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Cox v. Snap, Inc.

United States District Court, E.D. Virginia, Alexandria Division

September 20, 2016

CURTIS COX, Plaintiff,
v.
SNAP, INC., Defendant.

          MEMORANDUM OPINION

          LIAM O'GRADY UNITED STATES DISTRICT JUDGE

         This matter now comes before the Court on cross-motions for summary judgment by Defendant Snap, Inc. ("Snap") and Plaintiff Curtis Cox ("Cox"). Dkt. Nos. 84 & 91. The Motions have been fully briefed and the Court held a hearing on the Motions on September 9, 2016. For the reasons outlined below, the Court finds good cause to GRANT Cox's Motion for Summary Judgment and DENY Snap's Motion for Summary Judgment.

         I. BACKGROUND

         In 2006, Snap was a small business looking to grow in the government contracting community. At that time, Cox was a well-known figure in the industry. He was also the President of C2, an established government contractor.

         Snap proposed a strategic business relationship under which Cox would provide assistance promoting and marketing Snap in exchange for an option representing five percent of Snap's total authorized shares. The terms of the proposed agreement were set out in a Letter Agreement (or "memorandum of understanding") dated January 12, 2006, from Navneen Gupta, Snap's President, to Cox and C2 (the "Letter Agreement"). The letter instructed, "[i]f you [Cox] are in agreement with these terms, please sign below and we [Snap] will prepare the necessary documentation."

         Paragraph 1 of the Letter Agreement described the stock option Cox was to receive. It provided:

Snap currently has 4, 926 shares issued and outstanding and an additional 1, 232 shares, representing twenty (20%) percent of the authorized shares, reserved for key employees, strategic partners, and contractors. On January 12, 2006, Snap will issue a non-qualified stock option to Mr. Cox granting him the right to purchase 308 shares, representing five (5%) percent of the total authorized shares of stock of Snap. Snap intends to execute a stock split in the near future and the number of shares subject to Mr. Cox's option will increase proportionally.

         The following paragraphs set forth terms and conditions that would apply to the stock option transfer. Paragraph 3 stated: "Except as set forth in this Memorandum of Understanding and the final agreement, the options will be otherwise subject to the terms of Snap's stock option plan." In addition, Paragraph 6 stated that "[t]he options will be fully vested when granted."

         In return for these shares, Cox and C2 agreed to take a number of actions to assist Snap. For example, they agreed to provide "resources valued at approximately $240, 000 [during 2006] to be used in the areas of marketing support and assistance or as otherwise requested by Snap." They also agreed to "consider Snap for any potential leads that they encounter for work requiring an 8(a) company, " "use their best efforts to help Snap obtain the BOA contract and become registered with the U.S. Army NRCC, " and "give Snap the opportunity to bid for the work" if C2 was a primary contractor, along with other partnership-related provisions.

         The Letter Agreement also contained repurchase provisions for the stock options. Snap was able to repurchase the option any time after January 1, 2008, and Cox could require Snap to repurchase the options any time after January 1, 2011.[1] The Letter Agreement set forth a formula by which to calculate the strike price[2] and the final repurchase amount. Specifically, it stated: "For the purposes of determining the strike price of the options issued pursuant to Paragraph 1, the value of Snap will be based on a valuation of .8 times Snap's sales in calendar year 2005. This amount is estimated to be approximately $12, 000, 000."

         Relatedly, Paragraph 10 of the Agreement governed the redemption of Cox's shares:

10. Mr. Cox shall have the ability to require the Company to purchase his options at any time subject to the foregoing:
(a) Mr. Cox cannot exercise this put option prior to January 1, 2011.
(b) The price shall be determined based on the excess of the then fair market value of Snap, with such value determined based on .8 times Snap's annual sales during the most recently preceding twelve-month period, in excess of the initial strike price.
(c) The repurchase amount is payable by Snap to Mr. Cox over a five-year period with interest at the then current prime rate.

         The Letter Agreement concluded by saying: "If these terms are acceptable, please sign below and we will begin preparing the necessary documents." The letter was executed by Cox and Gupta.

         On March 18, 2011, Cox sent a letter to Gupta exercising his right to have Snap repurchase his options. The letter stated, "I hereby exercise my right under section 10 of the Agreement to require Snap to purchase all of my Options." On March 28, Gupta emailed Cox and offered to "negotiate a resolution of your option claims." The parties were unable to reach a resolution. In October 2015, Cox again raised the issue of Snaps repurchase obligations. On October 9, 2015, Gupta responded, saying: "Snap owes you nothing."

         At the time the parties executed the Letter Agreement, Snap had three owners: Vivek Bali, Navneet Gupta, and Inderbir Singh. At some point, Gupta decided to buy out Bali and Singh. During the buyout negotiations, Gupta accounted for the fact that the owners "had to deduct the value of Mr. Cox's stock options from the buyout and separation agreement." The formal separation documents, executed on April 13, 2011, stated: "The Company has previously promised options to Curtis Cox for 308, 000 shares, which are presently the subject of unwinding negotiations." Email communications between the parties similarly referenced the share transfer contemplated by the Agreement. In January 2006, Snap's attorney, Larry Stern, sent the following message to Gupta on January 31, 2006: "We're in the process of putting together documents to recapitalize the company to have 10 million shares authorized and then a stock split so that the 3 of you will have 4, 926, 000 shares outstanding and then we'll issue options for up to 1, 232, 000, with Mr. Cox owning 308, 000 of them." On the same day, Gupta forwarded this email to Cox.

         II. ...


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