Motion for Summary Judgment in VERTICAL HOLDINGS, LLC vs. LOCATORX, INC.| Trellis.Law

On March 13, 2020 a Motion,Ex Parte was filed involving a dispute between Vanguard Financial Trust, Vertical Holdings, Llc, and Locatorx, Inc., for OTHER CONTRACT in the District Court of Dallas County.

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FILED
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10/1 2/2020 12:50
FELICIA PITRE
DISTRICT CLERK
DALLAS CO., TEXAS
Margaret Thomas DEPUTY

CAUSE NO. DC-20-04237

VERTICAL HOLDINGS, LLC, and IN THE DISTRICT COURT
VANGUARD FINANCIAL TRUST,
Former Plaintiff/Counter-
Defendant, OF DALLAS COUNTY, TEXAS
WOODOODWOODOODWOODWDWOODWD

LOCATORX, INC, E- 1 O 1 STJUDICIAL DISTRICT

Former Defendant/Counter—
Plaintiff.

COUNTER— PLAINTIFF LOCATORX, INC.'S
MOTION FOR SUMMARY JUDGMENT
Pursuant to Texas Rule of Civil Procedure 166(a), Counter—Plaintiff LocatorX, Inc.

("Locator ") hereby moves for summary judgment as t0 Count 1 of its Third Amended

Counterclaim, a claim for declaratory judgment, and as to its claim for attorneys' fees based on

Counter—Defendants Vertical Holdings, LLC ("Vertical") and Vanguard Financial Trust's

("Vanguard") (collectively, "Plaintiffs" or "Counter-Defendants") strategic ﬁling of a nonsuit to

avoid an unfavorable judgment. For the reasons explained below, the Court should grant

LocatorX's motion and enter judgment for LocatorX.

I. SUMMARY OF THE ARGUMENT
Texas courts have long disfavored the procedural gamesmanship embodied by ﬁling a

nonsuit t0 avoid an unfavorable ruling 0r judgment. Epps v. Fowler, 351 S.W.3d 862, 870

(TeX. 201 1; Severs v. Mira Vista Homeowners Ass’n, Ina, 559 S.W.3d 684, 711 (TeX. App. 2018),

review denied (Feb. 1, 2019). LocatorX has brought this motion for summary judgment because

Vertical and Vanguard have unfortunately chosen to pursue that disfavored strategy.

Indeed, Vertical and Vanguard nonsuited their claims against LocatorX just two days after a

COUNTER— PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT — Page 1
summary judgment hearing, and the day before this Court had said that it would rule on pending

motions for summary judgment. Worse still, and to make their procedurally improper tactics even

more clear, Vertical and Vanguard filed an almost identical suit in federal court within hours of

nonsuiting their claims before this Court.

Vertical and Vanguard's transparent forum shopping may have terminated their claims

before this Court, but it has not left this Court powerless to resolve this dispute, or to sanction

Vertical and Vanguard's improper conduct. Indeed, as a matter of Texas law, the nonsuit has no

effect on any of LocatorX's affirmative claims for relief, which include LocatorX's counterclaims

and its claims for an award of attorneys' fees. As such, this Court still can decide the very same

legal issues that were about to be resolved before Vertical and Vanguard nonsuited on the eve of

a summary judgment ruling. The Court also retains jurisdiction to award fees to LocatorX. An

award of fees to LocatorX is especially "equitable and just" after Vertical and Vanguard forced

LocatorX and the Court to expend substantial time and effort on this case, only to dismiss and re-

file it when things did not go their way.

Thus, as explained further below, the Court should grant summary judgment to LocatorX.

II. STATEMENT OF FACTS

Defendant relies on the following summary judgment evidence attached hereto:

1. Declaration of Bruce Candebat, Exhibit 1 hereto;
2. Amended and Restated Subscription Agreement dated August 12, 2017
("Subscription Agreement") (Exhibit 2 hereto);
3. Vertical's Responses to LocatorX's Request for Admissions (the "RFA Response")
(Exhibit 3 hereto);
4. Vertical's Responses to Locator X's Interrogatories (the "Interrogatory Response")
(Exhibit 4 hereto);
5. Complaint, Vertical Holdings, LLC and Vanguard Financial Trust v. LocatorX,
Inc., Case No. 3:20-cv-02770-N, in the United States District Court for the
Northern District of Texas, Dallas Division (Exhibit 5 hereto)
6. Declaration of David Meadows (Exhibit 6 hereto); and
7. Affidavit of Eric G. Calhoun, (Exhibit 7 hereto).

