Private Equity deal goes sour after years of trading. Complex misleading and deceptive conduct case settled before Court action necessary.

The clients were the sole shareholders and directors of a large and successful service company with yearly sales revenue exceeding $12 million.

The directors sold the majority of their holding in the service company to a venture capital firm, on the understanding that the firm would develop and grow the business and substantially increase the value of the client’s remaining shares. Following the acquisition however, the service company experienced a significant drop in revenue which had the effect of devaluing the company.

The venture capital firm then sold off part of the service company to a wholly owned subsidiary of itself. The firm purported to use its power as a majority shareholder in the service company to force the sale of the clients’ shares in the transaction under as drag along provision of the Shareholders Agreement. The venture capital firm now valued the clients shares at less than $1,000.00 in total.

The clients sought the help of Roberts Legal, claiming that the directors of the venture capital firm had engaged in misleading and deceptive conduct and had mismanaged the service company causing them significant financial loss of approximately $300,000.00 by diminishing the value of the remaining shares. The clients also maintained that the venture capital firm did not have a legal right to force the sale of the client’s remaining shares as the purchaser was a wholly owned subsidiary and not a genuine third party purchaser.

An informal settlement conference was convened between the Solicitors. The matters in dispute were complex and likely to be expensive to litigate. It was the clients’ strong preference to avoid litigation. The matter was settled out of Court in the clients’ favour for more than $200,000.00.

By Sam Roberts,
Managing Director, Accredited Specialist (Commercial Litigation)