The opinion
2022 IL 127177
IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
(Docket No. 127177)
WALWORTH INVESTMENTS-LG, LLC, Appellee, v.
MU SIGMA, INC., et al., Appellants.
Opinion filed November 28, 2022.
JUSTICE OVERSTREET delivered the judgment of the court, with opinion.
Chief Justice Theis and Justices Anne M. Burke, Neville, Michael J. Burke,
Carter, and Holder White concurred in the judgment and opinion.
OPINION
¶1 Walworth Investments-LG, LLC, a former stockholder, brought this action
against Mu Sigma, Inc. (Mu Sigma), a privately held data analytics company, and
Dhiraj C. Rajaram, the company’s founder, chief executive officer (CEO), and
chairman of its board of directors (collectively, defendants), alleging that after
reaping the benefits of plaintiff’s $1.5 million investment and reputational capital,
defendants embarked on a fraudulent scheme to oust plaintiff of its substantial
ownership interest in the company.
¶2 The Cook County circuit court disposed of plaintiff’s claims as a matter of law,
dismissing plaintiff’s second amended complaint on the primary basis that the
parties’ stock repurchase agreement (SRA), which included antireliance and
general release provisions, barred plaintiff’s causes of action.
¶3 The appellate court reversed and remanded for further proceedings, holding,
inter alia, that the antireliance language found in the SRA was ambiguous and
therefore did not bar plaintiff’s claims as a matter of law. For the reasons that
follow, we reverse the appellate court’s judgment and affirm the circuit court’s
judgment.
¶4 I. BACKGROUND
¶5 In 2005, Rajaram, as founder and CEO, incorporated Mu Sigma. Mu Sigma was
incorporated in Delaware and is headquartered in Northbrook, Illinois. The next
year, plaintiff, an investment company acting on behalf of a prominent Chicago
family, purchased shares of series B preferred stock from Mu Sigma for $1.5
million, an implied per share value of $0.68. Upon execution of an initial
investment agreement, plaintiff became the sole holder of series B preferred stock,
reflecting an approximate 21% ownership stake in the company, and the single
largest outside investor in Mu Sigma at that time.
¶6 According to plaintiff, this investment significantly aided Mu Sigma’s growth
over the next few years. For example, in 2007, Mu Sigma generated revenues of
$4.2 million—almost 20 times the company’s revenues only two years earlier. In
December 2008, Mu Sigma generated gross revenues totaling nearly $14 million,
which was more than 60 times the company’s gross revenues of $219,000,
generated the year before plaintiff invested. Additionally, as a result of plaintiff’s
reputational capital, Mu Sigma developed an elite clientele, which included
companies like Dell, Microsoft, and WalMart, among others.
¶7 In August 2008, Mu Sigma raised an additional $15 million through the sale of
newly created shares of class C preferred stock for $1.72 per share. Mu Sigma also
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repurchased some of Rajaram’s stock shares for the same price. Around that time,
plaintiff also acquired additional shares of series B preferred stock. Plaintiff and
Mu Sigma also entered into a new investor rights agreement, which provided that
Mu Sigma would, upon request, provide to plaintiff periodic and annual financial
reports reflecting the company’s performance. According to plaintiff, when it made
this request, Rajaram instructed Mu Sigma’s chief financial officer (CFO) to send
the company’s financial reports when they became available, and the CFO
promised to do so “from now on.”
¶8 According to plaintiff, in August 2009, Mu Sigma made an unsolicited offer to
its investors, including plaintiff, to repurchase up to three million shares of its stock
for $0.67 cents per share. Plaintiff alleged that the $0.67 price implied a valuation
of approximately $31 million—down 61% from the $80 million valuation implied
by the series C sale. According to plaintiff, there was nothing in Mu Sigma’s
financial reports explaining the sudden, dramatic decrease in the company’s stock
value, which was less than half the price Mu Sigma paid to repurchase Rajaram’s
stock shares the year before. In any event, plaintiff declined the repurchase offer.
¶9 In mid-March 2010, Rajaram again approached plaintiff about repurchasing its
stock shares. According to plaintiff, Rajaram told it that Mu Sigma would no longer
experience explosive growth and instead would have to rely on acquisitions to
replace the company’s organic growth. According to plaintiff, Rajaram claimed that
Mu Sigma’s business had changed and that it was time for plaintiff to sell, warning
that there was “no upside left” for the company. According to plaintiff, against this
backdrop, Rajaram expressed the view that Mu Sigma would not “be his big
success” and thus invited plaintiff to be “lead investors in [his] next company.”
¶ 10 According to plaintiff, Rajaram represented that he was planning to offer a
$1.20 per share value to “early investors *** to buy their shares back into the
company,” and Mu Sigma’s counsel expressed that its repurchase offer was
intended to apply to “one or a small number of stockholders.” According to
Rajaram, the impending loss of Mu Sigma’s largest customer, IMS Health, was a
harbinger of the company’s grim future prospects, and given the economic and
political environments facing Mu Sigma and its potential clients, Mu Sigma was
unlikely to acquire new customers to replace the lost revenue.
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¶ 11 Plaintiff alleged that Rajaram’s statements and omissions of information
induced it to enter the SRA, after approximately two months’ negotiation, on May
27, 2010. Pursuant to the SRA executed by plaintiff and defendants, Mu Sigma
purchased all of plaintiff’s 7,764,705 shares of series B preferred stock at $1.20 per
share, for a total of $9,317,646. The SRA contained provisions wherein plaintiff
agreed that (1) it had received the information it deemed necessary to decide
whether to sell the stock, (2) defendants had not made any representations outside
the SRA, (3) it released and discharged defendants from any known or unknown
claims, (4) the SRA contained the complete agreement and understanding between
the parties and superseded any prior understandings, and (5) the SRA would be
governed by Delaware law.
¶ 12 Specifically, the SRA provided as follows:
“3. Representations and Warranties of Stockholder. Stockholder
represents and warrants that:
***
(e) Disclosure of Information. Stockholder has received all the
information it considers necessary or appropriate for deciding whether
to sell the Repurchased Stock to the Company pursuant to this
Agreement. Stockholder acknowledges (i) that neither the Company,
nor any of the Company’s Related Parties (as defined below), has made
any representation or warranty, express or implied, except as set forth
herein, regarding any aspect of the sale and purchase of the
Repurchased Stock, the operation or financial condition of the
Company or the value of the Repurchased Stock and (ii) that the
Company is relying upon the truth of the representations and warranties
in this Section 3 in connection with the purchase of the Repurchased
Stock hereunder.
***
4. Representations and Warranties of the Company. The Company
represents and warrants that:
***
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(d) Disclosure of Information. The Company is not currently
engaged in any discussions or conversations with any third parties
which the Company has reason to believe would directly or indirectly
result in the sale or issuance of any capital stock of the Company at an
implied valuation or purchase price greater than the implied valuation
of the Repurchased Stock. The Company acknowledges that
Stockholder is relying upon the truth of the representations and
warranties in this Section 4 in connection with the sale of the
Repurchased Stock hereunder.”
¶ 13 Next, the SRA’s release provision, found in section 5, provided:
“5. Release. Stockholder hereby forever generally and completely
releases and discharges the Company and its Related Parties and their
respective successors and assigns from any and all claims, liabilities,
obligations and demands of every kind and nature, in law, equity or
otherwise, known and unknown, suspected and unsuspected, disclosed
and undisclosed, and in particular of and from all claims and demands
of every kind of nature, known and unknown, suspected and
unsuspected, disclosed and undisclosed, that arose out of or are in any
way related to events, acts, conduct or omissions occurring prior to the
date of this Agreement; provided, however, that the foregoing release
shall not apply to claims relating to Stockholder’s right to payment by
the Company.”
¶ 14 The SRA further provided:
“6. Miscellaneous.
***
(b) This Agreement shall be construed in accordance with, and
governed in all respects by, the laws of the State of Delaware (without
giving effect to principles of conflicts of laws).
***
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(f) The representations and warranties set forth in this Agreement
shall survive the execution of this Agreement regardless of any
investigation or lack of investigation by the parties to this Agreement.
(g) This Agreement contains the complete agreement and
understanding between the parties as to the subject matter covered
hereby and supersedes any prior understandings, agreements or
representations by or between the parties, written or oral, which may
have related to the subject matter hereof in any way.”
The term “Related Parties” is defined in section 3(e) of the SRA to include Mu
Sigma’s officers, directors, stockholders, employees, and other company
representatives, and it thus extends by its terms to Rajaram.
¶ 15 According to plaintiff, Rajaram’s statements, made prior to the SRA’s
execution, were lies or, at best, intentionally misleading statements. Plaintiff
alleged that, contrary to what Rajaram had stated, members of Mu Sigma’s sales
team understood that the loss of IMS Health as a client represented an opportunity
for more organic growth, not a signal of declining business, in that parting ways
with IMS Health allowed Mu Sigma to pursue IMS Health’s previously off-limit
clients.
