by Adolfo Pesquera
Georgetown, Delaware — The former BidClerk Inc. chief executive officer, Michael Gaynor, brought a civil lawsuit recently against Blueprint Sub Inc., Genstar Capital Partners and iSqFt CEO David Conway in Delaware Chancery Court, claiming breach of contract and fraudulent inducement.
Gaynor seeks damages for actions related to a merger agreement that closed October 2014, according to a prepared statement. In the merger, Genstar, a private equity company, acquired iSqFt—now marketing itself as Construct Connect—and BidClerk. Both are information companies that acquire, package and sell data to construction industry contractors, subcontractors and building product manufacturers.
Blueprint, which was also part of the merger, was responsible for paying “merger consideration” to the stockholders of BidClerk. The defendants have not yet filed an Answer to the complaint with the court.
Gaynor, of Sag Harbor, New York, alleges that BidClerk agreed to reduce its base merger consideration in exchange for an “earn-out” to be paid after the closing and after the surviving entity hit certain EBITDA targets. His lawsuit further alleges that in order to induce the former shareholders to accept the earn-out, Genstar promised to enact a series of cost saving measures and synergies in the surviving entity.
According to the complaint Gaynor was a former stockholder in BidClerk (hereafter referred to as BC), one of two companies Genstar Entities acquired. The Plan of Merger included Blueprint Sub Inc., CST Merger Sub Inc., BC Merger Sub Inc., CST, BidClerk, Fortis Advisors LLC, and Archibald Cox Jr.
Gaynor alleges that during negotiations for the merger, “Conway colluded with Eli Weiss, the president of Blueprint, to induce BC to accept the contingent Earn-out Consideration by falsely representing that iSqFt would maintain the current operations of Sellers and implement certain cost-saving measures … in fact, defendants had no intention of ever doing either.”
Among other things, the measures were to include eliminating 183 staff positions and integrating overlapping processes and systems for a total “synergy savings of $13,300,000” by Dec. 31, 2015.
Rather than consummate the “Synergy Roadmap” to achieve the promised savings, “Blueprint and Genstar already had plans to acquire and integrate two other companies, which they knew would become the focus of management’s attention,” the complaint alleges.
“Blueprint pursued its aggressive acquisition strategy without providing the necessary personnel or the financial resources required to permit the management of iSqFt to focus on its own business operations,” the complaint alleges.
This acquisition strategy included a failed attempt to acquire MHF Construction, the lawsuit states. Other companies targeted for acquisition, successfully, included Construction Data Corporation LLC (CDC), and Construction Market Data Group LLC (CMD).
The merger agreement required that Blueprint would not do or omit to do any act that deliberately frustrated the BC stockholders. Blueprint breached its obligations and iSqFt failed to reach the EBITDA required to generate the BC earn-out.
“In a veiled effort to inhibit the BC Stockholders’ ability to challenge Blueprint’s breach, Blueprint also attempted to impose two obligations on the BC Stockholders that are each in violation of (Delaware corporation law). First, Blueprint, required that the BC Stockholders … execute a Letter of Transmittal … (which) purports to bind the BC Stockholders to additional obligations extraneous to the Merger Agreement, including, among other obligations, a broad release of any and all claims such BC Stockholder has against any of the parties to the Merger Agreement,” the complaint states.
Gaynor claims the additional obligations—detailed in a document referred to as the Release—are unenforceable. He goes on to allege Blueprint required an indemnification procedure be included that violates state law, and it would have the effect of leaving BC Stockholders “potentially individually liable for the entire amount of the BC Merger Consideration indefinitely.”
Gaynor asks the court for an order declaring the Release in the Letter of Transmittal and the indemnification provisions unenforceable. He also seeks to recover the BC Earn-out to which he would have been entitled had Blueprint not breached the Merger Agreement, and damages arising from “defendants’ fraudulent inducement.”
“At a March 18, 2016 shareholder representative meeting, Conway admitted that defendants budgeted cost synergy savings for 2015 (were) well below the agreed-upon target of $9,300,000. Furthermore, Blueprint did not make the agreed-upon reductions of 183 staff members within 90 days of closing. Instead, defendants did not make any reductions in staff within 90 days of closing, instead pledging to retain all of its employees,” the complaint said.
The lawsuit was filed May 4, but resubmitted with redactions June 1. According to the Chancery Court docket, the named defendants have not filed a response, nor is there a defense attorney of record.
Genstar filed a motion for “confidential treatment,” asking the Chancery Court to redact large portions of Gaynor’s complaint and entire exhibits. Gaynor’s attorneys opposed this and Genstar proposed a more limited redaction that both sides agreed to.
John G. Harris of the firm Berger Harris LLP in Wilmington, Delaware is the plaintiff attorney.
Conway was CEO of Construction Software Technologies Inc. (CST) and became president and CEO of iSqFt after a merger. Conway lives in Cincinnati, Ohio, where Blueprint is based. Genstar is the controlling shareholder of Blueprint and based in San Francisco, California.
