• February 1, 2011

When cutting edge technological ventures are getting off the ground, it is widely recognized that there are tremendous risks along with the potential for tremendous rewards.  Investors should go into such “opportunities” with eyes wide open to the risk.

Things can get complicated,  however, when a venture’s losses are borne by some shareholders (“outsiders”) and the rewards are limited to other shareholders (“insiders”).   Are those risks that the law will countenance or will the courts step in and recalibrate how the losses are shared (or not shared)?

This past week, Hennepin County District Court Judge Lloyd Zimmerman handed plaintiffs a resounding win against defendants’ motion to dismiss in an action by outsider shareholders against insiders of BioE/Bioergonomics, a med tech company in the business of developming human cord blood stem cells for development and therapeutic research.

BioErgonomics struggled in late 2009 in spite of $30 million invested by plaintiff-outsider shareholders.   Company insiders, it is alleged, then hatched a plan where BioErgonomics would structure a transaction to pay off about $5 million of company debt and, as part of the deal, would more or less dissolve “Old Bio” and be reborn as a new identical company — same business, same location, same key employees, but not saddled with the debt of “Old Bio.”

The only problem:  the majority of shareholders in the “old” company, the outsiders, were left with stock worth nothing (and no stock in “New Bio”).

No doubt it smarted when “new Bio” announced on January 21, 2010 a new contract with projected sales of $115 million from 2009-2013.

Defendants moved for dismissal on all counts of the multi-count complaint by “Old Bio” investors on several grounds  and lost across the board.  Judge Zimmerman rejected their motion to dismiss for failure to meet derivative suit requirements, motion to dismiss the shareholders’ claims due to their non-qualification as “creditors” for purposes of a fraudulent transfer claim, motion to dismiss shareholders’ claims for conversion, civil theft, tortious interference, unjust enrichment, breach of fiduciary duty against one of the defendants, conspiracy, accounting, constructive trust, and declaratory relief.

Defendants are represented by the Twin Cities’ “F&B firms”:   Jim Dorsey, et al., from Fredrikson & Byron, Wendy Wildung, et al., from Faegre & Benson.  Plaintiffs are represented by Gregg Fishbein and Karen H. Reibel of the Lockridge Grindal Nauen PLLC firm and Carolyn Anderson from the Zimmerman Reed.

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