Speirs v. Bluefire Ethanol Fuels, Inc.Annotate this Case
Plaintiffs held warrants to buy common stock issued by defendant BlueFire Ethanol Fuels, Inc. The warrants included an anti-dilution provision, requiring BlueFire to adjust the exercise price set in the warrants “to equal the consideration paid” by a subsequent investor for equity interests in BlueFire. The anti-dilution provision did not apply to certain issuances of securities, as specified in a list of five categories of exceptions. A few years after issuance of the warrants, BlueFire entered into an agreement with non-party Lincoln Park Capital Fund, LLC, creating an “equity line of credit” or a “standby equity distribution agreement.” Lincoln promised to make up to $10 million available to BlueFire to be accessed at the option of BlueFire over a set period of time. In exchange, BlueFire issued common stock and warrants to Lincoln at the time the agreement was executed, and promised to issue additional common stock in exchange for any future cash received from Lincoln. Plaintiffs sued BlueFire for breach of contract and declaratory relief when BlueFire refused to apply the warrants’ anti-dilution provision to the Lincoln agreement. Plaintiffs also sued individual defendants Arnold Klann and Christopher Scott for breach of fiduciary duty. After a bench trial, the court rejected the breach of fiduciary duty claim against Klann and Scott. But the court ruled the anti-dilution provision applied to the Lincoln transaction and that BlueFire had breached the warrants. The court also reduced the exercise price for the warrants from $2.90 per share to $0 per share, and authorized plaintiffs to immediately exercise the warrants. The court did not award monetary damages to plaintiffs. The parties appealed aspects of the judgment adverse to their respective interests. After review, the Court of Appeal agreed that a corporation’s officers did not have a fiduciary duty to warrant holders. The Court also agreed with the court’s interpretation of plaintiffs’ warrants. The anti-dilution provision applies to the Lincoln agreement and stock issuances to Lincoln resulting from that agreement. But substantial evidence did not support the court’s decision to reduce plaintiffs’ exercise price to $0. The Court therefore reversed the judgment and remanded for retrial solely on the proper remedy for BlueFire’s breach of contract.