IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`
`D1 JASPER HOLDINGS LP, D1 SPV JL
`MASTER LP, JAY BLOCKER LTD., JAY
`DOMESTIC LLC, GCCU II LLC, TOCU XX
`LLC, OC II FIE VIII LP, JL SPV HOLDINGS,
`LLC, EMS J-INV LLC, DISRUPTIVE TECH-
`NOLOGY SOLUTIONS XIV, LLC, DISRUP-
`TIVE TECHNOLOGY SOLUTIONS XVI,
`LLC–SERIES A, DISRUPTIVE TECHNOLO-
`GY SOLUTIONS XVI, LLC–SERIES B, and
`DISRUPTIVE TECHNOLOGY SOLUTIONS
`XVI, LLC–SERIES C,
`Plaintiffs,
`
`v.
`JUUL LABS, INC. and JL TAO LLC,
`Defendants.
`
`C.A. No. 2023-1060-NAC
`PUBLIC VERSION FILED:
`May 7, 2024
`
`PLAINTIFFS’ OPENING POST-TRIAL BRIEF
`
`OF COUNSEL:
`
`Martin Flumenbaum
`Jeffrey J. Recher
`Nina Kovalenko
`PAUL, WEISS, RIFKIND,
`WHARTON & GARRISON LLP
`1285 Avenue of the Americas
`New York, NY 10019-6064
`(212) 373-3000
`
`Dated: April 30, 2024
`
`Daniel A. Mason (#5206)
`Sabrina M. Hendershot (#6286)
`Elizabeth Wang (#6620)
`PAUL, WEISS, RIFKIND,
` WHARTON & GARRISON LLP
`1313 North Market Street, Suite 806
`Post Office Box 32
`Wilmington, DE 19899-0032
`(302) 655-4410
`
`Attorneys for Plaintiffs
`
`EFiled: May 07 2024 04:32PM EDT
`Transaction ID 72927000
`Case No. 2023-1060-NAC
`
`

`

`TABLE OF CONTENTS
`
`II.
`
`III.
`
`Page
`
`PRELIMINARY STATEMENT .....................................................................1
`STATEMENT OF FACTS.............................................................................6
`I.
`D1 Negotiates a Note Purchase Agreement with Substantial
`Protections for Noteholders. .........................................................8
`The Noteholders Provide Additional Financing on the
`Condition That Pritzker and Valani Invest Alongside Them............ 14
`JUUL’s Liabilities Push It to the Brink of Bankruptcy, but the
`Insiders Disfavor a Bankruptcy Filing.......................................... 17
`IV. Valani and Pritzker Refinance JUUL’s Term Loan Using Their
`Financial Vehicles, Which Everyone Understood Were
`Conduits for the Insiders. ........................................................... 20
`The Insiders Commit to Providing JUUL with $1.225 Billion to
`Resolve the MDL, While Planning to Convert the Notes. ............... 22
`A. Valani and Pritzker Lead the Insiders to a Collective
`Decision to Provide the Backstop. ...................................... 22
`B. When the Insiders Entered the Backstop Agreement,
`Outside Financing Was Unlikely to Be Found...................... 25
`The Insiders Were Planning for a Forced Conversion
`Beginning with the MDL Settlement Negotiations and
`Through the Execution of the Backstop............................... 27
`JUUL Fails to Raise Capital from Outside Investors. ..................... 28
`VI.
`VII. The Insiders Seek to Pass Off Their Backstop Commitments as
`a Qualified Financing, in Violation of the Notes Agreements. ......... 30
`A.
`Pritzker’s Estate Is Rearranged. ......................................... 30
`B.
`Pritzker Remains in Control. ............................................. 31
`
`V.
`
`C.
`
`i
`
`
`
`
`
`

