throbber
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`
`C.A. No. 2023-1060-NAC
`PUBLIC VERSION FILED:
`May 7, 2024
`
`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
`TECHNOLOGY SOLUTIONS XIV,
`LLC, DISRUPTIVE TECHNOLOGY
`SOLUTIONS XVI, LLC–SERIES A,
`DISRUPTIVE TECHNOLOGY
`SOLUTIONS XVI, LLC–SERIES B,
`and DISRUPTIVE TECHNOLOGY
`SOLUTIONS XVI, LLC–SERIES C,
`Plaintiffs,
`
`v.
`JUUL LABS, INC. and JL TAO LLC,
`Defendants.
`
`PLAINTIFFS’ PROPOSED POST-TRIAL FINDINGS OF FACT
`
`I.
`
`The Parties and Relevant Non-Parties. 1
`1.
`Plaintiffs 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
`
`1 Subject to the resolution of any evidentiary objections, the record in this action consists
`of the facts to which the parties stipulated in the Pre-Trial Stipulation and Order (D.I. 234)
`(the “PTO”); the deposition transcripts lodged with the Court; the trial testimony and
`exhibits used at trial; the exhibits cited in the parties’ pre-trial briefs (D.I.s 223, 224, 238,
`and 239); and the exhibits cited in the parties’ opening and answering post-trial briefs. The
`trial transcript is cited as “[Last Name] Tr. __.” Deposition transcripts are cited as “[Last
`Name] Dep. __.”
`
`EFiled: May 07 2024 04:32PM EDT
`Transaction ID 72927000
`Case No. 2023-1060-NAC
`
`

`

`
`
`SPV Holdings, LLC, EMS J-INV LLC, Disruptive Technology Solutions XIV, LLC,
`
`Disruptive Technology Solutions XVI, LLC–Series A, Disruptive Technology
`
`Solutions XVI, LLC–Series B, and Disruptive Technology Solutions XVI,
`
`LLC– Series C (“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”). 2
`
`2.
`
`Plaintiffs purchased convertible notes from defendant JUUL Labs, Inc.
`
`(“JUUL” or the “Company”) in 2019 and/or 2020 pursuant to a Note Purchase
`
`Agreement, dated August 2, 2019 (the “NPA”), and a Note and Warrant Purchase
`
`Agreement, dated February 3, 2020 (the “NWPA”).3 A convertible note is a debt
`
`security that can be converted into equity in circumstances prescribed by the
`
`governing note purchase agreement. 4
`
`3.
`
`In 2007, Adam Bowen and James Monsees co-founded Ploom, Inc.
`
`(“Ploom”), which developed vaporization devices. 5 Ploom was subsequently
`
`
`
`2 PTO ¶¶ 9-16.
`3 Id. Because, as described herein, the relevant NPA and NWPA terms are substantially
`identical, references may be made only to the NWPA for simplicity.
`4 Goldstein Dep. 16:19-25.
`5 Bowen Dep. 19:5-18, 20:2-6, 22:8-17.
`
`2
`
`
`
`
`
`

`

`
`
`renamed Pax Labs, Inc. (“Pax”).6 The JUUL e-cigarette was developed at Pax.7 In
`
`2017, JUUL was created through a spin-off transaction with Pax. 8 JUUL is a
`
`Delaware corporation headquartered in Washington, D.C. 9 JUUL manufactures
`
`electronic nicotine delivery systems. 10
`
`4.
`
`Bowen is a co-founder of JUUL11 and, through entities including PHR
`
`Investments LLC (“PHR”), is one of its largest stockholders.12 He was a JUUL
`
`director and employee until his resignation on July 10, 2023. 13 As of December
`
`2022, Bowen owned 2.61% of JUUL,14 which stake increased to 2.90% as of August
`
`2023, 15 and to 13.01% after October 27, 2023, the date of the initial closing of the
`
`financing at issue in this case (the “Insider Financing”).16 Bowen formed PHR
`
`Investments LLC (“PHR”) in order to participate in the Backstop Agreement and
`
`subsequently the Insider Financing.17 There is no dispute that Bowen controls
`
`PHR. 18
`
`
`
`6 Id.
`7 Bowen Dep. 21:16-19; Monsees Dep. 13:9-17.
`8 Monsees Dep. 13:9-20; Bowen Dep. 22:8-17.
`9 PTO ¶ 6.
`10 Id. ¶ 29.
`11 Bowen Dep. 19:5-11.
`12 JX-1166 at cell V3556.
`13 JX-835 at 2; JX-841; JX-845; Bowen Dep. 24:22-26:16.
`14 JX-693 (native).
`15 JX-933 at 11.
`16 JX-1166 at cells V36-V37, V3556, V4061-V4062.
`17 Bowen Tr. 296:10-297:9.
`18 Id. 297:13-14; JX-1189 at 7 (Resp. No. 3).
`3
`
`
`
`
`
`

