Basho Technologies Holdco B, LLC v. Georgetown Basho Investors, LLC ( 2018 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BASHO TECHNOLOGIES HOLDCO B, LLC, )
BASHO TECHNOLOGIES HOLDCO C, LLC, )
BASHO TECHNOLOGIES HOLDCO E, LLC, )
HUNOBY ENTERPRISES, LLC, and EARL )
P. GALLEHER, III, individually and )
derivatively on behalf of Basho Technologies,
)
Inc., )
)
Plaintiffs, )
)
v. ) C.A. No. 11802-VCL
)
GEORGETOWN BASHO INVESTORS, LLC, )
a Delaware limited liability company, )
NEWPORT BEACH INVESTORS, LLC, a )
Delaware limited liability company, CHESTER )
C. DAVENPORT, ROBERT L. REISLEY, )
JONATHAN FOTOS, ATSUSHI )
YAMANAKA, and ADAM J. WRAY, )
)
Defendants, )
)
and )
)
BASHO TECHNOLOGIES, INC., a Delaware )
corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: April 9, 2018
Date Decided: July 6, 2018
R. Montgomery Donaldson, Robert A. Penza, POLSINELLI PC, Wilmington, Delaware;
Robert V. Spake, POLSINELLI PC, Kansas City, Missouri; Attorneys for Plaintiffs.
Barry M. Klayman, COZEN O’CONNOR, Wilmington, Delaware; Lezlie Madden,
COZEN O’CONNOR, Philadelphia, Pennsylvania; Attorneys for Defendants.
LASTER, V.C.
Nominal defendant Basho Technologies, Inc. (“Basho” or the “Company”) was a
promising, early-stage technology company. In 2010, defendant Georgetown Basho
Investors, LLC (“Georgetown”) invested in Basho. Defendant Chester Davenport
controlled Georgetown and served as its President and Managing Member. Davenport
joined the Company’s board of directors (the “Board”).
Over the next three years, Georgetown led or co-led a series of preferred stock
financings for Basho. Through them, Georgetown gained blocking rights that enabled it to
control Basho’s access to capital. As Davenport recognized and emphasized repeatedly,
the blocking rights gave Georgetown effective control over the Company when the
Company was on the verge of running out of money.
In 2013, after maneuvering the Company into a positon of maximum financial
distress, Georgetown and Davenport forced through a Series G financing round that was
highly favorable to Georgetown and unfair to Basho and its other investors. The Series G
round also gave Georgetown hard control.
After achieving hard control, Georgetown added defendant Jonathan Fotos, a
Georgetown employee, to the Board. Davenport, Fotos, and their allies on the Board took
steps to consolidate their control, including by creating an Executive Committee through
which Davenport and another Georgetown representative ran the Company. They caused
Basho to engage in self-dealing transactions, and they turned down sources of capital that
would have undermined their control. Three outside directors left the Board, as did the
CEO, other senior managers, and key employees.
1
Davenport hoped to sell Basho and channel the bulk of the proceeds to Georgetown
through its preferred stock holdings. Davenport thought that other investors would eagerly
participate in the Series G financing that Georgetown had extracted, thereby providing the
Company with necessary financing. Instead, investors viewed Georgetown’s oppressive
actions as a red flag and questioned Basho’s ability to succeed. Georgetown was not able
to generate any significant outside funding for Basho, nor was it able to achieve a sale.
Basho never recovered. In 2016, Basho entered receivership and was liquidated. Its
equity was worthless.
The plaintiffs are former holders of common and preferred stock issued by Basho.
They filed suit, claiming that various combinations of defendants breached their fiduciary
duties, aided and abetted breaches of duty by other defendants, or committed other wrongs.
During the course of the litigation, the plaintiffs’ focus narrowed to a claim for breach of
fiduciary duty against Georgetown, Davenport, and Fotos.
The plaintiffs proved at trial that Georgetown and Davenport exercised effective
control over Basho in connection with the Series G financing. As a result, Georgetown and
Davenport had the burden of proving that the terms of the Series G financing were entirely
fair. They failed to carry that burden. As a remedy for the injury inflicted by the Series G
financing, this decision holds Georgetown and Davenport jointly and severally liable for
compensatory damages of $17,490,650, plus pre- and post-judgment interest calculated at
the legal rate, compounded quarterly, and running from January 23, 2013, to the date of
payment, with the rate of interest fluctuating with changes in the legal rate.
2
The plaintiffs proved at trial that after the Series G financing, Georgetown and
Davenport continued to control Basho. They further proved that Georgetown, Davenport,
and Fotos caused Basho to engage in self-dealing transactions and took other self-interested
actions. The defendants did not make any meaningful effort at trial to prove that their
actions were entirely fair. They bore the burden of proof on this issue, which they failed to
meet.
The plaintiffs did not seek transaction-specific damages awards for the actions that
the defendants took after the Series G financing. Instead, the plaintiffs sought a damages
award equal to the difference between the value of their shares after the Series G financing
and the value at the time of trial, which is zero. The plaintiffs convinced me that on the
facts presented, that award is warranted. As a remedy for their actions after the Series G
round, this decision holds Georgetown, Davenport, and Fotos jointly and severally liable
for damages in the amount of $2,778,228, plus post-judgment interest calculated at the
legal rate, compounded quarterly, and running from the date of judgment until the date of
payment, with the rate of interest fluctuating with changes in the legal rate.
I. FACTUAL BACKGROUND
Trial took place over four days. The parties submitted 866 joint exhibits, lodged
twelve depositions, and presented live testimony from four fact witnesses and one expert.
The parties made the court’s task more difficult by submitting exhibits that were not in
chronological order. The exhibits also included many imaged emails that appeared in (at
best) six-point font.
3
To facilitate fact-finding, courts evaluate evidence against a burden of proof. For
this case, the appropriate standard of proof was straightforward: a preponderance of the
evidence.1 The question of who bore it was complex.
For the breach of fiduciary duty claim, the plaintiff bore the burden of proving that
Georgetown owed fiduciary duties in connection with the Series G financing. With the
plaintiff having carried that burden, Georgetown and Davenport bore the burden of proving
that the Series G financing was entirely fair.2 The defendants bore the burden of proof on
their affirmative defense of acquiescence. The plaintiffs bore the burden of proof on
remedial issues. The same structure governed the analysis of Georgetown, Davenport, and
Fotos’ actions after the Series G financing. Within this framework, the following facts were
proven by a preponderance of the evidence.
A. Basho’s Early Stages
In 2008, plaintiff Earl Galleher and a colleague co-founded Basho.3 Galleher
became President, CEO, and Chairman of the Board.
1
See Estate of Osborn ex rel. Osborn v. Kemp, 2009 WL 2586783, at *4 (Del. Ch.
Aug. 20, 2009) (“Typically, in a post-trial opinion, the court evaluates the parties’ claims
using a preponderance of the evidence standard.”), aff’d, 991 A.2d 1153 (Del. 2010).
2
See Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1239 (Del. 2012).
3
PTO ¶¶ 13-14; Galleher Tr. 133. Citations in the form “PTO” refer to stipulated
facts in the pre-trial order. See Dkt. 219. Citations in the form “[Name] Tr.” refer to witness
testimony from the trial transcript. Citations in the form “[Name] Dep.” refer to witness
testimony from a deposition transcript. Citations in the form “JX –– at –––” refer to trial
exhibits using the JX-based page numbers generated for trial.
4
Galleher raised a Series A round of financing based on a business plan for a web-
based sales product. When that plan failed to generate results, Galleher re-focused Basho
on developing a distributed database product.4
Galleher tried unsuccessfully to raise venture capital to fund the database product.5
In February 2009, Galleher personally led a Series B round. He bought shares in his own
name, as he had in the Series A round, and he also formed an investor group that invested
through plaintiff Basho Technologies Holdco B, LLC.6
In August 2010, Basho needed more money, and Galleher led a Series C round.7
Once again he bought shares in his own name and formed an investor group that invested
through plaintiff Basho Technologies Holdco C, LLC.8 Plaintiff Hunoby Enterprises, LLC
also owns common stock in Basho and invested in the Series A, B, and C rounds.9
4
JX 750 at 5-9; Galleher Tr. 138, 142.
5
Galleher Tr. 145-46.
6
PTO ¶ 1.
7
Id. ¶ 16.
8
Id. ¶ 2.
9
Id. ¶ 4.
5
B. Georgetown Invests In Basho.
By early 2011, Basho needed additional funding.10 Galleher met with Don Rippert,
the chief technology officer at Accenture PLC.11 Rippert liked Basho’s technology, but
Accenture passed on the investment.
By chance, Rippert met Davenport and mentioned Basho.12 Davenport was a lawyer
who had worked in various roles, including as a name partner in a law firm, as chairman
of a publicly traded corporation, and as assistant secretary in the U.S. Department of
Transportation.13 Davenport had formed non-party Georgetown Partners LLC in 1987 as a
vehicle for private equity investments.14
Rippert put Davenport in touch with Galleher,15 who pitched him on an
investment.16 Davenport had Fotos research Basho and its industry.17 They thought
10
JX 11.
11
Galleher Tr. 149.
12
Id. at 150; Davenport Tr. 375.
13
Davenport Tr. at 368.
14
See id. at 370-75.
15
Id. at 376; Galleher Tr. 150.
16
Davenport Tr. 377.
17
Id. at 377; Fotos Tr. 727-28.
6
Georgetown could generate quick and outsized profits by investing in Basho and selling it
within two years.18 Davenport agreed to have Georgetown lead a Series D round.
The Series D round closed in February 2011.19 The full amount of the Series D
round was $5 million.20 Georgetown invested approximately $2 million, and Davenport
joined the Board.21 At that point, the Board comprised Galleher, Davenport, Dr. Eric
Brewer, Anthony Thornley, and Jorn Larsen. Brewer was a tenured computer science
professor at the University of California at Berkeley.22 Thornley had served as President
and COO of Qualcomm Inc. and as a director of Callaway Golf Company.23 Larsen was a
representative of a Danish venture capital firm that participated in the Series D round.24
During the quarter that immediately followed Georgetown’s investment, Basho’s
performance suffered.25 Galleher agreed with the other directors that it was time for him to
step aside as CEO. Galleher recruited Rippert to replace him in that role.
18
See JX 15 at Fotos 0001670-71 (planning a sale of Basho in early 2013).
19
PTO ¶ 20.
20
Id.
21
Id. ¶¶ 8, 21; see Galleher Tr. 151-52; Davenport Tr. 380.
22
PTO ¶ 17; see Galleher Tr. 172.
23
PTO ¶ 18; see JX 810.
24
Galleher Tr. 173-74.
25
Id. at 155; Fotos Tr. 733.
7
In July 2011, Rippert took over as CEO of Basho.26 Galleher remained Chairman of
the Board. To recruit Rippert, Galleher and Davenport agreed to provide the Company with
additional funding by investing $5 million in a Series E round, which they split evenly.27
Galleher led an investor group that invested in the round through plaintiff Basho
Technologies Holdco E, LLC.28
C. The Series F Round
By early 2012, it was clear that Basho would need more funding before achieving
profitability. Davenport announced that he would take charge of the fundraising efforts.
Galleher supported Davenport. After the Series E round, Galleher had exhausted his own
resources, and he was ready to let Davenport take the lead on fundraising.29
Davenport proposed to have Georgetown invest $10 million in a Series F round at
a pre-money valuation for Basho of $75 million. Rippert, Brewer, and others opposed the
term sheet because they believed that it would give Georgetown majority control.30 At the
time, Galleher trusted Davenport, and he was frustrated that the Board would not accept
Georgetown’s proposal.31 Meanwhile, Rippert solicited an investment from IDC Frontier
26
See JX 6; Galleher Tr. 136, 154; Davenport Tr. 384-85.
27
Galleher Tr. 155; see PTO ¶ 16.
28
PTO ¶ 3.
29
See Galleher Tr. 155, 163-64.
30
Id. at 168.
31
Id.; JX 16.
8
Inc. (“IDCF”), a large Japanese website-hosting company that was one of Basho’s
customers.32 IDCF wanted to invest to “strengthen a mutual technical cooperation and
collaboration.”33
In June 2012, Basho completed a modified Series F round that avoided giving
Georgetown majority control by including IDCF and reducing Georgetown’s participation.
IDCF invested $6.1 million and received the right to designate a member of the Board. The
relevant designee for purposes of this decision is Atsushi Yamanaka, who joined the Board
in February 2013.34 Georgetown invested $5 million and received an option to invest
another $5 million.35 Georgetown also received the right to designate a second director in
addition to Davenport.36 Georgetown designated defendant Robert Reisley, an associate
and confidante of Davenport’s who was a member and officer of Georgetown. Reisley also
was the president and co-founder of Evergreen Capital Advisors, Inc., a consulting firm
that had advised Georgetown on its investment in Basho.37
32
Galleher Tr. 169-70.
33
See JX 19 (IDCF investment memorandum to Basho explaining purpose of
investment); JX 357 (IDCF Board appointee’s response to crisis over Series G Financing);
Yamanaka Dep. 6-10 (describing his role on Board).
34
PTO ¶ 11.
35
See JX 13; Galleher Tr. 169.
36
Davenport Tr. 383.
37
PTO ¶ 23; see Davenport Tr. 381-82.
9
The shares of preferred stock sold in the Series F round carried blocking rights.
Among other things, without the consent of holders of a majority of the outstanding Series
F shares, Basho could not
either directly or indirectly by amendment, merger, consolidation or
otherwise, . . . issue any class of stock having any right, preference, or priority
superior to or pari passu with the Series F Preferred Stock, or amend, alter
or repeal any provision of the Certificate of Incorporation or Bylaws of the
Corporation in a manner that changes the powers, preferences, or special
rights of the Series F Preferred Stock so as to affect them adversely, which
does not so affect the entire class of Preferred Stock.38
As the holder of a majority of the Series F preferred stock, Georgetown controlled the
blocking right.
Davenport wanted to “sell the Company in early 2013.”39 He believed that the Series
F round gave Georgetown negative control over Basho because Georgetown could prevent
the Company from engaging in an extraordinary transaction or raising outside funding
without Georgetown’s consent.40 As a result, the Series F financing had put Georgetown
“in the position of being the sole life line of the Company for money until 2013.”41
Davenport expected that Basho would need additional capital and would ask Georgetown
to exercise its option to invest another $5 million. At that point, Georgetown could block
the Company from obtaining another deal, insist on receiving full control in return for
38
JX 378 § B.3.5; see also id. §§ B.3.3-4; Davenport Tr. 383-84.
39
JX 14 at 1.
40
See id.; JX 15 at 1.
41
JX 15 at 1.
10
exercising its option, and then force a near-term sale.42 In any sale, Davenport believed that
Georgetown’s preferred stock would give it “the largest share of the proceeds.”43
Davenport urged his team at Georgetown to “think about the best way to plot our
exit.”44 For assistance, Davenport reached out to Cowen & Co., an investment bank that
had a longstanding relationship with Georgetown and where Davenport had personal
connections to the head of the firm.45
Shortly thereafter, Davenport told Galleher that he wanted to “exit Basho in an
expedited manner” and that “[t]he only issue is how much money can we get . . . and how
42
See JX 14 (Davenport: “My objective is to sell the Company in early 2013.
Assuming we exercise our option we will get the largest share of the proceeds of sale.”);
JX 30 (Davenport: “My objective is to take total control of this Company in exchange for
our $5M option investment and force a near term exit that we control.”); id. (“These guys
by trying to be clever have put us in the position for $5M to control everything in the
Company to the exit and the exit itself. So much for people who are too smart by half.”);
id. (“I don’t want any additional investors until we decide it is in our interest.”); id. (“This
is how you can gain actual control of the Company and force a near term exit.”); JX 32 (“I
would like to use the exercise of our $5M option as the vehicle for the Basho exit.”); see
also JX 64 (Davenport stating after the Series F round that “[w]e have negative control of
the Company”); JX 72 (Galleher telling Davenport after the Series F round that “I know
you hold negative control of the company at this point. I hope that will not diminish my
voice in our continued collaboration.”); Davenport Tr. 521-28.
43
JX 14.
44
Id.
45
Davenport Tr. 398-99, 548; see JX 32 (Davenport: “To get this process started I
am going to talk to the bankers at Cowen to get their view.”); see also JX 35 (email
exchange regarding Cowen giving a presentation to the Board about strategic alternatives
including sale); JX 63 (Davenport threatening to speak with head of Cowen if issues were
not resolved); Collins Tr. 9-10 (describing Georgetown’s desire to hire Cowen).
11
quickly.”46 He claimed that based on the low end of a valuation range that Cowen had given
him, Galleher should receive at least $21 million in a sale.47 At trial, Galleher testified that
he “didn’t care” about the money, but decided to support Davenport because the “guy who
controls the company [was] telling me he wants to sell the company.”48
Rippert, by contrast, did not want to sell the Company. He thought that he had been
hired to grow the Company. Davenport began plotting ways to neutralize Rippert and
ensure that if Rippert did not support a sale, he at least would not be able to interfere.49
D. Georgetown Blocks Other Investments.
Consistent with his expressed desire to “force a near term exit that Georgetown
control[s],”50 Davenport tried to position himself as the point person for any efforts to raise
capital. He argued that this would enable Rippert to concentrate on Basho’s operations.51
46
JX 41. After emailing Galleher, Davenport asked his team at Georgetown for “any
thoughts you have as to how we make Earl understand that this is real and not a
continuation of the small time thing they have been doing since 2007.” JX 40 at Fotos
0011988.
47
JX 41.
48
Galleher Tr. 178.
49
See JX 42 at EPG-0007347 (threatening to put Rippert’s “30 year career and net
worth . . . in grave jeopardy”); JX 43 at Fotos 0002204 (declaring that Georgetown had
“outflanked” Rippert).
50
JX 30 at 1.
51
See JX 20.
12
In reality, Davenport wanted to avoid any financing that would impede Georgetown’s
control.
Rippert, however, continued to look for alternative sources of financing that would
enable the Company to achieve its business plan. In September 2012, Rippert secured an
executed term sheet from Updata Venture Partners, a technology-focused venture capital
firm. The term sheet contemplated Updata leading a Series F-1 investment round with a
$10 million investment at a pre-money valuation of $71 million.52 The transaction would
have deprived Georgetown of some of its blocking rights, so Davenport viewed it as a
“non-starter.”53 As an alternative to the Updata term sheet, Georgetown proposed to
provide Basho with a loan of $5 million at an interest rate of 5% per annum, payable
annually, and convertible at Georgetown’s option.54
During a meeting on October 10, 2012, the Board discussed the Updata term sheet
and the Georgetown loan.55 Proceeding with the Updata proposal required approval by
holders of a majority of the Series F preferred stock; Davenport announced that
Georgetown would not consent. The Board resolved to terminate discussions with Updata
and enter into negotiations with Georgetown over the loan.56 To make the terms of the loan
52
JX 38.
53
JX 106 at 1; see also JX 30; Davenport Tr. 389, 520-21; Fotos Tr. 733-34.
54
JX 44 at BTH00032189.
55
JX 39 at BTH00012168.
56
Id.
13
less unattractive when compared to the Updata term sheet, Georgetown nominally
increased the total authorized borrowings to $7.5 million, with Georgetown providing $5
million and allowing for the additional $2.5 million to be provided by either Georgetown
or other preferred investors. Georgetown also increased the interest rate to 7.5% per annum,
payable quarterly. 57 The loan was convertible into Series F preferred stock and came with
warrants to purchase 500,000 shares of Series F preferred stock at $1.515 per share as
compensation for providing the loan commitment.58 Georgetown insisted as a condition to
extending the loan that the Company retain Cowen as its financial advisor.59
Shortly after the October meeting, Rippert received a term sheet from Tokyo
Electron Devices Ltd., which was one of the Company’s customers.60 The term sheet
contemplated an investment of $3.75 million at a pre-money valuation of $81.5 million,
but Tokyo Electron was primarily interested in receiving commercial commitments,
including a reseller discount.61 Rippert argued that the Tokyo Electron investment was
57
JX 44 at BTH00032189; JX 50 at BTH00026435.
58
See JX 50 at BTH00026435; JX 66 at REISLEY 026136; see also Reisley Dep.
109. Georgetown ultimately committed to fund $7.45 million and received warrants to
purchase 496,666 shares of Series F preferred stock. Harbor Island Equity Partners, LLC,
committed to fund the remaining $50,000 and received warrants to purchase 3,334 shares.
JX 51 at BTH00028806.
59
See JX 39; Collins Tr. 9-10; see also JX 44 at BTH00032190 (noting that under
revised terms of loan, “Engagement of Cowen required”).
60
JX 43 at Fotos 0005795.
61
Id.
14
superior to the Georgetown loan.62 When Davenport heard about the term sheet from Tokyo
Electron, he crowed in an email to the Georgetown team that Rippert “knows that with our
blocking rights we control Basho. Therefore, everything he does is geared toward taking
those rights. Nice try but we outflanked him months ago.”63
Davenport wanted the Company to accept Georgetown’s loan offer, decline the
Tokyo Electron investment, and enter into a reseller agreement with Tokyo Electron.
Galleher told Rippert not to pursue the Tokyo Electron investment unless he could
convince Davenport to support it.64
Knowing that Davenport wanted to sell the Company, Galleher proposed to hire
Greg Collins as a consultant to help prepare Basho for a sale. Collins had decades of
experience providing M&A-focused advisory services in the technology sector and had
held senior roles at large companies where he had led and executed acquisitions.65 Collins
had joined the Board in May 2012.66
62
Id. at Fotos 0005793.
63
Id.
64
Id.
65
See Collins Tr. 4-7.
66
See PTO ¶ 19. The record seems to support the notion that Basho created an eighth
Board seat for Collins. I have not been able to discern from the record when Larsen left the
Board. Galleher’s testimony seemed to contemplate that David Ross, who was listed as a
director for the meetings in October 2012, had stepped into Larsen’s seat. As of October
2012, the Board appears to have consisted of Rippert, Galleher, Brewer, Thornley, Collins,
Ross, Davenport, and Reisley. See JX 39; Galleher Tr. 174.
15
Galleher worried that Rippert would leave if Basho hired Collins and that his
departure would hurt the sale process. Davenport dismissed his concerns.67 Davenport told
Galleher that they needed “to be prepared to take whatever action is necessary to protect
our financial interest” and that Rippert “does not understand what I will do to protect our
interest and how his 30 year career and net worth will be put in grave jeopardy.”68
As Galleher feared, Rippert resigned after Basho hired Collins. During a meeting
on October 29, 2012, the Board accepted Rippert’s resignation, appointed Collins to the
positions of President and CEO, and authorized Basho to enter into a loan agreement with
Georgetown.69 Everyone understood that draws under the loan would be “[a]vailable to the
Company at $1.5 million monthly.”70
E. The Georgetown Loan
In November and December 2012, Reisley and Collins negotiated the
documentation for the Georgetown loan. Just before the start of the negotiations, at
Georgetown’s request, Basho entered into a consulting agreement with Reisley’s company,
Evergreen Capital.71 Basho committed to pay Evergreen Capital a fee of $15,000 per month
67
JX 42 at EPG-0007346.
68
Id. at EPG-0007347.
69
See JX 45; see also Collins Tr. 10-11.
70
JX 50 at 4; see also JX 759.
71
Galleher Tr. 179-81; Reisley Dep. 8-9.
