Court Opinion

ID: 8406449
Source: CourtListenerOpinion
Date Created: 2022-10-28 15:02:09.04351+00
Date Added: 2024-06-11T16:47:13.822411
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

STEVEN MCCLURG,                          )
                                         )
                  Plaintiff,             )
                                         )
      v.                                 ) C.A. No. 2021-0896-SG
                                         )
PRAESIDIUM PARTNERS, INC.,               )
PHILIP LIU, JEREMY RAYNE                 )
                                         )
STEINBERG, and JEFF DORMAN,              )
                                         )
                  Defendants.            )

                        MEMORANDUM OPINION

                        Date Submitted: July 29, 2022
                       Date Decided: October 28, 2022

Bruce E. Jameson and Eric J. Juray, of PRICKETT, JONES & ELLIOTT, P.A.,
Wilmington, Delaware; OF COUNSEL: Thomas H. Vidal and Jessica Stone, of
PRYOR CASHMAN LLP, Los Angeles, California, Attorneys for Plaintiff Steven
McClurg.

Philip Trainer, Jr. and Randall J. Teti, of ASHBY & GEDDES, Wilmington,
Delaware; OF COUNSEL: Esra Acikalin Hudson and Lauren Chee, of MANATT,
PHELPS & PHILLIPS, LLP, Los Angeles, California, Attorneys for Defendants
Praesidium Partners, Inc., Philip Liu, Jeremy Rayne Steinberg, and Jeff Dorman.

GLASSCOCK, Vice Chancellor
      In 2017, two tech entrepreneurs—Plaintiff Steven McClurg and Defendant

Jeremy Steinberg—began discussing the formation of a company to provide

cryptocurrency investment and related services. McClurg, for his part, expended

effort into the creation of cryptocurrency indices for use in the business. Steinberg

assisted in this effort. On February 26, they formed Defendant Praesidium Partners,

Inc. (“Praesidium”), eventually doing business as its wholly owned subsidiary Arca

Investments GP, LLC (“Arca”).

      Meanwhile, non-party John Sarson had formed his own cryptocurrency fund,

Blockchain Momentum, LP (“Momentum”) and its General Partner, BC Momentum

Management, LLC (“BC Partner”). In February, Steinberg and McClurg decided to

make an equity investment in BC Partner, of $25,000 each, or $50,000 aggregate.

Steinberg paid in $25,000, but McClurg was only able to put in $15,000. Eventually,

McClurg, Steinberg and Sarson agreed that the equity investment would be for

$40,000 aggregate, the amount Steinberg and McClurg had already paid in.

McClurg agreed to pay Steinberg $5,000 to even their investment, although he has

not done so. Sarson agreed that McClurg and Steinberg collectively owned 8% of

the membership interest in BC Partner. This equity purchase, although complete,

was not memorialized with paperwork evincing the transfer of the membership units.

      In the spring of 2018, McClurg and Steinberg invited an attorney with an

interest in cryptocurrency, Defendant Phillip Liu, to join Praesidium. The parties

                                         1
caused Praesidium to issue 220,000 shares to each of these investors. Liu agreed to

contribute $25,000 cash. In lieu of a cash contribution, McClurg and Steinberg

agreed to contribute their equity interest in BC Partner and the cryptocurrency

indices they had created. The agreement was memorialized in a contribution

agreement (the “Contribution Agreement”). That document provided that each of

the three was required to invest a further nominal amount, $22, and that each would

receive 220,000 shares of Praesidium stock.1 The parties also executed a stock

purchase agreement, under the terms of which 120,000 of the shares issued to each

investor were subject to a vesting schedule and continued employment with

Praesidium.2

       By the fall of 2018—a few months after the stock issuance—the parties’

relationship had soured. Thereafter, Steinberg and Liu fired McClurg from his

employment at Praesidium. The company offered to buy out McClurg’s vested and

unvested shares.       According to the Defendants, Steinberg and Liu began to

investigate whether McClurg had complied with the Contribution Agreement.

Concluding that he had not, they dropped the attempt to have Praesidium repurchase

1
  Another Defendant, Jeffrey Dorman, received 120,000 shares pursuant to the Contribution
Agreement.
2
  This was set up as a call right that required Praesidium to exchange a nominal amount to recall
the shares.
                                               2
McClurg’s interest, and instead caused Praesidium to “cancel” McClurg’s 100,000

“vested” shares.

      McClurg brought this action, making two primary allegations. First, that the

Defendants breached the Contribution Agreement by cancelling his shares. Second,

that Liu and Steinberg (the “Director Defendants”) breached fiduciary duties to

McClurg by cancelling his stock. The matter was tried in 2022; this is my post-trial

decision.

      The Defendants’ defense relies on the allegation that McClurg and Steinberg

failed to comply with the Contribution Agreement, because 1) the stock indices were

worthless, and, in any event, never validly transferred to Praesidium, and 2) the

equity in BC Partner was not as valuable as McClurg had represented to Liu, and, in

any event, was not adequately documented or transferred to Praesidium.

      Based upon the facts developed at trial, I find the actions of the investors in

both BC Partner and Praesidium to have been remarkably casual and sloppy. I also

find, however, that McClurg placed the indices he and Steinberg had created on

Praesidium’s server and has relinquished all rights in the indices to Praesidium. Per

the Contribution Agreement, that is all McClurg was required to do. Similarly,

McClurg directed that Sarson transfer McClurg’s and Steinberg’s 8% “equity and

related interests” in BC Partner to Arca, and stood ready “at and following the

Closing, to deliver, or cause to be delivered” documents necessary to fulfil this term.

                                          3
Sarson and BC Partner have consistently recognized that Arca holds an 8% equity

interest in BC Partner.

