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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

KENZO KURODA, Plaintiff, v. SPJS HOLDINGS, L.L.C., LIBERTY SQUARE ASSET MANAGEMENT, L.L.C., WGL CAPITAL CORP., WARREN G. LICHTENSTEIN, THOMAS J. NIEDERMEYER, JR., and CLAIRE A. WALTON, Defendants.

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Civil Action No. 4030-CC

OPINION Date Submitted: January 13, 2010 Date Decided: March 16, 2010

Collins J. Seitz, Jr., David E. Ross, and Ryan P. Newell, of CONNOLLY BOVE LODGE & HUTZ LLP, Wilmington, Delaware; OF COUNSEL: Reid M. Figel, David L. Schwarz, and Kelly P. Dunbar, of KELLOGG, HUBER, HANSEN, TODD, EVANS & FIGEL, P.L.L.C., Washington, D.C., Attorneys for Plaintiff. Edward McNally, Lewis H. Lazarus, and Jason C. Jowers, of MORRIS JAMES LLP, Wilmington, Delaware; OF COUNSEL: Howard J. Kaplan, Lisa C. Solbakken, and Sara Welch, of ARKIN KAPLAN RICE LLP, New York, New York, Attorneys for Defendants.

CHANDLER, Chancellor

This is round two of a bout between sophisticated, experienced parties who have woven a complex web of overlapping contracts, agreements, and duties that the Court must now untangle and interpret in order to make sense of who among these sophisticated parties owes whom what. Plaintiff seeks money he alleges defendants owe to him pursuant to a limited liability company agreement. In an April 15, 2009 Memorandum Opinion, 1 I dismissed the bulk of plaintiff's claims against defendants. 2 On April 29, 2009, defendants filed their counterclaims

against plaintiff. The counterclaims include misappropriation of trade secrets, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and breach of contract. 3 On June 16, 2009, plaintiff moved to dismiss some, not all, of defendants' counterclaims under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Specifically, plaintiff moved to dismiss in their entirety the breach of the implied covenant counterclaim and the breach of contract counterclaim, and to dismiss in part or in full the breach of fiduciary duty

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Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872 (Del. Ch. 2009). The dismissed claims include: 1) breach of contract for improper tax allocation; 2) tortious interference with contract; 3) tortious interference with prospective economic advantage; 4) breach of the implied covenant of good faith and fair dealing; 5) conversion; 6) unjust enrichment; and 7) civil conspiracy. I dismissed these claims under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted, though I declined to dismiss plaintiff's breach of contract claims. 3 Defendants also ask me, on the grounds of a drafting error, to reform one section of the limited liability company agreement. That request is not related to the motion presently before the Court.

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counterclaim. For the reasons set forth below, I grant plaintiff's motion to dismiss in full. I. BACKGROUND 4 In 2001, defendants Thomas J. Niedermeyer, Jr. and Warren G. Lichtenstein formed non-party Steel Partners Japan Strategic Fund, L.P. ("Feeder Fund") 5 and non-party Steel Partners Japan Strategic Fund (Offshore), L.P. ("Master Fund") 6 in an effort to bring their investment experience and activist investor strategy to Japan. The Funds 7 applied an investment strategy of accumulating equity in

strategically targeted Japanese companies (specifically, small- to mid-size, publicly traded corporations), and applying an activist investor approach to managing those investments. The Master Fund was to serve as the principal investment vehicle for making investments in Japanese companies, and the Feeder Fund was structured to serve as a vehicle for United States investors to invest in the Master Fund. At the time of forming the Funds, Lichtenstein had already established a successful track
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The facts herein are drawn from defendants' Answer and Verified Counterclaims and ThirdParty Complaint, including those facts initially asserted in plaintiff's Complaint and admitted to in defendants' Answer, and are assumed true for the purposes of plaintiff's motion to dismiss counterclaims. 5 The Feeder Fund is a Delaware limited partnership, and its principal place of business is Boston, Massachusetts, at the offices of defendant Liberty Square Asset Management, LLC. I refer to the operative legal document for the Feeder Fund as the "Feeder Fund Agreement." 6 The Master Fund is a partnership formed under the laws of the Cayman Islands. As is the Feeder Fund, the Master Fund is based principally in Boston, Massachusetts, at the offices of defendant Liberty Square Asset Management, LLC. I refer to the operative legal document for the Master Fund as the "Master Fund Agreement." 7 I refer to the Feeder Fund and the Master Fund collectively as the "Funds," and to the agreements governing them as the "Fund Agreements."