`

`C.
`
`Bowen Resigns to Participate in the Insider Financing,
`but Not Until After He Agrees to Its Material Terms............. 35
`D. Bowen and Monsees Cancel Their Stock Options to
`Manipulate Their Aggregate Stockholding. ......................... 36
`E. As Part of the Insider Financing, JUUL Authorizes the
`Issuance of 400 Million Shares, Causing an Artificial and
`Temporary Dilution of the Insiders’ Holdings. ..................... 36
`VIII. JUUL Issues a Deficient Conversion Notice Hiding the
`Insiders’ Involvement. ............................................................... 37
`IX. At Closing, the Insiders Gain Overwhelming Control of JUUL
`and Pay for the MDL Settlement. ................................................ 38
`Procedural History .................................................................... 40
`X.
`XI. After Trial, JUUL Issues Financial Statements Suggesting That
`It Has Violated This Court’s TRO. .............................................. 40
`ARGUMENT ............................................................................................. 42
`I.
`The Insider Financing Fails to Satisfy the NWPA.......................... 42
`A.
`The Insiders Cannot Evade the NWPA’s Restrictions by
`Investing Through LLCs. .................................................. 43
`Extrinsic Evidence Confirms Plaintiffs’ Reading.................. 48
`B.
`C. None of the Insiders’ Contributions Count Toward a
`Qualified Financing Because They Acted in Concert and
`Together Own More Than 5% of JUUL Stock. .................... 51
`D. Bowen’s and Pritzker’s Contributions Do Not Count for
`Several Additional Reasons. .............................................. 54
`II. Alternatively, JUUL Breached the Implied Covenant of Good
`Faith and Fair Dealing. .............................................................. 60
`JUUL Failed to Satisfy the Notice Requirement in the Notes. ......... 64
`III.
`IV. Plaintiffs Are Entitled to Their Attorneys’ Fees and Costs. ............. 65
`CONCLUSION .......................................................................................... 65
`ii
`
`
`
`
`
`

`

`TABLE OF AUTHORITIES
`
` Page(s)
`
`Cases
`Airborne Health, Inc. v. Squid Soap, LP,
`984 A.2d 126 (Del. Ch. 2009) ............................................................ 60, 61
`Am. Sci. & Eng’g, Inc. v. Autoclear, LLC,
`606 F. Supp. 2d 617 (E.D. Va. 2008) ........................................................ 42
`In re BankAtlantic Bancorp, Inc. Litig.,
`39 A.3d 824 (Del. Ch. 2012) .................................................................... 47
`Bell Atl. Meridian Sys. v. Octel Commc’ns Corp.,
`1995 WL 707916 (Del. Ch. Nov. 28, 1995) ............................................... 48
`Chesapeake Corp. v. Shore,
`771 A.2d 293 (Del. Ch. 2000) .................................................................. 50
`Coughlan v. NXP B.V.,
`2011 WL 5299491 (Del. Ch. Nov. 4, 2011) .............................. 47, 48, 56, 57
`Cygnus Opportunity Fund, LLC v. Washington Prime Grp., LLC,
`302 A.3d 430 (Del. Ch. 2023) ............................................................ 60, 64
`Dubroff v. Wren Holdings, LLC,
`2011 WL 5137175 (Del. Ch. Oct. 28, 2011)............................................... 52
`Dunlap v. State Farm Fire & Cas. Co.,
`878 A.2d 434 (Del. 2005) ........................................................................ 63
`Eagle Indus., Inc. v. DeVilbiss Health Care, Inc.,
`702 A.2d 1228 (Del. 1997) ...................................................................... 48
`eCommerce Industries, Inc. v. MWA Intelligence, Inc.,
`2013 WL 5621678 (Del. Ch. Sept. 30, 2013) ....................................... 61, 62
`Garfield v. BlackRock Mortg. Ventures, LLC,
`2019 WL 7168004 (Del. Ch. Dec. 20, 2019) .............................................. 52
`Gatz v. Ponsoldt,
`925 A.2d 1265 (Del. 2007) ................................................................ 58, 59
`iii
`
`
`
`
`
`

`

`Gerber v. Enter. Prods. Holdings, LLC,
`67 A.3d 400 (Del. 2013).......................................................................... 60
`In re Hansen Med., Inc. Stockholders Litig.,
`2018 WL 3030808 (Del. Ch. June 18, 2018) .............................................. 52
`Litle v. Waters,
`1992 WL 25758 (Del. Ch. Feb. 11, 1992) .................................................. 64
`Malone v. Brincat,
`722 A.2d 5 (Del. 1998) ........................................................................... 42
`Manti Holdings, LLC v. Authentix Acq. Co.,
`261 A.3d 1199 (Del. 2021) ........................................................... 43, 44, 59
`Morales v. Quintel Entm’t, Inc.,
`249 F.3d 115 (2d Cir. 2001)..................................................................... 52
`NBC Universal v. Paxson Commc’ns Corp.,
`2005 WL 1038997 (Del. Ch. Apr. 29, 2005) .............................................. 43
`S’holder Representative Servs. LLC v. Gilead Scis., Inc.,
`2017 WL 1015621 (Del. Ch. Mar. 15, 2017) .............................................. 49
`Sassano v. CIBC World Markets Corp.,
`948 A.2d 453 (Del. Ch. 2008) .................................................................. 43
`Schaffer v. CC Invs., LDC,
`2002 WL 31869391 (S.D.N.Y. Dec. 20, 2002) ........................................... 52
`Senior Hous. Cap., LLC v. SHP Senior Hous. Fund, LLC,
`2013 WL 1955012 (Del. Ch. May 13, 2013) ........................................ 48, 49
`Sheldon v. Pinto Tech. Ventures, L.P.,
`220 A.3d 245 (Del. 2019) .................................................................. 51, 52
`Symbiont.io, Inc. v. Ipreo Holdings, LLC,
`2021 WL 3575709 (Del. Ch. Aug. 13, 2021).............................................. 47
`Totta v. CCSB Fin. Corp.,
`2022 WL 1751741 (Del. Ch. May 31, 2022) ........................................ 44, 51
`
`iv
`
`
`
`
`
`