       The consideration provided by McClurg, I find, complied with the

Contribution Agreement, and was not illusory. I find that McClurg’s shares were

validly issued and invalidly cancelled.              The remedy sought, imposition of a

constructive trust over the shares,3 is accordingly justified. My reasoning follows.

                                     I. BACKGROUND4

       This action begins with an agreement between the parties. The Plaintiff along

with the individual defendants entered a contract to receive the shares of a nascent

company. In exchange, they each provided bargained for consideration; specifically,

money, experience, time, work product, or some combination of these. Neither the

corporation nor its new stockholders took issue with the arrangement until after the

stockholders had a falling out. A power struggle ensued; Plaintiff lost. The result

was termination of his employment, removal from his position as a director, and the

purported cancellation of his shares. Although the Defendants had the power to

3
  Alternatively, McClurg seeks the value of the shares as damages.
4
  Where the facts are drawn from exhibits jointly submitted at trial, they are referred to according
to the numbers provided on the parties’ joint exhibit list and cited as “JTX- __”. Citations in the
form of “PTO ___" refer to paragraphs in Granted (Stipulated [Proposed] Joint-Pre-Trial Order),
DKT No. 23. Citations in the form of “Trial [I or II] ___:___” refer to Trial Tr. – Vol. I Held Via
Zoom, DKT No. 27 and Trial Tr. – Vol. II Held Via Zoom, DKT No. 28.
                                                 4
perform the first two actions, they lacked the power to cancel McClurg’s shares,

which, I find, were issued for valid consideration.

       The facts presented in this post-trial memorandum opinion are either

stipulated to in the parties’ pre-trial stipulation or were proven by a preponderance

of the evidence at trial.

       A. The Parties and the Allegations

       The Plaintiff in this action, McClurg, is a former employee, director, and

stockholder of Defendant Praesidium.5 Praesidium is a Delaware-incorporated,

California-based financial technology company focused on cryptocurrencies.6

McClurg alleges that after entering a contract with Praesidium to exchange certain

assets for Praesidium shares (the “Contribution Agreement”) and providing those

assets to the corporation, Defendants Steinberg and Liu—in their capacity as

directors—wrongfully cancelled those shares.7 McClurg alleges that by cancelling

his shares, Steinberg and Liu violated contractual and fiduciary duties owed to him.8

       McClurg was not alone in entering the Contribution Agreement. Steinberg,

Liu, and Defendant Jeff Dorman, another Praesidium employee, each participated

5
  PTO ¶¶ 15, 20.
6
  PTO ¶¶ 16, 36.
7
  Verified Compl. 8, DKT No. 1.
8
  Id. at 8–9.
                                            5
and received shares in exchange for consideration.9 McClurg alleges that Steinberg,

Liu, Dorman, and Praesidium, as contractual parties, breached the Contribution

Agreement in connection with the cancellation of McClurg’s shares.10

       Steinberg and Liu allege that McClurg failed to provide the requisite assets

and that they validly cancelled McClurg’s shares for lack of consideration.11 In

“cancelling” those shares, Steinberg and Liu state that they breached no fiduciary

duties and, rather, a failure to cancel the shares would have been a breach of their

fiduciary duty to Praesidium.12 Dorman along with Steinberg and Liu aver that they

were co-parties—not counterparties—with McClurg; that Praesidium was the sole

counterparty; and, therefore, that they cannot be personally liable for the

Corporation’s supposed breach of contract.13 Dorman also avers that he was neither

a director nor officer and was not involved in the cancellation of McClurg’s shares.14

The Defendants argue that McClurg’s action should fail on account of supposed

fraudulent misrepresentations he made to Liu.15

9
  PTO ¶ 20.
10
   Verified Compl. 8.
11
   Defs.’ Post-Trial Br. 40–41, DKT No. 31.
12
   Id. at 39–41.
13
   Id. at 58–60.
14
   Id. at 59–60.
15
   Id. at 55–58.
                                              6
       B. Procedural History

       Unlike the typical case that this Court oversees from initial complaint to full

trial, this action arrived at chambers fully formed and ready for trial. McClurg

initially brought an analog of this action on June 8, 2020 in Los Angeles County

Superior Court alleging: “(1) breach of contract against all Defendants, (2) breach

of fiduciary duty against Defendants Liu and Steinberg, (3) unfair competition in

violation [sic] California Business & Professions Code Section 17200 against all

Defendants, and (4) declaratory relief against all Defendants.”16 Defendants filed

their answer August 12, 2020.17 Following motion practice and rather extensive trial

preparation,18 the Defendants filed an Ex Parte Application to Dismiss or Stay

Action Pursuant to California Code of Civil Procedure Section 410.30.19 On

September 15, 2021, the California court granted an order to stay the case, pending

litigation of the breach of contract and breach of fiduciary duty claims in Delaware.20

       McClurg filed his complaint and a Motion to Set Trial Date in this court on

October 15, 2021.21 The Defendants filed their answer on November 12, 2021.22 I

16
   PTO ¶ 3.
17
   PTO ¶ 4.
18
   PTO ¶¶ 6 et seq.
19
   PTO ¶ 10.
20
   PTO ¶ 12.
21
   PTO ¶ 13.
22
   PTO ¶ 14.
                                          7
held a two-day trial in February 2022.23 Post-trial briefing followed and concluded