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record as an activist shareholder in the United States, and Niedermeyer had successfully invested in Japanese companies for many years. Soon after establishing the Funds, Niedermeyer and Lichtenstein formalized a relationship with two Japanese investment bankers: non-party Yusuke Nishi and plaintiff Kenzo Kuroda. Nishi had approached Niedermeyer and Lichtenstein to inquire about the possibility of working with them on the new Funds. Nishi also recommended to Niedermeyer and Lichtenstein that they bring in as a consultant Kuroda, with whom Nishi had previously worked. At that time, Kuroda was an investment banker with no experience managing investments or operating an investment fund, though he had spent the majority of his career evaluating Japanese companies and developing acquisition strategies for senior Japanese executives. The relationship between Niedermeyer, Lichtenstein, Nishi, and Kuroda was governed by a series of agreements and contracts that formed a complex web of interrelated companies and partnerships. The purposes of this web were to

establish a regulatory- and tax-efficient structure and to manage and provide investment advice to the Funds.

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First, defendant SPJS Holdings, LLC ("SPJS Holdings") 8 was created to serve as the Funds' General Partner. At the time of its creation, there were four members of SPJS Holdings: defendant Liberty Square Asset Management, LLC ("Liberty Square"); 9 defendant WGL Capital Corp. ("WGL"); 10 Nishi; and Kuroda. Liberty Square and WGL were designated as Class A Managing

Members of SPJS Holdings and, thus, were directly responsible for the operation and management of the Master Fund. 11 Nishi and Kuroda were designated as Class A Non-Managing Members. Kuroda did not contribute any capital to SPJS Holdings or the Funds at the time of their inception, nor did he bring any investors to the Funds at the time of the Funds' inception or at any point thereafter. Given his designation as a Non-Managing Member of SPJS Holdings, Kuroda had no decision-making authority in connection with the Funds or SPJS Holdings. It is worth noting here, that pursuant to their understanding of the terms of various agreements involved with the establishment of SPJS Holdings and the Funds, between 2002 and 2006 some of the Steel Partners Entities--that is, Managing

SPJS Holdings is a Delaware limited liability company, and its principal place of business is Boston, Massachusetts, at the offices of defendant Liberty Square Asset Management, LLC. I refer to the operative legal document for SPJS Holdings as the "LLC Agreement." 9 Liberty Square is a Delaware limited liability company founded in 1998 by Niedermeyer and three other individuals, including Claire Walton. Walton is a named defendant in this case. 10 WGL is a Colorado corporation formed by Lichtenstein, who currently is the Chairman of WGL. 11 SPJS Holdings, Liberty Square, and WGL are referred to herein collectively as the "Steel Partner Entities."

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Members of SPJS Holdings--pursued other investment activities and managed other investment funds outside the Steel Partners web. 12 Next, non-party Steel Partners Japan Asset Management ("SPJAM") was created to be the investment manager of the Funds. Under a Management

Agreement, SPJAM assumed the primary duty of providing investment advice to SPJS Holdings, the General Partner of the Master Fund. In return for these

management services, SPJAM was paid a per annum fee based on the total amount of assets under management in the Master Fund. In meeting its management and advisory obligations to the Master Fund, SPJAM utilized the consulting services of non-party Steel Partners Japan, K.K. ("SPJ-KK"), a Japanese corporation in which Kuroda and Nishi each were 50% shareholders. At the beginning of 2002, SPJ-KK entered into a Consulting

Agreement with SPJAM. Under this Consulting Agreement, SPJ-KK agreed to act as a consultant to SPJAM in connection with SPJAM's role as investment manager to the Funds, in exchange for a consulting fee. It was through SPJ-KK that Kuroda provided consulting and investment analyst services to SPJAM. As part of these services, Kuroda identified and analyzed potential investment opportunities, performed due diligence on potential investment opportunities, provided updates

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It is not clear to what extent, if any, these external activities occurred in Japan, or if they were investment endeavors in other countries. At this point in the narrative, however, that distinction seems to lack import.