`

`Wellman v. Dickinson,
`682 F.2d 355 (2d Cir. 1982)..................................................................... 52
`Whitestone REIT Operating P’ship, L.P. v. Pillarstone Capital REIT,
`2024 WL 274228 (Del. Ch. Jan. 25, 2024) ................................................. 60
`Statutes and Regulations
`15 U.S.C. § 78m(d)(1) ................................................................................. 52
`17 C.F.R. § 240.13d-5(b)(1)(i) ...................................................................... 52
`
`
`
`v
`
`
`
`
`
`

`

`PRELIMINARY STATEMENT
`Trial showed that the Insider Financing was brought about by four Company
`
`insiders. Faced with the severe personal risks posed by a trial or a JUUL
`
`bankruptcy, those insiders joined forces to fund JUUL for their own self-benefit
`
`while, at the same time, they schemed to convert Plaintiffs’ notes. A forced
`
`conversion of Plaintiffs’ notes in those circumstances violates the bargain the
`
`parties struck in the notes agreements. The Court should find that JUUL breached
`
`those agreements and enter judgment for Plaintiffs.
`
`Plaintiffs negotiated for strong contractual protections that Defendants have
`
`sought to subvert. The agreements (the “NPA” and the “NWPA”) provide that an
`
`automatic conversion requires at least $500 million in funds from investors other
`
`than JUUL directors. Further, $400 million of that $500 million must come from
`
`investors that do not own more than 5% of JUUL’s stock. The fundamental and
`
`agreed-upon premise of the contracts was that a financing resulting in conversion
`
`would come from disinterested third parties making a rational economic judgment
`
`about JUUL’s future prospects—not Company insiders forcing a conversion at an
`
`artificial valuation based on their own self-interested motives.
`
`Yet that is exactly what the Insider Financing is. The evidence at trial
`
`definitively demonstrated that the October 2023 financing (the “Insider
`
`Financing”) was provided exclusively by JUUL’s most influential insiders: its
`
`
`
`
`
`

`

`largest stockholders and current directors, Riaz Valani and Nick Pritzker, who
`
`dominate JUUL’s decision-making, and its two co-founders, Adam Bowen and
`
`James Monsees, who also are major stockholders (the “Insiders”). The Insiders
`
`provided that financing for their own self-interested purposes—the funds were
`
`expressly earmarked for the purpose of settling litigation in which the Insiders
`
`were named as defendants and faced massive personal risk.
`
`JUUL and the Insiders first began plotting to convert Plaintiffs’ notes in the
`
`fall of 2022, as they faced a strategic inflection point. Just as JUUL’s years-long
`
`litigation was headed to trial, the FDA issued a marketing denial order putting at
`
`risk JUUL’s ability to market its products. JUUL risked defaulting on its debt and
`
`began preparations for a bankruptcy filing, which would have stayed the litigation
`
`against JUUL and allowed it to find a manageable resolution of its legal liabilities.
`
`But Valani and Pritzker, JUUL’s biggest stockholders, disfavored that path.
`
`As Pritzker openly admitted at trial, bankruptcy posed serious personal risks. Had
`
`the litigation against the Company been stayed, the Insiders might have had to
`
`defend the trial on their own, without indemnification from JUUL. They also
`
`risked having to return billions of dollars in dividends that they had extracted from
`
`JUUL four years prior.
`
`Valani and Pritzker leveraged their capital (a fraction of the billions that they
`
`had extracted) to set JUUL on the path they preferred. They repaid and refinanced
`
`2
`
`
`
`
`
`

