The opinion
Tong v. Dunn, 2012 NCBC 16.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF ORANGE 11 CVS 1522
SIU S. TONG, et al, )
)
Plaintiffs, )
)
v. )
) ORDER ON
DAVID DUNN, TIMOTHY ) CORPORATE DEFENDANTS’
KRONGARD, ED MASI, SOPHIA ) MOTION TO DISMISS
WONG, JANET WYLIE, ENG )
ACQUISITION, INC., both )
individually and as successor-in- )
interest to ENGINEOUS SOFTWARE, )
INC., )
)
Defendants. )
)
{1} THIS MATTER is before the court on Defendants ENG Acquisition, Inc.
and Engineous Software, Inc.’s Motion to Dismiss (“Motion”) pursuant to Rule
12(b)(6) of the North Carolina Rules of Civil Procedure (“Rule” or “Rules”). For the
reasons stated below, the Motion is GRANTED.
Robinson & Lawing, LLP by Michael L. Robinson, H. Stephen Robinson, and
Kurt Seeber; Arrowood Peters, LLP by Raymond P. Ausrotas; Todd & Weld
LLP by David Rich for Plaintiffs.
Kilpatrick Townsend & Stockton PLLC by Gregg McDougal and John Moye
for Defendants David Dunn, Timothy Krongard, Ed Masi, Sophia Wong, and
Janet Wylie.
Moore & Van Allen PLLC by Mark A. Nebrig and Renee D. K. Miller for
Defendants ENG Acquisition, Inc. and Engineous Software, Inc.
Gale, Judge.
I. INTRODUCTION
{2} Plaintiffs, former holders of common stock, filed this action for monetary
relief against five individual Defendants and two corporate Defendants. The
individual Defendants are former Engineous Software, Inc. (“Engineous”) directors,
one of which was also an officer,1 who are accused of limiting the flow of information
to common shareholders and to Plaintiff Director Siu S. Tong (“Tong”) representing
their interest, regarding a merger transaction that impermissibly enriches the
preferred shareholder Defendants. Plaintiffs assert claims for breach of fiduciary
duty against the individual Defendants. They assert a claim against the corporate
Defendants for aiding and abetting the breach of those fiduciary duties by the
individual Defendants.
{3} The Motion attacks Plaintiffs’ claims against the corporate Defendants
asserting, inter alia, that: (1) the Complaint fails to assert a cognizable claim for
aiding and abetting a fiduciary duty even if North Carolina continues to recognize
such a cause of action, particularly where the claim depends on a breach of duties
by fellow fiduciaries, and the corporate Defendants, who are asserted to have aided
its own officers or directors, cannot be characterized as a third-party having no
fiduciary duty; or, alternatively (2) Plaintiffs’ conclusory allegations do not describe
how or when the corporate Defendants aided and abetted any breach of fiduciary
duty.
{4} The Motion is GRANTED, leaving Plaintiffs’ recovery, if any, to be from
the individual Defendants based on their own breaches of fiduciary duties.
1 On this issue, the Complaint is subject to interpretation.
Paragraph 82 suggests that Defendant
Timothy Krongard may have been both an Engineous director and officer. During briefing and oral
argument, however, Plaintiffs emphasized that the aiding and abetting claim is predicated on the
pre-merger conduct of a single Engineous officer, Defendant Janet Wylie. If, in fact, Timothy
Krongard was an Engineous officer, it would not change the court’s ruling on the Motion.
II. PROCEDURAL HISTORY
{5} Plaintiffs’ Complaint was filed in Orange County Superior Court on July
20, 2011. The matter was designated as a Complex Business Case by Chief Justice
Sarah Parker on August 29, 2011 and then assigned to the undersigned on
September 2, 2011. The individual Defendants filed their Answer on September 19,
2011 and their Amended Answer on October 24, 2011. The corporate Defendants
filed their Motion on September 23, 2011. The Motion has been fully briefed, the
court heard oral arguments, and the Motion is ripe for disposition.2
III. STATEMENT OF FACTS
{6} The court does not make findings of fact in connection with the Motion as
a motion to dismiss does “not present the merits, but only [determines] whether the
merits can be reached.” Concrete Serv. Corp. v. Investors Group, Inc., 79 N.C. App.