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on portfolio companies from an analyst's perspective, analyzed the proposed terms and structure of investment transactions, and assisted in communications with the Japanese companies in which the Funds invested or considered investing. In the course of performing these services, Kuroda worked as a trusted consultant to the Funds' investment manager. Kuroda's role and responsibilities exposed him to high-level proprietary and confidential information relating to the Steel Partners Entities, including but not limited to: (i) investor lists; (ii) information about Fund investors (including key contact people, decision-makers, preferences, and risk history); (iii) prospective investment opportunities; and (iv) information about the unique investment and market strategies applied by the Steel Partners Entities on behalf of the Funds. This high-level proprietary and confidential information was unknown to Kuroda prior to his relationship with the Steel Partners Entities, and was acquired by him solely in his role as a trusted consultant to SPJAM. In recognition of the critical nature of the confidential information to which Kuroda would be exposed, the parties had crafted the Consulting Agreement between SPJAM and SPJ-KK such that it contained a confidentiality provision. That confidentiality provision required SPJ-KK to maintain the confidentiality of any information obtained in connection with its consulting services. Additional confidentiality was required by other documents, including the Funds' partnership documents, the subscription

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documents executed by investors in the Funds, and the Management Agreement between SPJAM and the Master Fund. There were two channels through which Kuroda was to receive compensation for his business role in this web of corporate entities and contractual agreements. First, as a Class A Non-Managing Member of SPJS Holdings, Kuroda was entitled to receive personally 16-2/3% of the Incentive Allocation 13 allocated annually to SPJS Holdings' account with the Master Fund, subject to the agreements governing the Funds and their general partner, SPJS Holdings. Second, as a shareholder of SPJ-KK, Kuroda received his pro rata portion of the fees paid by SPJAM to SPJ-KK, pursuant to the Consulting Agreement. In 2003 and 2004, the Funds achieved net profits of approximately 22.3% and 30.0%, respectively. During this time period, Kuroda's Incentive Capital Account was credited with the full amount of his share of the Incentive Allocation credited to SPJS Holdings by the Funds. Also during this time period, Kuroda requested and received distributions from SPJS Holdings of approximately $26.3 million. In 2005, conflict and tension arose. Kuroda stated to Lichtenstein and

Niedermeyer that the Funds should abandon their activist investment strategy in
This allocation is a common tool used by hedge funds and other investment vehicles to create incentives for a general partner and its affiliates to generate significant returns for an investment fund. Kuroda's share of the Incentive Allocation would be deposited in his personal Incentive Capital Account at SPJS Holdings.
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Japan, a strategy that Kuroda alleged had become more aggressive over time but that in fact had been known to Kuroda at the time he came to the Funds and that had remained consistent since the time of the Funds' formation. Kuroda also took issue with a decision to waive the management and incentive fees for Steel Partners II, an investment fund controlled by WGL. Steel Partners II had made an early investment in the Funds--an investment that was instrumental in getting the Funds off the ground--and the fees on Steel Partner II's investment were waived so as to avoid double charging the investors in that fund. Tension continued into 2006, as did Kuroda's stated disagreement with defendants' approach to activist investing in Japan. On or about May 13, 2006, Kuroda abruptly informed representatives of SPJAM, who were also representatives of the Steel Partners Entities, that he was resigning as a consultant to SPJAM and leaving to pursue other business opportunities. He advised

defendants that he intended to establish his own fund. Kuroda also informed the SPJAM representatives that he had hired an employee of SPJAM, Gordon Ho ("Ho"), and an employee of SPJ-KK, Tomomi Sukagawa ("Sukagawa"), to assist him in his new endeavors. For a brief period after Kuroda made these announcements, his departure was treated as amicable, although defendants did express concern about the impact that Kuroda's departure and the circumstances of his departure would have on the

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Funds' investors. Specifically, Walton expressed concern that Kuroda's departure and the circumstances surrounding it could trigger a loss of investor capital. On or about May 16, 2006, Walton sent Kuroda an email that included a draft communication to investors, which was to serve the purpose of explaining Kuroda's departure to the Funds' investors. On or about May 22, 2006, Walton and Kuroda met to discuss the terms of Kuroda's withdrawal. A few weeks thereafter, in early June 2006, non-party Yoshiaki Murakami, the founder of M&A Consulting, another activist investment fund in Japan, was arrested for insider trading. Murakami's fund was shut down. Lichtenstein, Niedermeyer, and Walton approached Kuroda and asked that Kuroda take steps to mitigate any adverse impact resulting from Kuroda's departure. 14 Several weeks later, on or about June 26, 2006, Kuroda received a written proposal relating to his withdrawal. Kuroda formally ceased performing any consulting services as of June 30, 2006. During the May discussions with Walton, Kuroda had requested payment of all amounts held in his Incentive Capital Account at SPJS Holdings. Pursuant to Kuroda's request, 90% of that amount was paid to Kuroda within 45 days, and the total payment--that is, the 90% within 45 days and the remaining 10%--was to be