`

`JUUL’s term loan, using the same financial vehicles that they later used for the
`
`Insider Financing, which JUUL now seeks to paint as independent actors in an
`
`attempt to circumvent the NWPA’s restrictions on insider participation in a
`
`Qualified Financing. Then, Valani and Pritzker rallied JUUL’s co-founders,
`
`Bowen and Monsees, to join them in committing through a Backstop Agreement to
`
`provide JUUL with the funds it needed to settle the MDL (defined below) and
`
`thereby avoid a bankruptcy filing. Trial left no doubt that the Insiders’
`
`commitment of those funds, amounting to $1.225 billion, followed a collective
`
`decision by the four Insiders to “come together and be that backstop,” as Monsees
`
`described it.
`
`While negotiating the MDL settlement and before entering the Backstop
`
`Agreement, the Insiders began planning how to use the funds that they were
`
`committing to attempt a forced conversion of Plaintiffs’ notes. Given the
`
`contractual restrictions on the participation of directors and major stockholders, the
`
`Insiders engaged in multiple maneuvers intended to mask their involvement.
`
`Pritzker’s estate was rearranged because, in his own words, “it was desirable
`
`for” Pritzker “to get as far away from JL Tao as possible” so that he might “be seen
`
`to have no connection with JL Tao,” which is the entity that he admitted to using to
`
`refinance the term loan and sign the Backstop Agreement. Even so, his substantive
`
`involvement in the Insider Financing remained unchanged.
`
`3
`
`
`
`
`
`

`

`Bowen stepped down from JUUL’s Board of Directors (the “Board”), but
`
`not until after he had increased his contribution for the express purpose of
`
`manufacturing a Qualified Financing; provided an unconditional commitment to
`
`contribute those funds; and put his contribution in escrow. And Monsees and
`
`Bowen cancelled stock options for the purpose of manipulating their combined
`
`stockholdings to drop below 5%, in an acknowledgement that the NWPA’s
`
`limitation on the participation of 5% stockholders considers those holdings in the
`
`aggregate.
`
`Plaintiffs demonstrated at trial that the Insiders’ scheme violated the
`
`NWPA’s express and implied terms.
`
`First, JUUL’s attempt to pass off the Insider Financing as a Qualified
`
`Financing depends on an artificial, made-for-litigation distinction between the
`
`Insiders themselves and the entities through which the Insiders effected the
`
`financing. JUUL leans on this argument most heavily for Pritzker, who
`
`contributed over $400 million through JL Tao. The distinction that JUUL tries to
`
`draw asks the Court to ignore reality and elevate form over the substance of what
`
`actually happened.
`
`Indeed, until this litigation, JUUL itself treated Pritzker and his investment
`
`vehicles interchangeably, expressly representing to noteholders, both in
`
`anticipation of and after their investments, that Pritzker (and Valani) owned over
`
`4
`
`
`
`
`
`

`

`5% of JUUL’s stock, even though that stock always has been held through
`
`Pritzker’s family trusts and the same vehicles that JUUL now argues are somehow
`
`independent. Moreover, even after the restructuring of Pritzker’s investments,
`
`Pritzker continued to participate in negotiating the Insider Financing. Far from
`
`being distinct from JL Tao, Pritzker personally had input into the price at which the
`
`Insider entities would buy JUUL shares. As Pritzker’s associate testified, Pritzker
`
`always has been, and continues to be, the decision-maker setting the overall
`
`strategy for the investments in JUUL made through Pritzker’s family trusts.
`
`Second, the NWPA’s restriction on the participation in a Qualified
`
`Financing by “investors” owning “more than five percent of” JUUL’s stock should
`
`be read to count in the aggregate the stockholdings of all four Insiders, who agreed
`
`to act in concert to effect their goals of funding the MDL settlement while trying to
`
`force a conversion of Plaintiffs’ notes. The Insiders’ testimony on this point is
`
`consistent and unrebutted: their decisions to participate in the Backstop
`
`Agreement and the Insider Financing were made collectively as a group.
`
`Third, should the Court consider each Insider’s participation individually—
`
`and Plaintiffs respectfully submit that it should not—then the Insider Financing
`
`still does not constitute a Qualified Financing. Defendants have abandoned their
`
`attempt to argue that Valani’s contribution counts toward any relevant threshold.
`
`And Bowen’s and Pritzker’s contributions likewise do not count, as both were
`
`5
`
`
`
`
`
`

