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Court determines co-founder’s case can move forward

Opinion retains most of Frederick Hsu’s claims against investors, officers and board members.

Last year, I wrote about a lawsuit that co-founder Frederick Hsu (through the Frederick Hsu Living Trust) filed against investor Oak Hill Capital Partners and many former board members and officers of the company.

Hsu alleged six claims in the Delaware Court of Chancery, mostly around a breach of fiduciary duty. Hsu argued that the defendants took actions to benefit investor Oak Hill rather than shareholders at large.

On Friday, Vice Chancellor J. Travis Laster ruled that only two of the six claims should be dismissed, and the other four can move forward. Most notably, all claims related to a breach of fiduciary duty can move forward.

It’s important to note that, at this state of the complaint, all of Hsu’s allegations are assumed to be true and he receives all reasonable inferences for the purpose of determining if claims should be dismissed.

Hsu’s alleges that the defendants abandoned a growth plan that benefited all shareholders to instead focus on redeeming the investment of just one preferred shareholder, Oak Hill. Oak Hill invested $150 million in the company and had redemption rights. The defendants’ actions to fulfill redemptions are at the heart of the case. expanded aggressively until 2011. It had revenue of over $200 million and profits of $19 million in 2007. It bought SnapNames for $6.4 million, DomainSystems (Moniker) for $24.6 million and paid $17 million for ShopWiki.

But Hsu paints a picture that at some point in 2011 the board switched gears in an effort to preserve as much of Oak Hill’s investment as possible. Board members and officers were given incentive plans tied to how much of Oak Hill’s stock was redeemed and the company went into divestment mode. Hsu alleges that board members and officers made decisions in the best interests of Oak Hill and their own pocketbooks rather than all shareholders. sold its aftermarket and registrar businesses for $15.4 million in January 2012, just a third of what they were acquired for. After selling these businesses, revenue dropped from $141 million in 2011 to $89 million in 2012.

And instead of reinvesting cash, the company stockpiled $50 million by the end of 2012. This cash was used for redemptions.

Later, in 2014, the company sold ShopWiki for just $600,000.

One of the more damning parts of the case has to do with cash reserves. The company drastically reduced the amount of cash reserves it determined were necessary to support the business, apparently in order to meet Oak Hill’s demands for redemption.

The 95-page opinion (pdf) includes a lot of details about the rise and fall of The cliff notes version based on the initial filing is here.

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Author: Andrew Allemann

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