COUNTER- PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT – Page 2
LocatorX was founded in 2014 and is in the business of providing integrated tracking,

validation, and security platform services to businesses and other entities. (EX. 1 hereto, Candebat

Dec., ﬂ 3.) In 2017, LocatorX made a "bridge offering" 0f securities designed to raise capital until

the Company could make an initial public offering pursuant to Regulation A under the federal

securities law. (EX. 2 hereto, Agreement, § 2(c)(i).) That "bridge offering" took the form of the

sale of Series C preferred shares (the "Preferred Shares" 0r "Preferred Stock") marketed only to

"accredited investors" — i.e.,those with signiﬁcant ﬁnancial assets and investment experience.

(Id. § 6(a).)

A. The Subscription Agreement

On August 12, 2017, Vertical and Vanguard each purchased 200,000 Preferred Shares at a

price of $1.50 each, for a total of $300,000.00. (Plaintiffs' Second Amended Petition, 1]7; EX. 3

hereto, RFA Response, N0. 5.) Vertical and Vanguard's purchases were made pursuant t0 nearly

identical written Subscription Agreements. (EX. 3 hereto, RFA Response, Nos. 1-2; P1f.'s Second

Amended Petition, 117.).As part 0f the Agreement, Vertical and Vanguard certiﬁed in writing that

they were accredited investors With over $5 million in assets. (EX. 2 hereto, Agreement, § 7(j) and

App. 1.) The Agreement memorialized the fact that the Preferred Shares were a part 0f a "bridge

offering" designed t0 provide LocatorX with capital until the company could raise additional funds

through an initial public offering of securities pursuant t0 regulation A 0f the Securities Act 0f

1933. (Id.,§ 2(c)(1).) The Agreement also made clear that investing in the Preferred Shares carried

a "high degree 0f risk." (Id., § 2(0).)

The Agreement provides that Preferred Shares were convertible to common stock "at the

option of the holder." (1d,, Exhibit A, § 6(a).) Any shares not converted would automatically be

redeemed at $3.00 per share from ﬁmds raised through an initial public offering, or other future

COUNTER— PLAINTIFF LOCATORX, INC.’S MOTION FOR SUMMARY JUDGMENT — Page 3
sales 0f securities, if any, which the Agreement deﬁned as "Subsequent Securities Sales."

(Id., Exhibit A, § 7(a)(i).) The Agreement speciﬁes that redemptions would take place upon the

closing 0f each new Subsequent Securities Sale and required LocatorX to use speciﬁed percentages

0f proceeds from those Sales to redeem Preferred Shares at a price 0f $3.00 each. (1d,, Exhibit A,

§ 7(a)(ii)-(iv).) The Agreement also provided that "the Company Will not have the cash available

t0 honor the redemption right set forth in the Preferred Designation if the IPO is not completed,

and in such case investors will be dependent 0n the Company generating patent royalties or raising

additional ﬁnancing in order t0 satisfy the redemption right." Id. § 2(c)(i). Vertical and Vanguard

expressly represented in the Agreement that "I acknowledge and am aware that the Company has

given me no assurance that the IPO will be completed" and that "my investment involves a high

degree ofrisk." Id. § 7(a) and (b).

B. The Rovaltv Option

The Agreement includes a potential additional beneﬁt t0 Preferred Shareholders that would

be available if "the Company does not raise sufﬁcient proceeds in the IPO or from Subsequent

Securities Sales . ..to redeem 100% 0fthe Preferred Stock ..
."
(EX. 2 hereto, Agreement, § 3(g)(i);

Petition, ﬂ 8.) That potential beneﬁt is called the "Royalty Option." (Id) The Royalty Option

provided Preferred Shareholders With an option t0 purchase the right t0 receive "40% of the

royalties derived from the entire technology portfolio of the company for a total purchase price of

$1,000." (Id)

The Agreement speciﬁes that LocatorX was to sell the Royalty Option, if at all, to

"the Preferred Stock holders" as a group. (Id) That sale, ifit occurred, was t0 be made "pursuant

to" an "agreement as determined by Investors then holding a majority of the Preferred Stock."