16
in return for advice about raising money and selling the company.72 Despite being paid by
Basho, Reisley reported directly to Davenport.73
Basho also formally engaged Cowen.74 The engagement letter covered both selling
the Company and raising financing. By this point, Davenport already had been consulting
with Cowen for three months.75
During a meeting on December 16, 2012, the Board approved the terms of the
Georgetown loan, which were subsequently memorialized in a Senior Secured Convertible
Note Purchase Agreement (the “Loan Agreement”).76 The agreement authorized maximum
borrowings of $7.5 million. Basho could draw up to $1.5 million per month by making a
loan request, which Georgetown committed to fund within fifteen days.77
With the loan in place, Davenport no longer worried about the Tokyo Electron
investment undermining Georgetown’s control. At the same meeting that the Board
approved the Loan Agreement, the Board approved an investment of $3.75 million from
72
JX 47.
73
Reisley Dep. 7-9.
74
PTO ¶ 25; JX 48; Collins Tr. 10.
75
Davenport Tr. 524-25.
76
JX 51; see PTO ¶ 24.
77
JX 51 § 3; see JX 50 at BTH00026440; JX 66 at REISLEY 026136.
17
Tokyo Electron on terms comparable to the terms of the Series F preferred stock.78 The
Company and Tokyo Electron also entered into a distributor agreement.79
F. Cowen Tries To Sell The Company.
During the first quarter of 2013, Cowen searched for a buyer for the Company.
Davenport decided that Georgetown “need[ed] to drive this process,” and Fotos agreed that
Collins and other members of management would not be willing to give a buyer “the really
hard sell.”80 Davenport began restricting calls with Cowen to Georgetown personnel only.81
Reisley told Cowen to interact only with Georgetown personnel and not to call Collins
without getting approval from Georgetown.82 Davenport made it clear that he wanted to
freeze out Collins and Galleher.83
In May 2013, Cowen’s ability to perform its engagement was briefly hampered
when the firm fired its M&A team.84 Evidencing Cowen’s loyalty to Georgetown, Cowen
promptly notified Reisley of this development and only told Collins later, after getting
78
JX 50 at BTH00026435.
79
Id. at BTH00026439.
80
See JX 60 at REISLEY 010347-48; see also Davenport Tr. 566-67.
81
See JX 59; Collins Tr. 13-15; Davenport Tr. 569-70.
82
JX 60 at REISLEY 010347; see JX 76 at REISLEY 009014.
JX 75 (Davenport writing that he had “no intention to have Greg or Earl involved
83
with [Georgetown’s] strategy”); see Davenport Tr. 569-72.
84
See JX 73; Davenport Tr. 567.
18
Georgetown’s permission.85 Collins confronted Davenport about being cut out of the sale
process, but Davenport ignored him. Davenport told Reisley that the management team
needed to understand that he was in charge: “Decisions will be made that they don’t like
and I will take full responsibility for making those decisions . . . . I want [the management
team] to understand that we are in a full pivot and if they do not produce what we need to
exit we will be ruthless.”86
Davenport spoke with his contacts at Cowen about the departure of the M&A team.
To remedy matters, Chris McCabe, the co-head of investment banking at Cowen, and Setch
Subudhayangkul, a managing director with almost two decades of M&A experience, took
over the Basho account. Basho was a small engagement, and Cowen’s prompt staffing of
the matter with these senior professionals evidenced the firm’s loyalty to Georgetown. The
new team performed competently, but the sale process failed to generate any results.87
G. Georgetown Fails To Provide Funding Under The Loan Agreement.
When the Board approved the Loan Agreement between Georgetown and Basho,
the Board and management understood that Basho could draw on the loan at a rate of $1.5
million per month to fund the Company’s needs for operating capital. Georgetown was
obligated to fund Basho’s requests within fifteen business days. Georgetown only fulfilled
the first draw request per the Loan Agreement’s contractual terms:
85
JX 76 at REISLEY 009014.
86
Id.
87
See JX 93 at BASH0001581-82.
19
● On April 11, 2013, Basho made its first draw request. Georgetown
funded the request on May 2.
● On May 23, 2013, Basho made its second draw request. Georgetown
did not fund the request until July 11.
● On July 11, 2013, Basho made its third draw request. Georgetown did
not fund the request until September 4.
● On September 9, 2013, Basho made its fourth draw request.
Georgetown funded $600,000 on October 22 and funded the
remaining $900,000 on November 4.88
Davenport personally decided to delay funding the draws under the Loan Agreement as a
way “to force Management to cooperate with [Georgetown].”89
88
See JX 782.
89
JX 83. At trial, Davenport testified that Georgetown funded the draws based on
its counsel’s interpretation of the Loan Agreement. Under that supposed interpretation,
once Georgetown funded one request, it did not have to fund another for 60 days.
Davenport Tr. 535-36, 551-52, 554. Although Davenport got his counsel to say that, the
interpretation was so extreme and contrary to the parties’ understanding that it could not
have been advanced in good faith. Collins thoroughly rebutted Georgetown’s arguments.
See JX 82; Collins Tr. 37-40; see also Dkt. 274 (defendants’ litigation counsel
acknowledging at post-trial argument that he “had difficulty understanding [Georgetown’s
transactional counsel’s] interpretation”). Georgetown’s internal description of the Loan
Agreement matched Basho’s interpretation. See JX 759; JX 66 at REISLEY 026136;
Reisley Dep. 114-15. The only other investor in the note funded every thirty days. See JX
782; Collins Tr. 37-38. Davenport simply chose not to comply with Georgetown’s
obligations as a means of putting pressure on the Company. See JX 83; JX 84 at REISLEY
030491; see also JX 126 at Davenport 0013958 (Davenport later claiming to an investor in
Basho that Georgetown had no obligation to provide funding under the Loan Agreement).
Davenport also testified that Reisley decided how to handle the loan, but Davenport
explicitly told Reisley not to comply with the draw requests and to refer any inquiries to
Davenport. See JX 83. It is difficult to be understated about Davenport’s lack of credibility
on this issue and on other matters.
20
Rather than complying with Georgetown’s contractual obligations, Davenport told
Basho’s CFO, Marisa Linardos, that Georgetown would evaluate Basho’s funding needs
on a monthly basis and provide funds at its discretion.90 This diktat resulted in Linardos
meeting with Reisley to justify the uses of the funds that comprised each draw request. If
Reisely disagreed, Georgetown would not fund.91 Georgetown’s micromanagement of
Basho’s operations caused Basho to miss its third and fourth quarter forecasts.92
H. Georgetown Controls The Fundraising Process.
Beginning in May 2013, Davenport instructed Cowen to broaden its efforts to
include raising a Series G round. Just as he had cut Collins and Galleher out of the sale
process, he also maneuvered to cut them out of the fundraising process. In an email to
Reisley, he explained the plan:
I will call Earl [Galleher] tomorrow as a preemptive tactic. Since Cowen has
agreed to get our approval on all matters related to the Private Placement
prior to any discussion with Management, the following is how we will
proceed[.]
1. Cowen will work with Greg [Collins] to give him the
impression that he is leading the decision making Process
2. We will avoid giving the impression in any way that we are
contacting or meeting with Cowen independent of what Greg thinks he is
doing.
90
See Galleher Tr. 192-93; Linardos Dep. 21-25; Thornley Dep. 41-42.
91
Linardos Dep. 23-24.
92
See JX 215; JX 244; JX 304 at Davenport 0013213; Collins Tr. 72-73.
21
3. Greg is leading the process as CEO and we are available if he
feels he needs our input on anything.
4. Cowen’s contact for all matters related to the Private
Placement will be Greg . . . .93
Put simply, Davenport and Reisley misled a fellow director (Galleher) and the Company’s
CEO (Collins) to achieve Georgetown’s goals.
On June 5, 2013, Davenport sent an email to Reisley in which he explained that if
they could not sell the Company, then they would bring in a new investor to solidify their
control over Basho:
We will work with Cowen to find an investor who will take Earl [Galleher]
off of the payroll. Next we will find an investor that will work with us to get
control of the BOD. Together with the new investor we will fire Greg
[Collins] and find a real growth focus[ed] CEO. Cowen will work with us to
help accomplish our goal[.] They know that Earl and Greg are hostile to them
which is good for us. We will welcome Earl and Greg to the realities of Wall
Street. Let the fun begin[.]94
On June 6, Davenport gave Galleher “a harsh and vile tongue lashing” to make it “clear
that the nature of the relationship had changed.”95
Collins perceived that Davenport was trying to cut him out of the fundraising
process and attempted to exert his authority as CEO. In an email dated June 16, 2013,
Collins instructed the Cowen team to
93
JX 80; see also Davenport Tr. 563-64, 569-70.
94
JX 86 at REISLEY 008987; see also JX 87 (Davenport: “Greg [Collins] is a
mediocre small minded failure. We need to take control of this Company and Greg and
Earl [Galleher] will be history.”).
95
JX 89; see id. (“I want [Galleher] to twist slowly in the wind.”).
22
let [him] know immediately of any communications between any of [the
Cowen team] and any of Basho’s investors or Board members. To be clear,
I expect no communication one on one, given the preferential treatment
provided to certain investors earlier in the process. Continuation of that
approach could prejudice other Board members against our process—
something I’d like to avoid.96
On June 17, as Collins had expected, Reisley asked Cowen to give Georgetown a contact
list for potential investors.97 Cowen gave the information to Georgetown.98
By August 15, 2013, Cowen had reached out to eighty-four financial and strategic
investors, held meetings with seventeen investors, and executed non-disclosure agreements
with sixteen investors.99 When the process came to a conclusion in September, only one
investor—Battery Ventures—submitted an expression of interest.100 By early October,
Battery Ventures had dropped out because Basho was too far along in the growth cycle,
faced significant competition, and lacked a sufficiently mature and predictable market.101
96
JX 91 at COWENBASHO00020094.
97
See JX 92; see also Subudhayangkul Dep. 21.
98
See JX 94; JX 96; see also Subudhayangkul Dep. 25-28.
99
See JX 100 at BASH008839.
100
See JX 109; Subudhayangkul Dep. 38-39.
101
See JX 124 at BASH012317; Collins Tr. 82-83. At trial, Fotos testified that
Battery walked away from the investment because Collins announced in an investment
pitch that Basho would miss its third quarter projections by a wide margin. Fotos Tr. 753-
54. That testimony was not credible, conflicted with Collins’ contemporaneous account
and testimony, and seems to have been manufactured based on another email in the record.
See JX 215.
23
Under its budget, Basho expected to need more funding by the end of the year. With
few options left, Cowen reached out to Norvell Miller, the Managing Director of Southeast
Venture Partners.102 Galleher had identified Southeast as a possible investor and met with
Miller in August, but Miller had deferred engaging in any discussions while he completed
other deals.103 Miller also told Galleher that Southeast’s preliminary research on Basho
“had raised a yellow flag about [its] possible involvement with Mr. Davenport” because of
his history of litigation and lack of experience with technology companies.104 After
engaging in October, Miller spoke with Collins and told him that Southeast only would
invest if they could establish “a working relationship” with Davenport.105 Collins relayed
the information to Davenport and suggested that he and Miller speak with each other
directly.106
Miller told Davenport that Southeast was prepared to consider an investment at a
pre-money valuation of $100 million. Davenport responded that Georgetown was about to
submit its own term sheet and that Southeast should consider participating in that
102
JX 120; see PTO ¶ 26. Miller also led Southeast Interactive Technologies. The
parties did not always distinguish carefully between Miller’s two entities. The distinction
is not important for this decision, which refers to both as “Southeast.”
103
Galleher Tr. 200-01.
104
Collins Tr. 22.
105
JX 139; see 1 Miller Dep. 14-17. Miller’s deposition transcript comprised two,
nonconsecutively paginated volumes. To differentiate, this decision employs the citation
style for multi-volume treatises.
106
JX 138.
24
investment. Miller explained that Southeast could act more quickly by submitting a term
sheet of its own, but Davenport reiterated that Southeast should consider Georgetown’s
term sheet first.107 Davenport did not want to compete with Southeast. He wanted to be
able to extract advantageous terms from the Company and recognized that he could best
achieve that goal if Georgetown was the Company’s only option. He hoped Southeast
would be happy to ride Georgetown’s coattails and invest on the advantageous terms that
Georgetown could extract if the Company lacked alternatives.
To reduce the risk that Southeast might compete, Davenport tried to slow down
Southeast’s ability to prepare its own term sheet. On November 2, 2013, Davenport told
Miller that Reisley was in charge of drafting Georgetown’s term sheet and that the two
should speak.108 Miller scheduled a call with Reisley, but Reisley skipped it without ever
following up or explaining why.109
Also during October 2013, Georgetown met with NewSpring Capital, another
venture capital firm.110 NewSpring proposed a framework for a joint investment, but
Reisley found it unacceptable because it was “too attractive to the new investors and not
107
See JX 141.
108
JX 144 at BASH012290.
109
JX 147 at BASH017581; see also Collins Tr. 25-26; 1 Miller Dep. 20; Reisley
Dep. 178-79.
110
See JX 131.
25
sufficiently attractive to us.”111 Davenport worried that the investment would prevent
Georgetown from achieving “total positive control” over Basho.112 When Reisley told
NewSpring that Georgetown was submitting a term sheet without them, NewSpring
withdrew.113
1. Georgetown’s Series G Term Sheet
On November 4, 2013, Georgetown sent Basho a term sheet for the Series G
round.114 It contemplated a total investment of $20 million at a pre-money valuation of $75
million. Georgetown committed to invest $10.025 million, but only $2.575 million was
new money; the other $7.45 million would come from converting the amounts due under
the Loan Agreement. If Georgetown could find other investors to fill out the round, then
the Company would receive a total of $12.55 million in new money.115
The terms of the Series G preferred stock were onerous: a liquidation preference
equal to three times invested capital, a cumulative dividend of 8%, the ability to convert
the preferred stock into super-voting common stock that carried ten votes per share, the
111
JX 136 at REISLEY 015857.
112
JX 143; see also Fotos Tr. 751, 786.
113
See JX 145; JX 148 at Davenport 0027943; Fotos Tr. 751. Cowen knew about
the discussions with NewSpring. See JX 151 at REISLEY 016692. Neither Georgetown
nor Cowen ever told Galleher about the discussions, which he learned about during this
litigation. Galleher Tr. 345-46.
114
PTO ¶ 33.
115
JX 146.
26
right to designate five out of the seven members of the Board, and extensive blocking
rights. In addition, Georgetown would designate counsel to document the deal, Basho
would pay all of the expenses related to the deal, and Basho would extend Evergreen
Capital’s consulting agreement until Georgetown elected otherwise.116
Georgetown demanded an answer by November 7, 2013—72 hours later.117 Collins
asked Georgetown for additional time to evaluate the proposal; Georgetown refused.118 On
the evening of November 6, the Board met to discuss the term sheet. 119 Reisley and
Davenport insisted on being present for the discussions, although they agreed to abstain
from any vote.120 The Board countered by establishing a committee whose members were
Galleher, Collins, and Thornley and empowering the committee to consider the
investment.121 After deliberating in committee, they decided that the term sheet was too
one-sided and should be rejected.122
Rather than negotiating, Georgetown applied more pressure. Davenport threatened
to stop providing any funding under the Loan Agreement by claiming that Basho had
116
Id. at COWENBASHO00026672; see Galleher 213-14.
117
JX 831 at BASH006490; Collins Tr. 26.
118
See JX 154 at COWENBASHO00014992; Collins Tr. 26.
119
JX 158.
120
JX 155.
121
PTO ¶ 35; JX 158 at BTH00012758-59.
122
PTO ¶ 36; JX 159 at BTH00028049; Collins Tr. 33-34.
27
suffered a material adverse change.123 He also told Collins that he should not expect any
funding from Southeast and that Georgetown’s deal would only get worse if the Company
did not accept it.124
At this point, Collins concluded that the Company “had no path forward but to
proceed with approval of the term sheet.”125 On November 7, 2013, the committee changed
its position and recommended that management be authorized to negotiate definitive
transaction documents with Georgetown.126 The Board followed the committee’s
recommendation.127
2. Southeast Submits A Competing Term Sheet.
On November 10, 2013, Collins forwarded Georgetown’s term sheet to Miller in
hopes of securing a better offer. Miller indicated that Southeast’s partners were prepared
invest $15 million, subject to due diligence and an agreement on terms.128 The next day,
Miller spoke with Davenport. A string of pejorative texts that Davenport sent to Reisley
123
JX 160-61; see JX 167; Collins Tr. 34-35; Galleher Tr. 222-24; Davenport Tr.
437-38; Linardos Dep. 53-56; Thornley Dep. 69-6.
124
JX 166.
125
Collins Tr. 41-42; see also JX 159.
126
PTO ¶ 36; see JX 159; JX 160; Thornley Dep. 61-68; Collins Tr. 30-34.
127
Collins Tr. 42.
128
JX 170 at BTH00022988; 1 Miller Dep. 45-48.
28
indicates that Davenport had no intention of cooperating with Miller.129 The following day,
Miller told Galleher and Collins that he was “getting mixed signals from everyone.”130
On Thursday, November 14, 2013, Miller told Davenport that Southeast was
considering investing between $8 and $15 million.131 Galleher proposed to delay any deal
with Georgetown until after Southeast made its proposal.132 On Friday, November 15,
Davenport told Collins that Basho needed to sign Georgetown’s deal by Wednesday,
November 20, or he would sue Collins personally.133 Davenport also threatened to sue
Galleher personally.134 Meanwhile, Georgetown stopped providing any additional funding
under the Loan Agreement. Reisley told Linardos to conserve cash by stretching out vendor
payments.135 Collins became so frustrated that he tendered his resignation on November
19, but withdrew it after Galleher and Thornley asked to him reconsider.136
129
JX 173.
130
JX 175.
131
JX 180; 1 Miller Dep. 30.
132
JX 181 at BTH00023007.
133
JX 182; JX 421 at BTH00046221; Collins Tr. 16-17, 44-45; see also JX 224 at
BTH00028237.
134
JX 198 at COWENBASHO00016031; see JX 186; 421; Galleher Tr. 222, 292.
135
See JX 176 at REISLEY 026511-12.
136
JX 192; Collins Tr. 49.
29
On November 21, 2013, Southeast sent a term sheet to Collins.137 Southeast
proposed investing $12.5 million in cash plus a commitment to invest another $10 million
if the Board determined that additional funding was required. Southeast would receive
preferred stock carrying a liquidation preference equal to two times invested capital. The
post-investment Board would have nine seats: holders of the Series G preferred stock
would designate five seats (with Southeast designating two of the five), holders of the
Series A-F preferred stock would designate one seat; and the remaining seats would be
reserved for Basho’s CEO, Galleher, and one outside director selected by a majority of the
other directors. The preferred stock would accrue a 5% cumulative dividend that would be
paid out only upon sale or liquidation.138
Cowen immediately recognized that Southeast’s term sheet was superior to
Georgetown’s proposal.139 At trial, Davenport conceded this point.140
That night, Collins sent Southeast’s term sheet to Davenport and the other
directors.141 Brewer reacted positively.142 Galleher felt that Basho needed a bridge loan if
137
PTO ¶ 27.
138
JX 195.
139
See JX 222; JX 270.
140
Davenport Tr. 598.
141
JX 203; JX 207.
142
JX 207 at EPG-0007501.
30
Georgetown refused to continue funding under the Loan Agreement, but that if Southeast
added that feature, then the Board would likely accept Southeast’s proposal.143
Davenport was unimpressed with Southeast’s offer. He emailed his team: “This is
their Hail Mary Play? Let’s play along with them until time runs out.”144
As Davenport’s email suggested, he recognized that if he could delay a potential
deal with Southeast and create uncertainty about its ability to close, then the Company
would find itself desperate for money. At that point, Georgetown would be the Company’s
only option. Consistent with this plan, Davenport and Reisley spent the next two months
communicating a series of conflicting and confusing positions to Southeast and the
Company. At times, superficially, they expressed support for a Southeast deal. Meanwhile,
they would ignore requests for information, decline to respond to substantive proposals,
and otherwise adopt passive-aggressive stances. At other times, Davenport and Reisley
would be openly hostile and aggressive towards Southeast or critical of Company
management.145
Internal dynamics at Southeast further complicated matters and helped Davenport
and Reisley achieve their aims. Southeast was not an investment fund with committed
143
JX 198 at COWENBASHO00016031.
144
JX 210 at REISLEY 030288.
145
See, e.g., JX 217; JX 219 at COWENBASHO00016500; JX 225; JX 226 at
COWENBASHO00022216; JX 234 at COWENBASHO00022398; JX 247 at
COWENBASHO00022541; JX 249 at COWENBASHO00022596; JX 253; JX 260; JX
261; JX 277 at BTH00015759-60.
31
capital. Instead, it was a pledge fund with a stable of investors. Southeast presented
transactions to its investors on a deal-by-deal basis, and each investor decided whether or
not to participate.146 Two of Miller’s significant investors were Rutherford Seydel and Tom
Noonan. For the Basho investment, Noonan’s involvement was particularly important
because of his experience with technology companies.147
During the discussions about Basho, the complexities of both sides’ internal
structures meant that neither side could speak with one voice. Instead, the multiple players
produced awkward, complex, and confusing interactions involving varying combinations
of Miller, Noonan, Seydel, Collins, Galleher, Davenport, Reisley, and other members of
the Board. Matters became even more complicated because Miller was not able to discuss
the deal in detail with Noonan until late December 2013.148
For Davenport and Reisley, the chaotic situation perfectly suited their goal of delay.
They could say different things to different people, appear supportive in some
communications and antagonistic in others, and generally run out the clock while claiming
all along that they were trying to cooperate.
146
JX 264 at COWENBASHO00023996 (Cowen noting that Southeast “is unique
in the sense that you syndicate on a deal by deal basis”); Reisley Dep. 169-70.
147
Collins Tr. 24-25, 63-64; Davenport Tr. 598-99; see 1 Miller Dep. 44.
148
See JX 314 at Davenport 0001727.
32
3. The Southeast Deal Falls Apart.
On November 22, 2013, Miller told Cowen that his partners had verbally committed
to the deal.149 Miller also thought the request for a bridge loan would be approved.150 In an
email to his partners, Miller credited Georgetown’s greed with creating an attractive
opportunity:
We have been negotiating a term sheet with management and Cowen, after
the Davenport Group (the current largest investor) put in a term sheet that
was so pun[i]tive that management will likely quit. We are the beneficiary of
that term sheet, as we only had to move modestly to the right to be perceived
as the “white knight”. Steve Rakes, my dour partner, calls this the best deal
he has seen in his career, and is planning to personally participate.151
In reality, Miller did not yet have commitments from Noonan and Seydel, who were his
key investors for the Basho transaction.
During a meeting on November 22, 2013, the Board instructed Cowen to work with
Southeast on the details of transaction.152 Davenport and Reisley abstained from the vote.153
That evening, Davenport texted Thornley and accused Galleher of “actively working to
delay the approval process” for Georgetown’s deal.154 He told Thornley that Basho “will
149
JX 208 at COWENBASHO00016213.
150
Id.
151
JX 206 at 1; see also 1 Miller Dep. 39-40, 88; 2 Miller Dep. 20.
152
PTO ¶¶ 29.
153
Id.
154
JX 184.
33
be insolvent” and “this could end badly” unless Basho closed its financing promptly.155
After talking with Thornley, Davenport reported to his team at Georgetown:
I had a “come to Jesus” call with Thornley. I told him I was I [sic] tired of
him taking sides with [Collins] and [Galleher] and their attacks on us. I
resented what he did today and if he did it again I will treat him as an enemy.