¶ 16 According to plaintiff, Rajaram boasted in an internal April 2010 e-mail to his
employees that Mu Sigma “represent[ed] the new order of what a new age services
company [would] look like” and was “poised for explosive growth.” Rajaram also
told a potential Mu Sigma CFO that Mu Sigma was performing so well he expected
its valuation to more than double in the next three years, stating: “[O]ur company
should have a fair value of about $200MM today. *** I believe we can take it to
about $500 MM in the next 3 years.”
¶ 17 Plaintiff alleged that Mu Sigma was setting new records for growth in March
2010 and in April 2010 and maintained that growth throughout 2010 by bringing
on more than 20 new name-brand clients, expanding the size of its sales team, and
focusing nonsales employees on expanding revenues and clients. According to
plaintiff, Mu Sigma’s documents indicate that 2010 was the company’s highest
growth year between 2008 and 2013.
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¶ 18 Plaintiff alleged that, beyond mischaracterizing the loss of the client and Mu
Sigma’s financial health, Rajaram also failed to disclose to plaintiff that he wanted
to take Mu Sigma public in three to four years, valued the company at $200 million
in April 2010—which would have corresponded to a purchase price of four times
more than the $1.20 per share that the plaintiff received—and had no “next
company” in mind that would represent a more lucrative investment for plaintiff.
¶ 19 In the months leading up the repurchase transaction, Rajaram instructed Mu
Sigma’s CFO to stop sending monthly investor reports to plaintiff. According to
plaintiff, the March 2010 monthly revenue report that Rajaram withheld from
plaintiff demonstrated that, for the first time in the company’s history, monthly
revenues had exceeded $3 million, every business unit was exceeding projections,
and Mu Sigma was experiencing month-on-month growth of 16%. The April 2010
report similarly showed that the company had outperformed its first-quarter
projections. Plaintiff alleged that it never received these reports, which contradicted
Rajaram’s dour portrayals of Mu Sigma’s state of financial affairs.
¶ 20 A few months after the parties executed the SRA, plaintiff learned that Rajaram
had been interviewed by the Chicago Sun-Times newspaper. Contrary to what
Rajaram had told plaintiff, the Sun-Times reported that Rajaram predicted “huge
growth” for Mu Sigma, estimating that the company would “double its revenues to
$100 million *** in the next three years.” When plaintiff confronted Rajaram about
this inconsistency, however, he had no explanation.
¶ 21 Mu Sigma’s growth far exceeded Rajaram’s prediction for it in the Sun-Times.
By 2015, Mu Sigma was generating more than $250 million in annual revenue and
more than $125 million in annual cash profits. As of 2019, the company was
estimated to be worth over $1.5 billion. According to plaintiff, had it not
relinquished its stake, it would own Mu Sigma shares worth hundreds of millions
of dollars.
¶ 22 A. Circuit Court Proceedings
¶ 23 In 2016, plaintiff filed the instant suit. After the circuit court entered multiple
piecemeal rulings, including reconsideration of prior rulings with regard to
plaintiff’s previous complaints, plaintiff filed its second amended complaint
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containing six counts on April 23, 2019. Counts I through IV alleged plaintiff’s
previous claims for fraudulent inducement, fraudulent concealment, negligent
misrepresentation, and breach of fiduciary duty. Specifically, in count I, plaintiff
alleged that both defendants committed fraudulent inducement, based on Rajaram’s
false affirmative representations and omissions of material fact concerning the
valuation and business prospects of the company, the client and contract pipeline,
and Rajaram’s motive and purpose for the transaction, to induce plaintiff into the
repurchase transaction. In count II, plaintiff alleged both defendants committed
fraudulent concealment, in that Rajaram, despite his fiduciary obligations,
improperly omitted material facts relating to the SRA and actively concealed
material facts relating to Mu Sigma’s value. In count III, plaintiff alleged that both
defendants committed negligent misrepresentation, in that Rajaram and Mu Sigma
made false affirmative representations of material fact and omitted material facts
concerning the valuation and business prospects of the company, the company’s
client and contract pipeline, and Rajaram’s motive and purpose for the transaction.
¶ 24 In count IV, plaintiff alleged that Rajaram breached fiduciary duties owed to
plaintiff. Plaintiff alleged that Rajaram breached his obligation of loyalty by acting
in his own self-interest to the detriment of plaintiff as a stockholder and breached
his obligation to fully and fairly disclose information to plaintiff. Plaintiff alleged
that Rajaram made false and misleading statements and omissions of material
information regarding the company’s business prospects and value and the
company’s plans to conduct an initial public offering or other major strategic
transaction.
¶ 25 In count V, plaintiff alleged that Mu Sigma breached the investor rights
agreement, which was the separate contract between plaintiff and Mu Sigma, by
failing to provide the financial statements and reports requested by plaintiff and by
intentionally concealing such financial information from March 2010 to May 2010,
the months leading up to the execution of the SRA. In count VI, plaintiff asserted
an unjust enrichment claim, against both defendants, alleging that they acted in bad
faith to intentionally deceive plaintiff, concealed material information that Rajaram
had a fiduciary obligation to provide, and made material misstatements and
omissions to induce plaintiff into the repurchase transaction. Plaintiff sought
compensatory and punitive damages or, alternatively, rescission of the SRA.
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¶ 26 On August 30, 2019, upon defendants’ motion to dismiss pursuant to section 2-
619.1 of the Code of Civil Procedure (Code) (735 ILCS 5/2-619.1 (West 2018)),
which allows a combined motion under sections 2-619 and 2-615 of the Code (id.
§§ 2-615, 2-619), the circuit court dismissed with prejudice plaintiff’s second
amended complaint. In its order, the circuit court noted that all of the claims in
plaintiff’s first amended complaint had been dismissed or abandoned. The circuit
court, applying Delaware law, held that the broad and comprehensive general
release found in section 5 of the SRA, which was executed by sophisticated parties
represented by experienced counsel, was unambiguous and worked to bar
plaintiff’s claims, all of which related to conduct leading up to the May 2010 SRA.
¶ 27 In its August 30, 2019, order, the circuit court noted that it had previously
entered summary judgment in favor of defendants on the merits of plaintiff’s fraud
and fiduciary duty claims and that it had twice denied plaintiff’s motions for
reconsideration of those rulings, because plaintiff could not prove the essential
element of reliance for those claims because of the antireliance language found in
the SRA. 1 The circuit court thus reaffirmed that the antireliance language found in
section 3(e) of the SRA, coupled with the general release language in section 5,
sufficiently disclaimed plaintiff’s reliance on defendant’s alleged
misrepresentations or omissions made outside the four corners of the SRA and,
therefore, sufficiently barred plaintiff’s fraudulent inducement, fraudulent
concealment, negligent misrepresentation, and breach of fiduciary duty claims. The
circuit court also found defendants did not owe plaintiff a fiduciary duty of full
disclosure, because the duty only attaches to a “request for shareholder action” and
this case involved an individually negotiated transaction.
1
On October 9, 2018, the circuit court granted defendants’ motion to reconsider a previous
March 29, 2018, order denying defendants’ motion for partial summary judgment and granted
summary judgment in favor of defendants as to counts I (fraudulent inducement), II (fraudulent
concealment), and III (negligent misrepresentation) of plaintiff’s first amended complaint. The
circuit court found that, pursuant to the SRA language, plaintiff disclaimed its reliance on
extracontractual statements, barring these claims. On April 2, 2019, on the parties’ motions for
reconsideration of the court’s October 9, 2018, order, the circuit court granted defendants’ motion
for reconsideration, finding plaintiff’s breach of fiduciary duty claim also barred by the SRA
language. In this order, the circuit court granted plaintiff’s motion for leave to file a second amended
complaint.
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¶ 28 Noting that section 4(d) of the SRA included the representation that Mu Sigma
was not engaged in any discussions with any third parties it had reason to believe
would result in the sale of any capital stock at an implied valuation greater than the
implied valuation of the repurchased stock, the circuit court noted that the parties
could simply have expanded section 4(d) to include Mu Sigma’s misrepresentations
alleged here.
¶ 29 In its August 30, 2019, order, the circuit court further addressed plaintiff’s
argument that a “fiduciary exception” rendered the SRA’s release language
unenforceable absent disclosure of any misconduct or claims the release would
purportedly cover. The circuit court held that plaintiff’s fiduciary exception
argument could not rescue its breach of contract claim or its unjust enrichment
claim against Mu Sigma because Mu Sigma did not owe plaintiff a fiduciary duty.
See In re Wayport, Inc. Litigation, 76 A.3d 296, 322-23 (Del. Ch. 2013)
(corporation owes no fiduciary duties to its shareholders; only officers or directors
do). 2
¶ 30 The circuit court further held that plaintiff could not avoid application of the
release with regard to Rajaram. The circuit court distinguished Xy Hong Bin v.