`

`
`
`5. Monsees is a co-founder of JUUL and, through entities including JLI
`
`Invest, LLC (“JLI Invest”), is one of its largest stockholders.19 Monsees was a JUUL
`
`director until his resignation in March 2020. 20 As of December 2022, Monsees
`
`owned 2.61% of JUUL,21 which stake increased to 2.90% as of August 202322 and
`
`to 8.96% after the initial closing of the Insider Financing.23 Monsees’s investment
`
`vehicle JLI Invest was formed in order to participate in the Backstop Agreement and
`
`Insider Financing.24 Monsees is the sole manager of JLI Invest, which is wholly
`
`owned by the Monsees Living Trust (SP), of which Monsees is a Trustee.25 It is
`
`undisputed that Monsees controls JLI Invest. 26
`
`6.
`
`Riaz Valani has been an investor in and director of JUUL and its
`
`predecessor entities since 2007, 27 entering with an investment of “hundreds of
`
`thousands of dollars.”28 He is JUUL’s largest stockholder, including through the
`
`entity BIH Fund 2 LLC (“BIH Fund 2”). 29 According to JUUL’s cap tables, as of
`
`
`19 Bowen Dep. 19:5-8; JX-150 at 4; JX-933 at 11; JX-1166 at cells V1879, V2105, V4354;
`Monsees Tr. 309:13-16.
`20 PTO ¶ 17.
`21 JX-693 (native).
`22 JX-933 at 11.
`23 JX-1166 at cells V1879, V2105, V4354.
`24 Monsees Tr. 319:9-14, 321:18-21.
`25 JX-621 at 3, 8-9.
`26 JX-1189 at 7 (Resp. No. 2).
`27 Valani Dep. 23:13-17; Valani Tr. 88:8-12.
`28 Valani Dep. 25:5-9.
`29 Valani Tr. 86:13-20; JX-1166 at cells V578-V579, V3572-V3573, V3708.
`4
`
`
`
`
`
`

`

`
`
`December 2022, Valani owned 10.76% of JUUL.30 His stake increased to 11.97%
`
`in August 202331 and to approximately 25% after the initial closing of the Insider
`
`Financing.32 Valani has invested in JUUL through multiple investment vehicles,
`
`including Ploom Investment, LLC (“Ploom Investment”), Ploom Investment II, LLC
`
`(“Ploom Investment II”), BIH Fund LLC (“BIH Fund”), 33 and BIH Fund 2. 34
`
`7.
`
`BIH Fund 2 is beneficially owned by Valani and his family. 35 BIH
`
`Fund 2 is managed by Gwendolyn Moy, whom Valani hired more than a decade ago
`
`as an employee of Valani’s Global Asset Capital, which manages investments
`
`exclusively for Valani and his family.36 Valani testified that he could not identify a
`
`single instance in which he recommended that Moy take an action with respect to
`
`BIH Fund 2 that she declined. 37
`
`8.
`
`Nick Pritzker invested in JUUL in 2011 through a trust for his benefit38
`
`and joined JUUL’s Board of Directors (the “Board”) in 2013. 39 Pritzker’s trusts
`
`made additional investments in JUUL in 2015 and 2017, per Pritzker’s
`
`
`
`30 JX-693 (native).
`31 JX-933 at 11.
`32 JX-1166 at cells V578-V579, V3572-V3573, V3708.
`33 JX-933 at 11.
`34 Valani Tr. 86:13-20.
`35 Id. 87:12-14.
`36 Valani Dep. 20:14-22, 27:8-16, 42:4-5.
`37 Id.173:11-14.
`38 Pritzker Tr. 174:8-12.
`39 Id. 176:6-12.
`
`5
`
`
`
`
`
`

`

`
`
`recommendation.40 Pritzker is JUUL’s second-largest stockholder, owning 7.52%
`
`of JUUL as of December 2022, 41 8.36% as of August 2023, 42 and approximately
`
`22% after the initial closing of the Insider Financing.43 Pritzker invests exclusively
`
`through family-owned trusts and investment vehicles and does not hold investments
`
`in his own name. 44 With respect to JUUL, Pritzker has invested through the entities
`
`JL Special LLC (“JL Special”) and JL Tao LLC (“JL Tao”). 45
`
`9.
`
`Defendant JL Tao was created in January 2020 to purchase JUUL notes
`
`“on behalf of Nick [Pritzker].”46 JL Tao’s ownership and management underwent
`
`significant restructuring leading up to the Insider Financing. Until June 2023, JL
`
`Tao was owned by a trust whose sole beneficiary was Pritzker, but it is now owned
`
`by a trust whose beneficiaries are Pritzker’s children.47 Further, until September
`
`2023, JL Tao was managed by Tao Capital Management (a branch of Pritzker’s
`
`family office, 48 of which he was chairman and principal until May 202349).50 In
`
`
`40 Pritzker Tr. 175:17-176:5.
`41 JX-693 (native).
`42 JX-933 at 11.
`43 JX-1166 at cells V2103-V2104.
`44 Pritzker Tr. 180:14-181:4; Perkovich Tr. 531:1-17; Pritzker Dep. 82:17-25; see also
`Perkovich Dep. 137:12-15.
`45 JX-933 at 11.
`46 JX-306 at 6.
`47 Pritzker Tr. 228:24-229:12.
`48 Id. 226:9-18.
`49 Id. 226:19-227:1.
`50 Perkovich Tr. 522:5-18.
`
`6
`
`
`
`
`
`

