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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Co-Founder Squeezed Out in Conversion from LLC to Corporation Adequately Pled Claims for Fraud, Breach of Fiduciary Duties, Aiding and Abetting, and Civil Conspiracy
Simon Ogus was a co-founder of a sports-technology news company. He owned 44.5 percent of the LLC’s units, held veto power over major decisions of the company, and had employment protection based on a requirement that the company could only terminate his employment for cause. After outside investors began making large investments in the company, several officers and directors persuaded Mr. Ogus to: (1) approve a conversion of the LLC to a corporation; (2) sign a written consent of stockholders to expand the size of the board of directors; and (3) execute a shareholders agreement that gave the company the option to purchase Mr. Ogus’ shares if his employment was terminated for any reason, at fair market value, as determined in good faith by the board. One month later, the company terminated Mr. Ogus without cause and proposed to purchase his shares. Mr. Ogus brought suit, claiming that the officers and directors conspired to remove him from the company and eliminate his 44.5% interest to enrich themselves, and transfer control of the company to Oak View Group, a private equity & venture fund. Defendants moved to dismiss his suit.
The Court held that Mr. Ogus had adequately pled that defendant officers and directors had fraudulently induced him to approve the conversion of the company to a corporation by promising that Mr. Ogus would retain his managerial role and his veto power over major decisions after the conversion, and that they had also assured him falsely that he would be appointed to the board of directors. The Court also sustained fiduciary duty claims against the officers and directors that allegedly pressured Mr. Ogus to approve the conversion under arbitrary time constraints, to have intentionally misrepresented information regarding the effect of the conversion, and to have terminated Mr. Ogus in bad faith solely to permit the company to repurchase his shares. The Court also found that Mr. Ogus had pled a sufficient claim that the defendant private equity fund had aided and abetted the breach of fiduciary duty, because the fund’s board designee allegedly knowingly participated in the bad faith termination of Mr. Ogus, and her knowledge could be imputed to the fund. Accordingly, the Court found that this alleged conduct was sufficient to support a claim for civil conspiracy among the officers, directors, and the private equity fund.