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Laster Hits Investment Fund, Manager With $20.3M in Damages for Tech Firm Coup

[caption id="attachment_1857" align="aligncenter" width="607"] Photo Credit: Bigstock[/caption] The Delaware Court of Chancery has ordered an investment fund and its manager to pay $20.3 million in damages for using their control over Basho Technologies Inc. to profit from efforts to maneuver the young firm into a "position of maximum crisis." Vice Chancellor J. Travis Laster on July 6 found Georgetown Basho Investors and founder Chester Davenport joint and severally liable for nearly $17.5 million in a campaign to block out potential financial backers and silence dissenting voices, with the goal of capitalizing on a quick sale. The judge also tacked on about $2.8 million in "recessionary damages" to restore lost value that was taken from the plaintiffs for forcing a series of self-dealing transactions, which led to mass departures and, ultimately, Basho's demise last year. The ruling followed a four-day trial last year in which, Laster said, Davenport and Georgetown had made "no effort" to show the entire fairness of actions that put the company on a "greased slide to failure." "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," Laster wrote in a 126-page memorandum opinion. The ruling also came as vindication for Basho founder and former CEO Earl Galleher, who resigned from the Basho board and sued in 2015, accusing Davenport and Georgetown of "serial fiduciary breaches" stemming from a round of Series G funding in 2013. According to Laster's opinion, Davenport's firm was able to secure blocking rights and exclusive control to Basho's capital. From there, the defendants forced through the Series G funding on terms that gave Georgetown "hard control" over the firm but were "decidedly unfair" to Basho and its other investors. After the funding round, Davenport and his ally, Jonathan Fotos, moved to consolidate their control over Basho and approved favorable loans to a Davenport investment vehicle, with no oversight or input from the rest of the board. "Stuff just happened," Laster said, noting Davenport's method of "freezing out" directors who voiced concerns with the direction of the company. The "oppressive tactics" raised a red flag for potential buyers, eliminating any hope that the company could be sold for a profit, Laster wrote. Instead, the company entered receivership and was liquidated, its equity worth practically nothing. In a 167-page complaint, Galleher said the actions were in "direct conflict" with the interests of Basho and its minority shareholders, and he sought equitable and monetary relief for "catastrophic" loss in company value. On July 6, Laster decided the case under Delaware's entire fairness standard of review, which gives less deference to a controller's actions than the director-friendly business judgment rule. "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," Laster said. He continued: "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." Galleher's lawyer, Polsinelli attorney R. Montgomery Donaldson, said Laster's ruling was not surprising, in light of the record developed at trial. "It's truly extraordinary," Donaldson said of the defendant's behavior. "It's like nothing I've seen before and, frankly, like nothing I'd like to see again." An attorney for Davenport and Georgetown did not return a call Monday seeking comment on the ruling. Robert V. Spake, also of Polsinelli, joined Donaldson on Galleher's legal team. Davenport and Georgetown were represented by Lezlie Madden and Barry M. Klayman of Cozen O'Connor. The case was captioned Basho Technologies v. Georgetown Basho Investors.  

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