ThoughtWorks, Inc. v. SV
Investment Partners, LLC
Delaware Court of Chancery, 2009.
2009 WL 2225958
(Venture Capital Finance)
FACTSP, information technology firm, in 2000 raised $26.6M from SV investment partners (SVIP), a venture capital firm, in exchange for P’s series A convertible preferred stock.
-Both parties believed P would undertake IPO in next few years that would allow D to cash out investment.
Charter: SVIP would have right to put, or have co. redeem, all of its preferred shares for approx. $43M on 5th anniversary of closing.
-Charter: thoughtworks would have to obtain consent from holders of majority of pref. to conduct certain business transactions.
-Tech bubble burst, thoughtworks in trouble, unable to redeem preferred on 5th anniversary. Failed to find debt financing to fund redemption.
-Made formal offer to pref. to redeem stock for $12.8M in cash, some accepted, SVIP did not respond.
-Thoughtworks sought to increase line of bank credit from $3 to $10M to manage its cash flow so that it could pay employees and other expenses. SVIP objected, citing to its rights under charter.
ISSUE: Did charter allow TW to postpone payment of redemption obligation beyond 2005 due to funds too low for redemption and can TW have court declare that TW can enter into $10M line of credit with bank without SVIP’s consent?
HOLDING: No, court sides with SVIP.
ANALYSIS
Once fiscal year 2005 ended, TW was obliged to apply all legally available funds to its redemption obligation w/o regard to working capital set aside found in sec. 4(a).
-Credit increase falls within section 5(j) as a contractual arrangement providing for payment of $500,000 or more per year by either party. (court looks to plain language of k).
-$10M credit not contemplated by TW’s budget. Purpose of 5(j) to ensure that major contractual agreements are approved by a majority of the pref. stockholders.
Delaware Court of Chancery, 2009.
2009 WL 2225958
(Venture Capital Finance)
FACTSP, information technology firm, in 2000 raised $26.6M from SV investment partners (SVIP), a venture capital firm, in exchange for P’s series A convertible preferred stock.
-Both parties believed P would undertake IPO in next few years that would allow D to cash out investment.
Charter: SVIP would have right to put, or have co. redeem, all of its preferred shares for approx. $43M on 5th anniversary of closing.
-Charter: thoughtworks would have to obtain consent from holders of majority of pref. to conduct certain business transactions.
-Tech bubble burst, thoughtworks in trouble, unable to redeem preferred on 5th anniversary. Failed to find debt financing to fund redemption.
-Made formal offer to pref. to redeem stock for $12.8M in cash, some accepted, SVIP did not respond.
-Thoughtworks sought to increase line of bank credit from $3 to $10M to manage its cash flow so that it could pay employees and other expenses. SVIP objected, citing to its rights under charter.
ISSUE: Did charter allow TW to postpone payment of redemption obligation beyond 2005 due to funds too low for redemption and can TW have court declare that TW can enter into $10M line of credit with bank without SVIP’s consent?
HOLDING: No, court sides with SVIP.
ANALYSIS
Once fiscal year 2005 ended, TW was obliged to apply all legally available funds to its redemption obligation w/o regard to working capital set aside found in sec. 4(a).
-Credit increase falls within section 5(j) as a contractual arrangement providing for payment of $500,000 or more per year by either party. (court looks to plain language of k).
-$10M credit not contemplated by TW’s budget. Purpose of 5(j) to ensure that major contractual agreements are approved by a majority of the pref. stockholders.
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