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scoutanalyNot everyone is happy about today’s $32 million acquisition of Scout Analytics by ServiceSource. A group of series A preferred stockholders filed suit last week in King County Superior Court alleging that Scout Analytics’ board, including CEO Mark Upson and venture capitalist John Connors, engaged in “self-dealing, corporate waste, and gross negligence” by failing to explore a counter financing offer at a higher valuation by a group known as Catalyst Investors III. That deal would have valued the company at $40 million.

The suit alleges that the board — including former Microsoft CFO Connors; Upson and RRE’s Adam Ludwin — chose to ignore the deal at the higher valuation since it did not include any “post-merger payments” to Scout’s management team or the series B, C and C-1 preferred investors, which included Ignition and RRE.

“As a result of Defendants’ oppressive management of Scout, the value of Scout’s Series A Preferred and Common shares—of which Plaintiffs hold the vast majority—has been and will continue to be adversely impacted,” the suit says. The plaintiffs, which include Bionet Systems; Colin Bryar; J.B. Capital; Heather Erdmann; Sarah Bryer; Robert Johnson; Steve Moore; Willard Samms and Sharon Samms; are suing to recover damages, and to obtain an injunction blocking the sale of the company to ServiceSource International, a publicly-traded company based in San Francisco.

John Connors
John Connors

A representative from Scout Analytics declined to comment on pending litigation, while Ignition’s Connors declined to comment. Scout had raised $32 million in venture financing, matching the amount of today’s acquisition offer by ServiceSource.

In a motion filed last week, Scout Analytics argued that the plaintiffs disclosed confidential information in their lawsuit when they referred to ServiceSource by name. They asked the court to redact the document and place it under seal, an argument that may have less importance now that the deal has been publicly disclosed.

However, the motion also notes that the plaintiffs learned of the acquisition — and subsequently disclosed it in their suit — through the involvement of a principal at BioNet Systems who also sits on the board of Scout. That person is believed to be Scout Analytics chairman and BioPassword founder Mark DiSalle, who served as CEO of the predecessor company until 2006 when Upson was recruited.

In 2009, Scout Analytics spun out of BioPassword. But an entity by the name of Bionet Systems, which employs DiSalle, continued to own 69.3 percent of Scout’s common stock and 63.5 percent of the series A preferred shares.The plaintiffs argue that their economic interests would be completely wiped out if the deal with ServiceSource went ahead.

According to the suit, the board at Scout Analytics initially rebuffed the proposal from ServiceSource, since they wanted an acquisition price of $40 million or more. But the board then changed their minds. The suit says:

Noting that the Sale Proposal offered post-merger payments to the other directors and/or their employers but no benefits for any of Scout’s Common or Series A Preferred shareholders, DiSalle also urged the other directors—Defendants Upson, Connors and Ludwin—to abstain from voting. But they refused. Despite the glaring differences in valuation, Scout’s Board of Directors voted in favor of the Sale Proposal—not the more lucrative Investment Proposal.

The suit also alleges that Scout lacked authority to move ahead with the deal, unless they received written consent of the holders of a majority of the outstanding shares of preferred stock. While a shareholder vote was allegedly promised, the suit says that the board pushed ahead with the sale process anyway.

Here’s the complaint:

Bionet vs. Scout Analytics Complaint (3)

And here’s the response from the defendants:

Motion Defendant –Bionet vs. Scout

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