Fintech Shareholders Want Delaware, Not Texas for Bankruptcy
Investment firm Sapien Group said in a court filing Wednesday that shareholders want to challenge actions taken by Linqto's board after a new chief executive was hired to replace founder Bill Sarris.
The filing alleges that Linqto's new management team under CEO Dan Siciliano created a corporate shell named Linqto Texas that was used to justify filing for bankruptcy there instead of Delaware, where the parent in incorporated.
Delaware's reputation as the default location for companies to house their corporate paperwork has been under attack in recent months by a small number of tech heavyweights, who claim the state's business courts are biased against founders like Elon Musk. Texas lawmakers have taken advantage of the controversy by trying to persuade companies to reincorporate in their state.
Texas Sweetens Pitch to CEOs, Boards With New State Protections
Linqto shareholders should be allowed to fight current management in Delaware's federal bankruptcy court because the 'current board has taken actions in blatant derogation of the rights' shareholders have under Delaware law, Sapien said in its filing.
'The filing of the cases before this court in this district appears to be the quintessential example of improper forum shopping,' Sapien said in the filing.
In an emailed statement, Linqto defended the Texas filing, arguing the court there has the experience necessary to handle the case.
'The decision to file for Chapter 11 restructuring in the Southern District of Texas was made with a single priority focus: to provide our customers with the best chance of maximizing the value of their claims,' the company said.
Companies can file for bankruptcy in any US federal court so long as there is some kind of economic connection to the jurisdiction. Critics say the rule lets managers shop for friendly judges, since the link can be as simple as having one unit in a big corporate family set up a bank account in the state.
Houston-based federal judge Alfredo R. Perez would need to approve Sapien's motion for a move to happen.
Delaware's business courts routinely handle shareholder lawsuits aimed at company managers like Musk. He lost a case over his record-setting pay package last year and decided to reincorporate Tesla Inc. and Space Exploration Technologies Corp. in Texas.
Linqto's new managers claim that former executives mismanaged the firm's business for years by misleading customers into believing they owned shares in 111 privately-held companies worth more than $500 million.
The firm told its 13,600 customers that they could buy stakes in private companies before the firms went public, something that's typically available only to big institutions, Linqto bankruptcy attorney Samuel A. Schwartz told a judge in Texas overseeing the insolvency case last week. That turned out to be wrong, Schwartz said, with a Linqto affiliate the actual owner.
The company's customers are unsecured creditors, he said.
After Siciliano took over early this year, he began an internal investigation that eventually forced out many original executives, according to court records.
Shareholders are concerned about the allegations against former managers as well as alleged violations of shareholder rights by new managers, Sapien said in the filing. The company has not held an annual meeting of shareholders as required under Delaware law, according to the filing.
A new board of directors also wrongly changed the company's bylaws and prepared for the bankruptcy filing 'in a stealthy and secretive manner,' Sapien said.
Private Market Startup Collapses Amid SEC Probe: The Brink
The US Securities and Exchange Commission is investigating Linqto and whether former managers failed to verify if some of its customers were accredited investors with sufficient financial backing to invest through the company, according to court documents.
Linqto's advisers plan to use the bankruptcy process to raise money to repay customers and other creditors, Schwartz said. He added the company will try to negotiate a bankruptcy payout plan with regulators before presenting a detailed proposal to creditors for a vote.
The case is Linqto Texas, LLC, 25-90186, US Bankruptcy Court, Southern District of Texas, Houston.
(Updates with comment from company in the seventh graph.)
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