that Plimus had violated card network
245 Romano Dep. 299:5-9, 300:14-301:7, 302:14-304:6; JX 124; JX 138; Trial Tr. 1349:14– 1350:13 (Itshayek). 246 JX 307, at 52; JX 582, at 1; JX 601, at 37. 247 Trial Tr. 934:7–23 (Cayer); id. at 1363:14–1364:3 (Itshayek). 248 Tr. 1353:24–1356:1 (Itshayek); JX 582, at 18. 249 JX 470; JX 474.
38 rules and would be fined, sometimes Paymentech would attach the actual
correspondence that Paymentech itself had received from the card associations,
sometimes Paymentech would only copy and paste sections of the card association
letter into their notifications to Plimus, and other times would provide none of the
original correspondence.250 Neither Itshayek nor anyone else from Plimus provided
to Great Hill or PwC, either during or after the June 2011 meetings with PwC, any
of the particular correspondence Plimus had received from Paymentech associated
with the Visa or MasterCard fines levied against Plimus for excessive chargebacks
or the fine for failure to register as an MSP.251
Based on their due diligence review, PwC prepared a report for Great Hill.252
In their report, PwC wrote:
The one-time expenses provided by the Company indicate a $250k item for “credit card association fines.” Management was only able to provide the processor statements reflecting the fines over a period of several months, which total $250k. It appears that the Company was fined for experiencing a chargeback ratio of greater than 1%. Management has asserted that they have not incurred additional fines since this time (2010). However, there was no formal communication from the associations clearly defining the nature of the fines. Communication on the matter was limited to the Company and the processor account manager, Paymentech.253
250 Trial Tr. 1118:4–1118:15 (Itshayek). 251 Trial Tr. 1118:19–1131:6 (Itshayek). 252 JX 582. 253 JX 582, at 23.
39 PwC added that “the Company should consider a more proactive approach to dealing
with the card associations on these matters.”254
PwC had also reviewed and discussed with Plimus management various
Plimus policies and procedures, including those on adding new vendors and risk
monitoring.255 PwC reported that Plimus “delays the majority of the seller
underwriting process until the point at which the seller is most likely to begin
processing to avoid unnecessary underwriting expenses.”256 In line with this
approach, Plimus used a “self-serve” model for adding “long-tail” vendors, in which
the vendors logged onto the Plimus website and filled out an application.257 While
there was some initial fraud control,258 these vendors could start processing almost
immediately after opening an account and before any substantial fraud review.259
According to Plimus’s operational procedures, which were provided to Great
Hill, Plimus initially screened new vendors for violations of “Plimus terms of use
and prohibited items policy,” and “whenever [Plimus] receive[d] an alert from a
processing partner relating to a Plimus seller or product . . . [Plimus] react[ed] based
254 Id. 255 Trial Tr. 887:8–894:5 (Cayer). 256 JX 582, at 21. In PwC’s report, the “underwriting process” is depicted in three stages: first, the application, where there is initial screening; second, integration, where there is additional screening; and third, processing and ongoing monitoring, where there is daily and monthly review. 257 Id. at 20. 258 JX 457, at 35–36; JX 582, at 20. 259 Plimus’s “initial” and “additional” fraud screenings involved verifying the e-mail address and website of the vendor and manually reviewing the vendor’s first five transactions. JX 457, at 35– 37; JX 582, at 20.
40 on the partner’s requirements and the Plimus policy and procedure.”260 Plimus
monitored its vendors on a monthly basis for excessive chargebacks and copyright
infringement issues.261 With respect to copyright infringement, K&E noted in their
report to Great Hill that Plimus “occasionally receives notices by third party
copyright holders in the ordinary course,” and in K&E’s experience Plimus’s
compliance procedures were “common for business operating in this space.”262 The
vendors Plimus’s systems identified for fraud and high chargebacks could then be
subject to removal.263 Cayer acknowledged that Great Hill’s diligence showed some
of Plimus’s vendors could avoid meaningful chargeback review and termination for
30 days, and in some cases even months.264
3. Plimus Terminated 17 “Biz Opp” Vendors in June 2011
In March and April 2011, Plimus added new vendors who had left a
competitor, ClickBank,265 including a vendor called GoClickCash.266 GoClickCash
and several other of these new vendors were known as business opportunity, or “biz
opp,” vendors and were involved in “get rich quick” schemes. There was some
worry within Plimus that these “biz opp” vendors could be problematic,267 and by
260 JX 457, at 35–37. 261 JX 582, at 20. 262 JX 596, at 48–49. 263 JX 307, at 52. 264 Trial Tr. 1027:3–1029:24 (Cayer). 265 JSUF ¶ 169. 266 Trial Tr. 1360:18–1361:11 (Itshayek). 267 E.g., JX 317, at 4–5; JX 383.
41 May 2011, they were already producing high chargebacks.268 PayPal, which was
processing most of Plimus’s United States transactions by this time through Plimus’s
PayPal Pro account,269 raised concern about these types of vendors on a June 2, 2011
call with Plimus.270 On subsequent call on June 16, 2011, PayPal told Itshayek that
Plimus should terminate GoClickCash; PayPal had been notified by the card
associations that GoClickCash had been identified as a “get rich quick” scheme,
which violated card association rules.271 Plimus immediately terminated
GoClickCash272 and decided to terminate similar vendors;273 after an internal review,
Plimus came up with a list of sixteen additional vendors to terminate.274 While
Plimus and PayPal continued to communicate regularly, it was not until an August
2011 phone call that PayPal suggested that there may be a fine related to
GoClickCash,275 and it was not until September 22, 2011 that PayPal informed
Itshayek definitively that a $200,000 fine would be imposed.276
During phone calls on June 23, 2011 and June 29, 2011, Great Hill was
informed that Plimus had terminated GoClickCash and the other sixteen similar
268 JX 368. 269 JSUF ¶ 168. 270 JX 475. 271 JX 499; Trial Tr. 1168:7–1171:3, 1197:17–1203:2 (Itshayek). 272 JX 499. 273 JX 501, JX 502. 274 JX 510; JX 547. 275 Trial Tr. 1191:2–1191:17 (Itshayek). 276 JX 827, at 3.
42 vendors.277 Itshayek told Great Hill that PayPal had brought GoClickCash to
Plimus’s attention and that Plimus had taken the initiative to identify and terminate
the other sixteen similar vendors.278 Itshayek also disclosed to Great Hill that the
termination of these vendors was likely to negatively affect chargeback ratios going
forward.279 Even though Plimus had terminated these vendors, their customers
would continue to request refunds from the card associations over the next few
months, generating chargebacks. Plimus would then have the chargebacks
associated with these terminated vendors without the benefit of any offsetting
transactions.280 Given this dynamic, chargeback ratios often became a greater
problem after problematic vendors were terminated.281
Great Hill was aware that the terminated biz opp vendors represented 10.6%
of the year-to-date transaction volume of Plimus, and that four of the top five year-
to-date volume vendors had been terminated.282 As part of the due diligence process,
Tal went to Great Hill’s offices in Boston on June 27. The following day he sent an
e-mail to Busby and noted that “open items” included “CB details. (lets setup a call)
[sic]” and “list of account [sic] that we closed or [sic] planning to close.”283 In
277 JX 524; JX 536; JX 549; JX 571. 278 JX 549; Trial Tr. 1179:16–1183:8 (Itshayek). 279 JX 601, at 37; Trial Tr. 1032:6–22 (Cayer). 280 Trial Tr. 1410:11–1411:3 (Itshayek). 281 Id. 282 JX 547; JX 585. 283 JX 564.
43 advance of a June 29, 2011 call, Tal provided Great Hill with a spreadsheet
containing historical chargeback data dating back to 2010 for Plimus’s Paymentech
and PayPal Pro accounts, a recent daily chargeback report, and a recent “bad vendor”
report.284 Great Hill claimed it viewed the termination of the seventeen vendors, on
balance, as a positive; Busby testified that it demonstrated that Plimus had systems
for identifying and removing high-chargeback merchants, which outweighed, in
Great Hill’s view, the negative impact on the financial performance of the business
in the near term.285
4. Plimus Responded to Great Hill’s Due Diligence Request and Due Diligence Ends
On June 18, 2011, Plimus submitted a preliminary response to Great Hill’s
June 2 written diligence requests.286 This response indicated that a large number of
the requests were still “in process.”287 Specifically, in response to the request for
communications from the card companies reporting non-compliance and the request
for description of any fines paid in connection with such communications, Plimus
wrote that the “Company will provide if further review of its records results in
responsive documents.”288 Subsequently, on June 25, 2011, Plimus provided a
284 JX 562; JX 564. The daily chargeback report showed the month-to-date chargeback ratio for each processor by card network. See e.g., JX 641. The bad vendor report listed the Plimus vendors with the highest numbers of chargebacks. Trial Tr. 1409:10–1410:10 (Itshayek). 285 Trial Tr. 255:7–18 (Busby). 286 JX 507. 287 Id. 288 Id. at 17.
44 substantial update to its June 18 response (although some requests were still in
process).289 Regarding the request for communications from the major credit card
companies, Plimus maintained the response that Plimus “will provide if further
review of its records results in responsive documents.”290 Regarding the request for
a description of fines paid, Plimus wrote “[t]he Company paid $250,000 for an
excessive chargeback monitoring program in 2010 due to [an] increase in
chargebacks related to the Company’s poker chip vendors. As discussed below, all
such vendors have been removed.”291
Great Hill had sought additional information with respect to the termination
of these poker chip vendors, as Plimus referenced in its response to the request for a
description of fines. Plimus wrote in its diligence response that the eight hundred
vendors, terminated in the first quarter of 2010, were: “[p]arty poker chip vendors,
underperforming utility software vendors, and certain online services with high rate
[sic] of dissatisfaction.”292 The vendors had been terminated for issues with
“excessive customer disputes and chargeback activity” and “business models that
were not attractive to [Plimus’s] . . . payment processors.”293 Plimus wrote in its
289 JX 553. 290 Id. at 58. 291 Id. 292 Id. at 59 293 JX 241, at 59 n.4.
45 diligence response that: “The Company became aware of these issues upon
reviewing each vendors’ chargeback history.”294
With due diligence complete, the Great Hill deal team drafted a due diligence
memo and set out to make a presentation to the Great Hill partners. Despite
testifying at trial that Great Hill viewed the June 2011 termination of seventeen
vendors as a net positive, in early July 2011, as the Great Hill deal team prepared its
due diligence memo, it was considering reducing the purchase price from $115
million to $100 million because of the removal of those vendors.295 It included this
recommendation in a draft of the due diligence memo. However, the Great Hill deal
team decided to continue with the original purchase price and removed this
recommendation from the final version of the due diligence memo submitted to the
Great Hill partners.296 Great Hill was confident that the growth of both new sellers
and the growth of an existing seller, Wix, would mean that Plimus could still achieve
Great Hill’s original financial projections for the fourth quarter of 2011, which was
the basis for its purchase price.297
Wix sold “do it yourself” website building and hosting services, for which it
charged a monthly subscription fee.298 At the time of the due diligence memo,
294 JX 553, at 59. 295 JX 3040, at 3; JX 3045, at 3; Trial Tr. 452:11–15 (Busby). 296 JX 601, at 4; Trial Tr. 452:16–453:2 (Busby). 297 Trial Tr. 452:16–453:22 (Busby). 298 JX 601, at 27.
46 Plimus managed only a portion of these subscription payments for Wix, but it
expected to manage all of Wix’s transactions by the end of second half of 2011.299
Great Hill projected that Wix would represent sixteen percent of Plimus’s volume in
the fourth quarter of 2011, making it Plimus’s largest vendor.300 Vettel and Cayer
actually met with Wix as part of the due diligence process.301 Great Hill also noted
in its due diligence memo that projected transaction volume growth for Plimus in
2012 was “due to expected growth from Wix and MyHeritage,” another large
subscription service company.302 Plimus was actively seeking more enterprise/large
business clients like Wix, a process that required dedicated sale staff, unlike its
“long-tail” vendors that onboarded themselves.303
5. The Great Hill Deal Team Presented to Great Hill Partners on July 11, 2011
The Great Hill deal team presented their due diligence memo to the Great Hill
partners on July 11, 2011. The due diligence memo included the termination of
GoClickCash and similar vendors; the memo tied the termination of these “bad”
sellers to high chargebacks and graphed historical chargeback ratios for Plimus, as
a whole, from June 2009 to June 2011.304 The graph indicated that Plimus had
299 JX 601, at 33. 300 JX 604, at 33. 301 Trial Tr. 455:15–24 (Busby). During Great Hill’s diligence check with Wix, Busby was able to verify Plimus’s expectations as to Wix. Id. at 455:20–24 (Busby). 302 JX 601, at 24. MyHeritage provided online genealogy services. Id. at 27. 303 Trial Tr. 666:2–667:9 (Vettel). 304 JX 601, at 37.
47 exceeded a general one percent chargeback ratio threshold for much of 2010, the
ratio had fallen below one percent in 2011, and that it had increased above one
percent in June 2011 because of the termination of the seventeen vendors in that
month. Great Hill wrote of the June 2011 increase in chargebacks that “management
believes Plimus will not trigger excessive aggregate chargebacks for >3 consecutive
months, and thus does not expect to be fined by Visa/MasterCard.”305 The final
version of the presentation to the Great Hill partners made no mention that the Great
Hill deal team had considered reducing the sales price because of the same issue.306
The due diligence memo, as mentioned, highlighted Wix and its role in
projections for Plimus going forward. The due diligence memo also included
statements on Plimus’s vendor quality and risk monitoring systems. The memo
listed as vendor risks, “[vendor] experiences high level of chargebacks due to bad
product or services,” and “[vendor] shifts business to unacceptable vertical.”307 The
memo also noted that Plimus’s “self service” vendors had high quarterly churn
rates.308 Great Hill was not concerned about the high churn rate because Plimus
305 Id. 306 Id. at 3. 307 Id. at 19. The Great Hill deal team also listed as a threat in their “SWOT analysis” of Plimus that “[f]raudulent sellers use the Plimus platform to conduct illegal activities or offer products with services that have a high number of chargebacks.” Id. at 47. 308 Id. at 23
48 added new vendors at a high rate, and because the vendors Plimus retained showed
growth.309
Based on the due diligence memo and the presentation by the Great Hill deal
team, Great Hill’s investment committee voted unanimously to proceed with the
transaction.310
6. Chargeback Ratios in June and July 2011 Exceeded One Percent
Chargeback ratios were calculated monthly and Plimus could calculate its
ratio month-to-date using its own data, but it would not receive a formal notification
that it had exceeded a chargeback threshold until the month was complete.311
Accordingly, PayPal told Plimus in July 2011 that it had exceeded a one percent
chargeback ratio in June for both Visa and MasterCard.312 Great Hill knew and had
expected that Plimus would exceed the one percent chargeback ratio for both card
networks in June, given the termination of the “biz opp” vendors.313 During the end
of June and the beginning of July, Great Hill had multiple conversations with
Itshayek and Tal regarding chargebacks.
On July 5, 2011, Tal provided Great Hill information on chargebacks for
PayPal Pro for both Visa and MasterCard, showing previous months’ chargeback
309 Trial Tr. 930:13–931:8 (Cayer). 310 Id. at 731:22–732:12 (Vettel). 311 Id. at 1287:21–1288:21 (Itshayek). 312 JSUF ¶ 172. 313 Trial Tr. 148:8–13 (Busby); id. at 1032:6–18 (Cayer).
49 ratios and providing projections for July and August.314 In the first table Tal
provided, the chargeback ratio for June exceeded one percent for both Visa and
MasterCard, projections for July and August showed chargeback ratios for both
months exceeding one percent for both Visa and MasterCard.315 Another table titled
“Missing Transactions” added transactions from Wix’s expected ramp up; with these
extra transactions the chargeback ratio for Visa was still projected to be above one
percent in July but then fall below one percent in August, and the chargeback ratio
for MasterCard was projected to be below one percent for both months.316
On July 27, 2011, Itshayek e-mailed Busby to tell him that Plimus did not
expect the PayPal Pro chargeback ratio to exceed one percent for July for either Visa
or MasterCard.317 Busby replied immediately, “great news.”318 This was the last
direct contact Itshayek had with the Great Hill deal team until after closing.319
On July 31, 2011 an internally-generated Plimus report showed the PayPal
Pro chargeback ratio for MasterCard was over one percent for July.320 On August
3, Great Hill signed the initial merger agreement, which included an indemnification
314 JX 588. 315 Id. at 3. 316 Id. 317 JX 634. As of July 27, 2011 the chargeback ratio for both Visa and MasterCard through PayPal Pro was roughly 0.77%. JX 634; see also JX 641. 318 JX 635. 319 Trial Tr. 1311:11–1312:8 (Itshayek). 320 JX 641. The report showed that MasterCard reached a one percent chargeback ratio on July 28. Id.
50 provision specifically for fines related to excessive chargebacks. 321 The following
day PayPal e-mailed Plimus to inform Plimus that it had exceeded a one percent
chargeback ratio with PayPal Pro for MasterCard in July, the second consecutive
month for MasterCard.322
F. Tal’s Earn-Out Dispute and Roll-Over Negotiations
Tal was integral to Great Hill’s acquisition of Plimus, as Great Hill was, in
effect, buying into Tal’s vision of the company.323 Parallel to the due diligence
process, Great Hill and Tal negotiated the terms of his continued employment. Great
Hill wanted Tal to demonstrate his commitment by rolling over a large portion of
his merger proceeds into equity in the new Plimus (the “Roll-Over”). According to
the Letter of Intent, which Tal signed, “GHP will require the management team to
re-invest at least 50% of their after-tax net equity proceeds (GHP estimated at $4
million) unless otherwise agreed upon.”324 Tal’s proceeds from the merger were
composed of the equity he owned in Plimus (which Great Hill was buying) and
transaction bonuses that SGE and the Founders had previously agreed to pay Tal in
the event of a sale. Tal’s liquidity directly following the merger was then determined
by his combined merger proceeds less the amount of the Roll-Over.325
321 JSUF ¶ 142; JX 649, at 70. 322 JSUF ¶ 173. 323 Trial Tr. 693:20–694:2 (Vettel). 324 JX 428, at 2. 325 Trial Tr. 1504:14–20 (Tal).
51 1. Tal Entered Into Earn-Out Agreements with SGE and the Founders when SGE/SIG Fund Bought into Plimus in 2008
Just as Great Hill wanted Tal to maintain an ownership stake in Plimus after
the acquisition,326 SGE had wanted Tal to invest his own money into Plimus when
SGE/SIG Fund bought in,327 which Tal did.328 Additionally, as part of the SGE
investment in 2008, SGE and Tal entered into an earn-out agreement (the “SGE
Earn-Out”), sometimes referred to as a “side letter.”329 Under this agreement, if
Plimus was later sold, SGE would pay Tal a transaction bonus, calculated as a
percent of SGE’s profit on the sale, with the percent of profit paid to Tal to vary
according to how much profit SGE made.330
Tal separately, but relatedly, entered into earn-out agreements with Herzog
and Kleinberg in 2008. Tal and the Founders exchanged e-mails on the subject, and
Tal used the SGE earn-out agreement as a basis for the agreement with the
Founders.331 Both sides believed that they had reached an agreement in 2008 (the
“Founders’ Earn-Out”); however, at the time of the sales process in 2011, no signed
agreements could be found.332 Klahr was aware of the Founders’ Earn-Out,333 and
326 Id. at 639:21–640:4 (Vettel). 327 JX 11; JX 481. 328 JX 11; Trial Tr. 1824:14–1826:1 (Klahr). 329 JSUF ¶ 55. 330 Id. ¶ 56. 331 JX 14; JX 17; JX 18. 332 JX 14; JX 17; JX 18; JX 3000; Trial Tr. 1498:6–1499:2, 1557:6–1560:4 (Tal); Trial Tr. 2325:6– 24, 2355:23–2357:13, 2383:13–23 (Herzog); Trial Tr. 2423:11–21, 2496:1–13 (Kleinberg). 333 JX 26.