Heckmann Corp., No. 4637-CC, 2009 WL 3440004, at *7 (Del. Ch. Oct. 26, 2009)
(Delaware law requires a director to make full disclosure of his interest in a
transaction before engaging in that transaction with the corporation), 3 holding that
Heckmann did not apply to an arm’s-length transaction between a corporation and
a shareholder. Enforcing the release terms as written, the circuit court dismissed
with prejudice plaintiff’s breach of contract claim for the alleged breach of the 2008
investor rights agreement and plaintiff’s unjust enrichment claim.
¶ 31 B. Appellate Court Proceedings
2
“Delaware has long been recognized as the fountainhead of American corporations and *** its
Courts of Chancery are known for their expert exposition of corporate law.” In re Ivan F. Boesky
Securities Litigation, 129 F.R.D. 89, 97 (S.D.N.Y. 1990).
3
“Delaware courts give [unpublished Court of Chancery] opinions substantial precedential
weight.” Crystallex International Corp. v. Petróleos de Venezuela, S.A., 879 F.3d 79, 85 n.8 (3d Cir.
2018); see also Case Financial, Inc. v. Alden, No. 1184-VCP, 2009 WL 2581873, at *6 n.39 (Del.
Ch. Aug. 21, 2009) (unpublished opinions in Delaware “have precedential value”).
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¶ 32 Plaintiff appealed, contending that the circuit court erred in dismissing its
claims against defendants because the SRA contained no clear, unambiguous,
antireliance provision and the SRA’s general release provision was therefore
unenforceable as a product of fraud. 2021 IL App (1st) 191937, ¶ 25. Noting that
the parties agreed that Delaware law governed the issues on appeal, the appellate
court found absent from the SRA an unqualified disclaimer from plaintiff’s point
of view that it did not rely on the extracontractual statements allegedly made by
defendants. Id. ¶¶ 35-36. Accordingly, the appellate court concluded that the SRA’s
language was ambiguous as to which party, if any, disclaimed reliance, considered
extrinsic evidence of an earlier draft of section 3(e) and of Rajaram’s internal e-
mails, and determined that whether the SRA was enforceable or fraudulently
procured was a question of fact for a jury to decide. Id. ¶ 45.
¶ 33 The appellate court addressed whether Rajaram had a fiduciary duty to disclose
all information that was material to the stock repurchase transaction. Id. ¶ 53. The
appellate court held that the suggestion that defendants intended to extend their
repurchase offer to an unspecified number of other stockholders raised a question
of fact as to whether the repurchase was an individual transaction or part of a larger
request for stockholder action. Id. ¶ 54. Citing Dohmen v. Goodman, 234 A.3d
1161, 1168 (Del. 2020), the appellate court explained that, if the director requested
stockholder action but failed to disclose material facts bearing on that request, then
the SRA’s reliance clause was not applicable because, in such a circumstance,
plaintiff need not prove reliance as an element of its breach of fiduciary duty claim
in order to recover nominal damages. 2021 IL App (1st) 191937, ¶ 52. The appellate
court held that, because it concluded that there was a genuine issue of material fact
regarding whether the repurchase transaction was part of a request for shareholder
action, there remained genuine issues of material fact with regard to plaintiff’s
fraudulent inducement, fraudulent concealment, negligent misrepresentation, and
breach of fiduciary duty claims. Id. ¶ 56.
¶ 34 The appellate court also concluded that the circuit court erred in dismissing
plaintiff’s claims for breach of contract and unjust enrichment based on the SRA’s
release provision. Id. ¶ 58. The appellate court held that, because the enforceability
of the general release provision depended upon whether plaintiff’s fraud claims
were successful, the dismissal of plaintiff’s breach of contract and unjust
enrichment claims was premature. Id. ¶ 64.
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¶ 35 Accordingly, the appellate court “reverse[d] the circuit court’s summary
judgment ruling in favor of defendants on plaintiff’s fraudulent inducement,
fraudulent concealment, negligent misrepresentation, and breach of fiduciary duty
claims” and remanded the cause for further proceedings. Id. ¶ 70. In addition, the
appellate court reversed the circuit court’s judgment dismissing plaintiff’s breach
of contract and unjust enrichment claims and remanded the cause for further
proceedings. Id. Justice Pucinski specially concurred, opining that the majority’s
decision went too far into the trier of fact’s realm when discussing the parole
evidence. Id. ¶ 73 (Pucinski, J., specially concurring).
¶ 36 On September 29, 2021, this court allowed defendants’ petition for leave to
appeal. Ill. S. Ct. R. 315 (eff. Oct. 1, 2020). This court also allowed the
Northwestern University Pritzker School of Law Bluhm Legal Clinic Complex
Civil Litigation and Investor Protection Center, the University of Pittsburgh School
of Law Securities Arbitration Clinic, and the Illinois Trial Lawyers’ Association
leave to file briefs as amici curiae in support of plaintiff’s position. Ill. S. Ct. R.
345 (eff. Sept. 20, 2010).
¶ 37 II. ANALYSIS
¶ 38 The circuit court found that the express language of the SRA barred plaintiff’s
claims in its second amended complaint. In the circuit court, defendants filed a
motion to dismiss plaintiff’s second amended complaint pursuant to section 2-619.1
of the Code. 735 ILCS 5/2-619.1 (West 2018). Section 2-619.1 motions may be
granted where a defendant raises an affirmative defense or other matter that defeats
the plaintiff’s claim as a matter of law or based on an easily proved issue of fact.
Kedzie & 103rd Currency Exchange, Inc. v. Hodge, 156 Ill. 2d 112, 115-16 (1993).
¶ 39 Section 2-619.1 of the Code allows defendants to combine a section 2-615
motion to dismiss (735 ILCS 5/2-615 (West 2018)) with a section 2-619 motion to
dismiss (id. § 2-619). Pursuant to section 2-615 of the Code, the movant challenges
the legal sufficiency of a complaint based on certain defects or defenses apparent
on the face of the complaint. Beacham v. Walker, 231 Ill. 2d 51, 57 (2008). In ruling
on a section 2-615 motion, a court must accept as true all well-pleaded facts and all
reasonable inferences therefrom, to determine whether the complaint’s
allegations—construed in the light most favorable to the plaintiff—are sufficient to
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establish a cause of action upon which relief may be granted. Vitro v. Mihelcic, 209
Ill. 2d 76, 81 (2004).
¶ 40 Section 2-619 of the Code permits dismissal where “the claim asserted *** is
barred by other affirmative matter avoiding the legal effect of or defeating the
claim.” 735 ILCS 5/2-619(a)(9) (West 2018). “The phrase ‘affirmative matter’
encompasses any defense other than a negation of the essential allegations of the
plaintiff’s cause of action.” Kedzie & 103rd Currency Exchange, Inc., 156 Ill. 2d
at 115. “For that reason, it is recognized that a section 2-619(a)(9) motion to dismiss
admits the legal sufficiency of the plaintiff’s cause of action much in the same way
that a section 2-615 motion to dismiss admits a complaint’s well pleaded facts.” Id.
We review de novo an appeal from the dismissal of a complaint pursuant to section
2-615 or 2-619 of the Code. Id. at 116; see also Malone v. Brincat, 722 A.2d 5, 9
(Del. 1998) (motion to dismiss complaint presents question of law and is subject to
de novo review by court on appeal, where court must accept as true all well-pleaded
allegations of fact). We also review de novo a circuit court’s ruling on a motion for
summary judgment, where the court determines whether the pleadings, depositions,
and admissions on file, together with the affidavits, if any, evidence that there is no
genuine issue as to any material fact and the moving party is entitled to a judgment
as a matter of law. 735 ILCS 5/2-1005(c) (West 2018); Kedzie & 103rd Currency
Exchange, 156 Ill. 2d at 116.
¶ 41 In this case, the plain language of the SRA provides that it be construed and
governed by Delaware law. Moreover, because Mu Sigma was incorporated in
Delaware, Delaware law governs Rajaram’s fiduciary obligations to Mu Sigma’s
stockholders. See Prime Leasing, Inc. v. Kendig, 332 Ill. App. 3d 300, 314 n.1
(2002) (pursuant to Illinois choice-of-law principles, fiduciary duty claims are
governed by the law of the state of incorporation).
¶ 42 A. The SRA’s Antireliance Language
¶ 43 Counts I through IV of plaintiff’s second amended complaint allege claims for
fraudulent inducement, fraudulent concealment, negligent misrepresentation, and
breach of fiduciary duty. To state a claim for common-law fraud, plaintiff must
plead facts supporting an inference that
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“(1) the defendant falsely represented or omitted facts that the defendant
had a duty to disclose; (2) the defendant knew or believed that the
representation was false or made the representation with a reckless
indifference to the truth; (3) the defendant intended to induce the
plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable
reliance on the representation; and (5) the plaintiff was injured by its
reliance.” (Emphasis added.) Abry Partners V, L.P. v. F&W Acquisition
LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006).
