On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-8232-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Fisher, Sapp-Peterson and Fasciale.
Plaintiffs, Richard L. Clarkson, Trustee of the Lucille S. Ball Revocable Trust and Trustee of the Clarkson Trust, Duane Clarkson and Joseph Nitti, (hereinafter collectively referred to as "plaintiffs"), are investors who appeal the judgment entered by the court, following a trial on stipulated facts, dismissing their amended complaint filed against defendant, VioQuest Pharmaceuticals, Inc. ("VioQuest"). We affirm.
The parties waived a jury trial and proceeded to a bench trial on the following stipulated facts. VioQuest is a publicly-held biotechnology company specializing in drug development in the areas of oncology and antiviral diseases and disorders. It was incorporated in Delaware, with its principal place of business in New Jersey. On June 20, 2007, it issued a Private Placement Memorandum (PPM), in which it offered to sell between $1 million and $3.5 million in Senior Covertible Promissory Notes ("Notes"). Key provisions of the PPM cautioned investors that "purchase of our Securities entails a high degree of risk. No investment in the Securities offered hereby should be made by any person who is not in a position to lose the entire amount[.]" The PPM further cautioned that "[i]nvestors should be aware that they will be required to bear the financial risks of this investment for an indefinite period of time."
The PPM also cautioned potential investors that VioQuest has "a history of losses" and intends "to sell our only revenue generating assets[.]" The PPM further disclosed that since inception, VioQuest has "incurred an accumulated deficit of $31,058,000 as of March 31, 2007, and for the three months end[ing] March 31, 2007[,] we had losses from continuing operations of $2,256,000." The PPM disclosed that VioQuest has "had negative cash flows from operations and may not be able to generate sufficient cash to service all of our indebtedness, including the Notes." The PPM further indicated that "we will need to secure additional funding . . . in order for us to be in a position to pay the principal and accrued interest when due under the Notes, if the Notes have not previously converted into our common stock or other securities in accordance with the terms thereof."
Thereafter, between June 29 and July 3, 2007, VioQuest issued $3.7 million in Notes to forty investors, including plaintiffs, who, collectively, held notes totaling $210,000 in principal and interest. Plaintiffs entered into four contracts, representing their respective Notes. Other than the amounts, the terms of the Notes were identical. The critical portions of the Notes relevant to the issues before the court were:
1. Principal and Interest.
VIOQUEST . . . for value received, hereby promises to pay to the order of [Noteholder] . . . in lawful money of the United States of America . . . the principal amount of . . . together with interest as set forth below.
The Company promises to pay interest, compounded semi-annually, on the unpaid principal amount from the date hereof until such principal amount is paid in full at the rate of eight percent (8%), or such lesser rate as shall be the maximum rate allowable under applicable law . . . . Unless converted or prepaid earlier as set forth below, all unpaid principal and unpaid accrued interest on this Note shall be due and payable on the first anniversary of the final closing of the Company's sale of Bridge Notes (as defined below) (the "Due Date"). .
2.1 All unpaid principal and accrued unpaid interest on this Note shall be automatically converted into units of the Company's equity securities . . . issued in the Company's next equity financing (or series of related equity financings) involving the sale of Securities in which the Company receives at least $7,000,000 in gross aggregate cash proceeds . . . (a "Qualified Financing") . . . .
2.2 Immediately prior to the occurrence of a Sale of the Company (as defined below), all unpaid principal and accrued unpaid interest on this Note shall be automatically converted into shares of the Company's Common Stock . . . .
2.3 Upon conversion of this Note in accordance with the terms of Sections 2.1 and 2.2, the applicable amount of outstanding principal and accrued unpaid interest of the Note shall be converted without any further action by the Holder and whether or not the Note is surrendered to the Company or its transfer agent. . . .
10. No Dilution or Impairment. The Company will not, by amendment of its Certificate of Incorporation or Bylaws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Note against dilution or other impairment.
11. Waivers. . . . This Note is being delivered in and shall be construed in accordance with the laws of the State of New York, without regard to ...