(Id. § 3(g)(i).) The Agreement does not set forth any particular terms that are to be included in

COUNTER— PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT — Page 4
such an "agreement," other than to specify that the Royalty Option had a "total purchase price of

$1,000." (Id.) There is no provision in the Agreement for selling portions of the Royalty Option

for less than the "total purchase price" 0f $1,000. (Id)

If the Royalty Option were properly exercised, LocatorX had the right, but not the

obligation, t0 repurchase it,upon the occurrence of two conditions. Repurchase could occur "upon

redemption of 100% of the Preferred Stock," and "upon payment of the Royalty Option

Repurchase Price" (the "RORP"). (Id, § 3(g)(ii).) Per section 3(g)(ii), redemption requires

payment 0f the "Default Redemption Payment," deﬁned as the $3.00 per share redemption price

referenced above. (Id.) To the extent that Preferred Shareholders received any royalty payments,

however, the "Default Redemption Payment" was to be reduced by an equivalent amount. (See id.,

§ 3(g)(ii) ("The Default redemption Payment shall be reduced by any royalties received by the

Preferred Stock holders pursuant t0 their exercise of the Royalty option."))

With respect to "payment 0f the Royalty Option Repurchase Price," the Agreement

contains two related provisions. (Id. § 3(g)(ii).) First, as t0 timing, the Agreement refers to an

undeﬁned "royalty repurchase date," but does not set a speciﬁc deadline by Which LocatorX must

actually make any repurchase of the Royalty Option. (1d,) Second, with respect t0 the amount of

the RORP: Section 3(g)(ii) provides that the RORP is t0 be determined on a "per share" basis, and

according t0 shares 0f "preferred Stock outstanding on the royalty repurchase date." (Id.)

C. Vertical and Vanguard Attempt t0 Exercise the Rovaltv Option

On May 10, 2018, Vertical's manager Kevan Casey emailed LocatorX, saying, "Pursuant

t0 Section 3.g 0f my subscription document executed in August 2017 I am exercising my right to

acquire the royalty as deﬁned in the Agreement. Please let me know what percentage 0f the

Preferred Stockholders that I am so that I can send in the correct amount." (Plaintiffs' Second

COUNTER— PLAINTIFF LOCATORX, INC.’S MOTION FOR SUMMARY JUDGMENT — Page 5
Amended Petition, ¶10.) At the time, Vertical held approximately 31.5% of the outstanding

Preferred Shares. (Plaintiffs' Second Amended Petition, ¶ 11.) Shortly after Mr. Casey sent the

email inquiring about the Royalty Option, Vertical wired $315.79 to LocatorX. (Pl. Ex. A-3; Ex.

3 hereto, RFA Response, No. 36.) LocatorX's then-CFO responded that Vertical owned just over

31% of the outstanding Preferred Shares but did not address whether Vertical had any right to

exercise the Royalty Option without the "agreement" referenced in Section 3(g) of the Agreement,

or without payment of the full $1,000.00 purchase price. (Plaintiff's Second Amended Petition,

¶11.). Vanguard also paid that amount to LocatorX. (Plaintiff's Second Amended Petition, ¶ 11.)

When Vertical and Vanguard wired $315.79 to LocatorX, there was no agreement in place

between LocatorX and holders of a majority of the Preferred Shares with respect to the Royalty

Option. (Ex. 3 hereto, RFA Response, No. 34.) Indeed, Vertical admits that it has not, at any time

from August 12, 2017 to the present, owned a majority of shares of the Preferred Stock. (Ex. 3

hereto, RFA Response, No. 8). No agreement to memorialize a purchase of the Royalty Option

was ever proposed to LocatorX by Vertical, Vanguard, or any other Preferred Shareholder, let

alone executed by LocatorX. (Ex. 4 hereto, Interrogatory Response, No. 5 (admitting that Vertical

believed there was "no need for any additional agreement"); Ex. 3 hereto, RFA Response, No. 34.)

Thus, LocatorX never entered into a subsequent "agreement" with respect to the Royalty Option,

as Section 3(g) of the Agreement expressly contemplates and requires. (Ex. 2 hereto, Agreement,

§ 3(g)(i) and RFA Response, No. 34.) Nor did LocatorX receive the full balance of the $1,000.00

purchase price from holders of Preferred Shares. (Ex. 1 hereto, Candebat Dec., ¶ 5.) As a result,

the "total purchase price of $1,000.00" required by Section 3(g)(i) of the Agreement was never

paid. Id.