`

`JUUL directors at all relevant times, and Pritzker also is a 5% stockholder, as
`
`JUUL itself repeatedly represented before this litigation. Pritzker’s status as a 5%
`
`stockholder is unaffected by the temporary, artificial dilution of his stock that
`
`JUUL and the Insiders effected as a condition of the Insider Financing.
`
`Finally, should the Court find that the NWPA’s terms do not expressly
`
`prohibit the Insiders’ scheme, then their conduct constitutes a breach of the implied
`
`covenant of good faith and fair dealing. Delaware law demands more than
`
`superficial compliance with a contract; it requires that contracting parties act in
`
`good faith and satisfy their counterparties’ reasonable expectations. JUUL and the
`
`Insiders engaged in a concerted, months-long scheme to subvert those expectations
`
`in ways that Plaintiffs, who counted on good-faith compliance, could not
`
`reasonably have anticipated.
`
`The Court should enter judgment in Plaintiffs’ favor.
`
`STATEMENT OF FACTS1
`Defendant JUUL Labs, Inc. (“JUUL” or the “Company”) was formed in
`
`2017 pursuant to a spinoff transaction with its predecessor Pax Labs, Inc., which
`
`itself had previously been known as Ploom, Inc., a company founded in 2007 by
`
`Adam Bowen and James Monsees.2 JUUL markets and sells the JUUL e-cigarette.
`
`
`1 The trial transcript is cited as “[Last Name] Tr. __.” Deposition transcripts are cited as
`“[Last Name] Dep. __.”
`2 Bowen Dep. 19:5-11, 19:17-18, 22:8-17.
`
`6
`
`
`
`
`
`

`

`Beginning in the fall of 2022, JUUL’s most influential Insiders concocted a
`
`scheme to convert notes owned by Plaintiffs into equity in violation of the parties’
`
`notes agreements. The Court heard testimony at trial from each of the Insiders:
`
`• Valani, one of JUUL’s first investors, has been a director of JUUL
`and its predecessors since 2007. 3 Valani has invested in JUUL
`through various investment vehicles, including BIH Fund 2 LLC, and
`is JUUL’s largest stockholder. 4
`• Pritzker invested in JUUL in 2011 through a trust held for his
`benefit 5 and joined JUUL’s Board in 2013. 6 Pritzker, who invests
`exclusively through vehicles held by family trusts, 7 has invested in
`JUUL through JL Special LLC and JL Tao LLC. 8
`• Bowen is a co-founder of JUUL9 and one of its major stockholders. 10
`He was a JUUL director and employee until his resignation in July
`2023. 11 Bowen created the entity PHR Investments LLC to
`participate in the Backstop Agreement and subsequently the Insider
`Financing. 12 It is undisputed that Bowen controls PHR. 13
`• Monsees is JUUL’s other co-founder and a major stockholder. 14
`Monsees was a JUUL director until March 2020. 15 Monsees’s entity
`JLI Invest, LLC was formed to participate in the Backstop Agreement
`
`
`3 Valani Tr. 88:8-12, 144:9-16.
`4 Id. 86:13-20, 88:13-21.
`5 Pritzker Tr. 174:8-19, 174:24-175:9.
`6 Id. 176:6-12.
`7 Id. 180:14-181:4.
`8 Id. 177:6-14, 179:13-180:13; JX-933 at 11.
`9 Valani Tr. 90:10-12.
`10 JX-150 at 4; JX-933 at 11; JX-1166 at cell V3556.
`11 JX-845; Bowen Dep. 24:22-26:16.
`12 Bowen Tr. 296:10-297:14.
`13 JX-1189 at 7 (No. 3).
`14 Valani Tr. 90:23-91:3; Monsees Tr. 309:13-16; JX-150 at 4; JX-933 at 11; JX-1166 at
`cell V2105.
`15 Monsees Tr. 329:20-330:4.
`
`7
`
`
`
`
`
`

