Valhalla Partners II, L.P. v. Vistar Media, Inc.

• Court: Court of Chancery of Delaware
• Decided: January 17, 2025
• Docket: C.A. No. 2019-0202-SG
• Status: Published

Opinion

COURT OF CHANCERY OF THE SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE VICE CHANCELLOR 34 THE CIRCLE (RETIRED, SITTING BY SUPR. CT. ORDER 1, GEORGETOWN, DELAWARE 19947 2025 (JANUARY 8, 2025))

Date Submitted: December 19, 2024 Date Decided: January 17, 2025

Steven L. Caponi, Esquire Rudolf Koch, Esquire Matthew B. Goeller, Esquire John M. O’Toole, Esquire K&L GATES LLP RICHARDS, LAYTON & FINGER, P.A. 600 King Street, Suite 901 One Rodney Square Wilmington, DE 19801 920 North King Street Wilmington, DE 19801

Re: Valhalla Partners II, L.P., et. al. v. Vistar Media, Inc., C.A. No. 2019-0202-SG

Dear Counsel:

In the last iteration of this matter, I issued a post-trial decision, my

Memorandum Opinion of December 9, 20241 (the “Memorandum Opinion”),

finding that the contract among the parties called for the repayment of the notes in

question in cash, and not in conversion to equity, under the facts as demonstrated at

trial. Having thus disposed of Plaintiffs’ contract claims, I reserved decision on

whether equity offered relief in light of Defendant’s actions and statements after the

parties contracted for the notes.2 The following brief decision addresses those issues,

and finds that no relief in equity is invoked.

1 Valhalla P’rs II, L.P. v. Vistar Media, Inc., 2024 WL 5039563 (Del. Ch. Dec. 9, 2024). 2 Plaintiffs also, less plausibly, seek relief under the rubric of estoppel for statements contemporary with the issuance of the notes. To briefly recapitulate the facts, Defendant Vistar Media, Inc. (“Vistar”)

issued a series of convertible promissory notes to Plaintiffs in 2012 and 2013 (the

“Second Round Notes”).3 When Vistar sought to repay the Second Round Notes

after maturity, Plaintiffs averred that Vistar could not do so, and that Plaintiffs

instead had the right to continue to hold the Second Round Notes until an event that

converted the Second Round Notes to equity occurred.4 In the Memorandum

Opinion, I found, as a matter of contract, that language in the Second Round Notes

provided noteholders with the right to repayment at maturity, but not the unilateral

right to extend maturity.5 I also rejected Plaintiffs’ claims, based on the implied

covenant of good faith and fair dealing and on reformation, to otherwise impose this

unilateral right of extension.6 At the same time, I denied Vistar’s counterclaims, in

particular that Plaintiffs had a contractual obligation to accept repayment (which

Vistar had argued was breached when Plaintiffs refused to accept repayment and

instead litigate here).7 However, I reserved on Plaintiffs’ claims based on

promissory estoppel and equitable estoppel.8 The parties conferred and Plaintiffs’

counsel, by a December 19, 2024 letter, informed me that, as between themselves,

the parties did not believe further proceedings on the estoppel claims were

3 Valhalla P’rs II, L.P., 2024 WL 5039563, at *10. 4 Id. at *13. 5 Id. at *19. 6 Id. at *20–21. 7 Id. at *21. 8 Id. 2 warranted.9 I resolve the estoppel claims in this Letter Opinion, adopting all the

facts found in the Memorandum Opinion.