May 18, 2022.24 The matter was fully submitted July 29, 2022.25

       C. A Match Made on the Blockchain

       Steinberg and McClurg’s friendship began in December 2017 when

Steinberg’s brother-in-law introduced him to McClurg.26 Steinberg and McClurg

shared an interest in cryptocurrencies, and the pair immediately began to brainstorm

ideas for a new financial technology company focusing on cryptocurrency.27 That

same day, McClurg digitally introduced Steinberg to his friend and former

colleague, Sarson, who was the Chief Investment Officer and a Manager of BC

Partner, which is the general partner of Momentum, a cryptocurrency hedge fund.28

McClurg emailed Steinberg, Sarson, and two others the first draft of the “Crypto

Equal Weight Index,” a cryptocurrency index, requesting “comments and

23
   Trial Tr. – Vol. I Held Via Zoom, DKT No. 27, Trial Tr. – Vol. II Held Via Zoom, DKT No.
28.
24
   Pl. Steven McClurg’s Post-Tr. Reply Br., DKT No. 33.
25
   Letter to the Hon. Sam Glasscock III from Eric J. Juray, Esq. Resp. Ct.’s July 28, 2022 Letter to
Counsel, DKT No. 35.
26
   PTO ¶ 24.
27
   PTO ¶ 25.
28
   PTO ¶¶ 26–27.
                                                 8
insights.”29 Steinberg, having created several indices,30 eventually provided

comments and sent McClurg a copy of a white paper on index methodology.31

       D. Investment in BC Partner

       Over the course of the next several months, December 2017 to February 2018,

Steinberg and McClurg worked together as consultants for various cryptocurrency

companies.32 During that time, the pair discussed several potential investments in

the cryptocurrency space but settled on investment in Sarson’s fund, BC Partner.33

On February 22, 2018, Sarson sent McClurg and Steinberg transaction documents

to provide the pair membership units in BC Partner (collectively, the “February 2018

Subscription Agreement”).34 Among these were documents titled subscription

agreement, operating agreement, and 2018 profits interest plan for BC Partner.35 In

late February 2018, McClurg and Steinberg agreed to invest $25,000 each in BC

29
   JTX-3.
30
   See Trial II 440:22–41:9.
31
   Trial I 18:20–19:15.
32
   PTO ¶ 30.
33
   Trial II 410:2–11:14.
34
   PTO ¶ 32.
35
   PTO ¶ 32.
                                         9
Partner for a combined 10% ownership interest.36 Earlier negotiations had included

an option to earn an additional 40%.37

       On March 1, 2018, McClurg sent BC Partner 0.47102 BTC (bitcoin) from his

Kraken account, and 0.15692195 BTC from another bitcoin account.38 These

transfers amounted to $9,042.60, and BC Partner acknowledged receipt the next

day.39 Thereafter, McClurg made a cash payment of $5,957.40 to BC Partner.40 On

March 27, 2018, Steinberg remitted $25,000 to BC Partner, and the firm

acknowledged receipt of the funds.41 That same day, McClurg informed Steinberg

that he could not afford to pay BC Partner the remaining $10,000 of his $25,000

commitment and suggested that the pair reduce their total contribution to $40,000

for an 8% interest.42 McClurg offered to pay Steinberg the $5,000 difference and

Steinberg agreed saying, “that’s . . . fine with me.”43 Thus, the pair sent a total of

$40,000 to BC Partner.

36
   PTO ¶ 35.
37
   Trial I 53:24–54:7, 130:12–31:16.
38
   PTO ¶ 38.
39
   PTO ¶¶ 38–39.
40
   PTO ¶ 44.
41
   PTO ¶ 42.
42
   PTO ¶ 43.
43
   PTO ¶ 43 (internal quotations omitted). McClurg has not paid Steinberg the $5,000. Trial I
34:23–35:8.
                                             10
       E. Formation of Praesidium

       After working together for several months as consultants, on February 26,

2018, McClurg and Steinberg formed Praesidium.44 Upon formation, no capital was

contributed, no shares were issued, and the company was simply an empty shell.45

       The next day, February 27, 2018, a mutual friend, Steven Lehman, introduced

McClurg and Liu.46 Liu was an attorney with an interest in cryptocurrency who was

working at Manatt, Phelps & Phillips, LLP.47 In April 2018, after McClurg,

Steinberg, and Liu briefly worked together at another crypto firm, the trio, joined by

Dorman, sought to build Praesidium in earnest.48 To do so, the parties needed to

formalize their relationship with Praesidium and put capital into the fledgling

organization. Praesidium engaged outside counsel, Stradling Yocca Carlson &

Rauth P.C., to represent it and draft documents reifying these connections.49 Among

those documents was the Contribution Agreement now at issue.50

44
   PTO ¶ 33.
45
   PTO ¶ 34.
46
   PTO ¶ 37.
47
   PTO ¶ 37; Trial I 45:24–46:2.
48
   PTO ¶¶ 50–51; Trial II 422:1–23:5.
49
   See JTX-53 § 6.10.1; JTX-28.
50
   JTX-53 § 6.10.1; JTX-28.
                                         11
       F. Contribution Agreement

       McClurg, Steinberg, Liu, and Dorman executed the Contribution Agreement

as equity investors between May 10, 2018 and May 18, 2018, and McClurg signed

on behalf of Praesidium.51 This agreement set the terms of the exchange between

Praesidium and its intended stockholders. Beyond stating the consideration required

of each party,52 the Contribution Agreement designates Delaware law as

governing,53 contains a merger provision,54 and stipulates that the document was

jointly drafted.55 Stradling Yocca Carlson & Rauth P.C. included explicit language

indicating it represented only Praesidium and not any other party or faction.56

        Section 2 of the Contribution Agreement notes that the consideration to be

exchanged by the parties is listed in Schedule A.57 Specifically, it states, “On the

terms and subject to the conditions set forth herein, at the Closing, each of the

