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August 26, 2012
Online Marketplace Not Liable to Buyer for Aborted Private Sale of Facebook Shares -- Facie Libre Associates v. SecondMarket Holdings
[Post by Venkat Balasubramani]
Facie Libre Associates v. SecondMarket Holdings, 2012 N.Y. Misc. Lexis 3914; 2012 NY Slip Op 51545U (Supreme Court of NY; Aug 10, 2012)
SecondMarket operates an “online marketplace website” where shares of privately held companies are bought and sold. Karl Voskuil, a former Facebook employee, wanted to sell some of his Facebook shares prior to Facebook's IPO. He found a willing buyer in two "Facie Libre" entities that were organized to purchase Facebook shares and hold them until they became public. (This WSJ article provides background on the transaction, and also points out that Facie Libre is a latinate rendering of Facebook: "Deal For Facebook Shares Leads To Suit Vs. SecondMarket.")
Voskuil entered into a stock transfer agreement with Facie Libre to sell 75,000 Facebook shares (at $33 a share, a total purchase price of $2,475,000). Under this agreement, Voskuil was required to deliver a legal opinion to Facebook verifying that registration of the shares was not required under the Securities Act of 1933. This document had to be delivered to Facebook within 60 days of notifying Facebook that a shareholder proposed to sell Facebook shares. Separately, SecondMarket entered into an "Intermediary Services Agreement" agreement with Voskuil under which SecondMarket would “design, implement and facilitate” the transaction for $75,000. Facie Libre was not a party to any agreement with SecondMarket.
Fortunately or unfortunately (depending on which side of the transaction you were on), the transaction did not close. The required legal opinion was delivered on March 26, 2010, one day after the 60 day deadline. According to Facie Libre, SecondMarket undertook the obligation to deliver the legal opinion, failed to timely do so, and was not forthcoming about the transaction's status. SecondMarket allegedly only told Facie Libre three months after Facebook informed SecondMarket that the transaction would not close that Facebook did not approve the transaction. Some time after, Voskuil returned the purchase price that Facie Libre had wired to him ($2,400,000). Facie Libre sued SecondMarket alleging various theories relating to the aborted sale. Facie Libre’s primary argument was that SecondMarket was obligated to procure and timely deliver the legal opinion and its failure to do so was a breach.
Website terms: SecondMarket argued that it had an online agreement in place that contained a one year limitations period on when claims could be brought. The court dismisses this defense, saying that although SecondMarket had website terms in place, these were generally applicable to website users and do not supply any relevant terms for a separate transaction such as the Facebook stock sale.
Breach of contract: Facie Libre asserted a claim as a third party beneficiary under the Voskuil/SecondMarket intermediary services agreement. It argued that under this agreement, SecondMarket had an obligation to furnish the legal opinion. The court rejects this argument, saying that nothing in this agreement requires SecondMarket to procure the legal opinion. In fact, the intermediary services agreement expressly says that Voskuil has the obligation to furnish the legal opinion.
Negligence / Breach of Fiduciary Duty: The court also dismisses Facie Libre’s negligence and breach of fiduciary duty claims. As far as negligence, the court says that Facie Libre can’t sue in negligence since the relevant agreements require Voskuil to furnish the legal opinion (SecondMarket had no duty to do so). The breach of fiduciary duty claim fares no better. Facie Libre argued that it “subscribed to SecondMarket’s website and relied on [SecondMarket’s] expertise.” The court says that the parties engaged in an arms-length transaction and Facie Libre’s purported reliance (if any) on SecondMarket’s expertise didn’t establish a fiduciary relationship.
Misrepresentation: The one claim that survives is the misrepresentation claim. The court says that SecondMarket knew the transaction didn’t close and nevertheless strung Facie Libre along. Had Facie Libre known the transaction didn’t close, it would have taken steps to remedy the situation.
Oy. I don’t know the economics of who would have lost or gained from any appreciation in the Facebook shares had the transaction closed as planned, but it’s safe to say that given the downward slide in Facebook stock, someone may have actually benefited from the transaction not closing. This probably would be Facie Libre. The WSJ article linked above was written in June 2011, and it notes that at that time, Voskuil retained the shares after the botched sale, and the shares were "worth several times more than they were when he first agreed to sell them to Felix [one of the principals of Facie Libre]." He may have unloaded the shares since then, but if he has not done so, the shares are worth much less today than Facie Libre offered to pay for them. Given that Facie Libre likely didn't lose any money from the sale not having gone through, you wonder why the lack of damages didn't get any play from the court. (I thought this would be worth at least a passing mention, if nothing, to note how quickly fortunes can change.)
This court's conclusion with respect to SecondMarket's website terms argument is right--your agreement to the website terms do not supply contract terms for all aspects of your relationship with the website. Parties have tried this argument before and it typically goes nowhere. On the other hand, given that Facie Libre brought a fiduciary duty argument that seemed premised in part on SecondMarket's website representations, it's interesting that this didn't figure into the discussion of whether the limitations in SecondMarket's website terms could preclude Facie Libre's claims.