Basho Techs. Holdco B, LLC v. Georgetown Basho Investors, LLC
| Decision Date | 06 July 2018 |
| Docket Number | C.A. No. 11802-VCL |
| Parties | 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. 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. |
| Court | Court of Chancery of Delaware |
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.
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.
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.
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.
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.
In 2008, plaintiff Earl Galleher and a colleague co-founded Basho.3 Galleher became President, CEO, and Chairman of the Board.
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
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 thoughtGeorgetown 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.
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...
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