On Friday, a New York federal judge refused to dismiss a variety of claims against entities and individuals associated with venture capital firm Bessemer Venture Partners, claims that the firm breached a stockholders’ agreement in connection with post-acquisition activity involving Intego, a company that produces anti-virus software for Apple products. The suit was filed by Transeo, a minority shareholder in Intego’s holding company.
PRESS RELEASE:
Transeo may proceed in its lawsuit alleging various claims of breach of duty and other wrongful activities against associated entities of Bessemer Venture Partners (“BVP”) and the majority shareholders and directors of the holding company of Intego S.A. (“Intego”), an international security software company. Transeo is a shareholder in Intego’s holding company.
On Friday, March 29, 2013, a New York federal judge refused to dismiss a variety of claims against entities and individuals associated with venture capital firm Bessemer Venture Partners alleging that they had breached fiduciary duties and breached a stockholders’ agreement in connection with post-acquisition activity involving Intego. The 52-page opinion was handed down by the Hon. Cathy Seibel, United States District Judge of the U.S. District Court for the Southern District of New York in Transeo S.A.R.L. et ano. v. Bessemer Venture Partners VI L.P. et al., 11-CV-5331. Transeo is joined in this lawsuit with another minority shareholder.
“The owners of start-up companies everywhere should be gratified that the Court has upheld their right to challenge claimed wrongdoing by venture capitalists who might seek to take advantage of individuals in whose companies they invest,” said Laurent Marteau, founder of Intego and general manager of plaintiff Transeo.
“While allowing alleged major wrongdoings by BVP and its directors to be redressed, this decision brings a lot of light on the duty of good faith, which has been hidden for too long in the shadows of the duties of care and loyalty. At the same time, the decision clarifies in which context derivative actions can be brought against both directors and majority shareholders when plaintiffs have disproportionately suffered from defendants’ wrongdoings,” said Philippe C.M. Manteau, a partner in Schiff Hardin’s Corporate Group and one of Transeo’s lead attorneys.
Mr. Manteau added, “This opinion is especially important for non-U.S. entities seeking investment from U.S. venture capitalists because it provides these foreign entities with an adequate level of comfort and predictability as minority shareholders in cross-border ventures.”
Schiff Hardin partner David Jacoby, Transeo’s lead litigator on this case, said, “Judge Seibel wrote a very thorough opinion and we look forward to having the opportunity to prove our case.”
Factual Background
At issue was what defendants did and failed to do after Transeo, Marteau’s holding company, and BVP agreed to create a third entity, Neutral Holdings, Inc. (“NHI”), to own Intego. Intego, a highly successful Internet firm providing services to users of Apple equipment, was founded by Mr. Marteau, a French entrepreneur and innovator, in 1997. As a result of the 2007 acquisition, BVP owned 83.51 percent of NHI, Transeo owned 14.86 percent and two other individuals each owned less than one percent.
The Court sustained the legal sufficiency of the Second Amended Complaint’s allegations of three sets of wrongdoing violating plaintiffs’ rights under various legal theories. They were:
AVG offer: The plaintiffs alleged that at the end of February 2011, a prominent Dutch Internet security firm, AVG, gave NHI a non-binding letter of intent with certain conditions to acquire NHI, but that NHI, at BVP’s instance, refused to consider it.
Removal of Marteau and other improper conduct relating to NHI board of directors: The plaintiffs also alleged that the NHI board, at BVP’s instance, improperly removed Mr. Marteau from the NHI board of directors as well as conducted business at board meetings without a quorum, all in violation of requirements of the NHI Stockholders’ Agreement.
Illegal conduct: Plaintiffs also alleged that documents related to the creation of stock option interests and the conduct of the annual meeting of Intego had been falsified, in violation of law.
Judge Seibel’s Decision
Judge Seibel’s decision permits claims related to all three major sets of alleged improprieties to proceed, although she dismissed claims founded on certain legal theories. Specifically, Judge Seibel sustained plaintiffs’ derivative claims under Delaware law involving the AVG offer, Mr. Marteau’s removal, the conduct of board meetings without a quorum and the falsification of documents. She also sustained contract claims under New York law arising from breach of the NHI Stockholders’ Agreement with regard to Mr. Marteau’s removal and the conduct of board meetings without the proper quorum, as well as an aiding and abetting claim against one defendant. Highlights from the opinion follow.
Court Excuses Demand to Board on Derivative Claims, Finds Futility Based on Lack of Independence of Half of Directors
The District Court found that plaintiffs had satisfied both the procedural requirements of the Federal Rules of Civil Procedure and the substantive requirements of Delaware law in pleading it would have been futile to make a demand to the NHI board of directors to pursue the claims against the defendants, Messrs. Jeffrey Erwin and Jeremy Levine, because two of the four directors of NHI lacked sufficient independence.
“Plaintiffs have alleged sufficiently more control over and influence on the decisions of Levine and Erwin by [BVP] than exists in a typical business relationship. First, [a BVP-appointed director’s] removal from the NHI BOD and the installation of Erwin — who had an ‘extensive and long-standing’ relationship with [BVP] but lacked qualifications related to Intego’s business — as his replacement shortly before NHI’s failure to consider an offer for at least $5 million more than the price Levine had stated only a month earlier would be a ‘compelling’ offer raises a reasonable doubt as to whether Levine’s and Erwin’s actions in not pursuing AVG’s offer were based on ‘extraneous considerations or influences.’ Moreover, taking all of Plaintiffs’ allegations as true, the same doubts are raised by the actions of Levine and Erwin in removing Marteau — the successful founder of Intego — from his positions at Intego, NHI, and eventually (purportedly) the NHI BOD, particularly if Marteau was so integral to the companies that the AVG offer was contingent on his continued employment.” (Opinion at pp. 21-22).