COUNTER- PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT – Page 6
In March 2020, LocatorX redeemed the last remaining Preferred Shares, including shares

owned by Vertical and Vanguard. (Ex. 1 hereto, Candebat Dec., ¶ 9; Ex. 3 hereto, RFA Response,

No. 24; Plaintiff's Second Amended Petition, ¶12.) Vertical and Vanguard accepted payment from

LocatorX and voluntarily surrendered their share certificates. (Ex. 1 hereto, Candebat Dec., ¶ 8.)

Thus, as of March 2020, Vertical and Vanguard no longer owned any Preferred Shares. (Ex. 3

hereto, RFA Response, No. 27.) Per the Agreement, all of Vertical and Vanguard's 200,000 shares

were redeemed at a per-share price of $3.00. Accordingly, in a span of less than three years,

Vertical and Vanguard received $600,000.00 in cash from LocatorX, doubling their initial

investments of $300,000.00. (Ex. 1 hereto, Candebat Dec., ¶ 8.)

On May 7, 2020, when no Preferred Shareholders remained, LocatorX refunded Vertical

and Vanguard's $315.79 payments. (Ex. 1 hereto, Candebat Dec., ¶ 10.) LocatorX made Vertical

aware of the refund via email, in which LocatorX stated:

[T]he Subscription Agreement requires that any sale of the Royalty Option be made
'pursuant to' an agreement between LocatorX and holders of a majority of the
Preferred Stock. LocatorX is not aware of the existence of any such agreement. In
addition, since Vertical wired funds in May 2018, LocatorX has not received the
balance of the Royalty Option purchase price of $1,000.00, as specified in the
Subscription Agreement."

(Ex. 1 hereto, Candebat Dec., ¶ 10.)

D. The Present Action

On March 13, 2020, Plaintiff Vertical initiated this action against LocatorX seeking a

declaratory judgment concerning its rights under a Subscription Agreement with LocatorX.

See Plf.'s Original Petition. Vertical sought a declaratory judgment that it is entitled to "receive

12.631% of LocatorX's revenue in perpetuity" by allegedly exercising a Royalty Option under the

Subscription Agreement. Plf.'s Original Petition, ¶¶ 13-16.

COUNTER- PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT – Page 7
Over the next five months, Vertical took discovery, twice amended its Petition, and

Vanguard joined the case as an additional plaintiff. See Plf.'s First Amended Petition; Plf.'s Second

Amended Petition. Throughout those amendments, Vertical and Vanguard continued to seek a

judicial declaration that they had properly exercised the royalty option and were thus entitled to

receive roughly 12.6% (each) of LocatorX's royalty income "in perpetuity." Id., ¶¶2 and 11;

Plf.'s Second Amended Petition, ¶11.

LocatorX filed a counterclaim on July 23, 2020, bringing claims against Vertical for breach

of contract, common law fraudulent inducement, statutory fraud, and attorneys' fees.

Def.'s Counterclaim, ¶¶ 36-54. On August 28, 2020, LocatorX answered Plaintiffs' Second

Amended Petition. In addition to asserting several affirmative defenses, that answer included a

"Prayer for Relief" through which LocatorX sought to "recover its reasonable attorneys' fees and

costs." At the time, Plaintiffs' Second Amended Petition included the claim for a declaratory

judgment described above. Hence, this case was brought pursuant to and at all times governed by

the Texas Declaratory Judgments Act.

Vertical and Vanguard's claims spawned significant motion practice. As described below,

Vertical and Vanguard filed three motions for summary judgment, all seeking judgment as a matter

of law on their claim for a declaratory judgment concerning the Royalty Option. In addition,

Vertical filed a motion to dismiss LocatorX's counterclaims, which remains pending before the

Court. Vertical and Vanguard also engaged in improper discovery tactics, including taking the

"deposition upon written questions" of a former LocatorX consultant, without giving notice to

LocatorX of the time or place of the deposition. Vertical submitted that "deposition" to the Court,

requiring LocatorX to file an Objection and Motion to Strike. That Objection and Motion to Strike

COUNTER- PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT – Page 8
was fully briefed and argued when Vertical and Vanguard nonsuited their claims. Vertical also

filed a motion to compel prior to nonsuiting its claims.

As noted above, over the past several months, Vertical and LocatorX filed cross-motions

for summary judgment on Vertical's claim for a declaratory judgment. Those motions were fully

briefed and argued at two hearings, first on June 29, 2020 and then on September 1, 2020.

