Private Equity Firm Sues Alleging Dilution of its Interest through a Sham Offering

Tygon Peak Capital Management, LLC (“Tygon Peak”), a private equity firm, filed suit in Delaware Chancery Court against Voice Comm, LLC (“Voice Comm”) and its ownership group alleging breach of contract, unjust enrichment, breach of the covenant of good faith and fair dealing, deceptive trade practices, and defamation. (Verified Complaint, Tygon Peak Capital Management, LLC v. Mobile Investments Investco, LLC, No. 2019-0847 (Del. Ch. Oct 24, 2019)). The defendants in the suit include Voice Comm’s parent company, Mobile Investments Investco, LLC (“Investco”), the other firms that invested in Investco, and the individuals in charge of these investment companies who also sat on the boards of Investco and its subsidiaries. Id. Tygon Peak owns 100% of Investco’s Class A Units and 6.8% of Investco’s Class B Units and has a seat on Investco’s Board of Managers (“Investco’s Board”). Id. The suit arose after negotiations broke down over a potential buyout of Tygon Peak’s Investco stock. (Leonard, Bloomberg Law).

Voice Comm is a leading supply chain manager for mobile device services. (Beltra, PEHub). Tygon Peak is an independent sponsor, which is a private equity firm that raises capital and leads investments on a deal-by-deal basis. (Rychlewski, Forbes). Tygon Peak acquired its interest in Voice Comm through an acquisition that closed in August 2018. (Beltra, PEHub). As part of the acquisition, Tygon Peak invited additional investors into the transaction. Id. These investors are now also defendants in Tygon Peak’s suit. (Verified Complaint). 

The investors agreed to a term sheet under which Tygon Peak was entitled to an ongoing management fee, a promote interest in Voice Comm’s profits, and reimbursement for all costs and expenses incurred in connection with the acquisition. Id. Tygon Peak’s promote is an ownership interest in the profits of the company that Tygon Peak received in exchange for its facilitation of the investment opportunity. (Realty Mogul). This interest givesTygon Peak an additional share of the upside of the transaction, beyond what it would receive from its capital investment. Id.  The Investco Class A Units represented Tygon Peak’s promote interest and gave Tygon Peak additional approval rights over key matters related to Investco. (Verified Complaint). Under one of these rights, Tygon Peak’s representative on the Investco Board was required to vote with the Board to obtain a supermajority on certain matters, including transactions between Investco and its members and affiliates. (Operating Agreement). 

The complaint alleges Investco acted in bad faith in approving a sham offering aimed at diluting Tygon Peak’s interests. (Verified Complaint). In August 2019, Investco offered to buy out Tygon Peak’s ownership interests by purchasing the Class B Units at cost and attributing no value to Tygon Peak’s Class A Units, the promote. Id.Tygon Peak rejected the offer as it was not sufficient to compensate Tygon Peak for its promote interest. Id.According to the complaint, Investco’s Board responded to this rejection by passing a resolution allowing current members to purchase new equity in Investco to dilute Tygon Peak’s interest. (Written Consent). The resolution approved the issuance of 800,000 new Class B Units at a price of $1 per unit – well below fair market value as these units had been valued at $1,000 per unit at the time of Tygon Peak’s acquisition a year earlier. (Verified Complaint). Additionally, purchasers of these new Class B Units would receive an equal amount of Class A Units for free. (Written Consent). This would serve to reduce Tygon Peak’s interests in both classes of stock. The complaint further alleges that the sale of additional stock to existing members required supermajority approval under the Investco operating agreement. (Verified Complaint). Tygon Peak’s required approval, as part of the supermajority, was neither sought nor given. Id.

In addition to the claims relating to the sham offering, the complaint alleges that Voice Comm failed to reimburse Tygon Peak for its expenses related to the acquisition resulting in a breach of their investment contract and unfair enrichment to the other investors who benefit from Tygon Peak’s payment for these costs. Id. Further, Tygon Peak alleges that Voice Comm failed to pay the management fees due to it under the term sheet and master services agreement. Id. Finally, Tygon Peak alleges defamation and violations of Delaware’s Deceptive Trade Practices Act due to the allegedly disparaging and false statements Voice Comm has made relating to Tygon Peak’s services. Id.

Tygon Peak’s request for relief includes an injunction to prevent Investco from proceeding with its proposed offering, damages – including statutory, actual, consequential and special damages, and attorney’s fees. Id. While Tygon Peak initially sought a temporary restraining order to enjoin the offering, Investco agreed to delay the offering until the case is reviewed by the court. (Stipulation and Order Resolving Plaintiff’s Motion for Temporary Restraining Order). This case is ongoing and Voice Comm’s answer to the complaint has not yet been filed with the court.