Bionet vs. Scout Analytics Complaint (3)

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COMPLAINT- 1 NEWMAN DU WORS LLP

1201 Third Avenue, Suite 1600 Seattle, Washington 98101

(206) 274-2800

SUPERIOR COURT OF THE STATE OF WASHINGTON IN AND FOR THE COUNTY OF KING

BIONET SYSTEMS LLC, a Washington limited liability company, COLIN BRYAR, an individual, SARAH BRYER, an individual, HEATHER E. ERDMANN, an individual, J.B. CAPITAL LLC, a Washington limited liability company, ROBERT W. JOHNSON, an individual, STEVE MOORE, an individual, WILLARD B. SAMMS, an individual, SHARON M. SAMMS, an individual,

Plaintiffs, v. SCOUT ANALYTICS, INC., a Washington corporation, MARK UPSON, an individual, JOHN CONNORS, an individual, ADAM LUDWIN, an individual, IGNITION MANAGING DIRECTORS FUND III, LLC, a Delaware limited liability company, IGNITION VENTURE PARTNERS III, LP, a Delaware limited partnership, RRE VENTURES IV, LP, a Delaware limited partnership,

Defendants.

NO. _______________ COMPLAINT FOR DAMAGES AND INJUNCTIVE RELIEF JURY DEMANDED

FILED14 JAN 10 PM 4:06

KING COUNTYSUPERIOR COURT CLERK

E-FILEDCASE NUMBER: 14-2-01133-4 SEA

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Plaintiffs BIONET SYSTEMS LLC, a Washington limited liability company,

COLIN BRYAR, an individual, SARAH BRYER, an individual, HEATHER E.

ERDMANN, an individual, J.B. CAPITAL LLC, a Washington limited liability company,

ROBERT W. JOHNSON, an individual, STEVE MOORE, an individual, WILLARD B.

SAMMS a/k/a ROBIN SAMMS, an individual, SHARON M. SAMMS, an individual

(collectively, “Plaintiffs”) file this Complaint against defendants SCOUT ANALYTICS,

INC., a Washington corporation, MARK UPSON, an individual, JOHN CONNORS, an

individual, ADAM LUDWIN, an individual, IGNITION MANAGING DIRECTORS

FUND III, LLC, a Delaware limited liability company, IGNITION VENTURE

PARTNERS III, LP, a Delaware limited partnership, RRE VENTURES IV, LP, a

Delaware limited partnership (collectively, “Defendants”) on personal knowledge of

their own activities and on information and belief as to the activities of others as follows:

I. NATURE OF THE CASE

1. Plaintiffs collectively hold a near supermajority (63%) of the Series A

Preferred and 73% of the Common shares issued by Defendant Scout Analytics, Inc.

(“Scout”).

2. Defendants Mark Upson, John Connors and Adam Ludwin (collectively,

the Individual Defendants”) serve on Scout’s Board of Directors and constitute three of

the four voting members.

3. Defendant Connors is a partner at Defendants Ignition Managing Directors

Fund III and Ignition Venture Partners III (collectively, “Ignition”). Defendant Ludwin

is a partner with Defendant RRE Ventures IV (“RRE”). Collectively, Defendants

Ignition and RRE hold nearly half of Scout’s Series B Preferred and 64% of Scout’s Series

C and C-1 Preferred shares. Neither Ignition, RRE, nor any Individual Defendant holds

any of Scout’s Series A Preferred or Common shares.

4. Scout is a closely-held corporation and, as such, Defendants owe a fiduciary

duty to Scout’s Series A Preferred and Common shareholders. Defendants have instead

engaged in self-dealing, corporate waste, and gross negligence to the detriment of Scout’s

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Series A Preferred and Common shareholders.

5. In particular, Defendants have voted to approve a sale proposal by

ServiceSource International, Inc. (“ServiceSource”)—a proposal that eliminates the

economic interests of Scout’s Series A Preferred and Common shareholders—rather than

explore or investigate a proposal by Catalyst Investors III, LLP (“Catalyst”) which offers

a much higher valuation but no post-merger payments to Scout’s management and its

Series B, C and C-1 Preferred shareholders.

6. As a result of Defendants’ oppressive management of Scout, the value of

Scout’s Series A Preferred and Common shares—of which Plaintiffs hold the vast

majority—has been and will continue to be adversely impacted.

7. Plaintiffs are suing to recover their damages and obtain an injunction

preventing the sale of Scout to ServiceSource, as well as further wrongful conduct by

Defendants.

II. PARTIES

8. Plaintiff Bionet Systems LLC (“Bionet”) is a Washington limited liability

company whose members are all residents of the State of Washington. Bionet holds

69.37% of Scout’s Common and 25.03% of Scout’s Series A Preferred shares. Its founder,

Mark DiSalle, serves on Scout’s Board of Directors.