52 understood the agreement to be that the Founders together would pay Tal a
transaction bonus equal to a twenty percent discount to the amount SGE would pay
Tal.334
2. Tal and the Founders Disagreed Over the Conditions of Their 2008 Earn-Out Before and After Executing the Letter of Intent
At some time before May 11, 2011, Tal, Kleinberg, and Herzog discussed
proposed deals and the resulting earn-out payments;335 at this time, the bidding
process was ongoing and Great Hill had yet to submit its final bid. In a May 11,
2011 e-mail to Tal, Kleinberg summarized a dispute that had arisen on the subject:
Tal believed that the Founders’ Earn-Out entitled him to a twenty percent discount
to what SGE would pay him; whereas Kleinberg and Herzog believed the Founders’
Earn-Out was for a twenty percent discount of the percentages SGE was using to
calculate the SGE earn out; those discounted percentages were then supposed to be
applied to the profit Kleinberg and Herzog would make on a sale.336 Tal immediately
forwarded the e-mail to Goldman,337 who forwarded it to Klahr, who noted that it
“feels kind of ugly.”338 Tal responded to Kleinberg on May 14, 2011, stating that he
334 JX 26; JX 146; Trial Tr. 2167:7–13 (Goldman). 335 JX 361, at 1. 336 Id. In other words, the Founders believe their earn-out was based on the SGE earn-out, in the sense that the structure was the same, but replaced with the Founders’ profits and lower percentages. Tal believed the earn-out from the Founders was based on the SGE earn-out, in the sense that the amount of the SGE earn-out was used as a base for the Founders’ earn-out by simply applying a twenty percent discount. 337 JX 364. 338 Id.
53 understood the earn-out agreement differently, that the money from the earn-out
would be his only income from a deal, and that without it he had limited interest in
a deal.339 At a deal price of $115 million, the SGE Earn-Out entitled Tal to roughly
$2.5 million.340 At that price, the two interpretations of the Founders’ Earn-Out
resulted in very different transaction bonuses; under Tal’s interpretation he would
be owed eighty percent of $2.5 million, or $2 million, from the Founders; this
compared with (at most) $500,000 under the Founders’ interpretation.341
On May 14, 2011, Kleinberg and Herzog discussed among themselves
potential replies to Tal’s e-mail and vented their initial concerns. Notably, Kleinberg
wrote to Herzog that “once he understands what he gets from us, maybe then he can
go and ask Johnny for more (schita [or blackmail] money).”342 The Founders
determined that SGE had to be apprised of the dispute.343 Kleinberg accordingly
sent Tal an e-mail, in which he wrote that Klahr should be involved because “a
‘black-mail’ style sentence like ‘if you don’t give me money I don’t want the deal’
is something the entire board needs to hear.”344 Tal responded to the e-mail with
surprise at the word “black-mail” and informed Kleinberg that he had updated
339 JX 410, at 3. 340 JX 146; Trial Tr. 2167:7–13 (Goldman). 341 JX 386, at 2–3; JX 509. 342 JX 386, at 1. 343 Id. 344 JX 410, at 2.
54 Goldman since the first e-mail.345 Tal also separately wrote to Herzog and expressed
his discomfort with Kleinberg’s e-mail and stated that “this wasn’t my intention at
all.”346
Goldman then stepped in to mediate the dispute. During the mediation,
Herzog and Kleinberg accepted that Tal was not attempting to black-mail them, but
rather, that the dispute was an honest disagreement on the interpretation of the
Founders’ Earn-Out.347 While Goldman told Herzog and Kleinberg that Tal’s
interpretation was reasonable,348 the Founders remained unwilling to adopt it and
pay Tal substantially more than they believed the correct (i.e. their) interpretation
entitled Tal to.349 On June 19, 2011, Kleinberg e-mailed Goldman and Klahr; he
told them that the Founders were not willing to pay more, and wrote that, if Tal
needed to leave money in the company, “he never could have found a better deal for
himself . . . [as] he will have a nice % of stock in the new company which is already
worth a lot of money and will be much more.”350 The next day, Goldman asked the
Founders whether their dispute was worth disrupting the sale and costing both SGE
345 JX 410, at 1. 346 JX 3021, at 2. 347 Trial Tr. 2382:11–2383:4 (Herzog); id. at 2511:19–2512:11, 2513:22–2514:14 (Kleinberg). 348 Before the dispute SGE’s interpretation of the Founders’ Earn-Out was the same as Tal’s. JX 146; Trial Tr. 2167:7–13 (Goldman). Although Goldman came to understand that “there was a reasonable difference of opinion” on the interpretation, Goldman “felt [Tal] should get what was due to him.” Trial Tr. 2013:7–2015:12, 2170:14–2171:23 (Goldman). 349 JX 509. 350 Id. at 4.
55 and the Founders more than the difference between the earn-out interpretations.351
In response, the Founders again expressed that they “wouldn’t be surprised if at the
end of the Plimus saga [Tal] ends up with more money than us” and restated their
unwillingness to give Tal more money. The Founders also wrote “if the deal is not
meant to happen, I’m sure a better one will come at some point,”352 and ended by
telling Goldman and Klahr that if they did not feel Tal was being paid enough, then
they should “feel free to chip in.”353
Despite these hard negotiations, the Founders agreed to pay Tal more money.
By June 28, 2011, the Founders agreed to a resolution of the Founders’ Earn-Out
with Goldman. Under the resolution, the Founders would each pay Tal $625,000,
which is more than they believed they owed under the Founders’ Earn-Out, but still
less than Tal believed he was owed.354 SGE agreed to make up the difference by
paying Tal an additional $750,000.355 Under the resolution, Tal would not receive
more than he had maintained consistently that he was owed in total under those same
side letters.356 This resolution effectively solved the dispute over the Founders’
351 Id. 352 Id. at 3. 353 Id. 354 JX 569, at 1. 355 Id. 356 Trial Tr. 2171:9–16 (Goldman).
56 Earn-Out once it was presented to Tal;357 Tal did not ask for additional earn-out
money afterward.
3. SGE Cautioned Tal on Negotiating the Roll-Over
Tal negotiated his Roll-Over with Great Hill in June 2011, at the same time
Goldman mediated the Founders’ Earn-Out dispute. Under the May 26, 2011 Letter
of Intent, Plimus’s management team agreed to invest at least fifty percent of their
after-tax net equity proceeds as equity in the post-Merger company.358 However,
Tal wanted to negotiate this provision and gain more liquidity by rolling over less
equity.359 Tal, an Israeli citizen, also had several other concerns, including
remaining in the United States and the personal tax implications of his stock sale.360
On June 8, 2011, in connection with the Roll-Over, Tal provided Great Hill
with a spreadsheet created by SGE in October 2010.361 The spreadsheet showed that
at a price of $115 million, SGE would pay Tal $2.5 million and the Founders would
pay Tal $2 million under their respective side letters.362 Great Hill had asked for that
information to determine how much Tal would be rolling over into equity. In a June
12, 2011 e-mail, Klahr gave Tal some advice on the Roll-Over, writing that “the
357 JX 569. 358 JSUF ¶ 158. 359 JX 481; JX 566. 360 JX 566 (“I also need to stay in the company and the US for longer than I planned”); Trial Tr. 508:4–509:4 (Busby). 361 JX 465. 362 Id.
57 things management ask for are a big indicator for investors . . . A big emphasis on
liquidity is generally a big indication [management] aren’t believers . . . Please think
and consider your requests to your new potential partners very carefully.”363 On
June 26, in advance of Tal’s meeting with Great Hill in its Boston offices, Goldman
wrote to Tal that he was still working with the Founders to resolve the Founders’
Earn-Out dispute and that Tal should “go easy on pushing the greathill [sic] guys.
They won’t say anything to you, but I [guarantee] you that every time you push on
the liquidity issue you are sending them a signal that you don’t believe in the
business or aren’t committed,” and that “I’m not sure the alternative of no deal is a
great one for any of us.”364
4. The Earn-Out and Roll-Over Converged and Are Solved
On June 28, 2011, after meeting with Great Hill in its Boston offices, Tal
wrote an e-mail to Goldman to tell him that the meeting had gone well.365 Tal also
addressed the issue of Founders’ Earn Out and wrote, “I see no reason to compromise
on this subject and that is mainly because of your promise to me that we are on the
same boat when it come[s] to the exit.”366 Tal further stated that he was sure he
earned his commission “even if you guys do not read the contract some [sic] way I
363 JX 481. 364 JX 566. 365 Id. 366 Id.
58 do.”367 Tal continued, writing “GHP is buying Plimus for the vision and the future
that the team and I are creating . . . So in fact, I am not getting more than 50% of my
money in this process, and I also need to stay in the company and in the US for
longer time than I planned, and all this for you guys to get your money.” 368 In a
different June 28, 2011 e-mail, Tal followed up with Busby regarding his meeting
with Great Hill and noted that the “new contract and roll over” for management was
still an “open item.”369
Goldman and Klahr discussed how to respond to Tal’s e-mail on June 28,
2011. Klahr suggested they “let him cool down a little,” and “if he calls give him
the improved offer and tell him we have tried our hardest but that the new offer is
contingent on him taking what is on the table from GHP,” and that “if he blows up
the deal he looses [sic] big in lots of ways, the chief of them being financially.” 370
Goldman wrote in response, “He ain’t blowing up this deal. But I do feel like
slapping him back now rather than later.”371
Goldman and Tal did talk on June 28, 2011, and Goldman presented the
resolution to the Founders’ Earn-Out to Tal. Goldman reported to Steele of
Raymond James that Goldman had “settled the ‘side letter’ issue with [Tal],” that
367 Id. 368 Id. 369 JX 564. 370 JX 570, at 1. 371 Id.
59 the Founders had each “agreed to give [Tal] $625k . . . [and] SGE will make up the
additional $750k to get him to his $2M goal from these guys in addition to our
current side letter.” 372 Goldman told Steele that Tal “has also agreed that he’ll stop
negotiating his deal with GHP and move on.”373 Steele responded that he had just
spoken to Tal who had also told him things were resolved.374 Steele “also spoke to
GHP and they just echoed that Monday’s session went well, they are working
towards signing and from their perspective they had alignment with [Tal] so felt like
they were done there.”375 On June 29, 2011, Goldman reported to the Founders that
Great Hill had flagged Tal’s Roll-Over as the major remaining open item, that
Goldman had presented the resolution to the Founders’ Earn-Out to Tal, and that Tal
“has agreed that given [that] solution [] that he will sign up for that deal and stop
negotiating with GHP.”376
During this animated dispute over the Founders’ Earn-Out, at Tal’s June 27,
2011 meeting with Great Hill, Vettel had asked Tal what was left to prevent closing.
In response, Tal told Vettel that there was an issue with Tal’s side letters. When
asked what Great Hill could do to help, Tal told Vettel that they could call
Goldman.377 Vettel did call Goldman on June 28, 2011; this was the only time that
372 JX 569. 373 Id. 374 Id. 375 Id. 376 JX 573. 377 Trial Tr. 1569:12–1574:13 (Tal).
60 Great Hill and SGE had any direct contact.378 During the call, Vettel identified the
main outstanding issue on the deal as Tal’s Roll-Over and noted that Tal, in turn,
was having an issue with his side letters. Vettel then asked Goldman to help resolve
the issue and Goldman replied that he believed they had a solution.379 The Founders’
Earn-Out issue was resolved that same day. On June 30, Tal wrote an e-mail to
Vettel with the subject line “thanks” and the body “for the call with SIG !!,” to which
Vettel responded, “I hope you get the issue resolved quickly.”380 In other words,
despite testimony to the contrary, Great Hill was aware of the Founders’ Earn-Out
dispute and its relationship to Tal’s Roll-Over prior to entering into the initial merger
agreement.
While the Founders’ Earn-Out issue was resolved in principle by the end of
June 2011 and was formalized during the month of July,381 Tal’s Roll-Over
negotiations continued to be an issue for several weeks, at least in regard to the
specific mechanics. On July 20, 2011, Goldman provided Steele with an updated
spreadsheet that detailed the new breakdown of Tal’s earn-out agreements, which
Steele then provided to Great Hill.382 The new spreadsheet reflected the resolution
to the Founder’s Earn-Out; compared to the spreadsheet Tal had originally provided
378 JX 3030; Trial Tr. 694:3–696:5 (Vettel); Trial Tr. at 2182:22–2184:10 (Goldman). 379 Trial Tr. 2184:11–2185:15 (Goldman). 380 JX 575. 381 JX 576; JX 598. 382 JX 623.
61 to Great Hill, Tal’s total earn-out remained virtually the same.383 Steele wrote to
Goldman that Great Hill wanted the information in order “to try to understand what
[management] is getting in totality.”384
The fact that the Roll-Over issue had not yet been fully resolved irritated
Goldman. In a separate July 20, 2011 e-mail, Goldman wrote to Tal, in reference to
a phone call, “I didn’t understand what you were saying -- you promised us when
we agreed to increase your side letter that you would roll at least $3m or even all
your stock. Why is this even an issue? . . . What is going on? Why can’t we close.”385
Arnheim of Perkins Coie e-mailed Goldman on July 21, 2011 and told him that Tal
had not yet agreed to the Roll-Over.386 Arnheim also detailed how he expected Tal’s
Roll-Over to be structured to account for the side letter payments; the expected
structure of the Roll-Over was complex given Tal’s various holdings in preferred
shares, vested and unvested common shares, and common share options, and all the
associated tax consequences.387 Goldman responded to Arnheim on the same day
and asked him to tell Tal that “SGE’s position is that it’s additional funds to his side
letter . . . was contingent on him agreeing to roll $3m . . . . [Tal] told us he agreed
with this . . . . He also represented to us that he would stop negotiating with GHP on
383 There was a small difference attributable to rounding, as the new spreadsheet used the entire number and the previous spreadsheet was in millions. 384 JX 620. 385 JX 616. 386 JX 624, at 1. 387 Id.
62 the issue.”388 It is also clear from a July 23, 2011 e-mail between Busby and Tal
that, at least, the details of the roll-over still had not been fully resolved by then.389
The ultimate result of the e-mails and calls and accusations of blackmail is
that Tal was paid the total earn-out he anticipated before Great Hill ever submitted
its final bid. Furthermore, at the end of the negotiations with Great Hill, Tal agreed
to roll over fifty percent of his merger proceeds, as originally envisioned in the Letter
of Intent. In fact, Tal put more than fifty percent of his merger proceeds into the
new company; he left an additional portion of his merger proceeds in Plimus as a
secured promissory note,390 although this was primarily for tax purposes.
G. From the Signing of the Initial Merger Agreement to Closing
Following the Letter of Intent and due diligence review, Great Hill agreed to
acquire Plimus at a purchase price of $115 million.391 The Plimus Board of Directors
held a telephonic meeting on August 2, 2011, in which they approved the merger.392
Great Hill was also given log-in credentials to Plimus’s reporting portal on that day,
which allowed direct access to certain Plimus data.393 An initial merger agreement
was signed on August 3, 2011, accompanied by a disclosure schedule.394 Following
388 Id. 389 JX 628. 390 JSUF ¶ 159. 391 Id. ¶ 34. The exact structure of the transaction is not relevant. 392 JX 646. 393 JX 645. 394 JSUF ¶ 35.
63 the initial merger agreement, Cayer visited Plimus’s offices on August 16 and 17 to
meet with Tal.395 Cayer was working on financial projections for Plimus.396 Cayer
and Tal continued to correspond regarding financial projections throughout
September.397 Great Hill was particularly focused on Wix, the vendor that was
projected to constitute a substantial portion of Plimus’s future transaction volume.
Wix, however, was not ramping as expected, and as a result, Great Hill reduced
projections for Plimus’s transaction volume and EBITDA projections for the fourth
quarter of 2011.398 On September 15, Cayer sent Great Hill’s latest Plimus
projections to Tal, which reflected lower EBITDA projections in the near term
compared to what had been presented to Great Hill partners in the due diligence
memo.399
While the initial merger agreement was dated August 3, 2011, the merger did
not close until September 29, 2011.400 Closing was delayed because Tal needed a
new visa to continue working in the United States and Great Hill did not want to
close before they were sure he had obtained one and could act as CEO of the new
395 JX 3057. 396 JX 687. 397 E.g., JX 3062. 398 JX 667; JX 687; JX 701; JX 737; JX 738; JX 3062. 399 JX 601, JX 3062. 400 JSUF ¶ 152.
64 company.401 Great Hill was aware of the visa issue before signing the initial merger
agreement, but felt comfortable signing it regardless.402
1. Plimus Continued to Exceed a One Percent Chargeback Ratio for MasterCard through PayPal Pro
Plimus had three separate PayPal accounts: a PayPal Wallet account, a PayPal
Israel account, and a PayPal Pro account. PayPal Wallet was an alternative payment
method, under which consumers entrusted PayPal with their financial information
and PayPal then provided payment directly, so that the merchant never saw the
consumer’s financial information.403 PayPal Wallet stored consumers’ financial
information, which made it more convenient for consumers to transact.404 Plimus’s
own PayPal Wallet account allowed it to accept payments from consumers’ PayPal
Wallet accounts.405 Plimus’s PayPal Israel account was also a PayPal Wallet
account, but for international, primarily Israeli, transactions, and was maintained
separately from the PayPal Wallet account.406 By comparison, Plimus’s PayPal Pro
account was simply a payment processing account, largely indistinguishable from
the service provided by Plimus’s other payment processors.407 Plimus opened its
401 JX 628, at 2. 402 Id. 403 Trial Tr. 912:20–913:23 (Cayer); id. at 2567:4–15 (Layman). 404 Id. at 2566:1–2567:3 (Layman). 405 Id. 406 JX 329, at 58–63; Trial Tr. 1308:9–20, 1310:11–13 (Itshayek); Trial Tr. 1651:23–1652:10 (Dangelmaier); JX 582, at 46. 407 JX 29.
65 PayPal Wallet account in 2002,408 its PayPal Pro account in 2009,409 and its PayPal
Israel account in 2010.410
After the end of the Paymentech relationship, PayPal Pro became Plimus’s
top processor by volume, and its only United States-based processor.411 However,
Plimus could process transactions in the United States through its non-United States-
based processors.412 Tal viewed PayPal Pro as a “gap solution.”413 Plimus planned
to register as an Internet Payment Service Provider, which would allow Plimus to
work around the processors and deal directly with acquiring banks.414 Plimus also
worked to add more United States-based processors.415 Plimus did add another a
United States-based processor, Litle, during September 2011 before closing.416
Great Hill was aware and supportive of both initiatives.417
On August 4, 2011, PayPal informed Plimus that Plimus had exceeded a one
percent chargeback ratio for MasterCard for July 2011, the second consecutive
month.418 Plimus did not exceed a one percent chargeback ratio for Visa in July.419
408 Trial Tr. 1308:4–1309:6 (Itshayek); JX 329, at 31–50. 409 JX 29; JX 329, at 51–57. 410 JX 329, at 58–63. 411 JSUF ¶ 168; Trial Tr. 392:17–393:11 (Busby). 412 Trial Tr. 183:21–187:22 (Busby); id. at 1421:2–21 (Itshayek); id. at 1676:4–8 (Dangelmaier). 413 JX 460, at 2. 414 JX 582 at 18; JX 707, at 100. 415 Trial Tr. 182:23–183:7 (Busby); id. at 910:4–17 (Cayer). 416 JSUF ¶ 178. 417 Trial Tr. 182:23–183:7 (Busby); JX 460, at 2; JX 707, at 100. 418 JSUF ¶ 173; JX 654. 419 JX 641.
