Tong v. Dunn Powell v. Dunn

Tong v. Dunn; Powell v. Dunn, 2016 NCBC 49.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE

SUPERIOR COURT DIVISION

COUNTY OF ORANGE 11 CVS 1522; 13 CVS 1318

SIU S. TONG, )

)

Plaintiff, )

)

v. )

)

DAVID DUNN, TIMOTHY )

KRONGARD, ED MASI, SOPHIA )

WONG, and JANET WYLIE, )

)

Defendants. )

ORDER & OPINION

)

DAVID J. POWELL, Jr., et al., )

)

Plaintiffs, )

)

v. )

)

DAVID DUNN; TIMOTHY )

KRONGARD; ED MASI; SOPHIA )

WONG; and JANET WYLIE, )

)

Defendants. )

)

)

{1} THIS MATTER is before the Court on Defendants’ Motion for

Summary Judgment on the Statute of Limitations Defense (“Motion”) filed in these

two consolidated lawsuits. For the reasons explained below, the Motion is

GRANTED.

Alston & Bird LLP by Michael Kaeding and Gregg E. McDougal for

Defendants.

Poyner Spruill, LLP by Steven B. Epstein for Plaintiffs.

Gale, Chief Judge.

I. INTRODUCTION

{2} The forty-two Plaintiffs in these two consolidated cases either are

former Engineous, Inc. (“Engineous”) common shareholders or are former holders of

Engineous common stock options. Their claims arise from the merger of Engineous

with ENG Acquisition, Inc. (“ENG”), a subsidiary of Dassault Systèmes Simulia

Corporation (“Dassault”) (the “Merger”). Plaintiffs complain that the Merger was

unfair because it delivered no value to the common shareholders but guaranteed

preferential payments to certain preferred shareholders, some of whom are

Defendants in this action.

{3} Defendants have consistently maintained that Plaintiffs’ claims are

time-barred.1 They initially presented their statute-of-limitations defense through

a motion for judgment on the pleadings. In ruling on that earlier motion, the Court

determined that the briefing and argument suggested the existence of factual

disputes that impacted Defendants’ limitations defense, so the Court permitted

limited discovery on that issue. That discovery has been completed, and the

material facts are undisputed.

{4} For Plaintiffs to prevail on the Motion, their claims must have accrued

within the controlling limitations period. The parties disagree as to the source of

law that must guide the Court’s consideration. Plaintiffs contend that North

Carolina law applies, because the application of a statute of limitations is a

procedural issue that should be governed by the law of the forum state. Defendants

contend that Delaware law should apply, because the internal-affairs doctrine,

which all parties agree applies to the substantive claims, should trump more-

general procedural requirements. The Court need not resolve any such conflict-of-

1 This Order & Opinion is limited to addressing Defendants’ defense that Plaintiffs’ claims are time-

barred. For further detail on other issues in this action, refer to the North Carolina Court of

Appeals’ 2013 decision and this Court’s earlier orders. See Tong v. Dunn, 231 N.C. App. 491, 752

S.E.2d 669 (2013), rev’g No. 11 CVS 1522, 2012 NCBC LEXIS 31 (N.C. Super. Ct. May 18, 2012);

Powell v. Dunn, No. 13 CVS 1318, 2014 NCBC LEXIS 3 (N.C. Super. Ct. Jan. 28, 2014); Tong v.

Dunn, No. 11 CVS 1522, 2012 NCBC LEXIS 16 (N.C. Super. Ct. Mar. 9, 2012).

law issues because it concludes, after thorough consideration, that Plaintiffs’ claims

are time-barred under the laws of both states.

II. PARTIES

{5} Plaintiffs were either common shareholders of Engineous or holders of

options to purchase Engineous common shares. Plaintiff Sui Tong (“Tong”) was a

cofounder, former director, and common shareholder of Engineous. Tong resigned

from his director position while the Merger was under consideration.

{6} Defendants David Dunn (“Dunn”), Timothy Krongard (“Krongard”), Ed

Masi (“Masi”), Sophia Tsai2 (“Tsai”) and Janet Wylie (“Wylie”) were Engineous

directors leading up to and during the time of the Merger. Wylie was Engineous’s

CEO, and Dunn, Krongard, and Tsai were affiliated with entities that had invested

in Engineous as preferred shareholders.