The September 1, 2020 hearing also included argument on LocatorX's Objection and Motion to

Strike. At the conclusion of the last hearing, the Court said that it was ready to rule on all pending

motions by Friday, September 4, and directed the parties to submit proposed orders by September

3, 2020. LocatorX submitted proposed orders as directed. Vertical and Vanguard did not.

Instead, the Plaintiffs nonsuited their case on September 3, 2020. That same day, they filed a nearly

identical lawsuit in the United States District Court for the Northern District of Texas.

The federal lawsuit also brings claims for declaratory judgment and breach of contract.

(Ex. 5 hereto, Vertical and Vanguard's Federal Complaint, ¶¶19-27.) Vertical and Vanguard

request that the Court enter a declaratory judgment providing that Vertical and Vanguard are

entitled to the benefit of the Royalty Option, namely the right to receive 12.6316% each of the

royalties derived from the entire technology portfolio owned by LocatorX. (Id., ¶20.) In the

alternative, they request the Court enter a declaratory judgment that LocatorX is liable to vertical

and Vanguard for the amount of the Royalty Option Repurchase Price. (Id.) They further bring a

claim for breach of contract and request attorneys' fees. (Id., ¶¶24-29.)

Following the nonsuit, LocatorX amended its counterclaim to include a claim for

declaratory judgment that mirrors the claims initially brought by Vertical and Vanguard, which

were fully briefed and ripe for a decision by this court when the Plaintiffs chose to nonsuit their

claims rather than risk an unfavorable ruling by this court.

COUNTER- PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT – Page 9
III.

ISSUES PRESENTED

Defendant's Motion for Summary Judgment presents the following issues for decision:

1. Did Vanguard and Vertical satisfy the condition precedent to the exercise of the
Royalty Option that there was an agreement among the majority of Preferred
Shareholders to purchase 40% 0f Defendant's royalty income? [No].

Did all Preferred Shareholders Tender the $1,000.00 total purchase price that is a
condition precedent t0 the exercise 0f the Royalty Option? [N0].

Are Vertical 0r Vanguard entitled t0 a portion of any royalties earned by LocatorX?
[No].

Does the Subscription Agreement permit Vertical 0r Vanguard t0 acquire a portion
of Defendant's revenues in perpetuity? [N0].

Does the Subscription Agreement provide that LocatorX can repurchase the
Royalty Option? [Yes].

Alternatively, does the "agreement to agree" in the Royalty Option render it

unenforceable as a matter 0f law? [Yes].

Did Vertical and Vanguard's nonsuit of their claims after motions for summary
judgment were briefed and submitted, along With a ﬁnding in favor of LocatorX on
its counter—claim cause Vertical and Vanguard to be liable for LocatorX's attorneys'

fees and costs? [Yes.]

IV. ARGUMENT AND AUTHORITIES
As a matter 0f Texas law, Plaintiffs were entitled t0 nonsuit their claims at any time, and

without leave 0f court. See Tex. R. CiV. P. 162 ("At any time before the plaintiff has introduced

all of his evidence other than rebuttal evidence, the plaintiff may dismiss a case, 0r take a non-suit,

Which shall be entered in the minutes."). While a nonsuit terminates the Plaintiffs' claims against

LocatorX, it has no effect 0n any afﬁrmative claims for relief asserted by LocatorX. See Tex. R.

CiV. P. 162 (a nonsuit "shall not prejudice the right of an adverse party t0 be heard 0n a pending

claim for afﬁrmative relief."); see also Epps v. Fowler, 351 S.W.3d 862, 868 (Tex. 2011)

(recognizing that "a nonsuit does not affect any pending claim for afﬁrmative relief or motion for

COUNTER— PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT — Page 10
attorneys' fees or sanctions"). A request for attorneys' fees made in a Declaratory Judgments Act

case is a claim for afﬁrmative relief that survives a nonsuit under Texas Rule 162. Falls Cnty. v.

Perkins and Cullum, 798 S.W.2d 868, 870-71 (1990). Thus, LocatorX's counterclaims, and its

claim for attorneys' fees in its Second Amended Answer, are all "claims for afﬁrmative relief" that

are unaffected by the nonsuit and may be decided by this Court.