¶ 44 Accordingly, under Delaware law, plaintiff’s claims of fraudulent inducement,
fraudulent concealment, and negligent misrepresentation require the element of
plaintiff’s reliance. Nicolet, Inc. v. Nutt, 525 A.2d 146, 149 (Del. 1987) (“[t]o
establish a prima facie case of intentional representation (fraudulent concealment),”
plaintiff must prove “[a]n intent to induce plaintiff’s reliance upon the” defendant’s
deliberate concealment); Stephenson v. Capano Development, Inc., 462 A.2d 1069,
1074 (Del. 1983) (at common law, fraud or deceit requires proof of plaintiff’s action
or inaction taken in justifiable reliance upon the misrepresentation); Vichi v.
Koninklijke Philips Electronics, N.V., 85 A.3d 725, 822 (Del. Ch. 2014) (to recover
on a negligent misrepresentation claim, plaintiff must prove that it “suffered a
pecuniary loss caused by justifiable reliance upon the false information”).
Likewise, plaintiff’s claim for breach of fiduciary duty generally requires the
plaintiff to prove reliance. Dohmen, 234 A.3d at 1175 (“to recover compensatory
damages, an investor who proves a breach of the fiduciary duty of disclosure must
prove reliance, causation, and damages”).
¶ 45 The circuit court in this case determined that the antireliance language in the
SRA, wherein plaintiff stated that it had received all the information it considered
necessary and that the defendants had not made any representation or warranty,
express or implied, except as set forth in the SRA, barred counts I through IV of
plaintiff’s second amended complaint. However, the appellate court concluded that
the SRA’s language did not unambiguously disclaim reliance on extracontractual
statements or omissions and did not bar plaintiff’s fraud and fiduciary duty claims.
We therefore first review the language of the parties’ SRA.
¶ 46 “Delaware adheres to the objective theory of contracts, i.e., a contract’s
construction should be that which would be understood by an objective, reasonable
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third party.” (Internal quotation marks omitted.) Estate of Osborn v. Kemp, 991
A.2d 1153, 1159 (Del. 2010). Courts must read a contract as a whole, giving each
provision effect, so as not to render any part of the contract mere surplusage. Id.
Courts must not read a contract to render a provision illusory or meaningless. Id.
When a contract is clear and unambiguous, courts must give effect to the plain
language of the contract’s provisions. Id. at 1159-60.
¶ 47 A Delaware court will thus “give priority to the parties’ intentions as reflected
in the four corners of the agreement.” (Internal quotation marks omitted.) Riverbend
Community, LLC v. Green Stone Engineering, LLC, 55 A.3d 330, 334 (Del. 2012).
“When interpreting a contract, the role of a court is to effectuate the parties’ intent,”
and to do so, the court is “constrained by a combination of the parties’ words and
the plain meaning of those words where no special meaning is intended.” Lorillard
Tobacco Co. v. American Legacy Foundation, 903 A.2d 728, 739 (Del. 2006).
¶ 48 Pursuant to Delaware law, “[a] contract is not rendered ambiguous simply
because the parties do not agree upon its proper construction.” Rhone-Poulenc
Basic Chemicals Co. v. American Motorists Insurance Co., 616 A.2d 1192, 1196
(Del. 1992). Moreover, a mere split in the case law concerning the construction of
a contract does not render the contract’s meaning ambiguous in the Delaware
courts. O’Brien v. Progressive Northern Insurance Co., 785 A.2d 281, 289 (Del.
2001). Under Delaware law, a contract is rendered ambiguous “only when the
provisions in controversy are reasonably or fairly susceptible of different
interpretations or may have two or more different meanings.” Rhone-Poulenc Basic
Chemicals Co., 616 A.2d at 1196. Courts should not “torture contractual terms to
impart ambiguity where ordinary meaning leaves no room for uncertainty.” Id.
Where “a contract is unambiguous, extrinsic evidence may not be used to interpret
the intent of the parties, to vary the terms of the contract[,] or to create an
ambiguity.” Eagle Industries, Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228,
1232 (Del. 1997).
¶ 49 Defendants argue that by agreeing in the SRA that Mu Sigma had made no
representations about its financial condition or the value of its stock, except as set
forth in the SRA itself, plaintiff disclaimed reliance on any extracontractual
representations. Defendants thus argue that, under Delaware’s clearly stated policy
of enforcing written antireliance provisions, the circuit court correctly ruled that
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plaintiff’s claims requiring the element of reliance were barred as a matter of law.
Defendants argue that the appellate court erred in refusing to enforce the
antireliance language in the SRA, considering that such provisions have been
routinely enforced by Delaware courts. Plaintiff counters that the language of
section 3(e) of the SRA does not satisfy Delaware’s heightened standard for explicit
antireliance language because it does not contain an unqualified disclaimer from
plaintiff’s point of view that it did not rely on the extracontractual statements
allegedly made by defendants.
¶ 50 Delaware law enforces clauses identifying the information on which a party has
relied and foreclosing reliance on other information. RAA Management, LLC v.
Savage Sports Holdings, Inc., 45 A.3d 107, 116-17 (Del. 2012). Delaware law
attempts to strike the appropriate balance between holding sophisticated parties to
the terms of their contract and simultaneously protecting against the abuses of
fraud. Abry Partners, 891 A.2d at 1061-62 (“the common law ought to be especially
chary about relieving sophisticated business entities of the burden of freely
negotiated contracts”).
¶ 51 “[S]ophisticated parties to negotiated commercial contracts may not reasonably
rely on information that they contractually agreed did not form a part of the basis
for their decision to contract.” (Internal quotation marks omitted.) Id. at 1056. To
bar a contracting party from later asserting claims for fraud based on
representations outside the contract’s four corners, the contract must reveal that the
aggrieved party unambiguously disclaimed reliance on such statements. FdG
Logistics LLC v. A&R. Logistics Holdings, Inc., 131 A.3d 842, 860 (Del. Ch. 2016).
“[T]he disclaimer must come from the point of view of the aggrieved party [(the
party claiming fraud and not the party accused of fraud)] *** to ensure the
preclusion of fraud claims for extra-contractual statements.” Id.
¶ 52 Accordingly, for a contract to bar fraud in the inducement claims, the contract’s
language, when read together, must “add up to a clear anti-reliance clause by which
the plaintiff has contractually promised that it did not rely upon statements outside
the contract’s four corners in deciding to sign the contract.” Kronenberg v. Katz,
872 A.2d 568, 593 (Del. Ch. 2004). Murky or standard integration clauses without
explicit antireliance language “will not relieve a party of its oral and extra-
contractual fraudulent representations.” Abry Partners, 891 A.2d at 1059.
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¶ 53 Delaware courts “have honored clauses in which contracted parties have
disclaimed reliance on extra-contractual representations, which prohibits the
promising party from reneging on its promise by premising a fraudulent inducement
claim on statements of fact it had previously said were neither made to it nor had
an effect on it.” Id. at 1056 (fraud claims based on representations made outside of
agreement can be disclaimed through nonreliance language) (citing Homan v.
Turoczy, No. Civ.A. 19220, 2005 WL 2000756, at *16-17 (Del. Ch. 2005),
Kronenberg, 872 A.2d at 591-93, aff’d, 867 A.2d 902 (Del. 2005), H-M Wexford
LLC v. Encorp, Inc., 832 A.2d 129, 142 (Del. Ch. 2003), Progressive International
Corp. v. E.I. DuPont de Nemours & Co., No. C.A. 19209, 2002 WL 1558382, at
*7 (Del. Ch. July 9, 2002), Great Lakes Chemical Corp. v. Pharmacia Corp., 788
A.2d 544, 555 (Del. Ch. 2001), and MBIA Insurance Corp. v. Royal Indemnity Co.,
426 F.3d 204, 218 (3d Cir. 2005) (applying Delaware law and predicting that “when
sophisticated parties have inserted clear anti-reliance language *** Delaware’s
highest court will enforce it to bar a subsequent fraud claim”)). “Delaware law does
not require magic words” to disclaim reliance, and the specific language of an
agreement may vary but still “add up to a clear anti-reliance clause.” Prairie
Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 51 (Del. Ch. 2015).