He believed everything that they said and believed nothing I said. I [y]elled
at him for two minutes and would not let him say anything. I told him I use[d]
to respect him but not any longer. I told him that all of this was personal and
all we respect is business. I told him that we want total control and the best
interest of [Basho] would be served when [Collins] leaves [Basho] and was
happy he resigned. He has missed every BOD approved budget and more
importantly the BOD he gave the banker when they asked him to give them
a Budget that he was sure he would make [sic]. We had money at stake and
he has nothing. I am upset with him and do not feel he can be trusted. THE
END.156
When asked whether Thornley would support Georgetown, Davenport responded, “If we
put this last $4M in I want total control and do not care what his attitude. If I do not like
his attitude or actions I want the power to crush him.”157
Despite his actual views, Davenport feigned willingness to support Southeast’s term
sheet.158 He had Cowen propose that Basho close on Georgetown’s investment first, then
Georgetown would roll its investment into Southeast’s when Southeast was ready to close
in January.159 The idea that Georgetown voluntarily would give up its superior security in
155
Id.
156
JX 216; see also Davenport Dep. 185-87.
157
JX 216.
158
See JX 217.
159
JX 219 at COWENBASHO00016500.
34
order to roll into Southeast’s weaker security was not credible, and Galleher
understandably rejected the idea.160
On November 26, 2013, Miller submitted a revised term sheet in which he agreed
to changes requested by Georgetown and Cowen.161 Miller expected Basho to accept the
deal.162 He also believed that Georgetown had agreed to continue to fund its commitments
under the Loan Agreement so that Southeast would not have to provide bridge financing.163
Davenport likewise told Basho that he would not let the Company run out of funds.164
Three hours later, Davenport bluntly rejected Southeast’s term sheet, stating: “[W]e
think that this approach is not productive, therefore we do not have any comments on the
draft term sheet.”165 Miller decided “to go pencils down” rather than entering a “hostile
environment.”166 Davenport blamed Miller, accusing Southeast of lacking the capital to
fund the deal and claiming that Miller had failed to consider that Basho would have to pay
off its loan from Georgetown in December 2014.167 The first accusation had a germ of truth
160
JX 221.
161
PTO ¶ 30; 1 Miller Dep. 60-69.
162
JX 228 at SEY000133.
163
Id.
164
See JX 229.
165
JX 233; see also 1 Miller Dep. 69-70.
166
JX 234 at COWENBASHO00022398-99; see also 1 Miller Dep. 70-73.
167
Id. at COWENBASHO00022398.
35
in light of Southeast’s structure, but Miller had never hidden that fact and had represented
that his investors would fund the deal. The second accusation came out of the blue, because
the discussions had always contemplated Georgetown rolling the debt owed under the Loan
Agreement into the equity raise. Miller told Collins that Davenport had never mentioned
this point before.168 Davenport’s unprofessional communication echoed Reisley’s
treatment of Southeast, which Miller described as “obstinate, and non-responsive” to the
point that Southeast would “never speak to him again.”169
Less than a week later, on December 1, 2013, Davenport changed his tune once
more. This time, he told Cowen that Georgetown would either let Southeast lead a
standalone deal or work with Southeast on a combined deal.170 Davenport also committed
to fulfill Georgetown’s commitments under the Loan Agreement and requested a face-to-
face meeting with Galleher to clear the air.171 When the two met, Davenport told Galleher
that if Southeast could deliver a term sheet that worked for the Company, Georgetown
would support it.172
168
Id.
169
JX 237 at EPG-0006759; 2 Miller Dep. 20-21.
170
See JX 247 at COWENBASHO00022541; see also JX 249 at
COWENBASHO00022596.
171
Galleher Tr. 243.
172
JX 249; JX 251; Galleher Tr. 243-44.
36
With Davenport continuing to sound supportive,173 Miller re-engaged and sent a
revised term sheet to Basho on December 6, 2013.174 It contemplated an investment of
$27.5 million at a pre-money valuation of $75 million, plus the possibility of an additional
investment of $10 million. It incorporated a $1.5 million bridge loan to fund Basho’s
immediate cash needs.175 Collins believed that Miller’s principal investors, Noonan and
Seydel, had committed to the deal.176 In reality, they still had not yet agreed to fund the
transaction.177
On December 9, 2013, the Board approved the terms of Southeast’s proposal with
Davenport and Reisley abstaining.178 Although he outwardly remained supportive,
Davenport secretly continued to plot ways of disrupting the negotiations with Southeast.
In an email dated December 16, 2013, Davenport told Reisley:
With respect to Basho and [Southeast] my new thought is that we should wait
to resolve (or raise) any of our demands until it is too late for the Company
and [Southeast] to do a deal with anyone else and the Company is running
out of cash.
173
See JX 253; JX 260; JX 261.
174
See generally 1 Miller Dep. 86-96.
175
JX 254.
176
JX 255.
177
Cf. JX 256 at SEY000181.
178
PTO ¶ 32; JX 267 at BTH00004239.
37
My thinking is that we can play [Galleher’s] game. After the BOD approves
the definitive agreement and everyone thinks the deal is a go we should
approve only if we get everything we want.
[Galleher] and [Collins] will be emotionally attached and on the verge of
what they will see as a victory for them.
We will win this game of poker[.]179
Galleher correctly perceived at the time that Davenport was purposefully sending
conflicting messages and claiming to be supportive while in fact being non-cooperative.180
By late December 2013, Southeast was still not ready to close. It turned out that
Miller had not yet been able to convince Noonan to support the transaction. To gain more
time, Miller offered to provide $1 million of bridge financing.181 Miller later increased that
amount to $1.5 million.182
On December 31, 2013, Noonan sent Miller a list of seven objections to the deal.183
He concluded, “I like the technology, I like the market opportunity, but continue to have
179
JX 273. At trial, Davenport tried to reinterpret his email by claiming he simply
“wanted to get the best deal for the company.” Davenport Tr. 599-600. That testimony was
not credible.
180
JX 277 at BTH00015761.
181
JX 288 at COWENBASHO00025946.
182
JX 289.
183
JX 303 at 3-5.
38
anxiety about a series G financing, with Chester, under these terms.”184 After sending the
email, Noonan could not be reached for several days.185
By January 8, 2014, no significant progress had been made. Galleher wrote to
Davenport, noting that “the bridge financing is in some form of limbo” and that Basho was
“fast approaching the date of no more money in the company.”186 He asked Davenport to
submit a proposal that would:
1. Prevent the company from running out of money.
2. Establishing a deal that all investors (including [Georgetown]) could live
with and feel ok about.
3. Ensure there is not a management exodus from the company[.]
4. Provide for a condition wherein management has the runway to actually
build the business vs. being ever focused on our cash run out date.
5. Be something that could attract the strategic investors whom we want to
quickly bring into the company.187
This was the scenario that Davenport had sought to create. Knowing that the Company was
desperate, Davenport did not budge from Georgetown’s original Series G term sheet.
On January 10, 2014, Basho sent Davenport a counterproposal.188 It contemplated a
Series G round in which Georgetown would invest a total of $10 million, consisting of $2.5
184
Id. at 5.
185
Id. at 2-3.
186
JX 308 at BASH0001530.
187
Id.
188
JX 310.
39
million in new money and the conversion of $7.5 million advanced under the Loan
Agreement. The counterproposal anticipated another $12.5 million from a combination of
Southeast and other investors.189 The term sheet was aspirational, because neither
Southeast nor any other investors were committed.190
That same day, Collins met with Noonan and Seydel and their advisors.191 He
reported to Galleher and Davenport that Noonan and Seydel were “prepared to proceed
with a bridge and Series G financing,” but “under materially different terms than outlined
in the current documents.”192 Collins outlined the main points, which included:
a) Substantial reduction if not elimination of all non-Series G liquidation
preference.
b) Retention of a fully participating 2X series G liquidation preference[.]
c) Series G protection provisions voting threshold shall be increased to
require approval of the holders of the Notes[.]
d) Currently outstanding convertible debt held by Georgetown will convert
into Series F Preferred Stock at the Series F original purchase price prior
to the Series G financing and on a pre-money basis [.]
e) Board must be reduced to no more than 5 directors, constitution tbd.193
189
Id. at BASH006823.
190
Galleher Tr. 318-19.
191
See Collins Tr. 68-70; see also 1 Miller Dep. 110-13.
192
JX 314 at Davenport 0001727.
193
JX 318 at BTH00028303-04. Noonan’s revised term sheet is available at JX 801.
40
Galleher thought the deal was attractive and the only way for Basho to move forward. To
facilitate the deal, Galleher offered to give up his right to have any representation on the
Board.194 Davenport thought that Southeast was simply trying to re-trade the deal at the
last minute to get better terms.195
Davenport and Seydel spoke by telephone on January 12 and 13, 2014.196 In an
effort to establish a positive working relationship, Seydel invited Davenport to be his guest
at two social events; Davenport did not attend either.197 Davenport also spoke by telephone
with Noonan on January 13. During the call, Davenport made it clear that (i) he was not
happy with the performance of Basho management, (ii) Georgetown only would invest
more money if it achieved hard control, (iii) he would not subordinate Georgetown’s debt
under the Loan Agreement, and (iv) he would not reduce Georgetown’s liquidation
preference.198 The call gave Noonan serious doubts about the investment, but he remained
undecided.199
194
JX 317 at Davenport 0013009.
195
JX 320.
196
JX 325 at BASH014914.
197
See JX 323; Davenport Tr. 623.
198
JX 328 at SEV-TN 002894-95.
199
Id. at SEV-TN 002894.
41
After the call, Davenport spoke with Galleher and told him (falsely) that he and
Noonan had not talked about investment terms.200 Galleher then did some digging on his
own. On January 14, 2014, Galleher had a heated exchange with Davenport. He then
emailed his fellow directors and told them that Noonan had not completed the bridge
financing because of concern about Georgetown as an investor.201 Davenport called
Galleher’s comments “libelous.”202 Galleher asked for a Board meeting to discuss the
matter. Later that day, Davenport and Galleher had a conversation in which Davenport
reversed position again and committed to work with Seydel and Noonan to support a bridge
financing. Galleher postponed the Board meeting in hopes that a deal with Southeast would
finally work out.203
After conferring with his team at Georgetown, Davenport relayed a revised proposal
to Galleher. Galleher’s notes memorialized the terms:
1. Chester is willing to extend the current Note agreement of
$7.5m to approx. $8m to address immediate cash needs. He would fund the
$500,000 deficit on Monday, Jan 20. He said if the needs were a little higher,
her would be willing to do that… so let’s say up to $650k or so.
2. At close of round, Basho pays off $7.5 million (now say $8m
to $8.250m from immediate cash needs advance) note with funds raised
through G round.
200
JX 332 at BTH00016088-89; see also Davenport Tr. 633-35.
201
JX 330 at Davenport 0001725; Galleher Tr. 318-22.
202
JX 330 at Davenport 0001725.
203
JX 334 at REISLEY 035116.
42
3. He would request that his $13m passive investment be treated
fairly, like all early investors investments and not be wiped out.
4. He would release all blocking rights.
5. He would retain his 2 BOD seats.
6. He would cooperate with our efforts to bring in Noonan and
204
[Seydel].
Davenport claimed that he could convince Noonan and Seydel to accept these terms.205 I
do not believe that Davenport had any intention of proceeding with a deal on these terms.
I think he was stringing out the negotiations to increase the pressure on the Company.
On January 17, 2014, Miller reported that Noonan would not participate in the
financing.206 With Noonan out, the Southeast proposal fell through.
After hearing the news, Collins resigned from all of his positions with the
Company.207 Galleher did not believe that the Company could make its next payroll.208
Davenport had maneuvered the Company into a position of maximum crisis.
I. The Series G Round Closes.
At 10:40 pm on January 17, 2014, Reisley sent the Board a revised proposal for the
Series G round and demanded an answer by January 18, 2014 at 6:00 pm—19 hours and
204
JX 336 at Davenport 0001673; see also Davenport Tr. 637-40.
205
JX 336 at Davenport 0001672.
206
JX 341.
207
PTO ¶ 39; Collins Tr. 71; Galleher Tr. 264.
208
JX 346 at REISLEY 035070.
43
20 minutes later.209 Galleher replied with questions that he believed Georgetown should
answer.210 Georgetown ignored them.
The revised proposal increased the size of the total round from $20 million to $25
million. Georgetown still committed to fund only $10 million, and only $2.5 million was
new money; Georgetown’s remaining $7.5 million continued to come from the conversion
of amounts due under the Loan Agreement.211 No other investors had been lined up to
participate. In light of Davenport’s persistent criticisms about Southeast being a pledge
fund, this aspect of Georgetown’s proposal carried considerable irony: Georgetown did not
have the investors to back its proposal either. And unlike Southeast, which would have
lined up its investors before closing and funded the total round, Georgetown’s deal would
close first, then Georgetown would go out into the market to try to find more investors.212
Georgetown had modified other aspects of its proposal. The Series G security
remained participating preferred stock that earned a cumulative dividend of 8% per annum.
The shares remained convertible into a new class of common stock carrying ten votes per
share. Georgetown still controlled a majority of the post-transaction Board, although now
with the right to designate four out of seven seats rather than five out of seven. The main
changes were in the liquidation preference. Rather than three times invested capital, the
209
JX 343; Galleher Tr. 266; Davenport Tr. 647.
210
JX 350 at COWENBASHO00026703.
211
JX 354; see also Subudhayangkul Dep. 142.
212
See Subudhayangkul Dep. 137-39; 143-44.
44
shares carried a preference equal to two times invested capital. Evidencing Georgetown’s
eagerness for a near-term sale, the preference would decline to one times invested capital
if a liquidating event generating less than $75 million in aggregate value for all equity
holders occurred in 2014. Georgetown demanded irrevocable proxies from Galleher and
IDCF that it could vote in favor of the deal.213
During a meeting on January 18, 2014, the Board accepted Georgetown’s
proposal.214 Brewer did not participate.215 Davenport and Reisley voted in favor of their
proposal. Thornley said he approved it because he felt that the Company had no other
options.216 Ross and Yamanaka went along. Galleher also voted in favor, but only after
expressing a lengthy list of objections. He later submitted his objections in writing and
instructed that they be filed with the minutes.217
On January 23, 2013, Georgetown sent transaction documents to Basho and insisted
that they be approved and executed within two hours.218 Rather than approve the
213
See JX 354; JX 376.
214
PTO ¶ 40; JX 361 at BTH00004246.
215
JX 361 at BTH00004247.
216
See Thornley Dep. 126; see also Galleher Tr. 267-71.
217
JX 352 at EPG-0006967; see JX 359.
218
See JX 373.
45
documents, Brewer resigned from the Board.219 The Board convened without Brewer and
approved the documents.220
The initial closing took place that same day, resulting in the issuance of Series G
preferred stock to Georgetown (the “Series G Financing”).221 As a result of the issuance,
Georgetown gained control over a majority of Basho’s outstanding voting power, giving
Georgetown mathematical control at the stockholder level. Georgetown also gained the
right to appoint a majority of the members of the Board.
On January 24, 2013, the Board met again. At the outset of the meeting, Georgetown
designated Fotos as a director.222 Collins and Brewer had resigned, and although the record
is unclear on this point, Ross also left the Board. Adding Fotos resulted in a Board
comprising Davenport, Reisley, Fotos, Thornley, Yamanaka, and Galleher. Davenport
knew he controlled Reisley and Fotos and expected to control the CEO when that position
was filled.223 Davenport had verbally bludgeoned Thornley to the point where he assented
219
JX 374.
220
JX 381 at REISLEY 034301.
221
PTO ¶ 43; JX 381.
222
PTO ¶ 45; Fotos Tr. 760.
223
See JX 545 at BASH015854; see also JX 549.
46
to Georgetown’s wishes;224 he would resign in a matter of weeks.225 Yamanaka remained
a director, but he was based in Japan and saw his role as a liaison for IDCF.226 He routinely
went along with whatever the Board did. Only Galleher continued to question
Georgetown’s actions. If Galleher could have rallied Thornley and Yamanaka, which I do
not believe was possible, the three of them at most could have created a temporary deadlock
until Georgetown appointed a fourth director.
During the meeting, Davenport introduced a series of resolutions that the Board had
never seen or discussed.227 In quick succession, the Board approved the following actions:
● A resolution removing Galleher as Chairman of the Board and
appointing Davenport as Chairman. Davenport then renamed this
position “Executive Chairman.”
● A resolution appointing Davenport, Reisley, and the future CEO as
members of the Executive Committee. The resolution empowered the
Executive Committee to exercise “all the powers and authority of the
Board in the management of the business and affairs of the
Company.”
224
The Series G Financing listed Thornley as a Georgetown designee to the Board.
JX 354. Davenport also represented to others that he controlled Thornley and admitted so
at trial. See JX 545 at BASH015854; Davenport Tr. 655-56.
225
See Thornley Dep. 149; see also Galleher Tr. 279-80 (explaining that Thornley
delayed his resignation to reduce the overall disruption to the Company after Collins and
Brewer resigned).
226
See JX 19 (IDCF investment memorandum to Basho explaining purpose of
investment); JX 357 (Yamanaka’s response to crisis over Series G Financing).
227
See JX 383 (Reisley instructing not to distribute resolutions prior to Board call);
Galleher Tr. 282.
47
● A resolution appointing Davenport, Reisley, and Thornley as
members of the Audit Committee.
● A resolution appointing Davenport, Reisley, and Yamanaka as
members of the Compensation Committee.
● A resolution eliminating all committees of the Board except the
Executive Committee, the Audit Committee, and the Compensation
Committee.228
● A resolution engaging a Georgetown affiliate to provide financial and
management consulting services to Basho for $200,000 per year.229
In each case, the directors approved the resolutions with Galleher abstaining.230
On March, 19, 2014, Thornley resigned from the Board. 231 He was the fourth
director to leave the Board since Georgetown’s final proposal for the Series G Financing,
and many senior officers and line employees had left as well.232 Galleher sent an email to
his fellow directors complaining about the situation. The Executive Committee responded
by terminating a consulting agreement between Galleher and the Company that paid him
$200,000 per year.233
228
JX 384.
229
JX 385.
230
Galleher Tr. 281-82.
231
PTO ¶ 46.
232
See JX 444 at BASH0004004. The directors who left the Board were Collins,
Ross, Brewer, and Thornley. Collins was also the CEO.
233
JX 446.
48
Between January 17 and March 10, 2014, the Company lacked a CEO. The vacancy
left Davenport and Reisley as the sole members of the Executive Committee.234 They used
their status to run the Company without consulting with or advising the other directors.235
They took particular delight in freezing out Galleher.236 They also fired Latham & Watkins
LLP, the Company’s longstanding outside counsel.237
On March 10, 2014, without any input from any of the other directors, Davenport
and Reisley hired Adam Wray to serve as Basho’s CEO.238 The plaintiffs proved at trial
that although Wray had experience working at technology companies, including as a CEO,
he was underqualified for the job, and Davenport an Reisley paid him what was more-
likely-than-not an above-market salary given his background and experience.239
After Wray joined the Company and became a director, the Board comprised
Davenport, Reisley, Fotos, Wray, Yamanaka, and Galleher. Although Georgetown
234
Galleher Tr. 283-84; Thornley Dep. 138-42.
235
JX 401 at BASH014263.
236
See JX 401 at BASH01426. Galleher also sent out multiple requests for
information from the Board and Mark Martines, the Company’s then-General Counsel.
See, e.g., JX 410; JX 423; JX 427. Davenport ignored them. He even told a personal friend
of his, Bianca Sun, that Basho had hired a new CEO before bothering to tell Galleher. JX
428; Davenport Tr. 677-78.
237
See JX 416 at BTH00000693.
238
See JX 436; Galleher Tr. 296-97.
239
See JX 436 at BTH00004434-35; Galleher Tr. 297-98. The plaintiffs also raised
questions about Wray’s honesty. Compare JX 579, with Wray Dep. 17.
49
controlled the first four directors,240 Davenport and Reisley continued using the Executive
Committee to run the show. The Executive Committee did not hold formal meetings or
prepare minutes; its members just acted.241 With the Executive Committee handling
everything, the Board did not convene a formal meeting for months.242 During this period,
Wray worked with Georgetown to phase out much of Basho’s legacy management team.243
Basho continued to need money. When the Series G Financing closed, Georgetown
had only provided Basho with $2.5 million in new money. Georgetown thought it would
be able to find other investors who would buy Series G shares and provide the remaining
$15 million. But Georgetown had little success. Many of the investors lost interest after
speaking with Davenport and looking at the Company. 244 By mid-March 2014,
Georgetown had managed to raise only $67,500 from other investors.245
J. A Series Of Insider Transactions
The balance of 2014 witnessed a series of insider transactions. On April 15, 2014,
the Executive Committee amended Basho’s consulting agreement with Evergreen Capital
240
See JX 508; JX 523.
241
Galleher Tr. 282; Wray Dep. 98-100.
242
See JX 473 at BTH00000661 (noting that as of May 23, 2014, the Board had not
met); Galleher Tr. 272, 281-82, 90.
243
See JX 402-03; see also JX 437 at WRAY00020565; JX 470; Davenport Tr. 703.
244
See JX 401 at BASH014264; JX 409 at BASH014203.
245
JX 442 at BTH00004450.
50
to extend it indefinitely, subject to termination on thirty-days’ notice. To compensate
Evergreen Capital for the remainder of 2014, Evergreen Capital would receive 102,040
shares of Series G preferred stock plus nine monthly payments of $3,888.88 in cash. In
future years, the agreement would revert to a payment of $15,000 per month.246
On April 23, 2014, the Executive Committee approved a $650,000 loan from
Georgetown, payable on demand.247 The loan would bear interest at 5% per annum, but the
rate would increase to 7% if the Company failed to pay on demand. The outstanding
balance could be converted into Series G shares at any time or rolled into equity in the next
financing round.248
Georgetown was still having difficulty filling out the Series G round, so the
Executive Committee hired PGP Capital Advisors, LLC.249 They did not have much
success either. Among other things, investors balked at Georgetown’s insistence on vetting
every investor before they could speak with management.250 With his options dwindling,
Davenport emailed Seydel to invite him to participate, but Seydel did not respond.251
246
JX 455.
247
JX 459 at BTH00004468-69.
248
Id. at BTH00004473-74.
249
Id. at BTH00004469-70.
250
JX 503 at 1.
251
See JX 507 (soliciting investment); JX 512 (following up on email sent a few
weeks earlier); JX 515 (following up on voicemail Davenport left Seydel). At trial,
Davenport testified that he spoke to Seydel often and they communicated about a potential
51
On June 27, 2014, the Executive Committee approved a loan of $1.5 million from
defendant Newport Beach Investors, LLC (“Newport”), an entity that Davenport
controlled.252 The terms of the loan paralleled Georgetown’s loan in April 2014.253
As of mid-July 2014, no one other than Davenport, his affiliates, and a handful of
existing investors in Georgetown had invested in the Series G round. On August 22, the
Executive Committee approved another loan from Newport in the amount of $250,000.254
On September 12, the Executive Committee approved yet another loan from Newport in
the amount of $400,000.255 The terms were the same as the June loan.
