Shocking Technologies, Inc. v. Kosowsky

2012 WL 4482838 (Ch.Del. 2012)

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Nature of the Case

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Facts

P was failing and needed to raise more monies. P was developing polymeric materials that provide electrostatic discharge protection for electronic devices. D, a manager of Balch Hill Capital, through BHP, invested $100,000 in P during its first Series A round of financing in March 2007. BHP got the right to continue to invest on a pro rata basis in P's subsequent financings in order to avoid dilution in the later rounds. D invested in P's Series B round raising $4 million out of the $10 million raised at that time. D obtained a seat on P's board of directors. In April 2010, P raised approximately $13 million in its Series B-1 round of financing. D invested approximately $2.8 million, while D's associates and related individuals invested approximately $2.5 million. In January 2011, P obtained an equity investment of $6 million, of which approximately $1.8 million was provided by D. Between February and July 2011, P's Series C round of financing raised approximately $21 million in two stages. D invested approximately $4.2 million, and D's associates and related individuals invested approximately $1.59 million. By the summer of 2011, D had started to express his concerns about P's corporate governance. D wanted to alter P's balance of power by adding another director. D believed that he could get a better board by giving leverage to potential investors and he did so. D believed he could coerce them into meeting his demands through application of financial pressure that would jeopardize the existence of P. D sought to align Littelfuse's (a potential investor) interests with his because he anticipated that the likely cash crunch would force the Board to implement his objectives. D lobbied Littelfuse to hold off on additional investing until Littelfuse could get better terms. D urged Littlefuse to seek was a position on the Board. D not only sought to dissuade Littelfuse from exercising its warrants; he disclosed confidential business information to the effect that Littelfuse was, at that time, the only potential investor then at all likely to participate in the necessary fundraising.

In April 2012, Littelfuse invested $10 million in P. Littelfuse also obtained the right to designate a director. At this time, an eighth board seat, apparently serving a broader constituency of stockholders, was also authorized. P filed this action.