66 During an August 11, 2011 call with PayPal, PayPal told Plimus that if the
chargeback ratio for MasterCard exceeded one percent for a third month, PayPal
could issue a 30-day termination notice and thus end its relationship with Plimus.420
Jason Edge, a Payment Assistant at Plimus, memorialized this call in an e-mail to
Tal, writing “Paypal will issue a 30 day notice to potentially shut down Plimus’[s]
ability to process on the Pro account unless numbers improve.”421
On August 15, 2011, Edge e-mailed PayPal in reference to the August 11 call;
he detailed Plimus’s efforts to reduce chargebacks, which included mass refunds to
the customers of vendors that were suspended in June and July. 422 In addition to
mass refunds, Plimus also manually rerouted transactions in an attempt to reduce the
chargeback ratio,423 a practice known as “load balancing.”424 By routing more
transactions through PayPal Pro, Plimus could reduce the chargeback ratio by
increasing the number of transactions, the denominator in the chargeback ratio.425
Neither mass refunds nor load balancing was explicitly prohibited by card
420 JX 670. 421 Id. 422 JX 679. 423 JX 690; JX 695. 424 Trial Tr. 2558:23–2559:12 (Layman). 425 Id.
67 association rules at the time.426 PayPal was aware that Plimus was load balancing,
but did not raise any formal objection to the practice to Plimus.427
Despite these efforts, PayPal continued to threaten termination, and in mid-
August 2011, it explained to Plimus that the chargeback ratio for August would be
determinative. Itshayek memorialized an August 18, 2011 call with PayPal, writing
to thank them for an earlier call and stating that “[u]ntil today, it was our
understanding that September will be the crucial month and not August” and that
Plimus had concentrated its efforts on reducing September chargebacks.428
According to PayPal internal e-mails, PayPal also threatened termination in calls
with Plimus on August 19, August 26, and September 1.429 However, based on
previous experience with other processors, neither Tal nor Itshayek believed that a
third month of excessive chargebacks would actually result in a thirty-day
termination letter.430
Separately, on August 16, 2011, Itshayek received a request from PayPal for
information on a Plimus vendor, Home Wealth Solutions, which PayPal said Visa
was requesting because the vendor’s chargeback ratio was 1.65%.431
426 Trial Tr. 2589:13–21 (Layman). While the Plaintiffs disapprove of the practice of mass refunds, they do not contend that issuing mass refunds violated credit card association rules. 427 JX 756, at 2. 428 JX 692, at 2. 429 JX 693, at 1; JX 702; JX 754, at 4. 430 Trial Tr. 1416:23–1417:23 (Itshayek); id. at 1604:6–1605:6 (Tal). 431 JSUF ¶ 175; JX 681.
68 The chargeback ratio for Visa through PayPal Pro did not exceed one percent
in August 2011,432 however, Plimus exceeded the one percent chargeback ratio
threshold again for MasterCard in August.433 Itshayek e-mailed PayPal on
September 9, 2011 to memorialize a call PayPal had with Tal. In the e-mail, Itshayek
summarized the events and chargeback ratios of the past few months, and ended by
telling PayPal, “we would highly appreciate receiving one additional month to prove
the actions taken by Plimus to reduce and control [the chargeback] ratio and general
risk.”434 Plimus did not receive a thirty-day termination letter in September,435 and
PayPal did not notify Plimus of any further plans or threats to terminate any of
Plimus’s PayPal accounts during the rest of the month.436 However, Plimus and
PayPal continued to communicate. In one instance in late September, PayPal
reviewed a list of Plimus vendors and recommended that certain vendor categories
be “shut down if [Plimus] want[ed] to keep [their] relationship with [PayPal].”437 I
find that at the time of closing, Tal and Itshayek did not believe PayPal would
terminate Plimus’s PayPal Pro account, and believed that Plimus’s chargeback ratio
for MasterCard would not exceed one percent for September.438 An internal PayPal
432 See e.g., JX 731; JX 857. 433 JX 731. 434 Id. 435 JX 828 (PayPal did not issue a termination notice to Plimus until October). 436 JX 754, at 4; Trial Tr. 1418:11–1419:11 (Ithshayek). 437 JX 771 (emphasis added). 438 JX 731; Trial Tr. 1590:20–1591:13 (Tal).
69 e-mail sent on September 29, 2011 reflected that an official decision on whether to
terminate Plimus had not been made as of that date.439
Great Hill did not receive a specific update on Visa or MasterCard chargeback
ratios for PayPal Pro after Itshayek’s July 27, 2011 e-mail, in which she wrote that
Plimus did not expect the July chargeback ratios to exceed one percent. Great Hill
concedes that it also did not ask for updates on these specific ratios after that e-mail.
Great Hill did, however, continue to track Plimus’s aggregate chargeback ratio and
calculated it from Plimus’s materials (such as the “huge excel files”) that Great Hill
had been provided with.440 The information they received and reviewed in these
materials did not provide the detail necessary to calculate the chargeback ratios by
processor and region, which were the relevant chargeback ratios for PayPal Pro
purposes. 441 However, in an August 26, 2011 e-mail, Madden (of Great Hill) noted
to Cayer that Plimus’s aggregate chargeback ratio in July continued to exceed one
percent.442 This did not prompt further inquiry by Great Hill into Plimus’s current
chargeback ratio status.
Throughout August and September 2011 Great Hill paid close attention to the
transactions of new vendors and paid particularly close attention to Wix, which was
439 JX 810. 440 The “huge excel files,” so called because they were very big, were monthly reports detailing all Plimus vendors in that month and their volume/transaction data. Trial Tr. 388:15–389:8 (Busby). 441 Id. at 392:1–13 (Busby). 442 JX 710; Trial Tr. 391:10–392:16 (Busby).
70 still not ramping as expected.443 The slower ramp in Wix had caused Great Hill to
revise down Plimus’s projected EBITDA for the third quarter of 2011.444 The
slower-than-expected ramp worried Great Hill. For example, after Cayer reported
the September 2011 Wix run rate to Busby, Busby wrote “You’re killing me. Is there
any good news?” to which Cayer replied, “This is my life…I have lost sleep (and
hair) on these volume trends.”445 The Wix ramp up had been a key assumption in
Tal’s July 5, 2011 chargeback tables, which anticipated chargeback ratios to fall
below one percent in July and August.
2. Tal and Busby Met in Israel in September
Tal and Busby met in Israel on September 13, 2011.446 Plimus was hosting
an industry conference in Israel, and Busby attended at Tal’s invitation.447 During
the conference, Busby briefly met the representative for Plimus’s PayPal Israel
account, Oded Zehavi.448 This was Great Hill’s only contact with PayPal pre-
closing, and Great Hill never attempted to reach out to PayPal formally during due
diligence.449 At trial, Tal’s and Busby’s recollections of the trip differed materially.
Tal testified that during this trip he informed Busby: (1) that PayPal had threatened
443 JX 667; JX 687; JX 737. 444 JX 687. 445 JX 737. 446 JSUF ¶ 174. 447 Trial Tr. 160:18–161:4 (Busby). 448 Id. at 161:5–162:6 (Busby). 449 Id. at 754:19–757:8 (Vettel).
71 to terminate the PayPal Pro account; (2) that Tal did not believe they would actually
terminate that account; and (3) that they had other processors even if PayPal did
terminate.450 Tal also testified that he provided Busby with a further update on
PayPal by phone a few days before closing.451
Busby’s recollection is entirely different. He testified that he was not told of
any threatened PayPal termination, either in Israel or in a call prior to closing,452 but
that he did remember discussing the PayPal-Plimus relationship in Israel. According
to Busby, he and Tal discussed Plimus’s goal of adding more processors, at which
point Busby asked Tal for an assurance that Plimus would still keep PayPal as a
processor, to which Tal agreed.453
I find neither Tal nor Busby’s accounts credible. It is not credible that Tal
told Busby that PayPal, Plimus’s principal account, threatened termination and that
Busby did nothing to alert the rest of the Great Hill deal team or Great Hill’s deal
counsel. Busby’s testimony also lacks credibility. Specifically, I find it unlikely
that in the course of a discussion limited to adding processors, Busby demanded an
assurance from Tal that Plimus would maintain its PayPal relationship, despite the
fact that (per Busby) he had no reason to suspect that the Plimus-PayPal relationship
450 Id. at 1599:2–1600:14 (Tal). 451 Tal testified that he told Busby on this call that Plimus’s chargebacks through PayPal looked good for the month of September and that he continued to believe there would be no termination. Id. at 1601:15–1603:3 (Tal). 452 Id. at 122:17–22, 159:8–160:14 (Busby). 453 Id. at 164:12–165:16 (Busby).
72 was in doubt. Furthermore, as discussed below, Busby’s muted response when he
ultimately learned that PayPal had terminated Plimus suggests that Busby already
knew there was, at least, some issue with the PayPal relationship. Most likely, I find,
Tal disclosed to Busby that Plimus and PayPal were having some dispute, but did
not disclose the extent of the issue or that it involved explicit threats of termination.
This disclosure, accompanied with a comment on the availability of other
processors, prompted Busby to seek assurance that the PayPal relationship would be
maintained. The lack of a complete disclosure also fits with Tal’s own misplaced
confidence at that time that PayPal would not, in fact, terminate its relationship with
Plimus.
3. SGE Organized a Bring Down Call on September 12, 2011
In preparation for closing, Klahr and Wolfe organized a “bring down call”
with Plimus management for September 12, 2011.454 The purpose of the call was to
see if there had been any changes to the business between signing the initial merger
agreement and the upcoming closing that would require the disclosure schedule,
which had accompanied the initial merger agreement, to be amended.455 On
454 JX 730. The call was also referred to in the organizing e-mail as a “breaches of representations call.” Id. 455 Id.; Trial Tr. 1910:9–1911:2 (Klahr).
73 September 9, 2011, Klahr circulated a list of questions for the upcoming bring down
call, which Klahr made clear that all Plimus management were required to review.456
Tal was unable to participate in the call.457 However, Tal spoke with Itshayek
in advance of the bring down call, and they identified three business issues
responsive to Klahr’s list of questions: (1) a potential fine related to GoClickCash,
(2) PayPal’s termination threats, and (3) the recent request from PayPal for
information on Home Wealth Solutions.458 Tal and Itshayek determined that
Itshayek, who would be participating in the call, should bring up only the request for
information on Home Wealth Solutions.459 They agreed that Itshayek should not
bring up the PayPal threats or the potential fine for GoClickCash because Plimus
had not yet received formal notices for either.460 Importantly, Tal also told Itshayek
that he would bring up both issues personally with Great Hill prior to closing.461
Itshayek did as discussed, and during the bring down call, she raised only
Home Wealth Solutions.462 Klahr followed up with Itshayek about Home Wealth
Solutions.463 Itshayek forwarded the PayPal e-mail she had received on the
456 JX 732. 457 Trial Tr. 1372:12–21 (Itshayek). Most likely because Tal would be traveling to Israel for Plimus’s conference. 458 Id. at 1375:3–1378:10 (Itshayek). 459 Id. 460 Id. 461 Id. 462 JX 744; Trial Tr. 1378:23–9 (Itshayek); Trial Tr. 1914:20–1915:24 (Klahr). 463 JX 758; Trial Tr. 1915:14–1916:15 (Klahr).
74 vendor,464 which was in turn forwarded onto to Perkins Coie,465 who provided it to
K&E on behalf of Great Hill.466 The supplemental disclosure schedule attached to
the amended merger agreement467 included a disclosure which stated that Plimus had
received an information request regarding Home Wealth Solutions.468 The
supplemental disclosure schedule did not, however, reference the potential
GoClickCash fine or the threatened PayPal termination.469
Itshayek had been notified during an August call with PayPal that a fine might
be imposed on Plimus due to a MasterCard inquiry related to GoClickCash.470 On
September 22, 2011, after the bring down call, PayPal informed Itshayek that a
$200,000 fine would, in fact, be imposed regarding GoClickCash.471 Itshayek shared
this information with Tal.472 Although Tal testified that, on a call with Busby a few
days prior to closing, he informed Busby of the GoClickCash fine,473 the
supplemental disclosure schedule did not reference this fine or GoClickCash.474
464 JX 761. 465 JX 762. 466 JSUF ¶ 175; JX 766. 467 JSUF ¶ 152. 468 JX 797, at 6. 469 Id. 470 Trial Tr. 1191:2–1191:17 (Itshayek). 471 JSUF ¶ 176. 472 Id. 473 Trial Tr. 1601:15–1603:21, 1607:12–24 (Tal). 474 JSUF ¶ 177.
75 Tal and Itshayek did not raise PayPal Pro excessive chargebacks, the
GoClickCash fine, or PayPal’s threats of termination to the Plimus Board of
Directors.475 As a result, Goldman, Klahr, Herzog, and Kleinberg were unaware that
Plimus had exceeded one percent chargeback ratios in June, July, or August 2011,
or that Plimus was being fined related to GoClickCash.476 They were similarly
unaware that PayPal had threatened termination of Plimus’s account.477 The Plimus
Board of Directors did not a hold another meeting after the August 2, 2011 meeting
approving the initial merger agreement.478
H. The Deal Closes
The Parties entered into the Amended Agreement and Plan of Merger (the
“Merger Agreement”) on September 29, 2011. At issue in this action are four
representations and warranties in the Merger Agreement, and the provisions related
to indemnification.
1. Relevant Representations and Warranties in the Merger Agreement
Article 3 of the Merger Agreement lists representations and warranties.479
Section 3.09, titled “Financial Statements,” includes the representation that
475 Trial Tr. 1425:15–1426:13 (Itshayek); id. at 1616:8–1617:3 (Tal). 476 Id. at 1811:10–1812:2, 1814:8–24, 1906:13–16 (Klahr); id. at 2069:19–23, 2196:20–23 (Goldman); id. at 2401:12–2402:12 (Herzog); id. at 2490:21–2491:11, 2522:7–20 (Kleinberg). 477 Id. at 1816:11–1817:5 (Klahr); id. at 2102:9–12 (Goldman); id. at 2401:12–2402:12 (Herzog); id. at 2490:17–20, 2523:1–4 (Kleinberg). 478 Id. at 2490:7–12 (Kleinberg). 479 JX 796, at 31–49.
76 “[n]either the Company nor any of its Subsidiaries, taken as a whole, have any
material liabilities or obligations (whether accrued, absolute, contingent,
unliquidated or otherwise, whether or not known, whether due or to become due and
regardless of when asserted),” with certain exceptions.480
Under Merger Agreement Section 3.16, titled “Contracts,” all contracts to
which Plimus was a party were required to be listed in the disclosure schedule that
accompanied the Merger Agreement, except for certain contracts that did not meet
minimum thresholds.481 As to the contracts that were required to be listed, Section
3.16 included a representation that:
Neither the Company nor any Subsidiary of the Company, nor, to the Company’s Knowledge, any of the other parties thereto, is in default in complying with any material provisions thereof, nor has the Company or any of its Subsidiaries received written notice of any such default, and, to the Knowledge of the Company, no condition or event or facts exist which, with notice, lapse of time or both, would constitute a default thereof on the part of the Company . . . . There is no material dispute under any Contract required to be disclosed in Section 3.16 of the Disclosure Schedule.482
Plimus’s contract with PayPal was among those listed in the disclosure schedule.483
In Section 3.23, “Certain Business Practices,” of the Merger Agreement, there
is a representation that:
480 JX 796, at 37–38. 481 Id. at 42–43. 482 Id. at 43. 483 JX 648, at 18–19.
77 The Company . . . is and has been in compliance with the bylaws and operating rules of any Card System(s), the Payment Card Industry Standard (including the Payment Card Industry Data Security Standard), the operating rules of the National Automated Clearing House Association, the applicable regulations of the credit card industry and its member banks regarding the collection, storage, processing, and disposal of credit card data, and any other industry or association rules applicable to the Company . . . in connection with their respective operations.484
Section 3.26, “Significant Customers; Suppliers,” contains the representation that:
There are no suppliers of products or services . . . that are material to [the Company’s] business with respect to which alternative sources of supply are not general available on comparable terms and conditions in the marketplace. No supplier of products or services to the Company . . . had notified the Company . . . that it intends to terminate its business relationship with the Company . . . .485
2. Indemnification Provisions in the Merger Agreement
Article 10 of the Merger Agreement addresses “Certain Remedies.” Section
10.01, defines the survival period of the representations and warranties of the Merger
Agreement; the four representations and warranties restated above are included in
“all other representations and warranties . . . [which] terminate on the date which is
twelve (12) months following the Closing Date.”486 Section 10.02 is titled
“Indemnification Obligations; Claims,” and details the indemnification obligations
of “Effective Time Holders.” 487 An “Effective Time Holder” is defined, in pertinent
484 JX 796, at 47–48. 485 Id. at 49. 486 Id. at 68. 487 Id. at 69.
78 part, as “each holder of Company Capital Stock as of immediately prior to the
Effective Time.”488 Under Section 10.02(a),
Subject to the terms of this Article 10, after the effective time, each Effective Time Holder, individually as to himself, herself or itself only and not jointly as to or with any other Effective Time Holder, shall indemnify Parent and the Surviving Corporation and each of their respective Subsidiaries and Affiliates, and each of their respective directors, officers . . . (each a “Parent Indemnified Person”) against such Effective Time Holder’s Pro Rata Share of any actual loss, liability, damage, obligation, cost deficiency, Tax, penalty, fine or expense, … (collectively, “Losses” and individually” a “Loss”) which such Parent Indemnified Person suffers, sustains or becomes subject to, as a result of, in connection with or relating to: (i) any breach by the Company of any representation or warranty of the Company set forth herein, in any Disclosure Schedule or in the Company Closing Certificate; (ii) any breach by the Company of any of the covenants or agreements of the Company set forth herein to be performed on or before the Effective Time . . . ; or (iii) any fines, penalties or similar assessments imposed against the Company . . . for violating applicable credit card association policies, procedures, guidelines or rules with respect to excessive chargebacks or similar recurring payments during the period between the Agreement Effective Date and the one year anniversary of the Closing Date, by a credit card association, card- issuing bank, other credit card issuer or third-party payment processor with respect to, and only to the extent of, transactions occurring prior to the Closing Date.489
Section 10.03, titled “Certain Limitations,” provided a limitation on
indemnification liability of Effective Time Holders for breaches of the
representations and warranties, and states, “in no event shall the Effective Time
Holders’ aggregate liability for Losses pursuant to Section 10.02(a)(i) . . . exceed, in
488 Id. at 12. 489 Id. at 69.
79 the aggregate, the Escrow Amount, subject to the other terms of this Article 10.”490
The Escrow Amount of $9.2 million491 was funded by withholding a pro rata share
of each Effective Time Holder’s merger consideration,492 and would be held for the
Escrow Period (twelve months after closing)493 or until any prior claims were finally
adjudicated.494 Under Section 10.03(b):
The Escrow Amount will be the sole source of funds from which to satisfy the Effective Time Holders’ indemnification obligations under Section 10.02(a)(i) . . . . In no event shall any individual Effective Time Holders’ liability for Losses pursuant to Section 10.02(a)(i) . . . exceed, in the aggregate, the lesser of (x) such Effective Time Holder’s Pro Rata Share of the Escrow Amount, or (y) as to each and any claim for indemnification under Section 10.02(a)(i) . . . , such Effective Time Holder’s Pro Rata Share of the Losses relating to such claim, subject to the other terms of this Article 10.495
Under Section 10.04, “Effect of Knowledge,” of the Merger Agreement:
By virtue of this Agreement, each Effective Time Holder agrees that Parent’s rights to indemnification for the express representations and warranties set forth herein are part of the basis of the bargain contemplated by this Agreement; and Parent’s rights to indemnification shall not be affected or waived by virtue of . . . any knowledge on the part of the Parent of any untruth of any such representation or warranty of the Company expressly set forth in this Agreement, regardless of whether such knowledge was obtained through Parent’s own
490 Id. at 71. 491 Id. at 13. 492 Id. at 22. “Pro Rata Share” is defined as the percentage of Total Outstanding Common Shares held by the Effective Time Holder as of the Effective Time. Id. at 17. 493 Id. at 22. 494 Id. at 74. 495 Id. at 71.