`

`and Insider Financing.16 It is undisputed that Monsees controls JLI
`Invest. 17
`Plaintiffs are investment vehicles affiliated with or managed by D1 Capital
`
`Partners (“D1”), Sculptor Capital Management (“Sculptor”), Pacific Investment
`
`Management Company (“PIMCO”), GCM Grosvenor (“GCM”), EMS Capital
`
`(“EMS”), and Disruptive Technology Advisers (“DTA”).18 Plaintiffs invested in
`
`JUUL notes in 2019 and/or 2020.19 Convertible notes are debt instruments that can
`
`be converted to equity in various circumstances prescribed by contract. 20
`
`I.
`
`D1 Negotiates a Note Purchase Agreement with Substantial Protections
`for Noteholders.
`Tobacco conglomerate Altria Group purchased 35% of JUUL’s stock in late
`
`2018 for approximately $12.8 billion. 21 Instead of using Altria’s investment to
`
`fund JUUL’s growth, JUUL distributed $11.8 billion in dividends to its
`
`stockholders,22 with the Insiders—JUUL’s largest stockholders—cashing in on
`
`nearly 50% of the proceeds:23
`
`
`
`
`
`
`16 Monsees Tr. 319:9-14; Monsees Dep. 71:5-7.
`17 JX-1189 at 7 (No. 2).
`18 Joint Pre-Trial Stipulation and Order ¶¶ 9-16.
`19 Id.
`20 Goldstein Dep. 16:19-25.
`21 Valani Tr. 88:22-89:2; Crosthwaite Dep. 19:15-21, 20:9-21; JX-29.
`22 Valani Tr. 89:3-91:17; Pritzker Tr. 177:3-5.
`23 JX-1495 at ‘Summary’ C7, C9, C10, C33; see also Valani Tr. 89:3-91:17, 161:9-12.
`8
`
`
`
`
`
`

`

`$ 2,610,312,654.6324
`Valani
`$ 1,826,970,784.9625
`Pritzker
`$ 505,462,048.9726
`Bowen
`$ 464,276,252.3827
`Monsees
`$ 5,407,021,740.94
`Total
`Just months after Altria’s capital infusion, JUUL needed additional
`
`financing to fund its basic operations. 28 JUUL representatives thus met with JP
`
`Morgan in May 2019 to discuss a potential financing through the issuance of
`
`convertible notes.29 JP Morgan advised JUUL that investors would demand that
`
`any qualified financing resulting in conversion be led by outside investors. 30
`
`JUUL’s negotiations with D1, the lead investor, confirmed as much. As D1
`
`principal Dan Sundheim testified, D1 recognized that JUUL faced various business
`
`risks, including regulatory risk, and thus may need to raise capital while “in a more
`
`distressed situation.” 31 There was thus a possibility that the notes could be
`
`automatically converted at a valuation below the valuation floor contemplated by
`
`the notes, resulting in a mark-to-market loss. 32 But, so long as the investment “was
`
`made by independent third parties in an arm’s-length transaction” making an
`
`24 JX-1495 at ‘Shares’ K77, K79, K85, K142, K172, K421, K641, K907, K929.
`25 Id. at ‘Shares’ K230, K699-700, K935-36. Pritzker received dividends through JL
`Special, then-managed by Pritzker and Perkovich. JX-24.
`26 JX-1495 at ‘Shares’ K94.
`27 Id. at ‘Shares’ K288.
`28 Valani Tr. 91:18-21.
`29 JX-32 at 2-3.
`30 Kadapakkam Tr. 447:22-448:5; see also JX-32 at 2.
`31 Sundheim Tr. 11:3-12:3.
`32 Id.; Goldstein Tr. 256:6-21.
`
`9
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`
`
`
`
`

`

`economically rational judgment, the notes would be converted only where JUUL
`
`obtained “a substantial amount of capital” and was objectively judged to be an
`
`attractive investment. 33
`
`Conversely, D1 understood that the notes could not be converted based on a
`
`financing led by insiders, who may have incentives to invest to force a conversion
`
`because “it would either benefit their existing shareholdings or benefit them in
`
`some other way.”34 Sundheim agreed to this basic framework for the deal with
`
`JUUL Board member Zach Frankel. 35 Sundheim’s testimony on this point is
`
`undisputed; JUUL did not call Frankel—who still serves as a JUUL director—as a
`
`witness at trial. 36
`
`The parties then documented this basic agreement. Following Sundheim’s
`
`discussions with Frankel, JUUL sent D1 an initial term sheet providing that a
`
`Qualified Financing must be “led by a new investor.”37 JUUL subsequently
`
`proposed excluding by name JUUL’s “top three [stockholders] by percentage
`
`ownership”: Altria, Valani, and Pritzker. 38
`
`
`33 Sundheim Tr. 12:4-14:4.
`34 Id. 13:10-14:4; see also Goldstein Tr. 255:13-257:17.
`35 Sundheim Tr. 14:5-15:20.
`36 Kadapakkam Tr. 445:21-446:1.
`37 JX-33 at 1, 5.
`38 Herbert Dep. 29:10-30:2; see also Kadapakkam Tr. 410:7-15; JX-42 at 6.
`10
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`
`
`
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`

