Sabby Volatility Warrant Master Fund Ltd. v. Jupiter Wellness, Inc.

Background

Sabby Volatility Warrant Master Fund Ltd. sued Jupiter Wellness, Inc., alleging losses arising from Jupiter’s planned distribution of shares in its subsidiary, SRM Entertainment, Inc. Jupiter’s board initially set July 7, 2023, as the record date for distributing 2,000,000 SRM shares to eligible Jupiter shareholders. Jupiter’s public announcements also stated that the distribution was expected around July 12, while warning that the transaction and its timing could change.

Jupiter later delayed the distribution several times but continued stating that the record date would remain July 7. The distribution ultimately occurred on or about August 15, 2023, with August 14 identified as the record date. An August 21 filing stated that the shares had been distributed based on the July 7 record date, creating an inconsistency in Jupiter’s public disclosures.

Sabby alleged that it held 1,413,940 Jupiter shares on July 7 and would have received approximately 73,072 SRM shares if that date had remained effective. After July 7 and before August 14, Sabby sold its Jupiter shares and accumulated a short position of approximately 1,713,986 shares. Sabby alleged that it did not receive the SRM distribution and had to buy SRM shares to cover liabilities connected to its short position, causing total economic losses estimated to exceed $500,000.

Claims and Governing Law

Sabby’s amended complaint asserted four state-law causes of action: breach of contract, promissory estoppel, negligent misrepresentation, and negligence. Jupiter moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), which permits dismissal for lack of subject-matter jurisdiction, including lack of standing, and Rule 12(b)(6), which permits dismissal when a complaint does not plausibly state a legal claim.

Because the case was based on diversity jurisdiction, the court applied New York’s choice-of-law rules. The parties agreed, or at least did not dispute, that Delaware law governed, so the court applied Delaware law.

Standing and the Contract Claim

The court explained that under Delaware law, a former shareholder may continue to pursue a personal claim based on an injury suffered individually. But a claim tied to the ownership of the stock itself generally travels with the stock when it is sold.

Sabby’s contract claim relied on Section 6.9 of Jupiter’s bylaws, which required Jupiter to provide a declared dividend to holders as of the record date rather than to later transferees. The court held that claims based on corporate bylaws concern rights associated with the stock and are not personal claims. Because Sabby sold its Jupiter shares, it lost standing to pursue that claim. The court therefore dismissed the breach-of-contract claim for lack of standing.

The court reached a different conclusion for the other three claims. Those claims alleged that Sabby was individually harmed by allegedly false public statements and by its reliance on those statements. The court held that Sabby had standing to pursue the promissory-estoppel, negligent-misrepresentation, and negligence claims, even though it had sold its shares.

Promissory Estoppel

Under Delaware law, promissory estoppel requires a definite promise, an expectation that the promise would induce action or inaction, reasonable reliance causing detriment, and a need to enforce the promise to avoid injustice.

The court dismissed this claim because Jupiter’s public statements did not amount to an enforceable promise made to Sabby. The statements were directed to the public and included warnings that the spin-off might not occur and that its timing and terms could change. Those warnings also made Sabby’s alleged reliance on July 7 as a fixed record date unreasonable. The court dismissed the promissory-estoppel claim under Rule 12(b)(6).

Negligent Misrepresentation

A negligent-misrepresentation claim under Delaware law requires, among other things, a duty to provide accurate information, false information supplied without reasonable care, and a financial loss caused by justifiable reliance. The court also explained that public statements generally do not create the special relationship or special duty required for this claim.

The court held that Sabby did not plausibly allege such a special relationship either as a Jupiter shareholder or as an investor who shorted Jupiter’s stock. The court further held that Sabby did not plausibly allege justifiable reliance because Jupiter’s announcements warned that the transaction might not occur and that its timing could change. The prospectus issued after the distribution could not support reliance because it was issued after Sabby’s alleged investment decisions. The court dismissed the negligent-misrepresentation claim under Rule 12(b)(6).

Negligence

Sabby alleged that Jupiter failed to use reasonable care when distributing the SRM shares and failed to alert relevant entities promptly about the record date. Under Delaware law, negligence requires a duty of care, a breach, an injury, and a causal connection between the breach and injury.

The court rejected Sabby’s argument that Jupiter owed shareholders a fiduciary duty of care and candor. Under Delaware law, corporations do not owe fiduciary duties to their shareholders; those duties are owed by directors and officers. The court stated that a corporation may potentially face liability for misleading disclosures under a fraud-based theory, including negligent misrepresentation, but it had already found Sabby’s negligent-misrepresentation claim deficient. Because Sabby did not plausibly allege that Jupiter owed a duty of care to its former shareholders or to investors who shorted its stock, the court dismissed the negligence claim under Rule 12(b)(6).

Disposition

The court granted Jupiter’s motion to dismiss the amended complaint in full. It dismissed the breach-of-contract claim for lack of standing and dismissed the promissory-estoppel, negligent-misrepresentation, and negligence claims on the merits under Rule 12(b)(6). The clerk was directed to terminate pending motions, terminate remaining dates, and close the case. The opinion does not state that the dismissal was with or without prejudice.