80 investigation or through disclosure by the Company or another Person . . . .496
Finally, under Section 10.10, “Exclusive Remedy:”
Following the Closing, except (a) in the case of fraud or intentional misrepresentation (for which no limitations set forth herein shall be applicable), . . . , the sole and exclusive remedies of the parties hereto for monetary damages arising out of, relating to or resulting from any claim for breach of any covenant, agreement, representation or warranty set forth in this Agreement, the Disclosure Schedule, or any certificate delivered by a party with respect hereto will be limited to those contained in this Article 10.497
3. The Merger Closed on September 29, 2011
On September 29, 2011, the Merger Agreement was executed and the merger
was closed.498 Tal, Goldman (as managing director of both SGE and SIG Fund),
Herzog, and Kleinberg were all signatories to the Merger Agreement.499 The merger
was funded by approximately $90 million in cash from Great Hill, $23 million in
debt financing from Madison Capital Funding LLC, and $3 million in equity that
Tal rolled over.500 As envisioned in the Merger Agreement, $9.2 million was
deposited in an escrow account, where it remains today. 501 On July 20, 2011, in
anticipation of the merger, SGE donated preferred shares in Plimus to two charities,
Defendants Kids Connect Charitable Fund and Donors Capital Fund, Inc. (the
496 Id. at 72. 497 Id. at 74–75. 498 JSUF ¶ 152. 499 JX 796, at 84, 87–91. 500 JSUF ¶ 153. 501 Id. ¶¶ 154, 155.
81 “Charity Defendants”).502 Therefore, Kids Connect and Donors Capital were
“Effective Time Holders,” as defined by the Merger Agreement. Itshayek, Tal,
Goldman on behalf SIG Fund, Herzog, Kleinberg, and representatives of Kids
Connect and Donors Capital all executed letters of transmittal for their stock in
Plimus.503
Itshayek received $355,227 in merger proceeds, of which $35,997 is held in
the escrow account.504 Tal received $5,274,775 in merger proceeds; $478,656 is
held in escrow, $3,000,000 was rolled over, and $678,505 was left with Plimus in
the form of a promissory note.505 In this context, “merger proceeds” does not include
the payments Tal received from his side letter agreements. SIG Fund received
$49,908,911 in merger proceeds, $3,323,060 is held in escrow.506 Herzog and
Kleinberg both received $21,170,686 in merger proceeds, and $1,972,611 of each of
their respective merger proceeds is held in escrow.507 Kids Connect received
$2,201,317 in merger proceeds, $146,569 of which is held in escrow, and Donors
Capital received $8,482,419 in merger proceeds, $605,068 of which is held in
escrow.508
502 Id. ¶ 58. 503 Id. ¶¶ 144–150. 504 Id. ¶ 157. 505 Id. ¶ 159. 506 Id. ¶ 160. 507 Id. ¶¶ 161, 163. 508 Id. ¶¶ 165–66.
82 I. Plimus Post-Merger Events
Plimus was renamed BlueSnap after the transaction closed;509 for simplicity I
will continue to refer to the post-closing entity as Plimus. PayPal notified Plimus on
September 30, 2011 that the fine related to GoClickCash would appear on its
processor statement as “MasterCard Violation-July 2011.” 510 Plimus asked for more
detail on October 6, and PayPal, for the first time,511 told Plimus that the underlying
violation was a BRAM (or “Business Risk Assessment and Mitigation”) violation,512
which are considered severe violations.513 Plimus asked PayPal for the actual
MasterCard notice; a PayPal risk analyst instead prepared a short letter on PayPal
letterhead that stated, with little detail, that PayPal was debiting Plimus $200,000 for
a BRAM violation related to GoClickCash.514 At trial, the Plaintiffs’ and the
Defendants’ industry experts disagreed whether the underlying violation was, in fact,
a BRAM violation.515 In any event, PayPal considered the violation to be a BRAM
violation, but did not share this perspective with Plimus until October 6, 2011.
509 Trial Tr. 240:12–241:2 (Busby). 510 JX 827, at 3. 511 In internal e-mails, PayPal had previously referred to the GoClickCash violation as a BRAM violation, but October 6 was the first time that PayPal told Plimus it was such. JX 756. 512 JX 827, at 2. 513 Violations of MasterCard’s BRAM program are considered very serious threats to a merchant’s relationship with their processors, the acquiring banks, and the card networks. Trial Tr. 2542:16– 2543:21 (Layman); id. at 2877:8–18, 2890:4–8 (Moran). 514 JX 839; JX 3065, at 1–4. The PayPal risk analyst denied having a copy of the notice; however, internal e-mails showed he was provided one. JX 827, at 1; JX 819. 515 Based on this original notice, the violation does not appear to be a BRAM violation; for example, the MasterCard notice in fact details two different violations, and does not use the term BRAM or cite the MasterCard rule numbers specifically defined as BRAM. Apparently, payment
83 Plimus’s PayPal Pro chargeback ratio for MasterCard in September 2011 did
not exceed one percent.516 Nonetheless, on October 7, 2011, PayPal sent Plimus a
notice of termination, thereby ending its relationship as Plimus’s largest processor.
Following a call with Itshayek, PayPal sent a formal notice in the afternoon of
October 7, 2011. According to the formal notice, “upon review your account poses
an unreasonably high risk exposure to PayPal.”517 PayPal chose to terminate
Plimus’s PayPal Pro account, and it also terminated Plimus’s other PayPal accounts;
PayPal Wallet and PayPal Israel, and set a termination date for all three accounts of
November 11, 2011.518 Itshayek informed Tal of the termination on October 7,519
and eventually forwarded the e-mails and notices to Tal on October 9, 2011.520
On the day PayPal terminated its relationship with Plimus, Tal was flying back
from a business trip to Germany, and he did not receive notice of the PayPal
termination until his flight landed in California on Friday, October 7, 2011, when he
spoke with Itshayek.521 Tal observed the Jewish holiday of Yom Kippur from the
experts disagree on exactly what a “BRAM violation” is. The Plaintiffs’ payment expert testified at trial that the two violations detailed in the notice were not specifically defined as BRAM violations, but in his opinion were considered as severe and, again, while not defined in the rules as such, were considered by the industry to be violations of a broader group that the industry referred to as “BRAM Rules and Standards.” Trial Tr. 2542:10–2543:3, 2582:5–2587:16 (Layman); Id. at 2877:8–2880:14 (Moran). 516 JX 857; Trial Tr. 1591:7–10 (Tal). 517 JX 828, at 1. 518 Id. at 4–6. 519 Trial Tr. 1594:17–1595:5 (Tal). 520 JX 832. 521 JX 3088; Trial Tr. 1594:22–1595:5 (Tal).
84 night of October 7, 2011 to sundown on October 8, 2011, and conducted no business
during that period.522 In the late afternoon of October 7, 2011, Busby had sent an e-
mail to Tal, seeking to schedule a Tuesday meeting to follow-up on Tal’s European
business trip.523 Tal responded to this e-mail on Sunday, October 9, 2011. In this e-
mail Tal confirmed a Tuesday time for this meeting and added “We got a termination
letter from PayPal meeting them tomorrow to get more update.”524 Busby responded
by e-mail on Monday, October 10, 2011, “Ok. Let’s discuss on Tuesday. Are we on
schedule with Litle? Do you anticipate any issues in finding a North American
processing solution?”525 Plimus had entered into a processing agreement with Litle,
another United States-based payment processor, by that point.526 Busby was
referring to replacing PayPal Pro with Litle.
Testimony at trial from Tal and Busby regarding Great Hill’s reaction to the
PayPal news is irreconcilable. Busby testified that he received the news in a
“shocking call” from Tal while driving “on the Mass Pike, westbound, near the
522 Trial Tr. 1595:6–1596:20 (Tal). 523 JX 834, at 2. Busby first sent an e-mail earlier in the day to request this meeting. Tal had responded to this e-mail: “Let’s do that and other issues like asknet and budget on Monday.” Busby then wrote back that Monday was a holiday and their offices would be closed. Busby said he was nonetheless available Monday but suggested Tuesday would be better, so that Vettel could join the call. Busby ended his e-mail with “Hope the travels back from Europe went well.” JX 834; JX 3087. 524 JX 834, at 1. 525 Id. 526 JSUF ¶ 178.
85 Brighton exit,”527 before he received Tal’s e-mail.528 As a result, Busby testified, his
response to Tal’s e-mail was muted, because Tal had already informed him by phone
of the termination.529 According to Busby, he was shocked when he received the
news by phone. Tal, by contrast, denies that any such termination call took place.530
I do not find Busby’s testimony about this termination call credible.531 I instead find
that Tal first notified Busby about the PayPal termination via e-mail, a finding
consistent with the text of the e-mail. I note that I have already found that Tal did
not disclose PayPal’s termination threats to Busby in Israel or in phone calls prior to
527 Trial Tr. 157:3–15, 222:16–23 (Busby). 528 Id. at 156:23–157:2, (Busby). Busby testified that he then called Vettel and Cayer to relay the news. Id. at 157:23–158:9; 554:8–560:13 (Busby). Vettel testified the call from Busby gave him a “sickening feeling.” Id. at 652:3–653:8 (Vettel). Cayer also remembers how his “stomach churned” when he received the call from Busby with news of the termination. Id. at 971:5–974:2 (Cayer). 529 Id. at 220:2–224:17 (Busby). 530 Id. at 1588:4–14, 1595:11–15, 1596:16–20 (Tal). 531 Busby does not remember the date or time of the call, only that he was most likely driving home from work. Id. at 202:2-203–4 (Busby). Busby testified that he immediately called Vettel, who in turn testified he received a call from Busby but similarly could not remember the date and time of this follow-on call. Id. at 801:11–19 (Vettel). Cayer also testified to receiving a follow on call and guessed it was around a week after closing, which, if taken literally, would place the call before PayPal terminated Plimus on October 7. Id. at 971:5–13 (Cayer). If Busby’s testimony is to be believed, the phone call could only have occurred after the Friday October 7, 2011 notice of termination and before Busby’s Monday October 10, 2011 response to Tal’s e-mail. Phone records produced for the trial do not show any phone calls from Tal’s work or cell phones to Busby after the termination letter was received on October 7 and before Busby’s October 10, 2011 response. While I find that this call did not take place before Busby’s October 10 response, Busby is, most likely, truthfully recollecting a call that took place after October 10. According to Tal and Busby’s e-mail exchange, Tal planned to meet PayPal the following day. Tal no doubt updated Busby after this meeting, at which point Busby would have found out that the termination was real, despite Tal’s misplaced confidence and belief that his connection to senior officials at PayPal would save the relationship; and that the termination involved all Plimus’s PayPal accounts, which was not made clear in Tal’s initial e-mail.
86 closing, but I find that Tal did disclose some level of problem with PayPal to Busby
in Israel, which would explain Busby’s muted response.532 In other words, before
Tal’s e-mail, Busby was aware that PayPal’s relationship with Plimus was troubled,
but was unaware of PayPal’s threats to terminate because Tal had withheld those
threats from Great Hill.
Plimus’s PayPal Pro and PayPal Wallet accounts terminated in November
2011;533 Plimus’s PayPal Israel account was not terminated until December 2011.534
Plimus temporarily lost the ability to accept PayPal Wallet as a payment method. In
January 2012, Plimus released a workaround, where Plimus’s vendors would create
their own PayPal Wallet accounts, and then turn them over to Plimus to manage.535
The loss of PayPal as a processor and the temporary loss of PayPal wallet as a
payment method affected Plimus’s ability to do business. It also hurt Plimus’s
reputation, as it followed on the heels of the loss of Paymentech. Additionally,
PayPal placed Plimus on the MATCH list on November 14, 2011, with reason code
“Excessive Chargebacks.”536
532 Tal’s PayPal termination e-mail to Busby did not explain that the PayPal termination applied beyond the PayPal Pro account to the PayPal Wallet and PayPal Israel account. JX 834. The lack of this critical information further explains Busby’s muted response. 533 Trial Tr. 1057:24–1058:4 (Cayer). 534 Trial Tr. 1058:5–7 (Cayer); JX 883, at 2. 535 JX 950. 536 JX 921, at 5–6.
87 PayPal was not Plimus’s only stumbling block after closing. Plimus entered
into an agreement with Merchant e-Solutions, a payment processer, and began
processing transactions by November 13, 2011.537 Merchant e-Solutions terminated
Plimus on January 5, 2012, and added Plimus to the MATCH list under reason code
“Violation of MasterCard Standards.”538 In a letter “To Our Partners,” Great Hill
gave an annual report for the year ending on December 31, 2011, in which Great
Hill noted that “Plimus was the only portfolio company to experience decline in
valuation, as the company removed a number of high-risk clients from its payments
platform, resulting in a negative short-term impact.”539 Great Hill wrote that Plimus
had been terminated by PayPal and Merchant e-Solutions, “related to MasterCard
violations by certain Plimus clients. Specifically, Plimus’[s] platform had been used
by two customers to sell fraudulent ‘get-rich-quick’ schemes.”540 According to
Great Hill, Plimus took “several corrective actions, including the immediate removal
of a number of high-risk customers (which account for approximately 10% of
volume),” which meant that Plimus fell short of its processing volume expectations.
Great Hill wrote, “despite the near-term financial impact, our original investment
thesis [in Plimus] remains intact and the longer-term prognosis for the business
537 JSUF ¶¶ 179–80. 538 Id. ¶¶ 181–82. 539 JX 922, at 2. 540 Id. at 4.
88 remains highly favorable.”541 Great Hill also disclosed that Plimus’s “financial
performance has resulted in a financial covenant breach in Q4’11.”542
A business summary report of Plimus’s performance in the fourth quarter of
2011 similarly noted the termination by two processors, which related to two Plimus
customers who sold fraudulent “get rich quick” schemes.543 The summary noted that
Plimus took corrective action following the processor terminations, including a
January 2012544 Plimus purge of approximately 500 vendors in “higher-risk
merchant categories (auction/bid, forex software, media download, and virtual
currency) and stopped accepting new merchants in these categories.”545 In the
summary, Great Hill noted that Plimus also changed its onboarding process, which
added more review before new vendors could begin processing transactions.546
Great Hill wrote that “the impact of these events and the decision to remove the
higher-risk customers resulted in a decline in processing volume in December versus
expectations, and we anticipate lower volumes into 2012.”547 In the business
summary report of Plimus’s performance in the first quarter of 2012, Great Hill
noted that Plimus’s “key processing relationships appear to be stabilized.”548
541 Id. 542 Id. 543 JX 968. 544 JX 2108, at 3. 545 JX 968. 546 Id. 547 Id. 548 JX 926.
89 Tal was fired as CEO in August 2012.549 Great Hill filed this action on
September 27, 2012, two days before the funds held in escrow were scheduled to be
released. Additionally, SGE has not yet paid Tal the SGE Earn-Out.550 The result
of this litigation could affect SGE’s profit on the sale of Plimus, which is in turn
used to calculate Tal’s transaction bonus.551
Great Hill made the decision to invest $20 million into Plimus during 2012
and 2013.552 Plimus received an additional $28 million of funding in 2014, of which
$15 million came from outside investor Parthenon Capital Partners.553 In 2014,
Plimus largely abandoned the reseller model and was instead forced to operate as a
payment facilitator.554 Processors and acquiring banks preferred the payment
facilitator model,555 which, compared to the reseller model, mandated much greater
transparency on the identity of Plimus’s vendors.556
J. Procedural History
The Complaint in this action was filed on September 27, 2012. Since then,
this Court has issued written Opinions on November 15, 2013,557 November 26,
549 Trial Tr. 1060:23–1061:4 (Cayer). 550 Id. at 1447:23–1448:9 (Tal). 551 Id. at 1448:10–23 (Tal); id. at 2206:12–2207:6 (Goldman). 552 JX 927; JX 1035; JX 1036. 553 JX 1055. 554 Trial Tr. 1674:10–1675:2 (Dangelmaier). 555 Id. at 1709:22–1710:5 (Dangelmaier). 556 Id. at 1673:18–1675:2 (Dangelmaier). 557 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013).
90 2014,558 and July 26, 2017.559 For a complete procedural history, I refer the reader
to those Opinions. The matter was bifurcated, and trial on the Defendants’ liability
took place over ten days from November 29, 2017 to December 12, 2017. I heard
Post-Trial Oral Argument on August 7, 2018.
II. LEGAL ANALYSIS
The Plaintiffs allege that Tal, Itshayek, Goldman, and Klahr committed fraud
and fraudulent inducement in selling Plimus to Great Hill. The Plaintiffs further
allege that Herzog, Kleinberg, the SIG Fund, and SGE (as well as Goldman and
Klahr if they are not implicated in the fraud) aided and abetted this fraud, and that
all the Defendants, except the two Charity Defendants, committed civil conspiracy.
Great Hill seeks indemnification against Tal, Itshayek, Herzog, Kleinberg, SIG
Fund, SIG Management, and the Charity Defendants for the losses it suffered as a
result of breaches of the representations and warranties in the Merger Agreement.
Furthermore, Great Hill argues that, given the alleged fraud, indemnification should
not be limited to the escrow fund established by the Merger Agreement, and that
liability should attach to all indemnifying defendant regardless of their participation
in or knowledge of the alleged fraud. Finally, the Plaintiffs bring unjust enrichment
558 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980 (Del. Ch. Nov. 26, 2014). 559 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2017 WL 3168966 (Del. Ch. July 26, 2017).
91 claims against Tal, Itshayek, Herzog, Kleinberg, SIG Fund, and the Charity
Defendants. Liability and damages were bifurcated, and this Opinion addresses
issues of liability only, assuming damages. Much of this action is based on the fraud
and fraudulent inducement claims; I turn to them first.
A. The Fraud and Fraudulent Inducement Claims Against Goldman, Klahr, Tal, and Itshayek
While the Plaintiffs, unhelpfully, argue in briefing that the “fraud in this action
was extensive, and cannot be recounted in full here,” they “highlight [] four major
interrelated components” of the fraud.560 The Plaintiffs highlight: (1) the
Paymentech termination, (2) Plimus’s history of violations and risk monitoring
systems, (3) the dispute over the Founders’ Earn-Out, and (4) PayPal’s notices of
violations and threats to terminate.
1. The Legal Standard
The Plaintiffs allege that Goldman, Klahr, Tal, and Itshayek (the “Fraud
Defendants”) fraudulently induced Great Hill to bid for Plimus, enter into the Merger
Agreement, and close the transaction. The Plaintiffs similarly allege that Goldman,
Klahr, Tal, and Itshayek committed fraud on the same grounds. Under Delaware
560 Pls. Opening Post-Tr. Br. 162.
92 law, the elements of fraudulent inducement and fraud are the same.561 The elements
of fraud are:
(1) a false representation, usually one of fact, made by the defendant; (2) the defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth; (3) an intent to induce the plaintiff to act or to refrain from acting; (4) the plaintiff's action or inaction taken in justifiable reliance upon the representation; and (5) damage to the plaintiff as a result of such reliance.562
It is beneficial to first expand on several of these elements before applying them to
the facts of this case.
