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Law360
October 2, 2017
Law360, Wilmington (October 2, 2017, 8:13 PM EDT) -- The former CEO of database company Basho Technologies Inc. told a Delaware Chancery Court judge Monday of the contentious relationship with major shareholder Georgetown Basho Investors LLC that eventually led to the CEO’s resignation amid alleged bad faith negotiations on financing the company’s operations.

During the first day of a trial in Wilmington on claims Georgetown intentionally sunk the company's fortunes in an effort to exert more control, former CEO Gregory Collins described the increasing tensions between himself and Chester Davenport, a board member who is one of the principals of Georgetown, as the company pursued financing, including angry, threatening emails and phone calls and extended periods where Davenport allegedly would not even speak to Collins.

The disagreements allegedly stemmed from Georgetown’s efforts to torpedo financing from any other other sources, as outlined in the December 2015 complaint of former Basho board chairman Earl Galleher in which he accused Georgetown of destroying business prospects for Basho, creating a liquidity crisis and ultimately negotiating in bad faith with a potential funder of a Series G funding round for the company.

“There felt like an increasing amount of conflict with what he wanted me to do … and what the rest of the board wanted to do,” Collins said of the relationship with Davenport beginning in the spring of 2013, when Basho switched the focus of a marketing process with investment banker Cowen & Co.

Basho originally began pursuing a dual-track process where it simultaneously entertained offers to buy the company outright as well as offers to provide additional financing to help support Basho on a go-forward basis, Collins said.

When Collins began negotiating with Southeast Ventures to possibly provide that funding, he alleged from the stand Monday that Davenport’s participation in the process was detrimental to Basho’s efforts.

Georgetown submitted a proposed term sheet to provide the financing in November 2013, Collins said, but the board chose to form a three-member subcommittee to evaluate the offer because Davenport and another Georgetown-appointed board member would not recuse themselves from discussions.

The subcommittee conducted a private meeting and decided to continue its pursuit of the Southeast Ventures term sheet while letting the Georgetown term sheet expire, Collins testified. He said the group committed to keeping a dialogue open with Georgetown to try and get better terms.

“[The Georgetown term sheet] was quite one-sided and Georgetown was not interested in having discussions to make it not so one-sided,” Collins said.

The same day the board formed the subcommittee, Collins testified Davenport initiated a lengthy text message where he threatened to alter the terms of an existing $7.5 million secured note issued by Georgetown to help fund Basho through the first half of 2013, in addition to allegedly threatening Collins with litigation that would expose him to personal liability if he didn’t comply with Davenport’s wishes.

The threats led Collins to believe Basho’s funding would dry up before the company could come to terms on any alternate financing plan, he said.

“That text message changed my mind … so that I saw no other course at that point than to accept the term sheet as it was presented,” Collins said. “I felt there was only one path forward and there was no time or money to explore different options and there was no room for negotiations.”

The treatment by Davenport allegedly led Collins to offer his resignation to the company in mid-November 2013, but he was convinced to stay by Galleher, the board chairman and co-founder of the company.

Southeast Ventures submitted its term sheet in December 2013 and Davenport and Georgetown expressed a willingness to work together on a funding effort. When the board met to approve the Southeast Ventures term sheet on Dec. 9, Davenport and the other Georgetown director abstained from the vote.

As the financing process moved forward into January 2014, Collins testified that Southeast Ventures’ main backers had become frustrated at Davenport’s alleged meddling in the process and were disengaging from the Basho deal. Collins resigned later that day.

On cross-examination, Collins testified that several other funding options had fallen through in the months before the Southeast Ventures deal soured, saying they didn’t come to fruition for a variety of reasons.

He also said that Basho’s cash shortfall was predicted to be more than the $7.5 million provided under the existing secured credit facility extended by Georgetown, and that the maximum amount of funding being offered by Southeast Ventures was $15 million.

Collins described a $1.5 million bridge loan financing deal proposed by Southeast Ventures to get Basho through the end of the fund-raising process, predicted to wrap up by the end of January 2014. The terms of that proposal would have required Georgetown to agree to subordinate its secured note to the bridge loan.

The trial is expected to continue Tuesday.

Galleher, the plaintiff who brought the derivative complaint, informed the court late last week that a settlement had been reached with most of the board members named as defendants in the action, leaving just Georgetown and its principals, Davenport and Jonathan Fotos, in the case, along with Basho itself as a nominal defendant.

Earl P. Galleher III and Basho Technologies Holdco B LLC et al. are represented by R. Montgomery Donaldson, Robert A. Penza, Todd C. Bartels and Robert V. Spake of Polsinelli PC.

Georgetown Basho Investors LLC, Newport Beach Investors LLC, Chester Davenport and Jonathan Fotos are represented by Barry M. Klayman, Paul K. Leary Jr. and Lezlie Madden of Cozen O'Connor.

Nominal defendant Basho Technologies Inc. is represented by Bradley D. Sorrels and Lindsay M. Kwoka of Wilson Sonsini Goodrich & Rosati PC.

The case is Basho Technologies Holdco B et al. v. Georgetown Basho Investors LLC et al., case number 11802, in the Court of Chancery of the State of Delaware.