{7} Engineous was a software company organized under the laws of

Delaware, with a principal place of business in Wake County, North Carolina.

{8} Dassault is a publicly traded French company.

III. PROCEDURAL HISTORY

{9} This litigation consists of two related lawsuits: Tong v. Dunn, No. 11

CVS 1522 (N.C. Super. Ct. filed July 20, 2011) and Powell v. Dunn, No. 13 CVS

1318 (N.C. Super. Ct. filed Aug. 1, 2013).

{10} The Complaint in Tong was filed on July 20, 2011, and alleged claims

for breach of fiduciary duty against Defendants and aiding-and-abetting breach of

fiduciary duty against ENG and Engineous. Tong was designated a mandatory

complex business case on August 26, 2011, and assigned to the undersigned on

September 2, 2011.

{11} The Court dismissed Plaintiffs’ aiding-and-abetting claims against

ENG and Engineous on March 19, 2012, based on the doctrine of intracorporate

immunity, Tong, 2012 NCBC LEXIS 16, at *17–20, and dismissed Tong’s claims for

2 Formerly Sophia Wong.

breach of fiduciary duty against Defendants on May 18, 2012, holding that the

claims were barred by the res judicata effect of Tong’s dismissal of a prior action,

Tong, 2012 NCBC LEXIS 31, at *20–21. The remaining Plaintiffs voluntarily

dismissed their other claims without prejudice on August 6, 2012, and Tong

appealed the Court’s dismissal of his breach-of-fiduciary-duty claim. On December

17, 2013, the North Carolina Court of Appeals reversed this Court’s dismissal of

Tong’s claim and remanded the breach-of-fiduciary-duty claim to this Court for

further proceedings. See Tong, 231 N.C. App. at 503, 752 S.E.2d at 677. Tong is

the only remaining Plaintiff in Tong, and ENG and Engineous are no longer

Defendants in that litigation.3

{12} The Plaintiffs that voluntarily dismissed their claims without

prejudice in Tong, then filed Powell on August 1, 2013, alleging claims for breach of

fiduciary duty and unfair or deceptive trade practices (“UDTP”) against Defendants

based on the same factual allegations they previously stated in Tong. Powell was

designated a mandatory complex business case on August 19, 2013, and assigned to

the undersigned on August 21, 2013.

{13} On January 28, 2014, the Court granted in part Defendants’ motion for

judgment on the pleadings under Rule 12(c) of the North Carolina Rules of Civil

Procedure (“Rules”), dismissing Plaintiffs’ UDTP claims but reserving its ruling on

the statute-of-limitations issue until after the completion of limited discovery and

supplemental briefing.

{14} The Court consolidated Powell and Tong on February 27, 2014.

{15} The Motion has been fully briefed and argued and is ripe for decision.

IV. FACTS

{16} The Court does not make findings of fact on a motion for summary

judgment, but it may “articulate a summary of the material facts which [it]

3 The Court’s order dismissing Plaintiffs’ claims against ENG and Engineous became a final

judgment when the remaining Plaintiffs dismissed their claims without prejudice on August 6, 2012.

See N.C. R. Civ. P. 54(b). Plaintiffs did not appeal that order.

considers are not at issue and which justify entry of judgment.” See Hyde Ins.

Agency, Inc. v. Dixie Leasing Corp., 26 N.C. App. 138, 142, 215 S.E.2d 162, 165

(1975). Here, the parties base their positions on an uncontested statement of facts,

which is summarized below.

{17} Tong was a member of the Engineous board of directors in 2006, when

the board retained Wachovia to explore selling Engineous. Between 2008 and 2009,

four potential buyers expressed interest, two of which engaged in a bidding process.

In April 2008, one of the two potential buyers, Dassault, delivered a letter of intent

to Engineous to purchase the company for approximately $40 million. Dassault and

Engineous negotiated merger terms between April 2008 and June 2008. During

that period, Tong objected to the Merger because the proposed purchase price

yielded no value for the common shareholders, who would be “washed out” after the

Merger closed. Tong resigned from the Engineous board before it approved the

Merger.

