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LP v. Fir Tree, Inc.

United States District Court, D. Nevada

March 30, 2018

COMPARTMENT IT2, LP, a Georgia limited partnership, COMPARTMENT IT5, LP, a Georgia limited partnership, COMPARTMENT IT9, LP, a Georgia limited partnership, and MFAM MOBILFUNK ASSET MANAGEMENT GMBH, a German corporation, Plaintiffs,



         I. SUMMARY

         Before the Court are three motions: (1) Defendant Paul McGinn's Motion to Dismiss (ECF No. 9); (2) Defendants Jarret Cohen, Fir Tree, Inc. (“Fir Tree”), and Scott Troeller's Motion to Dismiss (ECF No. 12); and (3) Defendants Gabriel Margent and Grant Barber's Motion to Dismiss (ECF No. 16). Plaintiffs Compartments IT2, IT5, and IT9, LP (“IT Funds”), together with MFAM Mobilfunk Asset Management GmbH (collectively, “Plaintiffs”) filed one consolidated response (ECF No. 42), and Defendants replied (ECF Nos. 49, 50, 53). The Court held a hearing on the motions on March 26, 2018. (ECF No. 56.) For the following reasons, the Court grants Defendants' motions to dismiss.


         The following facts are taken from the Complaint unless otherwise indicated. CIG Wireless, Inc. (“CIG”) was a corporation whose business consisted primarily of leasing antenna space to wireless service providers on its network of communications towers. (ECF No. 1 at 6.) Defendant Fir Tree was CIG's controlling shareholder by virtue of the large quantity of preferred stock it held, preferred stock that entitled it to first cut of the proceeds from any liquidation of CIG. Plaintiffs were CIG's minority shareholders and held only common stock. Plaintiffs allege that Fir Tree engaged in a course of conduct that caused the value of the common stock to plummet while leaving the value of the preferred stock intact, ultimately forcing a merger that left Fir Tree flush with cash and Plaintiffs virtually empty-handed. Plaintiffs further allege that the directors of CIG-Cohen, Troeller, Margent, Barber, and McGinn (“Director Defendants”)-functioned as Fir Tree's puppets, carrying out Fir Tree's aim of concentrating the equity value of CIG in the preferred stock.

         A. Financing Agreements

         Plaintiffs IT Funds and Defendant Fir Tree both ended up as CIG shareholders, but only Fir Tree started out that way. The IT Funds began their relationship with CIG as creditors. (Id. at 7.) Eventually, the IT Funds' confidence in CIG grew, and the IT Funds agreed to convert certain loans they had made to CIG into shares of CIG common stock. (Id.) Although the IT Funds and CIG executed this financing agreement in 2012, the loans did not actually convert until 2014 and 2015. (Id.)

         While the IT Funds were still creditors, CIG obtained financing from Defendant Fir Tree consisting of a $35 million infusion with the right to call additional financing of up to $25 million. (Id. at 8-9.) In exchange for the $35 million infusion, Fir Tree received the right to designate two board members, veto power over certain business decisions, and two kinds of preferred stock (Series A-1 Preferred Stock and Series A-2 Preferred Stock). (Id. at 9-11.) Once Fir Tree received the preferred stock (of which Series A-2 conferred voting rights), Fir Tree controlled about 48.8% of CIG's voting stock. (Id. at 9.)

         The financing was governed by a contract (“Fir Tree Financing Agreement”). The Fir Tree Financing Agreement established that both kinds of preferred stock were entitled to liquidation premiums and anti-dilution protection. (Id.) The Fir Tree Financing Agreement also established priorities among CIG's equity holders in the event of liquidation: Series A-1 Preferred Stock would receive payment first, and any surplus would flow to Series A-2 Preferred Stock then to Series B followed by common stock. (ECF No. 12 at 6.)

         Plaintiffs do not dispute that they executed an “Acknowledgement and Consent” to the Fir Tree Financing Agreement. (See ECF No. 42 at 19; see also ECF No. 14 at 42-44.)

         B. Fir Tree Becomes Majority Shareholder

         CIG called on additional financing from Fir Tree twice, for a total of $9 million. (ECF No. 1 at 11.) When the first call closed on December 18, 2013, Fir Tree received sufficient shares of preferred stock to make it the majority shareholder of CIG, and the value of the common stock dropped to about $1.50 per share. (Id. at 11-12.) When the second call closed on March 7, 2014, Fir Tree held approximately fifty-six percent of the outstanding voting stock of CIG. (Id. at 12.) The common stock's value then fell further, to $1.25 per share. (Id.) Plaintiffs allege that the share price of the common stock fell because the common stock was diluted and placed under Fir Tree's growing liquidation preference. (Id.)

         C. Loan Conversion

         The IT Funds' interests converted into shares of common stock on December 31, 2014, and March 31, 2015. (Id. at 17.) These conversions triggered the anti-dilution protections of Fir Tree's preferred stock, but the corporate charter and certificate of designation did not authorize enough shares to carry out the anti-dilution protection. (Id.) The Director Defendants amended the charter and certificate of designation to authorize more shares, and Fir Tree received voting shares sufficient to obtain sixty percent voting power. (Id. at 17-18.)

         D. Alleged Mismanagement

         CIG allegedly went into “sleep mode” after accepting Fir Tree's financing. (Id. at 11-12.) CIG acquired towers at a slower rate, issued fewer press releases than it had prior to the Fir Tree financing, and abandoned efforts to list CIG's common stock on a U.S. national exchange. (Id. at 11, 13.) The value of CIG's common stock dropped significantly as a result of Fir Tree's alleged dilution and expanding ...

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