678, 681, 340 S.E.2d 755, 758 (1986). The following facts are stated to provide
context for the court’s opinion and are taken from the pleadings and are construed
favorably to the Plaintiffs, with the court drawing permissible inferences not
inconsistent with the facts alleged.
{7} Plaintiff Tong is a citizen and resident of Wake County, North Carolina
and an Engineous founder and former director nominated to represent the interests
of its common shareholders. Plaintiff David J. Powell (“Powell”) is a citizen and
resident of Orange County, North Carolina and an Engineous founder and former
director. The remaining Plaintiffs include all holders of Engineous common stock
other than the individual Defendants. Tong, Powell, and the remaining Plaintiffs
will be referred to collectively as the “Plaintiffs” or the “Common Shareholders.”
{8} Defendant David Dunn (“Dunn”) is a former Engineous director and a
citizen and resident of North Carolina. Defendant Timothy Krongard (“Krongard”)
is a former Engineous director and a citizen and resident of Maryland. Defendant
Ed Masi (“Masi”) is a former Engineous director and a citizen and resident of
2 The individual Defendants have separately moved to dismiss claims brought by Plaintiff Tong.
That motion will later be addressed by a separate order.
Arizona. Defendant Sophia Wong (“Wong”) is a former Engineous director and a
citizen and resident of Connecticut. Defendant Janet Wylie (“Wylie”) is both a
former Engineous director and officer and is a citizen and resident of Florida.
Defendants Dunn, Krongard, Masi, Wong, and Wylie are referred to collectively as
the “Individual Defendants.”
{9} Defendant ENG Acquisition, Inc. (“ENG”) is a corporation organized and
existing under the laws of the State of Delaware and is the successor-in-interest to
Engineous as a result of a merger transaction. ENG is a wholly owned subsidiary of
non-party Dassault Systemes S.A. (“Dassault”), a publicly traded company
headquartered in France. Defendant Engineous is a corporation organized under
the laws of the State of Delaware with a principal place of business in Wake
County, North Carolina. ENG and Engineous are referred to collectively as the
“Corporate Defendants.”
{10} In early Spring 2006, the Engineous Board of Directors (“Board”) voted
to explore opportunities to sell the company and retained the investment banking
division of Wachovia Bank (“Wachovia”) to facilitate the transaction. (Compl. ¶¶ 57,
59.) Wachovia stated that it would bring non-traditional buyers to compete for
Engineous’ assets and orally projected a sales price between $100-120 million.
(Compl. ¶ 59.)
{11} Krongard expressed a belief that a sales price below $60 million was not
in the best interest of Engineous or its shareholders, (Compl. ¶ 58), and sought to
work with Tong to block any sale if the valuation was too low. (Compl. ¶ 60.) As a
founder and common shareholder, Tong agreed to work with Krongard and
Wachovia in an attempt to represent the interests of all Engineous shareholders.
(Compl. ¶ 61.)
{12} Wachovia was unable to generate the promised competition. Tong then
located Dassault and three (3) other potential buyers, and Dassault and Siemens
participated in the bidding process. (Compl. ¶¶ 62, 63.) Engineous’ Board held a
special meeting in Fall 2007 to effectively cut off Tong’s interaction with potential
buyers. (Compl. ¶ 64.) Other Board meetings were held in Fall 2007 during which
the rights of preferred and common shareholders were discussed. Plaintiffs contend
that during these meetings, the Individual Defendants collectively agreed to
negotiate a merger that would adequately compensate preferred shareholders at the
expense of the Common Shareholders.