`

`
`
`September 2023, Perkovich, the long-time lead executive of Pritzker’s family
`
`office, 51 and Kurt Hunsberger, who had been managing dozens of Pritzker family
`
`trusts for years, 52 were installed as JL Tao’s managers.53 Pritzker hired Perkovich
`
`in 2013 to be the president of Tao Capital, Pritzker’s family office, a role in which
`
`Perkovich served until his recent retirement. 54
`
`10. Bowen, Monsees, Valani, and Pritzker are collectively referred to
`
`herein as the “Insiders.”
`
`II. D1 Negotiates a Note Purchase Agreement with JUUL, Obtaining
`Significant Protections for Noteholders.
`In mid-December 2018, tobacco conglomerate Altria Group purchased
`11.
`
`35% of JUUL’s stock for approximately $12.8 billion.55 The Board, on which each
`
`of Pritzker, Valani, Bowen, and Monsees served at the time,56 distributed $11.8
`
`billion in dividends to its stockholders.57 Only $200 million of the $12.8 billion
`
`remained on JUUL’s balance sheet. 58
`
`
`51 Perkovich Tr. 525:23-526:14.
`52 JX-968 at 1, 6; Pritzker Tr. 228:13-21; Perkovich Tr. 529:1-6.
`53 Perkovich Dep. 17:21-24; Pritzker Tr. 228:13-19.
`54 Pritzker Tr. 212:14-23; Perkovich Tr. 475:12-18, 525:23-526:14.
`55 Valani Tr. 88:22-89:2; see also JX-29; Crosthwaite Dep. 19:15-21, 20:9-21.
`56 Valani Tr. 161:2-8.
`57 Id. 89:3-91:17; Pritzker Tr. 177:3-5.
`58 JX-1495 (native) at ‘Summary’ C10.
`
`7
`
`
`
`
`
`

`

`
`
`12. Valani received approximately $2.61 billion from the Altria dividend,
`
`through Ploom Investment, Ploom Investment II, and his personal holdings. 59
`
`13. Pritzker received approximately $1.83 billion from the Altria dividend,
`
`through JL Special.60 JL Special was then managed by Pritzker and Perkovich61 and
`
`held in a trust for the benefit of Pritzker’s children,62 although JUUL’s cap tables
`
`made no mention of that entity and simply listed Pritzker as the relevant
`
`stockholder. 63
`
`14. Bowen received approximately $505 million from the Altria
`
`dividend. 64
`
`15. Monsees received approximately $464 million from the Altria
`
`dividend. 65
`
`16.
`
`Just months after Altria’s $12.8 billion investment, JUUL needed
`
`additional financing. 66
`
`
`59 JX-1495 (native) at ‘Shares’ K77, K79, K85, K142, K172, K421, K641, K907, and
`K929.
`60 Id. (native) at ‘Shares’ K230, K699-700, and K935-936.
`61 See JX-24; Perkovich Tr. 483:16-21.
`62 Pritzker Tr. 243:13-244:7.
`63 See, e.g., JX-114 at 2.
`64 JX-1495 (native) at ‘Shares’ K94.
`65 Id. (native) at ‘Shares’ K288.
`66 Valani Tr. 91:18-21.
`
`8
`
`
`
`
`
`

`

`
`
`17.
`
`In May 2019, representatives of JUUL met with JP Morgan to discuss
`
`a potential financing through the issuance of convertible notes.67 JP Morgan advised
`
`JUUL that investors would demand that outside investors lead a qualified financing
`
`in which the notes could be converted. 68
`
`18. Soon thereafter, JUUL began conversations with lead investor and
`
`negotiator D1. D1 principal Daniel Sundheim and JUUL director Zach Frankel
`
`primarily negotiated the fundamental business deal.69 Although Frankel is currently
`
`a JUUL director, JUUL did not call Frankel as a witness at trial. 70
`
`19. D1 recognized that JUUL faced various business risks, including
`
`significant regulatory risk, and thus understood that JUUL may need to raise capital
`
`while “in a more distressed situation.”71 D1 was aware there was a risk that the notes
`
`could be converted at a valuation below the valuation floor contemplated by the
`
`notes, resulting in a mark-to-market loss. 72 But, so long as the investment “was
`
`made by independent third parties in an arm’s-length transaction” making an
`
`economically rational judgment, then the notes would be converted to equity only in
`
`situations where JUUL obtained “a substantial amount of capital” and where
`
`
`
`67 JX-32 at 2-3.
`68 Kadapakkam Tr. 447:22-448:5; see also JX-32 at 2.
`69 Sundheim Tr. 14:5-15:21.
`70 Kadapakkam Tr. 445:21-446:1.
`71 Sundheim Tr. 11:3-22.
`72 Id. 11:3-12:3; Goldstein Tr. 256:6-21.
`
`9
`
`
`
`
`
`