Vistar was founded in 2012.10 At the time, as a start-up focused on advertising

technology, it sought out funding from venture capitalists and angel investors.11

After raising funds by issuing convertible promissory notes in early 2012,12 Vistar

issued the Second Round Notes, including to Plaintiffs, on or around December 31,

2012, March 1, 2013, June 1, 2013, and September 1, 2013.13 The Second Round

Notes had a maturity date of September 30, 2014, with a nominal interest rate of

4%.14 Plaintiffs, as venture capitalists and angel investors, purchased the Second

Round Notes in the hopes that Vistar would be successful and conduct an equity

financing15 (the latter of which would trigger either optional or automatic conversion

of the Second Round Notes to equity of Vistar).16 Plaintiffs were not primarily

interested in earning the nominal interest.17 Vistar was aware that Plaintiffs’ goal

9 Ltr. to V.C. Glasscock from Steven L. Caponi regarding the Mem. Op. dated Dec. 9, 2024, Dkt. No. 304. 10 Valhalla P’rs II, L.P., 2024 WL 5039563, at *4. 11 Id. at *4, *6. 12 Id. at *4–5. 13 Id. at *10. 14 Id. at *8, *11. 15 Id. at *6. 16 Id. at *9–10. 17 Id. at *6. 3 was to hold equity in successful start-ups.18 The Second Round Notes did not

contain any express obligation to pursue or consummate an equity financing.19

No evidence was presented that during the negotiation of the Second Round

Notes Vistar promised or represented to any Plaintiff that their Second Round Note

would convert to equity, outside of the possibility of conversion precedent on equity

financing. In other words, the terms of the Second Round Notes, as executed by

Plaintiffs and drafted by Plaintiff Valhalla Partners II, L.P. (“Valhalla”), provided

that conversion to equity was predicated on an equity financing, which may or may

not occur.20 Upon maturity, Plaintiffs were entitled to repayment with interest.21 In

the course of negotiating and issuing the Second Round Notes, Vistar did share

financial statements with Plaintiff Advancit Capital I, LP (“Advancit”), which

statements recorded the Second Round Notes as the “Purchase of Stock.”22

Throughout the life of the Second Round Notes, Vistar consistently accounted for

the Second Round Notes as the “Purchase of Stock” on its financial statements,

which it shared with certain Plaintiffs who used them for their own accounting and

financial reasons (and shared capitalization tables of Vistar on a fully diluted basis

that showed Second Round Note holders as equity holders).23 Vistar did make

18 Id. 19 Id. at *20. 20 Id. at *10. 21 Id. at *9, *19. 22 Id. at *12 n.121 (Vistar shared these financial statements with Advancit on January 29, 2013). 23 Id. 4 statements to third-parties prior to maturity that the Second Round Notes were

“basically an equity instrument,” were “intended to convert,” and “will almost 100%

convert.”24

The Second Round Notes did not contain any express provision regarding

extending maturity25 and I found in the Memorandum Opinion that ambiguous

language in the Second Round Notes did not provide holders of Second Round Notes

with the right to unilaterally extend maturity.26 Instead, extension of the maturity

date was possible in accord with the explicit amendment provision of the Second

Round Notes, which required approval by Vistar and at least a majority of the

aggregate amount of the outstanding principal of the Second Round Notes.27 This

amendment procedure was used to amend the maturity date twice, first extending it

from September 31, 2014 to September 30, 2015 (the “First Extension”), and finally

extending it from September 30, 2015 to March 31, 2016 (the “Second

Extension”).28 If a “qualified” financing had occurred during the extension periods,

the notes would have converted to equity.29

24 Id. at *12 n.116. 25 Id. at *11. 26 Id. at *19. 27 Id. at *11. 28 Id. 29 See id. at *10 (quoting the Second Round Note term that provided for automatic conversion to equity in the case of a “Qualified Financing”). Noteholders would have the option to convert their notes to equity if the equity financing generated cash proceeds of less than $2 million. Id. at *1 n.8, *10. 5 In its October 2, 2014 email requesting approval of the First Extension from

certain noteholders, Vistar wrote that as a result of “exceeding its projections . . . [it

had] not needed to raise a qualifying financing” and, therefore, Vistar “needs to

extend the maturity of the note by 12 months.”30

In its June 28, 2015 email requesting approval of the Second Extension from

certain noteholders, Vistar again raised its success and being ahead of budget as

reasons that it “[does] not see the need for another funding round before September

of [2015] when the convertible note is set to mature” and therefore “would like to

request an extension until March of 2016.”31 Absent these extensions, according to

the terms of the Second Round Notes as I have found them, Vistar would have been

then liable for the repayment of the Second Round Notes together with interest.

