Summary
The Appellate Division, First Department unanimously affirmed an order denying MicroCloud Hologram, Inc.'s motion to dismiss claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The court held that the contract provided objective standards for the company's registration-related obligations and that the allegations sufficiently supported a claim that the company acted in bad faith in denying the plaintiff's requests.
Topics
Practice areas
Questions Presented
- Whether the complaint stated a cause of action for breach of contract based on MicroCloud's alleged failure to file a registration statement and take related actions required by the contract.
- Whether the contract supplied sufficiently objective criteria to measure MicroCloud's performance of its best-efforts and registration obligations.
- Whether the complaint stated a cause of action for breach of the implied covenant of good faith and fair dealing based on MicroCloud's alleged bad-faith refusal to honor Greenland's requests.
- Whether MicroCloud had sole discretion to decide whether to remove restrictive legends from Greenland's securities.
Holdings
- The complaint stated a cause of action for breach of contract by alleging that MicroCloud failed, among other things, to file a registration statement with the SEC despite Greenland's multiple written demands under the contract.
- The contract provided sufficiently objective criteria to measure MicroCloud's performance because it incorporated the Securities Act and SEC regulations and specified timing guidance, including a maximum 30-day deferral.
- The complaint stated a cause of action for breach of the implied covenant by alleging that MicroCloud denied Greenland's requests because its principal sought to sell his own shares without competing with Greenland.
- MicroCloud did not possess sole discretion to decide whether to remove restrictive legends because the contract stated that MicroCloud shall take action to enable Greenland to sell its shares under the Securities Act.
Key quotations
“The contract's definitions, in turn, expressly refer to the filing of registration statements, amendments, and supplements in compliance with the Securities Act and SEC regulations, therefore incorporating the Act and the regulations into the contract's terms and providing objective standards for judging the adequacy of defendant's efforts” ([*1])
“even an explicitly discretionary contract right may not be exercised in bad faith so as to frustrate the other party's right to the benefit under the agreement” ([*1])
“Disputes about the removal of legends are governed by state law or contractual agreements” ([*1])
Factual background
Greenland alleged that MicroCloud failed to file a registration statement with the Securities and Exchange Commission despite Greenland's multiple written demands under the parties' contract. The contract required MicroCloud to use its best efforts to prepare and file a registration statement as expeditiously as possible, subject to a provision permitting a deferral of up to 30 days, and to take action enabling Greenland to sell its securities. Greenland also alleged that MicroCloud denied its requests because MicroCloud's principal wanted to sell his own shares without competing with Greenland.
Procedural history
Supreme Court, New York County, entered an order on July 25, 2024 denying, to the extent appealed from, MicroCloud Hologram's motion to dismiss the first and third causes of action. The Appellate Division, First Department, unanimously affirmed the order with costs.