BidClerk Shareholders File Amended Lawsuit Citing Evasion by Genstar Capital of Required Earn-Out Provision

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Genstar Capital is a defendant in a lawsuit that alleges fraudulent inducement, and breach of guarantee agreement for failure to pay an earnout following a merger agreement, filed by Michael G. Gaynor, on behalf of all former BidClerk stockholders.

August 23, 2016 – An amended complaint was filed in the Delaware Court of Chancery regarding the matter of Michael G. Gaynor, on behalf of all former BidClerk stockholders v. iSqFt Sub (formerly Blueprint Sub, Inc.), Genstar Capital Partners VI, L.P. and David W. Conway, the former chief executive officer of Construction Software Technologies, Inc. (CST). The plaintiff seeks to recover damages against the Defendants in a long-running lawsuit alleging breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, and breach of guarantee agreement. The amended lawsuit further seeks a declaration that the indemnification provisions of the Merger Agreement are not enforceable against the Plaintiff. According to the suit, at the time of the acquisition, BidClerk and CST (now iSqFt) were all in the business of providing information to and about the commercial construction industry in the U.S. and Canada.

The case stems from a merger agreement executed in October 2014 in which Genstar, a private equity firm, acquired both CST and BidClerk, as alleged in the amended complaint. Gaynor, the former CEO of BidClerk, alleges in the suit that several matters negotiated as part of the agreement – particularly the contingent earn-out consideration – were falsely promised by Genstar and that the Defendants never actually planned to follow through in pursuing this provision.

Specifically, Gaynor alleges in the amended complaint that BidClerk was induced to accept the contingent earn-out consideration by assuring the company that iSqft would maintain the company’s operations and implement a number of cost-saving measures, including eliminating staff and introducing system integration and other synergies. (Under the redacted public version of the action, filed on August 15, 2016, the actual contingent earn-out consideration amount is unavailable for viewing).

Rather than moving forward with these measures, alleges the lawsuit, the merged entity focused primarily on a continued acquisition strategy, with the subsequent acquisitions of Construction Data Corporation LLC and Construction Market Data Group LLC. In doing so, the suit contends, the company failed to focus adequately on the current business and failed to achieve the cost reductions that would have triggered the earn-out provisions, which were based on EBITDA (earnings before interest, tax, depreciation and amortization). The suit further alleges that post-merger, Defendants dramatically cut prices, frustrating the earnout.

According to the amended lawsuit, “Upon information and belief, Conway colluded… to induce BC to accept the contingent earnout consideration by falsely representing that iSqFt would maintain the current operations of Sellers….In fact, Defendants had no intention of ever doing either.”

For more information:
https://www.scribd.com/document/321883516/Redacted-Amended-Verified-Complaint
Gaynor v. iSqFt sub, Inc., Genstar Capital Partners and David W. Conway, CA 12297 – VCS (Delaware Court of Chancery)

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Katy Frank

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