Boustead Securities Survives Motion to Dismiss in Success Fee Dispute

July 13, 2022

In today's blog we come upon a convoluted dispute involving an underwriter, two companies, two deals, two agreements, one IPO goes forward, one IPO gets withdrawn, then the IPO'd company acquires the other non-IPO'd company, and . . . omigod, what a mess! Was a success fee earned for one or two or three deals? Did FINRA have to approve all three purported transactions or only two or one? 

The ATIF Agreement

Around September 2018, Plaintiff Boustead Securities entered into an exclusive financial advisor agreement with Defendant ATIF in connection with the latter's proposed listing on NASDAQ or the New York Stock Exchange (the "ATIF Agreement"). 

The Leaping Agreement

In October 2018, Plaintiff Boustead entered into a second exclusive financial advisor agreement with Defendant Leaping Group whereby Boustead was to act as an underwriter for Leaping's initial public offering as well as to facilitate fund raising transactions (the "Leaping Agreement"). 

Two Agreements. One Headache.

Now let's pick up the history as asserted Boustead Securities, LLC, Plaintiff, v. Leaping Group Co., Ltd and ATIF Holdings Limited, Defendants (Opinion and Order, United States District Court for the Southern District of New York ("SDNY"), 20-CV-3749) [Ed: footnotes omitted):

Plaintiff's agreements with Leaping and ATIF each included a twelve-month tail period, a Future Services provision, and a Success Fee provision for all Equity Investment Transactions ("EIT"). Id. ¶¶ 22-23, 29. Both the ATIF Agreement and the Leaping Agreement define an EIT, or "Transaction," as "any common stock, preferred stock convertible stock, LLC, or LP Memberships, convertible debentures, convertible debt, debt with warrants or any other securities convertible into common stock, any form of debt instrument involving any form of equity participation, and including the conversion or exercise of any securities sold in any Transaction." Id. ¶¶ 21, 31. 

The Future Services provision provided Plaintiff with a right of first refusal to act as a Financial Advisor for two years after the consummation of a Transaction or termination or expiration of the Agreement. Id. ¶ 22; Def. Mem. at 5. The Success Fee provision provided that Plaintiff was to be paid cash plus warrants for any amount raised through an EIT. Second Am. Compl. ¶¶ 20, 30. The twelve-month tail period entitled Plaintiff to Success Fees if ATIF entered into a Transaction with a third party that became known to ATIF, or a third party that became aware of ATIF, prior to the termination or expiration of the ATIF Agreement. Id. ¶ 29; Def. Mem. at 4. The ATIF Agreement conditioned payment of Success Fees on approval by the Financial Industry Regulatory Authority ("FINRA") for Plaintiff to conduct the IPO on ATIF's behalf. Def. Mem. at 11; see also Second Am. Compl. ¶ 56. 

On February 6, 2019, Plaintiff obtained FINRA approval for the underwriting terms in its Agreement with ATIF. Second Am. Compl. ¶ 54. On April 23, 2019, Plaintiff and ATIF amended their agreement. Pl. Opp., Dkt. 120 at 4-5. The Amendment altered the Success Fee and removed the Future Services provision, but it kept the twelve-month tail provision intact. Id.; see also Def. Mem. at 5. On May 3, 2019, ATIF's shares began trading on the NASDAQ. Second Am. Compl. ¶ 33. On March 13, 2020, Leaping withdrew the registration statement for its planned IPO. Id. ¶ 40. Then, on or around April 23, 2020, ATIF acquired a majority stake in Leaping Group through a (1) Debt Conversion and Share Purchase Agreement; and (2) a Share Exchange Agreement (hereinafter, the "ATIF-Leaping Transactions"). Id. ¶ 41.

at Pages 2 - 3 of the SDNY Opinion

SIDE BAR: Boustead has one agreement with ATIF and one agreement with Leaping Group. Both agreements contemplate success fees. ATIF begins trading on NASDAQ. Then ATIF acquired a majority stake in Leaping Group, which withdrew its IPO. So . . . does Boustead earn two success fees or one or none?