`

`
`
`objective parties determined that the investment was attractive and that JUUL had
`
`“very bright” prospects.73 The notes also provided downside protection in that
`
`noteholders would retain their seniority in the capital structure if the Company could
`
`not obtain significant outside funding triggering conversion. 74
`
`20. Sundheim and Frankel thus agreed at the outset that to effect a forced
`
`conversion, the triggering transaction would need to be “truly an arm’s length
`
`transaction,” involving third-party independent investors who would be
`
`economically motivated to place an objective valuation on the Company. 75
`
`21. Following Sundheim’s discussions with Frankel, JUUL sent D1 a first
`
`draft of the NPA term sheet reflecting JP Morgan’s advice and the business deal that
`
`the parties had reached. The initial term sheet thus provided that a Qualified
`
`Financing must be led by a “new investor.”76
`
`22.
`
`JUUL subsequently replaced the phrase “new investor” with language
`
`that identified JUUL’s “top three [stockholders] by percentage ownership”: Altria,
`
`Valani, and Pritzker. 77
`
`
`73 Sundheim Tr. 12:4-14:4.
`74 Sundheim Dep. 269:3-24.
`75 Sundheim Tr. 13:10-15:17; see also Goldstein Tr. 254:13-257:7.
`76 JX-33 at 5.
`77 Herbert Dep. 29:10-30:2; see also Kadapakkam Tr. 410:7-15; JX-42 at 6.
`10
`
`
`
`
`
`

`

`
`
`23. D1, however, sought a threshold that would pick up “all of [JUUL’s]
`
`largest investors.”78 Thus, D1 rejected JUUL’s proposal and inserted broader
`
`language that prevented any investors owning more than 5% of JUUL’s stock from
`
`effecting a Qualified Financing.79 D1 proposed this change based on its
`
`understanding that Pritzker and Valani owned more than 5% of JUUL’s stock; the
`
`language thus would capture Pritzker, Valani, and additional substantial investors.80
`
`24. D1’s understanding was based on information provided by JUUL.
`
`Before the execution of the NPA, JUUL provided investors with capitalization tables
`
`showing that Pritzker and Valani owned more than 5% of JUUL’s stock. 81 For
`
`example, one such cap table that shows JUUL’s major shareholders as of June 30,
`
`2019, represented that Valani and Pritzker owned 12.25% and 8.60% of JUUL,
`
`respectively. 82 The cap tables made no mention of any investment vehicles. 83
`
`
`78 Kadapakkam Tr. 411:17-412:17.
`79 JX-46 at 16; Sundheim Tr. 21:15-22:12.
`80 Sundheim Tr. 21:10-14, 21:24-22:12.
`81 See, e.g., JX-114 at 2; see also Sundheim Tr. 23:11-25:15 (discussing JX-114); JX-150
`at 4; Goldstein Tr. 258:7-260:18 (discussing JX-150).
`82 See JX-114 at 2.
`83 See id.; Sundheim Tr. 23:11-16, 24:15-25:15; Goldstein Tr. 259:17-260:18; JX-114 at 2;
`JX-150 at 4.
`
`11
`
`
`
`
`
`

`

`
`
`25. The cap tables tracked the discussions that the prospective noteholders
`
`had with JUUL representatives, who consistently referred to Pritzker and Valani as
`
`JUUL’s major stockholders, without mention of any investment vehicles. 84
`
`26. When the NPA was being negotiated, Pritzker’s investment was held in
`
`JL Special, a vehicle owned by a trust for the benefit of Pritzker’s children.85 The
`
`cap tables provided to investors by JUUL contained no mention of JL Special,
`
`naming only Pritzker as a JUUL stockholder. 86
`
`27. The parties additionally agreed that a Qualified Financing also had to
`
`meet the requirements of a “Capital Raising Transaction.”87 JUUL sought to define
`
`narrowly the types of stock issuances that would be excluded from a Capital Raising
`
`Transaction, defining it as an issuance of stock that excluded shares issued to
`
`JUUL’s employees, directors, consultants, and advisors that were not to be used for
`
`general working capital purposes.88 D1 broadened the exclusion to cover any
`
`issuances of stock to JUUL’s employees, directors, consultants, and advisors,
`
`
`84 Sundheim Tr. 25:16-26:14; Goldstein Tr. 260:15-18, 270:11-24.
`85 See Pritzker Tr. 177:6-14, 243:11-244:11, 244:18-20.
`86 E.g., JX-114 at 2; JX-150 at 4.
`87 Sundheim Tr. 18:20-19:17.
`88 JX-50 at 10-11, 14.
`
`12
`
`
`
`
`
`