9. Plaintiff J.B. Capital LLC (“J.B. Capital”) is a Washington limited liability

company. J.B. Capital holds 15.84% of Scout’s Series A Preferred shares.

10. Plaintiffs Colin Bryar and Sarah Bryar are Washington residents. As

husband and wife, they own 5.43% of Scout’s Series A Preferred shares.

11. Plaintiffs Robert W. Johnson and Heather E. Erdmann are Washington

residents. Johnson holds 1.36% of Scout’s Series A Preferred shares in his own name. As

husband and wife, Johnson and Erdmann own another 1.81% of Scout’s Series A Preferred

shares.

12. Plaintiff Steve Moore is a Washington resident. Moore holds 3.55% of

Scout’s Common and 12.67% of Scout’s Series A Preferred shares.

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(206) 274-2800

13. Plaintiffs Willard B. Samms, Jr. a/k/a Robin Samms and Sharon M. Samms

are Washington residents. As husband and wife, they own 0.63% of Scout’s Series A

Preferred shares.

14. Defendant Scout Analytics, Inc. (“Scout”) is a Washington corporation

with its principal place of business in Issaquah, Washington.

15. Defendant Mark Upson is an individual, the president and chief executive

officer of Scout, and a member of Scout’s Board of Directors. Plaintiffs are informed and

believe, and on that basis allege, that Upson currently resides in Issaquah, Washington.

16. Defendant Ignition Managing Directors Fund III is a Delaware limited

liability company. Plaintiffs are informed and believe, and on that basis allege, that the

members of this LLC are domiciled in the States of Washington and California.

17. Defendant Ignition Venture Partners III is Delaware limited partnership.

Plaintiffs are informed and believe, and on that basis allege, that the members of this

partnership are domiciled in the States of Washington and California.

18. Defendant RRE Ventures IV (“RRE”) is a Delaware limited partnership.

Plaintiffs are informed and believe, and on that basis allege, that the members of this

partnership are domiciled in the State of New York.

19. Defendants Ignition Managing Directors Fund III and Ignition Venture

Partners III (collectively, “Ignition”) hold 47.06% of Scout’s Series B and 27.84% of

Scout’s Series C and C-1 Preferred shares.

20. Defendant RRE holds 35.72% of Scout’s Series C and C-1 Preferred shares.

21. Defendant John Connors is an individual and a member of Scout’s Board of

Directors. He is also a partner with Defendant Ignition. Plaintiffs are informed and

believe, and on that basis allege, that Connors currently resides in Bellevue, Washington.

22. Defendant Adam Ludwin is an individual and a member of Scout’s Board of

Directors. He is also a partner with RRE. Plaintiffs are informed and believe, and on that

basis allege, that Ludwin currently resides in New York, New York.

23. Each Defendant aided and abetted the actions of the other Defendants as

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set forth below, in that each Defendant had knowledge of those actions, provided

assistance and benefitted from those actions. Each of the Defendants was the agent of

each of the remaining Defendants, and in doing the things hereinafter alleged, was acting

within the course and scope of such agency and with the permission and consent of the

other Defendants.

III. JURISDICTION AND VENUE

24. This court has subject matter jurisdiction over the subject matter of this

action pursuant to RCW 2.08.010.

25. This Court has personal jurisdiction over Defendants Scout, Upson and

Connors because they are residents of the State of Washington.

26. This Court has personal jurisdiction over all Defendants pursuant to

Washington’s long-arm statute, RCW 4.28.185(1)(a) because Defendants transacted

business as described herein in the State of Washington.

27. This Court has personal jurisdiction over all Defendants pursuant to

Washington’s long-arm statute, RCW 4.28.185(1)(b) because Defendants committed the

tortious acts as described herein in the State of Washington.

28. Venue is proper in this Court pursuant to RCW 4.12.025(1) because at least

one defendant resides in King County, Washington. Venue is also proper in this Court

pursuant to RCW 4.12.020(3) because King County, Washington is the county where

Defendants committed the torts alleged herein.

IV. FACTS

29. Defendant Scout Analytics, Inc. (“Scout”) is a company that offers

multiple platforms through which other companies—particularly information service

providers, media publishers and software companies—leverage user data.

30. Scout is authorized to issue two classes of stock: Common and Preferred.

The Preferred Stock is designated as either Series A, Series B, Series C or Series C-1.

31. There are four member of Scout’s Board of Directors. They are Defendant

John Connors, Defendant Adam Ludwin, and Defendant Mark Upson, Scout’s president

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and chief executive officer. Mark DiSalle is a fourth member and the chairman of the

Board

32. Defendant Connors is employed by Defendant Ignition. Defendant Ludwin

is employed by Defendant RRE. Ignition and RRE collectively own 47.06% of Scout’s

Series B Preferred and 63.56% of Scout’s Series C and C-1 Preferred shares. Neither

Ignition nor RRE own any of Scout’s Common or Series A shares.