{18} The Engineous board held a special meeting on June 16, 2008, at

which the board voted and unanimously approved the Merger. The Dassault board

of directors approved the Merger on the same day, and Engineous and Dassault

executed the Merger Agreement. Although the Merger required the further

approval of a supermajority of Engineous’s preferred shareholders and a majority of

its preferred and common shareholders (voting together on an as-converted basis),

the required majorities had entered into binding voting agreements on or before

June 16, 2008, to vote in favor of the Merger.

{19} The Merger Agreement provided that incentive payments would be

made to certain Engineous employees to entice those employees to remain with the

surviving entity after the Merger closed. The terms of the Merger Agreement and

the terms that governed shareholder liquidation preferences in Engineous’s

corporate charter worked together in such a way that, by operation of math, the

common shareholders would not receive any of the $40 million of cash consideration

that Dassault was to pay in connection with the Merger. Instead, the common

shareholders’ shares would be canceled and the shareholders would receive no

ownership interest in the surviving entity.

{20} The Engineous board sent an information statement to Engineous’s

common shareholders on June 18, 2008, which:

(1) advised the shareholders that the board had approved the Merger,

provided a summary of the Merger terms, and included a copy of the

Merger Agreement;

(2) indicated that Engineous’s common shareholders would receive no

consideration for their shares as a result of the Merger and that their

Engineous shares would be canceled;

(3) indicated that certain directors and officers have interests, including

incentive payments and retention agreements, that may have made them

more likely to vote in favor of the Merger;

(4) disclosed that certain directors, including Dunn, Krongard, and Wong,

stood to benefit from the transaction as a result of holding preferred

shares; and

(5) provided that the Engineous certificate of incorporation would be

amended to adjust the liquidation preferences of certain classes of

preferred shares so shareholders of those preferred shares would bear the

cost of the incentive payments.

{21} After they received the information statement on June 18, 2008,

various common shareholders, including several of the Plaintiffs, expressed their

dissatisfaction with the Merger, complained that the board had advanced the

interests of the preferred shareholders over those of the common shareholders, and

threatened legal action to prevent the Merger. On June 27, 2008, Powell wrote a

letter to Defendants and members of Engineous’s and Dassault’s management. The

letter asserted that the board had unfairly approved the Merger terms without due

regard for the interests of the common shareholders. On July 7, 2008, Tong

communicated to the corporate secretary that he intended to pursue an appraisal

remedy under Delaware law, but Tong ultimately did not pursue such a remedy.

{22} Engineous held a special shareholders’ meeting to vote on the Merger

on July 8, 2008, at which shareholders cast votes in accordance with the voting

agreements that they had executed before the board approved the Merger terms on

June 16, 2008.

{23} On July 14, 2008, Tong notified Dassault’s management that he would

not sign the release on which his incentive payment was conditioned. On July 17,

2008, Tong and Plaintiff Adam Young communicated regarding a potential attorney

demand letter that would be sent on behalf of all common shareholders. The letter

was sent the next day. It advised that if the Merger closed, the common

shareholders would take legal action to seek a remedy for Engineous’s and the

board’s alleged self-dealing and breaches of fiduciary duties.

{24} On July 18, 2008, the board and the preferred and common

shareholders approved an amendment to Engineous’s corporate charter to adjust

the preferred shareholders’ liquidation preferences. The amendment was different

from the amendment that had been disclosed in the information statement, but

neither the amendment nor the alteration to the amendment changed the effect of

the Merger on the common shareholders. There is no evidence of any other

alterations being made to the board-approved Merger terms.

{25} No one filed suit to enjoin the Merger. The Merger closed on July 21,

2008.

{26} Plaintiffs instituted this litigation on July 20, 2011, less than three

years after the Merger closed on July 21, 2008, but more than three years after the

Engineous board of directors approved the Merger terms and executed the Merger

Agreement on June 16, 2008, and more than three years after the Merger was

approved by shareholder vote on July 8, 2008.

V. ANALYSIS

{27} The Court must view all evidence in the light most favorable to

Plaintiff. Dalton v. Camp, 353 N.C. 647, 651, 548 S.E.2d 704, 707 (2001). Where,

as here, the facts are undisputed, summary judgment “is designed to eliminate the

necessity of a formal trial where only questions of law are involved and a fatal

weakness in the claim of a party is exposed.” Id. at 650, 548 S.E.2d at 707.

