Not a Lexis Advance subscriber? Try it out for free.

Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC

Court of Chancery of Delaware

April 9, 2018, Submitted; July 6, 2018, Decided

C.A. No. 11802-VCL

Opinion

MEMORANDUM OPINION

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 position of maximum financial distress,Georgetown and Davenport  [*2]  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 [*3]  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.

Read The Full CaseNot a Lexis Advance subscriber? Try it out for free.

Full case includes Shepard's, Headnotes, Legal Analytics from Lex Machina, and more.

2018 Del. Ch. LEXIS 222 *; 2018 WL 3326693

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.

Notice: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.

Subsequent History: Affirmed by Davenport v. Basho Techs., 2019 Del. LEXIS 476 (Del., Oct. 22, 2019)

CORE TERMS

Financing, investors, term sheet, round, terms, valuation, damages, loan agreement, fiduciary, funding, stockholder, fiduciary duty, preferred stock, invest, resigned, blocking, rights, negotiations, voted, email, transactions, shares, unfair, standard of review, designate, pre-money, team, liquidation, technology, appraisal

Civil Procedure, Trials, Bench Trials, Evidence, Burdens of Proof, Allocation, Preponderance of Evidence, Appeals, Appellate Briefs, Reviewability of Lower Court Decisions, Preservation for Review, Business & Corporate Law, Causes of Action & Remedies, Breach of Fiduciary Duty, Burdens of Proof, Torts, Intentional Torts, Elements, Agency Relationships, Fiduciaries, Definitions, Management Duties & Liabilities, Fiduciary Duties, Business Judgment Rule, Duty of Care, Duty of Loyalty, Burden Shifting, Duty of Good Faith, Directors & Officers, Fiduciary Duties, Remedies, Shareholder Duties & Liabilities, Controlling Shareholders, Formation, Shareholders, Controlling Shareholders, Inferences & Presumptions, Presumptions, Creation, Causes of Action, Self-Dealing, Causes of Action, Defenses, Demurrers & Objections, Affirmative Defenses, Estoppel, Preliminary Considerations, Equity, Relief, Defenses, Ratification, Defenses, Tax Law, Federal Taxpayer Groups, C Corporations, Attribution of Stock, Earnings & Profits, Retirement Plans, Defined Contribution Plans, Employee Stock Ownership Plans, Remedies, Damages, Monetary Damages