Wednesday, May 2, 2012

ThoughtWorks, Inc. v. SV Investment Partners, LLC case brief

ThoughtWorks, Inc. v. SV Investment Partners, LLC
Delaware Court of Chancery, 2009.
2009 WL 2225958
(Venture Capital Finance)

P, 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.

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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