In late September 2014, after Galleher indicated that he would file a lawsuit seeking
books and records, Reisley began reaching out to other members of the Board about
ratifying the actions taken by the Executive Committee.256 On October 24, the Board met
for the first time since January.257 During the meeting, the Board ratified the employment
agreements for Wray and another senior officer, as well as certain employee retention
investment in Basho’s Series G round. See Davenport Tr. 648-53. As with other instances,
the contemporaneous documents do not support Davenport’s claims.
252
JX 447; JX 510; Davenport Tr. 507-08.
253
JX 510.
254
JX 534.
255
JX 541; see Galleher Tr. 292-93; Fotos 770-71.
256
JX 542.
257
See JX 549.
52
agreements and stock option issuances.258 In December 2014, the Executive Committee
acted by written consent to grant approvals required for the loans from Georgetown and
Newport and to authorize another $2 million in loans.259 Then on January 22, 2015, the
Board met again and approved a laundry list of actions the Executive Committee had taken
during the preceding year. During a meeting on January 26, the Board approved minutes
for all of the meetings that had taken place between August 2013 and October 2014. The
Board also ratified all of the transactions between Newport and Georgetown.260 Galleher
abstained from each vote, and he voted against ratifying the hiring of Wray.261
K. A False Hope
In early 2015, Basho showed some signs of success. It achieved the best quarter in
its history, closed several million-dollar deals, and its full year bookings for the prior year
had increased by 25%.262 Davenport even thought that IBM might buy Basho.263
In February 2015, the Business Development Corporation of America (“BDCA”)
submitted a term sheet for a $10 million loan plus a $2 million investment in the Series G
258
JX 542; JX 550.
259
JX 566.
260
JX 588; Galleher Tr. 295-96; Fotos Tr. 765-70, 791-801.
261
JX 588 at 10.
262
JX 570.
263
See JX 569 at REISLEY 000629; Davenport Tr. 706.
53
round, pending remaining diligence.264 BDCA had started looking at Basho as part of
Basho’s fundraising efforts during the previous summer.265 Georgetown saw this as a big
opportunity, and Reisley instructed management to cooperate fully.266 On March 9, the
BDCA investment closed.267 Basho used a portion of the proceeds to pay off the loans from
Newport.268
On March 26, 2015, FTV Capital proposed to lead an investment round of $45
million at a pre-money valuation of $130 million.269 Davenport caused Georgetown to
block the investment because he believed it would be highly dilutive to Georgetown’s
equity position. Davenport instead tried to use the term sheet to generate a deal with
IBM.270
Unfortunately, Basho experienced another downturn.271 Investors were growing
restless and demanding tangible results.272 As of June 2015, Basho had approximately $5.3
264
See JX 589; JX 591.
265
JX 520 at REISLEY 053151.
266
JX 593 at WRAY00008231.
267
PTO ¶ 81.
268
JX 623 at REISLEY 040462.
269
JX 607.
270
JX 610.
271
See JX 617; JX 630.
272
JX 621.
54
million on hand with a burn rate of $1.5 million per month, and BDCA had communicated
that it would not refinance its loan.273 Management tried to adjust Basho’s strategy,274 but
the Company’s performance continued to decline.275
Georgetown continued to look for outside capital, but opportunities were slim, and
the terms were only getting worse. In November 2015, JMI Equity proposed to lead a $25
million Series H round, which could be increased to $30 million at the investors’ option,
but at a pre-money enterprise value of $40 million. Under the term sheet, all of the prior
series of preferred stock—Series A through G—would be converted into common stock.
JMI also demanded a significant role in Basho’s governance.276 Management supported
the deal.277 It ultimately fell through,278 forcing Basho to accept another loan from
Georgetown.279
On December 11, 2015, Galleher resigned from the Board. On December 14, he
filed this lawsuit.280
273
JX 630 at BTH00003629-30.
274
See Fotos Tr. 773-74.
275
See JX 640 at Davenport 0035587-88.
276
JX 646; see Galleher Tr. 306-07.
277
JX 648 at WRAY00005446.
278
See JX 658.
279
See JX 657; JX 659.
280
PTO ¶¶ 78-79.
55
L. Receivership
In February 2016, Davenport and Kenneth Clark, a former business partner of
Davenport’s, invested $6 million in Basho through KEC Capital, LLC. Each contributed
$2.5 million in cash, and Georgetown also converted $1 million of Basho’s indebtedness.
In return, they received shares of Series H preferred stock.281
In September 2016, Basho defaulted on its loan from BDCA.282 Davenport blamed
Wray and the management team.283 Rather than immediately foreclosing, BDCA tried to
work with Basho.284 BDCA and Basho continued negotiations, and Davenport made a last
ditch effort to sell the Company’s intellectual property to Amazon.com, Inc.285 The deal
never came to fruition.286
By May 2017, Basho had ceased operations as a going concern. In July 2017, BDCA
obtained an order from a court in the State of Washington that placed Basho into
281
JX 668; see Davenport Tr. 668-71.
282
PTO ¶ 82.
283
See JX 677; JX 692.
284
See PTO ¶¶ 83-85; JX 707. The pre-trial order contains two paragraphs 84 and
two paragraphs 85. This citation references the first set.
285
See JX 728; JX 732; Davenport Tr. 515-16.
286
Davenport Tr. 711-12.
56
receivership.287 As part of the liquidation, the receiver sold any claims that Basho might
have against the defendants to the plaintiffs.288
II. LEGAL ANALYSIS
By the time of post-trial briefing and argument, the plaintiffs had narrowed their
claims to the assertion that Georgetown, Davenport, and Fotos breached their fiduciary
duties. At one time, questions about the distinction between direct and derivative claims
might have loomed large, but as part of Basho’s receivership, the plaintiffs purchased all
of Basho’s derivative claims. All other claims have been dismissed289 or waived.290
The plaintiffs’ claim for breach of fiduciary duty covers two time periods. First, the
plaintiffs contend that Georgetown and Davenport breached their duties by forcing the
Company to accept the onerous Series G Financing. They claim that the closing of the
Series G Financing inflicted serious harm on the Company and damaged the value of the
plaintiffs’ shares.
Second, the plaintiffs contend that after the Series G Financing, Georgetown,
Davenport, and Fotos breached their fiduciary duties by managing the Company to serve
287
PTO ¶¶ 84-85. This citation references the second set of these paragraphs.
288
See id. ¶¶ 87-88.
289
See Dkt. 233 (dismissing claims against Robert L. Reisley, Adam J. Wray, and
Atsushi Yamanaka).
290
Count III alleged a claim for tortious interference with prospective contractual
relations. The parties did not brief or argue that claim. See Dkt. 274 at 6. It is therefore
waived. See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed
are deemed waived.”).
57
Georgetown’s interests, rather than the interests of the Company and its stockholders as a
whole. During this period, Georgetown and Davenport controlled the Company at both the
stockholder and Board levels. After forming a majority of a three-member Executive
Committee, Davenport and Reisley ran the Company without input or oversight from any
other directors. During this authoritarian reign, Georgetown and its representatives caused
the Company to enter into a series of self-dealing transactions and continued to refuse third-
party capital that could dilute their control. The plaintiffs contend that after the Company
had been weakened by the onerous Series G Financing, the actions of Georgetown and its
representatives damaged the Company further, leading to its eventual liquidation.
A claim for breach of fiduciary duty is an equitable tort. 291 The basic elements of a
common law tort claim are well known: The plaintiff must prove existence of a duty, a
breach of that duty, injury, and a causal connection between the breach and injury that is
sufficient to warrant a remedy, such as compensatory damages. Similar concepts frame the
analysis of an equitable claim for breach of fiduciary duty, although decisions have tailored
these concepts to the equitable setting involving a relationship of trust and confidence
between the fiduciary and the cestui que trust.292
291
Hampshire Gp., Ltd. v. Kuttner, 2010 WL 2739995, at *54 (Del. Ch. July 12,
2010) (Strine, V.C.) (“A breach of fiduciary duty is easy to conceive of as an equitable
tort.”); see also Restatement (Second) Torts § 874 cmt. b (Am. Law Inst. 1979) (“A
fiduciary who commits a breach of his duty as a fiduciary is guilty of tortious conduct.”).
See generally J. Travis Laster & Michelle D. Morris, Breaches of Fiduciary Duty and the
Delaware Uniform Contribution Act, 11 Del. L. Rev. 71 (2010).
292
Auriga Capital Corp. v. Gatz Props., 40 A.3d 839, 850 (Del. Ch. 2012) (Strine,
C.) (“Under Delaware law, ‘[a] fiduciary relationship is a situation where one person
58
The equitable tort for breach of fiduciary duty has only two formal elements: (i) the
existence of a fiduciary duty and (ii) a breach of that duty. 293 The first element closely
resembles the corresponding aspect of a common law tort claim: the plaintiff must prove
by a preponderance of the evidence that the defendant was a fiduciary and owed duties to
the plaintiff. The second element departs from the common law model in significant
respects. For the traditional common law tort, the court analyzes the question of breach
using the standard of conduct that the defendant was expected to follow.294 For the
equitable tort, the court evaluates the question of breach through the lens of one of several
possible standards of review.295 “In each manifestation, the standard of review is more
reposes special trust in and reliance on the judgment of another or where a special duty
exists on the part of one person to protect the interests of another.’” (quoting Metro
Ambulance, Inc. v. E. Med. Billing, Inc., 1995 WL 409015, at *2 (Del. Ch. July 5, 1995)),
aff’d, 59 A.3d 1206 (Del. 2012).
293
See Beard Research, Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010); accord ZRii,
LLC v. Wellness Acq. Gp., Inc., 2009 WL 2998169, at *11 (Del. Ch. Sept. 21, 2009) (citing
Heller v. Kiernan, 2002 WL 385545, at *3 (Del. Ch. Feb. 27, 2002)).
294
See generally Melvin Aron Eisenberg, The Divergence of Standards of Conduct
and Standards of Review in Corporate Law, 62 Fordham L. Rev. 437, 461-67 (1993).
295
Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014); In re Trados Inc.
S’holder Litig. (Trados II), 73 A.3d 17, 35-36 (Del. Ch. 2013); see also William T. Allen,
Jack B. Jacobs & Leo E. Strine, Jr., Realigning the Standard of Review of Director Due
Care with Delaware Public Policy: A Critique of Van Gorkom and its Progeny as a
Standard of Review Problem, 96 Nw. U. L. Rev. 449, 451-52 (2002) [hereinafter
Realigning the Standard]; William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Function
Over Form: A Reassessment of the Standards of Review in Delaware Corporation Law, 56
Bus. Law. 1287, 1295-99 (2001) [hereinafter Function Over Form].
59
forgiving of [defendant fiduciaries] and more onerous for [the] plaintiffs than the standard
of conduct.”296
If the governing standard of review is the business judgment rule, then the plaintiff
bears the initial burden of proving that the defendant breached her duty of loyalty or her
duty of care, thereby rebutting one of the business judgment rule’s presumptions and
triggering further review of the decision under the entire fairness test.297 It is possible,
however, that the plaintiff will not always bear the burden of proving breach. When the
governing standard of review is entire fairness, either because the plaintiff has made the
necessary showing to rebut the business judgment rule or for other reasons, then the
defendant fiduciaries bear the burden of proof to show that they in fact acted in a manner
296
Chen, 87 A.3d at 666; see also id. at 667 (“The numerous policy justifications
for this divergence largely parallel the well-understood rationales for the business judgment
rule.”). For cogent explanations, see Function over Form, supra, at 1296, and Realigning
the Standard, supra, at 451-57; accord Eisenberg, supra, at 461-67; E. Norman Veasey &
Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance
from 1992–2004? A Retrospective on Some Key Developments, 153 U. Pa. L. Rev. 1399,
1421-28 (2005); Julian Velasco, The Role of Aspiration in Corporate Fiduciary Duties, 54
Wm. & Mary L. Rev. 519, 553-58 (2012). Opinions articulating the policy rationales for
applying standards of review that are more lenient than the underlying standards of conduct
include Brehm v. Eisner, 746 A.2d 244, 255-56 (Del. 2000) and Gagliardi v. TriFoods
Int’l, Inc., 683 A.2d 1049, 1052 (Del. Ch. 1996) (Allen, C.).
297
See In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 52 (Del. 2006) (explaining
that business judgment rule can be rebutted by establishing “the directors breached their
fiduciary duty of care or of loyalty or acted in bad faith” and “[i]f that is shown, the burden
then shifts to the director defendants to demonstrate that the challenged act or transaction
was entirely fair to the corporation and its shareholders”); accord Brehm, 746 A.2d at 264
n.66; Cinerama, Inc. v. Technicolor, Inc. (Technicolor Plenary IV), 663 A.2d 1156, 1163
(Del. 1995); Cede & Co. v. Technicolor, Inc. (Technicolor Plenary II), 634 A.2d 345, 363
(Del. 1993).
60
that was entirely fair to their beneficiaries.298 By making this showing, the defendant can
establish that no breach of duty in fact occurred, even if the defendant committed errors or
engaged in improprieties along the way.299
Although a claim for breach of fiduciary duty has only two formal elements, a
plaintiff will not be awarded a meaningful remedy without additional showings that parallel
the other elements of a traditional common law tort claim. One is a showing of harm to the
beneficiary or, alternatively, the wrongful taking of a benefit by the fiduciary.300 Another
is showing that a sufficiently convincing causal linkage exists between the breach of duty
298
Ams. Mining, 51 A.3d at 1239; Weinberger v. UOP, Inc., 457 A.2d 701, 710
(Del. 1983).
299
See, e.g., Trados II, 73 A.3d at 78 (finding transaction was entirely fair despite
defendants’ failure to follow a fair process); see also In re Dole Food Co., Inc. S’holders
Litig., 2015 WL 5052214, at *34 n.26 (Del. Ch. Aug. 27, 2015) (discussing possibility of
altruistic controller who effectuates a transaction using an unfair process for purpose of
conferring a more-than-fair result). Likewise, when the intermediate standard of enhanced
scrutiny governs, the burden of proof similarly shifts to the defendants, but to satisfy their
burden they need only show that they acted for a valid corporate purpose and that their
actions fell within a range of reasonableness. See, e.g., Paramount Commc’ns Inc. v. QVC
Network Inc., 637 A.2d 34, 45-46 (Del. 1994); Citron v. Fairchild Camera & Instr. Corp.,
569 A.2d 53, 64-65 (Del. 1989); Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *22
(Del. Ch. Jan. 25, 1999) (Strine, V.C.); Yanow v. Sci. Leasing, Inc., 1991 WL 165304, at
*9-10 (Del. Ch. July 31, 1991).
300
See Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 838 (Del. 2011)
(“[I]t is inequitable to permit the fiduciary to profit from using confidential corporate
information. Even if the corporation did not suffer actual harm, equity requires
disgorgement of that profit.”); Doug Rendleman, Measurement of Restitution:
Coordinating Restitution with Compensatory Damages and Punitive Damages, 68 Wash.
& Lee L. Rev. 973, 990 (2011) (“Actual harm to the corporation is not . . . a prerequisite
for a plaintiff to state a claim for restitution-disgorgement.”).
61
and the remedy sought that makes the remedy an apt means of addressing the breach.301 A
court may award nominal damages if a breach existed but does not warrant a meaningful
remedy.302
These concepts frame the analysis of the claims in this case. Although a case like
this one potentially raises many knotty legal questions, the parties painted in broad strokes.
This decision represents my best attempt to appropriately analyze this matter consistent
with the parties’ presentations and the record they created.
A. The Series G Financing
The plaintiffs contend that Georgetown and Davenport breached their fiduciary
duties in connection with the Series G Financing. The plaintiffs satisfied all the
301
See In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 773, 775 (Del.
2006) (explaining that when seeking post-closing damages for breach of fiduciary duty
based on false or misleading disclosures, plaintiff must prove a causal link between
disclosure violation and quantifiable damages); ACP Master, Ltd. v. Sprint Corp., 2017
WL 3421142, *20 (Del. Ch. July 21, 2017) (finding transaction was entirely fair where
controller engaged in acts of unfair dealing, but third party bidder intervened and severed
any causal connection between controller’s actions and ultimate deal price), aff’d, – A.3d
–, 2018 WL 1905256 (Del. Apr. 23, 2018); see also In re Wayport, Inc. Litig., 76 A.3d 296,
314-15 (Del. Ch. 2013) (“A failure to disclose material information in [the context of a
request for stockholder action] may warrant an injunction . . . but will not provide a basis
for damages from defendant directors absent proof of (i) a culpable state of mind or non-
exculpated gross negligence, (ii) reliance by the stockholders . . . , and (iii) damages
proximately caused by that failure.”).
302
See, e.g., Ravenswood Inv. Co., L.P. v. Estate of Winmill, 2018 WL 1410860, at
*2, 19, 25 (Del. Ch. Mar. 21, 2018) (awarding nominal damages for breach of duty); Lake
Treasure Hldgs., Ltd. v. Foundry Hill GP LLC, 2014 WL 5192179, at *1, 9, 13 (Del. Ch.
Oct. 10, 2014) (same); In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *51
(Del. Ch. Sept. 4, 2014) (same); Oliver v. Bos. Univ., 2006 WL 1064169, *25, 29, 30, 32,
34-35 (Del. Ch. Apr. 14, 2006) (same).
62
requirements necessary to receive a meaningful remedy for the injury inflicted by the Series
G Financing.
1. Fiduciary Status
The first question is whether the plaintiffs proved that Georgetown and Davenport
owed fiduciary duties in connection with the Series G Financing. They did.
For Davenport, the answer is easy. He was a director of Basho and owed fiduciaries
duties in that capacity.
For Georgetown, the analysis is more difficult. Georgetown was a stockholder, and
that status alone does not give rise to fiduciary duties. Instead, stockholders are the
beneficiaries of the fiduciary duties owed by the corporation’s directors and officers. But
identifying Georgetown as a stockholder does not end the analysis, because “Delaware law
imposes fiduciary duties on those who effectively control a corporation.”303 If a defendant
wields control over a corporation, then the defendant takes on fiduciary duties, even if the
defendant is a stockholder who otherwise would not owe duties in that capacity.
One means of establishing that a defendant wields control sufficient to impose
fiduciary duties is for the plaintiff to show that the defendant has the ability to exercise a
majority of the corporation’s voting power.304 Before the Series G Financing, Georgetown
303
Quadrant Structured Prods. Co. Ltd. v. Vertin, 102 A.3d 155, 183-84 (Del. Ch.
2014); see S. Pac. Co. v. Bogert, 250 U.S. 483, 487–88 (1919).
304
See Kahn v. Lynch Commc’n Sys., Inc. (Lynch I), 638 A.2d 1110, 1113 (Del.
1994) (observing that a stockholder becomes a fiduciary if it “‘owns a majority interest in
. . . the corporation.’”) (quoting Ivanhoe P’rs v. Newmont Mining Corp., 535 A.2d 1334,
1344 (Del. 1987)); In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del.
63
did not exercise a majority of Basho’s voting power, so it did not control Basho under this
standard.
A defendant without majority voting power can be found to owe fiduciary duties if
the plaintiff proves that the defendant in fact “exercises control over the business and
affairs of the corporation.”305 “The requisite degree of control can be shown to exist
generally or with regard to the particular transaction that is being challenged.”306
To show that the requisite degree of control exists generally, a plaintiff may
establish that a defendant or group of defendants exercised sufficient influence “that they,
as a practical matter, are no differently situated than if they had majority voting control.”307
One means of doing so is to show that the defendant, “as a practical matter, possesses a
combination of stock voting power and managerial authority that enables him to control
Ch. Aug. 18, 2006) (Strine, V.C.) (“Under our law, a controlling stockholder exists when
a stockholder . . . owns more than 50% of the voting power of a corporation . . . .”);
Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *4 (Del. Ch. June 5, 2006) (“A
shareholder is a ‘controlling’ one if she owns more than 50% of the voting power in a
corporation.”).
305
Lynch I, 638 A.2d at 1113 (internal quotation marks omitted) (quoting Ivanhoe,
535 A.2d at 1344).
306
Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 659 (Del. Ch. 2013)
(internal quotation marks omitted) (quoting Williamson, 2006 WL 1586375, at *4); accord
In re Primedia Inc. Deriv. Litig., 910 A.2d 248, 257 (Del. Ch. 2006) (“control over the
particular transaction at issue [is] enough”); see also American Law Institute, Principles of
Corporate Governance § 1.10(a)(2) (1994) (defining controlling stockholder as a person
who has the power to vote more than 50% of the voting equity or “otherwise exercises a
controlling influence over the management or policies of the corporation or the transaction
or conduct in question” (emphasis added)).
307
PNB Hldg., 2006 WL 2403999, at *9.
64
the corporation, if he so wishes.”308 For purposes of their challenge to the Series G
Financing, the plaintiffs do not seek to show that Georgetown exercised control pervasively
over Basho’s business and affairs.
As noted above, a plaintiff also may prove that a defendant exercised actual control
over the corporation with respect to a particular transaction or decision. In this way, a
defendant
that does not, as a general matter, exercise actual control over a corporation’s
business and affairs or over the corporation’s board of directors, but does, in
fact, exercise actual control over the board of directors during the course of
a particular transaction, can assume fiduciary duties for purposes of that
transaction.309
For this purpose, a showing of “pervasive control over the corporation’s actions is not
required.”310 Rather, the plaintiff must establish that the defendant exercised “actual control
with regard to the particular transaction that is being challenged.”311 “[T]he potential ability
to exercise control is not sufficient.”312
308
In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 553 (Del. Ch. 2003) (Strine,
V.C.).
309
1 Stephen A. Radin, The Business Judgment Rule 1129 (6th ed. 2009) (internal
quotation marks omitted) (quoting In re W. Nat’l Corp. S’holders Litig., 2000 WL 710192,
at *20 (Del. Ch. May 22, 2000)).
310
Superior Vision Servs., Inc. v. Reliastar Life Ins. Co., 2006 WL 2521426, at *4
(Del. Ch. Aug. 25, 2006); see also Primedia, 910 A.2d at 257 (noting that transactional
control does not require control over day-to-day business operations); Williamson, 2006
WL 1586375, at *4 (same).
311
Superior Vision, 2006 WL 2521426, at *4; accord Carsanaro, 65 A.3d at 659.
312
Williamson, 2006 WL 1586375, at *4.
65
It is impossible to identify or foresee all of the possible sources of influence that
could contribute to a finding of actual control over a particular decision. Examples include,
but are not limited, to: (i) relationships with particular directors that compromise their
disinterestedness or independence,313 (ii) relationships with key managers or advisors who
play a critical role in presenting options, providing information, and making
recommendations,314 (iii) the exercise of contractual rights to channel the corporation into
a particular outcome by blocking or restricting other paths,315 and (iv) the existence of
313
See, e.g., In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *17 (Del.
Ch. Mar. 28, 2018) (considering defendant’s relationships with directors as factor
supporting reasonable inference of control); Calesa Assocs., L.P. v. Am. Capital, Ltd., 2016
WL 770251, at *11 (Del. Ch. Feb. 29, 2016) (finding allegations supported inference
defendant was a controlling stockholder where it was reasonably conceivable “to infer that
a majority of the Board was not independent or disinterested, but rather was under the
influence of, or shared a special interest with,” the defendant); Thermopylae Capital P’rs,
L.P. v. Simbol, Inc., 2016 WL 368170, at *14 (Del. Ch. Jan. 29, 2016) (recognizing
defendant can exercise control over a decision if defendant “had achieved control or
influence over a majority of directors through non-contractual means, such as affiliation or
aligned self-interest”); N.J. Carpenters Pension Fund v. infoGROUP, Inc., 2011 WL
4825888, at *11 (Del. Ch. Oct. 6, 2011) (drawing inference defendant dominated majority
of directors).