A false representation is not only an “overt misrepresentation”—that is, a
lie—but can also be a “deliberate concealment of material facts, or [] silence in the
face of a duty to speak.”563 The Plaintiffs allege that the Fraud Defendants
committed all three types of false representation at various times. To show active
concealment, a plaintiff must prove that the defendant “took some action affirmative
in nature designed or intended to prevent, and which does prevent, the discovery of
facts giving rise to the fraud claim, some artifice to prevent knowledge of the facts
or some representation intended to exclude suspicion and prevent inquiry.” 564 A
561 Trascent Mgmt. Consulting, LLC v. Bouri, 2018 WL 4293359, at *12 (Del. Ch. Sept. 10, 2018); Smith v. Mattia, 2010 WL 412030, at *5 n.37 (Del. Ch. Feb. 1, 2010); Haase v. Grant, 2008 WL 372471, at *2 (Del. Ch. Feb. 7, 2008). 562 E.I. DuPont de Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 461–62 (Del. 1999); Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983); see also Trascent Mgmt. Consulting, 2018 WL 4293359, at *12. 563 Stephenson v. Capano Dev., 462 A.2d 1069, 1074 (Del. 1983). 564 Metro Comm. Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.3d 121, 150 (Del. Ch. 2004) (quoting Lock v. Schreppler, 426 A.2d 856, 860 (Del. Super. 1981)).
93 duty to speak can arise before the consummation of a business transaction, when a
party to that transaction acquires information that the speaker “knows will make
untrue or misleading a previous representation that when made was true.”565
After showing that a false representation was made, a plaintiff must show that
the defendant had knowledge of the falsity of the representation or made the
representation with reckless indifference to the truth. The Plaintiffs here allege that
Goldman and Klahr, given their access to information and their duties as directors,
made representations on several occasions with such reckless indifference. Ordinary
negligence is insufficient to show reckless indifference; the Plaintiffs must show, for
example, that Goldman and Klahr “consciously ignored specific warning signs”
related to alleged issues.566
Having shown a false representation and knowledge of the falsity, a plaintiff
must show that the defendants intended for the plaintiff to rely on the false
representation. To establish this requisite scienter, a plaintiff can show the
defendants either “committed the misstatement recklessly or with intent.”567 In this
context, recklessness is “an extreme departure from the standards of ordinary
care.”568 Recklessness or intent can be shown through circumstantial evidence.569
565 In re Wayport, Inc. Litig., 76 A.3d 296, 323 (Del. Ch. 2013) (quoting Restatement (Second) of Torts § 551 (1977)). 566 Metro Comm. Corp. BVI, 854 A.3d at 147. 567 Deloitte LLP v. Flanagan, 2009 WL 5200657, at *8 (Del. Ch. Dec. 29, 2009) 568 Id. (quoting In re Digital Island Sec. Litig., 357 F.3d 322, 332 (3d Cir. 2004)). 569 Id.
94 For example, in Deloitte LLP v. Flanagan, a partner at an accounting firm was
accused of trading in the securities of his clients and making fraudulent
misrepresentations about this trading.570 At the summary judgment stage in Deloitte
LLP, this Court found that there was a reasonable inference of scienter based on the
“magnitude of unauthorized trades, the incredibly prescient trading in those clients
for which [the defendant] had material nonpublic information, along with his misuse
of the Trading & Tracking system.”571 The timing of misrepresentations is also
informative, especially when made during a due diligence investigation.572 Facts
that establish a motive and opportunity to commit common law fraud can also be
used to establish scienter.573
To commit fraud, not only must a defendant have intended for the plaintiff to
rely on a false representation, but the plaintiff must have taken, or refrained from,
action in justifiable reliance upon that representation. This reliance element of fraud
has several facets. As an initial matter, the plaintiff must have actually relied.574 For
example, “a party who gains actual knowledge of the falsity of a representation,
structures a contract to address the risk of loss associated with the false
570 Id., at *1. 571 Id., at *8. 572 Paron Cap. Mgmt., LLC v. McConnon, 2012 WL 2045857, at *6 (Del. Ch. May 22, 2012). 573 Deloitte LLP, 2009 WL 5200657, at *8. 574 “To prove common law fraud, the recipient of the false representation ‘must in fact have acted or not acted in justifiable reliance’ upon it.” Universal Enter. Grp., L.P. v. Duncan Petroleum Corp., 2013 WL 3353743, at *14 (Del. Ch. July 1, 2013) (quoting NACCO Industries, Inc. v. Applica Inc., 997 A.2d 1, 29 (Del. Ch. 2009)).
95 representation, and proceeds to closing cannot claim justifiable reliance.”575 This
Court sometimes explicitly separates from justifiable reliance the requirement that
reliance be reasonable.576 A plaintiff’s diligence efforts can be evidence that her
reliance on a false representation was reasonable because she made efforts to verify
the representation and discovered no reason to doubt its truth. 577 The fact that a
plaintiff’s diligence efforts do not uncover fraud does not render such efforts
unreasonable, especially when the fraud was intentionally hidden.578 Whether
reliance is justifiable is an objective standard. 579 In addition to being reasonable,
justifiable reliance also “requires that the representations relied upon involve matters
which a reasonable person would consider important in determining his course of
action in the transaction in question.”580 In other words, a plaintiff can be said to
“rely” on a matter only when it is material to the action she takes, or from which she
forbears. For such a reliance to be actionable, the inducing “representation must not
575 Id. 576 See e.g., Stephenson v. Capano Dev., 462 A.2d 1069, 1074 (Del. 1983) (“the plaintiff [at common law] had to demonstrate that he reasonably or justifiably relied on the defendant's statements”); Standard General L.P. v. Charney, 2017 WL 6498063, at *12 (Del. Ch. Dec. 19, 2017) (“To prove fraud under Delaware law, a party must show, among other things, reasonable reliance on a false representation.”). 577 Paron Cap. Mgmt., LLC, 2012 WL 2045857, at *7. 578 Cobalt Operating LLC v. James Crystal Enters., LLC, 2007 WL 2142926, at *28 (Del. Ch. July 20, 2007). 579 Trascent Mgmt. Consulting, LLC v. Bouri, 2018 WL 4293359, at *12 (Del. Ch. Sept. 10, 2018). 580 Craft v. Bariglio, 1984 WL 8207, at *8 (Del Ch. Mar. 1, 1984).
96 only be material, but must concern ‘an essential part of the transaction.’”581 Relying
on this understanding of the law, I turn to the Plaintiffs’ allegations of fraud.
2. The Paymentech Termination
Paymentech communicated the termination of its business relationship with
Plimus via letters to Plimus of February 4, February 14, March 1, and March 3, 2011.
The Plaintiffs allege that Great Hill was not provided with these four Paymentech
termination letters, and that because the letters were responsive to due diligence
requests, including the June 2, 2011 diligence request, the omission was a “deliberate
concealment of material facts” sufficient to support a finding of fraud. 582 The
Plaintiffs further argue that a May 18, 2011 legal disclosure that described the
termination as “mutual” was a fraudulent misrepresentation. They point out that an
accurate disclosure was part of an early draft disclosure schedule prepared by
Perkins Coie, and note that this accurate disclosure was removed from the draft
disclosure schedule that was provided to Great Hill. I turn first to the alleged
concealment of the termination letters.
581 E.I. DuPont De Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 462 (Del. 1999) (quoting Nye Odorless Incinerator Corp. v. Felton, 162 A. 504, 512 (Del. 1931)). 582 Stephenson v. Capano Dev., 462 A.2d 1069, 1074 (Del. 1983).
97 a. Tal, Itshayek, Goldman, and Klahr Did Not Knowingly Conceal the Paymentech Termination Letters from Great Hill
All the Fraud Defendants argue that the Paymentech termination letters were
disclosed. Nevertheless, the Plaintiffs have shown that Great Hill never received
them—neither during nor after the bidding process. The Plaintiffs argue generally
that the “Fraud Defendants concealed material information;”583 however, they make
no specific allegations beyond the fact that Great Hill never received the letters.
SGE, and therefore Goldman and Klahr, noticed that the letters were not in the data
room in early May and asked Perkins Coie to release them, and expressed an
understanding that the Paymentech termination had been resolved and was ordinary
course. Goldman and Klahr subsequently believed that the letters had been released
to the data room. As a result, Goldman and Klahr had no knowledge of the omission
of the letters, nor were they recklessly indifferent to the omission, as they had no
responsibility regarding the data room or responding to diligence requests. Itshayek
did have responsibility to respond to diligence requests that were directed to her, but
she also believed that the letters had previously been placed in the data room.
Itshayek told Tal that she believed PwC had yet to see the letters in June, when PwC
performed on-site diligence. She gave physical copies to Tal, which he offered to
PwC. PwC, however, declined to take the documents from Tal, because it, too,
583 Pls. Opening Post-Tr. Br. 166.
98 believed that the letters were available in the data room. Tal has similarly maintained
that he believed the letters were in the data room, and this belief is corroborated both
by his assent to their release to the data room when Perkins Coie asked for his
permission to do so, and by his offer of the documents to PwC. Therefore, I find
that none of the Fraud Defendants intentionally concealed these documents. No
finding of fraud, therefore, can be based on failure to provide the Paymentech
correspondence to Great Hill.
b. The Representation Describing the Paymentech Termination As “Mutual” Was False
Tal, Itshayek, Goldman, and Klahr had all reviewed the Paymentech
termination letters; the Plaintiffs, therefore, argue that the Fraud Defendants all knew
that the legal disclosure on the Paymentech termination in the May 18, 2011 draft
disclosure schedule—describing the termination as “mutual”—was affirmatively
false. The Plaintiffs further contend that the disclosure constituted active
concealment. This disclosure described the termination as “mutual;” it did not reveal
that Paymentech initiated the termination and that it had provided alleged violations
of card association rules as the basis for termination. The Fraud Defendants maintain
that the disclosure made by Plimus is a truthful and accurate depiction of the
Paymentech termination. I disagree. While the termination was “mutual” in the
sense that Plimus did not care to oppose it, Paymentech clearly initiated the
termination. Despite Plimus’s reasons to be dissatisfied with Paymentech, which it
99 truthfully shared with Great Hill, Plimus had no incentive to prematurely end the
relationship, which was due to expire in September 2011. On the other hand,
Paymentech could incur risk when Plimus routed its transactions through
Paymentech. In this regard, Paymentech was worried specifically about the risk of
cross-border transactions in India, where it did not have a license to process such
transactions. Therefore, Paymentech did have an incentive to end the relationship
when it did, and the description of the end of the relationship as “mutual” is a false
representation.
The Plaintiffs argue not only that the disclosure was false, but also that Tal,
Itshayek, Goldman, and Klahr actively concealed the “real reasons” for the
Paymentech termination, which the Plaintiffs allege were “improper business
practices and poor risk management.”584 The Plaintiffs, quoting Corporate Property
Associates 14 Inc. v. CHR Holding Corporation,585 argue “that active concealment
can be established by showing that defendants made a ‘representation intended to
exclude suspicion and prevent inquiry.’”586 The Plaintiffs further claim that outside
the disclosure, Tal and Itshayek continued the active concealment when they told
Great Hill during the diligence process that Plimus had decided to leave Paymentech.
584 Id. at 162–63. 585 Corp. Prop. Assocs. 14 Inc. v. CHR Hldg. Corp., 2008 WL 963048, at *7–8 (Del. Ch. Apr. 10, 2008) 586 Pls. Opening Post-Tr. Br. 163.
100 As an initial matter, the legal disclosure predated on-site diligence, during
which time PwC and Great Hill did, in fact, ask more questions about the
Paymentech relationship. The Defendants have shown that Plimus had long been
unhappy with Paymentech’s service and rates, and when Paymentech stopped
supporting transactions outside the US, Canada, and the European Union, Plimus
made a decision not to renew the relationship when it expired later in the year. All
of this was disclosed to Great Hill.
Furthermore, as described above, there was no attempt to conceal the
Paymentech correspondence, which Tal, Itshayek, Goldman, and Klahr believed had
been released to the data room. It is possible that the Fraud Defendants intended
their misleading disclosures to distract attention away from the letters—perhaps
even preempt their review—and thus conceal the “real” reason for the Paymentech
termination. However, the “real” reason for the termination was shared with Great
Hill; it was the incompatibility of Paymentech and Plimus around transactions
outside the US, Canada, and the European Union. Therefore, it is far more likely
that the intent of the Fraud Defendants was to supplement and provide context to the
end of the Paymentech relationship beyond what was in the Paymentech termination
letters, which the Fraud Defendants believed had been disclosed. As a result, I find
that there was no active concealment by the Fraud Defendants. Nonetheless, the
101 representation that the end of the Paymentech relationship was “mutual” was
false.587
c. Tal, Goldman, and Klahr Knew the “Mutual” Termination Representation Was False
I turn next to the Plaintiffs’ argument that Tal, Itshayek, Goldman, and Klahr
had knowledge that the representation in the legal disclosure was false. Tal clearly
had such knowledge, because he authored the legal disclosure and was intimately
familiar with the Paymentech termination. Furthermore, his comment, when
approving the release of the Paymentech termination letters, that he “need[ed] to
think about ways to communicate this,” foreshadows the disclosure he then crafted
as an attempt to spin the termination in a misleadingly positive light. While Itshayek
also knew Paymentech had taken the first step in terminating the relationship, the
Plaintiffs do not allege that she helped draft, review or even that she saw the
disclosure that Tal prepared. As a result, Itshayek did not have the requisite
knowledge that the disclosure was false to support a fraud claim against her.
Goldman and Klahr, by contrast, knew that Paymentech had taken the
initiative in ending the relationship. They, along with SIG Fund’s in-house counsel,
reviewed and even supplied edits to the draft disclosure schedule. Furthermore,
587 Having found a false statement, I will not dwell further on the sometimes “prosciutto-thin distinctions” between the various theories of false representation. Corp. Prop. Assocs. 14 Inc., 2008 WL 963048, at *8 (referring to the difference between the theories of fraud by silence in the face of a duty speak and fraud by active concealment).
102 Goldman and Klahr both saw the previous draft of the legal disclosure prepared by
Perkins Coie, which stated that Paymentech had notified Plimus that it was
terminating the relationship based on alleged breaches. Goldman and Klahr argue
that they lacked knowledge of the representation’s falsity because they relied on
management and counsel, and that the description of the termination was consistent
with their understanding of the end of the relationship based on what management
had told them. The Plaintiffs have shown that Goldman and Klahr were at least
recklessly indifferent. It is true that Goldman and Klahr honestly did believe the end
of the relationship was, in a sense, “mutual.” Nonetheless, they had investigated the
Paymentech termination in their capacity as directors, they knew that it was
Paymentech who had ended the relationship, and they approved a disclosure that
said otherwise. Therefore Tal, Goldman, and Klahr had knowledge of the false
representation describing the Paymentech termination as “mutual.”
d. The Intent Behind the False Representation
The Plaintiffs spill much ink commenting on what they consider the enormity
of the Fraud Defendants’ behavior. They argue that the failure of the Silver Lake
deal and the Fraud Defendants’ purported belief that Plimus’s business was about to
tank, together support every inference that the Fraud Defendants’ intent was to
mislead Great Hill in order to facilitate a quick sale. Without addressing every
allegation, suffice it to say that the record convinces me to the contrary on the
103 Plaintiffs’ theory of motive. The Fraud Defendants ultimately had confidence in
Plimus’s viability and profitability. Nonetheless, it is clear that the Fraud
Defendants believed the deal with Great Hill was advantageous to them, and wished
it to close. Tal wanted liquidity and new investors with the capital to support roll-
ups going forward;588 SGE believed in supporting management, including through
sale,589 and the deal price met its profit goals;590 the Founders, who are accused of
aiding and abetting the alleged fraud, wanted to cash out.591 Therefore, I find that
the Fraud Defendants generally intended for Great Hill to rely on the disclosures and
the representations in order to facilitate the sales process, merger agreement, and
closing. That is sufficient to my finding that Tal created the disclosure stating that
the Paymentech termination was mutual, with the intent that Great Hill believe it in
support of the sale closing, and that Goldman and Klahr approved the misleading
disclosure for the same reasons.
To reiterate, the Fraud Defendants believed that the Paymentech termination
letters were released to Great Hill, therefore they could not have seriously intended,
through the legal disclosure, to cover up the contents of those letters. Furthermore,
the main purpose of the disclosure was to provide information on ongoing legal
588 Trial Tr. 1622:7–10 (Tal), id. at 1864:4–1864:11 (Klahr). 589 Id. at 1864:12–1864:19 (Klahr). 590 Id. at 1863:17–1864:3 (Klahr). 591 JX 179, at 162–64 (lines 1881–1927), 195–96 (lines 1877–1906), 202–04 (lines 2155–2185).
104 proceedings, not to detail the end of business relationships. However, a description
of the termination as “mutual” was untrue and constitutes a false representation. It
is also too far from the truth to be accidental; rather, it is an attempt to frame the end
of the relationship in a misleading way and to have Great Hill rely on that framing.
Therefore, I find that Tal, Goldman, and Klahr intended for Great Hill to rely on the
description of the Paymentech termination as “mutual,” and turn to the next element,
justifiable reliance.
e. There Was No Justifiable Reliance Because the False Representation on the Paymentech Termination Was Not Material
Goldman and Klahr identified the Paymentech relationship to be
disadvantageous to Plimus when they conducted their own due diligence in 2008.
After Tal informed Goldman and Klahr of the Paymentech termination in 2011,
Goldman and Klahr pushed Plimus to involve legal counsel, Perkins Coie, in the
Paymentech termination. Perkins Coie found that the termination was “ordinary
course,” achieved a release of the majority of the reserve account of Plimus’s funds
held by Paymentech to cover potential fines, and confirmed that no fines would
result from the alleged violations in the original termination letter. Tal, Goldman,
and Klahr all knew by the time the legal disclosure to Great Hill was made that
Paymentech had released the majority of the reserve account and would not pursue
fines or additional action for the alleged violations. The real point of friction
105 between Plimus and Paymentech was the cross-border transactions in India, which
Paymentech refused to continue supporting, and which Plimus refused to stop
transacting. The legal disclosure identified the cross-border issue as the main reason
for the end of the Paymentech termination. Tal and Itshayek truthfully disclosed this
information to Great Hill and its representatives during on-site diligence, in addition
to disclosing truthfully the other reasons Plimus had to be dissatisfied with the
relationship.
Great Hill, therefore, knew before closing that Plimus had previously had a
disadvantageous contract with Paymentech, that Paymentech had decided to stop
supporting certain cross-border transactions, and that as a result of that decision the
Plimus-Paymentech relationship ended. What was not disclosed was that
Paymentech had taken the definitive step to end the relationship and had also
justified the termination with alleged violations that it did not thereafter pursue. To
show justifiable reliance, the Plaintiffs must show that “the representations relied
upon involve matters which a reasonable person would consider important in
determining his course of action in the transaction in question,”592 and “concern ‘an
essential part of the transaction.’”593 In other words, the Plaintiffs must show that
592 Craft v. Bariglio, 1984 WL 8207, at *8 (Del Ch. Mar. 1, 1984). 593 E.I. DuPont De Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 462 (Del. 1999) (quoting Nye Odorless Incinerator Corp. v. Felton, 162 A. 504, 512 (Del. 1931)).
106 Paymentech’s initiation of the termination and certain alleged violations cited by
Paymentech were material information.
The relationship between Paymentech and Plimus became unworkable for
both parties and ended before Great Hill offered to buy Plimus. Paymentech was no
longer available to Plimus to process transactions as part of Plimus’s business. This
information was material, and was accurately and timely disclosed to Great Hill.
What was concealed by the misleading disclosure was that Paymentech initiated the
termination. In the context of this case, that fact was not material, notwithstanding
the Plaintiffs’ assertions to the contrary. The additional fact that Paymentech had an
incentive to end the relationship before it came to a natural close does not materially
add to the information that Great Hill had regarding this relationship. The cross-
border transaction dispute that ended the relationship was known to Great Hill. The
other allegations made by Paymentech were, I find, pretextual, and cannot have been
material to Great Hill; they resulted in no actual fines and no further investigation
by Paymentech. Given that Great Hill understood both that the Paymentech-Plimus
relationship had ended and the reason therefor, the concealed information did not
addresses an essential part of the transaction. Great Hill knew it was buying a Plimus
that did not have Paymentech as a processor, and knew the primary reason why
Paymentech was no longer a processor.
