In this decision, the Court of Chancery held that the plaintiffs failed to state claims for fraud and equitable fraud, but pled sufficient facts to infer mistake, which stated a claim in equity for reformation.
The parties signed a Simple Agreement for Future Equity (“SAFE”). The plaintiffs did not argue that the SAFE was ambiguous, but rather challenged its terms as inconsistent with the agreement allegedly reached by the parties at a pre-investment meeting. The plaintiffs relied on the defendants’ representations of the terms allegedly agreed upon at the meeting, and then signed the SAFE without review.
The plaintiffs sought reformation of the SAFE based on allegations of fraud and mistake. The Court ruled that the plaintiffs had failed to state a claim for fraud or equitable fraud, reasoning that the plain text of the SAFE contradicted the terms that the plaintiffs claimed to have relied upon, and thus, their reliance was not reasonable.
The plaintiffs also argued, however, that the parties held a shared understanding that the SAFE would contain a 70% discount and a valuation cap consistent with prior investment rounds, and that the terms of the contract materially departed from this understanding because of a mistake. The Court reasoned that the plaintiffs had sufficiently particularized factual allegations, such as the attendance of a prior in-person meeting to discuss the terms of the SAFE, the repeated representations made by the defendants’ CEO, and the prior practice, to which the defendants adhered when executing similar contracts. The Court pointed out that reformation was not barred by the plaintiffs’ failure to read the contract, because the defendants did not assert that the plaintiffs acted in “bad faith (as opposed to, say, gross negligence or foolish disregard of self-interest)[.]” Accordingly, the Court denied the defendants’ motion to dismiss the reformation claim.