314
See OTK Assocs., LLC v. Friedman, 85 A.3d 696, 706-07 (Del. Ch. 2014)
(considering defendant’s relationship with management, including tips received by
defendant from company’s officers that provided negotiating leverage, as supporting
reasonable inference of control); see also Hollinger Int’l, Inc. v. Black, 844 A.2d 1022,
1061 (Del. Ch. 2004) (Strine, V.C.) (discussing interactions between board chairman and
banker).
315
See Williamson, 2006 WL 1586375, at *4 (noting that “board veto power in and
of itself” does not give rise to control but that defendants’ “veto power is significant for
analysis of the control issue” because it indicated that defendants “had the ability to shut
down the effective operation of the At Home board of directors by vetoing board actions”);
Joseph W. Bartlett & Kevin R. Garlitz, Fiduciary Duties in Burnout/Cramdown
Financings, 20 J. Corp. L. 593, 601 (1995) (discussing role of blocking rights as source of
66
commercial relationships that provide the defendant with leverage over the corporation,
such as status as a key customer or supplier.316 Lending relationships can be particularly
potent sources of influence,317 to the point where courts have recognized a claim for lender
control for venture capital funds over portfolio companies). As with other indicators of
control, a blocking right standing alone is highly unlikely to support either a finding or a
reasonable inference of control. See Thermopylae Capital, 2016 WL 368170, at *13
(“Under Delaware law, however, contractual rights held by a non-majority stockholder do
not equate to control, even where the contractual rights allegedly are exercised by the
minority stockholder to further its own goals.”); see also id. at *14 (“[A] stockholder
who—via majority stock ownership or through control of the board—operates the decision-
making machinery of the corporation, is a classic fiduciary; in controlling the company he
controls the property of others—he controls the property of the non-controlling
stockholders. Conversely, an individual who owns a contractual right, and who exploits
that right—even in a way that forces a reaction by a corporation—is simply exercising his
own property rights, not that of others, and is no fiduciary.”). Compare Superior Vision,
2006 WL 2521426, at *5 (“In sum, a significant shareholder, who exercises a duly-obtained
contractual right that somehow limits or restricts the actions that a corporation otherwise
would take, does not become, without more, a ‘controlling shareholder’ for that particular
purpose.”) with id. (“There may be circumstances where the holding of contractual rights,
coupled with a significant equity position and other factors, will support the finding that a
particular shareholder is, indeed, a ‘controlling shareholder,’ especially if those contractual
rights are used to induce or to coerce the board of directors to approve (or refrain from
approving) certain actions.”).
316
See Williamson, 2006 WL 1586375, at *5 (considering defendants’ status as
corporation’s “only significant customers” and noting that corporation “depended on their
cooperation as customers if it was going to operate its business profitably”).
317
See, e.g., Joanna M. Shepherd et. al., What Else Matters for Corporate
Governance?: The Case of Bank Monitoring, 88 B.U. L. Rev. 991, 995 (2008) (“The
standard loan agreement imposes numerous operating and financial constraints on the
borrower firm. The borrower is also typically required to maintain a regular flow of
information to the bank, detailing the borrower’s operating performance and current
financial condition.” (footnote omitted)); id. at 1002 (“The detailed reporting obligations
and contract constraints imposed by the loan agreement, as well as the bank’s ability to
control the borrower’s cash, enable the bank literally to control the firm.”); Douglas G.
Baird & Robert K. Rasmussen, Private Debt and the Missing Lever of Corporate
Governance, 154 U. Pa. L. Rev. 1209, 1243-45 (2006) (explaining role of private debt as
67
liability when a lender exercises influence over a company that goes “beyond the domain
of the usual money lender” and, while doing so, acts negligently or in bad faith.318
Broader indicia of effective control also play a role in evaluating whether a
defendant exercised actual control over a decision. Examples of broader indicia include
ownership of a significant equity stake (albeit less than a majority),319 the right to designate
a “lever of corporate control”); id. at 1231-32 (describing features of loan agreements that
afford lenders influence and control).
318
NVent, LLC v. Hortonworks, Inc., 2017 WL 449585, at *9 (Del. Super. Feb. 1,
2017) (internal quotation marks omitted) (quoting Connor v. Great W. Sav. & Loan Ass’n,
44 P.2d 609, 616 (Cal. 1968)). See generally Daniel R. Fischel, The Economics of Lender
Liability, 99 Yale L.J. 131 (1989) (analyzing lender liability as remedy for lender
misbehavior); Margaret Hambrecht Douglas-Hamilton, Creditor Liabilities Resulting from
Improper Interference with a Management of a Financially Troubled Debtor, 31 Bus. Law.
343 (1975) (cataloging cases of lender liability).
319
See In re Crimson Exploration Inc. S’holders Litig., 2014 WL 5449419, at *10-
12 (Del. Ch. Oct. 24, 2014) (collecting cases). Section 203 of the Delaware General
Corporation Law creates a presumption of control at 20% ownership. See 8 Del. C. §
203(c)(4) (“A person who is the owner of 20% or more of the outstanding voting stock of
any corporation, partnership, unincorporated association or other entity shall be presumed
to have control of such entity, in the absence of proof by a preponderance of the evidence
to the contrary.”). The same section uses the acquisition of 15% ownership as a threshold
for a degree of influence warranting restrictions. See 8 Del. C. § 203(c)(5) (definition of
interested stockholder). The American Law Institute recommends a rebuttable presumption
of control when a person has the power to vote more than 25% of the voting equity of a
corporation. See American Law Institute, Principles of Corporate Governance § 1.10(b).
Many federal statues establish comparable thresholds for control or presumptive control.
The Bank Holding Company Act of 1956 sets a 25% threshold for control of a bank. 12
U.S.C. § 1841(a)(2)(A) (noting control exists when “the company directly or indirectly or
acting through one or more other persons owns, controls, or has power to vote 25 per
centum or more of any class of voting securities of the bank or company.”). The statute’s
implementing regulations establish “rebuttable presumptions of control” at 5% ownership.
12 C.F.R. § 225.31 (d)(2)(ii). For savings and loans, the thresholds are 25% for control and
10% for a rebuttable presumption of control. See 12 C.F.R. §§ 574.4(a) & (b)(i)-(ii). For
public utilities, “holding company” status arises at 10% ownership. See 42 U.S.C. §
68directors (albeit less than a majority),320 decisional rules in governing documents that
enhance the power of a minority stockholder or board-level positon,321 and the ability to
exercise outsized influence in the board room, such as through high-status roles like CEO,
Chairman, or founder.322
Invariably, the facts and circumstances surrounding the particular transaction will
loom large. Probative evidence can include statements by participants or other
16451(8)(A)(i). The securities laws do not require any level of ownership at all, defining
control to mean “the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through the ownership of
voting securities, by contract, or otherwise.” 17 C.F.R. § 230.405; accord 17 C.F.R. §
240.12b-2 (same). For a comprehensive overview of control statutes and their application,
see generally Phillip I. Blumberg, Control and the Partly Owned Corporation: A
Preliminary Inquiry Into Shared Control, 10 Fla. J. Int’l L. 419 (1996).
320
See, e.g., Williamson, 2006 WL 1586375, at *4 (“The fact that an allegedly
controlling shareholder appointed its affiliates to the board of directors is one of many
factors Delaware courts have considered in analyzing whether a shareholder is
controlling.”); Lynch I, 638 A2d at 1112, 1114-15 (considering right of Alcatel U.S.A.
Corporation to designate five of eleven directors of Lynch Communications Systems, Inc.
as part of affirming trial court’s finding of actual control).
321
See Tesla, 2018 WL 1560293, at *15 (considering high voting requirements
imposed by bylaws for certain actions that gave defendant a strong likelihood of blocking
them from taking place).
322
See, e.g., id. at *2, 3, 13, 16, 19 (considering defendant’s status as founder,
Chairman, CEO, and Chief Product Architect as part of factors supporting reasonable
inference of control); Cysive, 836 A.2d at 533-35 (considering defendant’s status as
founder, CEO, and chairman when making finding of control). To state the obvious, no
director or officer likes to receive explicit or implicit criticism or face ongoing hostility
from another board member, but the explicit or implicit threat of retaliation will carry much
more weight if it comes from a (hypothetical) defendant who controls 25% of the voting
power of the company, has the right under the certificate of incorporation or through a
stockholders agreement to appoint one-third of the directors, and serves as Chairman of the
Board with the power to call board meetings and set the agenda. Context matters.
69
contemporaneous evidence indicating that a defendant was in fact exercising control over
a decision. A court also can consider whether the defendant insisted on a particular course
of action, whether there were indications of resistance or second thoughts from other
fiduciaries, and whether the defendant’s efforts to get its way extended beyond ordinary
advocacy to encompass aggressive, threatening, disruptive, or punitive behavior.323
Rarely (if ever) will any one source of influence or indication of control, standing
alone, be sufficient to make the necessary showing.324 A finding of control after trial, like
a reasonable inference of control at the pleading stage, typically results when a confluence
of multiple sources combines in a fact-specific manner to produce a particular result.325
323
See, e.g., Lynch I, 638 A.2d at 1114 (citing bullying by Alcatel directors,
including statement to Lynch board that “‘You must listen to us. We are 43 percent owner.
You have to do what we tell you.’”); Tesla, 2018 WL 1560293, at *15 (considering that
defendant had “demonstrated a willingness to facilitate the ouster of senior management
when displeased”); infoGROUP, Inc., 2011 WL 4825888, at *11 (crediting inference that
defendant dominated board through threats and intimidation, including statements that
“some directors would be sued,” and calls for firing company management).
324
Calesa Assocs., 2016 WL 770251, at *11 (“[T]here is no magic formula to find
control; rather, it is a highly fact specific inquiry.”); see Superior Vision, 2006 WL
2521426, at *4 (citing need to consider multiple factors); Williamson, 2006 WL 1586375,
at *4-6 (discussing factors such as the right to designate directors, blocking rights, and
commercial relationships; noting that each one individually, without more, would not be
sufficient, but finding that factors combined to support inference of control).
325
See OTK Assocs., 85 A.3d at 702 (finding it reasonably conceivable that
“[d]espite not owning a mathematical majority of the Company’s common stock, [the
defendant] held a combination of securities and contract rights that, together with [the
defendant’s] board representation and close relationships with management, gave [the
defendant] effective control over [the company].”).
70
The plaintiffs proved at trial that Georgetown exercised effective control over Basho
for purposes of the decision to consummate the Series G Financing. Georgetown exercised
effective control as a result of a combination of factors:
 Georgetown’s use of its contractual rights to channel the Company into a
position where it had no options other than to accept Georgetown’s terms.
 Davenport and Reisley’s efforts, taken on Georgetown’s behalf, to spread
misinformation about Georgetown’s intentions and the status of negotiations.
 Davenport’s interference with Collins and other members of management.
 Davenport’s influence over Cowen, which Davenport used to manipulate the
fundraising process.
 Georgetown’s insistence on the Series G Financing, supported by Davenport
and Reisley’s threats and combative behavior.
Supporting these transaction-specific considerations are general indicia of control,
including Georgetown’s status as a significant stockholder and its ability to designate two
Board seats. Although this decision discusses the transaction-specific considerations
individually, the finding of actual control rests on the totality of the facts and
circumstances, considered in the aggregate.
a. Georgetown’s Use Of Its Contractual Rights
During the period leading up to the Series G Financing, Georgetown used its
contractual rights to cut off the Company’s access to other sources of financing. During
the same period, Georgetown failed to comply with its obligations to provide financing
under the Loan Agreement, first by delaying when it funded draws, then by threatening to
cut off financing altogether. By using its contract rights, Georgetown maneuvered the
71
Company into a position of maximum financial distress where it had no options other than
to accept the Series G Financing.
As Davenport recognized after closing the Series F round, Georgetown’s status as
the holder of a majority of the Series F preferred stock gave it the ability to block the
Company from raising capital through equity financings. He observed that the power to
exercise the blocking right put Georgetown “in the position of being the sole life line of
the Company for money.”326
For a profitable company that can finance its own business plan out of working
capital, or for a company that has access to multiple sources of financing, including debt,
the ability to block equity raises might not contribute significantly to a finding of control.
Basho, however, was a cash-burning, asset-light company that could not borrow and that
required regular rounds of equity financing to build out its business. For a company like
Basho, the parties that control its access to cash “sit on the company’s lifeline, with the
ability to turn it on or off.”327 When cash is like oxygen, self-interested steps to choke off
the air supply provide a strong indicator of control.
326
JX 15 at Fotos 0001670; see also JX 14 at Fotos 0010206 (Davenport observing
that with “the Company depending on us to fund it into 2013 couple[d] with our BOD seats
and Committee membership we control Basho”); JX 15 (Davenport: “we control the
Company.”); JX 43 at Fotos 0005793; JX 64 (Davenport observing after Series F round
that “[w]e have negative control of the Company”); JX 72 at REISLEY 009053 (Galleher
emailing Davenport after Series F round: “I know you hold negative control of the
company at this point. I hope that [you] will not diminish my voice in our continued
collaboration.”).
327
Bartlett & Garlitz, supra, at 601; see Manuel A. Utset, Reciprocal Fairness,
Strategic Behavior & Venture Survival: A Theory of Venture Capital-Financed Firms,
72
Davenport understood the power that Georgetown possessed, and he recognized that
by limiting the Company’s access to other sources of capital, the Company would reach a
position where it could not refuse Georgetown’s terms. To that end, Davenport used
Georgetown’s rights on several occasions to block alternative transactions. He vetoed an
attractive term sheet that Rippert had obtained from Updata because it threatened
Georgetown’s control of Basho.328 Instead, he proposed that Basho and Georgetown enter
into the Loan Agreement.329 That alternative enhanced Georgetown’s control by forcing
Basho to request monthly draws and giving Georgetown rights as a lender, including
priority over the equity for amounts that Georgetown loaned Basho.
2002 Wis. L. Rev. 45, 66 (2002) (“A venture capitalist’s leverage is further strengthened
by contract provisions giving it a monopoly over future financing.”). There is extensive
literature that discusses the use of staged financing as a control device. See, e.g., Darian M.
Ibrahim, The (Not So) Puzzling Behavior of Angel Investors, 61 Vand. L. Rev. 1405, 1413
(2008) (summarizing role of staged financing); Paul A. Gompers & Josh Lerner, The
Venture Capital Cycle 1, 139 (2000) (describing staged financing as “the most potent
control mechanism a venture capitalist can employ”).
Lest sensitive readers fear that this decision signals heightened risk for venture
capital firms who exercise their consent rights over equity financings, I reiterate that a
finding of control requires a fact-specific analysis of multiple factors. If Georgetown only
had exercised its consent right, that fact alone would not have supported a finding of
control. The plaintiffs proved that Georgetown and Davenport did far more.
328
See JX 106 at Davenport 0014401 (Davenport: “This Term Sheet is a
nonstarter.”); see also JX 30 at 1 (Davenport: “I don’t want any additional investors until
we decide it is in our interests.”); Davenport Tr. 520-21.
329
See JX 39 at BTH00012168; Davenport Tr. 394.
73
During the same period, Davenport sent Rippert an email reminding him that any
term sheet had to be “acceptable to [Georgetown].”330 He characterized this email as “my
way of reminding [Rippert] that the ultimate decision as to whether the Company accepts
any new investor is [Georgetown’s] to make. I do not think he understands how difficult
we will be until we get everything we want.”331 Shortly after that, Georgetown blocked an
attractive term sheet that Rippert had obtained from Tokyo Electron, recognizing that it
would alleviate some of the pressure on Basho to borrow funds under the Loan
Agreement.332 When Davenport heard about the Tokyo Electron term sheet, he exulted to
his Georgetown colleagues that Rippert “knows that with our blocking rights we control
Basho. Therefore, everything he does is geared toward taking those rights. Nice try but we
outflanked him months ago.”333 Davenport only permitted the Tokyo Electron investment
after the Company agreed to enter into the Loan Agreement.334
Georgetown next blocked an investment from NewSpring because it was “too
attractive to the new investors and not sufficiently attractive to us.”335 Davenport had
Reisley contact NewSpring on a Friday afternoon to tell them that Georgetown would be
330
JX 33 at Fotos 0011742; Reisley Dep. 18-19.
331
JX 33 at Fotos 0011742.
332
See JX 43.
333
Id. at Fotos 0002204.
334
See JX 45; JX 50.
335
JX 136 at REISLEY 015857.
74
submitting a term sheet of its own that following Monday. Georgetown told NewSpring
that in any deal, “we [Georgetown] have to have total positive control.” 336 NewSpring
walked away.337
Most consequentially, Georgetown used its blocking rights to prevent the Company
from securing an investment from Southeast. After Collins secured a term sheet from
Southeast, Davenport told his team that Georgetown would “play along with them until
time runs out.”338 Davenport proceeded to string along both the Company and Southeast,
sometimes acting receptive towards a deal, at other times acting hostile. During the process,
he reiterated to his team that Georgetown would “wait to resolve (or raise) any of our
demands until it is too late for the Company and [Southeast] to do a deal with anyone else
and the Company is running out of cash.”339 In late November, Davenport bluntly rejected
Southeast’s term sheet, stating: “[W]e think that this approach is not productive, therefore
we do not have any comments on the draft term sheet.”340 Later, when Noonan tried to
work out the final terms of a deal, Davenport told him that Georgetown would not consent
to any transaction that subordinated its debt or reduced its liquidation preferences.341 After
336
JX 143.
337
JX 145; see JX 148 at Davenport 0027943; Fotos Tr. 751.
338
JX 210 at REISLEY 030288.
339
JX 273.
340
JX 233; Davenport Tr. 451-52.
341
JX 328 at SEV-TN 002895.
75
realizing that Georgetown would only permit Southeast to tag along as a passive investor,
Noonan understandably declined to proceed, and the Southeast deal died.
While Georgetown interfered with the Southeast deal, Georgetown also increased
the financial pressure on the Company, first by delaying draws under the Loan Agreement
and later threatening to cut funds off altogether. Davenport personally decided to use the
draws under the Loan Agreement as a way “to force Management to cooperate with
[Georgetown].”342 Davenport then threatened to stop providing any financing under the
Loan Agreement, claiming that Basho had suffered a material adverse change because it
was running out of cash.343 Later that month, rather than funding the Loan Agreement per
its contractual terms, Reisley told Company management that they should conserve cash
by stretching out vendor payments.344 Although Davenport had Georgetown’s lawyer back
him up on his interpretation of the Loan Agreement, I do not believe that the interpretation
was advanced in good faith. It was advanced to squeeze the Company. 345
By exercising its contract rights in this fashion, Georgetown forced the Company
into a financial crisis. By the time Southeast withdrew, the Company had no other
alternatives. Galleher asked Davenport to make a fair proposal. Instead, Georgetown
resubmitted its proposal for the Series G Financing and demanded an answer in less than
342
JX 83; Davenport Tr. 545-46.
343
JX 160.
344
JX 176.
345
Compare JX 82 with JX 83.
76
20 hours. With Georgetown and Davenport having cut off all exits, the Board was forced
to accept it.346
b. Davenport and Reisley’s Spreading of Misinformation
During the period leading up to the Series G Financing, Davenport and Reisley acted
on Georgetown’s behalf by spreading misinformation, making threats, and engaging in
combative behavior. Beginning in May 2013, Davenport instructed Cowen to begin
contacting investors about a Series G round. He instructed Cowen to obtain Georgetown’s
approval for “all matters related to the Private Placement prior to any discussion with
Management,”347 while at the same time Davenport, Reisley, and Cowen would give
Collins (the CEO) and Galleher (the Chairman) the impression that Collins and Cowen
were leading the process without Georgetown’s involvement.348 Between themselves,
Davenport and Reisley discussed using the capital raise to “get control of the [Board]” so
they could get rid of Collins and Galleher.349
Davenport and Reisley continued their program of misinformation after Southeast
appeared on the scene. They started out by giving Southeast the run-around. Davenport
told Miller during a call that Southeast should wait until Georgetown had submitted a term
346
PTO ¶ 40; JX 352; JX 361; JX 384; see Galleher Tr. 267-71; Thornley Dep. 126.
347
JX 80; Davenport Tr. 577-78.
348
JX 86.
349
Id.77
sheet for an investment.350 He also told Miller that Reisley was handling the transaction
and that Miller should talk to him.351 But when Miller scheduled a call with Reisley,
Reisley skipped the call with no notice or excuse.352 After that initial non-interaction,
Reisley continued being belligerent and unprofessional in his dealings with Southeast.
Miller later described Reisley as ‘obstinate, and non-responsive” and told Collins that
Southeast would “never speak with [Reisley] again.”353
In November 2013, after Georgetown submitted an onerous term sheet for the Series
G Financing, Southeast submitted a clearly superior term sheet of its own. Davenport
alternated between acting receptive and hostile. Davenport described himself as “play[ing]
along . . . until time runs out.” 354
Consistent with this plan, Davenport and Reisley
communicated a series of conflicting and confusing positions, sometimes expressing
support for a Southeast deal and other times being hostile or adopting a passive-aggressive
stance. At one point, Davenport told Miller that he could not talk to Company
management.355 When Miller later submitted a term sheet that Davenport had seemed likely
350
See JX 141.
351
JX 144.
352
JX 147; see also Collins Tr. 25-26; 1 Miller Dep. 20.
353
JX 237 at EPG-0006759; see also 2 Miller Dep. 20-21.
354
JX 210 at REISLEY 030288.
355
JX 184 at BASH017910.
78
to accept, Davenport rejected it out of hand without providing any comments. 356 In
December and January 2013, the principal investors in Southeast, Seydel and Noonan, tried
to work directly with Davenport to strike a deal. Davenport turned down multiple
invitations to meet with them.357 After Davenport finally did speak with Noonan, he told
Galleher (falsely) that he and Noonan had not discussed investment terms.358
By spreading misinformation and engaging in combative behavior, Davenport and
Reisley helped Georgetown channel the Company into a positon where it had no
alternatives other than to accept the Series G Financing. Collins and the other members of
management, Galleher and the other directors, and Southeast could not make progress
towards a transaction in the face of Davenport and Reisley’s actions.
c. Interference With Management
Georgetown also exerted control over management through Davenport’s presence
on the Board and interactions with management. If a member of management did not
support Georgetown’s interests, then Davenport would subvert them, threaten them, or get
rid of them. After the Company entered into the Loan Agreement and Georgetown became
its primary source of operating capital, Davenport used the monthly draw process as an
additional means of controlling management.
356
JX 233; see also 1 Miller Dep. 69-70.
357
Davenport Tr. 623.
358
JX 332 at BTH00016088-89; see also Davenport Tr. 633-35.
79
The fates of two Basho CEOs illustrate how Georgetown treated management.
Davenport originally invested in Basho after speaking with Rippert, and he later supported
Galleher’s decision to hand over the CEO reins to Rippert.359 But after Rippert began trying
to raise alternative sources of capital that would reduce Georgetown’s influence, Davenport
decided that Rippert needed to go. Davenport told Galleher that Rippert did not understand
“how his 30 year career and net worth will be put in grave jeopardy.” 360 At the time,
Galleher supported Davenport, and they brought on Collins as a consultant. As Galleher
and Davenport had anticipated, Rippert viewed this move as a “constructive termination”
and resigned.361
Collins’ time at Basho followed a similar arc. Originally, Davenport supported his
candidacy, expecting him to use his M&A experience to achieve a quick sale. But once
Collins proved to have opinions of his own, Davenport began threatening to fire him, sue
him, or both.362 Davenport also made negative comments about Collins in meetings with
investors.363 The situation grew so dire that Collins resigned in the middle of the
negotiations with Southeast, stating:
359
JX 6; Galleher Tr. 154; Davenport Tr. 384-85.