Court Sustains Derivative Claims Asserting Breach of Duty, Finds They Fall Outside Business Judgment Rule
The District Court sustained derivative breach of duty claims under Delaware law against Jeffrey Erwin and Jeremy Levine as NHI directors and against BVP and Deer VI & Co. LLC (“Deer”), the general partner of various BVP-related entities, as majority shareholders. The Court found sufficient the plausible allegations that BVP used the Director Defendants “to effect its plan to maintain access to NHI’s cash and assets through refusing to consider the AVG Offer.” (Opinion at p. 25).
While recognizing the directors might have an exculpation defense under NHI’s Certificate of Incorporation, the Court nevertheless found the “allegations, taken as true, plausibly suggest that [the Director Defendants’] actions were not undertaken in good faith to advance the best interest of NHI, and thus do not merit protection under the business judgment rule.” (Opinion at p. 25).
Similarly, as to BVP and Deer, the Court found that the pleading rendered “plausible Plaintiffs’ claim that the Shareholder Defendants exercised control over the NHI BOD to ensure the AVG Offer would not be pursued, which ultimately benefited the Shareholder Defendants at Plaintiffs’ expense. Specifically, Plaintiffs allege that the Shareholder Defendants sought to maximize NHI’s short-term cash flow and ensure their access to its cash and intellectual property, while Plaintiffs sought to protect and advance NHI’s long-term prospects and good will . . . . After the Shareholder Defendants replaced . . . one of their own appointed directors — once his support for pursuing the offer became known, the Shareholder Defendants could control the actions of the NHI directors, aside from Marteau, with respect to the consideration of the offer. . . . The Shareholder Defendants allegedly did not want to sell NHI in March 2011 because a sale would have culminated in a distribution of cash pro rata to all shareholders and ended their access to Intego’s intellectual property, . . . while letting the offer lapse instead depressed NHI’s value, making it unlikely that Transeo would invoke its right of redemption or demand a sale after June 2012, actions that would have further hindered the Shareholder Defendants’ access to cash and assets . . . . Taking all of Plaintiffs’ allegations in the SAC as true, as I must on a motion to dismiss, Plaintiffs have alleged facts sufficient to suggest that Shareholder Defendants ensured that the NHI BOD would not consider the AVG Offer, in order to maintain their access to NHI and Intego’s cash and assets at the expense of the minority shareholders, who were thereafter ‘deprive[d] . . . of the value of their stock’.” (Opinion at p. 27).
Court Sustains Claims as to Marteau’s Removal from NHI Board and Conduct of NHI Board Meeting Without a Quorum
The Court also sustained plaintiffs’ breach of contract claims based on the Stockholders’ Agreement’s provisions arising from Mr. Marteau’s alleged removal from the NHI board and the conduct of NHI board meetings in the absence of the quorum the agreement required. It dismissed parallel claims grounded on breach of fiduciary duty as duplicative.
Intentional Violations of Law Concerning Documents
The Court also sustained derivative claims based on allegations Mr. Jeffrey Erwin intentionally violated the law by creating false and fraudulent documents, with the claimed direct knowledge or acquiescence of other BVP-appointed directors, notably Mr. Jeremy Levine, a BVP partner. (Opinion at pp. 31-32).
“Taking the allegations . . . as true, Plaintiffs have plausibly alleged that Erwin directly, and Levine indirectly, knowingly falsified business records and relocated NHI’s cash and assets, and further that these actions potentially violated applicable laws, thus rendering plausible that the Director Defendants breached their fiduciary duties to NHI.” (Opinion at p. 32).
The Court dismissed similar claims against the Shareholder Defendants.
Aiding and Abetting Breach of Fiduciary Duty, Other Claims
The Court also sustained a claim of aiding and abetting breach of fiduciary duty against Peter Price, who was NHI’s chief financial officer and secretary, in connection with the assertion of falsifying documents related to the stock option grant, but otherwise dismissed the aiding and abetting claims.
The Court also dismissed claims for: a direct breach of fiduciary duty against BVP; breach of the implied covenant of good faith and fair dealing under New York law, as precluded by the contract claim; unjust enrichment; tortious interference with prospective contractual advantage; and what the Court construed as a prima facie tort claim.
Plaintiffs were represented by Schiff Hardin LLP. The Schiff Hardin litigation team was led by partners David Jacoby and Philippe C.M. Manteau, assisted, among others, by associates Randi S.K. Rosenblatt and Sara Rosenberg, all in the firm’s New York office. Schiff Hardin Chicago office partners Allan Horwich, who is a senior lecturer in federal securities law and litigation at Northwestern University School of Law, and Edward Spacapan Jr., whose practice concentrates in employee benefits and executive compensation, provided invaluable knowledge and constant support throughout the process.
Judge Seibel set an April 25, 2013, status conference in the case.
About Schiff Hardin LLP
Schiff Hardin LLP (www.schiffhardin.com) is a general practice law firm representing clients across the United States and around the world. We have offices located in Ann Arbor, Atlanta, Boston, Charlotte, Chicago, Lake Forest, New York, San Francisco and Washington. Our attorneys are strong advocates and trusted advisers – roles that contribute to many lasting client relationships.
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