51
   PTO ¶ 20.
52
   JTX-53 § 2; JTX-53 Schedule A.
53
   JTX-53 § 6.5.
54
   JTX-53 § 6.2 (“This Agreement and the other agreements and documents delivered pursuant
hereto contain the sole and entire agreement and understanding of the parties with respect to the
entire subject matter of this Agreement, and any and all prior discussions, negotiations,
commitments and understandings, whether oral or otherwise, related to the subject matter of this
Agreement are hereby merged herein. Nothing in this Agreement, express or implied, is intended
to confer upon any person other than the parties hereto any rights or remedies under or by way of
this Agreement.”).
55
   JTX-53 § 6.10.2 (“If an ambiguity or question of intent or interpretation arises, then this
Agreement will be construed as if drafted jointly by the parties to this Agreement, and no
presumption or burden of proof will arise favoring or disfavoring any party to this Agreement by
virtue of the authorship of any of the provisions of this Agreement.”).
56
   JTX-53 § 6.10.
57
   JTX-53 § 2.
                                               12
Stockholders shall contribute, assign, transfer, quitclaim and deliver to the

Corporation all of its right, title and interest in and to the amount of capital and/or

other assets set forth opposite such Stockholder's name on Schedule A (collectively,

the ‘Contributed Assets’).”58

       In exchange for 220,000 shares each, McClurg and Steinberg were to

contribute “(i) $22.00, (ii) all rights in and to the Cryptocurrency Indexes created by

Steven Keith McClurg and Jeremy Rayne Steinberg, and (iii) all equity and other

related interests in [BC Partner].”59        Only 100,000 of each of McClurg and

Steinberg’s shares were fully vested ab initio;60 the remainder were to vest on a two

year schedule beginning on November 1, 2018 subject to continued employment

with Praesidium.61

       Liu was to receive 220,000 shares in exchange for $25,022.00.62 100,000 of

those shares were fully vested upon initial payment.63 120,000 of those shares were

to vest subject to continued employment and a schedule beginning on November 1,

2018.64

58
   JTX 53 § 2.
59
   PTO ¶ 20; JTX-53 Schedule A.
60
   PTO ¶ 20; JTX-54.
61
   PTO ¶ 20; JTX-54. Recall of unvested shares was designed to be accomplished through a call
option exercisable upon termination of employment.
62
   PTO ¶ 20.
63
   PTO ¶ 20.
64
   PTO ¶ 20.
                                             13
      Dorman was to receive 120,000 shares for $12.00.65 All of Dorman’s shares

were to vest subject to continued employment at Praesidium and a two-year schedule

beginning on November 1, 2018.66 Dorman had been offered the opportunity to

invest $25,000 in exchange for 100,000 additional vested shares but he forwent the

option.67

      G. Consideration Paid and Received

      Liu paid $25,022.00 and received 100,000 vested and 120,000 unvested

shares.68 Dorman paid $12.00 and received 120,000 unvested shares.69 Praesidium

issued 100,000 vested and 120,000 unvested shares to each of McClurg and

Steinberg.70 McClurg and Steinberg each paid $22.00;71 however, the parties now

disagree whether Steinberg and McClurg ultimately contributed the rights to and in

the requisite cryptocurrency indices and the “equity and other related interests in

[BC Partner].”72 Though Liu claims he took issue with McClurg and Steinberg’s

65
   Granted (Stipulation and [Proposed] Order Governing Post-Trial Briefing and Amendment to
Stipulated Fact) § 7.
66
   Id.
67
   PTO ¶ 56.
68
   PTO ¶ 20.
69
    Granted (Stipulation and [Proposed] Order Governing Post-Trial Briefing and Amendment
Stipulated Fact) ¶ 7, DKT No. 29.
70
   See JTX-53 § 3.1.
71
   PTO ¶ 20.
72
   JTX-53 Schedule A.
                                            14
consideration on May 22, 2018,73 the issue did not truly come to a head until October

18, 2018, when Liu and Steinberg “cancelled” McClurg’s vested shares.74

               1. Interest in BC Partner

       Despite sending funds to BC Partner, neither McClurg nor Steinberg signed

the February 2018 Subscription Agreement, and BC Partner did not issue

Membership Certificates to either McClurg or Steinberg.75 However, on May 4,

2018, McClurg Telegram-messaged76 Steinberg to ask if the pair’s interest in BC

Partner could be assigned to Arca,77 a wholly owned Praesidium subsidiary.78

Steinberg unequivocally said, “yes.”79 To effectuate this proposed assignment,

McClurg—with a carbon copy to Steinberg—sent an email to Sarson several hours

later, which said, “For the capital that [Steinberg] and I contributed to the GP, can

you issue a single subscription doc to ‘Arca Investments GP, LLC’ for our combined

total? I will sign on behalf of Arca.”80 Sarson’s response was in the affirmative:

“Hey buddy, I can handle this.”81 Sarson also asked if the total investment was

73
   Trial I 195:11–21, 245:6–48:8.
74
   See PTO ¶ 63.
75
   PTO ¶¶ 46–48.
76
   For the unhip, including (before this litigation) this judge, the parties did not communicate via
Western Union. “Telegram” here refers to a messaging application usable on smartphones and
personal computers.
77
   JTX-47.
78
   PTO ¶ 54.
79
   JTX-47.
80
   PTO ¶ 54; JTX-48.
81
   PTO ¶ 55; JTX-49.
                                                15
$40,000 or if he should expect the remaining $10,000.82 McClurg responded, “40k

perfect.”83 On May 21, 2018, Sarson emailed McClurg and Steinberg attaching the

following documents: Private Placement Memorandum, Subscription Agreement,

and Verification of Accredited Status (collectively, the “May 2018 Subscription

Agreement”).84 A day later, May 22, 2018, McClurg forwarded the email and

attachments to Liu.85 The parties disagree as to what happened next. On the one

hand, Defendants claim that Liu, “found [the May 2018 Subscription Agreement] to

be materially defective”86 and verbally told McClurg that the assignment

documentation was insufficient.87 Liu testified that McClurg responded that “he

would take care of it” but never did.88 On the other hand, McClurg testified that

these conversations never occurred, Liu never informed McClurg of his misgivings,

and Liu accepted responsibility for handling the remainder of the assignment.89

Irrespective of Liu and McClurg’s actions or inactions, no one executed the May

2018 Subscription Agreement.90         Moreover, it is clear that Liu reviewed the

82
   PTO ¶ 55; JTX-49.
83
   PTO ¶ 55; JTX-49.
84
   PTO ¶¶ 57–58.
85
   PTO ¶ 59.
86
   Defs.’ Post-Trial Br. 24.
87
   Trial I 197:1–8, 245:6–48:8.
88
   Trial I 247:3–48:8.
89
   Trial I 106:18–07:3, 81:12–83:14.
90
   PTO ¶ 60.
                                          16
document, and, whatever its deficiencies, it accurately disclosed the amount of

McClurg and Steinberg’s investment, $40,000.91

              2. Cryptocurrency Indices

       McClurg placed the following indices into Praesidium’s Google Drive: Arca

Equal Weighted Digital Asset Index,92 Cap Weighted Crypto Index,93 Arca

Blockchain Protocol Index,94 Arca Large Cap Digital Asset Index,95 and Arca Mid

Cap Digital Asset Index (collectively, the “Cryptocurrency Indices”).96 Aside from

the Contribution Agreement, McClurg and Steinberg did not draft or execute a

separate assignment document for the indices.97

       H. Running Praesidium

       At first, Praesidium ran smoothly,98 but things changed around August 2018

when McClurg and Steinberg started to disagree.99 One percolating point of

disagreement was who would take the helm of Praesidium as its CEO; both

91
   JTX-59.
92
   JTX-3; JTX-128; Trial I 71:20–72:13.
93
   JTX-134; Trial I 72:14–73:6.
94
   JTX-135; Trial I 74:18–75:4.
95
   JTX-136; Trial I 75:6–75:15.
96
   JTX-137; Trial I 75:16–76:3.
97
   See Trial I 121:14–22:15.
98
   Trial I 97:21–98:12.
99
   See Trial I 98:17–101:10.
                                          17
McClurg and Steinberg wanted the position.100 Ultimately, Steinberg prevailed

and assumed the mantle of CEO.101

       I. Termination of Employment, Ousting as Director, and Cancellation of the
       Shares

       On October 3, 2018, Steinberg called a Praesidium board meeting.102 At that

meeting, Liu and Steinberg voted to terminate McClurg’s employment as a

Praesidium employee and its Chief Investment Officer.103 With the assistance of

outside counsel, Liu and Steinberg removed McClurg as a director on October 8,

2018 by written consent of the majority of shareholders.104

       In addition to firing McClurg at the October 3 board meeting, Praesidium

offered $50,000 to repurchase “all of [McClurg’s] outstanding vested and unvested

shares.”105 McClurg said “he would take some time to consider the offer.”106 Within

a week, Liu reached out and suggested that McClurg should counter the $50,000

offer if he wanted.107

100
    Trial I 101:11–03:2; Trial I 211:21–12:17.
101
    See Trial I 211:21–12:17; PTO § 18.
102
    JTX-71.
103
    JTX-71.
104
    Trial I 262:2–14; JTX-74.
105
    JTX-71; Trial I 111:21–112:1.
106
    JTX-71.
107
    JTX-75.
                                                 18
       Outside of the negotiations with McClurg, Liu and Steinberg were busy

looking into Arca’s interest in BC Partner. According to the Defendants, following

the October 3, 2018 board meeting, “Liu and Steinberg scoured the Company’s

email for a signed subscription agreement or an assignment.”108 Liu testified that he

was surprised that “there was any issue with their initial subscription into [BC

Partner]”.109 After they were unable to find a signed subscription agreement, Liu

and Steinberg consulted with outside counsel to determine their obligations as

directors.110 On October 8, 2018, Liu reached out to Sarson to request the return to

Arca of not only Steinberg’s investment in BC Partner, but also McClurg’s

investment as well.111

       In addition to [Steinberg], I understand that Steven McClurg also has
       a contribution to your GP. That was assigned to Arca, as Steven has
       previously communicated to you I understand. We would like to get
       that refunded to Arca as well. Please let me know if you need
       additional documentation on that however, I have an email from you
       back in May that was a forward from Steven.112

In a follow-up email on October 10, 2018, Liu asked Sarson how much McClurg

invested in BC Partner.113 Sarson’s response came on October 17, 2018 and noted

108
    Defs.’ Post-Trial Br. 38; Trial I 264:4–65:14.
109
    Trial I 264:13–23.
110
    Trial I 264:24–65:22.
111
    JTX-73.
112
    JTX-73 (emphasis added).
113
    JTX-77.
                                                19
that McClurg remitted a total of $15,000 to BC Partner but that the total investment

was $40,000.114

       Despite continued negotiations with Liu on October 14 through October 16,115

Praesidium, via Steinberg and Liu in their capacity as directors, purported to cancel