`

`
`
`regardless of the purpose of the proceeds. 89 At the time of the negotiations, the
`
`Insiders were each directors, and Bowen and Monsees were employees. 90
`
`28. The parties eventually agreed on contractual language in the NPA
`
`capturing the business deal they had previously reached. 91 In pertinent part,
`
`Section 1.36 of the NPA defines a “Qualified Financing” as a “Capital Raising
`
`Transaction” (a separately defined term, as discussed further below) “with total net
`
`proceeds in cash to the Company in amount equal to at least $500 million … at least
`
`$400 million of which is attributable to purchases by investors that do not own more
`
`than five percent of the outstanding shares capital stock of the Company on a fully-
`
`diluted basis as of immediately prior to the initial closing of such Capital Raising
`
`Transaction[.]”92 Sundheim explained that this definition is “directly related” to the
`
`business deal reached by the parties and ensures that any investors leading a
`
`Qualified Financing “are truly … independent third parties [who] would not be
`
`making the investment solely to benefit existing investment[s].”93
`
`29.
`
`In turn, Section 1.6 of the NPA defines a “Capital Raising Transaction,”
`
`in relevant part, as “a transaction or series of related transactions in which the
`
`
`
`89 JX-55 at 23.
`90 See supra ¶¶ 4-8.
`91 Sundheim Tr. 15:18-21, 26:15-19.
`92 JX-1 at 5 (§1.36).
`93 Sundheim Tr. 17:16-18:14.
`
`13
`
`
`
`
`
`

`

`
`
`Company sells capital stock of the Company to investors for cash, in all cases
`
`excluding … shares issued to employees or directors of, or consultants or advisors
`
`to the Company or any of its subsidiaries.”94
`
`30. The NPA was executed in August 2019.95 JUUL raised approximately
`
`$800 million. 96
`
`III. The Noteholders Provide Another Round of Financing on the Condition
`That Valani and Pritzker Invest Alongside Them.
`In the fall of 2019, JUUL hit several roadblocks, leading it to turn back
`31.
`
`to the noteholders for additional funding.97 By November 2019, the JUUL device
`
`was banned in several jurisdictions, and JUUL stopped marketing its most popular
`
`pod flavor, mint, which accounted for “about 70 percent of [JUUL’s] business at the
`
`time.”98
`
`32.
`
`In late November, Kadapakkam and Crosthwaite met with D1 to
`
`discuss a new financing round.99 D1 conveyed that it “felt 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
`
`
`
`94 JX-1 at 2 (§1.6).
`95 JX-1 at 1, 35-42.
`96 JX-1197 at 3.
`97 Valani Tr. 93:1-8; Kadapakkam Tr. 427:4-10.
`98 Kadapakkam Tr. 427:2-10; JX-172 at 2.
`99 JX-172 at 1-3.
`
`14
`
`
`
`
`
`

`

`
`
`to show support.”100 D1 relayed its growing frustration that the Insiders had “tak[en]
`
`out billions and were unwilling to put in a faction of that when the company need[ed]
`
`it most.”101 Further, D1 explained that it would be a “terrible message to everybody
`
`if” Pritzker and Valani, who had “more at stake here than anyone else on the cap
`
`table,” did not “invest at least $100m in this round.”102
`
`33. D1 and other investors thus insisted that Pritzker and Valani, along with
`
`other JUUL directors, invest $100 million alongside them in any additional financing
`
`round.103 Both Pritzker and Valani understood that their investment was a condition
`
`of the investors’ participation. 104
`
`A. The Company Forms a Note Financing Committee to Allow Valani
`and Pritzker to Invest in the 2020 Note Financing.
`34. To facilitate Valani’s and Pritzker’s investment, JUUL’s Board formed
`
`a “2020 Note Financing Committee” of Bowen and Monsees.105 The co-founders
`
`were tasked with deciding “whether to permit certain members of the Board”—
`
`
`
`100 Sundheim Tr. 28:9-21.
`101 JX-213 at 2; see also JX-217.
`102 JX-213 at 2-3.
`103 Id. at 2 (“Riaz and Nick have more at stake here than anyone else on the cap table.”);
`JX-291; JX-292 at 1-2; Monsees Tr. 319:22-320:8; Sundheim Tr. 28:13-29:4.
`104 Pritzker Tr. 178:20-179:12; Valani Tr. 93:1-94:11.
`105 Monsees Tr. 320:9-12; see also JX-291; JX-292.
`15
`
`
`
`
`
`

