Federal Court In New Jersey Enters Judgment In Favor Of Company Against Investor Who Refused To Pay For Shares Of Stock, But Creates Dilemma For Company As To Proof Of Valuation
By: Carl L. Engel
June 5, 2023
On May 31, 2023, the U.S. District Court for the District of New Jersey, in the case Origin, Inc. v. Magid Financial Services Inc., entered summary judgment against a prospective investor who refused to purchase stock in a private company, even though they had executed a contract in which the investor agreed to do so. However, the trial court refused to enter an amount as to the company’s damages, instead giving the parties more time to develop their arguments. The trial court’s decision puts the private company in a precarious position, because to prove damages, it will need to present an analysis of its current valuation. If the company’s stock is worth more now than when the investor refused to buy it, the company arguably has not been harmed, because it can sell the stock to another investor at a higher price. However, if the company were to argue that its valuation has decreased during that time, then it will likely vex its investors and creditors who benefit from a higher valuation. The company, therefore, is in the unenviable position of having to choose between building a robust damages case or tarnishing important business relationships, and has a difficult business decision to make.
Origin, Inc. is a privately held clinical-stage biotechnology company that is working to bring a product to market in the plasma-medicine arena. Origin began raising capital in 2014 through the sale of equity and debt securities (i.e., stocks and bonds). In 2017, Magid Financial Services, Inc. (“MFS”), which is an accounting firm solely owned and operated by Joseph Magid, elected to invest in Origin.
On December 20, 2017, Origin and MFS entered into a “Subscription Agreement,” wherein MFS agreed to purchase 2,035 shares of Origin at a price of $1,400.00 per share, or $2,850,000.00 in total. On June 11, 2018, the parties entered into a second Subscription Agreement, in which MFS agreed to purchase 3,143 shares, also at $1,400.00 per share, for a total of $4,400,200.00. Both agreements required MFS to pay for the shares immediately upon execution. MFS, however, did not pay for the shares under either of the Subscription Agreements.
On October 22, 2018, Origin and MFS entered into a “Letter of Intent” to change the funding arrangement from a stock purchase to a loan in the amount of $4,400,000.00. Repayment to MFS would be made in $400,000.00 cash and $4,000,000.00 worth of Origin stock. The Letter of Intent stated that all previous agreements between Origin and MFS would be rendered null and void upon payment to Origin of the loaned funds. However, as with the Subscription Agreements, MFS did not pay the amount owed under the Letter of Intent either.
On June 28, 2019, Origin sued MFS for breach of the Subscription Agreements. After discovery, on March 11, 2022, Origin moved for summary judgment on these claims.
On May 31, 2023, the trial court entered judgment in favor of Origin as to the second Subscription Agreement, in which MFS had agreed to purchase 3,143 shares for $4,400,200.00, but found that the Letter of Intent and the first Subscription Agreement were null and void. As to the Letter of Intent, because MFS had not paid the amount due thereunder, it did not take effect and, therefore, did not supersede the two Subscription Agreements. The court found that the first Subscription Agreement was null and void because the second Subscription Agreement had contained an integration clause, stating that it “represents the entire agreement between the parties hereto” and “supersed[es] all prior or contemporaneous agreements.” Therefore, by its express terms, the second Subscription Agreement was the only existing contract between the parties regarding MFS’s purchase of Origin stock.
The court, however, declined to rule on the amount of damages owed to Origin, instead giving the parties additional time to brief the issue. The issue of damages puts Origin in a precarious position, because to prove that it was damaged by MFS’s refusal to invest at $1,400 per share, it must present evidence of its present valuation. If the stock is now worth more than $1,400 per share, then Origin arguably has not been damaged at all by MFS’s refusal to purchase it at that price. However, if Origin were to argue that it is worth less than $1,400, it likely will have a negative impact on its relationship with its investors and creditors. Therefore, even though the damages appear at first glance to be a staggering $4,400,000.00, the actual settlement value of this case may be pennies on the dollar.