{13} Plaintiffs aver that the minutes of Board meetings were drafted to
conceal evidence suggesting that certain Board members placed their own interests
ahead of the Common Shareholders, but instead only reflected that Wylie was being
appointed to lead any merger and acquisition discussions. (Compl. ¶ 66.) Plaintiffs
believe that Wylie received a “carve-out” and possibly severance payments as
consideration for her decision to support a merger that would only benefit preferred
shareholders. (Compl. ¶ 67.)
{14} Tong refused to sign off on the minutes for one Board meeting, citing the
omission of several statements made and the failure to acknowledge the apparent
agreement between the directors representing preferred shareholders that their
interests should and would drive the negotiations forward. (Compl. ¶ 68.)
Thereafter, the Board and executive management attempted to block
communications between Tong and potential buyers in order to limit the flow of
information to the Common Shareholders. (Compl. ¶ 69.)
{15} At that time, Tong requested that the Board consider the fair treatment
of all shareholders. (Compl. ¶ 70.) Tong encouraged the Board to wait a “bit
longer,” suggesting that the roll-out of a new product, FIPER, might cause a short-
term delay in the sale, but would likely result in substantial benefits to all
Engineous shareholders. (Compl. ¶ 71.) The Board refused to wait for the roll-out,
citing a potential future cash flow shortage. (Compl. ¶ 72.)
{16} At a Fall 2007 Board meeting, the preferred shareholder directors
proposed that a percentage of the proceeds from the merger be carved out to reward
“key business employees” for their contributions to the merger. (Compl. ¶ 73.)
Plaintiffs believe that this money was actually set aside to reward those employees
and executives who supported the merger in favor of the preferred shareholders and
to “buy” general releases from certain employees, alleging that Wylie and “other
preferred shareholders holding board seats” misled Engineous employees by
insisting that Dassault, rather than Engineous and its preferred shareholder
directors, demanded signed releases as a condition to the carve-out. (Compl. ¶¶
74−75.)
{17} Dassault initially offered $35-40 million for Engineous. Dunn proposed
that the Board accept the offer, whereas Tong suggested that the Board wait for a
competitive purchase offer from Siemens. (Compl. ¶ 78.) Engineous was not able to
secure a more favorable offer from Siemens. (Compl. ¶ 79.) Tong did not vote in
favor of either the Dassault or Siemens letters of intent, believing that neither was
in the best interest of all Engineous shareholders. (Compl. ¶ 76.)
{18} Plaintiffs allege that throughout the negotiations, officers of the
company, including Wylie and Krongard, “interfered with Mr. Tong and his rights,
both as a director representing Common Shareholders, and as a common
shareholder personally, to interact with participants and gather information about
ongoing developments” as “part of a concerted effort to assure the process would
proceed in a manner that benefitted only the preferred shareholder Individual
Defendants at Mr. Tong’s and the other Common Shareholders’ expense.” (Compl. ¶
82.) Plaintiffs further assert that the “preferred shareholder majority members of
Engineous’s board, as well as Individual Defendant officers . . . made false
representations to induce others to believe that their ‘wash-out’ scheme was being
executed in a manner that was consistent with the fiduciary duties they owed to all
shareholders.” (Compl. ¶ 84.) Specifically, they contend that Wylie:
provided false information to an Engineous common shareholder,
Stanley Young, in which she claimed that the company had previously
raised funds that resulted in $100M preference and that the company
had only ever been the subject of a prior offer to purchase for $10
Million. This was knowingly false to hide the fact that the sales price
in the currently pending transaction was just below preference, and
Common Shareholders could actually have an “upside” in the
transaction if it had closed in excess of approximately $45-50M – but
for the Individual Defendants’ desire to exit and sell the company
before the Common Shareholders would receive any financial benefit.
No offer of $10 Million was ever presented to Mr. Tong . . . so Ms.
