IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN AND FOR NEW CASTLE COUNTY

MEMORANDUM OPINION

Date Submitted: September 24, 2003

Date Decided: September 25, 2003

Kevin G. Abrams, Srinivas M. Raju, J. Travis Laster (argued), Thad J. Bracegirdle, and John D. Hendershot, of RICHARDS, LAYTON & FINGER, Wilmington, Delaware; OF COUNSEL: BAKER BOTTS L.L.P., New York, New York, Attorneys for Plaintiff.

James P. Hughes, Jr. and John J. Paschetto, of YOUNG, CONAWAY, STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Alan M. Fisch (argued), Kelly A. Clement, Brent H. Allen, Jason F. Hoffman, Alexander B. Berger, and Jennifer R. Bagosy, of HOWREY SIMON ARNOLD & WHITE, LLP, Washington, D.C., Attorneys for Defendants.

CHANDLER, Chancellor

Plaintiff ODS Technology, L.P. d/b/a TVG Network (TVG) filed this action on September 5, 2003. TVG seeks to enjoin Youbet.com, Inc. (Youbet) from proceeding with its annual meeting of shareholders (the Annual Meeting) pending the correction of alleged breaches of the duty of disclosure in connection with the Proxy Statement filed by Youbet in advance of the Annual Meeting. This Court expedited the proceedings and on September 24, 2003, heard TVGs motion for a preliminary injunction.¹

I. BACKGROUND

Plaintiff TVG, a shareholder of Youbet, is a Delaware limited partnership that develops interactive gambling systems for horse racing and owns intellectual property rights related to such systems.

Defendant Youbet is a Delaware corporation that provides services which enables individuals to gamble on horse racing events over the internet. The remaining defendants are members of Youbets board of directors (the Board). Defendant Charles Champion has served as Youbets CEO since September 2000 and Chairman of Youbets board since August 5, 2003. Defendant David Marshall is co-founder of Youbet and current Vice Chairman of Youbets board. Defendant Guy Chipparoni has been a director of Youbet since 1998; Defendant Gary Adelson since April 2002; Defendant James Edgar since June 2002; and Defendant Joseph Barletta since December 2002.

On May 18, 2001, TVG and Youbet entered in a License and Content Agreement (the License Agreement) pursuant to which TVG granted Youbet non-exclusive licenses to certain of TVGs patent rights and simulcast audio and video content. According to a Youbet press

¹ The plaintiff also brought a fiduciary duty claim based on an entrenchment theory, but this Court did not expedite that claim and it is not considered for purposes of the instant motion.

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release issued on May 21, 2001, the License Agreement was integral to [Youbet] gaining broad market penetration and growth.²

In partial consideration for providing these licenses and intellectual property rights to Youbet, TVG received two warrants. The parties also signed a related Warranted Issuance Agreement. The Initial Warrant, exercised on June 13, 2002, entitled TVG to purchase 3,884,650 shares of Youbet common stock. The Additional Warrant entitled TVG to purchase a number of shares of Youbet common stock which, when aggregated with the 3,884,650 shares issued under the Initial Warrant, would result in TVG owning 51% of Youbets common stock on a fully diluted basis. The aggregate exercise price exceeds $41 million. TVG has not exercised the Additional Warrant, and it expires on May 18, 2004.

The Warrant Issuance Agreement includes a clause that requires Youbet to use its best efforts to enable TVG to designate a number of directors to Youbets board of directors based on TVGs ownership of Youbet common stock according to a specified formula set forth in the agreement (the Board Representation Clause).³ Under the formula, if TVG owns more than 49.9% of Youbets outstanding common stock, TVG is entitled to designate three-fifths of the Board members. Additionally, the Additional Warrant contains a provision which states that Youbet will not, by amendment to its Certificate of Incorporation or through any reorganization, recapitalization, conveyance or transfer of assets, consolidation, merger, dissolution, issuance or sales of securities or other agreement or voluntary act, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder

² PX 6. Exhibits to the Plaintiffs Opening Brief in Support of its Motion for a Preliminary Injunction will be designated throughout the opinion as PX [number] at [pg.]. References to the Plaintiffs Opening Brief will be designated as OB at [pg.]. References to deposition testimony will be designated as [deponent] [pg.].

³ PX 3 4.05.

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