During March 2016, but prior to the final maturity date of March 31, 2016,

Plaintiff Great Oaks Venture Fund LP (“Great Oaks”) inquired about the status of

the Second Round Notes, to which, Vistar responded that Great Oaks’ Second Round

Note “is still outstanding and has not been converted” and that “[Vistar] need[s] to

ask for approval from note holders again for extension.”32 Great Oaks also asked

why its Second Round Note would not convert to Vistar preferred equity if Vistar’s

30 Id. at *11. 31 Id. 32 Id. 6 business was so robust, to which Vistar responded that such a conversion required

an equity financing.33

Vistar did not seek a third extension (nor was any evidence presented that any

Plaintiff requested one), and continued to communicate with Plaintiffs following the

final maturity date of the Second Round Notes of March 31, 2016.34 Vistar and

Great Oaks continued their email exchange, including on May 10, 2016, when Vistar

wrote to Great Oaks that Vistar expected an equity financing “over the next 6

months.”35 In October 2016, Vistar wrote to Great Oaks that it had “[n]o need for

fresh capital at the moment but going to speak with [its] lawyers about note cleanup

ideas in Q4.”36 On June 8 and 9, 2016, Vistar and Valhalla exchanged emails

discussing various valuations for Vistar.37 On October 13, 2016, Vistar told Plaintiff

Scott Becker that the Second Round Notes were “still outstanding” and it is “hard to

say what [the] estimated current value is.”38

Around late 2016, Vistar had internal discussions related to repaying the

Second Round Notes and by a February 17, 2017 unanimous written consent of

Vistar’s board of directors, Vistar resolved to repay the Second Round Notes and to

33 Id. 34 Id. at *12–13. 35 Id. at *12. 36 Id. 37 Id. at *13. 38 Id. 7 repurchase Vistar common stock.39 As part of Vistar’s tender offer, Becker and

Great Oaks (who both held Vistar common stock) received Vistar financial

statements, which did not include the Second Round Notes as liabilities.40 Vistar

again referred to Becker’s Second Round Note as “still outstanding” in

communication with Becker related to the tender offer.41

Advancit also recalled a conversation with Vistar on March 14, 2017, where

Vistar had “made the joke, [Vistar] better be [Advancit’s] fund-returner,” which

Advancit took to mean that “the return on [its] investment would return the whole

size of [Advancit’s] fund.”42 Two days later, on March 16, 2017, Vistar notified

holders of Second Round Notes that it intended to repay the Second Round Notes in

full, in cash, on March 30, 2017.43 Plaintiffs rejected Vistar’s repayment.44 This

litigation ensued.

Plaintiffs argue that, prior to repayment, the foregoing statements and

representations made by Vistar (and their conduct therewith) conveyed to Plaintiffs

that an equity financing that would convert the Second Round Notes was imminent.

Plaintiffs, they say, relied on these words and actions, and otherwise may not have

approved either of the two extensions to maturity, or may have requested a third

39 Id. 40 Id. at *13 n.127. 41 Id. 42 Id. at *13 n.128. 43 Id. at *13. 44 Id. 8 extension to maturity. The detriment to Plaintiffs, presumably, being the retention

of their capital by Vistar, when Plaintiffs could have demanded repayment in cash

and deployed it more profitably elsewhere (or, presumably, in the case of statements

made in connection with the Second Round Note purchase/sale, not have invested at

all). Accordingly, Plaintiffs posit that promissory estoppel or equitable estoppel

should apply.

