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| Latif v. Nishan Systems, et al. |
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Sagy Law Associates recently negotiated a favorable settlement of a lawsuit it filed in September 2003 on behalf of Aamer Latif, founder of a Silicon Valley storage network company Nishan Systems, and its former CEO, largest minority shareholder, and board member. The lawsuit was filed before Nishan merged with McData. It involved issues of corporate governance, dissenters’ rights, and the power of liquidation preferences in the context of venture capitalists’ duties and obligations as directors of the company in which they invested.
The lawsuit, Latif v. Nishan Systems, Inc., et al. (Santa Clara Sup. Ct., No. 1-03-CV-004-939), charged the company's majority shareholders and venture capital investors (the "VCs") with, among other things: exploiting their control of the Nishan board to advance their own financial interests, neglecting to advance the corporate interests and those of its minority shareholders, failing to disclose potential and actual conflicts of interest, reaping an unreasonable profit from short-term, risk-free bridge loans, and vote-buying. The lawsuit further alleged that Nishan's financial advisor, Credit Suisse First Boston ("CSFB"), while pursuing merger and acquisition opportunities for the company, failed to disclose that it had a pre-existing contractual relationship with McData, the company with which Nishan negotiated, and eventually consummated, a merger transaction. Plaintiff filed a separate lawsuit in December 2004 challenging defendants' actions in creating a $13 million escrow account funded by withholding 20% of the Nishan shareholders' merger proceeds, to finance their defense against Latif's claims in the first action.
The Nishan Defendants, including the VCs and their board representatives, were represented by O'Melveny & Myers. Shearman & Sterling represented CSFB. Defendants filed several successive demurrers to plaintiff's claims. They first maintained that the complaint stated a corporate injury that could only be maintained as a derivative action. Plaintiff opposed the demurrer, citing Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, and Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, among other authorities. The trial court agreed that plaintiff could maintain these claims in his individual capacity. Defendants then argued that California Corporations Code S1312(a), as construed by the California Supreme Court in Steinberg v. Amplica (1986) 42 Cal.3d 1198, acted as a bar to the entire action, and that plaintiff’s right to appraisal is his exclusive remedy. Latif opposed the demurrers on three principal grounds. First, he argued that the vote-buying claims fell within the stated exception to the appraisal remedy in S1312, as they challenged whether certain shares had been "legally voted" in favor of the merger. Second, he maintained that Steinberg had no application to these facts as he, unlike Steinberg, was not aware of "all of the facts" underlying his claims prior to the merger with McData, and he filed his suit before the merger was consummated. Finally, Latif argued that CSFB and others lacked standing to raise this corporate defense. The trial court sustained defendants' S1312 demurrers but granted plaintiff leave to amend.
In January 2005 the parties engaged in a mediation session that resulted in an all-party settlement of all of Latif's claims to his full satisfaction. |
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