Opinion ID: 618229
Heading Depth: 3
Heading Rank: 3

Heading: Western Oil Sands

Text: However, the AFG-Alchemix transaction never took place because in the midst of those negotiations, Horton received welcome news for Alchemix. On June 17, 2002, a Canadian company, Western Oil Sands (“Western”), indicated its interest in a potentially larger investment in Alchemix than AFG was willing to offer. Western sent a “Memorandum of Understanding” (“Western Memo”) to Horton. According to the Western Memo, Western was to make an initial investment of $3 million and had the option to continue investment if certain conditions were met. The potential investment was up to $36 million. The next day, on June 18, 2002, Horton canceled the negotiations with AFG. He faxed a copy of the Western Memo to members of the Alchemix Board, including Weiss who received the document. Sometime after the Western proposal and the circulated Western Memo, Weiss asserts that Horton misrepresented the nature of the Western investment. Weiss testified that he and Horton were “on the phone fairly often” and that “Bob Horton told me that they [Western] were investing $30 million and that the various concessions that I made were, from my personal point of view, contingent on and related directly to that kind of investment.” Weiss also claims that he inquired as to STRATEGIC DIVERSITY v. ALCHEMIX CORP. 20621 whether there were “any adverse facts or circumstances” that would affect his decision and that Horton did not offer any comments. Because Weiss was busy with other matters, including travel outside the country, Arthur Hagopian, executive assistant to Weiss and a corporate officer of Strategic, handled the “day-to-day discussions with Alchemix’ and Horton’s representative.” Hagopian had one conversation with Horton regarding Weiss’s resignation from the Board, but all other discussions were with Richard Armstrong, Alchemix’s CFO. Horton stated that Armstrong would be the person “shifting the paper” on any such transaction. Hagopian describes his discussions with Armstrong as a “single transaction” that would involve the “replacement” of Strategic’s loan with an equity holding. Armstrong, however, testified in his deposition that he did not recall the transaction. Hagopian stated that Armstrong had opened discussions by claiming that a number of concessions were needed to “clear the way” for a “new investor.” The new concessions for the Western investment included the following: prepayment of the Note; relinquishment of Weiss’s Board seat; waiver of Strategic’s non-dilution rights; and waiver of Strategic’s right to make further loans to Alchemix. Hagopian stated that Armstrong proposed that an equivalent investment in Alchemix stock would be provided at a discounted price in exchange for these concessions. Hagopian and Armstrong negotiated the price of the stock, ultimately arriving at a “discount” price of $1 per share. Armstrong told Hagopian that the 250,000 shares would not originate from Alchemix but rather from Horton’s family’s holdings in Medici Associates. In the midst of the Weiss and Horton negotiations, Western made its first $3 million investment in Alchemix, pursuant to the terms in the Western Memo. On June 27, 2002, Strategic accepted prepayment of the Note with interest and penalties totaling $560,531. In consid20622 STRATEGIC DIVERSITY v. ALCHEMIX CORP. eration of the prepayment, Strategic (1) waived the thirty day notice, (2) waived Strategic’s right to loan an additional $500,000 to Alchemix, and (3) modified the Warrant to allow capitalization of up to 45 million shares. Although the document accepting prepayment of the Note itself makes no reference to the right to purchase Alchemix shares at $1 per share, Weiss produced a sheet with wiring instructions for the payment that also includes the following statement: “Please do not transfer this payment until you send a note stating, ‘Strategic Diversity and/or Kenneth P. Weiss shall have the right to purchase up to 500,000 shares of Alchemix Corp. at $1 a share directly from Robert Horton.’ ” Hagopian also wrote to Armstrong that if there were issues with the arrangement, then the loan repayment should not be made because “the documents were conceived and created as one package.” On July 2, 2002, Alchemix sent a check to Strategic in the amount of $560,832.00. Concurrent with the payment of the Note, Horton sent a letter to Weiss in which he agreed to sell “up to 390,000 shares of Alchemix common stock on or before July 10, 2002, that is owned by Medici or me for a sales price per share of $1.00.” The next week, on July 8, 2002, Weiss sent a check to Medici in the amount of $250,000 to purchase 250,000 shares of Alchemix common stock. On July 11, 2002, Weiss, as part of the transaction, tendered his resignation as a member of the Alchemix Board. Horton views the facts differently. Although Horton and Armstrong both testified that they cannot recall the details of the transaction, they contend that it was two separate transactions: (1) the repayment of the Note to Strategic; and (2) Weiss’s subsequent purchase of stock from Medici. In Horton’s view, the repayment of the Note was made, and any subsequent offer of shares was strictly because Weiss was part of AFG negotiations, a point that Weiss disputes. By the end of July 2002, Western, pursuant to the Western Memo, had the option to invest another $5 million in STRATEGIC DIVERSITY v. ALCHEMIX CORP. 20623 Alchemix. However, it never did so. Due to a fire at its facilities, the company was “strapped for cash” and decided not to continue its investment in Alchemix. Horton testified that the news of Western forgoing its Alchemix investment was a “game changer.” He notified members of the Alchemix Board, but he did not notify Weiss. On August 5, 2002, Weiss released the security interests in certain Alchemix patents. Weiss contends that since he left the Alchemix Board, he had not received “any updates, legally required annual reports, or any communication regarding the status of Alchemix’ technology, finances and development.” It was only in December 2005 that Weiss learned for the first time that Western had never made an investment of $30 million and that the Alchemix Board had resigned.