107 The Plaintiffs seek to establish the materiality of the concealed information
by puffing up the importance of Paymentech to Plimus. Paymentech was Plimus’s
largest supplier, but it supplied commodity processing services, which could be (and
were) easily replaced at the time. While the accelerated termination posed a
“challenge” for Plimus, it was a temporal technical challenge of transitioning to new
processors in a short period of time. Tal correctly downplayed the seriousness of
the loss of Paymentech to the Plimus Board of Directors given Plimus’s other
processing relationships. Fundamentally, moreover, the importance of Paymentech
to Plimus is irrelevant to the materiality of the fact that Paymentech unilaterally
discharged Plimus, given Great Hill’s accurate understanding as of the time of the
transaction. I find, therefore, that the Fraud Defendants’ misrepresentations
regarding Paymentech cannot support liability for fraud.
3. Plimus’s History of Violations and Risk Monitoring Systems
The Plaintiffs allege that the Fraud Defendants misrepresented the quality of
Plimus’s business by hiding a long history of violations (including violations related
to PayPal Pro after the initial merger agreement was signed), and by fabricating
Plimus’s risk monitoring prowess. In 2010, Paymentech fined Plimus on many
occasions. Almost all the fines related to excessive chargebacks, and one fine related
to acting as an aggregator without a license, a situation that Plimus subsequently
remedied. During 2011, Plimus exceeded allowed chargeback ratios for PayPal Pro,
108 and, before closing, was apprised that PayPal would levy a fine regarding Plimus’s
vendor GoClickCash, although the actual notice was not received until after closing.
Plimus’s payment processor (in this situation, either Paymentech or PayPal) would
e-mail Plimus when Plimus exceeded chargeback ratios, entered into excessive
chargeback programs, or otherwise violated card network rules and regulations.
These e-mails were not provided to Great Hill. The e-mails at least contained a
description of the problem, and sometimes included language copied and pasted
from a notice the processor received from the card networks—in some cases, they
even included the whole notice. The Plaintiffs point out that the e-mails were
responsive to diligence requests, and the response they received indicated that no
such communications existed. That response on Plimus’s behalf, per the Plaintiffs,
was fraudulent.
In terms of Plimus’s risk monitoring and vendor termination policies and
systems (collectively, “risk monitoring systems”), the Plaintiffs claim that the Fraud
Defendants represented that Plimus had “robust” and “proactive” risk monitoring
systems. The Plaintiffs argue that these representations were made in presentations
given by Plimus management and were reinforced by management after the
termination of seventeen vendors in 2011. The Plaintiffs allege that these
representations were false because the mass vendor terminations in 2010 and 2011
were initiated by Plimus’s processors, and did not arise from Plimus’s own internal
109 risk monitoring. The Fraud Defendants argue that no written materials describe their
risk monitoring systems as “robust” or “proactive;” rather, the management
presentation said only that Plimus monitors the performance of sellers and
“cleanse[s] sellers with negative perception, consistent issues with buyers or high
chargeback ratios.”594 They contend that this was a truthful statement. The Fraud
Defendants therefore maintain that they made no misrepresentation regarding
Plimus’s risk monitoring systems. I first turn to the allegations concerning the risk
monitoring systems, and then analyze whether the failure to provide notice of
violation e-mails sent by Plimus’s processors was fraudulent.
a. The Fraud Defendants Did Not Make Any False Representations on Plimus’s Risk Monitoring Systems, and In Any Event, Great Hill Did Not Justifiably Rely on the Representations They Allege Were Fraudulent
Plimus’s written policy on risk review, disclosed to Great Hill, states that
Plimus reviews vendors for violations of Plimus’s terms of use and for copyright
infringement, and will react to alerts from processors “based on the [processor’s]
requirements.”595 This written policy is consistent with Plimus’s termination of
vendors in 2010 and 2011.
In terms of the 2010 vendor terminations, Plimus had received notices from
Paymentech, its processor, that Plimus as a whole was exceeding the one percent
594 JX 307, at 52. 595 JX 457, at 35.
110 chargeback ratio ceiling. These were not individualized notices specific to each
Plimus vendor with chargebacks over one percent.596 Plimus then identified and
terminated certain vendors with high chargebacks in order to reduce the Plimus-wide
chargeback ratio and exit the excessive chargeback programs. There is no indication
that prior to their termination these vendors—which were primarily “poker chip”
vendors—violated Plimus’s terms of use. The Plaintiffs point to a June 25, 2011
diligence disclosure, which stated that “the Company became aware of these issues
upon reviewing each vendors’ [sic] chargeback history.”597 According to the
Plaintiffs, this was a false representation, because it conveyed the impression that
Plimus’s own internal procedures led to this review, which in fact arose based on
communication from the processor. Nothing about the disclosure, however,
suggests that the review was independent of communications with Paymentech, and
the disclosure is not otherwise inconsistent with Plimus’s disclosed written policies.
Accordingly, I find that the Fraud Defendants did not make false representations in
Plimus’s written statements—either in the CIM or disclosures around vendor
termination—about Plimus’s risk monitoring systems. The Plaintiffs’ allegations
against Goldman and Klahr stem only from their involvement in drafting
management presentations and reviewing the diligence disclosure. Since these do
596 See, e.g., JX 37. 597 JX 553, at 24.
111 not contain false representations, the Plaintiffs have failed to show fraud against
Goldman and Klahr in relation to Plimus’s risk monitoring systems.
The Plaintiffs’ claims against Tal and Itshayek regarding Plimus’s risk
monitoring systems, on the other hand, also allege that Tal and Itshayek made oral
representations on the strength and proactivity of the risk monitoring systems during
meetings and phone calls with Great Hill. In particular, the Plaintiffs allege that
Itshayek told Great Hill that the 2011 termination of sixteen vendors was the result
of Plimus’s risk monitoring systems.598 This statement, however, was not false.
Plimus terminated seventeen vendors during that particular vendor purge. Itshayek
testified credibly that she told Great Hill that the 2011 vendor termination started
with a PayPal notice on one vendor, GoClickCash, and that Plimus then identified
sixteen similar vendors and terminated them also. While Plimus may have felt that
the sixteen similar vendors would cause problems with PayPal in light of PayPal’s
initial notice, it was still Plimus who identified the sixteen problematic vendors, and
Plimus who decided to terminate the additional vendors based on the assessment of
the risk imposed on Plimus. Itshayek’s description of the termination is therefore
consistent with Great Hill’s own account and matches Plimus’s written policy on
risk monitoring. Therefore, at least in regard to the particular termination of the
seventeen vendors in 2011, there was no false representation.
598 Pls. Opening Post-Tr. Br. 172.
112 Assuming that the Plaintiffs could demonstrate that Plimus’s risk monitoring
systems and policies were mischaracterized to Great Hill because Tal and Itshayek
allegedly described these systems and policies as “robust” or “proactive,” the
Plaintiffs are unable to demonstrate justifiable reliance on these statements. PwC,
on Great Hill’s behalf, investigated Plimus’s vendor monitoring systems, among
much else. In fact, PwC’s resulting diligence report to Great Hill states that Plimus
should be more “proactive” in dealing with chargebacks.599 PwC’s report also
detailed the self-service onboarding process by which vendors enrolled themselves
as Plimus clients. In PwC’s own words, Plimus “delay[ed] the majority of the seller
underwriting until the point at which the seller is most likely to begin processing.”600
Additionally, Cayer testified that he understood before closing that vendors could
onboard themselves and avoid scrutiny for months. Therefore, Great Hill’s own
diligence disclosed the limited extent to which Plimus could be said to have a
“robust” or “proactive” risk monitoring system.601 Furthermore, Great Hill was
aware that Plimus engaged in sporadic large-scale purges of vendors, as opposed to
continuous small-scale terminations consistent with proactive risk monitoring.
Given their own diligence findings, the Plaintiffs could not justifiably rely on Tal
599 JX 582, at 23. 600 Id., at 21. 601 I make no determination whether the terms “robust” or “proactive,” if false, were sufficiently definitive to constitute fraud.
113 and Itshayek’s allegedly false representations regarding Plimus’s risk monitoring
systems.
b. The Plaintiffs Have Not Shown Justifiable Reliance on False Representations Made About Plimus’s History of Violations
I next turn to Plimus’s failure to provide Great Hill with documentation
concerning excessive chargebacks. Paymentech’s (and later PayPal’s) notices
regarding chargebacks and other violations were provided to Plimus, accompanied
by varying levels of detail as to the nature and consequences of the chargebacks.
These documents were requested by Great Hill as part of its diligence, but were not
turned over to Great Hill; Itshayek testified as much at trial. Furthermore, despite
Tal and Itshayek possessing these notices, Plimus’s June 18, 2011 and June 25, 2011
responses to Great Hill’s diligence request implied that no such notices existed. The
PwC report states that, regarding the $250,000 in fines that were disclosed, PwC was
told that Plimus received “no formal communication from the associations clearly
defining the nature of the fines.”602
i. Plimus’s Disclosure of Only $250,000 In Fines and Plimus’s Representation That Plimus Did Not Have Communications on Violations Are False Representations
Plimus did not report to Great Hill all the fines it received in 2010. Instead,
Plimus reported only $250,000 in fines. The Plaintiffs correctly aver that the
602 JX 582, at 23.
114 disclosure on the amount of the fines constitutes a false representation because it
implies that Plimus paid only $250,000 in fines in 2010. At trial, the Plaintiffs
showed that the $250,000 figure constituted the fines Plimus paid for Visa excessive
chargebacks in 2010 and a MasterCard violation for acting as an aggregator without
a license, and did not include the fines Plimus paid in 2010 for MasterCard excessive
chargebacks. Furthermore, it was false for Plimus to represent in diligence responses
that no communications from Paymentech or PayPal regarding violations existed
when, in fact, they did. The Plaintiffs argue that all the Fraud Defendants committed
actionable fraud by these actions, and that they all violated a duty to speak when
Plimus updated its response to Great Hill’s diligence request without changing its
response that no violation-related communications existed. Since the disclosure of
only $250,000 in fines and the omission of communications on violations
(collectively, “Plimus’s history of violations”) constitute false representations, I
discuss next which Fraud Defendants had knowledge of the false representations.
ii. Only Tal and Itshayek Had Knowledge that the Representations on Plimus’s History of Violations Were False
The Plaintiffs contend that Tal, Itshayek, Goldman, and Klahr all had
knowledge of the false representations on Plimus’s history of violations. Tal and
Itshayek were recipients of the various violation notices from processors throughout
2010 and 2011, did not provide them as sought in Great Hill’s diligence requests,
115 and therefore knew when they participated in the drafting of the relevant disclosure
that it was false to represent that no such notices existed. Additionally, they were at
least recklessly indifferent to the falsity of the $250,000 figure, which they were
aware did not include all 2010 fines. Goldman and Klahr were copied on the
disclosure requests and were involved in the drafting of the merger agreement, which
included a representation that Plimus “is and has been in compliance”603 with card
network rules. However, Goldman and Klahr did not possess the 2010 notices from
Paymentech and were not informed of any notices from PayPal, and they
furthermore were not responsible for diligence requests. As directors, Goldman and
Klahr did not manage Plimus’s day-to-day operations (and were not expected to),
which included managing payment processor relationships. The Plaintiffs point out
that Goldman and Klahr were copied on e-mails containing the diligence responses.
Even if I were to assume that Goldman and Klahr actually read the diligence
responses, that does not show that they knew the representations were false, given
their limited knowledge of day-to-day operations. For a similar reason, Goldman
and Klahr cannot be found to have had knowledge of, or to have been recklessly
indifferent to, these false representations in the Merger Agreement; they had no
reason to doubt the representations being made, but rather were entitled to rely on
their counsel and Plimus management in this respect. I find that only Tal and
603 JX 796, at 47–48.
116 Itshayek knowingly made false representations or concealments, in satisfaction of
the second element of fraud. I next turn to scienter.
iii. Tal and Itshayek Intended for Great Hill to Rely on the False Representations Concerning Plimus’s History of Violations
The Plaintiffs argue that Tal and Itshayek can be presumed to have the
requisite scienter, given the magnitude of misleading statements and omissions. The
Plaintiffs make this argument on intent as to fraud in general and for all the Fraud
Defendants, but it seems particularly focused here, where tens of notices on Plimus
violations were responsive to diligence requests, yet were not provided. The
Plaintiffs argue that Tal and Itshayek intended for Great Hill to rely on the false
representations in order to create the illusion that Plimus was in “good standing with
the credit card companies.”604 I previously found that the record satisfied, in general,
the Fraud Defendants’ intent to rely, based on a desire to facilitate the transaction,
but I pause to add a few words on that general intent in the specific context of
Plimus’s history of violations.
The Plaintiffs’ argument for intent to rely is somewhat undercut by the fact
that Itshayek shared Plimus’s processor statements with Great Hill, which reflected
that Plimus had paid at least $250,000 in fines to Paymentech in 2010. Processor
statements were monthly statements of all financial transactions between a processor
604 Pls. Opening Post-Tr. Br. 184.
117 and Plimus, including fines and fees paid by Plimus to the processor. Furthermore,
Tal and Itshayek disclosed Plimus’s June 2011 PayPal chargeback issues to Great
Hill. Both of these actions runs counter to the Plaintiffs’ theory that Tal and Itshayek
were trying to create an illusion of a company in good standing. However, despite
Tal and Itshayek’s willingness to discuss chargebacks with Great Hill, they withheld
the actual notices that underlined those chargeback issues, even when PwC sent a
specific diligence request for such notices after its on-site visit. Furthermore, the
representation that Plimus had no such notices was reiterated with each update to
Plimus’s response to Great Hill’s due diligence request—responses that were
reviewed or drafted, in pertinent part, by Tal and Itshayek. This belies innocent
mistake.
At trial, Itshayek admitted that the notices from Paymentech were responsive
to Great Hill’s requests and defended her oversight only by claiming that the
processor statements should have been sufficient. Given the amount of notices
extant, the fact that those notices were known to Tal and Itshayek, and that there
were multiple prompts and opportunities to share them—including a specific
request—I find that Tal and Itshayek were at a minimum reckless when they omitted
the notices. Tal and Itshayek had a duty to share the notices, which they disregarded,
and they falsely represented that no such documents existed with the intent that Great
118 Hill consummate the transaction. I find the intent requirement satisfied, and turn to
reliance.
iv. Great Hill Did Not Justifiably Rely on the False Representations About Plimus’s History of Violations
I find that Great Hill cannot have relied on the false representations about
Plimus’s history of violations, nor could Great Hill have reasonably believed that
Plimus was always a company in good standing with the card associations, based on
Tal and Itshayek’s false representations and omissions. The PwC report and Great
Hill’s own due diligence memo to its partners show that Great Hill was aware that
Plimus exceeded chargeback ratios throughout 2010 and in June 2011. The PwC
report created for Great Hill states that chargebacks demonstrate non-compliance
and could result in fines, as does Great Hill’s own due diligence memo. As a result,
the Plaintiffs have failed to show actual reliance on the omission of the various
communications with Paymentech regarding fines and violations in 2010, which
would have simply confirmed Great Hill’s understanding. The Plaintiffs have not
demonstrated justifiable reliance on the exact amount of fines paid in 2010, the
affirmatively false representation that documents explaining the fines and violations
did not exist, nor on Tal’s and Itshayek’s silence when the due diligence responses
were updated without correcting the original false representations. Any information
provided to Great Hill in that regard would have been cumulative.
119 Turning to the communications on subsequent fines in 2011, Great Hill was
alerted that Plimus exceeded chargeback ratio thresholds for PayPal in June 2011.
While Tal and Itshayek told Great Hill in late July that they did not expect July
chargeback ratios to exceed one percent, I note that modeling that Tal had previously
provided to Great Hill informed Great Hill that Plimus’s exceeding this threshold
was a real possibility.605 The Plaintiffs argue that Tal’s and Itshayek’s expectation
proved to be wrong, and that Great Hill was not informed once those chargebacks
exceeded one percent for July and August. Neither did Great Hill ask to be so
informed. Great Hill had reason to not be overly concerned with chargebacks, as
they had asked for and received an indemnity provision in the merger agreement
specifically for fines for excessive chargebacks related to pre-closing issues.606
Based on Great Hill’s actual knowledge of Plimus’s extensive history with
chargebacks and Great Hill’s bargained-for indemnity for fines related to pre-closing
chargebacks issues, I find that there was no justifiable reliance on false
representations about Plimus’s history of violations and compliance with card
605 Tal provided Great Hill with tables in early July 2011, which contained historical chargeback data and chargeback projections for July and August 2011. The tables projected that chargeback ratios would exceed one percent in July and August for both Visa and MasterCard without added transactions from an expected ramp up in volume from Wix. JX 588, at 3. 606 A known risk addressed by indemnification cannot be used to support a claim of fraud. See Universal Enter. Grp., L.P. v. Duncan Petroleum Corp., 2013 WL 3353743, at *14 (Del. Ch. July 1, 2013).
120 network rules. As a result, the Plaintiffs have not proven fraud against Tal and
Itshayek in relation to Plimus’s history of violations.
c. Other Miscellaneous Fraud Allegations Also Fail, Either Because They Are Not False or Because There Was No Justifiable Reliance
It is appropriate here to deal with several other miscellaneous
misrepresentations and omissions that the Plaintiffs allege, which did not seem to be
cabined within any of the four categories of alleged fraud in particular. The previous
discussion primarily revolved around chargeback violations; however, the Plaintiffs
also point to other “violations” or practices, which they say were not disclosed and
which reflected poor business quality or poor processor relationships. The violations
or practices included mass refunds, IP infringement, volume shifting/load balancing,
and a BRAM violation.
To the extent I understand the allegation, the Plaintiffs appear to argue that
Plimus engaged in mass refunds and volume shifting to avoid excessive
chargebacks, and that this practice should have been disclosed. Mass refunds and
volume shifting/load balancing have already been described, and I will simply repeat
that the evidence does not show that these were violations of card association rules
at the time. Therefore, Plimus was not required to disclose the practices as rule
violations. The Plaintiffs do not point to any affirmative misrepresentations in
regard to mass refunds or volume shifting/load balancing.
121 The Plaintiffs also complain about disclosures on IP infringement. Plimus
was often sent inquiries about IP infringement, and Great Hill, through its deal
counsel, was aware that Plimus received such notifications on an ordinary basis, and
that such notices were common in Plimus’s industry. I find that the Plaintiffs have
failed to demonstrate any misrepresentation with respect to IP infringement.
A BRAM violation, as described in more detail infra, is considered by
processors and the credit card associations to be among the most serious of
violations. In terms of the alleged BRAM violation in connection with
GoClickCash, Plimus was not informed that PayPal considered Plimus’s facilitation
of GoClickCash transactions to be a BRAM violation until after closing. The Fraud
Defendants could not misrepresent or hide something of which they were unaware,
pre-closing. However, Plimus was aware, pre-closing, that PayPal would assess a
fine against Plimus for a violation related to GoClickCash; I will address this non-
disclosure when I review the PayPal component of the alleged fraud.
The Plaintiffs also contend that the Defendants made representations about
the growth of the company, the visibility of financial performance, and the quality
of vendors. To the extent that these statements were projections or expectations,
there was no reliance.607 Furthermore, the Plaintiffs have not made serious claims
607 “The law has always been skeptical about grounding fraud claims in projections of future events for the obvious reason that the fact that a prediction might not come true does not mean the projection was not made in good faith and also because it is unreasonable to place much weight
122 that any such projections were not made in good faith. With respect to vendor
quality, the Plaintiffs appear to contend that Plimus concealed or misrepresented the
fact that many of its vendors’ businesses were of questionable validity. Great Hill,
however, knew before the transaction that the vast majority of Plimus’s vendors
were “long-tail” vendors, and that there was frequent churn of these vendors. Great
Hill did an extensive review of these vendors, even noting which ones might be
fraudulent. The purpose of the review was a point of contention at trial; Busby
testified that Great Hill’s review only concerned the sustainability of vendor’s
businesses, and that he did not ask his analysts for judgments on vendor’s legitimacy.
