$10M Bribe to CEO by the VC firm

verus_logo In 2002, Richardson Roberts founded Verus Financial Management. The company focused primarily on merchant services of credit and debit card acceptance. The company was backed by Financial Technology Ventures.

Verus had significant organic growth among the private merchants with over 100,000 merchant clients doing about $10 billion in annual merchant payment volume.

In 2005, Sage Group PLC, agreed to acquire Verus for $235M. The CEO Roberts made about $50M from the transaction. The VC firm, which owned about 40% of the company earned about $155M from the sale.

Then, Roberts sued the VC firm for $10M side deal that the had entered in to. Robert says that he agreed to the sale only because he was promised extra $10M from the VC firm for the sale.

The judge ruled this week that Roberts committed “an egregious breach of fiduciary duty of loyalty” by putting his personal financial interests over those of his shareholders.

Roberts had told the venture capital firm that without the side payment he wouldn’t sell his credit and debit card financing company because it was still growing and could fetch a higher price at a later date — and because he was going through a divorce at the time.

Even if the sale was in the interests of the company, the side deal was illegal because it would have meant extracting a payment by threatening not to support an advantageous corporate action.

The VC firm said that the investor group didn’t pay Roberts the $10 million because the sales price had been above expectations and because Roberts already stood to earn $50 million from the deal, according to the ruling.

This side transaction was wrong from so many angles. It was wrong for the CEO/Founder to seek extra money on the side, it was wrong for the VC firm to agree to a side deal, it was wrong that the transaction wasn’t approved or discussed in the board, it was wrong that the CEO allowed his personal divorce situation to cloud his judgment.

Unfortunately transactions like these happen way too often. “It’s not a bribe, it is just a tactic to properly incentivise the parties”, they argue. At the time of sale, every participant looks at the cards that they are holding, and attempt to gain some leverage or advantage, and invariably get in to issues with the required corporate formalities, or stepping on the toes of other share holders.

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