{28} The parties agree that the internal-affairs doctrine dictates that

Delaware, Engineous’s state of incorporation, provide the law that governs the

substantive elements of Plaintiffs’ breach-of-fiduciary-duty claims against

Engineous’s former directors. See Bluebird Corp. v. Aubin, 188 N.C. App. 671, 680–

81, 657 S.E.2d 55, 63 (2008). Defendants argue that the internal-affairs doctrine

should also direct the Court to apply Delaware’s law related to Delaware’s statute of

limitations. Plaintiffs argue, however, that a limitations period is a procedural

matter that is controlled by the law of the forum—in this case North Carolina—and

that the suit is timely brought under North Carolina law even if it might be time-

barred under Delaware law.

{29} The Court has reviewed both North Carolina’s and Delaware’s (1)

requirements to bring substantive claims for breach of fiduciary duty, (2) statutes of

limitations, and (3) rules governing the accrual of a cause of action. Having done so,

the Court concludes that Plaintiffs’ claims are barred regardless of which state’s law

provides the controlling limitations period or governs the time at which Plaintiffs’

claims accrued. Thus, the Court does not need to decide whether the internal-

affairs doctrine should override the default rule that the limitations period of the

forum state controls. See Boudreau v. Baughman, 322 N.C. 331, 335, 340 368

S.E.2d 849, 854, 857 (1988) (noting that “procedural rights are determined by lex

fori, the law of the forum,” and that “[o]rdinary statutes of limitation are clearly

procedural”).

{30} Both North Carolina law and Delaware law apply a three-year statute

of limitations to a breach-of-fiduciary-duty claim. See N.C. Gen. Stat. § 1-52(1)

(2015); Del. Code Ann. tit. 10, § 8106(a) (2015); see also Marzec v. Nye, 203 N.C.

App. 88, 93, 690 S.E.2d 537, 541 (2010) (applying the three-year statute of

limitations found in subsection 1-52(1) of the General Statutes to a breach-of-

fiduciary-duty claim). Plaintiffs contend that, under North Carolina law, the claims

did not accrue at the time the board voted on the Merger, because Plaintiffs did not

suffer actual damage until the Merger closed. The Court concludes that this is not a

proper construction of North Carolina law as applied to the facts of this case.

A. Delaware’s Accrual Rule Directs that Plaintiffs’ Breach-of-Fiduciary-Duty

Claims Accrued When the Board Wrongfully Approved the Merger.

{31} Delaware courts have stated clearly that a claim for breach of fiduciary

duty “accrues at the moment of the wrongful act—not when the harmful effects of

the act are felt—even if the plaintiff is unaware of the wrong.” In re Coca-Cola

Enters., Inc. S’holders Litig., No. 1927-CC, 2007 Del. Ch. LEXIS 147, at *18 (Del.

Ch. Oct. 17, 2007), aff’d sub nom. Int’l Bhd. Teamsters v. Coca-Cola Co., No. 601,

2007, 2008 Del. LEXIS 274 (Del. June 20, 2008). The Delaware Court of Chancery

succinctly summarized Delaware’s accrual rule in Albert v. Alex. Brown

Management Services, Inc.:

The law in Delaware is crystal clear that a claim accrues as soon as the

wrongful act occurs. This is so because the plaintiffs were harmed as

soon as the alleged wrongful acts occurred. Whether or not the

plaintiffs could have sued for damages is not dispositive as to whether

the claim accrued, since, as soon as the alleged wrongful act occurred,

the plaintiffs could have sought injunctive relief.

C.A. Nos. 762-N, 763-N, 2005 Del. Ch. LEXIS 100, at *58–59 (Del. Ch. June 29,

2005) (footnote omitted). The rationale underlying the Delaware courts’ decisions is

that a putative plaintiff who complains of wrongful board action should be

encouraged to promptly seek redress rather than waiting to determine the extent of

any damage resulting from the wrongful action. See In re SunGard Data Sys., Inc.

S’holder Litig., C.A. No. 1221-N, 2005 Del. Ch. LEXIS 105, at *5 (Del. Ch. July 8,

2005); see also Albert, 2005 Del. Ch. LEXIS 100, at *60 (noting that a putative

plaintiff should not be encouraged to wait and see if they benefit from a wrongful

act before bringing suit). Thus, under Delaware law, a claim for breach of fiduciary

duty can accrue before a wrongful act causes a putative plaintiff to suffer damages,

because the wrongful act causes harm to the putative plaintiff as soon as the act is

committed.

