ProtoComm Corp. v. Novell Advanced Services

ProtoComm Corporation (ProtoComm) (plaintiff) sued Fluent, Inc. (Fluent) for breach of contract. While this litigation was ongoing, Fluent began talks with Novell Advanced Services, Inc. (Novell) about the possibility of Novell acquiring Fluent. Fluent and Novell originally planned to structure the acquisition as an asset sale but eventually decided on a stock sale whereby Fluent would become a wholly owned subsidiary of Novell. Novell was aware of ProtoComm’s pending litigation against Fluent while negotiating the acquisition and expressed its desire to protect itself from shouldering the cost were ProtoComm to prevail. Novell and Fluent consummated the acquisition, and Fluent became Novell’s subsidiary. Shortly thereafter, Fluent’s assets were transferred to Novell, and Fluent’s employees were taken off of Fluent’s payroll and put onto Novell’s. ProtoComm later prevailed against Fluent in its breach-of-contract action but was unable to collect the judgment because Fluent’s assets and operations had been transferred to Novell. ProtoComm sued several parties involved in the acquisition, including a group of former Fluent shareholders who had also served as directors (former shareholders) (defendants), claiming that Novell’s acquisition of Fluent’s stock was, in substance, a disguised asset sale intended to leave Fluent as an entity stripped of all its valuable assets and unable to pay its liability to ProtoComm. Accordingly, ProtoComm argued that the distributions authorized by the former shareholders in connection with the acquisition were wrongful and, thus, recoverable. The former shareholders moved to dismiss.