¶ 54 In this case, pursuant to Delaware law, the integration provision found in
section 6(g) of the SRA, stating that the SRA contained “the complete agreement
and understanding between the parties as to the subject matter covered hereby and
supersedes any prior understandings, agreements or representations by or between
the parties, written or oral, which may have related to the subject matter hereof in
any way,” may have been insufficient, alone, to disclaim reliance upon defendants’
extracontractual statements. Abry Partners, 891 A.2d at 1059 (“standard integration
clauses without explicit anti-reliance representations, will not relieve a party of its
oral and extra-contractual fraudulent representations”); Kronenberg, 872 A.2d at
574-75 (standard integration clause alone will not preclude fraud in the inducement
claims). However, section 6(g)’s integration clause, in combination with the clear
language in subsection (i) of section 3(e) of the SRA, stating that plaintiff “ha[d]
received all the information it consider[ed] necessary or appropriate for deciding
whether to sell the Repurchased Stock to the Company” and that defendants had
made no “representation or warranty, express or implied, except as set forth [in the
SRA], regarding any aspect of the sale[,] and purchase of the Repurchased Stock,
the operation or financial condition of the Company or the value of the Repurchased
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Stock,” add up to clear antireliance language. The parties here were sophisticated
parties represented by counsel. Yet, in its second amended complaint, plaintiff
pleaded allegations of fraud in the inducement based on Rajaram’s extracontractual
statements, made to plaintiff before it entered the SRA. If plaintiff had relied on
statements made outside of the SRA, it should not have signed an agreement
expressly stating that no such representations had been made to it. See H-M
Wexford LLC, 832 A.2d at 142 n.18 (Delaware law has consistently held that a
sophisticated party to a negotiated commercial contract may not reasonably rely on
information it contractually agreed did not form the basis for the contract).
¶ 55 Section 3(e)(ii) further put forth that Mu Sigma was relying on plaintiff’s
acknowledgement that neither it nor any of its related parties had made any
representation except as set forth in the SRA. Thus, the SRA, considered as a whole,
reveals a clear disclaimer of reliance by the plaintiff on extracontractual statements
made by defendants. Collab9, LLC v. En Pointe Technologies Sales, LLC, No. C.A.
N16C-12-032 MMJ CCLD, 2019 WL 4454412, at *5 (Del. Super. Ct. Sept. 17,
2019) (combined integration and antireliance language where each party
acknowledged that neither made any representations that survived execution of
agreement, except for those expressly set forth in agreement, expressed intent to
preclude reliance on representations made prior to effective date of agreement and
barred fraud claims); ChyronHego Corp. v. Wight, No. 2017-0548-SG, 2018 WL
3642132, at *5, *7 (Del. Ch. July 31, 2018) (provision stating the plaintiff agreed
that the defendant had made no representations other than those set forth in the
agreement, read in conjunction with integration clause, expressed intent to preclude
reliance on extracontractual statements and barred fraud claims because language
constituted “a clear statement that no extra-contractual representations were relied
upon by the parties”).
¶ 56 The antireliance language circumscribes the universe of representations Mu
Sigma made to plaintiff concerning the financial condition of the company and the
value of the repurchased stock to only representations Mu Sigma made in the SRA
itself. Moreover, the SRA also contains a general release in which plaintiff released
defendants from all claims, “known and unknown,” that “arose out of or are in any
way related to events, acts, conduct[,] or omissions occurring prior to the date of”
the SRA. See IAC Search, LLC v. Conversant LLC, No. 11774-CB, 2016 WL
6995363, at *7 (Del. Ch. Nov. 30, 2016) (noting that the presence of a release
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further reinforces the effect of antireliance language). Considering that “Delaware
law does not require magic words” to disclaim reliance, we find that the specific
language of the SRA “add[s] up to a clear anti-reliance clause” barring plaintiff’s
claims involving representations made outside of the SRA. See also Prairie
Capital, 132 A.3d at 51 (combination of standard integration clause and clause
representing affirmatively that buyer relied only on representations in the
agreement added up to clear antireliance clause that barred fraud claims based on
extracontractual statements).
¶ 57 Below, the appellate court declined to enforce the antireliance language in the
SRA, holding that the language was not from plaintiff’s point of view. 2021 IL App
(1st) 191937, ¶¶ 35-36; see FdG Logistics LLC, 131 A.3d at 859. However, the
SRA specifically provides in section 3, titled “Representations and Warranties of
Stockholder,” that plaintiff, as stockholder, “received all the information it
consider[ed] necessary or appropriate” and that plaintiff, as stockholder,
acknowledged “neither the [c]ompany, nor [its related parties], ha[d] made any
representation or warranty, express or implied,” except as set forth in the SRA
“regarding any aspect of the sale and purchase of the Repurchased Stock, the
operation or financial condition of the Company or the value of the Repurchased
Stock.” The clear language of the SRA belies the appellate court’s holding.
¶ 58 Plaintiff argues that this court should decline to enforce the language of the
SRA on policy grounds, arguing that defendants should be prohibited from using
contracts to shield themselves from liability for their own fraud. Yet, the Supreme
Court of Delaware has affirmed Delaware’s public policy in favor of enforcing
contractually binding, written disclaimers of reliance on representations outside of
a final sale agreement:
“[A] party cannot promise, in a clear integration clause of a negotiated
agreement, that it will not rely on promises and representations outside
of the agreement and then shirk its own bargain in favor of a ‘but we did
rely on those representations’ fraudulent inducement claim. The policy
basis for this line of cases is *** quite strong. If there is a public policy
interest in truthfulness, then that interest applies with more force, not
less, to contractual representations of fact. Contractually binding,
written representations of fact ought to be the most reliable of
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representations, and a law intolerant of fraud should abhor parties that
make such representations knowing they are false.
To fail to enforce non-reliance clauses is not to promote a public
policy against lying. Rather, it is to excuse a lie made by one contracting
party in writing—the lie that it was relying only on contractual
representations and that no other representations had been made—to
enable it to prove that another party lied orally or in a writing outside
the contract’s four corners. For the plaintiff in such a situation to prove
its fraudulent inducement claim, it proves itself not only a liar, but a liar
in the most inexcusable of commercial circumstances: in a freely
negotiated written contract. Put colloquially, this is necessarily a
‘Double Liar’ scenario. To allow the buyer to prevail on its claim is to
sanction its own fraudulent conduct.” Abry Partners, 891 A.2d at 1057-
58 (cited with approval by RAA Management, LLC, 45 A.3d at 117).
¶ 59 Plaintiff represented in writing that no representations were made to it regarding
Mu Sigma’s operation, financial condition, or value other than as set forth in the
SRA itself, that it had received all the information it considered necessary and
appropriate for deciding whether to sell the stock, that it understood that the
defendants were relying upon its acknowledgement that no outside representations
had been made to it, that the SRA contained the complete agreement as to the
subject matter and superseded any prior written or oral agreement related to the
subject matter, and that it was releasing defendants from any and all claims that
arose out of or were in any way related to events occurring prior to the date of the
SRA. However, here, plaintiff seeks to bring fraud in the inducement claims,
alleging that there were additional representations about Mu Sigma’s operation,
financial condition, and stock value upon which it relied prior to entering into the
SRA. To allow plaintiff to prevail on these claims would be to sanction fraudulent
conduct. See id. at 116-17 (in accordance with ratio decidendi of Abry Partners,
claim must be barred by the nonreliance disclaimer and waiver provisions in the
agreement).
¶ 60 Plaintiff argues that, even if the parties’ SRA contains sufficient antireliance
language to preclude its claims for Rajaram’s overt misrepresentations, it did not
unambiguously disclaim plaintiff’s reliance on information defendants
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intentionally omitted or concealed to induce the repurchase transaction. Plaintiff
asserts that its fraud and breach of fiduciary duty claims are premised in part on
defendants’ actionable omissions and their intentional concealment of Mu Sigma’s
investor reports, among other things. To support its position, plaintiff cites
TransDigm Inc. v. Alcoa Global Fasteners, Inc., No. 7135-VCP, 2013 WL
2326881, at *7-9 (Del. Ch. May 29, 2013), wherein the Delaware Court of
Chancery denied a motion to dismiss a fraudulent, active concealment claim on the
basis that the antireliance provision at issue did not disclaim reliance on
extracontractual omissions.
¶ 61 Defendants counter that plaintiff cannot evade an antireliance clause’s effect by
pleading reliance on purported omissions that amount to recharacterized
extracontractual statements. To support their position, defendants cite Prairie
Capital, 132 A.3d at 54, wherein the Delaware Court of Chancery declined to
follow TransDigm and held that the antireliance language in the agreement barred
fraud claims based on both overt misrepresentations and omissions, even though
the language did not expressly state that the buyer was not relying on omissions.
¶ 62 Delaware law establishes that fraud may occur in three ways: (1) an overt
misrepresentation, (2) an omission in the face of a duty to speak, or (3) deliberate
concealment of a material fact. Stephenson, 462 A.2d at 1074. “A claim of fraud
based on active concealment does not require a showing that the defendant had a
pre-existing duty to speak.” TransDigm, 2013 WL 2326881, at *6.