McClurg’s 100,000 vested shares on October 18, 2018.116 The unanimous board

consent cancelled not only McClurg’s 100,000 vested shares but also Steinberg’s

100,000 vested shares.117 Steinberg retained his unvested shares.118

       Several months later, in December 2018, Sarson reached out to Steinberg and

Liu asking “where would you like me to send information on Arca's investment in

[BC Partner]” and requesting the execution of freshly attached subscription

documentation.119 In later emails, Liu sought the documents showing Arca’s interest

in BC Partner and questioned the lack of a signed agreement.120 In response, Sarson

noted the request to list Arca as BC Partner’s investor, BC Partner’s effectuation of

that request, the fact that BC Partner was not involved in “the conflict between

[Steinberg] [McClurg] and Arca,” and the assistance BC Partner provided to Arca

114
    JTX-77.
115
    JTX-76.
116
    PTO ¶ 63; JTX-80.
117
    PTO ¶ 63; JTX-80.
118
    Trial II 472:12–18. It is unclear whether Praesidium ever exercised its option to repurchase
McClurg’s unvested shares, which, in any event, are not at issue here.
119
    JTX-85.
120
    JTX-85.
                                              20
in setting up shop.121 Liu responded, “As far as I'm concerned, there never existed

any subscription by Arca and I'm unwilling now to complete this subscription.”122

He also noted deficiencies in the documentation and took issue with the amount of

the investment stating, “what was represented to me was a subscription already done

of $25,000 each by [Steinberg] and [McClurg]. That totals $50,000, not $40,000.”123

                                  II. ANALYSIS

       Plaintiff’s two counts operate on similar but distinct frequencies. Count 1

sounds in contract, while Count 2 alleges breach of the directorial duty of loyalty.

In Count 1, McClurg asserts that despite his provision of valid consideration and

execution of the Contribution Agreement, the Defendants unlawfully caused the

company to revoke his stock and thus breached the contract. In Count 2, McClurg

alleges that the Director Defendants’ decision to cancel McClurg’s shares breached

the duty of loyalty they owed to him as a stockholder. The Plaintiff seeks a

constructive trust in his favor over the stock, or damages. The questions pertinent

to this relief are whether Praesidium validly issued McClurg’s shares pursuant to the

121
    JTX-85.
122
    JTX-85.
123
    JTX-85.
                                         21
Contribution Agreement, and whether Praesidium’s cancellation of the shares was

valid and effective.

       A. The Issue of Issuance

       The question of whether Praesidium validly issued McClurg’s shares hinges

on whether he complied with the Contribution Agreement. That agreement required

McClurg (and Steinberg) to contribute certain assets to the company; McClurg

maintains that he did; the Defendants contend that he did not perform, or that his

performance was inadequate and illusory.

               1. McClurg Gave Valid Consideration

       The Defendants claim that “Praesidium did not receive any bargained-for

consideration from McClurg.”124 The parties to this action each executed the

Contribution Agreement and in exchange for 220,000 shares McClurg was to

provide “(i) $22.00, (ii) all rights in and to the Cryptocurrency Indexes created by

Steven Keith McClurg and Jeremy Rayne Steinberg, and (iii) all equity and other

related interests in [BC Partner].”125 There is no question that McClurg remitted

$22.00 to Praesidium.126        However, the Defendants contest whether McClurg

124
    Defs.’ Post-Trial Br. 41.
125
    PTO ¶ 20.
126
    PTO ¶ 20.
                                          22
provided the requisite rights in the cryptocurrency indices as well as the equity and

other related interests in BC Partner.

                     a. McClurg Assigned His Interests in the Cryptocurrency
                     Indices

       McClurg, as discussed above, uploaded all of the cryptocurrency indices that

he created onto Praesidium’s Google Drive.127 He also signed the Contribution

Agreement, which listed “all rights in and to the Cryptocurrency Indexes created by

Steven Keith McClurg and Jeremy Rayne Steinberg” as his contributed assets.128

McClurg intended to effectuate the requirements of the Contribution Agreement

through the upload and claimed no interest in the cryptocurrency indices after

signing the Contribution Agreement.

       The Defendants argue 1) that the indices were not tendered, 2) that the indices

were worthless, 3) that the indices were not indices, and 4) that Praesidium did not

publicly acknowledge ownership.129

       The first of the Defendants’ arguments fails because although the method of

transfer may not have been optimal, McClurg’s actions and intent caused the transfer

of the Cryptocurrency Indices to Praesidium. The Contribution Agreement required

that each party “execute such assignments or other documents as necessary or

127
    See supra notes 92–96 and accompanying text.
128
    JTX-53 Schedule A.
129
    Defs.’ Post-Trial Br. 44.
                                             23
reasonably requested by the Corporation to effect the transfer”130 and deliver “such

further certificates, consents and other documents as may be necessary.”131 The

corporation could have requested further documentation but chose not to. From the

mid-May 2018 execution of the Contribution Agreement until, at least, the October

18, 2018 cancellation of the shares, Praesidium took no issue with the indices.132 I

find that McClurg tendered the Cryptocurrency Indices.

       The Defendants’ second and third arguments are unavailing. The products

that McClurg and Steinberg provided were undoubtedly the “Cryptocurrency

Indexes” they had created; the contract required them to be assigned to Praesidium,

they did so, and thus complied with the bargained for duty.

