Carsanaro v. Bloodhound Technologies, Inc.
65 A.3d 618
| Del. Ch. | 2013Background
- Bloodhound created web-based software to monitor healthcare claims fraud; five founders and developers held common stock.
- VCs gained board control by Series B/C rounds, thereafter financing through self-interested, highly dilutive issuances.
- In 2011 Bloodhound sold for $82.5 million; founders discovered their aggregate common stock was diluted to under 2%+ and their share of proceeds was nominal.
- Series D and Series E financing rounds were conducted largely by the fund-defendants or their affiliates, with unilateral terms and offshore-like board dynamics.
- Reverse split and Series E Charter adjustments created disproportionate value for insiders and reduced common stock value; lack of proper disclosures and misalignment of incentives followed.
- In April 2011 merger proceeds allocated heavily to management and preferred holders, with common stockholders receiving minimal recoveries; Founding Team filed direct, non-derivative claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Personal jurisdiction over fund defendants | Fund Defendants consented via board actions. | Delaware court should not exercise jurisdiction over nonresidents. | Court exercised jurisdiction under conspiracy theory. |
| Were Series D and Series E financings entirely fair | Board lacked disinterested majority; self-dealing. | Business judgment rule governs; transactions within board authority. | Counts I and III largely survive; certain Series D/E claims require entire fairness review. |
| Disclosure duty and DGCL conformity for Series E | Board failed to disclose insider benefits and to adjust rights; Charter amendments not properly filed. | Procedural and statutory compliance adequate; no direct harm shown. | Counts alleging disclosure and DGCL Section 242 violations survive in part; some claims dismissed. |
| Merger and management incentive plan | 39%+ of merger proceeds diverted to insiders via MIP and preferred protections. | Merger fair value determined by market processes; MIP not improper. | MIP and related allocations support a direct claim; entire fairness governs, requiring further development at trial. |
| Standing—direct vs derivative claims | Harm to public stockholders distinct from corporate injury; Gentile controls allow direct action. | In some cases, dilution claims are derivative. | Founding Team has direct claims against challenged Series D/E transactions and MIP; some counts against Bloodhound dismissed. |
Key Cases Cited
- Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210 (Del. 1982) (conspiracy-based personal jurisdiction analysis)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (business judgment rule standard)
- Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994) (entire fairness standard when loyal conflicts exist)
- Gentile v. Rossette, 906 A.2d 91 (Del. 2006) (expropriation/dilution framework for direct vs derivative claims)
- Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) (dual fiduciary duties when officers serve on subsidiary boards)
- Dubroff I, 2009 WL 1478697 (Del. Ch. 2009) (equitable tolling and fraudulent concealment considerations)