`

`
`
`namely, Pritzker, Valani, and Harold Handelsman106—to purchase notes “through
`
`their affiliated funds.”107
`
`35. After Bowen and Monsees approved,108 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.109 When Kadapakkam asked Valani “what structure” he was “planning to
`
`use” to invest, Valani said it was “[j]ust an LLC we created – think its called BIH
`
`fund.”110 Perkovich likewise confirmed that JL Tao was the “new entity for the cap
`
`table” that would make “the convertible note contribution on behalf of Nick.”111
`
`36.
`
`JUUL told D1 that it had satisfied its condition that Pritzker and Valani
`
`individually invest in the 2020 notes. 112
`
`37. On February 3, 2020, the day of the closing of the NWPA, 113 JUUL
`
`sent to Sculptor an “allocation spreadsheet” representing that Pritzker and Valani
`
`were investing through “BIH Fund [Riaz]” and “JL Tao [Nick].”114
`
`
`
`106 JX-291.
`107 JX-292.
`108 JX-302 at 2.
`109 Valani Tr. 94:3-11; Pritzker Tr. 179:13-180:13; JX-300 at 2; JX-306 at 6; JX-308
`(native).
`110 JX-300 at 2.
`111 JX-306 at 6.
`112 Sundheim Tr. 29:2-4.
`113 JX-2.
`114 JX-308 and native; see also JX-319 and native.
`16
`
`
`
`
`
`

`

`
`
`38.
`
`JUUL documented Pritzker’s participation in the 2020 note financing
`
`internally as well, noting in its records that “JL Tao” was “Nick,” as late as
`
`September 2023. 115
`
`B. The Conversion Mechanics of the 2020 Note Financing Were
`Substantively Identical to Those of the 2019 Financing.
`39. Upon the closing of the NWPA on February 3, 2020, JUUL issued
`
`approximately $1.5 billion in notes, of which $800 million were issued in exchange
`
`for the 2019 notes. 116
`
`40. The conversion mechanism in the NWPA is substantially identical to
`
`that in the NPA with limited exceptions. For example, the NWPA lowered the
`
`valuation cap and valuation floor for conversion in light of the Company’s bleaker
`
`prospects117 and provided that, for the first 36 months following the NWPA’s
`
`execution, the notes could not be automatically converted at a valuation below the
`
`floor. 118
`
`41.
`
`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’
`
`
`
`115 JX-992 (native).
`116 JX-2 at 57-59.
`117 Sundheim Tr. 27:13-28:3; see JX-2 at 9-10 (§1.64).
`118 Sundheim Tr. 72:3-6; see JX-2 at 7 (§1.43).
`17
`
`
`
`
`
`

`

`
`
`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.”119
`
`42. Before the closing of the 2020 note financing, JUUL sent noteholders
`
`cap tables identifying the investors that owned 5% or more of the Company.120
`
`Again, they named Pritzker and Valani as JUUL’s largest individual stockholders,
`
`with no mention of their entities. 121
`
`IV. JUUL’s Liabilities Push It to the Brink of Bankruptcy.
`43. Over the last several years, JUUL has faced substantial litigation and
`
`regulatory troubles that have personally implicated the Insiders. The popularity of
`
`e-cigarettes, particularly among minors, has garnered the attention of the Food and
`
`Drug Administration (“FDA”), Congress, and State Attorneys General.122 For years,
`
`JUUL has been accused of creating and furthering a youth nicotine epidemic.123 As
`
`of 2022, thousands of lawsuits had been filed nationwide against JUUL for its sales
`
`and marketing practices.124 JUUL also faced a federal multi-district litigation (the
`
`“MDL”) which consolidated many of those cases. 125 Monsees, Bowen, Valani, and
`
`
`119 JX-2 at 63 (Ex. A, §3.1).
`120 JX-148 at 3; JX-150 at 4.
`121 Id.
`122 JX-642 at 95-102.
`123 Valani Tr. 96:11-17.
`124 JX-642 at 81-84; Pritzker Tr. 183:3-5; Barse Tr. 356:21-357:5.
`125 JX-642 at 82.
`
`18
`
`
`
`
`
`

`

`
`
`Pritzker were named as individual defendants in the MDL, including on claims of
`
`federal racketeering and, as Valani testified, “a lot of claims beyond RICO.”126
`
`44.
`
`In June 2022, the FDA issued a Marketing Denial Order (“MDO”)
`
`against JUUL, rejecting
`
`its Pre-Market Tobacco Product Applications
`
`(“PMTAs”). 127 Although the MDO was stayed, its issuance severely disrupted
`
`JUUL’s business. Crosthwaite approximated that JUUL lost about 20% of its value
`
`as a result. 128
`
`45.
`
` The MDO, coupled with the ongoing MDL and JUUL’s deteriorating
`
`financials, pushed JUUL into crisis mode. Beginning in mid-June 2022, the Board
`
`met multiple times each week, holding nearly 40 meetings through September.129
`
`Of primary concern was whether JUUL’s cash on hand would satisfy the minimum
`
`liquidity threshold required by JUUL’s term loans. 130 The Board was advised at the
`
`end of July that there was a “high risk of” tripping the covenant in August131 and
`
`again in September. 132
`
`
`126 JX-324 ¶¶ 22-24, ¶¶ 26-28; Valani Tr. 96:21-23, 97:21-23, 122:18-24; Pritzker
`Tr. 181:24-182:10.
`127 Crosthwaite Tr. 556:15-22.
`128 Id. 559:20-560:4.
`129 See, e.g., JX-339; JX-345; JX-349; JX-354; JX-452.
`130 E.g., JX-343 at 2; JX-349 at 4; JX-350 at 4.
`131 JX-382 at 4.
`132 JX-406 at 3; JX-416 at 3; JX-423 at 2.
`
`19
`
`
`
`
`
`