LocatorX's claim for declaratory judgment raised in its Third Amended Counterclaim has

been fully (and extensively) briefed and argued and is ripe for a decision. The Court should

therefore render a decision on the purely legal issues raised by that motion, asit was ready t0 d0

When Vertical and Vanguard nonsuited their claims. Moreover, because Vertical's and Vanguard's

purely tactical nonsuit was ﬁled for the transparent purpose of avoiding an unfavorable ruling on

the pending summary judgment motions, and an award of attorneys' fees under the Declaratory

Judgments Act would be equitable and just under the circumstances.

A. Legal Standards

1. Summary Judgment Standards

Summary judgment is proper When the movant's evidence, as a matter 0f law, either proves

all of the elements of the movant's claim 0r defense or disproves the facts of at least one element

0f the Movant's claim 0r defenses. See, e.g. Park Plaza Hosp. v. Estate ofMilo, 909 S.W.2d 508,

511 (TeX. 1995). When evaluating a motion for summary judgment, the Court (1) assumes the

truth of the nonmovant's proof; (2) makes all reasonable inferences in favor of the nonmovant; and

(3) resolves all doubts about the existence of a genuine issue 0f fact against the movant. See Little

v. TDCJ, 148 S.W.3d 374, 381 (TeX. 2004).

COUNTER— PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT — Page 11
2. Standards for Interpreting the Subscription Agreement

In order t0 be entitled t0 a declaratory judgment, a petitioner must "conclusively prove all

elements of their declaratory judgment claim as a matter of law." Wright v. Hooker, N0. 12-17-

00095-CV, 2017 WL 6350137, at *6 (TeX. App. —Tyler 2017) (Citing Rhone—Poulenc, Inc. v.Steel,

997 S.W.2d 217, 223 (Tex. 1999)). Here, LocatorX seeks a declaration concerning its

interpretation of the Agreement. Under Texas law, in interpreting a contract, "courts must enforce

contract terms as written and may not rewrite contracts 0r add t0 their language under the guise 0f

interpretation." Weaver v. Jamar, 383 S.W.3d 805, 811 (TeX. App. —Houst0n [14th Dist] 2012);

see Royal Indem. C0. v. Marshall, 388 S.W.2d 176, 181 (TeX. 1965) ("Courts cannot make new

contracts between the parties, but must enforce the contracts as written"). Further, "[i]f possible,

When interpreting a contract, we should avoid a construction that is unreasonable, oppressive,

inequitable, or absurd." Concert Health Plan, Inc. v.Houston Northwest Partners, Ltd., N0. 14—

12—00457—CV, 2013 WL 2382960 at *10 n. 13 (Tex. App. —F0rt Worth May 20, 2013); see

Pavecon, Inc. v. R-Com, Ina, 159 S.W.3d 219, 222 (TeX. App. —F0rt Worth 2005) ("[W]e Will

avoid a construction that is unreasonable, inequitable, or oppressive, or would lead t0 an absurd

result").

Under Texas law, options must be exercised in strict compliance With contractual terms.

See M7 Capital LLC v. Miller, 312 S.W.3d 214, 222 (Tex. App. —H0ust0n [14th Dist] 2010)

("[A]n option contract may be exercised only in strict compliance with the contract's terms.").

Indeed, "[a] failure t0 exercise an option according to itsterms, including a defective performance,

legally amounts t0 a rejection." Id.; see Comeaux v. Suderman, 93 S.W.3d 215, 220 (Tex. App. —

Houston [14th Dist] 2005) ("Acceptance 0f an option must be unqualiﬁed, unambiguous, and

strictly in accordance With the terms of the agreement").

COUNTER— PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT — Page 12
B. LocatorX is entitled t0 summary judgment as t0 Count 1 0f its Counterclaim,
a claim for a Declaratory Judgment

The issues set forth in LocatorX's counterclaim for declaratory judgment, on which this

motion for summary judgment is based, are precisely the same issues that were presented t0 the

Court in both previous motions for summary judgment and that were fully briefed and argued. In

its Petition, Vertical and Vanguard sought a declaratory judgment that "Vertical and Vanguard are

entitled t0 the beneﬁt of its Royalty Option, namely the right t0 receive 12.6316% each 0f the

royalties derived from the entire technology portfolio owned by LocatorX." (Plaintiffs' Second

Amended Petition, 1N 2, 9, 15.) Indeed, LocatorX's Third Amended Counterclaim seeks a

declaration that neither Vertical nor Vanguard properly exercised the "Royalty Option" set forth

in the Subscription Agreement and are therefore not entitled t0 receive any portion of LocatorX's

revenues pursuant t0 that Royalty Option. For the exact same reasons that LocatorX was entitled

t0 judgment as a matter of law With respect t0 its cross motion for summary judgement, it isentitled

t0 judgment as a matter of law here.

