Plaintiff Meets High Burden of Proving Reformation Claim

On March 23, 2023, the First Department issued a decision in Empery Asset Master, Ltd. v. AIT Therapeutics, Inc., 2023 NY Slip Op. 01585, holding that a plaintiff had met the heavy burden of proving its right to reformation of a contract, explaining:

While there is a presumption that the language contained within a contract embodies the parties’ true intent, when a party shows by clear and convincing evidence that the writing memorialized in an agreement is at variance with the intent of the parties, reformation will be granted. Here, plaintiffs’ trial evidence established their entitlement to an award based on reformation of the warrants, as they showed by clear and convincing evidence that the omission of an antidilution provision providing for share protection as well as price protection was due to a mutual mistake or scrivener’s error in the final drafting of the warrants.

As noted above, section 3(b) of plaintiffs’ warrants governs adjustments to share price and share amounts if defendant makes a dilutive offering while plaintiffs warrants are outstanding. As executed, section 3(b) provides that:

“If . . . the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock . . . , for a consideration per share (the “New Issuance Price”) less than a price equal to the Exercise Price in effect immediately prior to such issuance or sale (the “Applicable Price”), . . . the Exercise Price then in effect shall be reduced to the New Issuance Price. If any sale or issuance . . . is for no consideration, then the New Issuance Price shall be deemed to be $0.01 per Ordinary [*4]Share. Upon each such adjustment of the Exercise Price pursuant to the immediately preceding sentence, the number of Warrant Shares issuable upon exercise of this Warrant shall be increased . . .”

However, the evidence, including but not limited to the drafting history and other contemporaneous correspondence, shows that the second sentence in section 3(b) of the warrants was not inserted into the agreement to remove any aspect of the antidilution protection, but rather to clarify what would occur in the event shares were issued for no consideration. Thus, we find that Supreme Court correctly held that the parties intended to include an antidilution provision that provided for the adjustment of both the share price and the number of shares when common stock was issued at a price below plaintiffs’ exercise price, and that, as result of mutual mistake, inadvertently left the word “sentence” and did not change it to the plural, “sentences” in section 3(b). Accordingly, upon exercise of their warrants, plaintiffs were entitled to the value of the adjusted number of shares that were owed but not delivered (565,822 shares).

(Internal citations omitted).

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