ISN Software Execs Face $9M Disclosure Suit Over Cash-Out Merger

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By Jacob Rund

A former ISN Software Corp. stockholder is suing the company’s top two executives over alleged disclosure failures during a 2013 cash-out merger, which Delaware’s high court said was undervalued.

Private equity firm Gallagher Industries LLC used details from a long-running appraisal lawsuit to launch its breach of fiduciary duty complaint, filed against the executives Feb. 14 in the Delaware Chancery Court.

Dallas-based ISN, a privately held corporation, merged with one of its subsidiaries under instructions from its two-person board. One of the directors, ISN founder and Chairman William Addy, was the controlling stockholder at that time, the new lawsuit said.

ISN didn’t provide Gallagher with the information necessary to determine whether to exercise its appraisal rights, causing it to lose out on millions of dollars, the firm claimed. Gallagher, which owned a 5.1 percent stake in ISN at the time of the merger, opted to accept the $38,317 in cash offered for each of its 155 shares, for a total of $5.9 million.

Appraisal Decision

Other former ISN stockholders requested an appraisal of their shares, leading to a prolonged court battle.

The chancery court used its own discounted cash flow analysis to conclude that the fair value of the deal was $357 million, or $98,783 per share. It rejected expert valuations that ranged from $106 million to $820 million and weighted various appraisal methods.

The Delaware Supreme Court upheld the chancery court’s higher valuation.

Gallagher wasn’t eligible for the higher payout because it accepted the lower offer. Addy and ISN CEO Joseph Eastin’s “false and misleading disclosures wrongfully deprived Gallagher of the opportunity to make a fully-informed decision,” the firm said in its complaint.

It also said the information gleaned from the appraisal proceedings shows the executives “failed to disclose that the true purpose of the merger was to squeeze out the minority stockholders at an unfair price.”

Gallagher is asking for the $9.38 million difference between the price it received for its 155 shares and the court-determined value, as well as any pre-judgment and post-judgment interest.

ISN didn’t immediately respond to a request for comment.

The case is Gallagher Industries LLC v. Addy and Eastin , Del. Ch., No. 2018-0106, complaint filed 2/14/18 .

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