33. Mark DiSalle is employed by Plaintiff Bionet Systems LLC (“Bionet”). In

contrast to Ignition and RRE, Bionet owns 69.37% of Scout’s Common and 63.56% of

Scout’s Series A Preferred shares. And Bionet owns none of Scout’s Series B, C or C-1

Preferred shares.

34. Subject to certain exceptions that are not at issue here, Scout’s Articles of

Incorporation prevent Scout from effecting a sale of the company or from changing the

rights and privileges of any holder of Preferred shares, without first obtaining the written

consent of the holders of at least a majority of the then outstanding shares of all Preferred

stock.

35. Scout’s bylaws also contain strict notice requirements for any meeting at

which Scout’s shareholders will be called to act on a plan of merger or sale of assets.

36. Scout’s bylaws further require that Scout’s Board of Directors act in the

best interests of Scout’s shareholders.

37. But Defendants have not acted in the best interests of Scout’s shareholders.

Instead, Defendants have acted in the best interests of Scout’s management (represented

on Scout’s Board by Defendant Upson) and Defendants Ignition and RRE (who hold the

great majority of Scout’s Series B, C and C-1 Preferred shares). As such, Defendants have

engaged in self-dealing, have wasted corporate profits and have acted with gross

negligence towards Scout’s Series A and Common shareholders.

38. In early December, Scout and its Board predicted that it would be out of

cash within the first quarter of 2014. So they solicited and received two proposals for

financing. The first is a proposal for an investment (the “Investment Proposal”) by

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Catalyst Investors III, LP (“Catalyst”). The Investment Proposal is based upon a

valuation of Scout at $40 million.

39. The second proposal (the “Sale Proposal”) involves an acquisition by

ServiceSource International, Inc. (“ServiceSource”). The Sale Proposal is based upon a

much smaller valuation—only $31 million. But the Sale Proposal offers post-merger

payments of proceeds to Defendants Ignition, RRE and Scout’s management. Scout’s

Series A Preferred and Common shareholders, on the other hand, receive nothing under

the Sale Proposal and their shares would be cancelled.

40. Because of its low valuation, Defendants initially found the Sale Proposal

unacceptable and told ServiceSource that its offer would need to involve a valuation at

$40 million or higher.

41. But ServiceSource refused to adjust its valuation and remarked that the

parties were too far apart to warrant further discussion.

42. Shortly thereafter, Scout’s Board of Directors held a vote on the proposals.

43. Because of his employment with Bionet—which holds a majority of Scout’s

Common and a significant percentage of Scout’s Series A Preferred shares—Mark

DiSalle believed a vote on the proposals posed a conflict of interest for him. So he

abstained from voting.

44. Noting that the Sale Proposal offered post-merger payments to the other

directors and/or their employers but no benefits for any of Scout’s Common or Series A

Preferred shareholders, DiSalle also urged the other directors—Defendants Upson,

Connors and Ludwin—to abstain from voting. But they refused.

45. Despite the glaring differences in valuation, Scout’s Board of Directors

voted in favor of the Sale Proposal—not the more lucrative Investment Proposal.

46. In so doing, Defendants acted in service of their self-interests and the

interests of their employers, not Scout’s shareholders to whom they owed a duty of care,

loyalty and accountability.

47. On December 18, 2013, Plaintiffs via their counsel sent a letter to

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Defendants complaining that the Sale Proposal vote posed a significant conflict of

interest. Citing Scout’s Articles of Incorporation, the letter also noted that Scout lacked

authority to proceed with the merger absent sufficient notice and written consent of the

holders of at least a majority of the then outstanding shares of all Preferred stock.

48. Defendants responded by promising to submit the Sale Proposal for

shareholder vote. But Defendants broke that promise, choosing instead to proceed with

the due diligence associated with the Sale Proposal.

49. Unless Defendants are immediately enjoined, they will finalize the sale of

Scout to ServiceSource—which only serves their individual interests and completely

eliminates the economic interests of Plaintiffs and the other Series A Preferred and

Common shareholders.

V. FIRST CAUSE OF ACTION Breach of Fiduciary Duty

(All Defendants)

50. Plaintiffs incorporate by reference the allegations set forth in Paragraphs 1

through 49 as though fully set forth herein.

51. Directors of a corporation are fiduciaries that owe the highest duty of

loyalty to both the corporation and its minority shareholders. Saviano v. Westport

Amusements, Inc., 144 Wn. App. 72 (2008).

52. By virtue of their positions on Scout’s Board of Directors, the Individual

Defendants have the power to control and did control Scout’s business and corporate

affairs.