¶ 63 In Prairie Capital, the Delaware Court of Chancery held that a stock purchase
agreement’s provision, providing that the buyer relied only on representations and
warranties in the agreement, in combination with the agreement’s integration clause
providing that the agreement superseded all prior agreements, foreclosed claims of
fraud based on extracontractual misrepresentations. 132 A.3d at 50. As an
alternative means of avoiding the agreement’s language, the buyer argued that its
fraudulent omission and concealment claims survived. Id. at 51.
¶ 64 The Delaware court in Prairie Capital noted that, absent a special relationship,
a party is under no duty to disclose facts of which he knows the other party is
ignorant even if he knows the other party would consider the omitted facts material
in determining its course of action in the transaction. Id. at 52. The court held that,
because parties in an arm’s-length contractual setting “begin[ ] the process without
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any affirmative duty to speak, any claim of fraud” “cannot start from an omission.”
Id. “[T]herefore, contractual provisions that identify the representations on which
a party exclusively relied define the universe of information that is in play for
purposes of a fraud claim.” Id. The court explained that “[t]he critical distinction is
not between misrepresentations and omissions, but between information identified
in the written agreement and information outside of it.” Id.
¶ 65 In Prairie Capital, the Delaware court disagreed with the TransDigm court’s
reasoning that a clause must expressly refer to omissions to bar a fraudulent
omissions claim. Id. at 54; see also Universal American Corp. v. Partners
Healthcare Solutions Holdings, L.P., 176 F. Supp. 3d 387, 400-02 (Dist. Ct. Del.
2016) (holding an antireliance clause barred claims for both fraudulent
representations and omissions even though the clause did not expressly refer to
omissions). The court held that recasting allegations of an overt misrepresentation
“as an omission should not enable a party to circumvent an agreed-upon
informational definition.” Prairie Capital, 132 A.3d at 54.
¶ 66 The Delaware court in Prairie Capital explained:
“ ‘Every misrepresentation, to some extent, involves an omission of the
truth….’ [Citation.] Consequently, any misrepresentation can be re-
framed for pleading purposes as an omission. If a plaintiff could escape
a provision like [antireliance provisions] by re-framing an extra-
contractual misrepresentation as an omission, then the clause would be
rendered nugatory. When parties identify a universe of contractually
operative representations in a written agreement, they remain in that
universe. A party that is later disappointed with the written agreement
cannot escape through a wormhole into an alternative universe of extra-
contractual omissions.” Id. at 52-53.
¶ 67 Accordingly, “[i]f the contract says that the buyer only relied on the
representations in the four corners of the agreement, then that is sufficient.” Id. at
54-55. “The party may prove that the representations in the four corners of the
agreement were false or materially misleading, but the party cannot claim that
information it received outside of the agreement, which was not the subject of a
contractual representation, contained material omissions.” Id. at 55.
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¶ 68 Defendants argue that the alleged misrepresentations at issue here involved
statements to the effect that Mu Sigma’s “growth prospects had severely dimmed”
and that plaintiff’s “omissions” claim is, in effect, that Rajaram failed to convey
that Mu Sigma’s growth prospects had not severely dimmed, which is merely a
recharacterization of its misrepresentation claim. In this respect, we agree with
defendants. The majority of plaintiff’s omission claims, including plaintiff’s
allegations regarding Rajaram’s stated misrepresentations and omissions of fact
involving the valuation and business prospects of the company, the client and
contract pipeline, and the motive and purpose for the transaction, are
recharacterized misrepresentation claims that are barred by the provisions of the
SRA’s antireliance provisions. Although plaintiff’s claim found in count II of its
second amended complaint, that defendants actively concealed investment reports,
which plaintiff was contractually entitled to receive and which included material
facts relating to Mu Sigma’s value, is somewhat akin to the circumstances in
TransDigm, we nevertheless find TransDigm distinguishable.
¶ 69 In TransDigm, the Delaware Court of Chancery concluded that the fraudulent
and active concealment claim at issue, which was based on alleged omissions, was
not barred by the antireliance language in the stock purchase agreement. 2013 WL
2326881, at *8. The court did not find the antireliance language sufficient to
disclaim the plaintiff-buyer’s reliance on information that had been actively
concealed, holding that the intentional and affirmative concealment of material
facts did not constitute an extracontractual representation. Id. at *9. The buyer had
alleged that, during the parties’ negotiations, the seller failed to reveal and actively
concealed the fact that a key customer intended to shift a large portion of its
business to a competitor and had accepted a 5% price discount effective after the
closing date. Id. at *1. The court found that the antireliance clause contained
language expressly disclaiming reliance on overt representations, but in the absence
of language disclaiming reliance on the omission of information or language that
the company was making no representation as to the accuracy and completeness of
the information, the court held that the fraudulent concealment and fraudulent
omissions claims could proceed. Id. Notably, in TransDigm, the company’s
negotiation tactics included active concealment of material information that would
have been responsive to the aggrieved party’s request for information. Id. at *13.
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¶ 70 Here, in count II of its second amended complaint, plaintiff alleged a cause of
action for fraudulent concealment. Plaintiff alleged that, in the months leading up
to the repurchase transaction, defendants actively concealed material facts, in that
Rajaram explicitly instructed Mu Sigma’s CFO to withhold vital financial reports
from plaintiff, which plaintiff had previously requested pursuant to the investor
rights agreement. According to plaintiff, the March 2010 monthly revenue report
that Rajaram withheld from plaintiff demonstrated that, for the first time in the
company’s history, monthly revenues had exceeded $3 million, every business unit
was exceeding projections, and Mu Sigma was experiencing month-on-month
growth of 16%. Similarly, plaintiff alleged that the April 2010 monthly revenue
report was improperly withheld from plaintiff and reflected that the company
outperformed its projections in the first quarter of 2010. Plaintiff alleged that it
never received these reports, which contradicted Rajaram’s dour portrayals of Mu
Sigma’s state of financial affairs.
¶ 71 In TransDigm, as here, the agreement included language stating that the buyer
had been provided with the information it had deemed necessary to enable it to
make an informed decision with regard to the agreement. Id. at *9. The court in
TransDigm held, however, that absent contrary language elsewhere in the
agreement, the aggrieved party reasonably could have relied on the assumption that
the company was not actively concealing information that was responsive to its
inquiries and that the company was not engaged in a scheme to hide information
material to the purchase. Id. TransDigm is distinguishable on this basis.
¶ 72 Plaintiff was aware that it had not received the investor reports pursuant to its
previously negotiated investor rights agreement, yet it agreed in the SRA that it had
“received all the information it consider[ed] necessary or appropriate for deciding
whether to sell the Repurchased Stock to the Company.” Moreover, here, plaintiff
also expressly released claims based on “omissions,” agreeing in the SRA to
“hereby forever generally and completely release[ ] and discharge[ ] the
Company and its Related Parties *** from any and all claims *** known
and unknown, suspected and unsuspected, disclosed and undisclosed
*** that arose out of or are in any way related to events, acts, conduct
or omissions occurring prior to the date of this [a]greement.” (Emphasis
added.)
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¶ 73 Delaware courts examine a contract in its entirety to determine if its provisions
“add up to a clear anti-reliance clause.” Prairie Capital, 132 A.3d at 51. No words
are rendered mere surplusage. Osborn, 991 A.2d at 1159. Instead, the bargained-
for antireliance provisions in the SRA reflected the understanding that there may
be undisclosed information but that plaintiff was satisfied by the information
provided. See Progressive International Corp., 2002 WL 1558382. Accordingly,
the SRA, construed as a whole, bars plaintiff’s claims. Pursuant to its own binding
contractual representations, plaintiff precluded its ability to reasonably rely on any
statements or omissions by defendants that were not reduced to writing in the SRA.
¶ 74 B. Directors’ Fiduciary Duties
¶ 75 Plaintiff argues that even if the parties’ SRA contained sufficient antireliance
language, thereby preventing plaintiff from proving that it relied on representations
or omissions outside the SRA, such antireliance language would not be enforceable
here in light of the parties’ fiduciary relationship. To argue that Rajaram, as a
director and CEO of Mu Sigma, owed a fiduciary duty of loyalty to plaintiff, as a
stockholder, plaintiff cites Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261,
1280 (Del. 1989) (“directors owe fiduciary duties of care and loyalty to the
corporation and its shareholders”). Thus, plaintiff asks that we affirm the appellate
court’s judgment on this alternative ground.
¶ 76 “An underlying premise for the imposition of fiduciary duties is a separation of
legal control from beneficial ownership.” Malone, 722 A.2d at 9. “Equitable
principles act in those circumstances to protect the beneficiaries who are not in a
position to protect themselves.” Id. “One of the fundamental tenets of Delaware
corporate law provides for a separation of control and ownership.” Id. Directors
have the legal responsibility to manage the business of a corporation for the benefit
of its shareholder owners. Id. “Accordingly, fiduciary duties are imposed on the
directors of Delaware corporations to regulate their conduct when they discharge
that function.” Id. “The directors of Delaware corporations stand in a fiduciary
relationship not only to the stockholders but also to the corporations upon whose
boards they serve.” Id. at 10. “The director’s fiduciary duty to both the corporation
and its shareholders has been characterized by this Court as a triad: due care, good
faith, and loyalty.” Id.