After a reading of defendants' Answer, it is not entirely clear to me what impact, if any, Murakami's arrest had on defendants' interactions with Kuroda. I simply have included it here because plaintiff included it in his narrative and indicates it had some influence on interactions between the parties, and defendants' Answer does not clearly deny any such influence.

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approximately $6.3 million. 15 Yet that is where any amicability seems to have ended. Although Kuroda had told defendants he intended to establish his own fund, it was not clear to defendants that Kuroda intended to launch a fund that would compete directly with the Funds. That is in fact what happened, however. In or about May 2006, Kuroda formed Fugen Capital Management LLC ("Fugen"), an investment fund that applies an investment strategy substantially similar to the strategy applied by the Steel Partners Entities on behalf of the Funds. It is solely as a result of information and strategies shared with Kuroda in his position as a consultant to SPJAM that Kuroda allegedly was able to learn this investment strategy. Furthermore, Kuroda surreptitiously used the office infrastructure and resources (for example, fax machines, Internet access, and telephones) of the Steel Partners Entities to establish Fugen before he departed the Steel Partners Entities. And, at the time of Ho's departure from SPJAM and before Ho began working

The language of plaintiff's Complaint seems to indicate that the total value of Kuroda's Incentive Capital Account was $6.3 million, rather than $6.3 million being the 90% payout from the account. Defendants' Answer does not seem to dispute the former interpretation, though the sentence structure in the Answer could be read to mean either of the two. See Defs.' Answer and Verified Counterclaims and Third-Party Complaint, 9 ("Admit that during these discussions, Kuroda requested payment of all amounts held in his Incentive Capital Account at SPJS Holdings, and that 90% of this amount was paid to him within 45 days of the request, for a total payment of approximately $6.3 million.") This question of fact is not material to the motion before the Court; rather, I have selected one possible interpretation from defendants' Answer and simply note it here as a point for future clarification.

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with Kuroda at Fugen, Ho downloaded his contacts list from his SPJAM work computer, a list that contained information regarding the Funds' investors. In July 2006, approximately two months after Kuroda last performed any real service as a consultant to SPJAM, SPJS Holdings was advised by various Fund investors that Kuroda had solicited those investors both before and after the time of his departure from the Steel Partners Entities. As part of those

solicitations, Kuroda informed the Fund investors that as of July 1 he had withdrawn as Co-Founding Partner of Steel Partners Japan Strategic Fund. 16 In reality, Kuroda had nothing to do with structuring the Funds, formulating the strategy to be applied by the Funds, or recruiting the Funds' initial investors. Yet by describing his role as that of a Co-Founding Partner, Kuroda had exaggerated his own contributions to the Funds, and thereby had created a misleading impression as to the significance of his departure from SPJS Holdings. In an attempt to convince Fund investors and various third parties to join Fugen, Kuroda also falsely disparaged the Steel Partners Entities' investment strategy and management. As a result of this disparagement, marketplace rumors began to surface that Kuroda had withdrawn from SPJS Holdings because the activist investment strategy it employed had become unduly aggressive. Subsequently and
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The description Kuroda offered the Funds' investors is false. He was not permitted to withdraw from SPJS Holdings except with the consent of, and on such terms as were approved by, all of the other Class A Members of SPJS Holdings. Such approval had not been secured as of the date of Kuroda's communications to investors.