May 2020 SDNY Complaint

On May 14, 2020, Boustead filed a Complaint in SDNY against ATIF and Leaping alleging breaches of contract and of the implied covenant of good fait and fair dealing; tortious interference with business relations; and quantum meruit. Thereafter, the lawsuit move forward as follows:

[A]fter ATIF moved to dismiss, Plaintiff amended its complaint. See Am. Compl., Dkt. 53. On December 8, 2020, ATIF again moved to dismiss, and on August 25, 2021, the Court granted the motion, dismissing Plaintiff's claims without prejudice to amend the complaint to allege adequately its own performance and plead satisfaction of all conditions precedent. Order, Dkt. 82. On September 7, 2021, Plaintiff moved for default judgment against Leaping. See Dkt. 93. On October 15, 2021, this Court held Plaintiff's motion for default judgment against Defendant Leaping in abeyance. Order, Dkt. 102 at 1.  

at Footnote 4 of the SDNY Opinion

December 2021: Second Amended SDNY Complaint

In response to SDNY's dismissal of its Initial Complaint, Boustead filed an amended one:

On December 28, 2021, Plaintiff filed its Second Amended Complaint, asserting claims against ATIF and Leaping for breach of contract.4 Id. ¶¶ 1-4. Plaintiff alleges that the ATIF Leaping Transactions qualify as EITs under Plaintiff's Agreements with ATIF and Leaping. Id. ¶ 48. Plaintiff alleges that Leaping and ATIF both breached their respective agreements with Plaintiff by failing to pay Plaintiff cash and warrants for the ATIF-Leaping Transactions, thereby violating the Success Fee provision found in both the ATIF and Leaping Agreements. Id. ¶ 60. Plaintiff also alleges that ATIF and Leaping have entered into additional undisclosed transactions with each other and with third parties for which Plaintiff claims it is entitled to compensation. Id. ¶ 51.

at Pages 3 - 4 of the SDNY Opinion

SIDE BAR: In its Second Amended Complaint, Boustead lumps the ATIF IPO and the Leaping discontinued IPO and ATIF's acquisition of Leaping into what it calls the "ATIF Leaping Transactions." If SDNY accepts the invitation to engage in some form of holistic jurisprudence, then the disparate transactions might be viewed as a unified transaction, which, in turn, might fall under the respective prior agreements; and, moving along here, if the Court agrees that the individual agreements cover the ATIF listing and Leaping withdrawn listing and the ATIF acquisition of Leaping, then, Plaintiff argues that it is entitled to cash and warrants as its Success Fee. 

ATIF Motion to Dismiss

In response to Boustead's version of events and theories:

Defendant ATIF has moved to dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). See generally Def. Mem. Defendant argues that Plaintiff failed to plead that it obtained FINRA approval, an essential condition precedent for it to be entitled to Success Fees under the ATIF Agreement. Id. at 11. Defendant also argues that even if Plaintiff adequately pled all conditions precedent, Plaintiff failed adequately to plead its own performance because, although Plaintiff alleged performance in relation to ATIF's IPO, it did not allege performance with respect to the ATIF-Leaping Transactions. Id. at 15-16. Consequently, Defendant moves for dismissal of Plaintiff's SAC. Id. at 1.

at Page 4 of the SDNY Opinion

SIDE BAR: Essentially, ATIF dismisses all of Boustead's conjecture and asserts that Plaintiff was required to get FINRA approval as a condition precedent to its Success Fee. Ya wanna play a game of legal fiction? Okay, fine, let's see how you got FINRA approval for a figment of your imagination.

What Exactly Did You Do?