`

`D1, however, sought a threshold that would pick up “all of [JUUL’s] largest
`
`investors.”39 Thus, D1 rejected JUUL’s proposal and inserted broader language
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`that prevented any investors owning more than 5% of JUUL’s stock from effecting
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`a Qualified Financing. 40 D1 proposed this change based on its understanding
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`(consistent with JUUL’s representations) that Pritzker and Valani owned more than
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`5% of JUUL’s stock; the language thus would capture Pritzker, Valani, and other
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`investors. 41
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`There is no dispute that the information supplied by JUUL to D1—and the
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`other noteholders—represented that Pritzker and Valani were covered by the
`
`prohibition on the participation of 5% shareholders. That much was clear from the
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`cap tables that JUUL shared with the noteholders as prospective investors, which
`
`made no mention of any investment vehicles:42
`
`
`39 Kadapakkam Tr. 411:17-412:17; Sundheim Tr. 17:16-18:14.
`40 JX-46 at 16; Sundheim Tr. 21:15-23.
`41 Id. 21:10-14, 21:24-22:12, 23:11-16.
`42 Id. 23:11-16, 24:15-21, 24:22-25:15; Goldstein Tr. 257:19-258:1, 259:17-260:18; JX-
`114 at 2; JX-150 at 4.
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`JUUL executives, including Crosthwaite and Frankel, made the same
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`representations in conversations with prospective investors, naming Pritzker and
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`Valani as JUUL’s major stockholders.43 In none of those conversations did JUUL
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`ever even mention Pritzker’s or Valani’s investment vehicles, let alone place any
`
`
`
`
`43 Sundheim Tr. 25:16-26:14.
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`significance on the fact that their investments in JUUL were not held in their own
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`names. 44 Again, the testimony on this point is uncontested.
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`D1 obtained additional protections surrounding forced conversion through
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`the restriction that a Qualified Financing also had to meet the requirements of a
`
`“Capital Raising Transaction.”45 JUUL sought to define narrowly the types of
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`stock issuances that would be excluded from a Capital Raising Transaction,
`
`defining it to exclude shares issued to JUUL’s employees, directors, consultants,
`
`and advisors where the funds raised were not to be used for general working
`
`capital purposes.46 D1 broadened the exclusion to cover any issuances of stock to
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`JUUL’s employees, directors, consultants, and advisors, regardless of the purpose
`
`of the proceeds. 47
`
`The final contractual language thus provided two layers of protection, tied to
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`two thresholds for a “Qualified Financing.” First, JUUL could effect a conversion
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`only upon a “Capital Raising Transaction” of $500 million through stock issuances
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`to investors other than JUUL’s employees and directors. “Capital Raising
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`Transaction” is defined in relevant part as:
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`a transaction or series of related transactions in which the
`Company sells capital stock of the Company to investors for cash, in
`all cases excluding Altria Issuances and excluding the following
`
`44 Sundheim Tr. 26:10-14; Goldstein Tr. 260:15-18.
`45 Sundheim Tr. 18:20-19:17.
`46 JX-50 at 10-11, 14.
`47 JX-55 at 23.
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`issuances of capital stock by the Company: (a) shares issued to
`employees or directors of, or consultants or advisors to, the
`Company or any of its subsidiaries …. 48
`Second, the notes could be converted only where $400 million of the $500
`
`million “Capital Raising Transaction” came from investors that do not own more
`
`than 5% of JUUL’s stock. “Qualified Financing” is defined in relevant part as:
`
`a Capital Raising Transaction (i) with total net proceeds in cash to
`the Company in an amount equal to at least $500 million …, (ii) at