Wylie’s statement was either wholly fabricated, or information was
concealed from Mr. Tong.
(Compl. ¶ 85.)
{19} On July 21, 2008, Dassault acquired Engineous for approximately $40
million, by way of its merger into the ENG entity. (Compl. ¶ 83.)
{20} Plaintiffs now assert that: (1) the pre-merger conduct of the Individual
Defendants constitute breaches of fiduciary duties owed to Engineous and the
Common Shareholders; and (2) Engineous aided and abetted their own directors
and officers in breaching those duties.
IV. STANDARD OF REVIEW
{21} The appropriate inquiry on a motion to dismiss pursuant to Rule
12(b)(6) is “whether, as a matter of law, the allegations of the complaint, treated as
true, are sufficient to state a claim upon which relief may be granted under some
legal theory, whether properly labeled or not.” Crouse v. Mineo, 189 N.C. App. 232,
237, 658 S.E.2d 33, 36 (2008); Harris v. NCNB Nat’l Bank of N.C., 85 N.C. App. 669,
670−71, 355 S.E.2d 838, 840−41 (1987); see Sutton v. Duke, 277 N.C. 94, 102−03,
176 S.E.2d 161, 166 (1970).
V. ANALYSIS
{22} Inquiry begins with examining whether North Carolina recognizes a
claim for aiding and abetting a breach of fiduciary duty under any set of facts, and if
so, whether the Complaint alleges facts that satisfy the elements of such a claim.
{23} “It is undisputed that the Supreme Court of North Carolina has never
recognized [a cause of action for aiding and abetting breach of fiduciary duty].”
Laws v. Priority Tr. Servs. of N.C., L.L.C., 610 F. Supp. 2d 528, 532 (W.D.N.C.
2009). “The only North Carolina Court of Appeals decision recognizing such a
claim, Blow v. Shaughnessy, 88 N.C. App. 484, 364 S.E.2d 444 (1988), involved
allegations of securities fraud, and its underlying rationale was eliminated by the
United States Supreme Court in Central Bank of Denver v. First Interstate Bank of
Denver, 511 U.S. 164, 114 S. Ct. 1439, 128 L. Ed. 2d 119 (1994).” Laws, 610 F.
Supp. 2d at 532.
{24} Without a definitive recent statement from our appellate courts, “[i]t
remains an open question whether North Carolina law recognizes” the claim.
Battleground Veterinary Hosp., P.C. v. McGeough, 2007 NCBC 33 ¶ 68 (N.C. Super.
Ct. Oct. 19, 2007), http://www.ncbusinesscourt.net/opinions/101907%20Order%
20Webpage.pdf; compare Laws, 610 F. Supp. 2d at 532 (granting Rule 12(b)(6)
motion to dismiss claim for aiding and abetting breach of fiduciary duty because “no
such cause of action exists in North Carolina”) with In re Vendsouth, Inc., 2003
Bankr. LEXIS 1437, at *49 (M.D.N.C. Oct. 9, 2003) (stating “North Carolina law
recognizes a claim for aiding and abetting breach of fiduciary duty”).
{25} While the Parties have differing contentions with respect to whether
North Carolina recognizes the cause of action, both concede that, if recognized, the
essential elements of aiding and abetting breach of fiduciary duty are articulated by
the Court of Appeals in Blow. To establish a claim for aiding and abetting breach of
fiduciary duty as stated in Blow, Plaintiffs must show: (1) violation of a fiduciary
duty by the primary party; (2) knowledge of the violation by the aiding and abetting
party; and (3) substantial assistance by the aider and abettor in achieving the
primary violation. Blow, 88 N.C. App. at 489, 364 S.E.2d at 447. Substantial
assistance is a “substantial causal connection between the culpable conduct of the
alleged aider and abettor and the harm to the plaintiff, or a showing that the
encouragement or assistance is a substantial factor in causing the resulting
breach.” Id. at 491, 364 S.E.2d at 448 (citations omitted).