Regardless, Great Hill’s analysts made such judgments. Furthermore, in their due
diligence memo, Great Hill identifies vendors in “unacceptable vertical[s]” as a
risk.608 As already discussed, Great Hill was aware that Plimus’s onboarding
process allowed vendors—including illegitimate vendors—to potentially transact
business through Plimus for months before discovery. This was the case with the
“biz opp” vendors that were terminated in 2011, which, given the resulting financial
impact, Great Hill lamented at the time.609 In other words, Great Hill was well aware
of Plimus’s business model, including the quality of the vendors. Given how much
on such statements.” Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 2005 WL 5757652, *12 (Del. Ch. Apr. 1, 2005). 608 JX 601, at 3. 609 The termination of these “get rich quick” scheme vendors negatively impacted Plimus’s projected transaction volume and EBITDA. Given the financial impact, the Great Hill deal team considered—and ultimately rejected—lowering the transaction price.
123 Great Hill knew and accepted about Plimus’s vendor quality, Great Hill cannot
establish justifiable reliance on any misrepresentations that may have been made
regarding vendor quality.
4. The Dispute Over Tal’s Earn-Out Agreement with the Founders
As laid out in the Background section of this Memorandum Opinion, Tal had
earn-out agreements with SGE and the Founders, which provided for payment of
incentive funds to Tal upon sale of Plimus (under certain conditions). The terms of
the Founders’ Earn-Out agreement were ambiguous. During the bidding process, a
dispute arose between Tal and the Founders over the interpretation of the Founders’
Earn-Out. The dispute was resolved shortly before the initial merger agreement was
signed. The Plaintiffs originally argued that the existence of a dispute between Tal
and the Founders over the Founders’ Earn-Out was not disclosed. The Plaintiffs
have abandoned this claim in light of the evidence to the contrary, but continue to
argue that the substance of the dispute was not disclosed, and that the partial
disclosure was materially misleading.
The substance of their argument can be divided into two parts. First, the
Plaintiffs claim that Tal had to be bribed to support the deal and to stay with Plimus
after closing, and that settlement of the Founders’ Earn-Out dispute in Tal’s favor
was, in fact, the bribe. The facts of this alleged blackmail and bribery were not
disclosed, which, according to the Plaintiffs, amounts to fraud. The Plaintiffs’
124 second, related theory is that it was fraudulent for the Fraud Defendants to conceal
the fact that the resolution of the Founders’ Earn-Out dispute was made “contingent”
on Tal capitulating in his Roll-Over negotiations with Great Hill. However, I find
no fraud in regard to the Founders’ Earn-Out dispute.
I address the “blackmail” claims first. If Goldman and Klahr needed to bribe
Tal to support the deal, then it could certainly be a false representation to omit this
information. However, it is clear that the ultimate restructuring of the side letter
payments was the result of an honest business dispute over the interpretation of the
original agreements, and not the result of Tal demanding funds to conceal his lack
of faith in Plimus. There was no false representation in this regard. The Plaintiffs
seize on the Founders’ initial reactions to their earn-out dispute with Tal. Tal knew
that the Founders supported a sale, and the Founders’ first reaction was that Tal was
leveraging this knowledge, to negotiate “blackmail” or “schita” payments to ensure
his support. Goldman and Klahr ultimately made up a part of the difference between
Tal’s understanding of his entitlement under the Founders’ Earn-Out, and that of the
Founders; the Plaintiffs characterize this as “hush money” payments to Tal. The
Plaintiffs argue that Tal did not believe in Plimus and that he demanded this hush
money in order to support the deal with Great Hill, which (per the Plaintiffs) would
be especially unattractive to Tal in light of the requirement that he roll over fifty
125 percent of his merger proceeds into equity in Plimus after the sale. The facts,
however, are to the contrary.
When first accused of blackmail by the Founders, Tal immediately denied that
such was his intention. Tal stoutly maintained to the Founders that he was entitled
to the money he was demanding under his reading of the Founders’ Earn-Out. While
Tal frequently complained about being expected to participate in the Roll-Over, none
of his communications with the Founders or the SGE Defendants suggest that he had
any doubts about Plimus or its business prospects. Critically, Tal’s interpretation of
the Founders’ Earn-Out arose early in the sale process, when the bidding was still
ongoing and the identity of the buyer, and any roll-over requirements, had not yet
materialized. Throughout the sales process, that interpretation never changed. Tal
never asked for more than he originally and consistently maintained he was owed.
Goldman, when apprised of the dispute, stepped in to mediate between Tal
and the Founders. Goldman believed that, given Tal’s work in building Plimus, his
interpretation of the side letter agreement should be honored in good faith.
Throughout Goldman’s mediation with the Founders on the dispute, no party
expressed doubt in Plimus or implied that Tal had such doubts. In fact, the Founders
clearly believed in Plimus and its prospects (to the point that they were willing to
walk away from the Great Hill deal) and believed that Tal would benefit from the
deal, given his equity interest in the new company. In other words, the Founders
126 viewed Tal’s Roll-Over as a good opportunity for Tal. Therefore, they believed he
should not be insistent on receiving the Founders’ Earn-Out, as he would be well
compensated financially in any event. It is therefore clear that there was no
“blackmail” to disclose.
Perhaps acknowledging the weakness of the “blackmail” claim, the Plaintiffs
argue derivatively that it was fraud not to disclose that the Founders’ Earn-Out
resolution offered to Tal was made “contingent” on Tal ending negotiations on the
Roll-Over with Great Hill. The Plaintiffs argue that, regardless of the existence of
any blackmail, the contingent nature of the settlement was material, and was omitted
and concealed. The Fraud Defendants do not dispute that they considered the
resolution of the Founders’ Earn-Out disagreement in Tal’s favor as requiring him
to accept Great Hill’s terms for the Roll-Over; they acknowledge that they were
trying to facilitate the closing of the transaction.
Having already found that no blackmail took place, however, I do not find an
intent by the Fraud Defendants to conceal information from Great Hill. It is obvious
that the earn-out payments and the Roll-Over were intimately linked for Tal. That
is because together, they determined his liquidity post-closing, and the amount of
the side letter payments would itself have a bearing on the amount of the Roll-Over.
Not only was this obvious in retrospect, but it was also known to Great Hill at the
time. Tal met with Great Hill in their Boston offices on June 27; Great Hill identified
127 Tal’s new employment contract as the only remaining obstacle to closing, and Tal
disclosed that an earn-out dispute prevented him from ending negotiations on that
employment contract. I find that Vettel of Great Hill then called Goldman and asked
him to resolve Tal’s earn-out dispute, so that Great Hill could, in turn, resolve Tal’s
employment contract and Roll-Over.610 After this call, Goldman presented Tal with
the resolution that Goldman had mediated with the Founders. As a result, Great Hill
was aware that the resolution of Tal’s earn-out dispute was contingent on Tal ending
negotiations on his Roll-Over. Given this information, I do not find any false
representation, either through omission or through concealment, with regard to the
Founders’ Earn-Out or the Roll-Over.
5. PayPal’s Notice of Violations and Threats to Terminate
The most serious allegations of fraud involve PayPal’s relationship with
Plimus. In relation to the PayPal termination, the Plaintiffs allege fraud through the
failure to disclose, and/or the active concealment of: PayPal’s notice of violations
and fines; Plimus’s efforts to address chargebacks and other violations with PayPal;
Plimus’s practice of reactive vendor termination; and PayPal’s threats to terminate.
610 I find Vettel’s testimony to the contrary not credible. Vettel testified he did call Goldman but only as a “reference check” on Tal, and that the reference check was the only thing they discussed. This is inconsistent with the preponderance of the evidence, as set out in the Background section of this Memorandum Opinion.
128 The Plaintiffs also claim that representations in the Merger Agreement were
affirmatively false in light of PayPal’s threats.
I first deal with PayPal’s notices of chargeback problems, management’s
efforts to address those problems through load balancing and mass refunds, the
GoClickCash BRAM Violation, and Plimus’s policy of reactive vendor termination.
I have already found that the Plaintiffs have not shown fraud as to notices of
chargebacks, the practices of load balancing and mass refunds, and representations
about business quality and risk management systems. I also found that there was no
misrepresentation as to the BRAM Violation because Tal and Itshayek (and the other
Fraud Defendants) were unaware, pre-closing, that PayPal considered the
GoClickCash violation to be a BRAM violation. At issue here, then, are the alleged
failure to disclose that PayPal was fining Plimus related to GoClickCash and the
failure to disclose that PayPal was threatening to terminate its relationship with
a. Not Disclosing PayPal’s Termination Threats and the GoClickCash Fine Constitute False Representations
The communications that led up to the PayPal termination show that PayPal’s
threats to terminate were tied primarily to excessive chargebacks. However, in its
ultimate termination letter, PayPal claimed that Plimus brought too much risk to
PayPal generally without citing specifics. Internally, PayPal talked about Plimus’s
GoClickCash BRAM Violation and PayPal terminated Plimus the day after it told
129 Plimus that that the GoClickCash violation was a BRAM Violation. Internal
communications also show that PayPal was aware that Plimus was practicing load
balancing and mass refunds. As I found earlier, those practices were not rule
violations, but PayPal internally found them problematic. However, PayPal did not
reprimand Plimus externally for employing mass refunds and load balancing, and
the Plaintiffs have not shown that the Fraud Defendants were aware that these
practices were disfavored.
PayPal began to threaten termination of its relationship with Plimus in August
2011 and continued to make threats into September 2011, although it did not follow
through on its threats prior to closing. Tal and Itshayek did not believe that PayPal
would actually terminate Plimus. While the Plaintiffs allege generally a violation of
a duty to disclose and active concealment, they only argue specifically the violation
of two representations in the Merger Agreement. The Plaintiffs allege that the Fraud
Defendants made misrepresentations by asserting that they were in compliance with
card network rules while not disclosing the GoClickCash fine, and by representing
that no suppliers had threatened termination even though PayPal had made several
such threats throughout August and September 2011.
Tal testified that he disclosed the GoClickCash fine in a phone call with Busby
only a few days prior to closing. To recap, I found this assertion was not credible
because the supplemental disclosure schedule contained no reference to
130 GoClickCash.611 Additionally, I found that Tal disclosed some level of problems
with PayPal to Busby in Israel, but that this disclosure did not include PayPal’s
credible threats of termination. The failure to disclose the fine and the termination
threats are false representations. Tal had a duty to disclose them to Great Hill, and
to the extent they were not included in representations made in the Merger
Agreement, those representations are also false.
b. Only Tal Knew of the False Representations Regarding PayPal
Other than Tal, the Fraud Defendants are not implicated in these
misrepresentations. Only Tal had actual knowledge of the falsity. Goldman and
Klahr organized a bring down call prior to closing, specifically to inform SGE of
any need to update the disclosure schedule that would accompany the Merger
Agreement. Tal and Itshayek spoke before this call and agreed not to disclose the
possibility of a GoClickCash fine or the PayPal termination threats. Tal told
Itshayek that he would personally disclose these issues to Great Hill. Given Tal’s
assurance, Itshayek had no reason to believe that, to the contrary, these facts would
be withheld from Great Hill. For this reason, Itshayek cannot be charged with
knowledge that Tal ultimately did not make the necessary disclosures. Tal did have
611 By contrast, the parties made sure to include a last-minute disclosure on Home Wealth Solutions, which was only a third-parties’ request for information. Therefore, it is not plausible that Great Hill learned of an actual fine and inadvertently or innocently proceeded to closing without adding the fine into the disclosure schedule.
131 knowledge of the false representations because he knew the information would not
be presented during the bring down call and did not thereafter inform Great Hill.
Goldman and Klahr were not previously informed of any chargeback issues
related to PayPal, a fine related to GoClickCash, or of termination threats by PayPal.
Thus, Goldman and Klahr had no knowledge of the parlous state of Plimus’s
relationship with PayPal. Moreover, they were not recklessly indifferent to such
issues, as evidenced by their own efforts via the bring down call to inform
themselves of any outstanding issues prior to closing. As a result, the Plaintiffs have
shown only that Tal had knowledge of the false representations on Plimus’s issues
with PayPal.
c. Tal Intended for Great Hill to Rely on the Non-Disclosure of the PayPal Issues
Tal was set to continue as CEO of Plimus after the merger. As I have
previously alluded, I am not persuaded by the Plaintiffs’ arguments that Tal lacked
faith in the business. However, Tal wanted the merger to go forward, as it had
advantages for him personally—he could become CEO of a better-capitalized
company and would personally benefit from the earn-outs and the liquidity that he
would realize from the sale. Tal testified that, despite its threats, he thought PayPal
would not terminate Plimus. He believed that he could resolve the issues between
PayPal and Plimus post-closing. I believe that testimony. Nonetheless, he
undoubtedly recognized that Plimus’s problems with PayPal could have a negative
132 effect on the merger. Therefore, and in line with the general intent I found when
discussing the Paymentech termination, I find that Tal intended for Great Hill to rely
on Tal’s false representations in order to induce Great Hill to proceed with the
transaction.
d. Great Hill Justifiably Relied on Tal’s False Representations
Great Hill’s reliance on these false representations was actual and justified.
PayPal’s termination threats were material information. PayPal Pro was a
commodity processing service, similar to Paymentech. However the loss of
Paymentech was disclosed, only certain details, which I found not material, were
concealed. I find, by contrast, the possibility of losing a second major processor in
a matter of few months to be material to a prospective buyer. Furthermore, unlike
with Paymentech, Plimus was not ambivalent to the PayPal relationship, and the loss
of PayPal would mean a major disruption to Plimus’s business. And Tal knew that
the grounds raised by PayPal—excessive chargebacks—were an ongoing problem
for Plimus.612
Great Hill’s reliance on Plimus’s failure to disclose the PayPal problems was,
I find, reasonable. The Fraud Defendants point out that Great Hill did not itself
contact PayPal as part of its due diligence. Great Hill had completed its due
612 Paymentech’s termination notice used pretext to end the relationship. Plimus’s chargeback problems with Paymentech had long been resolved, and Great Hill was aware of those problems. By contrast, the problems with PayPal were ongoing and were largely undisclosed to Great Hill.
133 diligence and signed the merger agreement before any PayPal termination threats
were made. Thus, Great Hill could not have discovered these termination threats
through pre-signing diligence. After the initial merger agreement was signed, the
largest factor delaying closing was Tal’s immigration visa. During this time, Great
Hill could rely on Tal, as the SGE and Founder Directors did, to raise issues that
required their attention. Plimus was contractually bound to disclose this
information, and Great Hill was entitled to rely that disclosures were not knowingly
false. Given this dynamic and the materiality of PayPal’s threats, I find that the
Plaintiffs have shown justifiable reliance.613
The findings above are sufficient to a finding of liability against Tal for
fraud/fraudulent inducement. While damages are an element of fraud, the quantum
of damages here awaits further litigation.
B. Aiding and Abetting the Fraud
The Plaintiffs allege that Herzog, Kleinberg, and all the SGE Defendants614
(the “Aiding and Abetting Defendants”) aided and abetted the fraud committed by
Tal (and, per the Plaintiffs, Itshayek, Goldman, and Klahr). The Plaintiffs argue that
that SGE and SIG Fund are imputed with the knowledge and actions of Goldman
and Klahr, who are their agents. To impose liability for aiding and abetting,
613 Nothing in this finding should be read as preventing any Defendant from pointing to the extent of Great Hill’s diligence review as relevant to their unjust enrichment claims. 614 Those are SGE, SIG Fund, and Goldman and Klahr, whom I have found did not commit fraud.
134 Plaintiffs must show that: (1) there is an underlying fraud; (2) which the aiding and
abetting defendants had knowledge of that fraud; and that (3) they provided
substantial assistance.615
The Plaintiffs failed to show fraud related to the Paymentech termination,
Plimus’s history of violations and risk management systems, and the dispute over
the Founders’ Earn-Out. While the Plaintiffs demonstrated fraud in relation to the
PayPal termination, neither Herzog, Kleinberg, Goldman, nor Klahr were aware that
PayPal was threatening termination. The Plaintiffs argue that under Delaware law,
aiding and abetting liability can be imposed when a defendant lacks knowledge but
is recklessly indifferent to the fraud.616 The Aiding and Abetting Defendants
disagree with Plaintiffs’ assertion. The issue is moot, as I find that the Aiding and
Abetting Defendants were also not recklessly indifferent to the PayPal termination
threats; consistent with their practice as directors, they expected management to raise
issues to the Board as necessary. As a result, the Plaintiffs have not shown that the
Aiding and Abetting Defendants had knowledge of fraud related to the PayPal
termination.
615 LVI Grp. Invs., LLC v. NCM Grp. Hldgs., LLC, 2018 WL 1559936, at *14 (Del. Ch. March 28, 2018). 616 Pls. Opening Post-Tr. Br. 188 (citing Anderson v. Airco, Inc., 2004 WL 2827887, at *4 (Del. Super. Nov. 30, 2004).
135 For the sake of completeness, I add that the Plaintiffs are also unable to show
substantial assistance on the part of the Aiding and Abetting Defendants. The
Plaintiffs have failed to demonstrate any assistance to Tal in the sole area in which I
have found fraud, involving the end of the PayPal relationship.
C. Civil Conspiracy
The Plaintiffs’ sole argument for civil conspiracy is that, “if Plaintiffs prove
aiding and abetting liability, they will have necessarily proved civil conspiracy.”617
They rely on comments I made in my earlier Memorandum Opinion, deciding the
Defendants’ Motion to Dismiss in this case.618 As I have found that the Plaintiffs
have not proven aiding and abetting liability, I find they have not proved civil
conspiracy.
D. Indemnification
A claim for indemnification based on the breach of a representation and
warranty is a claim for breach of contract.619 A breach of contract claim, in turn,
requires: “(1) a contractual obligation; (2) a breach of that obligation by the
defendant; and (3) a resulting damage to the plaintiff.”620 It is worth noting the
617 Pls. Opening Post-Tr. Br. 188 n.73. 618 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at *22 (Del. Ch. Nov. 26, 2014) 619 See, e.g., Hudson’s Bay Co. Luxembourg, S.A.R.L. v. JZ LLC, 2011 WL 3082339, at *2 (Del. Super. July 26, 2011). 620 Cedarview Opportunities Master Fund v. Spanish Broad., Inc., 2018 WL 4057012, at *6 (Del. Ch. Aug. 27, 2018) (citation omitted).
136 fundamental difference between the showing necessary for contractual
indemnification and that required for fraud. For indemnification, the Defendant’s
scienter requirement is absent. Moreover, the Plaintiffs need not show reasonable
reliance; here, in fact, the parties agreed that even the Plaintiffs’ prior “knowledge
. . . of any untruth of any such representation or warranty of [Plimus] expressly set
forth in [the Merger Agreement], regardless of whether such knowledge was
obtained through [Great Hill’s] own investigation or through disclosure by
[Plimus],” is no bar to an indemnification claim.621
The Plaintiffs’ indemnification claim requires some parsing. As an initial
matter, the claim is brought against Tal, Itshayek, Herzog, Kleinberg, SIG Fund, SIG
Management, and the Charity Defendants (the “Indemnification Defendants”).
