Court Orders Enforcement of Facebook Settlement with ConnectU, Rejecting Allegations of Fraud

Tonight, in San Jose District Court, Judge James ware issued a decision rejecting ConnectU’s claims of fraud in its recent settlement with Facebook, and enforcing the terms of that agreement. Two weeks ago, ConnectU fired its legal team, hired new counsel, and sued Facebook for fraud.

In the decision (full text here), Judge Ware listed the following reasons for tonight’s decision:

  • First, the Agreement clearly states the consideration for the performance required and how it must be paid.
  • Second, the Agreement clearly defines the structure of the transaction. (Sutton Decl., Ex. A at 1-2.) Paragraph 7 recites that all ConnectU stock is to be exchanged for a sum certain amount of cash and a precise number of common shares in Facebook; it is a stock and cash for stock acquisition. Subsequent negotiations might have proposed a different structure for the transaction or other additional terms, but those proposal were, apparently, rejected.
  • Third, the principals of each company, who are persons authorized to make decisions for the parties, all signed the handwritten version of the Agreement and none of the signatures are disputed.
  • The shareholders who signed the Agreement own 99% of the outstanding shares. Since a majority of ConnectU’s shareholders have agreed to the transaction, the consent of Howard Winklevoss is unnecessary to make the Agreement binding on him.

Regarding ConnectU’s claim of fraud regarding Facebook’s valuation, Judge Ware wrote,

Apparently, in October 2007, Facebook and Microsoft issued a press release stating Microsoft would “take a $240 million stake in Facebook’s next round of financing at a $15 billion valuation.” (Parke Decl., Ex. J.) Defendants proffer evidence that subsequent to the press release, in the regular course of its operations, Facebook’s Board of Directors determined a value of the company’s “shares” which was different than the valuation disclosed in the press release. (Declaration of Robert T. Clarkson ¶ 11, filed under seal.)

Defendants do not challenge the accuracy of the press release itself. Thus, there is no claim that the statement in the release was not true when it was made. (Declaration of Ted Wang in Support of Plaintiffs’ Confidential Motion ¶ 2, filed under seal.) Plaintiffs do not deny that the Facebook Board of Directors made a subsequent valuation of Facebook shares which was a different value from the value Microsoft attributed to the company. However, Plaintiffs did not make any representations or warranties in the Agreement about the value of Facebook common stock.

Morever, it is undisputed that the shares the parties agreed to exchange in the Agreement and the shares involved in the Microsoft’s transaction are of different classes. Accordingly, the failure to disclose the difference in the valuations cannot be fraudulent as a matter of law. Further, the Agreement does not attribute a specific value to the outstanding shares of Facebook’s stock; there is no admissible evidence that Plaintiffs made any such representation while negotiating the settlement. Rather, the only representation evident from the Agreement is the number of fully diluted shares which Facebook currently has outstanding. (Parke Decl., Ex. A.) Defendants have failed to show that this representation was false or that there were any other misrepresentations made by Plaintiffs upon which Defendants could have justifiably relied.

Finally, Judge Ware concludes,

In sum, the Court finds Defendants have failed to establish that Plaintiffs made a misrepresentation during the negotiation. The individual signatories to the Agreement are sophisticated business parties who were represented by reputable counsel at the mediation. Either party could have chosen to condition the financial exchange being negotiated on representations and warranties of the value of the stock involved or to conduct their own due diligence with respect to Facebook’s valuation. Neither party chose these courses of conduct.

Basically, ConnectU tried to get out of the deal, fire its lawyers, and settle for more cash and stock, and the judge told them it was too late.

Responding to the decision, Facebook issued the following comment:

We are happy that Judge Ware enforced the agreement settling our dispute with the ConnectU founders.  ConnectU’s founders were represented by six lawyers and a professor at Wharton Business School when they signed the Settlement Agreement.  The ConnectU founders understood the deal they made, and we are gratified that the Court rejected their false allegations of fraud.  Their challenge was simply a case of ‘buyers remorse,’ as described by the Boston Court earlier this month.

We were disappointed that we had to litigate the settlement, as we believed we were caught in the middle of a fee dispute between ConnectU’s founders and its former counsel.  Nevertheless, we can now consider this chapter closed and wish the Winklevoss brothers the best of luck in their future endeavors.

We’ll see if ConnectU is done or if their new counsel wants to press the matter further.

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