{32} Under the Delaware accrual rule, the board’s approval of the Merger

terms on June 16, 2008, was the wrongful act, and Plaintiffs’ claims accrued on that

date. Thus, any claims arising from the Merger must have been brought in

Delaware within three years of June 16, 2008. Plaintiffs’ breach-of-fiduciary-duty

claims were brought on July 20, 2011, and were therefore untimely under Delaware

law.

B. Plaintiffs’ Action Was Untimely Under North Carolina’s Accrual Rule.

{33} The leading North Carolina case on the accrual of a claim is the North

Carolina Supreme Court’s opinion in Shearin v. Lloyd, which stated that

[i]t is a firmly established rule that with certain exceptions, such as in

the cases of covenants and indemnity contracts, the occurrence of an

act or omission, whether it is a breach of contract or of duty, whereby

one sustains a direct injury, however slight, starts the statute of

limitations running against the right to maintain an action. It is

sufficient if nominal damages are recoverable for the breach or for the

wrong, and it is unimportant that the actual or substantial damage is

not discovered or does not occur until later. However, it is well settled

that where an act is not necessarily injurious or is not an invasion of

the rights of another, and the act itself affords no cause of action, the

statute of limitations begins to run against an action for consequential

injuries resulting therefrom only from the time actual damage ensues.

246 N.C. 363, 367, 98 S.E.2d 508, 511–12 (1957) (quoting 34 Am. Jur. Limitation of

Actions § 115 (1936)). The supreme court continued:

[A]s stated by Walker, J., in Mast v. Sapp: ‘When the right of the party

is once violated, even in ever so small a degree, the injury, in the

technical acceptation of that term, at once springs into existence and

the cause of action is complete.’ In such case, as stated by Walker, J.:

‘When a cause of action once accrues there is a right, as of the time of

the accrual, to all the direct and consequential damages which will

ever ensu—that is, all damages not resulting from a continuing fault

which may be the foundation of a new action or of successive actions—

and the law will in such a case take into consideration not only damage

already suffered, but that which will naturally and probably be

produced by the wrongful act . . . .’

Id. at 367–68, 98 S.E.2d at 512 (citations omitted) (quoting Mast v. Sapp, 140 N.C.

533, 538–39, 540, 53 S.E. 350, 352 (1906)). Citing Shearin, the supreme court later

explained in Jewell v. Price that the time at which actual or substantial damage

occurs is not dispositive as to the timing of the accrual of a claim that is based on a

violation of a right, as long as the “whole injury results from the original tortious

act.” 264 N.C. 459, 461, 142 S.E.2d 1, 3 (1965) (citing Shearin, 246 N.C. at 367, 98

S.E.2d at 511–12).

{34} In Shearin, the supreme court also provided an exception to the

general accrual rule. See Shearin, 246 N.C. at 367, 98 S.E.2d at 511. The exception

applies when the act complained of is not by itself a violation of rights or a breach of

duties and damage does not occur until later. See id. Plaintiffs attempt to take

advantage of this exception by arguing that the board’s action was not “necessarily

injurious” until the Merger actually closed because the board could have taken

action before that time to eliminate the potential harm to Plaintiffs. Id. But that

argument fails because Shearin—as interpreted in Jewell—provides that any

violation of a party’s rights or of a duty owed to another party constitutes an injury,

irrespective of whether the party can make a claim for only nominal damages at

that time.4

{35} Substantive Delaware law specifies that a board’s failure to consider

the best interests of the common shareholders in a merger transaction constitutes a

violation of the board’s duty. See In re Trados Inc. S’holder Litig., 73 A.3d 17, 51–

52 (Del. Ch. 2013) (discussing a merger scenario that was markedly similar to the

instant case). That failure, if it occurred at all, occurred when the board approved

the Merger Agreement. Plaintiffs’ underlying cause of action, which must be

evaluated using Delaware law, “spr[ang] into existence” at that time. Shearin, 246

N.C. at 367, 98 S.E.2d at 512 (quoting Mast, 140 N.C. at 540, 53 S.E. at 352).

