On January 31, 2025, the Delaware Court of Chancery issued an opinion in Rick Henricus van den Wildenberg v. Sign-Zone Holdings, L.P., et al., granting the defendants’ motion to dismiss all claims relating to alleged misrepresentations. The court held that the complaint failed to allege a false statement of fact or an omission that rendered a statement of fact misleading and, thus, dismissed the misrepresentation claims.
For background, in April 2019, plaintiff Rick Henricus van den Wildenberg (the plaintiff or Wildenberg), Promic Holding B.V., and defendant Showdown Displays Europe B.V. (Showdown) executed a share purchase agreement (the SPA). Wildenberg, Promic Holding B.V., and Showdown purchased all outstanding shares of Promic B.V., a Netherlands limited liability company, through the SPA. The plaintiff also received partnership units of defendant Sign-Zone Holdings, L.P. (Sign-Zone), a Delaware limited partnership.
In April 2021, Sign-Zone informed the plaintiff that it was undertaking a capital financing round (the capital infusion). Sign-Zone sent Wildenberg a “Presentation to Sign-Zone Unitholders” (the unitholder presentation). The unitholder presentation stated that “Sign-Zone’s EBITDA declined 73% in 2020 to $5.4 million, from $19.8 million in 2019,” and that “[c]urrent outstanding debt of $81.8 million (as of 3/31/21) must be repaid before the Preferred Units or Common Units [issued in the capital infusion] have any value.” The unitholder presentation also stated that “[t]he value of Common Units of Sign-Zone outstanding prior to the new capital commitment is $0” and “the Common Units are projected to have immaterial value, if any, through at least 2023.” The unitholder presentation included three sets of financial projections: a base case, an upside case, and an extended recovery case, all of which forecast earnings before interest, taxes, depreciation, and amortization (EBITDA) through the end of 2023. The base case forecast 2023 EBITDA of $15.8 million, and the upside case forecast 2023 EBITDA of $22.48 million.
Sign-Zone also provided a financial report in April 2021 showing a $38.8 million write-off of Sign-Zone’s intangible assets, resulting in a negative equity value of $12.6 million as of the end of March 2021. Around that time, Sign-Zone’s CEO informed Wildenberg’s adviser that “the company was facing a difficult situation and conveyed it also purportedly had bad projections for future performance.” On May 17, 2021—the deadline for Wildenberg to inform Sign-Zone whether he would participate in the capital infusion—Sign-Zone provided the plaintiff with an audited financial report. Wildenberg elected not to participate in the capital infusion, “[g]iven [Sign-Zone]’s purportedly dismal prospects, and having already invested a substantial sum in the Company.”
However, Sign-Zone ended up outperforming its 2023 projections; the results were 71 percent higher than the base case and 21 percent higher than the upside case. Then, in 2024, Wildenberg learned of a quantitative impairment analysis dated December 2020, which other limited partners previously had access to and which—the plaintiff claimed—provided a more-positive financial projection for Sign-Zone than did the unitholder presentation. Wildenberg also learned Sign-Zone did not perform a valuation in April 2021 with respect to the capital infusion and that all the other limited partners had already committed their pro rata portion of the capital infusion when Sign-Zone asked Wildenberg to invest.
On April 16, 2024, the plaintiff filed a complaint alleging claims of misrepresentation (clarified as negligent misrepresentation claims and referred to interchangeably as equitable fraud during the motion to dismiss briefing) against Sign-Zone, Showdown, the limited partners, and Sign-Zone’s general partner, Sign-Zone Holdings GP DE L.L.C. On May 14, 2024, the defendants moved to dismiss the complaint, arguing Wildenberg failed to sufficiently plead negligent misrepresentation pursuant to Rules 12(b)(6) and 9(b).
In analyzing Wildenberg’s complaint, the court first noted that the plaintiff’s claims were “premised on forward-looking financial projections in the Unitholder Presentation.” This was important because Delaware courts have found that predictions of the future are not considered facts that can support misrepresentation claims. The court acknowledged that forward-looking statements can support a claim of fraud if the declarant knows the statement to be false at the time it is made; however, it explained that the plaintiff’s complaint did not allege any statement in the unitholder presentation to be untrue.
The court also addressed Wildenberg’s theory that the misrepresentation claims were actually based on the defendants omitting the “more optimistic” projections in the quantitative impairment analysis from the unitholder presentation. But the court explained that this theory failed as well. While Delaware courts have held fraud may exist where a party fails to speak when they have a duty to do so, such as when a party to a business transaction acquires information before the consummation of a transaction that will make untrue or misleading a previous representation that was true when made, the present case did not rise to that level for two reasons. First, the projections in the quantitative impairment analysis were not subsequently acquired information, nor could they be considered “facts.” And second, the complaint did not allege that the quantitative impairment analysis projections were premisedon any new facts that rendered the prior projections false or misleading.
Wildenberg also argued the defendants had a duty to provide him the quantitative impairment analysis because the projections would have been “material” in deciding whether to participate in the capital infusion. The court explained that the complaint did not support a reasonably conceivable inference that the quantitative impairment analysis’s projections were material. The court cited Arnold v. Soc’y for Sav. Bancorp, Inc.,650 A.2d 1270 (Del. 1994) to explain that for something to be material, there must be a substantial likelihood that the disclosure of an omitted fact would have been viewed by a reasonable investor as having significantly altered the total mix of information made available. Here, however, Wildenberg failed to explain how the projections in the quantitative impairment analysis (which fell in between the base case and the upside case projections provided in the unitholder presentation) would have altered the total mix of information.
This opinion helps parties understand the type of information that companies have a duty to disclose. “Material” information does not translate to “all” information, particularly where some materials (or projections) may be redundant of others. This opinion also cautions investors that they must take accountability for their own investment decisions and cannot place undue blame for missed opportunity on companies when the future does not turn out exactly as forecast. Companies cannot be expected to predict every possible future that may come to fruition.