       The Defendants’ fourth argument is made irrelevant by the outcome of

arguments one through three. Although public acknowledgement would be evidence

of acceptance and ownership, I have already found that McClurg and Steinberg

assigned the Cryptocurrency Indices.133

130
    JTX-53 § 4.2.2.
131
    JTX-53 § 4.3.
132
     There is no indication that Praesidium took issue with the indices at any time prior to this
litigation.
133
     The Plaintiff sought to introduce marketing decks to help prove this point. The Defendants
objected for lack of proper foundation. As the point of argument that the marketing decks relate
to is moot, I need not rule on their admissibility.
                                               24
                     b. McClurg Assigned His Interest in BC Partner

       Although through somewhat circuitous means, Praesidium received all of

McClurg’s interest in BC Partner. As discussed above, Steinberg, McClurg, and

Sarson came to an understanding that the total investment by Steinberg and McClurg

in BC Partner was $40,000, resulting in an 8% interest. Steinberg and McClurg

independently negotiated to equalize their respective shares of the investment.134 As

such, each contributed $20,000 to BC Partner.135 These actions created Steinberg

and McClurg’s interest in BC Partner. McClurg, with Steinberg’s knowledge and

consent,136 requested that Sarson transfer their interest in BC Partner to Praesidium’s

subsidiary Arca.137 Sarson acknowledged this request and sent McClurg documents

to effectuate it.138 Sarson has acknowledged the purchase of equity by McClurg and

Steinberg, and the directive to transfer the interest to Arca.139                 Sarson’s

documentation served to monumentalize rather than create Praesidium’s interest in

BC Partner, an equitable interest created at the time of the investment. After

134
    PTO ¶ 43.
135
    Whether McClurg owes Steinberg $5,000 was not a question addressed by the parties, and I
need not address it here.
136
    JTX-47.
137
    JTX-48.
138
    PTO ¶¶ 57–58.
139
    Trial II 291:9–293:23, 297:2–20.
                                            25
McClurg requested the assignment, BC Partner treated Praesidium as an equity

holder.140

       Moreover, at the time of the cancellation, the Director Defendants were aware

of McClurg’s actual equity investment in BC Partner. Steinberg, of course, had

personally made a $25,000 investment,141 and understood that McClurg had put in

$15,000 with the promise to true up that investment by paying Steinberg $5,000.142

Steinberg thus knew that $40,000 was the sum total of the equity investment in BC

Partner. I find that this investment was made to acquire equity in the business; there

is no evidence that the payment was a loan to BC Partner or had some other purpose.

       Liu, too, was aware of the equity investment in BC Partner, as evidenced by

his communication to Sarson contemporary with McClurg’s firing and the

“cancellation” of his shares. Liu referred to the investment in BC Partner as made

by McClurg and “assigned to Arca.”143 He further requested Sarson return the funds

to Arca.144     Further, despite Sarson providing documentation after McClurg’s

termination and offering to provide additional documentation if necessary,145 Liu

140
    This included working with Praesidium by sharing internal operational flow charts, sharing BC
Partner’s Rolodex, connecting Praesidium with service providers, training a Praesidium trader, and
provisioning that trader with BC Partner’s trading platforms and security apparatuses. Trial II
302:11–304:4.
141
    PTO ¶ 42.
142
    PTO ¶ 43.
143
    JTX-73.
144
    JTX-73.
145
    JTX-85.
                                               26
evinced no interest in documenting Praesidium’s interest—the Director Defendants

were more interested in a tool to defenestrate McClurg.146

       The Defendants argue 1) that the method of assignment was improper, 2) that

McClurg did not have “good and marketable title” to any equity interest in BC

Partner and the May 2018 Subscription is not good evidence of such an interest, and

3) that even if McClurg and Steinberg provided an equity interest, that equity interest

was the wrong kind of equity interest.

       The Defendants’ first argument does not comport with the Contribution

Agreement. As McClurg rightfully noted, the Contribution Agreement was silent as

to the method by which assets were to be contributed. Rather, the Contribution

Agreement states that “Stockholders shall contribute, assign, transfer, quitclaim, and

deliver to the Corporation all of its right, title and interest in and to the amount of

capital and/or other assets set forth . . . on Schedule A.”147 McClurg, through his

email to Sarson and Sarson’s affirmative response, assigned his interest in BC

Partner to Praesidium. Praesidium, per the Contribution Agreement, had a right to

request further documentation from McClurg or Sarson. They did not do so.148 In

actuality, the facts indicate that following McClurg’s ouster, Liu and Steinberg were

146
    BC Partner listed Arca as an investor as late as January 2019, JTX-90, but it ultimately returned
$10,957 to Steinberg as the value of “his” $25,000 investment, JTX-91.
147
    JTX-53 § 2.
148
    Presumably, Praesidium still has the right to obtain documentation to perfect its interest.
                                                27
uninterested in documenting Praesidium’s equity interest in BC Partner.149 Instead,

they wished to emphasize the technical shortcomings of the documentation to

validate cancelation of McClurg’s stock.

      The Defendants’ second argument fails because McClurg held an interest in

BC Partner upon Sarson’s acknowledgment of receipt of funds. The Defendants

have failed to demonstrate otherwise, and, again, have eschewed Sarson’s assistance

to confirm Praesidium’s equity interest.150

      The Defendants third argument fails because the Contribution Agreement did

not specify the type of equity interest required. In briefing, the Director Defendants

deny that the interest of Steinberg and McClurg in BC Partner was the “right kind”

of equity—that is, it was not membership units represented by certification. But that

is not the consideration Praesidium required of McClurg.           The Contribution

Agreement simply required McClurg to contribute “all equity and other related

interests in [BC Partner].”151 He provided such interests, which were real, not

illusory.

149
    JTX-85.
150
    JTX-85.
151
    JTX-53 Schedule A.
                                         28
              2. The Defendants’ Affirmative Defense of Misrepresentation Fails

       The Defendants attempt to escape any obligation to McClurg by asserting that

he materially or fraudulently misrepresented his interest in BC Partner, resulting in

McClurg’s interest, presumably, being voidable. They take issue with McClurg’s

representations as to the value of his investment in BC Partner. They have failed to

demonstrate any misrepresentation to Praesidium.