4 Even if the Court was to determine that a breach-of-fiduciary-duty claim arising from a merger

accrues only after a plaintiff is able to recover damages, both Delaware and North Carolina award at

least nominal damages if a plaintiff can prove that his rights have been violated or impaired by a

defendant. See, e.g., In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 773 (Del. 2006)

(noting that nominal damages are available when a shareholder’s economic interests or voting rights

have been impaired); Potts v. Howser, 274 N.C. 49, 61, 161 S.E.2d 737, 747 (1968) (noting that

nominal damages are granted in recognition that a legal right has been invaded).

{36} Further, Plaintiffs identified a specific harm that occurred when the

board approved the merger term: the elimination of the value of the common shares.

The fact that the full nature, extent, or cost of the injury was unknown at the time

the board approved the merger did not prevent or delay the accrual of Plaintiffs’

claims.

{37} This is not a case where a board conditionally approved a merger and

the close of that merger was dependent on future events that were uncertain or

unknown at the time of the approval. Likewise, this is not a transaction where a

common shareholder had to await the Merger’s closing to determine whether the

closing price was so low as to result in damages to the shareholder. The terms of

the Merger eliminated whatever value Plaintiffs’ common stock might have had.

{38} Plaintiffs nevertheless argue that the Merger represents such a

contingent transaction because the terms of the Merger allowed for the corporate

charter to be amended to modify the allocation of certain classes of preferred

shareholders’ responsibility to absorb the costs of the incentive payments. But

there were no Merger provisions that allowed for amendments to the terms of which

Plaintiffs complain, and the alterations that were implemented did not ultimately

impact the fact that the common shareholders’ interests were extinguished. Also,

when the board approved the merger, shareholders constituting the majority

required for the Merger’s approval were already contractually bound to vote in favor

of the Merger.

{39} Even when the evidence is viewed in the light most favorable to

Plaintiffs, there is no evidence before the Court to indicate that the shareholder vote

on July 8, 2008, was anything other than a foregone conclusion that resulted from

the board’s original approval of the Merger. There are no reasonable inferences

that lead to a different result. See Ray v. Lewis Hauling & Excavating, Inc., 145

N.C. App. 94, 97, 549 S.E.2d 237, 239 (2001) (requiring all evidence to be viewed in

the light most favorable to the nonmoving party, and for all reasonable inferences to

be drawn in favor of the nonmovant). Regardless, even if it could reasonably be

argued that Defendants’ wrong was complete on July 8, 2008, when the

shareholders approved the Merger, that also occurred more than three years before

Plaintiffs filed their Complaint.

{40} Thus, under North Carolina law, Plaintiffs claims must have been

brought within three years of the board’s approval of the Merger terms on June 16,

2008. Because Plaintiffs’ claims for breach of fiduciary duty were brought on July

20, 2011, the claims were untimely under North Carolina law.

C. The Continuing-Wrong Doctrine Does Not Save Plaintiffs’ Claims.

{41} Plaintiffs argue that, even if their breach-of-fiduciary-duty claims first

accrued on June 16, 2008, the continuing-wrong doctrine should apply to toll the

running of the statute of limitations until the Merger closed on July 21, 2008. See

Williams v. Blue Cross Blue Shield of N.C., 357 N.C. 170, 179, 581 S.E.2d 415, 423

(2003) (noting that the continuing-wrong doctrine can serve to toll the running of a

statute of limitations). Under the continuing-wrong doctrine, a continuing wrong

“is occasioned by continual unlawful acts, not by continual ill effects from an

original violation.” Id. (quoting Ward v. Caulk, 650 F.2d 1144, 1147 (9th Cir.

1981)).

{42} Here, the alleged wrong occurred when the board approved the Merger

terms. The continuing-wrong doctrine does not save Plaintiffs’ claims from being

time-barred.

VI. CONCLUSION

{43} The Court holds that, under both North Carolina and Delaware law,

Plaintiffs’ breach-of-fiduciary-duty claims accrued more than three years before

Plaintiffs filed their Complaint. The claims are therefore time-barred and are

DISMISSED WITH PREJUDICE. This Order & Opinion is a final judgment on all

claims.

IT IS SO ORDERED, this the 8th day of July, 2016.

/s/ James L. Gale

James L. Gale

Chief Special Superior Court Judge

for Complex Business Cases