1. Vertical and Vanguard Have No Right to BuV a Pro Rata Share 0f the
Royalty Option

As an initial matter, Vertical and Vanguard have no right t0 buy a pro rata share 0f the

Royalty Option. The Agreement provides that the Royalty Option will be sold, only t0 the
if at all,

"Preferred Stock holders" as a group. (Ex. 2 hereto, Agreement, § 3(g)(i).) Nothing in the

Agreement permits an individual holder 0f Preferred Stock to purchase a portion of the Royalty

Option 0n a pro rata basis, as Vertical and Vanguard claim t0 have done.

In fact, multiple provisions Within Section 3(g) of the Agreement are inconsistent with

Counter—Defendants' position that they have the right to buy a pro rata share of the Royalty Option.

For example, the Agreement provides that the Royalty Option is t0 be sold, if atall, only "for a

COUNTER— PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT — Page 13
total purchase price of $1,000." (EX. 2 hereto, Agreement, § 3(g)(i).) Nothing in the Agreement

permits a portion 0f the Royalty Option t0 be sold for less than the ﬁlll $1,000 purchase price.

Further conﬁrmation that the Royalty Option can only be sold to the Preferred Stock holders as a

group is found in Section 3(g)(i)'s requirement that any sale 0f the Royalty Option be made

"pursuant t0" an agreement "as determined by the Investors then holding a maj ority 0fthe Preferred

Stock." (Id.) By requiring any sale of the Royalty Option t0 be made pursuant t0 a single

"agreement" that would bind all Preferred Shareholders, the Agreement precludes the sort of

piecemeal, "pro rata" transaction t0 Which Counter—Defendants assert they are entitled. No such

agreement exists, and Counter-Defendants are not excused from the Agreement's unambiguous

requirement that a new "agreement" be created.

2. Conditions Precedent to Any Sale ofthe Royalty Option Have Not Occurred

Under Texas law, Counter-Defendants' attempts t0 exercise the Royalty Option had to be

made in strict compliance with the Agreement. See M7 Capital LLC v. Miller, 312 S.W.3d 214,

222 (TeX. App. —Houston [14th Dist] 2010); Comeaux v. Suderman, 93 S.W.3d 215, 220

(Tex. App. —Houston [14th Dist] 2005). Despite that obligation, neither Vertical nor Vanguard

satisﬁed any of Section 3(g)‘s prerequisites. The most obvious and undisputed example is that

neither Vertical nor Vanguard can show that "total purchase price of $ 1 ,000," as explicitly set forth

in Section 3(g), was ever paid. Vertical and Vanguard each paid a portion ofthat total, just $3 1 5.79,

and neither Vertical or Vanguard caused the balance of $684.21 t0 be paid. (Petition, 1] 10;

Pl's Motion at 2; EX. 3 hereto, RFA Response, N0. 36.) And the record is devoid of any evidence

that any other holder of Preferred Stock made up the difference between Vertical 0r Vanguard's

payment and the full $ 1 ,000 purchase price. Indeed, it isundisputed that the $ 1 ,000 was never paid

in full. (EX. 1 hereto, Candebat Dec., 1] 10.) Having failed t0 argue 0r prove that the ﬁlll option

COUNTER— PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT — Page 14
exercise price was paid, Counter—Defendants failed as a matter of law to establish that the Royalty

Option terms were strictly complied With, and hence, that the option was properly exercised.

Relatedly, and as noted above, Vertical speciﬁcally admitted that no other agreement (much less

one determined by a maj ority of Preferred Stock holders) exists with respect to Vertical's supposed

purchase of a portion of the Royalty Option. (EX. 4 hereto, Interrogatory Response, No. 6; EX. 3

hereto, RFA Response, N0. 34.) The failure to supply an agreement pursuant t0 Which the purchase

was purportedly to be made is yet another prerequisite to Counter-Defendants' exercise of the

Royalty Option that Counter-Defendants failed t0 satisfy, rendering any argument that the Royalty

Option was purchased erroneous as a matter 0f Texas law.