       To avoid a contractual obligation due to misrepresentation, a party must show

by a preponderance of the evidence “A) that there was a misrepresentation B) that

the misrepresentation was either fraudulent or material, C) that the misrepresentation

induced the recipient to enter into the contract, and D) that the recipient’s reliance

on the misrepresentation was reasonable.”152 The parties acquiring stock in the

corporation were McClurg, Steinberg, Liu and Dorman; the counterparty was

Praesidium.

       The Defendants claim that “McClurg repeatedly misrepresented to Liu that he

and Steinberg had recently paid $25,000 each for an equity interest in [BC

Partner].”153 They support this proposition with a single piece of documentary

evidence, an April 8, 2018 Telegram message from McClurg to Liu stating,

152
    Martin v. Med-Dev Corp., 2015 WL 6472597, at *12 (Del. Ch. Oct. 27, 2015) (quoting Alabi
v. DHL Airways, Inc., 583 A.2d 1358, 1361–62 (Del. Super. Ct. 1990)).
153
    Defs.’ Post-Trial Br. 56.
                                            29
“[Momentum] is run by John Sarson. Rayne and I own 8% of [BC Partner] with

$50k paid in, option to earn 40% if we raise captital [sic]. Want us to throw our

share into company?”154

         In fact, that representation was correct as to the ownership interest—8%—but

misstated the investment, which was in actuality $40,000, not $50,000. The “option”

to earn a larger equity interest was indeed discussed between McClurg and Sarson,

but I assume for purposes of this opinion that the option had lapsed as of the time of

the communication between McClurg and Liu. These misstatements, I find, cannot

have mislead the counterparty, Praesidium.

         The two principals of Praesidium at the time the Contribution Agreement was

entered were McClurg and Steinberg. Obviously, McClurg was aware of the extent

of his investment with Steinberg at the time of the agreement. I find, based on the

evidence at trial, that Steinberg was fully aware that the contribution was $40,000;

that he and McClurg owned 8% of the equity in BC Partner as a result; and that

McClurg promised to repay him $5,000 personally, outside the Contribution

Agreement. Steinberg knew the extent of the interest he and McClurg were

contributing to the company. If there was a party mislead by the misrepresentation,

it was Liu in his capacity as an individual investor. He asserts that he was induced

154
      JTX-38.
                                          30
to invest $25,000 in Praesidium on the misrepresentation that McClurg and

Steinberg held $50,000 in BC Partner equity, which they stated they would

contribute, along with the cryptocurrency indices, to the company.155 Whatever

rights this gives Liu personally, he has not asserted them here. But there is no basis

for Praesidium to void the Contribution Agreement.156

       B. The Issue of Cancellation

       I have found that Praesidium validly issued McClurg’s shares for

consideration that was both non-illusory and contractually compliant. There is,

accordingly, no justification for the cancellation of McClurg’s shares. The Director

Defendants, moreover, have submitted no evidence that the purported cancelation

155
     Liu testified that McClurg told him repeatedly that the parties were making “equal”
investments. But the Contribution agreement makes clear that Liu was contributing cash, and
McClurg and Steinberg were contributing equity in BC Partner and the Cryptocurrency Indices.
If, in fact, this equity had represented a recent contribution of $50,000, not $40,000—as Liu has
testified he believed—this would make Liu’s contributions less than those of McClurg and
Steinberg.
156
    It is unclear how the Defendants expect their defense, if realized, to operate. If the Contribution
Agreement were voided, the result would presumably be much more fundamental than McClurg
losing his equity in the company.
                                                 31
was compliant with the DGCL.157 They maintain only that they attempted to cancel

McClurg and Steinberg’s shares by “Unanimous Board Consent.”158

       Praesidium did not bring an action against McClurg asking the Court to cancel

McClurg’s stock or find the issuance void. Liu and Steinberg wanted McClurg

removed from Praesidium and resorted to self-help. The attempted cancelation, in

light of McClurg’s payment of consideration, was not effective.

       C. The Remedy

       Because I have found the action to cancel the stock was ineffective, one

remedy sought by McClurg—imposition of a trust in his favor over the shares—is

appropriate.159 Because my decision here seems to provide McClurg with full relief,

it is appropriate to seek the opinion of the parties as to whether other outstanding

issues need to be addressed, including the contractual claim against Praesidium160

157
     To the extent that the purported cancellation changed the capital structure of Praesidium,
presumably actions comporting with 8 Del. C. 242(a) were required to effect a cancellation. See
Reddy v. MBKS Co., Ltd., 945 A.2d 1080, 1086–88 (Del. 2008) (requiring charter amendment to
effect cancellation of stock). The Plaintiff, I note, has not argued that the cancellation was
ineffective on statutory grounds (basing his argument instead on contract and fiduciary duty
breaches) and I make no such finding here.
158
    PTO ¶ 63.
159
    In post-trial briefing, McClurg seeks damages, not his stock. To the extent after review of this
decision, the parties require further instruction as to the proper remedy, they should so inform me.
160
    To the extent McClurg asserts contractual claims against the other stockholders for breach of
the Subscription Agreement, those claims must fail, as the other stockholders are not counterparties
and have no obligation to McClurg under that agreement.
                                                32
and the breach of duty claim against the Director Defendants. I will defer a final

order pending submissions of the parties to that effect.

                                III. CONCLUSION

      The attempt by the Director Defendants to cancel the vested stock held by

McClurg in Praesidium was not effective. Accordingly, a constructive trust attaches

to the stock in favor of McClurg. Further consideration awaits consultation with

counsel, as provided above.

                                         33