Indemnification claims were not brought against Goldman and Klahr, who were not
shareholders of Plimus (although Goldman signed the Merger Agreement as
representative of SIG Management and SIG Fund). Itshayek and the Charity
Defendants were not parties to the Merger Agreement, but they executed letters of
transmittal, in which they represented they had read the Merger Agreement and
agreed to be bound by its provisions.622 Tal, SIG Fund, Herzog, and Kleinberg
similarly signed such letters of transmittal.623 As a result, the Plaintiffs have shown
621 JX 796, at 72. 622 JSUF ¶ 144; JX2030 at 2, 5, 9; JX790 at 2, 5, 9. 623 JX336 at 1, 4, 8; JX791 at 2, 5, 9; JX794 at 6; JX795 at 1, 4, 8.
137 that contractual obligations on the part of the Indemnification Defendants run to
Great Hill.
The Plaintiffs allege that four representations and warranties in the Merger
Agreement were breached. They interpret the indemnity provisions in the case of
fraud to impose indemnification liability beyond the escrow amount on all parties
who executed letters of transmittal, regardless of their participation in or knowledge
of that fraud. Although the Indemnification Defendants admit indemnification
liability for three fines related to pre-closing Plimus activity,624 they contest the other
alleged breaches; moreover, they argue that the correct interpretation of the
indemnity provisions does not extend liability for fraud beyond actual tort-feasors.
1. The Defendants Have Breached Certain of the Representations and Warranties in the Merger Agreement
a. The Indemnification Defendants Did Not Breach the Representation on “Material Liabilities or Obligations”
The Plaintiffs allege that the Indemnification Defendants breached the
representation in Section 3.09 of the Merger Agreement that there were no
undisclosed “material liabilities or obligations.”625 The Plaintiffs argue
specifically626 that Plimus’s revenue and profits, as represented in the disclosure
schedule attached to the Merger Agreement, were inflated because they included
624 Post-Tr. Answering Br. Defs. Tal and Itshayek 106. 625 JX 796, at 37. 626 The Plaintiffs also argue generally (and late in a 200-page brief) that “fundamental” flaws were concealed, but for support, they simply point at substantially all of their facts section.
138 vendors that were later terminated and did not reflect the loss of PayPal. Given that
these vendors “had to be terminated after Plimus’s repeated violations of the Card
Network rules lest the company lose every payment processor,”627 I assume the
Plaintiffs are referring to the five hundred vendors that Plimus terminated in January
2012, post-merger.
I note at the outset that characterizing the loss of PayPal as breaching a duty
to disclose “liabilities or obligations” is a strained interpretation of Plimus’s
contractual duties. At the time of closing, PayPal had threatened to terminate its
relationship with Plimus, but had yet to make a definitive decision; furthermore, Tal
did not believe that PayPal would actually terminate. Fundamentally, there was no
known or unknown material liability related to the loss of PayPal at the time of
closing.
Similarly, the post-closing termination of five hundred vendors in January of
2012, four months after closing, was not a material liability that existed at the time
of closing. An unrealized threat to a business model is not a “liability.” The
Plaintiffs cite an internal Plimus e-mail sent on September 26, 2011 that summarized
a call with a PayPal representative, in which the representative identified certain
product categories prohibited by PayPal and considered high risk by the card
627 Pls. Opening Post-Tr. Br. 201.
139 networks. 628 According to the representative, Plimus should “shut down [these
vendors] if [Plimus] want[ed] to keep [its] relationship with [PayPal].”629 The
categories identified did include several categories of vendors that Plimus later
terminated in January 2012. However, the fact that these categories should be shut
down to “keep” PayPal suggests that PayPal was not lost as of September 26, 2011,
only three days before closing. Moreover, while Plimus ultimately terminated these
categories in January 2012, it did so not to keep PayPal, but in an effort to regain
PayPal. Plimus’s efforts to recoup PayPal, in any event, cannot be considered a
material liability at the time of closing, when Plimus had yet to even lose PayPal.
Additionally, the Plaintiffs’ argument that Plimus must have recognized this need to
discharge the vendors or “lose every processor” pre-closing is misplaced. The
Plaintiffs have not shown that Plimus’s relationships with its other processors were
in any way, known or unknown, strained prior to closing, or that Plimus’s other
processors had made similar demands to remove certain vendors. Therefore, to the
extent the five hundred vendors were terminated to save Plimus’s other processor
relationships, the termination was not a material liability at closing. For these
reasons, I find that the Indemnification Defendants have not breached Section 3.09
of the Merger Agreement.
628 JX 771; Pls. Post-Tr. Reply Br. 42 n.21. 629 JX 771; Pls. Post-Tr. Reply Br. 42 n.21.
140 b. The Representations Concerning Compliance With Contracts
Next, the Plaintiffs allege that the Indemnification Defendants breached the
representations in Section 3.16 of the Merger Agreement, by representing that
Plimus was not in “default in complying” with all contracts, nor in “dispute”
regarding those contracts.630 The Plaintiffs assert that Plimus was in default of, or
in dispute regarding its contract with PayPal. Again, this is a strained construction
of the representations at issue. Plimus was not in “default” of, nor in a contractual
“dispute” under, its contract with PayPal, although pursuant to that contract it was
assessed a fine and threatened with termination of the PayPal relationship. In any
event, any breach of this Representation and Warranty is duplicative of the breaches
of the representations concerning supplier relationships and compliance with card
system rules, as discussed below. Any resulting indemnification will also be the
same. Therefore, I discuss these allegations in regard to those breaches of
Representations and Warranties, below.
c. The Indemnification Defendants Have Breached the Representation on Compliance with Card System Rules
The Plaintiffs also argue that the Indemnification Defendants breached the
representation in Section 3.23 of the Merger Agreement that Plimus “is and has been
in compliance with the bylaws and operating rules of any Card System(s).”631 The
630 JX 796, at 42. 631 Id. at 47.
141 Plaintiffs point to the numerous violation notices that Plimus received from
Paymentech and PayPal.
The Indemnification Defendants admit that the compliance representation was
breached, but only with respect to three fines from PayPal relating to pre-closing
transactions. These, the Indemnification Defendants concede, demonstrate that
Plimus had not been in compliance with card system rules.632 The three fines were
for excessive chargebacks in July, excessive chargebacks in August, and the fine
related to GoClickCash. The Plaintiffs have not shown any additional fines or
violations with regard to PayPal.633 As a result, the Indemnification Defendants have
breached this representation, as it relates to the three identified violations through
PayPal.
Next, the Plaintiffs point to Plimus’s failure to disclose violations in
connection with Paymentech. Again, Plimus warranted that it “has been” in
compliance with card system rules, a representation that was untrue with respect to
Paymentech given, among other things, its excessive chargeback issues in 2011. It
is true that any fines related to the Paymentech violations were paid before closing
and the Paymentech relationship ended before the bidding process was even
complete. As a result, the Plaintiffs will, perhaps, have difficulty showing any
632 Post-Tr. Answering Br. Defs. Tal and Itshayek 106. 633 In fact, the Plaintiffs do not specifically state any violations when alleging breach of this representation, and instead unhelpfully cited to certain of their fact sections generally.
142 damages with respect to Paymentech violations. That inquiry, however, is for
another day. The Indemnification Defendants have breached Section 3.23 of the
Merger Agreement.
d. The Indemnification Defendants Breached the Representation on Relationships with Suppliers
Finally, the Plaintiffs argue that, because PayPal threatened termination, the
Indemnification Defendants breached the representation in Section 3.26(b) of the
Merger Agreement that “[n]o supplier of products or services . . . has notified the
Company . . . that it intends to terminate its business relationship with the
Company.”634 The Indemnification Defendants argue that they did not breach this
representation because Plimus did not receive a termination notice prior to closing,
and because PayPal’s internal communications showed that a definitive decision
regarding termination was not made prior to closing. Plimus, however, was aware
of the PayPal representatives’ declarative statements that PayPal would send a
termination notice once certain conditions were met. Section 3.26(b)’s plain
language does not require a notification of termination; only a notification of an
intent to terminate. PayPal representatives expressed such an intent to terminate in
e-mails and calls to Plimus in August and September 2011. As a result, the
Indemnification Defendants have breached Section 3.26(b).
634 JX 796, at 48.
143 2. The Fraud Exception Provision Does Not Allow Uncapped Indemnification Liability for the Fraud of Others
Pursuant to Section 10.03 of the Merger Agreement, the Defendants’
indemnity liability for breaches of representations and warranties is limited to the
lesser of their pro rata share of losses caused by such breaches and their pro rata
share of the escrow amount.635 The Exclusive Remedy clause in Section 10.10 of
the Merger Agreement maintains that the sole and exclusive remedies for breaches
of the Merger Agreement are those found within Article 10, “except in the case of
fraud or intentional misrepresentation (for which no limitations set forth herein shall
be applicable).”636 The Plaintiffs argue that in the case of fraud, this provision
removes the cap on indemnity liability, and imposes this uncapped indemnity
liability on all the Indemnification Defendants even for the fraud of others; that is,
even upon those parties both innocent and ignorant of any fraud. The Plaintiffs
argue that the provision is unambiguous, that a different reading would render
certain language illusory, and that their interpretation is reasonable in light of the
real-world context. They note correctly that Delaware embraces a contractarian
outlook. As a result, per the Plaintiffs, the Indemnification Defendants who were
selling stockholders, known in the Merger Agreement as Effective Time Holders
(“ETHs”)—having agreed to unlimited liability for the frauds of others—must be
635 Id. at 71. 636 Id. at 74–75.
144 held to their bargain in the Merger Agreement. According to the Plaintiffs, this
applies to the ETHs equally, that is, to the charitable interests who were donees of
stock equally with the fraudsters.
As part of a prior Motion to Dismiss, certain Defendants previously sought a
ruling, as a matter of law, that the Exclusive Remedy clause “simply exempts from
the indemnification limitations in Section 10 any recovery in tort from fraudsters.”637
In my 2014 Opinion on the Motion to Dismiss, I declined to address the meaning of
the Exclusive Remedy clause, noting that any decision at that time would not result
in dismissing the entire count. Accordingly, I did not make a finding on whether or
not the language was ambiguous on its face.638 However, as the Defendants point
out, I wrote that “I tend to agree that the Moving Defendants’ reading is
commercially reasonable,” and the issue “would be helpfully illuminated by
evidence of the parties’ intent.”639 Because I have found above that Tal committed
fraud when he did not disclose PayPal’s termination threat, I must now grapple with
the Exclusive Remedy clause.
I must first determine whether the Agreement, read as a whole, is ambiguous
as to remedies available here. The pertinent provisions are set out below. In light
637 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at *26 (Del. Ch. Nov. 26, 2014). 638 Id. at *27. 639 Id. In any event, evidence of the parties’ intent was presented at trial but was limited to self- interested recitations by the Defendants concerning their subjective intent, and is not helpful here.
145 of this language, I turn to the issue of ambiguity. “[A] contract is ambiguous only
when the provisions in controversy are reasonably or fairly susceptible of different
interpretations or may have two or more different meanings . . . . The true test is not
what the parties to the contract intended it to mean, but what a reasonable person in
the position of the parties would have thought it meant.”640 The Plaintiffs point to
Section 10.10, which mandates that the limited indemnification obligations of
Section 10 to be the buyer’s exclusive remedy for damages, “except . . . in the case
of fraud or intentional misrepresentation (for which no limitations set forth herein
shall be applicable).”641 According to the Plaintiffs, this language is unambiguous;
in case of fraud, all sellers agreed to personally indemnify the buyer for all damages,
“without limits.” The argument that Section 10.10 unambiguously provides such
liability fails at inception; even when read in isolation, Section 10.10 does not
address whose fraud will trigger the provision. The Plaintiffs’ argument fails for a
more fundamental reason as well: I must construe the contract as a whole,642 and in
doing so, it is clear that the language quoted exempts fraudsters from the benefits of
the negotiated limits on liability.
640 Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992). 641 JX 796, at 74–75. 642 See, e.g., Chicago Bridge & Iron Company N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 926–927 n.61 (Del. 2017); Northwestern Nat. Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del. 1996); E.I. du Pont de Nemours and Co., Inc. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985).
146 In Article 10, the parties agreed to a carefully thought-out liability scheme on
the part of the ETHs. Section 10.02 sets out the ETH’s indemnification obligations.
ETHs agreed to indemnify the buyer for the pro rata amount of all losses, as defined
in the Section. Section 10.02(c) limits such liability to claims brought by notice on
the ETHs during the contractual limitation period, made with specified detail.
Section 10.03 then places limitations on claims against ETHs:
(a)(ii) in no event shall the [ETH]’s aggregate liability . . . exceed, in the aggregate, the escrow amount . . . .
(b) The Escrow Amount will be the sole source of funds from which to satisfy the [ETH]’s indemnification obligations . . . . In no event shall any individual ETH]’s liability for Losses . . . exceed, in the aggregate, the lesser of (x) such [ETH]’s Pro Rata Share of the Escrow Amount, or (y) . . . [the] Pro Rata Share of the losses.”643
The provisions detailed above demonstrate a thoughtful, bargained-for
liability scheme for ETHs—the parties agreed that losses from breaches of
representations and warranties would be indemnified from a fund, which would be
created from the sale proceeds of the ETH’s, and that such fund would represent the
limit on ETH liability. Section 10 contained benefits for the buyer as well. For
instance, Section 10.04 preserved the buyer’s rights of indemnification for breaches
of representations and warranties, even if the buyer was aware of the falsity of the
643 JX 796, at 71.
147 representation when made.644 In this context, however, what is important is that the
ETHs agreed to be liable without fault for violations of representations and
warranties by Plimus management, at an amount capped by the escrow. Section
10.10 must be read in this context.
Section 10.10 provides that indemnification is the “sole and exclusive
remedy” running to the buyer for “breach of any covenant, agreement, representation
or warranty set forth in this Agreement;” remedies are “limited to those contained in
this Article 10.”645 Three exceptions are carved out from the exclusivity of the
indemnification remedy, of which two are not applicable here. The third involves
fraud, for which damages are not “limited to those contained in this Article 10;”
instead, in case of fraud or intentional misrepresentation, “no limitations set forth
herein shall be applicable.”646 The question, then, is the meaning of the fraud
exception. In light of the contractual liability scheme as a whole, I find the meaning
unambiguous.
The ETHs agreed to set up an escrow fund. They agreed that damages for
breaches of representations and warranties would be paid from this fund, regardless
644 The Merger Agreement provides such rights of indemnification “are part of the basis of the bargain contemplated . . . and shall not be affected or waived by virtue of . . . any knowledge on the part of [the buyer] of any untruth of such representation or warranty . . . regardless of whether such knowledge was obtained by [the buyer’s] own investigation . . . [and] whether such knowledge was obtained before or after the execution” of the Agreement. Id. at 72. 645 Id. at 74–75. 646 Id.
148 of any fault on the part of an individual ETH and regardless of pre-contractual notice
of the falsity of the representations on the part of the buyer. This limited liability
made sense from the point of view of the ETHs, since many of them would have
limited or no opportunity to verify the representations and warranties personally. It
also made sense from the point of view of the buyer, since it had a ready fund from
which to be made whole in the event of a breach. The buyer could attempt, through
due diligence, to insulate itself from harm exceeding the amount in escrow. It could
not, however, reasonably anticipate fraud. Thus, it is unremarkable that while
liability was “limited to” the Article 10 indemnification, in case of fraud “no
limitations set forth herein” applied. This clause permitted the buyer to bring an
action against tort-feasors for damages outside of Article 10, as the Plaintiffs have
done here. This reading is consistent with Section 10.03(b), which provides that the
“Escrow Amount will be the sole source of funds from which to satisfy the [ETH]s’
indemnification obligations . . . .”647
The Plaintiffs, however, seek to expand the benefits of their bargain. They
seek to convert a remedy “limited to” indemnification—except in the event of fraud,
in which case “no limitations” are applicable—into something else altogether. They
interpret the language as something akin to “in case of fraud, buyer may proceed in
indemnification, without showing fault against indemnitors, and with no limit on
647 Id. at 71 (emphasis added).
149 amount.” To my mind, this is simply not a reasonable reading of section 10.10. The
ETHs exposed themselves to indemnification liability for breaches of
representations and warrantees, without regard to fault, even in cases where the
buyer knew the truth of the misrepresentation before contracting; however, the ETHs
strictly limited the amount of that liability. I find that to read the Merger Agreement
as making the ETH’s strict-liability exposure limitless does not comport with the
language of the contract, nor does it comport with the closely-written liability
scheme the parties created.648 I find the language unambiguous: the Plaintiffs may
seek indemnification for breaches; their right to recover is limited to indemnification
under the contract from the escrowed funds, except in case of fraud, in which case
they are free to pursue their remedies in tort as well.
The Plaintiffs contend that this eviscerates their bargain, and that it is against
public policy because it encourages the ETHs to benefit by turning a blind eye to
fraud. Neither argument is persuasive. In case of fraud, the Plaintiffs are entitled to
indemnification as well as any recovery in tort—that is what they bargained for. And
tort-feasors, including the fraudsters and those who conspired with them or aided
648 “[T]he meaning which arises from a particular portion of an agreement cannot control the meaning of the entire agreement where such inference runs counter to the agreement’s overall scheme or plan.” E.I. du Pont de Nemours and Co., Inc. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985).
150 and abetted the fraud, do not escape liability under my plain reading of the Merger
E. Unjust Enrichment
The Plaintiffs bring an unjust enrichment claim against Tal, Itshayek, Herzog,
Kleinberg, SIG Fund, and the Charity Defendants. The Plaintiffs argue that such a
claim is not precluded by the Merger Agreement because that Agreement does not
fully define the relationship between the Plaintiffs and the Defendants.649 The
Plaintiffs point in this regard to the side letter payments and to the fact that Itshayek
and the two Charity Defendants were not parties to the Merger Agreement.
Furthermore, the Plaintiffs argue that unjust enrichment is a viable remedy when the
contract itself constitutes unjust enrichment.
Unjust enrichment is a purely equitable cause of action and remedy. It
involves the unjust retention by one party of a right or property of another, in a
manner that is obnoxious to equity in a fundamental way, and where the plaintiff
lacks a remedy at law. In order to vindicate a claim for unjust enrichment, a plaintiff
must show (1) gain by one party; (2) loss by another; (3) that the gain and loss are
related; (4) that the first party has retained the gain without justification; and (5) the
absence of a remedy at law.650
649 Pls. Opening Post-Tr. Br. 210. 650 Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
151 The Plaintiffs aver that, absent breaches of contract and fraud in connection
with their purchase of Plimus, they would have avoided the sale, or paid less. They
allege that the overpayment has been retained by certain Defendants, which warrants
equitable relief. The Plaintiffs face a formidable barrier to recovery under a theory
of unjust enrichment, because our courts have consistently held that a plaintiff may
not pursue unjust enrichment “aris[ing] from a relationship governed by
contract”651—here, the Merger Agreement. In any event, it would be premature, and
risk an advisory opinion, to address potential entitlement to recovery under a theory
of unjust enrichment here. This matter is bifurcated, with a trial on damages yet to
come. I found it efficient to determine liability under tort and contract theories, to
assume damages, and to set aside a determination of the extent of damages, if any,
for another phase. Tort and breach of contract are legal causes where a plaintiff must
demonstrate actionable behavior; they also impose the obligation to demonstrate
damages arising from that actionable behavior before recovery. Unjust enrichment,
however, is fundamentally different. In an action for unjust enrichment, loss and
related gain are the marrow of the cause of action itself. Therefore, I decline to
address unjust enrichment until the record is complete on damages.
651 Id.
152 III. CONCLUSION
For the forgoing reasons, I find that the Plaintiffs have shown that Tal is liable
for fraud, and that the Plaintiffs are entitled to restitution for breaches of certain
representations and warranties, in an amount capped by the funds in escrow. Issues
of damages remain to be tried.
Related
Cite This Page — Counsel Stack
Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, Counsel Stack Legal Research, https://law.counselstack.com/opinion/great-hill-equity-partners-iv-lp-v-sig-growth-equity-fund-i-lllp-delch-2018.