3. Even if Vertical and Vanguard Had Purchased the Royalty Option,
LocatorX Can Repurchase It for N0 Additional Consideration

Even if the Court were t0 somehow ﬁnd that Counter-Defendants validly exercised the

Royalty Option, they stillwould not be entitled to the declaration that itseeks in itsfederal claims

because LocatorX has a contractual right t0 repurchase the Royalty Option pursuant to Section

3(g)(ii). That section provides that LocatorX's repurchase right arises "upon the redemption 0f

"
100% 0f the Preferred Stock in exchange for the payment 0f the Option[al] Redemption Amoun

and "upon payment 0f the Royalty Option Repurchase Price." (EX. 2 hereto, Agreement, § 3(g)(ii).)

There is n0 dispute that all 0f Vertical's Preferred Shares were redeemed by mid-March,

2020. (EX. 3 hereto, RFA Response, N0. 26) At that time, Vertical accepted payment 0f the

redemption price of $3.00/share and also surrendered its share certiﬁcate. (EX. 3 hereto, RFA

Response, Nos. 23-24; EX. 1 hereto, Candebat Dec., 1] 8.) Thus, the ﬁrst precondition on LocatorX's

repurchase right — that "100% 0f the Preferred Stock" be redeemed — has been satisﬁed.

The second condition is "upon payment of the Royalty Option Repurchase Price."

The Agreement expresses the RORP as a price "per share of Preferred Stock outstanding 0n the

COUNTER— PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT — Page 15
royalty repurchase date." Thus, if no Preferred Shares remain outstanding on the date of

repurchase, there is no way to calculate a positive dollar value for the RORP, and no additional

consideration is due to any Preferred Shareholders who may have exercised the Royalty Option

before their Preferred Shares were redeemed. In short, once all of the Preferred Shares have been

redeemed, LocatorX can "repurchase" the Royalty Option for no additional money.

While it may seem odd that LocatorX can "repurchase" the Royalty Option without

spending additional cash, upon closer examination, that structure is entirely consistent with the

Agreement as a whole. The Agreements makes clear that Counter-Defendants' investment was part

of a "bridge offering" intended to provide LocatorX with short-term capital until LocatorX could

raise sufficient funds to redeem all of the Preferred Stock. (Ex. 2 hereto, Agreement, § 2(c)(i).)

As such, the Agreement affirmatively requires that, as LocatorX raises new funds from

"Subsequent Securities Sales," it will use portions of those proceeds to redeem Preferred Shares at

a significant premium – twice their initial purchase price. (Id., Exhibit A, § 7(a).)

The Royalty Option was never intended to further compensate Preferred Shareholders

whose shares had already been redeemed at twice their purchase price. Instead, the Royalty Option

had the limited purpose of providing cash to Preferred Stockholders if LocatorX failed to raise

additional funding and was therefore unable to redeem the Preferred Shares. That is why Section

3(g)(i) explicitly provides that the Royalty Option applies "[i]f the Company does not raise

sufficient proceeds in the IPO or from Subsequent Securities Sales (as defined in the Preferred

Designation) to redeem 100% of the Preferred Stock . . ." (Id., § 3(g)(i).) Here, LocatorX did raise

sufficient funds to redeem the Preferred Stock, and actually paid the Preferred Shareholders –

including Counter-Defendants – the $3.00 per share redemption price. (Ex. 3 hereto, RFA

Response, Nos. 9-18, 24, 26; Ex. 1 hereto, Candebat Dec., ¶ 9.)

COUNTER- PLAINTIFF LOCATORX, INC.'S MOTION FOR SUMMARY JUDGMENT – Page 16
That the Royalty Option existed in lieu of, and not in addition to, redemption can also be

seen in Section 3(g)(ii) of the Agreement. There, the Agreement provides that the "Default

Redemption Payment" – i.e., the $3.00 per share redemption price – "shall be reduced by any

royalties received by the Preferred Stock holders pursuant to their exercise of the Royalty Option."

(Ex. 2 hereto, Agreement, § 3(g)(ii).) That sentence makes clear that, even if Preferred

Stockholders do properly exercise the Royalty Option, they can receive royalties or the $3.00/share

the redemption price, but not both. Section 3(g)(ii)'s command that the RORP be calculated "per

share of Preferred Stock outstanding on the royalty repurchase date" is another clear signal that

redemption and the Royalty Option are mutually exclusive. (Id. (emphasis added).) If no Preferred

Shares remain outstanding on the repurchase date, then no

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Motion,Ex Parte: VERTICAL HOLDINGS, LLC vs. LOCATORX, INC.

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