Delaware Court Allows Challenge to Venture Capital Preferred Financings
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2013-07-10
In Carsanaro v. Bloodhound Technologies, Inc., 2013 WL 1104901 (Del. Ch. Mar. 15, 2013), Vice Chancellor Laster of the Court of Chancery denied defendants’ motion to dismiss a complaint alleging breaches of fiduciary duties and statutory violations, among other things, in connection with several rounds of venture capital financings for a start-up healthcare technology company (“Bloodhound” or the “Company”).
In the late 1990s, Bloodhound began developing a web-based software application to monitor healthcare claims for fraud. From 1999 to 2002, the Company issued five series of preferred stock, designated Series A through Series E. Plaintiffs, former common stockholders of Bloodhound, alleged that in the Series D and Series E capital raises, the venture capital firms investing in the Company used their control over the Company’s board of directors to approve financings that unfairly diluted the common stock, undervalued the Company, and improperly benefitted the venture capital firms and management. Plaintiffs also challenged a 1-for-10 reverse stock split of the common stock carried out in connection with the Series E refinancing in 2002. In addition to their challenges to transactions in 2001 and 2002, plaintiffs alleged that the board had acted wrongfully in 2011 when it agreed to sell the Company to a third party for $82.5 million, and approved a management incentive plan (“MIP”) that allocated $15 million, or about 19 percent of the merger proceeds, to the Company’s management. Plaintiffs alleged that, as a result of the dilutive financings and the MIP, they received only approximately $36,000 for their common shares in the merger.