Promissory estoppel requires that:

(i) a promise was made; (ii) it was the reasonable expectation of the promisor to induce action or forbearance on the part of the promisee; (iii) the promisee reasonably relied on the promise and took action to his detriment; and (iv) such promise is binding because injustice can be avoided only by enforcement of the promise.45

These elements must be proven by clear and convincing evidence.46 Promissory

estoppel requires “a real promise, not just mere expressions of expectation, opinion,

or assumption.”47 Such a promise must be “reasonably definite and certain.”48

The promise that Plaintiffs argue was made is that the Second Round Notes

would convert or would soon convert to Vistar equity, rather than being repaid in

cash. As an initial matter, I reject that such a promise was made at the time the

45 Lord v. Souder, 748 A.2d 393, 399 (Del. 2000). Because of my decision here, I need not evaluate whether the express contract language of the Second Round Notes precludes the relief Plaintiffs seek via estoppel or equitable estoppel, as a matter of law. 46 Schaeffer v. Lockwood, 2021 WL 5579050, at *18 (Del. Ch. Nov. 30, 2021). 47 Id. (quoting James Cable, LLC v. Millennium Digital Media Sys., L.L.C., 2009 WL 1638634, at *5 (Del. Ch. June 11, 2009)). 48 Id. 9 Second Round Notes were issued (such that Plaintiffs could rely on such promise

when deciding whether to invest). Plaintiffs are venture capitalists and angel

investors who invest in start-ups expecting many of their investments to fail (which,

as they explained, is why they wish to hold equity when their investments are

successful).49 They purchased notes that rejected automatic conversion and that

were payable in cash at maturity.50 Furthermore, Plaintiffs do not point to any

statements made by Vistar which would contradict that reading of the notes, except

that Advancit was provided with financial statements that recorded the Second

Round Notes as “Purchase of Stock,” which Plaintiffs purport equates to a promise

to provide equity. I do not find it reasonable for Advancit, which executed a Second

Round Note with express and conditional conversion provisions, to otherwise expect

that its Second Round Note would in all cases convert to equity based on the

accounting treatment of such convertible promissory note.

I pause here to further address these financial statements, which were provided

to Plaintiffs throughout the life of the Second Round Notes. Plaintiffs’ claim the

accounting treatment of the Second Round Notes as equity in Vistar’s financial

statements (and which Plaintiffs were provided with or obtained for their own

49 Valhalla P’rs II, L.P., 2024 WL 5039563 at *6. 50 Valhalla explicitly negotiated that the Second Round Notes would not automatically convert to equity at maturity. Id. at *8. In other words, even if Vistar succeeded and did not fail, as Plaintiffs expected many of their investments to, conversion was expressly subject to the occurrence of equity financing in the Second Round Notes executed by the Plaintiffs. Id. at *10 (providing the conversion provisions of the Second Round Notes). 10 financial and accounting reasons) equated to a promise that the Second Round Notes

must eventually convert to equity. As with the financial statements provided to

Advancit prior to it being issued a Second Round Note, I find this “promise” to be

belied by the Second Round Notes. I do not find in the face of the written agreements

(signed by and available to the Plaintiffs) that it was reasonable for the Plaintiffs to

rely on the accounting treatment of the Second Round Notes so that equity must

impose a contractual term absent from the notes themselves. Plaintiffs have also

pointed to certain statements Vistar made to third parties about the Second Round

Notes (and their intended conversion, e.g., the Second Round Notes were “basically

an equity instrument”) as evidence of a promise of conversion. However, these

statements were made to third parties, and Plaintiffs have not argued that the same

statements were made to Plaintiffs or that Plaintiffs were otherwise aware of the

statements at the relevant times (much less that Vistar as a promisor expected,

reasonably or otherwise, to induce action or forbearance on the part of Plaintiffs as

promisees through these statements); I, therefore, do not consider these statements

for purposes of evaluating promissory estoppel.

In other words, there is no basis for equity to impose a modification to the

contractual language of the Second Round Notes based on any Vistar promise before

or contemporaneous with purchase of the Second Round Notes.