In its deliberations as to whether Boustead sufficiently pled the parameters of its performance, SDNY found in part that:

[I]n the SAC, Plaintiff alleges specific actions it took pursuant to the ATIF Agreement, including "review of entity formation documents, review of board minutes and board consents, reviewing the business prospects of ATIF," negotiation of agreements "with key shareholders," advisory services "on the offering structure, terms and items of disclosure in ATIF's registration statement filings," "review[] and comment[] on numerous versions of ATIF's investor PowerPoint," engaging third-party firms and "an experienced in-house investment banking team," and working with ATIF management and counsel "on the NASDAQ listing application, providing support for items requested by NASDAQ and providing NASDAQ with a ‘Plan of Distribution' letter" to further support ATIF's listing application, among other tasks. See Second Am. Compl. ¶¶ 54-56. These new allegations of specific actions Plaintiff took pursuant to the ATIF Agreement cure the deficiencies this Court identified when it dismissed Plaintiff's First Amended Complaint for failure to "identify a single specific action it took pursuant to the ATIF Agreement, including any facts regarding the nature of the financial advice it gave to ATIF, any conversations it had with ATIF about its corporate development, or any firms or products it introduced to ATIF." See Order, Dkt. 82 at 6. 

Defendant maintains, however, that this is insufficient because Plaintiff needed to have pled performance in connection with the ATIF-Leaping Transactions to adequately allege its entitlement to those Success Fees. Def. Mem. at 16; see also Def. Reply at 8 (claiming that this Court "in ruling on ATIF's motion to dismiss the FAC has already rejected [Plaintiff's] argument" that it was under no obligation to allege performance of tasks in support of the ATIF-Leaping Transactions). The Court disagrees with Defendant's characterization of its prior ruling. 

Plaintiff has adequately pled performance at this stage. The Agreement states that Plaintiff is entitled to Success Fees for Defendant's EITs with any party that became aware of ATIF or became known to ATIF prior to the termination of the ATIF Agreement, but it remains unclear whether Plaintiff was required to facilitate the introduction of Defendant to the third party (or complete any other tasks) to be entitled to those Success Fees. Second Am. Compl. ¶ 29. Construing this ambiguity in Plaintiff's favor, Plaintiff's interpretation of its obligations under the ATIF Agreement as limited to actions related to ATIF's IPO is entirely plausible, thus foreclosing dismissal of Plaintiff's claim. Therefore, Plaintiff has adequately alleged its own performance under the ATIF Agreement and has cured the deficiencies identified in the First Amended Complaint.

at Pages 6 -7 of the SDNY Opinion

SIDE BAR: SDNY rolls the dice and plays a round of legal fiction. The Court lands on the "PLAUSIBLE" square and Plaintiff Boustead gets another move.

FINRA's Approval: Is Once Enough?

In determining whether Boustead's Success Fee was contingent upon its receipt of FINRA's underwriting approval, SDNY held in part that:

Defendant argues that the FINRA approval letter obtained by Plaintiff was specific to ATIF's IPO, that Plaintiff was required to have the Amendment to the ATIF Agreement approved as a condition precedent, and that the FINRA approval letter does not actually constitute approval. Def. Mem. at 12-13. Defendant additionally argues that Plaintiff failed to allege that it received FINRA approval of the ATIF Agreement Amendment, which Defendant argues was a second condition precedent. Id. at 13. Defendant's arguments-while persuasive-are factual arguments that are not appropriately considered by the Court at this stage of the litigation. 

In construing the ATIF Agreement in the light most favorable to Plaintiff, Plaintiff has adequately pled performance of the condition precedent. Section Two of the ATIF Agreement provides that "[i]n connection with the services to be rendered hereunder, subject to FINRA approval, the company agrees to pay Boustead the following fees and expenses." Second Am. Compl. ¶ 29, Ex. D.6 It remains unclear, however, whether Section Two of the contract required Plaintiff to obtain FINRA approval once or to obtain FINRA approval whenever the terms of the Agreement were amended. Nor is it clear whether failure to abide by FINRA's own terms (i.e., that Plaintiff submit any amendments to it for reapproval, see Johnson Decl. Dkt. 118, Ex. B) affected whether Plaintiff had fulfilled Section Two's requirement of obtaining FINRA approval. Thus, Plaintiff's interpretation of Section Two as only requiring FINRA approval of the initial ATIF Agreement is plausible, albeit barely, for purposes of this Motion, and Plaintiff has adequately pled satisfaction of the condition precedent that it obtain FINRA approval for the Success Fees. 

at Pages 8 - 9 of the SDNY Opinion

Accordingly, SDNY denied Defendant's Motion to Dismiss; and lifted the stay on Discovery.