`

`
`
`46.
`
`In summer 2022, JUUL’s Board was repeatedly briefed on “essentially
`
`two viable options” going forward: (1) a strategic transaction with Altria or (2) a
`
`Chapter 11 filing. 133 JUUL and Altria extensively negotiated potential deal
`
`structures, including an acquisition of JUUL or an IP licensing deal, 134 with deal
`
`values from $6 to $7 billion. 135 On September 26, Altria notified JUUL that it was
`
`no longer interested in pursuing a transaction. 136
`
`47.
`
`In August 2022, JUUL remained at risk of breaching the minimum
`
`liquidity covenants of its term loan.137 JUUL also was fast approaching its first MDL
`
`trial, scheduled to begin in November 2022 in San Francisco, a venue JUUL
`
`perceived as hostile.138 But JUUL never seriously considered going forward with
`
`the trial due to the potential risks. 139 The Insiders, personally named as defendants,
`
`discussed their “shared personal concern” about the lawsuits and the resulting
`
`“personal strife” amongst themselves. 140
`
`
`133 JX-404 at 4; JX-371 at 4-5.
`134 JX-357 at 4; JX-406 at 4.
`135 Crosthwaite Dep. 113:2-114:12; see also JX-719.
`136 JX-432.
`137 Crosthwaite Tr. 560:17-561:2; see also, e.g., JX-350 at 4.
`138 Goldstein Tr. 265:15-266:13; Goldstein Dep. 72:3-73:9.
`139 Sundheim Tr. 34:4-12.
`140 Monsees Tr. 307:5-16, 308:1-309:12.
`
`20
`
`
`
`
`
`

`

`
`
`48. One way for JUUL to avoid the trial was by filing for bankruptcy,
`
`which would result in a stay of parallel litigation against JUUL.141 In October 2022,
`
`two new directors joined JUUL’s Board, David Barse and Paul Aronzon (together,
`
`“the Independent Directors”), to evaluate a potential Chapter 11 filing. 142
`
`49. Some senior executives, including Crosthwaite, favored that path.
`
`Sundheim testified that Crosthwaite told him that a Chapter 11 filing “would be the
`
`best outcome for everybody,” including because bankruptcy would allow JUUL to
`
`free itself from certain non-compete agreements it had with Altria and because
`
`bankruptcy would “minimize the liabilities of the company, most of which were in
`
`the form of potential legal settlements.”143 Crosthwaite—who observed the trial,
`
`including Sundheim’s testimony, as JUUL’s corporate representative—did not deny
`
`conveying this view to Sundheim, instead testifying that his views on bankruptcy
`
`underwent “an evolution.”144
`
`50. Pritzker and Valani opposed a Chapter 11 filing. In addition to being
`
`JUUL’s top equity holders, Pritzker and Valani faced personal liability in the MDL.
`
`Pritzker admitted that a JUUL bankruptcy filing would have had serious personal
`
`
`
`141 Barse Tr. 357:1-9.
`142 Id. 352:11-17.
`143 Sundheim Tr. 33:3-34:3.
`144 Crosthwaite Tr. 569:6-22.
`
`21
`
`
`
`
`
`

`

`
`
`consequences,145 and Valani likewise acknowledged that bankruptcy was against his
`
`interest “as a shareholder and as a director.”146 In particular, if JUUL managed to
`
`stay the MDL through a bankruptcy filing, the San Francisco trial could have
`
`nevertheless proceeded against
`
`the
`
`individual defendants—the
`
`Insiders
`
`themselves.147 A bankruptcy filing might also have put at risk the Insiders’ right to
`
`indemnification from JUUL,148 an issue that Pritzker and Valani discussed with their
`
`counsel. 149
`
`51. There also was a risk that the Insiders’ Altria dividends would be
`
`clawed back as part of a bankruptcy proceeding—a risk that Pritzker and Valani
`
`understood.150 Indeed, JUUL obtained a tolling agreement for claims related to the
`
`Altria dividends from Valani, his entities BIH Fund 2 and Ploom Investment,
`
`Bowen, and Pritzker’s entities JL Tao and JL Special. 151 And, JUUL executives
`
`
`145 Pritzker Tr. 182:11-14. Bowen also acknowledged that a JUUL bankruptcy would have
`had consequences for him as an equity holder. Bowen Dep. 104:22-105:16 (agreeing that
`equity holders have lower priority than creditors in a bankruptcy). Bowen claimed not to
`understand the tolling agreement he had signed with JUUL in connection with claims
`related to the Altria dividends, Bowen Dep 107:17-110:22, or to remember the implications
`of bankruptcy for his right to indemnification from JUUL, id. 105:18-106:1.
`146 Valani Tr. 101:22-102:6.
`147 Pritzker Tr. 182:15-23; Valani Tr. 102:7-16.
`148 Pritzker Tr. 183:9-21; Valani Tr. 104:9-12.
`149 Pritzker Tr. 183:22-24; Valani Dep. 102:3-8.
`150 Pritzker Tr. 184:16-185:5; Valani Tr. 102:17-103:13.
`151 JX-4 at 1; see also JX-562 at 3 (Valani and Pritzker’s joint counsel at Skadden
`“confirmed that Riaz and Nick would sign up” for tolling “immediately”).
`22
`
`
`
`
`
`