360
JX 42 at EPG-0007347.
361
Id. at EPG-0007346.
362
JX 182; JX 421 at BTH00046221; Collins Tr. 16-17, 44-45; see also JX 224 at
BTH00028237.
363
See JX 226 at COWENBASHO00022216.
80
I can’t do my job (and won’t try) with the continuation of the threats of legal
liability or job retention or intimidation to act in one way or the other. My
actions, and [Basho’s] actions, are fully in compliance with good governance
and excellent communication. The threats aren’t productive, and constitute
duress and reason for my departure for good reason. I don’t mean to be so
blunt – but that’s the case.364
Galleher and Thornley convinced Collins to reconsider at the time. Collins ultimately
resigned when the Southeast deal fell through.
Once Georgetown became Basho’s primary source of financing under the Loan
Agreement, Davenport used access to cash to bring management to heel. Davenport told
Reisley, “I intend to use [the loan funding] to force Management to cooperate with us on
the EB5 documentation and other matters we need them to do. Any questions let me
know.”365 Davenport then instructed Linardos, the Company’s CFO, to provide Reisley
with a monthly budget and financial statements before Davenport would release any
funding under the Loan Agreement.366 Georgetown did not have the right under the Loan
Agreement to micromanage the Company’s finances in this fashion.367 Georgetown and
Davenport engaged in these practices to dominate management.
364
JX 224 at BTH00028237.
365
JX 83.
366
Linardos Dep. 21-25; Thornley Dep. 41-42.
367
Cf. Reisley Dep. 114-16, 120-21.
81
d. Influence Over Cowen
Georgetown also used its relationship with Cowen to control the Company. As a
threshold matter, Davenport strong-armed Basho into hiring Cowen.368 Davenport then
shut management out of the sale process, instructing Cowen that Georgetown “need[ed] to
drive this process” and that involving management, except when absolutely necessary,
“will not result in getting the best price for Basho.”369 Reisley later instructed Cowen only
to interface with Georgetown and not with Basho’s management.370 When Collins and
Galleher found out and objected, Davenport temporarily cut off communication with them:
I want these guys to understand that they do not have free access to me.
Decisions will be made that they don’t like and I will take full responsibility
for making those decisions . . . . I want these guys to understand that we are
in a full pivot and if they do not produce what we need to exit we will be
ruthless.371
368
Collins Tr. 10.
369
JX 60 at REISLEY 010348; see JX 61 at REISLEY 009617 (Davenport: “We
need to take over.”).
370
see, e.g., JX 59 (Davenport to Cowen: “I do not want Greg [Collins] or anyone
from Basho on the call. I want it restricted to the GTP guys.”); JX 60 at REISLEY 010347
(Reisley: “I told Matt that Cowen needs to interface with [Georgetown], not management
. . .”).
371
JX 76 at REISLEY 009014. Davenport also instructed the other Georgetown
members to stop responding to Collins and Galleher. See JX 74 (Davenport to Reisley:
“Please do not respond [to Galleher] or talk to him or Greg [Collins]. Radio silent[.]”); JX
75 at REISLEY 009046 (Davenport to Reisley: “I think it is best that you go radio silent
on Greg [Collins]. He is a mental case. We do not have time to deal with first graders with
security issues. I would like to exit and I have no intention to have Greg or Earl involved
with our strategy feeding upon each other[’]s mental problems.”); JX 77 at REISLEY
030505 (Davenport telling Reisley that Collins and Galleher’s reactions to being cut out of
process were “irrational”).
82
When Georgetown and Cowen re-focused on raising capital, Davenport decided
decide it was better to mislead Collins and Galleher into thinking they were part of the
sales process, while Georgetown worked with Cowen behind their backs.372 Davenport
planned to
work with Cowen to find an investor who will take Earl [Galleher] off of the
payroll. Next we will find an investor that will work with us to get control of
the BOD. Together with the new investor we will fire Greg [Collins] and find
a real growth focus CEO. Cowen will work with us to help accomplish our
goal[.] They know that Earl and Greg are hostile to them which is good for
us. We will welcome Earl and Greg to the realities of Wall Street. Let the fun
begin[.]373
After Collins perceived what Davenport was doing, he tried to assert his authority as CEO
by instructing Cowen to inform him immediately about all communications with Board
members and investors.374 The competing instructions from Davenport and Collins put
Cowen in a bind.375 Cowen’s solution was to communicate separately with Georgetown
and Basho management so that Cowen could appear to be doing what each of them
wanted.376
372
See JX 75; see also Davenport Tr. 569-72.
373
JX 86 at REISLEY 008987 (emphasis added); accord JX 87 REISLEY 008989
(Davenport to Reisley: “Greg [Collins] is a mediocre small minded failure. We need to
take control of this Company and Greg and Earl [Galleher] will be history.”).
374
JX 91 at COWENBASHO00020094.
375
JX 92; see also Subudhayangkul Dep. 21.
376
See JX 94; JX 96; see also Subudhayangkul Dep. 25-28.
83
This decision need not and does not consider whether Cowen engaged in any
culpable conduct. For present purposes, Georgetown’s interactions with Cowen provide
additional evidence of how Georgetown supplanted the Company’s management team
during the lead-up to the Series G Financing.
e. Insistence On The Series G Financing
Finally, Georgetown insisted on the Series G Financing, refused to negotiate or
answer questions, and threatened Basho’s directors and officers with dire consequences if
they did not accept it. In November 2013, Georgetown proposed the onerous terms of the
Series G Financing and demanded an answer within 72 hours.377 Collins asked for more
time, but Georgetown refused.378 When a committee of the Board initially rejected
Georgetown’s Series G term sheet as too onerous, Davenport threatened to stop funding
the Loan Agreement by claiming that Basho had suffered a material adverse change. 379 He
also told Collins that Georgetown’s deal would only get worse if the Company did not
accept it.380 These threats caused the Board to change its position and authorize the
negotiation of definitive documents for a transaction with Georgetown.381
377
PTO ¶ 33; JX 831 at BASH006490; Collins Tr. 26.
378
See JX 154 at COWENBASHO00014992; Collins Tr. 26.
379
JX 160-61; see JX 167; Collins Tr. 34-35; Galleher Tr. 222-24; Davenport Tr.
437-38; Linardos Dep. 53-56; Thornley Dep. 69-6.
380
JX 166.
381
PTO ¶ 36; Collins Tr. 41-42.
84
Rather than simply going along, Collins continued pursuing an investment from
Southeast. When the Company secured a superior term sheet from Southeast, Davenport
told Collins that Basho needed to sign Georgetown’s deal within five days or he would sue
Collins personally.382 Davenport also threatened to sue Galleher personally. 383 Later than
month, Davenport told Thornley that Basho “will be insolvent” and “this could end badly”
unless Basho accepted Georgetown’s terms.384 During a call, he “[y]elled at [Thornley] for
two minutes and would not let him say anything.”385 He also told Thornley that he was
“upset with him and do not feel he can be trusted.”386 After this call, Thornley supported
Georgetown.
In January 2014, Galleher asked Georgetown to make a fair proposal.387 Davenport
refused to budge from the Series G term sheet. Within two weeks, Collins had resigned,
and Galleher feared that the Company could not make its next payroll.388 At this point,
Reisley sent a revised Series G proposal that gave Georgetown full control of the Company
382
See JX 182; JX 421 at BTH00046221; Collins Tr. 44-45; see also JX 224 at
BTH00028237.
383
See JX 198 at COWENBASHO00016031; see JX 186; 421; Galleher Tr. 222,
292.
384
JX 184.
385
JX 216; see also Davenport Dep. 185-87.
386
JX 216.
387
See JX 358-59; Galleher Tr. 267-68.
388
See PTO ¶ 39; JX 346 at REISLEY 035070; Collins Tr. 71; Galleher Tr. 264.
85
at the stockholder and Board-levels in return for only $2.5 million in new money. He
demanded an answer by January 18, 2014 at 6:00 pm—19 hours and 20 minutes later.389
Galleher replied with a list of questions that he believed Georgetown should answer.390
Georgetown ignored the questions and insisted that the Company take its deal. With no
other options or alternatives, the Company accepted it. Thornley voted in favor because he
felt that the Company had no other options.391 Galleher voted in favor, but only after
expressing a lengthy list of objections.392 Within three months, six senior officers and
directors had resigned from the Board, including Collins, Brewer, and Thornley.393
f. Georgetown’s Fiduciary Status
Taken as a whole, the plaintiffs proved by a preponderance of the evidence that
Georgetown exercised actual control over the Company in connection with the Series G
Financing. Georgetown’s actual control did not arise from any single factor, but rather from
a confluence of multiple sources of influence. These factors included its contractual rights,
which enabled Georgetown to block other financing alternatives, limit the Company’s
access to capital, and force it into a position of maximum financial distress. They also
included the coordinated actions of its representatives, Davenport and Reisley, who spread
389
JX 343; Galleher Tr. 266; Davenport Tr. 647.
390
JX 350 at COWENBASHO00026703.
391
See Galleher Tr. 267-71; Thornley Dep. 126.
392
JX 352.
393
See Galleher Tr. 263-65.
86
misinformation, made threats, and engaged in combative behavior. Georgetown also used
Cowen to serve its goals. By creating a situation in which the Company had no other
alternatives and no more money, Georgetown forced the Company to accept its deal.
Because Georgetown exercised actual control over the Company for purposes of the Series
G Financing, Georgetown became a fiduciary for purposes of evaluating that transaction.
2. Breach
The next question is whether Georgetown and Davenport breached their fiduciary
duties in connection with the Series G Financing. To determine whether a corporate
fiduciary has breached its duties, a court examines the fiduciary’s conduct through the lens
of a standard of review.394 “When a transaction involving self-dealing by a controlling
shareholder is challenged, the applicable standard of judicial review is entire fairness, with
the defendants having the burden of persuasion.”395
Once entire fairness applies, the defendants must establish “to the court’s
satisfaction that the transaction was the product of both fair dealing and fair price.”396 “Not
even an honest belief that the transaction was entirely fair will be sufficient to establish
394
Chen, 87 A.3d at 666; Trados II, 73 A.3d at 35-36; Realigning the Standard,
supra, at 451-52; Function Over Form, supra, at 1295-99.
395
Ams. Mining, 51 A.3d at 1239; accord Kahn v. M & F Worldwide Corp. (MFW
II), 88 A.3d 635, 642 (Del. 2014); Kahn v. Tremont Corp. (Tremont II), 694 A.2d 422, 428
(Del. 1997); Weinberger, 457 A.2d at 710.
396
Technicolor Plenary IV, 663 A.2d at 1163 (internal quotation marks omitted)
(quoting Technicolor Plenary II, 634 A.2d at 631).
87
entire fairness. Rather, the transaction itself must be objectively fair, independent of the
board’s beliefs.”397
Although entire fairness is Delaware’s most onerous standard of review, “[a]
determination that a transaction must be subjected to an entire fairness analysis is not an
implication of liability.”398 While the reverberations of isolated plaintiffs’ victories
continue to echo in the collective consciousness, scholarly research establishes that only
exceptional entire fairness cases result in meaningful damages awards.399
397
Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del. Ch. 2006).
398
Emerald P’rs v Berlin, 787 A.2d 85, 93 (Del. 2001).
399
See, e.g., Reza Dibadj, Networks of Fairness Review in Corporate Law, 45 San
Diego L. Rev. 1, 22 (2008) (observing “[w]hile the conventional wisdom might suggest
that standards of review are typically outcome determinative, the empirical research
suggests the fairness standard is not . . .” and cataloging cases where defendants prevailed
(footnote omitted)); Julian Velasco, A Defense of the Corporate Law Duty of Care, 40 J.
Corp. L. 647, 689 (2015) (collecting cases where defendants prevailed under entire fairness
and noting that “[o]nce applied, the entire fairness test is no longer considered outcome-
determinative”). For illustrative cases where the defendants prevailed under the entire
fairness standard of review in a post-trial setting, see Kahn v. Lynch Commc’n Sys., Inc.,
669 A.2d 79 (Del. 1995); Technicolor Plenary IV, 663 A.2d 1156; Nixon v. Blackwell, 626
A.2d 1366 (Del. 1993); Rosenblatt v. Getty Oil Co., 493 A.2d 929 (Del. 1985); Trados II,
73 A.3d 17; Zimmerman v. Crothall, 62 A.3d 676 (Del. Ch. 2013); S. Muoio & Co. LLC v.
Hallmark Entm’t Invs. Co., 2011 WL 863007 (Del. Ch.), aff’d, 35 A.3d 419 (Del. 2011);
In re John Q. Hammons Hotels Inc. S’holder Litig., 2011 WL 227634 (Del. Ch. Jan. 14,
2011); Hanover Direct, Inc. S’holders Litig., 2010 WL 3959399 (Del. Ch. Sept. 24, 2010);
Kates v. Beard Research, Inc., 2010 WL 1644176 (Del. Ch. Apr. 23, 2010); Cysive, 836
A.2d 531; Emerald P’rs v. Berlin, 2003 WL 21003437 (Del. Ch.), aff’d, 840 A.2d 641(Del. 2003); Liberis v. Europa Cruises Corp., 1996 WL 73567 (Del. Ch. Feb. 8, 1996),
aff’d, 702 A.2d 926 (Del. 1997); Van de Walle v. Unimation, Inc., 1991 WL 29303 (Del.
Ch. Mar. 7, 1991); Citron v. E.I. Du Pont de Nemours & Co., 584 A.2d 490 (Del. Ch.
1990); Rabkin v. Olin Corp., 1990 WL 47648 (Del. Ch.), aff’d, 586 A.2d 1202 (Del. 1990)
(TABLE); Shamrock Hldgs., Inc. v. Polaroid Corp., 559 A.2d 257 (Del. Ch. 1989); see
also Kleinhandler v. Borgia, 1989 WL 76299 (Del. Ch. July 7, 1989) (summary judgment).
88
“The concept of fairness has two basic aspects: fair dealing and fair price.”400
Although the two aspects may be examined separately, they are not separate elements of a
two-part test. “[T]he test for fairness is not a bifurcated one as between fair dealing and
price. All aspects of the issue must be examined as a whole since the question is one of
entire fairness.”401
The fair dealing aspect of the unitary entire fairness test “embraces questions of
when the transaction was timed, how it was initiated, structured, negotiated, disclosed to
the directors, and how the approvals of the directors and the stockholders were
obtained.”402 The various dimensions of fair dealing can interact and elide such that a
particular instance of unfair dealing affects multiple phases of the process. This is often the
case when a controller engages in an act of unfair dealing that it subsequently fails to
disclose. In those situations, the act both provides evidence of unfairness in its own right
and gives rise to an additional instance of unfairness in the form of a disclosure violation.403
As noted previously, in other cases the court has held after trial that the challenged
transaction was not entirely fair, but that the plaintiffs had not suffered an injury that
warranted an award other than nominal damages. See, e.g., Nine Sys., 2014 WL 4383127;
Oliver, 2006 WL 1064169.
400
Weinberger, 457 A.2d at 711.
401
Id.402
Id.403
See Rabkin v. Phillip A. Hunt Chem. Corp., 498 A.2d 1099, 1104 (Del. 1985)
(“[The] duty of fairness certainly incorporates the principle that a cash-out merger must be
free of fraud or misrepresentation.”); Weinberger, 457 A.2d at 710 (holding entire fairness
standard requires compliance with duty of disclosure and incorporating this principle into
fair dealing aspect of the test); Lynch v. Vickers Energy Corp., 383 A.2d 278, 281 (Del.
89
The fair price aspect of the entire fairness test “relates to the economic and financial
considerations of the proposed merger, including all relevant factors: assets, market value,
earnings, future prospects, and any other elements that affect the intrinsic or inherent value
of a company’s stock.”404 The fair price aspect calls for the same basic economic inquiry
as the fair value standard under the appraisal statute.405 The two standards differ, however,
1977) (holding that when controlling stockholder pursues squeeze-out merger, controller
owes same fiduciary duty of disclosure as directors of controlled corporation).
404
Weinberger, 457 A.2d at 711.
405
Id. at 713 (equating fair price aspect of entire fairness with fair value standard in
appraisal); Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 114 (Del. 1952) (adopting
valuation standard for appraisal announced in Tri-Continental v. Battye, 74 A.2d 71 (Del.
1950), for entire fairness case); accord Bershad v. Curtiss-Wright Corp., 535 A.2d 840,
845 (Del. 1987) (explaining that fair price aspect of entire fairness standard “flow[s] from
the statutory provisions . . . designed to ensure fair value by an appraisal, 8 Del C. § 262”);
Rosenblatt, 493 A.2d at 940 (following Sterling); see, e.g., Del. Open MRI Radiology
Assocs., P.A. v. Kessler, 898 A.2d 290, 342-44 (Del. Ch. 2006) (Strine, V.C.) (determining
company’s per-share value, then using that value “as the basis for a conclusion that the
merger was not financially fair to the squeezed-out minority . . . as a matter of equity,” and
granting same amount as damages); In re Emerging Commc’ns, Inc. S’holders Litig., 2004
WL 1305745, at *24 (Del. Ch. June 4, 2004) (determining that “fair value” of company
was $38.05, stating that “[f]rom that fair value finding it further follows that the $10.25 per
share merger price was not a ‘fair price’ within the meaning of the Delaware fiduciary duty
case law beginning with Weinberger,” and granting difference as damages); see also John
C. Coates IV, “Fair Value” As an Avoidable Rule of Corporate Law: Minority Discounts
in Conflict Transactions, 147 U. Pa. L. Rev. 1251, 1261 (1999) (“In entire fairness cases,
corporate fiduciaries are required to show that the terms of a proposed conflict transaction
include a ‘fair price,’ and Delaware courts look to appraisal cases for guidance in deciding
whether a given price is fair, even when a merger does not trigger appraisal rights.”);
Lawrence A. Hamermesh & Michael L. Wachter, Rationalizing Appraisal Standards in
Compulsory Buyouts, 50 B.C. L. Rev. 1021, 1030 (2009) (“[I]t is generally accepted in the
Delaware case law and the major treatises on Delaware corporate law that in evaluating the
entire fairness of a squeeze-out merger, the courts generally utilize the same valuation
analysis for both the fair price prong of the fiduciary duty action and the appraisal action.”)
(internal quotation marks and footnote omitted); Guhan Subramanian, Fixing Freezeouts,
90
in that the appraisal statute requires that the court determine a point estimate for fair value
measured in dollars and cents.406 The fair price aspect of the entire fairness test, by contrast,
is not in itself a remedial calculation. The entire fairness test is a standard of review that is
applied to identify a fiduciary breach.407 “For purposes of determining fairness, as opposed
to crafting a remedy, the court’s task is not to pick a single number, but to determine
whether the transaction price falls within a range of fairness.”408
Consistent with the unitary nature of the entire fairness test, the fair process and fair
price aspects interact. The range of fairness has most salience when the controller has
established a process that simulates arm’s-length bargaining, supported by appropriate
procedural protections.409 A strong record of fair dealing can influence the fair price inquiry
115 Yale L.J. 2, 43 (2005) (“As a starting point, courts in entire fairness proceedings
generally look to the appraisal remedy . . . .”). See generally Reis v. Hazelett Strip-Casting
Corp., 28 A.3d 442, 461-64 (Del. Ch. 2011) (discussing authorities).
406
8 Del. C. § 262(h); see In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 30
(Del. Ch. 2014).
407
See generally In re Appraisal of Dell Inc., 2016 WL 3186538, at *25-27 (Del.
Ch. May 31, 2016), aff’d in part, rev’d in part on other grounds, Dell, Inc. v. Magnetar
Glob. Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017) (distinguishing between task
of determining fair value in appraisal and application of standard of review for purposes of
evaluating fiduciary breach, albeit with primary emphasis on intermediate standard of
enhanced scrutiny rather than entire fairness). See generally Charles Korsmo & Minor
Myers, Reforming Modern Appraisal Litigation, 41 Del. J. Corp. L. 279, 320-25 (2017)
(comparing appraisal with fiduciary review with primary focus on deals without controlling
stockholder); Charles R. Korsmo & Minor Myers, Appraisal Arbitrage and the Future of
Public Company M&A, 92 Wash. U. L. Rev. 1551, 1607-09 (2015) (same).
408
Dole, 2015 WL 5052214, at *33.
409
See, e.g., M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 797 (Del. 1999) (“A
merger price resulting from arms-length negotiations where there are no claims of collusion
91
and lead to a conclusion that the price was fair. But the range of fairness is not a safe-harbor
that permits controllers to extract barely fair transactions. Factors such as coercion, the
misuse of confidential information, secret conflicts, or fraud could lead a court to hold that
a transaction that fell within the range of fairness was nevertheless unfair compared to what
faithful fiduciaries could have achieved. Under those circumstances, the appropriate
is a very strong indication of fair value.”); Rosenblatt, 493 A.2d at 937–38 (observing that
controller established separate negotiating terms to recreate arm’s-length bargaining, that
negotiations were adversarial, and that result was “more than the theoretical concept of
what an independent board might do under like circumstances” and “clear that these
contending parties to the merger in fact exerted their bargaining power against one
another”); Van de Walle, 1991 WL 29303, at *17 (“The most persuasive evidence of the
fairness of the $21 per share merger price is that it was the result of arm’s-length
negotiations between two independent parties, where the seller . . . was motivated to seek
the highest available price, and a diligent and extensive canvass of the market had
confirmed that no better price was available. The fact that a transaction price was forged
in the crucible of objective market reality (as distinguished from the unavoidably subjective
thought process of a valuation expert) is viewed as strong evidence that the price is fair.”).
92
remedy can be a “fairer” price410 or an award of rescissory damages.411 Just as a fair process
can support the price, an unfair process can taint the price.412
a. Process
Georgetown and Davenport did not prove that the Series G Financing process was
entirely fair. Instead, the record establishes that the process was decidedly unfair.
410
Reis, 28 A.3d at 467; see, e.g., Dole, 2015 WL 5052214, at *2 (finding that
controller and his associate had engaged in fraud; holding that “under these circumstances,
assuming for the sake of argument that the $13.50 price still fell within a range of fairness,
the stockholders are not limited to a fair price. They are entitled to a fairer price designed
to eliminate the ability of the defendants to profit from their breaches of the duty of
loyalty.”); HMG/Courtland Props., Inc. v. Gray, 749 A.2d 94, 116-17 (Del. Ch. 1999)
(Strine, V.C.) (finding that although price fell within lower range of fairness, “[t]he
defendants have failed to persuade me that HMG would not have gotten a materially higher
value for Wallingford and the Grossman’s Portfolio had Gray and Fieber come clean about
Gray’s interest. That is, they have not convinced me that their misconduct did not taint the
price to HMG’s disadvantage.”); Bomarko, Inc. v. Int’l Telecharge Inc. (Bomarko I), 794
A.2d 1161, 1184-85 (Del. Ch. 1999) (holding that although “uncertainty [about] whether
or not ITI could secure financing and restructure” lowered the value of the plaintiffs’
shares, the plaintiffs were entitled to a damages award that reflected the possibility that the
company might have succeeded absent the fiduciary’s disloyal acts), aff’d, 766 A.2d 437(Del. 2000).