{26} Pursuant to Restatement (Second) of Torts § 876 (“Section 876”),3 a
contributing tort-feaser is subject to liability if they “give substantial assistance to
the other in accomplishing a tortious result and his own conduct, separately
3 The North Carolina Supreme Court has expressly adopted Section 876 as it applies to the
negligence of joint tort-feasers but has not been presented with the question of its applicability to
aiding and abetting claims. See Boykin v. Bennett, 253 N.C. 725, 118 S.E.2d 12 (1961). The North
Carolina Court of Appeals, however, has cited favorably to Section 876 in analyzing other aiding and
abetting claims. See Blow, 88 N.C. App. 484, 364 S.E.2d 444; see also McMillan v. Mahoney, 99 N.C.
App. 448, 393 S.E.2d 298 (1990).
considered, constitutes a breach of duty to the third person.” Restatement (Second)
of Torts § 876 (1979). Consistent with the Restatement approach, but without
addressing whether North Carolina recognizes claims for aiding and abetting
tortious conduct, this court has previously held that for any aiding and abetting
claim a North Carolina court might recognize, it is clear that the primary party and
the aiding and abetting party must have the same level of culpability or scienter.
Sompo Japan Ins. Co., v. Deloitte & Touche, LLP, 2005 NCBC 2 ¶ 12 ( N.C. Super.
Ct. June 10, 2005), http://www.ncbusinesscourt.net/opinions/2005%20NCBC
%202.htm (“[w]hat is clear from all the cases and the Restatement is that there is
not a lower level of culpability or scienter for the aiding and abetting than the
underlying tort”).
{27} To support their claim that the Corporate Defendants aided and abetted
in the Individual Defendants’ breach of fiduciary duty, Plaintiffs allege only the
following conclusory allegations:
95. The Individual Defendants owed to Mr. Tong and the Common
Shareholders the fiduciary duties that are fully set forth above.
96. By committing the acts and omissions as set forth, the Individual
Defendants breached their fiduciary duties owed to Mr. Tong and the
Common Shareholders.
97. Engineous (and its successor-in-interest ENG) aided and abetted
the individual defendants in breaching their fiduciary duties owed to
Mr. Tong and the Common Shareholders.
98. Engineous (and its successor ENG) colluded in or aided and
abetted the Individual Defendants’ breaches of fiduciary duties, and
were active and knowing participants in the breaches of fiduciary
duties owed to Mr. Tong and the Common Shareholders.
(Compl. ¶¶ 95−98.)
{28} Plaintiffs have attempted to flesh out their allegations in their written
submissions and oral argument, where they argued that through the pre-merger
conduct of its officer Defendant Wylie which is imputed to the corporation, the
Corporate Defendants aided and abetted the breaches of fiduciary duties by its own
officers and directors. Recognizing the general rule that a corporation cannot be
said to conspire with or aid its own directors, Plaintiffs emphasize acts taken by
Wylie as an officer. They assert that “executive management of the Corporate
Defendants worked with the board of directors to block Plaintiff Tong . . . from
interacting with the potential buyer, Dassault” and “an Officer of the Corporate
Defendants actively frustrated . . . Tong’s efforts to gather information about
ongoing developments.” (Plaintiffs’ [Corrected] Opposition to Corporate Defendants’
Motion to Dismiss (“Pls.’ Opp’n Br.”) 7; Compl. ¶¶ 69, 82.) That is, Wylie, as an
officer, assisted the directors in breaching their duties, and since Wylie’s acts as an
officer are imputed to the corporation, the Corporate Defendants are liable for
aiding and abetting. Plaintiffs argue that: (1) Wylie was a Engineous board
member and a corporate officer; (2) in her dual role as director and officer she
performed multiple acts in collaboration with the Individual Defendant directors;
(3) she accepted a carve-out and severance package benefitting the Individual
Defendants personally in exchange for supporting a low-value merger; (4) she
misled Engineous Common Shareholder employees by claiming that Dassault
wanted releases to be signed (when actually Engineous management and the Board
did); and (5) she provided false information to shareholders concerning the value of
supposed prior offers. (Pls.’ Opp’n Br. 7.)