11 I next turn to the pre-maturity actions and representations of Vistar. There

were two decisions taken by Plaintiffs to which an estoppel could theoretically

attach: the decisions to extend the maturity dates of the Second Round Notes. At the

time the First Extension and Second Extension were made, Vistar reached out to

noteholders (or at least enough noteholders to reach the required aggregate majority

of the outstanding principal for an amendment) and told them that Vistar was

successful and ahead of budget, and therefore did not need to raise additional

funding. In the case of the First Extension, Vistar said it therefore “needs to extend

the maturity,” and in the case of the Second Extension, it said it “would like to

request an extension.” Plaintiffs see, implicit in these statements of Vistar’s success

(which were also conveyed in general updates from Vistar and in individual status

updates) and the lack of need for additional financing, a promise that equity

financing—resulting in conversion—was forthcoming. This, Plaintiffs argue,

induced them to sign the two extensions. In other words, Vistar’s “needing” or

“wanting” an extension was a promise that, if the maturity date was so extended, an

equity financing (and resulting conversion) would occur.

Plaintiffs ask that I look to Keating v. Board of Education of Appoquinimink

School District,51 where a teacher was repeatedly and definitively told by the

51 1993 WL 460527 (Del. Ch. Nov. 3, 1993), aff’d by, Bd. of Educ. of Appoquinimink Sch. Dist. v. Keating, 650 A.2d 1305 (Del. 1994). 12 principal of the school where she worked that she would be rehired, a decision that

was typically rubber stamped by the board of education of the relevant school district

if a teacher was recommended by an administrator.52 In reliance on these

representations, the teacher bought a car (upon the principal’s advice) and did not

seek another teaching position, only for the board of education to vote not to rehire

her.53 The court found it was reasonable for the teacher to rely on the representations

made to her that she would be rehired even if she knew the decision to rehire her

was ultimately up to the board of education because that board had never rejected an

administrator’s hiring recommendation.54 I do not find the circumstances in Keating

to be similar to those here, or persuasive in this context.

First, Vistar’s requests for extensions, looked at in the context of the

contractual language, may reasonably be read as requesting the extension periods to

avoid the responsibility to repay the Second Round Notes in cash at maturity, absent

an extension. Plaintiffs suggest that they read this as a promise that an equity

financing must occur, but Vistar did not state that an equity financing would occur

during the extension period it was requesting. While such a definitive statement

would not necessarily be required to create a promise here, Plaintiffs need to point

to something other than Vistar’s statements regarding its success and the resulting

52 Id. at *5. 53 Id. 54 Id. at *6. 13 lack of a need for equity financing. That such success indicated to Plaintiffs that

Vistar could achieve an equity financing, to my mind, does not equate to a promise

from Vistar that it would complete an equity financing.

Additionally, even if I were to find an implied promise in the requests for

extension, such a promise is a far cry from the explicit representations in Keating,

and I do not find it would be reasonable to rely on such an implied promise. Vistar

was, at the times it was requesting extensions, successful. However, Vistar itself

stated when requesting the extensions that its success was the very reason it had not

conducted equity financing. It follows (as it did with the Second Extension) that

Vistar’s continued success could continue to delay equity financing.

Finally, I do not see an injustice that demands a remedy based on these facts.

The amendment procedure agreed to here required consent of both Vistar and a

majority of the outstanding principal of the Second Round Notes. Under the

contractual language as I have construed it, both extensions had benefits to issuer

and holder. Vistar benefitted by avoiding an immediate obligation to make a cash

repayment. The holders benefited by continuing to have a possibility of a

conversion. That an equity financing would not occur, even with the extensions,

was a business risk. Plaintiffs approved both extensions, and with the benefit of

hindsight they now seek to have those decisions retracted. This result would not

give Plaintiffs the relief they seek, however—at most, even if an estoppel resulted,

14 Defendant would be estopped from relying on the extensions, and Plaintiffs’

damages would be limited to the return on capital they could have expected, if the

notes had been repaid on the (non-extended) maturity date.55 Plaintiffs, instead, seek

a finding that the notes remained viable until converted to equity. The doctrine of

promissory estoppel does not support such a result.