411
See, e.g., Duncan v. Theratx, Inc., 775 A.2d 1019, 1023-24 (Del. 2001); Lynch
v. Vickers Energy Corp. (Vickers II), 429 A.2d 497, 501-03 (Del. 1981), overruled in part
on other grounds, Weinberger, 457 A.2d at 703-04; Paradee v. Paradee, 2010 WL
3959604, at *13-14 (Del. Ch. Oct. 5, 2010).
412
See Tremont II, 694 A.2d at 432 (“[H]ere, the process is so intertwined with price
that under Weinberger’s unitary standard a finding that the price negotiated by the Special
Committee might have been fair does not save the result.”); Bomarko I, 794 A.2d at 1183(“[T]he unfairness of the process also infects the fairness of the price.”).
93
“Fair dealing encompasses an evaluation of how the transaction was initiated.”413
“The scope of this factor is not limited to the controller’s formal act of making the proposal;
it encompasses actions taken by the controller in the period leading up to the formal
proposal.”414
The Series G Financing was not initiated fairly. In the month before making its
proposal, Georgetown interfered with competing investments from NewSpring and
Southeast. Georgetown viewed NewSpring’s term sheet as “too attractive to the new
investors and not sufficiently attractive to us.”415 Georgetown told NewSpring’s
management on a Friday evening that Georgetown would move forward with its own term
sheet that following Monday.416 NewSpring walked away.417
Georgetown tried to use the same strategy with Southeast. After Miller suggested
that Southeast would submit a term sheet with a $100 million pre-money valuation,
Davenport told Miller that “[Georgetown] was about to submit their own term sheet to the
company and that [Miller] and his group could look at that and see if they want to
participate.”418 When Miller reiterated that Southeast could submit its own term sheet,
413
Trados II, 73 A.3d at 56.
414
Dole, 2015 WL 5052214, at *26.
415
JX 136 at REISLEY 015857; see also JX 143; see Fotos Tr. 751, 786.
416
See JX 143; JX 145.
417
See JX 148 at Davenport 0027943; Fotos Tr. 751.
418
JX 141.
94
Davenport rebuffed him again.419 Davenport then told Miller to speak with Reisley about
Georgetown’s term sheet, but Reisley skipped the call with Miller and provided no warning
or explanation.420 Georgetown submitted its term sheet that same day.421 Rather than
working with prospective investors to raise funds for Basho, Georgetown and Davenport
tried to drive off perceived competition to advance their own interests.
“Fair dealing encompasses questions of how the transaction was negotiated and
structured.”422 Georgetown refused to negotiate or even answer questions about its term
sheet. It dictated the terms.
“Fair dealing encompasses questions of how director approval was obtained.”423
This decision has already found that Georgetown used its control over Basho to impose the
Series G Financing on the Company. The directors approved the deal, but only because
Georgetown and Davenport created a scenario in which the Company had no other options.
The same was true for the approvals by stockholders: Georgetown conditioned its proposal
on proxies from Galleher and IDCF, which it then voted in favor of the deal it had forced
them to accept.
419
Id.420
JX 147 at BASH017581; see also Collins Tr. 25-26; 1 Miller Dep. 20; Reisley
Dep. 178-79.
421
JX 146.
422
Trados II, 73 A.3d at 58.
423
Id. at 62.
95
None of the traditional indicia of fairness were present in this case. The fair process
aspect of the entire fairness test weighs heavily against a finding of fairness.
b. Price
The fair price aspect can be “the predominant consideration in the unitary entire
fairness inquiry.”424 The defendants did not make a meaningful effort at trial to prove that
the terms of the Series G Financing were fair. Strikingly, they did not present any expert
testimony on the subject. Nor did they marshal any meaningful contemporaneous evidence
to support financial or economic fairness. To the contrary, a disinterested observer—Miller
of Southeast—contemporaneously described an iteration of the Series G Financing as
“punitive.”425 Miller believed that by offering “modestly” better terms, Southeast was able
to submit what an experienced member of Miller’s team regarded as “the best deal he has
seen in his career.”426
Rather than presenting direct evidence of fairness, the defendants argue that the
Series G Financing must have been priced fairly because no other party submitted an
actionable investment proposal. This argument builds on the recognized proposition that a
court’s evaluation of whether the substantive aspects of a transaction are fair can be
424
Dole, 2015 WL 5052214, at *34.
425
JX 206 at 1; see also 1 Miller Dep. 39-40, 88.
426
JX 206 at 1; see also 2 Miller Dep. 20.
96
influenced significantly by evidence of true, arms’-length bargaining.427 The defendants
ask the court to agree that the Series G Financing was better than nothing.
This is a case where “the unfairness of the process also infects the fairness of the
price.”428 In other settings, the absence of a better offer often provides meaningful evidence
of fairness by indicating that the challenged transaction provided a market-clearing price.
Here, the defendants drove away the investors who were most interested in the
Company.429 They dissuaded other investors from participating by providing negative
feedback about Company management and the Company’s prospects.430 Although Cowen
appears to have engaged in a workmanlike effort, the defendants undermined the reliability
of that process as an indication of fairness. The absence of competing offers says more
about Georgetown’s actual control over the Company and the defendants’ acts of unfair
dealing than it does the fairness of the Series G Financing’s price.
In their only other meaningful argument, the defendants cite the implied pre-money
valuation in the Series G Financing and contend that its terms must have been fair because
other indications of interest contemplated valuations in the same ballpark. In private,
427
Ams. Mining, 51 A.3d at 1243-44 (explaining that fairness analysis “will be
significantly influenced by the work product of a properly functioning special committee
of independent directors”).
428
Bomarko I, 794 A.2d at 1183.
429
See, e.g., JX 43; JX 106; JX 143; JX 184; JX 217; JX 225-26; JX 233-34; JX
237; JX 247; JX 277; Davenport Tr. 599-600, 623; Fotos Tr. 786.
430
See JX 226 at COWENBASHO00022216; see also Reisley Dep. 173-77.
97
venture-backed companies, pre-money valuations for financing rounds are squishy.431
Much more could be said about this, but for present purposes, it suffices that the defendants
did not prove that the Series G Financing pre-money valuation was a reliable indicator of
value. Basho’s valuations appeared to have more to do with Davenport’s insistence on
avoiding the optics of a down round than with any principled valuation techniques.432 More
importantly, the pre-money valuation says nothing about the other terms of the Series G
Financing, such as (i) the amount of new money that the Company received, (ii) the rights,
powers, preferences, and privileges granted to holders of the Series G preferred stock, and
(iii) the effect of the transaction on holders of other classes and series of stock.
The weight of contemporaneous evidence indicates that the terms of the Series G
Financing were not fair. A committee of the Board initially rejected the terms because they
were so onerous.433 A Cowen representative described the proposal by Georgetown as a
431
See Spencer Williams, Venture Capital Contract Design: An Empirical Analysis
of the Connection Between Bargaining Power and Venture Financing Contract Terms, 23
Fordham J. Corp. & Fin. L. 105, 126-28, 156 (2017); Andy Smith & Ryan Berry, The
Phantom of Pre-Money and Post-Money Valuations, 15 Valuation Strategies 26 (2012);
Michael A. Woronoff & Jonathan A. Rosen, Effective vs. Nominal Valuations in Venture
Capital Investing, 2 N.Y.U. J. L. & Bus. 199, 199-207 (2005). See also Galleher Tr. 342-
43; Galleher Dep. 175.
432
See JX 145 (“While I understand the sensitivity in protecting the interests of
existing investors and not signaling a down round to the market, in my experience I have
found that employees and customers care more about a business that is properly capitalized
and the attributes of the product they’re purchasing . . . . I have never heard of a customer
not buying technology because the valuation in the current round was lower than the last.”);
Fotos Tr. 734.
433
See JX 159.
98
bid from “Davenport . . . who wants to take over the company [on] very unfavorable
terms.”434 As already noted, Southeast regarded the terms as punitive.
In the final term sheet, Georgetown made only minor changes. Collins and six other
executives indicated that they would resign if the financing was approved.435 The head of
engineering indicated that a large part of his team would also leave.436
Comparing the major terms of the Series G Financing with its closest competitor
evidences its unfairness. Although the Southeast deal did not reach fruition, it provides an
indication of arm’s-length terms from a third-party investor.
Southeast Proposal437 Series G Financing438
 Total round of $30M with $20M  Total round of $25M.
initially and $10M follow on.  Only $2.5M in new money from
 $20 million included conversion of Georgetown plus conversion of
$7.5 million under Loan Agreement. $7.5 million under Loan
 Southeast fully funds round with new Agreement.
money unless other investors
participate.
 Later modified to accommodate
$10M from Georgetown.
 2x liquidation preference.  2x liquidation preference,
reduced to 1x for a sale in 2014.
 5% cumulative dividend, payable  8% cumulative dividend.
upon liquidation or winding up.
434
JX 243.
435
See JX 356.
436
See id.437
JX 195.
JX 354 & JX 146. The final terms were implemented in the Company’s Eighth
438
Amended and Restated Certificate of Incorporation. See JX 376.
99
 Holders of Series G designate 5 of 9  Georgetown designates 4 of 7
Board seats; Southeast designates 2 of Board seats.
the 5.
 Conversion into existing, single-vote  Conversion into new Class B
common stock. common stock carrying 10 votes
per share.
 Consent of Series G required for  Consent of Series G required for
certain significant transactions. all significant transactions.
 Voting rights on an as-converted  Voting rights on an as-converted
basis. basis, resulting in control of a
majority of the outstanding
voting power.
 One time transaction fee for  Annual management fee for
Southeast of $100,000. Georgetown of $200,000.
As the summary indicates, the Series G Financing resulted in Georgetown controlling a
majority of the Company’s voting power and a majority of its Board seats, despite
providing only $2.5 million in new money.439
Thornley voted to approve Series G Financing only because he felt he had no choice.
Galleher felt the same way and lodged a lengthy objection to the transaction. Within three
months, six senior officers and directors, including Collins, Brewer, and Thornley, had
resigned over the deal.440
In perhaps the most telling source of market evidence, after closing its portion of
the transaction, Georgetown was unable to convince third parties to participate. Rather than
439
JX 354; JX 247 at COWENBASHO00022541; see also Subudhayangkul Dep.
111.
440
See Galleher 263-65.
100
viewing the deal as highly attractive, investors saw its oppressive terms as a warning sign
about how Georgetown treated the Company and its fellow investors.
Georgetown and Davenport failed to prove that the substantive terms of the Series
G Financing were fair.
c. The Unitary Determination of Fairness
Georgetown and Davenport did not prove that the Series G Financing was entirely
fair. They did not demonstrate fairness as to process or price. To the contrary, the Series G
Financing was an oppressive transaction that Georgetown and Davenport forced the
Company to accept.
3. Causally Related Injury
The plaintiffs proved at trial by a preponderance of the evidence that the Series G
Financing injured the Company and the plaintiffs. Its onerous terms directly reallocated
value from the Company and its other stockholders to Georgetown.
4. The Defense Of Acquiescence
Georgetown and Davenport contend that because Galleher voted in favor of the
Series G Financing, he acquiesced to its terms and neither he nor the entities he controls
can be awarded a remedy. Georgetown and Davenport make a comparable argument based
on estoppel.
Estoppel and acquiescence are closely related doctrines:
Estoppel is the effect of the voluntary conduct of a party whereby he is
absolutely precluded . . . from asserting rights which might perhaps have
otherwise existed, . . . as against another person, who has in good faith relied
upon such conduct, and has been led thereby to change his position for the
worse . . . . [A]cquiescence in the wrongful conduct of another by which
101
one’s rights are invaded may often operate, upon the principles of and in
analogy to estoppel, to preclude the injured party from obtaining many
distinctively equitable remedies to which he would otherwise be entitled.441
In my view, Galleher’s approval of the Series G Financing fits better within the doctrine
of acquiescence. Except for voting in favor (an obviously significant fact), Galleher
steadfastly opposed the Series G Financing. For purposes of estoppel, he never represented
to the defendants that he would not challenge their actions. Instead, he listed numerous
objections to the deal and insisted that his objections be documented in the minutes. This
decision therefore analyzes Galleher’s approval from the standpoint of acquiescence.
Acquiescence is an affirmative defense.442 In order to prevail, the defendant must
show that
[the] complainant has full knowledge of his rights and the material facts and
(1) remains inactive for a considerable time; (2) freely does what amounts to
recognition of the complained of act; or (3) acts in a manner inconsistent with
the subsequent repudiation, which leads the other party to believe the act has
been approved.443
441
Kahn v. Household Acq. Corp., 591 A.2d 166, 176 (Del. 1991) (alterations
omitted) (internal quotation marks and citations omitted) (quoting 3 Spencer W. Symons,
Pomeroy’s Equity Jurisprudence §§ 804, 817 (5th ed. 1941)).
442
See McCafferty v. Wells Fargo Bank, N.A., 105 A.3d 989 (Del. 2014) (TABLE)
(listing acquiescence as an affirmative defense); Robinson v. Oakwood Vill., LLC, 2017
WL 1548549, at *21 (Del. Ch. April 28, 2017) (same); Lehman Bros. Hldgs. Inc. v. Spanish
Broad. Sys., Inc., 2014 WL 718430, at *7 (Del. Ch. Feb. 25, 2014) (same).
443
Bakerman v. Sidney Frank Importing Co., Inc., 2006 WL 3927242, at *17 (Del.
Ch. Oct. 10, 2006) (internal quotation marks omitted) (quoting Cantor Fitzgerald L.P. v.
Cantor, 2000 WL 307370, at *24 (Del. Ch. Mar. 13, 2000)).
102
Said differently, “the defendants must show that [the plaintiff] essentially consented to the
[challenged action] before or after the fact.”444
When evaluating an equitable defense, a court of equity will look beyond surface-
level compliance to consider the underlying facts and circumstances. The conceptually
similar doctrine of ratification illustrates this principle. Although ratification is a powerful
defense, it will not apply if approval is “deemed the result of inequitable coercion or [a]
similar violation of equitable duties and principles such that the asserted ratification cannot
be viewed as having a cleansing effect or as cloaking the challenged transaction with
presumptive validity.”445 The presence of a controller also changes the analysis: When a
controller imposes a transaction on a corporation, approval from either the board or the
stockholders will not prevent an entire fairness challenge.446 The controller instead must
444
Stengel v. Rotman, 2001 WL 221512, at *6 (Del. Ch. Feb. 26, 2001) (Strine,
V.C.).
445
Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial
Practice in the Delaware Court of Chancery § 11.05[b][7] (2012).
See, e.g., PNB Hldg., 2006 WL 2403999, at *14 n.71 (“In the context of a going
446
private transaction with a controlling stockholder, there are reasons why the simple fact
that a majority of the disinterested electorate votes yes on a merger might be deemed
insufficient to be given ratification effect.”); In re JCC Hldg. Co., Inc., 843 A.2d 713, 723
(Del. Ch. 2003) (Strine, V.C.) (“This inherent coercion [of a controlling stockholder] is
thought to undermine the fairness-guaranteeing effect of a majority-of-the-minority vote
condition because coerced fear or a hopeless acceptance of a dominant power’s will, rather
than rational self-interest, is deemed likely to be the animating force behind the minority’s
decision to approve the merger.”); In re Wheelabrator Techs., Inc. S’holders Litig., 663
A.2d 1194, 1203 (Del. Ch. 1995) (“[W]here the merger [between a controlling stockholder
and its subsidiary] is conditioned upon approval by a ‘majority of the minority’ stockholder
vote, and such approval is granted, the standard of review remains entire fairness, but the
burden of demonstrating that the merger was unfair shifts to the plaintiff.”); J. Travis
103
agree before any negotiations begin that the controller will not proceed with the proposed
transaction without both (i) the affirmative recommendation of a sufficiently authorized
board committee composed of independent and disinterested directors and (ii) the
affirmative vote of a majority of the shares owned by stockholders who are not affiliated
with the controller.447
This court has applied similar principles to the defense of acquiescence. In
Bakerman, the defendants sought to effectuate a sale of a limited liability company that
would enrich them disproportionately. The plaintiff opposed the transaction and informed
the defendants that he would not consent. At that point, the defendants gave the plaintiff
(Bakerman) an ultimatum with less than half an hour to choose one of three options:
a. Bakerman could sign the consent, keep his employment at SFIC, and
receive $700,000 (similar to the bonuses that all SFIC employees would
receive upon the closing of the sale with Bacardi);
b. Bakerman could sign the consent, resign his employment at SFIC, and
receive $1,000,000 in severance from SFIC; or
c. Bakerman could refuse to sign the consent, have his employment
terminated by SFIC, and be sued by SFIC.448
Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40 Wm. Mitchell L.
Rev. 1443, 1461 (2014) (“Because the controller’s influence operates at both the board and
stockholder levels, neither a special committee nor a majority-of-the-minority vote,
standing alone, is sufficient to sterilize the controller’s influence and reestablish the
presence of a qualified decision maker.”).
In re MFW S’holders Litig., 67 A.3d 496, 502 (Del. Ch. 2013), aff’d sub nom.
447
MFW II, 88 A.3d 635.
448
Bakerman, 2006 WL 3927242, at *5.
104
The defendants told Bakerman that if he did not choose within the allotted time, then the
third option would be chosen for him. Bakerman chose the first option, telling the
defendants that he needed to keep his job and therefore would sign the consent.449
When Bakerman challenged the transaction, the defendants raised the defense of
acquiescence. This court found that Bakerman had not acquiesced because he “did not
show unequivocal approval of the allocation, as he vigorously objected to the allocation,
even as he was allegedly coerced into consenting.”450
The affirmative defense of acquiescence likewise does not apply in this case. As this
decision already has discussed at length, Georgetown and Davenport imposed the Series G
Financing on the Company. They blocked other financing opportunities so that the
Company had no alternative, and they limited the Company’s access to funding under the
Loan Agreement to place maximum pressure on the Company. When the Company had
reached the point where it risked not meeting its next payroll, Georgetown presented the
Series G Financing and gave the Board less than twenty hours to accept it. During the
period leading up to the crisis, Georgetown and Davenport had threatened Galleher and
other directors and officers with litigation if they did not approve the Series G Financing.
Galleher attempted to negotiate better terms, but Georgetown refused. Galleher and the
449
Id.450
Id. at *18.
105
other directors faced a Morton’s Fork: approve the unfair offer or destroy the Company.451
Under these factual circumstances, the equitable defense of acquiescence is unavailable to
the defendants.
Georgetown and Davenport have argued that the Board approved the Series G
Financing a second time on January 23, 2014, when they voted in favor of the definitive
transaction documents. The situation had not changed, and Georgetown (through Reisley)
continued to pressure the directors.452 Brewer was fed up and resigned.453 The remaining
directors approved the documents less than twenty-four hours after receiving them.454 The
second approval was no better than the first.
“A fiduciary may not play ‘hardball’ with those to whom he owes fiduciary duties,
and our law provides recourse against disloyal fiduciaries or controllers who use their
power to coerce the minority into economic submission.”455 Acquiescence does not apply
to the facts of this case.
451
PTO ¶ 41; JX 361 at BTH00004246.
452
See JX 373.
453
JX 374; see also JX 373.
454
PTO ¶ 43.
455
Auriga, 40 A.3d at 870.
106
5. The Remedy For The Series G Financing
Once a breach of duty has been established, this court’s “powers are complete to
fashion any form of equitable and monetary relief as may be appropriate . . . .” 456 “In
determining damages, the powers of the Court of Chancery are very broad in fashioning
equitable and monetary relief under the entire fairness standard as may be appropriate,
including rescissory damages.”457
The plaintiffs retained David G. Clarke, ASA, to calculate the damages that the
plaintiffs suffered as a result of the Series G Financing. In his initial report, Clarke derived
damages by comparing the value of Basho after the Series G Financing to the value that he
believed Basho could have achieved through a hypothetical transaction with Southeast at
a $110 million pre-money valuation.458 I do not believe that Southeast ever made serious
overtures to Basho at a valuation of $110 million. The best offer that Southeast made
contemplated a pre-money valuation of $75 million, and that was without any commitment
from Noonan to invest.459 Miller believed that Noonan’s involvement was critical, and a
deal would not have gone forward without Noonan.
456
Weinberger, 457 A.2d at 714.
457
Int’l Telecharge, Inc. v. Bomarko, Inc. (Bomarko II), 766 A.2d 437, 440 (Del.
2000).
458
See JX 750 at 33-36; Clarke Tr. 845-46.
459
See JX 303 at 3-5; 1 Miller Dep. 41, 43-45.
107
In a supplemental report, Clark calculated damages using two contemporaneous
valuations of Basho conducted to satisfy Section 409(a) of the Internal Revenue Code.460
The Board approved a Section 409(a) valuation dated December 31, 2012, prepared by
Murray Devine Valuation Advisors (the “2012 Valuation”) and a Section 409(a) valuation
dated January 23, 2014, prepared by CGFI Valuation Services (the “2014 Valuation”).461
The 2012 Valuation preceded Georgetown’s efforts during 2013 to pressure the Company
into accepting the Series G Financing by depriving it of capital. The 2014 Valuation
coincided with the Series G Financing close. The valuations therefore provided a real-time,
non-litigation driven, before-and-after assessment of the Company’s value.
The defendants objected to Clarke’s reliance on the hypothetical Southeast
transaction to calculate a damages award. They did not object to the concept of using the
Section 409(a) valuations to craft a damages award,462 although they did raise one
methodological objection.463
In my view, the Section 409(a) valuations provide a reliable and fair basis for
imposing a remedy. Federal law mandates that if an issuer wants to avoid generating
immediate income for an option recipient, then the exercise price for the option must be
equal to or greater than the “fair market value of the stock at the time such option is granted
460
Dkt. 268.
461
See Dkt. 274 at 33-34; JX 53; JX 380.
462
See Dkt. 274 at 82-83.
463
Dkt. 277 at 2.
108
. . . .”464 IRS regulations require that a non-public company determine fair market value by
taking into account “the company’s net worth, prospective earning power and dividend-
paying capacity, and other relevant factors.”465 Serious penalties attach when taxpayers
make false statements to the IRS.466 Davenport approved these valuations as a member of
the Board, and by law he was required to have a good faith belief that the valuations were
accurate. He therefore should not be heard now to complain about the figures.
The 2012 Valuation valued Basho’s common stock at $.43 per share. The
underlying calculation included a discount for lack of marketability of 22.5%.467 Clarke
used this figure to value the plaintiffs’ shares of common stock, then used the terms of the
preferred stock to derive a valuation for the plaintiffs’ shares of preferred stock. Based on
these calculations, the total value of Galleher’s pre-Series G Financing equity was
$20,268,878.
The 2014 Valuation valued Basho’s common stock at $.13 per share. The
underlying calculation included a discount for lack of marketability of 20%. 468 Clarke
46426 U.S.C. § 422(b)(4).
465
26 C.F.R. § 20.2031–2(f)(2).
466
See 26 U.S.C. § 6662 (civil penalty for accuracy-related tax underpayment); id.§ 6663 (civil penalty for fraudulent tax underpayment); id. § 6701 (civil penalty for aiding
and abetting understatement of tax liability); id. § 7201 (criminal penalty for willfully
attempting to evade or defeat tax).
467
JX 53 at 16-17.
468
JX 380 at 18.