53. Defendants are required to use their ability to control and manage Scout in a

fair, just, and equitable manner; maximize shareholder value; act in furtherance of the

best interests of Scout’s shareholders; refrain from abusing their positions of control; and

not favor their own interests at the expense of Plaintiffs and the other Series A Preferred

and Common shareholders.

54. By virtue of the acts and conduct alleged herein, Defendants have breached

the fiduciary duties of care, loyalty, and accountability to Plaintiffs and the other Series A

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Preferred and Common shareholders.

55. Defendants have violated their fiduciary duties by voting in favor of and

recommending the Sale Proposal, which provides them a substantial financial benefit to

the great detriment of Plaintiffs and the other Series A Preferred and Common

shareholders.

56. Defendants have caused other violations of Scout’s Articles of

Incorporation and continue to endanger the economic interests of Plaintiffs and the other

Series A Preferred and Common shareholders.

57. As a direct result of Defendants’ wrongful conduct and actions, Plaintiffs

and the other Series A Preferred and Common shareholders have suffered considerable

damage in an amount to be proven at trial.

VI. SECOND CAUSE OF ACTION Minority Shareholder Oppression

(All Defendants)



59. Scout is a closely-held corporation.

60. The shareholders of closely-held corporations are fiduciaries of each other

and must act loyally, in good faith, and honestly with the other shareholders.

61. But Defendants have breached those obligations and, in so doing, have

oppressed the rights of Scout’s Series A Preferred and Common shareholders.

62. Defendants’ actions have violated the agreements and representations that

were relied upon by Plaintiffs and the other Series A Preferred and Common

shareholders.

63. Defendants have engaged in burdensome, harsh, and wrongful conduct via

their roles on Scout’s Board of Directors. Their actions show a lack of probity and fair

dealing and are a visible departure from the fair play that Plaintiffs and the other Series A

Preferred and Common shareholders are entitled to expect.

64. By virtue of the acts and conduct alleged herein, Defendants have

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oppressed the rights of Plaintiffs and the other Series A Preferred and Common

shareholders.

65. As a direct result of Defendants’ wrongful conduct and actions, Plaintiffs



VII. THIRD CAUSE OF ACTION Corporate Waste (All Defendants)



67. By virtue of the acts and conduct alleged herein, Defendants misused

corporate assets for their own gain and have misused and wasted Scout’s corporate assets.

68. As a direct result of Defendant’s wrongful conduct and actions, Plaintiffs



VIII. FOURTH CAUSE OF ACTION Injunctive Relief (All Defendants)



70. Plaintiffs and the other Series A Preferred and Common shareholders have

suffered, and will continue to suffer, irreparable injury from Defendants’ continued

activities, which have resulted and will continue to result in violations of Scout’s Articles

of Incorporation and the unfair and oppressive elimination of the economic interests of

Plaintiffs and the other Series A Preferred and Common shareholders.

71. It is appropriate for the Court to issue an injunction compelling Defendants

to take such steps as are necessary to protect the economic interests of Plaintiffs and the

other Series A Preferred and Common shareholders, in particular by voiding the merger

and acquisition offered by the Sale Proposal.

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IX. FIFTH CAUSE OF ACTION Unjust Enrichment

(All Defendants)



73. Defendants benefitted and intend to continue benefitting from their self-

dealing as described herein.

74. Defendants appreciate or know they received the aforementioned benefits.

75. The circumstances of Defendants’ acceptance or retention of the

aforementioned benefits—to the detriment of Plaintiffs and the other Series A Preferred

and Common shareholders—make it inequitable for them to retain the benefits without

providing sufficient value in exchange.

X. PRAYER FOR RELIEF

WHEREFORE, Plaintiffs respectfully request that the Court enter judgment

against Defendants and in favor of Plaintiffs as follows:

1. That the Court award Plaintiffs all quantifiable and measurable unique

damages sustained by them by reason of Defendants’ acts complained of

herein.

2. That the Court issue an injunction prohibiting continuing acts of oppressive

conduct including the merger and acquisition offered by the Sale Proposal.

3. That the Court award Plaintiffs damages as compensation for their injuries

resulting from Defendants’ oppressive conduct.

4. That the Court award Plaintiffs their attorneys’ fees, expert fees, costs and

expenses of this litigation.

5. That the Court award Plaintiffs pre- and post-judgment interest as allowed

by law.

6. That the Court award Plaintiffs such other and further relief as this Court

may deem just and proper.

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RESPECTFULLY SUBMITTED this 10th day of January 2014.

NEWMAN DU WORS LLP

By: John DuWors, WSBA No. 33987 Attorney for Plaintiffs

Documents

Bionet vs. Scout Analytics Complaint (3)