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¶ 77 Accordingly, “Delaware corporate law starts from the bedrock principle that
‘[t]he business and affairs of every corporation *** shall be managed by or under
the direction of a board of directors.’ ” In re Trados Inc. Shareholder Litigation, 73
A.3d 17, 36 (Del. Ch. 2013) (quoting Del. Code Ann. tit. 8, § 141(a) (2011)).
“When exercising their statutory responsibility, the standard of conduct requires
that directors seek ‘to promote the value of the corporation for the benefit of its
stockholders.’ ” Id. (quoting eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1,
34 (Del. Ch. 2010)). By rendering decisions benefitting the corporation as a whole
and by increasing the value of the corporation, “the directors increase the share of
value available for the residual claimants.” Id.
¶ 78 “Judicial opinions therefore often refer to directors owing fiduciary duties ‘to
the corporation and its shareholders.’ ” Id. (quoting North American Catholic
Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92, 99 (Del.
2007)). “This formulation captures the foundational relationship in which directors
owe duties to the corporation for the ultimate benefit of the entity’s residual
claimants.” Id. at 36-37. Directors must act loyally to advance the best interests of
the corporation and “the stockholders in the aggregate in their capacity as residual
claimants, which means the undifferentiated equity as a collective.” Frederick Hsu
Living Trust v. ODN Holding Corp., No. 12108-VCL, 2017 WL 1437308, at *17
(Del. Ch. Apr. 14, 2017).
¶ 79 Nevertheless, Delaware law holds that “corporate directors do not owe
fiduciary duties to individual stockholders; they owe fiduciary duties to the entity
and to the stockholders as a whole.” Klaassen v. Allegro Development Corp., No.
8626-VCL, 2013 WL 5967028, at *11 (Del. Ch. Nov. 7, 2013); see, e.g., Unocal
Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985); eBay Domestic
Holdings, Inc., 16 A.3d at 34. A director’s fiduciary duties run to the corporation
and to the body of shareholders generally, as opposed to specific shareholders.
Frederick Hsu Living Trust, 2017 WL 1437308, at *17 n.16 (citing J. Travis Laster
& John Mark Zeberkiewicz, The Rights and Duties of Blockholder Directors, 70
Bus. Law. 33, 49 (2014) (“The reference [to fiduciary duties running] to
‘stockholders’ means all of the corporation’s stockholders as a collective. It means
the stockholders as a whole.”)).
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¶ 80 By example, “[a] board does not owe fiduciary duties to preferred stockholders
when considering whether or not to take corporate action that might trigger or
circumvent the preferred stockholders’ contractual rights.” In re Trados Inc.
Shareholder Litigation, 73 A.3d at 39; see also Wolfensohn v. Madison Fund, Inc.,
253 A.2d 72, 75 (Del. 1969) (holding that former preferred stockholders who
received debentures and a share of common stock were not owed fiduciary duties
in their capacity as debenture holders and had only their contractual rights as
creditors); LC Capital Master Fund, Ltd. v. James, 990 A.2d 435, 437 (Del. Ch.
2010) (“[O]nce the QuadraMed Board honored the special contractual rights of the
preferred, it was entitled to favor the interests of the common stockholders.”);
Fletcher International, Ltd. v. ION Geophysical Corp., No. 5109-VCP, 2010 WL
2173838, at *7 (Del. Ch. May 28, 2010) (“[R]ights arising from documents
governing a preferred class of stock, such as the [c]ertificates, that are enjoyed
solely by the preferred class, do not give rise to fiduciary duties because such rights
are purely contractual in nature.”); MCG Capital Corp. v. Maginn, No. 4521-CC,
2010 WL 1782271, at *15 (Del. Ch. May 5, 2010) (“[D]irectors do not owe
preferred shareholders any fiduciary duties with respect to [their contractual]
rights.”). “Preferred stockholders are owed fiduciary duties only when they do not
invoke their special contractual rights and rely on a right shared equally with the
common stock.” In re Trados Inc. Shareholder Litigation, 73 A.3d at 39-40.
¶ 81 Additionally, a corporation owes no fiduciary duty to its shareholder. In re
Wayport, Inc. Litigation, 76 A.3d at 322-23 (corporation owes no fiduciary duties
to its shareholders; only officers or directors do). Moreover, Delaware law does not
impose “an affirmative fiduciary duty of disclosure for individual transactions.”
Dohmen, 234 A.3d at 1171; see also our discussion, infra ¶ 91.
¶ 82 To support its position that an antireliance provision cannot bar claims by a
beneficiary against a fiduciary, plaintiff cites McDonald’s Corp. v. Easterbrook,
No. 2020-0658-JRS, 2021 WL 351967, at *6 (Del. Ch. Feb. 2, 2021). In
McDonald’s, however, the defendant, a former CEO of McDonald’s Corporation
(McDonald’s), who argued that a provision in his severance agreement constituted
an antireliance provision barring the company’s later fraud claims against him, was
a clear fiduciary to the company, much like Rajaram was a clear fiduciary to Mu
Sigma. Id. However, neither Mu Sigma nor Rajaram owed fiduciary duties to
plaintiff individually pursuant to plaintiff’s stockholder status in the negotiated
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repurchase transaction. See Nemec v. Shrader, 991 A.2d 1120, 1129 (Del. 2010)
(the nature and scope of director’s duties when causing company to exercise right
to redeem shares were defined solely by reference to contract, and any separate
fiduciary duty claims arising out of company’s exercise of its contract right were
foreclosed).
¶ 83 Moreover, plaintiff and Mu Sigma engaged in an arm’s-length negotiation over
the terms by which Mu Sigma might repurchase its shares. Plaintiff’s interest in
obtaining a higher redemption price was in opposition to the interests of Mu Sigma
and its shareholders generally. That circumstance is not one that, by itself, would
give rise to a fiduciary relationship. Blaustein v. Lord Baltimore Capital Corp., No.
6685-VCN, 2013 WL 1810956, at *17 (Del. Ch. Apr. 30, 2013) (concept of
fiduciary relationship is more aptly applied in legal relationships where the interest
of the fiduciary and the beneficiary incline toward a common goal in which
fiduciary is required to pursue solely interests of the beneficiary in the property).
¶ 84 Nevertheless, where a corporation makes a request for shareholder action, the
fiduciary duties of directors involve a general duty to disclose to stockholders all
material information reasonably available. See Malone, 722 A.2d at 9.
Accordingly, plaintiff argues that defendants owed it a fiduciary duty of disclosure
in connection with Mu Sigma’s “request for shareholder action,” i.e., the request to
repurchase plaintiff’s stock, and that it has sufficiently pleaded that defendants
breached this duty for failing to disclose material information. Plaintiff asserts that,
because Delaware law holds that a claim for a breach of this specific duty does not
include the element of reliance (id. at 12), then its claim based on this theory may
proceed regardless of whether the language in the SRA amounts to an enforceable
antireliance provision.
¶ 85 In the absence of a request for shareholder action, Delaware law does not
require directors to provide shareholders with information concerning the
corporation’s finances or affairs. Id. at 11; see also Raskin v. Birmingham Steel
Corp., No. 11365, 1990 WL 193326, at *5 (Del. Ch. Dec. 4, 1990) (fiduciaries have
“no distinctive state law duty to disclose material developments with respect to the
company’s business” in the absence of a request for stockholder action). However,
Delaware law maintains that directors are under a fiduciary duty to fully and fairly
disclose all reasonably available, material information when seeking shareholder
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action. See Malone, 722 A.2d at 9 (citing Loudon v. Archer-Daniels-Midland Co.,
700 A.2d 135, 137-38 (Del. 1997)); Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992);
see also Metro Communication Corp. BVI v. Advanced MobileComm Technologies
Inc., 854 A.2d 121, 156 (Del. Ch. 2004) (only misrepresentations associated with
requests for discretionary action trigger the fiduciary duty of disclosure).
¶ 86 “When the fiduciaries communicate with the beneficiaries in the context of
asking the beneficiary to make a discretionary decision ***[,] the fiduciary has the
duty to disclose all material facts bearing on the decision at issue.” Metro
Communication Corp. BVI, 854 A.2d at 156. “Whether or not a failure to fulfill that
duty will result in personal liability for damages against directors depends upon the
nature of the stockholder action that was the object of the solicitation of stockholder
votes and the misstated or omitted disclosures in connections with that solicitation.”
Loudon, 700 A.2d at 137-38.
¶ 87 When a director breaches the duty of disclosure arising from the request for
shareholder action, his liability is considered “per se.” Dohmen, 234 A.3d at 1168.
