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Court of Chancery Imposes Over $20 Million in Damages on Investment Fund and Its Manager

Posted In Fiduciary Duty

Basho Technologies Holdco B LLC v. Georgetown Basho Investors LLC, C.A. No. 11802-VCL (Del. Ch. July 6, 2018)

This notable decision issued by the Court of Chancery holds an investment fund and its manager liable for over $20 million essentially for destroying a Delaware entity’s value.  The litigation arises out of a once promising technology company’s downfall into liquidation.  The facts involved an investor that leveraged a series of preferred investments into negative control and used that control to secure a self-dealing financing unfavorable to the company, while simultaneously turning away much needed financing opportunities threatening its control.  The investor hoped to position the company for a prompt sale in which it would reap the benefits, but that did not pan out, and the company went under. 

The decision should serve as a cautionary tale for investors who position themselves with effective control in one form or another and thereby take on fiduciary duties.  In that scenario, an investor engaging in a conflicted transaction with the company must rely on available procedural safeguards or be prepared to defend its actions as entirely fair.  It also must walk a fine line when opposing opportunities that appear in the company’s best interests.  While a legitimate exercise of contractual rights will not lead to liability, an investor with control must be careful in wielding those rights.  Also notable is the Court’s damages award, which utilized valuations in connection with secondary offerings to determine values before and after the self-dealing financing.  To conclude, the decision is essential reading for investors with some forms of control, such as blocking rights for financing and representation in management.