Kohlberg Ventures: Victory in court – Jacobs’ lawsuit against buyout failed!

Kohlberg Ventures: Victory in court – Jacobs’ lawsuit against buyout failed!

Kohlberg Ventures LLC has won a significant victory in the Delaware Supreme Court in the case surrounding the buyout of education technology company Akademos Inc. The judge barred Akademos founder Brian Jacobs from pursuing his challenge to the deal. Jacobs had argued that the buyout and previous financing rounds had been detrimental to common shareholders. The five-member Court expressed skepticism of Jacobs' reasoning and found it difficult to understand his claims, Justice Abigail M. LeGrow noted. This means that the Delaware Chancery Court's decision to dismiss Jacobs' claim will likely stand, as Bloomberg Law reports.

Akademos Inc. itself has been operating in the online educational bookstore space for over two decades and has yet to record a profitable year in that time. Founder Jacobs had to overcome initial financial constraints with support from friends, family and angel investors, which led to the issuance of common shares. Over the course of the company's history, Akademos benefited from an investment by a venture capital fund that purchased preferred shares and thus received liquidation preferences. Despite multiple attempts to scale the company, it fell short of its goals by 2020, as detailed by VLex.

Financial challenges and takeover attempt

In 2020, Akademos faced significant financial difficulties. A new CEO suggested establishing two higher-margin businesses, but the company needed at least $2 million to cover operating costs and $6 million for the new business initiatives. The search for external investments in the first half of 2020 was unsuccessful, and the negotiations for a takeover were similar: there were only interested parties, but no offers exceeding USD 10 million.

In July 2020, the venture capital fund submitted a cash-out merger proposal, with a valuation of $12.5 million. Crucially, the fund's liquidation preferences stated that the company's valuation had to first reach $40 million before common shareholders could receive a payout. Ultimately, the merger was approved by three unaffiliated directors, while founder Jacobs voted against it. The fund, endowed with sufficient voting rights, approved the merger at the shareholder level, which was initially completed in September 2020.

Litigation and Judgment

However, due to tax considerations, the deal was deemed suboptimal, leading to a restructuring and a second deal in December 2020. Jacobs and a group of common shareholders demanded a valuation of the company and sued the directors and the fund for breach of fiduciary duty. In the subsequent evaluation process, both sides had to bear the burden of proof for their positions. Ultimately, defendants were able to demonstrate that the fair value of plaintiffs' shares at the time of the merger was zero, while plaintiffs were unable to provide a credible valuation.

The court's ruling was in favor of the defendants, solidifying Kohlberg Ventures' position. Given these developments, it will be interesting to see how the case, as well as Akademos' situation, develops in the future.