Lastly, I address Vistar’s statements and actions during the post-maturity

period. Plaintiffs point to the statements made by Vistar (1) to Becker and Great

Oaks via financial statements that Plaintiffs claim did not include the Second Round

Notes as liabilities to be repaid, despite the Vistar board of directors having resolved

to repay the Second Round Notes, (2) to Valhalla, when discussing possible

valuations of Vistar, (3) to Great Oaks on May 10, 2016 that it expected equity

financing over the following 6 months, (4) to Becker that his Second Round Notes

were still outstanding, and (5) to Advancit that Vistar should be Advancit’s “fund-

returner.” The “promise,” again, per Plaintiffs is that an equity financing event that

would convert the Second Round Notes was still forthcoming. I note that these

statements were made to only certain of the Plaintiffs. In other words, that Vistar

told Great Oaks that it expected an equity financing event, does not accrue to the

other Plaintiffs who were not so informed. In any case, to the extent promises exist,

I do not find it reasonable for the Plaintiffs to which they were made to have relied

55 Plaintiffs, I note, have not sought such relief, or attempted to prove damages. 15 on them, to the extent there existed any such reliance. No Plaintiff, it seems, raised

any issue with the passing of the maturity date, and even if requested by Plaintiffs,

a third extension was not possible without Vistar’s approval. In other words, it is

unclear to me what reliance to its detriment, post maturity, any Plaintiff made.

Vistar’s statements indeed held out the hope of equity financing, but to the extent

Plaintiffs relied on them, it was only in briefly postponing exercising their present

right to repayment; equity cannot support the relief (conversion to equity) that

Plaintiffs now seek.

Having not found any promises (and even when assuming such promises,

having not found reliance on such assumed promises to be reasonable) at the time

the Second Round Notes were issued, extended (either the First Extension of Second

Extension), or post-maturity, I do not find grounds for promissory estoppel. I turn

next to equitable estoppel (which does not require a promise). Equitable estoppel

requires a demonstration by Plaintiffs that:

(i) they lacked knowledge or the means of obtaining knowledge of the truth of the facts in question; (ii) they reasonably relied on the conduct of the party against whom estoppel is claimed; and (iii) they suffered a prejudicial change of position as a result of their reliance.56

56 Vintage Rodeo Parent, LLC v. Rent-a-Ctr., Inc., 2019 WL 1223026, at *23 (Del. Ch. Mar. 14, 2019) (quoting Nevins v. Bryan, 885 A.2d 233, 249 (Del. Ch. 2005)). The Plaintiff has the burden of establishing these elements by clear and convincing evidence. Id. 16 It is hard to imagine that counterparties to the contracts “lacked the means of

obtaining knowledge of the . . . facts in question” when those facts were available

by reading the terms of the Second Round Notes. Further, while equitable estoppel

does not require a promise, it still requires reasonable reliance on the conduct of the

party to be estopped. Plaintiffs point to the same statements and actions they claim

to be promises as the conduct for the basis equitable estoppel. In my analysis of the

promissory estoppel claim, even where I assumed for purposes of analysis the

existence of a promise, I found reliance on such promises not to be reasonable. For

those same reasons, I do not find it reasonable for Plaintiffs to have relied on the

conduct of Vistar they question. The Second Round Notes were available to the

Plaintiffs to determine what rights they had regarding conversion and extension of

maturity; in Valhalla’s case it had drafted the language in question—certain of the

other Plaintiffs could not recall if they had read the Second Round Notes,57 others

asked for conversion without an equity financing (for which the Second Round

Notes did not provide).58 As stated above, this was not a case where Vistar told

Plaintiffs that an equity financing would occur within the extended maturity date

(something that it would be uniquely placed to know), but only that it expected one

57 Valhalla Partners II, L.P., 2024 WL 5039563 at *18. 58 Id. at *11 (Plaintiffs DFJ Mercury II, L.P. and DFJ Mercury Affiliates Fund, L.P., and Great Oaks asked Vistar why Vistar would not convert the Second Round and were told by Vistar that conversion required an equity financing). 17 to occur. Equity, I find, is not invoked here. If it were, again, presumably any relief

would be limited to returns forgone by not extending, and instead taking cash at

maturity. Equity could not support the relief sought—construing the Second Round

Notes so as to provide a right to hold until an equity financing occurred.

To the extent the foregoing requires an Order to take effect, IT IS SO

ORDERED.

Sincerely,

/s/ Sam Glasscock III

Sam Glasscock III