An Ontario Court of Appeal Judge not only rejected the arguments of two former founders of Extreme Venture Partners (EVP), and the CEO of Social Capital, but ordered that they now pay $29.5 million (all numbers USD) rather than the $15.69 million awarded to plaintiffs in a lawsuit dating back to 2014.
Justice William Hourigan had harsh words for EVP founding partners Sundeep Madra and Amar Varma, as well as Social Capital CEO and former Facebook VP Chamath Palihapitiya, in the tangled court case over whether the three had conspired to acquire mobile software development shop Xtreme Labs at a discounted price, in addition to breaching contractual obligations with EVP.
“After a five-week trial, the trial judge released thorough and compelling reasons that weaved a narrative of corporate malfeasance, avarice, and deceit in the technology sector,” Hourigan wrote in his judgement. “The appeals before this court raise important issues about remedies and, more fundamentally, acceptable standards of conduct in corporate Canada.”
The lawsuit began when additional EVP co-founders Ray Sharma, Ken Teslia, and Imran Bashir filed a claim of over $200 million in damages against Madra and Varma. In their claim they alleged that the pair had conspired with Palihapitiya, also a former Facebook VP, to hide an interest in dating app Tinder as part of a sale of shares in dev studio Xtreme Labs.
The complex case dates back to August 2012, when Madra and Varma sold a controlling stake of Xtreme Labs (founded the same year as EVP) to Palihapitiya, buying out the three plaintiffs, who were also co-founders in the software development shop. At that time, Xtreme owned 13 percent equity interest in Hatch Labs, which had developed and launched Tinder that same month.
Sharma, Bashir, and Teslia (the plaintiffs) alleged that the two partners “misrepresented the financial status of Xtreme Labs and concealed material information from them,” including the equity interest they maintained in Hatch Labs and the existence of Tinder. They argued that this misrepresentation led the trio to sell their shares in Xtreme at a discounted price.
After having purchased Xtreme for $18 million USD, Palihapitiya negotiated, just over a year after the original purchase, the sale of the lab to Pivotal for $60 million USD.
In 2019, the Ontario Superior Court of Justice ruled in favour of Sharma, Bashir, and Teslia, with Justice Barbara Conway stating that Madra and Varma breached their “fiduciary obligations” and conspired with Palihapitiya to acquire developer studio Xtreme Labs at a discounted price, hiding an interest in Tinder as part of the sale to appropriate for themselves.
The ruling noted that, at that time, Palihapitiya, as well as Madra and Varma, “carved certain assets out of Xtreme Labs” and transferred them to their own holding company. That included the 13 percent equity in Hatch, which they later sold for $30 million USD in March 2014.
An Ontario Court of Appeal decision in May 2019 denied an appeal by Sharma, Teslia, and Bashir to seek damages for the valuation of Xtreme Labs.