{29} As a general rule, the conduct of a corporate officer, within the scope of
employment, cannot expose the corporation itself to aider and abettor liability
because of the intra-corporate immunity doctrine, which recognizes that “a
corporation cannot successfully conspire with its own officers, employees or agents.”
Tate v. Sallie Mae, Inc., 2011 WL 3651813, at *3 (W.D.N.C. Aug. 19, 2011). While
the court here premises its holding on North Carolina law, it is aware and has
considered that Delaware recognizes a limited exception to the intra-corporate
immunity doctrine where an officer or director who has fiduciary duties to the
corporation also undertakes acts independent of that duty, such as when having a
personal interest separate and distinct from the corporation or where participating
on both sides of a merger transaction. See Ronald A. Brown, Jr., Claims of Aiding
and Abetting a Director’s Breach of Fiduciary Duty—Does Everybody Who Deals
With a Delaware Director Owe Fiduciary Duties to that Director’s Shareholders?,
15 DEL. J. CORP. L. 943 (1990). However, Delaware also adopts the general
principle that “a corporation’s directors and officers are all part of a single legal
entity and, therefore, they cannot conspire with each other because it takes at least
two people or entities to carry out a conspiracy.” Id. at 960−61.
{30} Under Plaintiffs’ theory of liability, acts by Wylie are imputed to the
corporation and Wylie’s conduct gives rise to an aiding and abetting claim because
under established North Carolina law, “a corporation can act only through its
agents, which includes its corporate officers.” See Woodson v. Rowland, 329 N.C.
330, 344, 407 S.E.2d 202, 231 (1991). This theory, however, conflicts with the
proposition that liability for aiding and abetting a breach of fiduciary duty “applies
only to third parties who do not stand in a fiduciary relationship with the alleged
victim, but who provide substantial assistance towards accomplishing the alleged
breach.” Battleground, 2007 NCBC 33 ¶ 70.
{31} A different case might be presented if Wylie were alleged to have
undertaken acts independent of and outside her acts as an Engineous officer or
director. But here, the Complaint rests on the pre-merger acts by Wylie within the
scope of her duties as an officer and in a manner that her acts are imputed to the
corporation. Such an allegation falls within the intra-corporate immunity doctrine
and outside its exception recognized in Delaware. Wylie’s actions cannot give rise to
aider and abettor liability under these circumstances because Wylie stands in a
direct fiduciary relationship with Engineous, the alleged victim.
{32} Even were the court able to construe the Complaint as somehow falling
within the parameters of an aiding and abetting claim the North Carolina courts
may allow, which it cannot, further scrutiny would be required because of the
sparse conclusory allegations upon which the claim is asserted. Specifically: (1) the
Complaint is devoid of allegations of substantial assistance by the Corporate
Defendants; (2) Plaintiffs’ argument relies, at least in part, on facts absent from the
Complaint and unsupported by reasonable inferences drawn therefrom; (3) with the
exception of paragraphs 82 and 84, the Complaint fails to distinguish actions taken
by Wylie as a director from actions taken as a corporate officer.
{33} There are separate policy issues that ultimately may need to be
addressed by the North Carolina appellate courts if an aiding and abetting a breach
of fiduciary claim is to be clearly recognized. However, on the facts of this case, the
court has not been required to enter those unsettled waters.
VI. CONCLUSION
{34} For the reasons stated, the Corporate Defendants’ Motion is GRANTED
and Plaintiffs’ claim for aiding and abetting a breach of fiduciary duty is
DISMISSED.
IT IS SO ORDERED, this 19th day of March, 2012.