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consequently, certain of the Funds' investors became concerned about the future of the Funds. This concern first created a significant distraction for SPJS Holdings and required its Managing Members to devote substantial time and effort responding to investor inquiries. The concern ultimately resulted in several

investors leaving the Funds at the close of 2006. Upon learning that Kuroda had misappropriated their confidential investor list and had begun contacting the Funds' investors, the Steel Partners Entities sent a cease-and-desist letter to Kuroda. The letter advised Kuroda that he and his agents were in unlawful possession of, and had unlawfully used, confidential trade secret information belonging to the Steel Partners Entities, including the confidential investor list. The letter further demanded that Kuroda: (i) immediately return the misappropriated investor list and all copies or extracts thereof, and any other confidential, proprietary, or trade secret information relating to the Steel Partners Entities, whether maintained electronically or otherwise; (ii) cease and desist using information derived from the confidential investor list; and (iii) cease and desist any further solicitation of business from the Funds' investors. Kuroda refused that request and to this date has not returned any confidential information. As part of this souring of relations, no additional payments have been made to Kuroda. The remaining 10% of Kuroda's Incentive Capital Account at SPJS Holdings was to be paid to Kuroda after a 2006 audit of the Master Fund. That

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audit was completed no later than May 2007. The Master Fund reported net profits in 2006, and, in accordance with the Master Fund Agreement, Incentive Allocations were credited to SPJS Holdings based upon those profits. Although a 2006 audit has been completed and Incentive Allocations have been credited to SPJS Holdings, SPJS Holdings has yet to pay Kuroda that amount withheld from the payment he received within 45 days of his May 2006 request. Defendants deny that Kuroda is entitled to receive any additional amounts under the SPJS Holdings LLC Agreement. Any previous payments to Kuroda notwithstanding, defendants also deny Kuroda has the right to withdraw from SPJS Holdings without the consent of all of the remaining Class A Members. Defendants filed counterclaims against Kuroda on April 29, 2009. Relevant now are the counterclaims of: 1) misappropriation of trade secrets; 2) breach of fiduciary duty, via the use of the Steel Partners Entities' infrastructure, solicitation of employees of the Steel Partners Entities' affiliates, and the use of confidential information regarding the Funds' investors to solicit those investors on behalf of Fugen; 3) breach of the implied covenant of good faith and fair dealing, via use of SPJS Holdings' and the Funds' confidential information to solicit the Funds' investors on behalf of Fugen and via disparagement of SPJS Holdings and its management; and 4) breach of contract, via the appropriation and use--for Kuroda's own benefit--of confidential information belonging to or relating to

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SPJS Holdings and the Funds, all in violation of the confidentiality provisions in the Master Fund and Feeder Fund Agreements. Defendants seek compensatory and punitive damages for Kuroda's willful wrongdoing, a declaration that the Steel Partners Entities owe no further amounts to Kuroda under the SPJS Holdings LLC Agreement, and injunctive relief compelling Kuroda to return all confidential information belonging to the Steel Partners Entities and prohibiting any further use or disclosure of that information. On June 16, 2009, plaintiff moved to dismiss some, not all, of defendants' counterclaims under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Specifically, plaintiff moved to dismiss in their entirety the breach of the implied covenant of good faith and fair dealing counterclaim (Count III) and the breach of contract counterclaim (Count IV), and to dismiss in part the breach of fiduciary duty counterclaim (Count II). At oral argument, both sides modified their respective arguments relating to the breach of fiduciary duty counterclaim. First, in light of an October 28, 2009 Court decision 17 issued by Vice Chancellor Parsons in an unrelated case, Kuroda withdrew his argument that defendants' trade secret counterclaim--via the

Petroplast Petrofisa Plasticos S.A. v. Ameron Intern. Corp., 2009 WL 3465984 (Del. Ch. Oct. 28, 2009) (holding that, under California law, a common law misappropriation claim is not preempted by California's Uniform Trade Secrets Act when litigation is in its early stages and it remains uncertain whether the information in question was in fact a trade secret).

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Delaware Uniform Trade Secrets Act 18 --preempts their fiduciary duty counterclaim. Rather than continue to argue preemption, Kuroda conceded to postpone the preemption issue until later in these proceedings when it is clearer whether, assuming information had been taken, the information taken was in fact a trade secret. At oral argument, Kuroda next asserted that because defendants' own fiduciary duty counterclaim was based upon the consulting relationship between Kuroda (via SPJ-KK) and SPJAM, 19 the operative agreement should be the Consulting Agreement, which contains a provision that mandates arbitration in Tokyo. 20 Plaintiff had not made this argument in the briefs supporting his motion to dismiss counterclaims. Faced with this new argument, defendants responded that the basis for their fiduciary duty counterclaim is much broader than the terms of the Consulting Agreement between SPJAM and SPJ-KK. Specifically, as

reflected in other sections of defendants' counterclaims, Kuroda had a "central role

6 Del. C.

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