`

`
`
`likewise conveyed Pritzker and Valani’s concerns about potential clawbacks of the
`
`Altria dividends to PIMCO principal Gabe Goldstein. 152
`
`V. Valani and Pritzker Refinance JUUL’s Term Loan Through the Same
`Financial Vehicles Used to Participate in the Insider Financing.
`52. To avoid default and a bankruptcy filing, JUUL, Pritzker, and Valani
`
`effected a term loan refinancing through a Credit Agreement between JUUL as the
`
`borrower and BIH Fund 2 and JL Tao as the lenders.153 These were the same entities
`
`that later participated in the Backstop Agreement154 and the Insider Financing. 155
`
`53. At a September 26 Board meeting, Crosthwaite “provided an update on
`
`re-financing of the Company’s current term loan, noting that a re-financing by a
`
`group of Company insiders was a viable option.”156 Those insiders were Valani and
`
`Pritzker.157 Before the Board meeting that evening, Moy, Valani’s employee,158
`
`emailed Valani and Pritzker’s attorneys at Skadden, 159 copying Perkovich, and
`
`
`152 Goldstein Tr. 266:23-267:22.
`153 JX-461 at 18, 155; Valani Tr. 121:2-8; Pritzker Tr. 186:7-187:2.
`154 JX-657 at 48.
`155 JX-14.
`156 JX-432 at 2; see also JX-442 at 4 (“Mr. Pritzker went on the record” at a Board meeting
`to state that “he was involved in the ongoing term loan lender situation”).
`157 JX-1189 at 22 (Nos. 48 and 49).
`158 Valani Tr. 112:23-113:1.
`159 Id. 113:13-23; Pritzker Tr. 211:7-9.
`
`23
`
`
`
`
`
`

`

`
`
`informing them that “Riaz and Nick verbally confirmed to KC (the CEO) that they
`
`will fund.”160 Valani acknowledged at trial that “we did fund.”161
`
`54. Later that evening, a WilmerHale attorney emailed JUUL’s attorneys
`
`at Kirkland & Ellis, identifying himself as “represent[ing] Nick Pritzker and Riaz
`
`Valani.”162 According to WilmerHale, JUUL had “requested that Mr. Pritzker and
`
`Mr. Valani consider providing a new term loan,” the proceeds of which JUUL would
`
`use to pay off the existing term loan and thus “avoid an imminent default.”163
`
`WilmerHale relayed that “Mr. Pritzker an

This document is available on Docket Alarm but you must sign up to view it.


Or .

Accessing this document will incur an additional charge of $.

After purchase, you can access this document again without charge.

Accept $ Charge
throbber

Still Working On It

This document is taking longer than usual to download. This can happen if we need to contact the court directly to obtain the document and their servers are running slowly.

Give it another minute or two to complete, and then try the refresh button.

throbber

A few More Minutes ... Still Working

It can take up to 5 minutes for us to download a document if the court servers are running slowly.

Thank you for your continued patience.

This document could not be displayed.

We could not find this document within its docket. Please go back to the docket page and check the link. If that does not work, go back to the docket and refresh it to pull the newest information.

Your account does not support viewing this document.

You need a Paid Account to view this document. Click here to change your account type.

Your account does not support viewing this document.

Set your membership status to view this document.

With a Docket Alarm membership, you'll get a whole lot more, including:

  • Up-to-date information for this case.
  • Email alerts whenever there is an update.
  • Full text search for other cases.
  • Get email alerts whenever a new case matches your search.

Become a Member

One Moment Please

The filing “” is large (MB) and is being downloaded.

Please refresh this page in a few minutes to see if the filing has been downloaded. The filing will also be emailed to you when the download completes.

Your document is on its way!

If you do not receive the document in five minutes, contact support at support@docketalarm.com.

Sealed Document

We are unable to display this document, it may be under a court ordered seal.

If you have proper credentials to access the file, you may proceed directly to the court's system using your government issued username and password.


Access Government Site

We are redirecting you
to a mobile optimized page.





Document Unreadable or Corrupt

Refresh this Document
Go to the Docket

We are unable to display this document.

Refresh this Document
Go to the Docket