`least $400 million of which is attributable to purchases by
`investors that do not own more than five percent of the
`outstanding shares of capital stock of the Company on a fully-
`diluted basis as of immediately prior to the initial closing of such
`Capital Raising Transaction …. 49
`The NPA was executed in August 2019.50 JUUL raised approximately $800
`
`million. 51
`
`II. The Noteholders Provide Additional Financing on the Condition That
`Pritzker and Valani Invest Alongside Them.
`In the fall of 2019, JUUL hit several roadblocks, leading it to turn back to
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`the noteholders for additional investment.52 Kadapakkam (then-JUUL SVP, now
`
`CFO) and K.C. Crosthwaite (JUUL’s CEO) met with D1 in late November to
`
`discuss a new financing round. 53
`
`
`48 JX-1 at 2 (emphases added).
`49 JX-1 at 5 (emphases added).
`50 JX-1.
`51 JX-1197 at 3.
`52 Valani Tr. 93:1-8; Kadapakkam Tr. 427:4-10.
`53 JX-172 at 1-3.
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`D1 conveyed that “it was important” that Pritzker and Valani, “who had
`
`taken a substantial amount of money out of the company in the form of [the Altria]
`
`dividends reinvest money back into the company to show support.”54 D1 and other
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`investors thus insisted that Pritzker and Valani, along with other JUUL directors,
`
`invest $100 million alongside them in any additional financing round. 55 Both
`
`Pritzker and Valani admit that they understood their investment was a condition of
`
`the investors’ participation. 56
`
`JUUL’s Board thus formed a “2020 Note Financing Committee” of Bowen
`
`and Monsees57 to consider whether to permit “members of the Board,” namely,
`
`Pritzker, Valani, and Harold Handelsman (Valani’s designee on the Board58), to
`
`purchase notes “through their affiliated funds.”59 After Bowen and Monsees
`
`approved, 60 Valani purchased $60 million of the 2020 notes through a newly
`
`created entity called BIH Fund, while JL Tao, another new LLC, purchased $30
`
`million of the 2020 notes “on behalf of” Pritzker. 61 JUUL told D1 that it had
`
`
`
`54 Sundheim Tr. 28:9-21.
`55 JX-213 at 2; JX-291; JX-292 at 1-2; Monsees Tr. 319:22-320:8; Sundheim Tr. 28:13-
`29:4.
`56 Pritzker Tr. 178:20-179:12; Valani Tr. 93:1-94:11.
`57 Monsees Tr. 320:9-12; see also JX-291; JX-292.
`58 Valani Tr. 95:11-13.
`59 JX-291 at 1; JX-292 at 1.
`60 JX-302 at 2.
`61 Valani Tr. at 94:3-11; Pritzker Tr. 179:13-180:13; JX-300 at 2; JX-306 at 6; JX-308
`(native).
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`satisfied D1’s condition that Pritzker and Valani individually invest in the 2020
`
`notes. 62
`
`Upon the closing of the NWPA on February 3, 2020, JUUL issued
`
`approximately $1.5 billion in notes, $800 million of which was issued in exchange
`
`for the 2019 notes. 63
`
`The NWPA’s conversion mechanism is substantially identical to that in the
`
`NPA with limited exceptions.64 First, the NWPA lowered the Valuation Cap and
`
`Valuation Floor for conversion in light of JUUL’s bleaker prospects.65 Second, the
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`NWPA provided that for the three years following the execution of the agreement,
`
`the notes could not be converted at a value below the floor. 66
`
`In addition to the other protections surrounding conversion discussed above,
`
`Section 3.1 of the Notes requires that JUUL provide “at least ten (10) days’
`
`advance notice” of the initial closing of any transaction purporting to be a
`
`Qualified Financing, which notice must “include a summary of the principal
`
`terms thereof.”67
`
`
`
`62 Sundheim Tr. 29:2-4.
`63 JX-2 at 57-59.
`terms “NPA,” “NWPA,” and “notes agreements” are used
`the
`64 Accordingly,
`interchangeably herein.
`65 Sundheim Tr. 27:13-28:3.
`66 Id. 72:2-13.
`67 JX-2 at 63 (emphases added).
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`III. JUUL’s Liabilities Push It to the Brink of Bankruptcy, but the Insiders
`Disfavor a Bankruptcy Filing.
`For years, JUUL has been accused of furthering a youth nicotine epidemic.68
`
`As of 2022, thousands of lawsuits had been filed nationwide against JUUL for its
`
`sales and marketing practices. 69 Many of these cases were consolidated in a
`
`federal multi-district litigation (the “MDL”). 70 The Insiders were personally
`
`named as defendants, including on claims of federal racketeering—and, in Valani’s
`
`words, “a lot of claims beyond RICO”—for which they faced personal liability. 71
`
`In June 2022, JUUL faced another blow: the FDA issued a Marketing
`
`Denial Order (“MDO”) against JUUL, rejecting its Pre-Market Tobacco Product
`
`Applications.72 Although the MDO was stayed, its issuance severely