109
performed the same analysis as he did with the 2012 Valuation, but he added a second
discount for marketability that cut the value of the post-Series-G-Financing equity by an
additional 20%. The purpose of this additional discount seems to be to recognize that the
terms of the Series G Financing were onerous.469 The defendants objected to the additional
discount, which does not appear warranted: the 2014 Valuation took into account the
onerous terms of the Series G Financing when calculating the 20% discount.470 Using the
2014 Valuation’s figure of $.13 per share, Clarke’s model generates a value for the
plaintiffs’ post-Series G equity of $2,778,228.
Subtracting the value of the plaintiffs’ post-Series G equity from the value of the
plaintiffs’ pre-Series G equity indicates that the plaintiffs suffered damages of $17,490,650
from the Series G Financing. As a remedy for their breach of fiduciary duty in connection
with the Series G Financing, Georgetown and Davenport are jointly and severally liable
for this amount, plus pre- and post-judgment interest calculated at the legal rate,
compounded quarterly, and running from January 23, 2014, to the date of payment, with
the rate of interest fluctuating with changes in the legal rate.471
469
See Dkt. 268 at 5 (noting that “because of the onerous economic and governance
terms attributed to the preferred G shares, an additional discount, incremental to the already
inherent discount, needed to be applied to the remaining share classes.”); see also id. at 10
(noting that “[t]here is no reason to apply a DLOM to a value per share that already reflects
a discount for lack of marketability.”).
470
JX 380 at 17-18.
471
See 6 Del. C. § 2301(a); Levey v. Browstone Asset Mgmt., LP, 2014 WL 4290192,
at *1 (Del. Ch. Aug. 29, 2014) (explaining rationale for fluctuating rate); Taylor v. Am.
Specialty Retailing Gp., Inc., 2003 WL 21753752, at *13 (Del. Ch. July 25, 2003) (using
110
B. The Challenge To The Defendants’ Conduct After The Series G Financing
The plaintiffs contend that after the Series G Financing, Georgetown, Davenport,
and Fotos breached their fiduciary duties by causing Basho to enter into a series of unfair,
self-dealing transactions that ultimately resulted in Basho entering receivership. The
plaintiffs satisfied all of the requirements necessary to receive a meaningful remedy for the
injury that the defendants caused during this period.
1. Fiduciary Status
The first question is whether the plaintiffs proved that Georgetown, Davenport, and
Fotos owed fiduciary duties in connection with the actions they took after the Series G
Financing. They did.
After the Series G Financing, Georgetown controlled a mathematical majority of
the Company’s voting power. For purposes of Delaware law, it controlled the Company
and was obligated to act as a fiduciary.472
After the Series G Financing, Davenport continued to serve as a director. After the
Board meeting on January 24, 2013, Davenport assumed the title of “Executive Chairman”
quarterly compounding interval for legal rate “due to the fact that the legal rate of interest
most nearly resembles a return on a bond, which typically compounds quarterly”).
472
See Lynch I, 638 A.2d at 1113 (observing that a stockholder becomes a fiduciary
if it “‘owns a majority interest in . . . the corporation.’”) (quoting Ivanhoe, 535 A.2d at
1344)).
111
and purported to act as an officer of the Company. 473 In these capacities, Davenport owed
fiduciary duties to the Company and its stockholders.
Fotos joined the Board as a Georgetown-designated director on January 24, 2013,
at the outset of the first meeting after the Series G Financing.474 Fotos owed fiduciary duties
in his capacity as a director.
2. Breach
The next question is whether Georgetown, Davenport, and Fotos breached their
fiduciary duties during the period following the Series G Financing. The plaintiffs proved
that Georgetown, Davenport, and Fotos managed the Company to serve Georgetown’s
interests, rather than the interests of the Company and the stockholders as a whole.
a. Consolidation of Control
Immediately after the Series G Financing, Davenport, Fotos, and Reisley took steps
to consolidate Georgetown’s control during the Board meeting on January 24, 2014.
Collins had resigned on January 17 after learning that the Southeast deal had failed and
receiving the final Series G term sheet.475 Brewer resigned after receiving the final Series
G Financing documents.476 At the outset of the January 24 meeting, Georgetown appointed
Fotos to the Board. As a result, the Board comprised Davenport, Reisley, Fotos, Thornley,
473
See JX 384; see also Galleher Tr. 280.
474
PTO ¶ 45; Fotos Tr. 760.
475
PTO ¶ 39; Collins Tr. 71; Galleher Tr. 264.
476
PTO ¶ 42.
112
Yamanaka, and Galleher. At most, the three nominally disinterested directors could have
created a deadlock. In reality, two of them had stopped resisting Georgetown. Davenport
had yelled at and threatened Thornley to the point where he simply assented to
Georgetown’s wishes;477 he would resign in a matter of weeks.478 Yamanaka remained a
director, but he was based in Japan, and his sole purpose for being on the Board was to
monitor the Company for IDCF, a large customer, with the goal of “strength[ening] a
mutual technical cooperation and collaboration.”479 He simply went along with whatever
the Board did. Only Galleher continued to question Georgetown’s actions.
During the meeting on January 24, 2014, the Georgetown representatives presented
the Board with a list of previously prepared resolutions designed to solidify Georgetown’s
control. They chose not present the resolutions earlier so that Galleher could not analyze
them and raise objections.480 The resolutions specifically targeted Galleher, whom the
Georgetown representatives correctly perceived as the only on-going source of potential
477
The Series G Financing listed Thornley as a Georgetown designee to the Board.
JX 354. Davenport also represented to others that he controlled Thornley and admitted so
at trial. See JX 545 at BASH015854; Davenport Tr. 655-56.
478
See Thornley Dep. 149; see also Galleher Tr. 279-80 (explaining that Thornley
delayed his resignation to reduce the overall disruption to the Company after Collins and
Brewer resigned).
479
See JX 19 at BTH00034658 (IDCF investment memorandum to Basho
explaining purpose of investment); JX 357 (Yamanaka’s response to crisis over Series G
Financing).
480
See JX 383 (Reisley instructing Basho general counsel not to distribute
resolutions before Board call); Galleher Tr. 282.
113
oversight and possible resistance to their actions. All of the resolutions were approved with
Galleher abstaining.481
One resolution removed Galleher from the position of Chairman and replaced him
with Davenport. When the minutes were prepared, Davenport’s position was elevated to
the role of Executive Chairman.482 The minutes also reflected that Reisley received the title
of Vice President. In that role, he reported directly to Davenport.483
Another resolution created an Executive Committee comprising Davenport,
Reisley, and the Company’s CEO. The resolution delegated to the Executive Committee
the full power authorized by Delaware law.484
After the meeting, to reinforce the message that Galleher was not wanted, Davenport
shut down Galleher’s Company email account, his Salesforce.com account, and his
Yammer account. He later terminated a consulting agreement between Galleher and the
Company. Davenport instructed members of management not to communicate with
Galleher.485 Davenport also fired Latham & Watkins, the Company’s longstanding outside
counsel.486
481
Galleher Tr. 281-82.
482
See JX 384 at 2.
483
Reisley Dep. 207-08.
484
JX 384 at 3.
485
Galleher 281, 288-89.
486
JX 397.
114
As part of Georgetown’s proposal for the Series G Financing, Georgetown
represented that it would support an incentive and retention plan for the Company’s
employees. That plan was never implemented.487 Within six months after the Series G
Financing, six senior managers had resigned or been terminated.488 This was in addition to
the departures of Collins, Thornley, and Brewer.
b. Self-Dealing Actions
After consolidating control during the meeting on January 24, 2014, Davenport and
Reisley wielded their authority as the Executive Committee to benefit Georgetown and
themselves. For two months, Davenport and Reisley ran the Company while the CEO seat
was vacant.489 In March 2014, they hired Adam Wray as CEO without any input from other
directors. The plaintiffs proved at trial that Wray was underqualified for the job and that
Davenport and Reisley caused the Company to pay Wray an above-market incentive
package, thereby enhancing Wray’s loyalty to Georgetown. After hiring Wray, Davenport
and Reisley continued using the Executive Committee to run the Company without Board
oversight or input. The Executive Committee did not actually meet and did not make any
record of its deliberations.490 Stuff just happened.
487
Galleher Tr. 268.
488
See id. at 263-65.
489
See id. at 283-84, 289-90; Thornley Dep. 140-42.
490
See Galleher Tr. 282; Wray Dep. 98-100; see also Thornley Dep. 138-42, 149.
115
Effective as of January 23, 2014, Georgetown entered into an agreement with Basho
to provide financing and management consulting services for compensation of $200,000
per year plus reimbursement of all expenses.491 In April 2014, the Executive Committee
engaged in self-dealing by extending Basho’s consulting agreement with Reisley’s
company, Evergreen Capital, and restructuring Evergreen Capital’s compensation to
include $100,000 in Series G shares.492 During the same month, the Executive Committee
approved a $650,000 loan from Georgetown.493
Between June and December 2014, the Executive Committee approved a series of
loans from Newport, an investment vehicle formed by Davenport. Basho borrowed $1.5
million from Newport in June 2014,494 $250,000 in July 2014,495 and $400,000 in
September 2014.496 In December 2014, the Executive Committee acted by written consent
and authorized an additional $2 million in loans.497
491
JX 385.
492
JX 455.
493
JX 459 at BTH00004468-69.
494
JX 510.
495
JX 534.
496
JX 541.
497
JX 566.
116
On multiple occasions, the Executive Committee extended the exercise period for
warrants that Georgetown held.498
c. No Effort To Show Fairness
Each of these transactions was between Basho and a party affiliated with its
controlling stockholder, making entire fairness the applicable standard of review.499 At
trial, the defendants did not make any effort to prove that any of the transactions were
entirely fair.
The fact that a transaction is an interested one does not inherently make it unfair. It
is possible to imagine that some of the interested transactions between Basho and
Georgetown might have been fair. I personally find this easiest to imagine when thinking
about some of the later financings, when Basho likely could not find other sources of
liquidity. At this stage of the proceeding, however, the time for hypotheticals has passed.
The defendants had the burden to prove that the post-Series G transactions were entirely
fair. They chose not to make that attempt. Because they bore the burden of proof and did
not meet it, this decision holds that the transactions were unfair.
3. Causally Related Injury
The plaintiffs convinced me that with the Company laboring under the overhang of
the Series G Financing, Georgetown’s self-interested actions led directly to the Company’s
demise. Framed differently, the plaintiffs carried their burden of showing at trial that the
498
See, e.g., JX 461; JX 528 at BTH00004505; Galleher Tr. 290-91.
499
See Tremont II, 694 A.2d at 428.
117
manner in which the defendants managed Basho after the Series G Financing, including
the self-dealing transactions, played a causal role in depriving the plaintiffs’ shares of any
remaining value, and that the causal connection was sufficient close to warrant a remedy.
The Series G Financing had a more sustained effect than simply inflicting one-time
harm on the Company and its stockholders. The Series G Financing changed how potential
acquirers and investors looked at the Company. It was not possible to view the onerous
terms of the Series G Financing as a positive signal. If third parties assumed that the
onerous terms were necessary, then it strongly signaled that the Company was a distressed
asset without real prospects that only could raise capital on extreme terms. For third parties
that had a more positive view of the Company’s technology and prospects, the onerous
terms sent a strong signal about how Georgetown and Davenport treated their ostensible
business partners. Davenport and Reisley’s insistence on maintaining hard control in any
further financing, combined with their frequently brusque and unprofessional manner,
reinforced the impression that investors should pass. Not surprisingly, they did.
After consolidating control, the Georgetown team made business decisions that
harmed the Company. These included a series of self-interested transactions, as well as
other business decisions that resulted in the departures of large numbers of employees.
Ordinarily, the latter types of decisions would not raise any specter of impropriety because
they affect all investors equally. The Georgetown team might have been prudent or
imprudent when making those decisions, and the consequences might have been fortunate
or unfortunate, but there would be no grounds for a court to second guess those decisions
or to infer a disloyal or selfish intent.
118
In this case, the plaintiffs convinced me that it is more likely than not (the standard
for proof by a preponderance of the evidence)500 that Georgetown acted selfishly to cut
staff and expenses, regardless of the harm to the Company’s long-term prospects, because
Georgetown thought it could still achieve a near-term sale and extract value for itself
through its senior securities. Because its investments had priority in the capital structure,
Georgetown would walk away with a profit, regardless of whether the other investors
would benefit. In any sale, Georgetown’s loans would be paid off first. After that,
Georgetown’s Series G preferred stock occupied the top position in the equity, and it was
accruing cumulative dividends at 8% per annum. Georgetown also was the dominant holder
of the Series F preferred stock, which stood next in line. Galleher and his investment
vehicles would not see a return unless the proceeds were sufficient to reach the Series E or
the Series D. Earlier stage investors came after that, with the common last in line. 501
500
“Proof by a preponderance of the evidence means proof that something is more
likely than not. It means that certain evidence, when compared to the evidence opposed to
it, has the more convincing force and makes you believe that something is more likely true
than not.” Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18,
2010) (Strine, V.C.) (internal quotation marks omitted) (quoting Del. Express Shuttle, Inc.
v. Older, 2002 WL 31458243, at *17 (Del. Ch. Oct. 23, 2002)). “Under this standard, [the
party bearing the burden] is not required to prove its claims by clear and convincing
evidence or to exacting certainty. Rather, [the party] must prove only that it is more likely
than not that it is entitled to relief.” Triton Const. Co. v. E. Shore Elec. Servs., 2009 WL
1387115, at *6 (Del. Ch. May 18, 2009), aff’d, 988 A.2d 938 (Del. 2010) (TABLE).
501
For a more extensive discussion of the divergent interests created by different
priorities in the capital structure, see Trados II, 73 A.3d at 47-51. The principal difference
is that in Trados, the venture capital investors were trying to avoid a sideways situation.
Id. at 51-54. In this case, Basho could not self-fund its business plan.
119
From the outset, Davenport wanted to sell the Company quickly. 502 After the Series
G Financing, Davenport continued to focus on selling the Company.503 He also continued
to refuse to accept capital from third-party investors who would dilute Georgetown’s
position.504 Davenport’s desire to capture the lion’s share of the return for Georgetown
caused him to run the Company into the ground. And during the same period that the
Company’s prospects were dimming, Basho’s peer companies were prospering. 505
The plaintiffs convinced me that it was more likely than not that the defendants’
actions after the Series G Financing, combined with the financing itself, led directly and
ineluctably to the demise of the Company. It is not possible to trace the causal relationship
with certainty. Nevertheless, the evidence at trial convinced me that the Series G Financing
started the Company on a greased slide to failure, and the defendants’ actions after the
Series G Financing contributed to the Company’s completion of that journey.
502
See, e.g., JX 14 (Davenport: “My objective is to sell the Company in early 2013.
Assuming we exercise our option we will get the largest share of the proceeds of sale.”);
JX 30 (“My objective is to take total control of this Company . . . and force a near term exit
that we control.”); JX 32 (“I would like to use the exercise of our $5M option as the vehicle
for the Basho exit.”); JX 76 (“I want [Collins and Galleher] to understand that we are in
full pivot and if they do not produce what we need to exit we will be ruthless.”); Davenport
Tr. 522-23, 569-70, 575-76.
503
See, e.g., JX 469 at Davenport 0010012; JX 519; JX 569 at REISLEY 000629;
JX 728; Davenport Tr. 706-07, 709-12.
504
See, e.g., JX 607 (investment from FTV Capital); JX 656 (investment from JMI
Equity).
505
See JX 879.
120
Fotos tried to argue that he was a special case and should not be held liable because
he was only a bit player and tried to act as an independent director.
Fotos was hardly a bit player. On January 24, 2014, he voted in favor of the
Georgetown-dominated governance structure, which gave Davenport and Reisley free
reign at the Company. In October 2014, he voted in favor of every self-dealing transaction
Davenport and Reisley had completed as part of a blanket ratification of all of the actions
taken by the Executive Committee.506 In January 2015, he provided another blanket
ratification.507 These votes demonstrated that Fotos fully supported the actions that
Georgetown took. Moreover, like Davenport and Reisley, Fotos did not only support
Georgetown’s efforts at formal Board meetings. As a Georgetown employee, Fotos was
deeply involved in Basho matters. His participation dated back to Davenport’s original
consideration of an investment, when Davenport had Fotos conduct diligence on the
Company.
Fotos also was not an independent director. He was a Georgetown employee who
had reported to Davenport since 1989.508 He never questioned the actions taken by the
506
See JX 550.
507
See JX 588.
508
Fotos Tr. 819-21.
121
Executive Committee while Basho was “imploding,”509 and he ratified the Executive
Committee’s actions without a second thought.510
In relative terms, Fotos was less culpable than Davenport and the other major
Georgetown participant, Reisely, who settled. But that is not enough to avoid liability.
Fotos harmed Basho by serving Georgetown and Davenport’s interests while on the Board.
He is therefore jointly and severally with the other defendants.511
4. The Remedy
“In determining damages, the powers of the Court of Chancery are very broad in
fashioning equitable and monetary relief under the entire fairness standard as may be
appropriate, including rescissory damages.”512 When defendant fiduciaries have failed to
satisfy the entire fairness test and have breached their duty of loyalty, “the stockholders
may . . . demand rescission of the transaction or, if that is impractical, the payment of
rescissory damages.”513 Rescissory damages are “the monetary equivalent of rescission”
509
Id. at 789.
510
Id. at 803-12.
511
See ATR-KIM Eng Fin. Corp. v. Araneta, 2006 WL 3783520, at *19-20 (Del.
Ch. Dec. 21, 2006) (Strine, V.C.).
512
Bomarko II, 766 A.2d at 440.
513
Oberly v. Kirby, 592 A.2d 445, 466 (Del. 1991); see Wolfe & Pittenger, supra,
§ 12.04[b] (“[T]he Delaware Supreme Court has suggested on more than one occasion that
rescissory damages are the preferred remedial measure where a transaction fails to pass the
test of entire fairness . . . .”).
122
and may be awarded when “the equitable remedy of rescission is impractical.”514 Delaware
courts have awarded rescissory damages for adjudicated breaches of the duty of loyalty,
particularly in cases where a fiduciary has selfishly appropriated the property of a
beneficiary.515 Rescissory damages differ from compensatory damages in that the loss can
be measured at the time of judgment rather than at the time of the injury.516 An award
incorporating rescissory elements may be appropriate “particularly where fraud,
misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable
overreaching are involved.”517
“Delaware law dictates that the scope of recovery for a breach of the duty of loyalty
is not to be determined narrowly.”518 Damages must be “logically and reasonably related
to the harm or injury for which compensation is being awarded.”519 But as long as that
connection exists, “[t]he law does not require certainty in the award of damages where a
514
Vickers II, 429 A.2d at 501; accord In re S. Peru Copper Corp. S’holder Deriv.
Litig., 52 A.3d 761, 815 (Del. Ch. 2011) (Strine, C.) (“Rescissory damages are the
economic equivalent of rescission . . . .”), aff’d sub nom. Ams. Mining, 51 A.3d 1213;
Technicolor Plenary IV, 663 A.2d at 1144 (explaining that rescissory damages are
warranted “when equitable rescission of a transaction would be appropriate, but is not
feasible”). See generally Wolfe & Pittinger, supra, § 12.04[b].
515
See Strassburger v. Earley, 752 A.2d 557, 581 (Del. Ch. 2000); Technicolor
Plenary IV, 663 A.2d at 1144.
516
See Orchard 88 A.3d at 39.
517
Weinberger, 457 A.2d at 714.
518
Thorpe v. CERBCO, Inc., 676 A.2d 436, 445 (Del. 1996).
519
J.P. Morgan, 906 A.2d at 773.
123
wrong has been proven and injury established. Responsible estimates that lack
m[a]thematical certainty are permissible so long as the court has a basis to make a
responsible estimate of damages.”520 “[O]nce a breach of duty is established, uncertainties
in awarding damages are generally resolved against the wrongdoer.”521
The plaintiffs seek a rescissory damages remedy equal to the difference between the
value of their equity after the Series G Financing and its current value. As discussed
previously, the value of the plaintiffs’ equity after the Series G Financing was $2,778,228.
Its value is currently worthless.
In my view, a damages award of this nature is warranted on the facts of this case,
given the egregious manner in which Georgetown operated the Company after taking
control through the Series G Financing. Through the Executive Committee, Georgetown
froze out the Company’s other directors, managed the Company unilaterally and in
Georgetown’s own interest, and then demanded that the directors periodically ratify
everything that had been done. During this period, Georgetown engaged in self-dealing
and continued to reject offers of third-party capital so as to maintain its position of control.
Given this course of conduct and the ultimate result, the plaintiffs have not sought to tie
520
Red Sail Easter Ltd. P’rs v. Radio City Music Hall Prods., Inc., 1992 WL
251380, at *7 (Del. Ch. Sept. 29, 1992) (Allen, C.).
521
Thorpe v. CERBCO, Inc., 1993 WL 443406, at *12 (Del. Ch. Oct. 29, 1993)
(Allen, C.).
124
specific damages amounts to specific decisions. Instead, they have sought what I regard as
an apt remedy for the defendants’ behavior.
The award differs from the usual concept of rescissory damages. Traditionally in
Delaware, rescissory damages could come into play when a defendant fiduciary wrongfully
took control of property, and the value of the property went up during the period of the
fiduciary’s control. In that setting, the law does not limit the plaintiff beneficiary to the
value of the property at the time of the taking, plus an award of interest. The plaintiff
beneficiary is entitled to recover the property itself or a measure of its full value. In this
case, the plaintiffs have invoked the reciprocal of these principles. The defendant
fiduciaries wrongfully took control of the property and, through a combination of the taking
and their subsequent use of the property, destroyed its value entirely. In both settings, the
same overarching principle governs: The disloyal fiduciary who wrongfully takes property
from the beneficiary is liable for changes in value while the wrongfully taken property is
under the disloyal fiduciary’s control.
As an award of damages for their breaches of fiduciary duty after the Series G
Financing, Georgetown, Davenport, and Fotos are jointly and severally liable for
$2,778,228. Because this award is measured at the date of judgment, the plaintiffs will not
receive prejudgment interest. Post-judgment interest calculated at the legal rate,
compounded quarterly, is due on this amount from the date of judgment until the date of
payment, with the rate of interest fluctuating with changes in the legal rate.
125
III. CONCLUSION
Georgetown and Davenport breached their fiduciary duties by forcing the Company
to enter into the Series G Financing. As a remedy for their breach of fiduciary duty in
connection with the Series G Financing, Georgetown and Davenport are jointly and
severally liable for $17,490,650, plus pre- and post-judgment interest calculated at the legal
rate, compounded quarterly, and running from January 23, 2014, to the date of payment,
with the rate of interest fluctuating with changes in the legal rate.
Georgetown, Davenport, and Fotos breached their fiduciary duties by operating the
Company after the Series G Financing for the benefit of Georgetown, including by entering
into a series of self-interested transactions. As damages for their breaches of fiduciary duty
after the Series G Financing, they are jointly and severally liable for $2,778,228, plus post-
judgment interest calculated at the legal rate, compounded quarterly, and running from the
date of judgment until the date of payment, with the rate of interest fluctuating with changes
in the legal rate.
As the prevailing party, the plaintiffs are awarded costs. Within thirty days, the
parties shall submit a joint letter identifying any other matters that the court needs to
address to bring this matter to a conclusion at the trial level. If there are no other matters,
then the parties shall instead submit a final order that has been agreed upon as to form.
126