This means that, when a director requests stockholder action but fails to disclose
material facts bearing on that request, the beneficiary stockholder need not
demonstrate the elements of reliance, causation, or actual quantifiable monetary
damages to succeed on a claim for breach of fiduciary duty. Id.; Malone, 722 A.3d
at 12. Accordingly, the essential inquiry with regard to alleging a breach of the duty
of disclosure upon a request for shareholder action is whether the alleged omission
or misrepresentation is material, which is determined in light of the shareholder
action being sought. Dohmen, 234 A.3d at 1167; Alessi v. Beracha, 849 A.2d 939,
944 (Del. Ch. 2004). This per se rule, however, applies only to nominal damages,
not compensatory damages. Dohmen, 234 A.3d at 1175. To recover compensatory
damages for a breach of the fiduciary duty of disclosure, a stockholder must prove
reliance, causation, and damages. Id.
¶ 88 The Delaware Court of Chancery’s decision in Latesco, L.P. v. Wayport, Inc.,
No. 4167-VCL, 2009 WL 2246793 (Del. Ch. July 24, 2009), addressed stockholder
action and the fiduciary duty of disclosure in the context of an individual
stockholder transaction. In Wayport, corporate insiders sought to invoke their
contractual rights of first refusal in the sale of a minority holder’s units without
disclosing material facts relating to a pending transaction. Id. at *5. The court
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declined to characterize the transaction as a request for stockholder action,
explaining as follows:
“The rule requiring calls for stockholder action to be accompanied by
full and fair disclosure of all material information regarding the decision
presented to the stockholders is premised on the collective action
problem that stockholders, in the aggregate, are faced with when asked
to vote or tender their shares. In such a situation, it would be impractical,
if not impossible, for each stockholder to ask and have answered by the
corporation its own set of questions regarding the decision presented for
consideration. In the absence of a fiduciary duty by the corporation and
its directors to engage in full and fair disclosure, stockholders would
thus be forced to make a decision in an information vacuum. These same
factors do not, however, come into play when the corporation asks a
stockholder as an individual to enter into a purchase or sale. There, the
stockholder may refuse to do so until he is satisfied the corporation has
given him sufficient information to evaluate the decision presented to
him.” Id. at *6 (cited with approval by Dohmen, 234 A.3d at 1171).
¶ 89 The Delaware court explained in Wayport that the duty of disclosure instead
arises when a board asks the stockholders as a whole to make a discretionary
decision, such as whether to grant a proxy, to vote on a particular matter, to seek
appraisal, or to accept merger consideration. Id. at *6 n.18 (citing with approval
Sims v. Tezak, 296 Ill. App. 3d 503 (1998) (surveying Delaware cases regarding the
duty of disclosure and concluding that a corporation’s offer to buy an individual
shareholder’s shares did not implicate the duty of disclosure because it did not
constitute a call for shareholder action as contemplated by Delaware case law)). In
Dohmen, the Supreme Court of Delaware “agree[d] with the Court of Chancery’s
analysis in Wayport and its decision not to impose an affirmative fiduciary duty of
disclosure for individual transactions.” 234 A.3d at 1171.
¶ 90 Here, “[u]nlike the collective action problem when a large number of
stockholders are considering a transaction and depend on directors to disclose
material facts bearing on the decision” (id.), plaintiff’s second amended complaint
and the SRA reveal that plaintiff had direct access to Rajaram to negotiate the
arm’s-length transaction at issue. The SRA involved an individually negotiated
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transaction between the corporation and a single, highly sophisticated stockholder,
which followed two months of negotiations between the parties and their counsel.
¶ 91 Indeed, the parties expressly agreed in section 6(d) of the SRA that the SRA
was “the product of negotiations between the parties hereto represented by
counsel.” Although Delaware law imposes upon corporate directors a fiduciary
duty of disclosure to fully and fairly disclose material information within the
directors’ control when it seeks shareholder action, Delaware law does not impose
a fiduciary duty of candor whenever a company repurchases its own shares. See
Sims, 296 Ill. App. 3d at 507-08 (although “Delaware courts have imposed upon
corporate directors a fiduciary duty to disclose fully and fairly all material
information within the board’s control when it seeks shareholder action,” Delaware
law does not clearly impose a fiduciary duty of candor whenever a corporation
repurchases its own shares). Accordingly, the appellate court erred in holding that
plaintiff’s claims might be viable in the context of a company’s request for
stockholder action.
¶ 92 C. SRA’s Release of Breach of Contract and
Unjust Enrichment Claims
¶ 93 Defendants assert that the appellate court erred in declining to enforce
plaintiff’s general release of all claims against them in the SRA. Defendants assert
that the circuit court correctly ruled that plaintiff’s release, in addition to supporting
the dismissal of plaintiff’s fraud and fiduciary duty claims, unambiguously bars the
breach of contract and unjust enrichment claims that plaintiff asserted in its second
amended complaint.
¶ 94 Plaintiff asserts as a preliminary issue that defendants have not preserved a
challenge to the appellate court’s conclusion that the circuit court wrongly
dismissed both claims based on the SRA’s general release provision, for failing to
include the argument in their petition for leave to appeal to this court. However,
this court may exercise its discretion to decide unpreserved issues that are
inextricably intertwined with preserved issues. See Hansen v. Baxter Healthcare
Corp., 198 Ill. 2d 420, 429-30 (2002). Moreover, waiver and forfeiture are
limitations on the parties and not on the court, and a court may overlook forfeiture
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where necessary to reach a just result or maintain a sound body of precedent. See
People v. Sophanavong, 2020 IL 124337, ¶ 21.
¶ 95 Plaintiff asserts that the appellate court correctly ruled that its breach of contract
and unjust enrichment claims should be reinstated. However, we find that plaintiff’s
unjust enrichment and breach of contract claims fail as a matter of both Delaware
and Illinois law.
¶ 96 A release agreement involves the abandonment of a claim and is governed by
contract law. Farm Credit Bank of St. Louis v. Whitlock, 144 Ill. 2d 440, 447 (1991);
see also Seven Investments, LLC v. AD Capital, LLC, 32 A.3d 391, 396 (Del. Ch.
2011). “The intention of the parties to contract must be determined from the
instrument itself, and construction of the instrument where no ambiguity exists is a
matter of law.” Farm Credit Bank of St. Louis, 144 Ill. 2d at 447; see also Seven
Investments, LLC, 32 A.3d at 396 (if a claim falls within the plain language of a
release, then the claim should be dismissed).
¶ 97 Section 5 of the SRA provided that plaintiff “forever generally and completely”
released and discharged the defendants:
“from any and all claims, liabilities, obligations[,] and demands of every
kind and nature in law, equity[,] or otherwise, known and unknown,
suspected and unsuspected, disclosed and undisclosed, and in particular
of and from all claims and demands of every kind and nature, known
and unknown, suspected and unsuspected, disclosed and undisclosed,
that arose out of or are in any way related to events, acts, conduct[,] or
omissions occurring prior to the date of this Agreement; provided,
however, that the foregoing release shall not apply to claims relating to
Stockholder’s right to payment by the Company.”
¶ 98 We agree with the circuit court’s conclusion that “the broad and comprehensive
release agreed to by [plaintiff], a sophisticated party represented by experienced
counsel, unambiguously encompasses” plaintiff’s unjust enrichment and breach of
contract claims found in its second amended complaint. In its breach of contract
claim, plaintiff alleged that defendants failed to provide two investor reports prior
to executing the SRA, and in its unjust enrichment claim, plaintiff alleged that
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improper statements and commissions made in connection with negotiating the
repurchase transaction culminated in the SRA itself.
¶ 99 Plaintiff argues that the release is unenforceable because Rajaram was its
fiduciary and failed to fully disclose his wrongdoing. However, as discussed supra,
we have determined that Rajaram was not acting in a fiduciary capacity for plaintiff
in the repurchase transaction. Accordingly, plaintiff’s claims fail as a matter of law.
¶ 100 Because we have determined, as a matter of law, that plaintiff’s fraud in the
inducement claims are barred, the SRA stands. Cf. PHL Variable insurance Co. v.
Price Dawe 2006 Insurance Trust, 28 A.3d 1059, 1067 (Del. 2011) (where there is
fraud in the inducement to enter into a contract, the contract is “voidable” at the
election of the innocent party). The language of the SRA bars plaintiff’s second
amended complaint, and we hereby reverse the appellate court’s judgment finding
otherwise.
¶ 101 III. CONCLUSION
¶ 102 For the foregoing reasons, we find that the plaintiff’s claims, found in its second
amended complaint, are barred by the language of the SRA, and the circuit court
properly entered judgment in favor of defendants. Accordingly, we reverse the
judgment of the appellate court and affirm the circuit court’s judgment.
¶ 103 Appellate court judgment reversed.
¶ 104 Circuit court judgment affirmed.
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