A pedestrian walks past a billboard advertisement for the dating app Tinder, in Berlin, Germany.Getty Images
An Ontario judge has ordered a former Facebook executive and two Toronto venture capitalists to pay almost US$16-million in damages in a case that included claims of a hidden interest in the popular dating app Tinder.
The complex case involved former business associates in the Toronto technology fund Extreme Venture Partners and one of the central issues was the 2012 sale of Xtreme Labs, a software company that held a 13-per-cent interest in Hatch Labs, the developer of Tinder.
The plaintiffs, three of the original partners in the fund, alleged they were misled on that US$18-million deal, which saw Xtreme Labs sold to Chamath Palihapitiya, a Facebook vice-president turned Silicon Valley investor.
Amar Varma and Sundeep Madra, two of the Extreme Venture Partners principals, remained invested in Xtreme Labs, which was sold again just more than one year later for about US$60-million. That deal did not include the interest in Hatch Labs, and in 2014 the defendants sold the Tinder developer for US$30-million.
The following year, Ravinder (Ray) Sharma, Imran Bashir and Kenneth Teslia, who co-founded Extreme Venture Partners, launched a lawsuit against Mr. Palihapitiya and their former partners, Mr. Varma and Mr. Madra, claiming more than $200-million in damages. They alleged, among other things, that the defendants engaged in a conspiracy against them and concealed the Tinder investment.
The dating app is now owned by Match Group and has more than 4.3 million users and annual revenue of US$805-million, but at the time of the Xtreme Labs sale in August, 2012, it was in the early stages of launching.
“I conclude that Amar and Sunny breached their fiduciary obligations and conspired with Chamath to acquire the company at a discounted price,” Justice Conway of the Superior Court of Justice wrote of the Xtreme Labs sale in her Tuesday ruling. “They further concealed the existence of the equity interest in Hatch Labs and Tinder and appropriated the value of that asset for themselves.”
“This is not a case of tough business tactics and clever negotiating strategy. Nor is it a case of sellers’ remorse,” she wrote, referencing some of the arguments made by the defendants.
“This is a case of a purchaser conspiring with fiduciaries of a company to acquire a business and doing so based on breaches of fiduciary and contractual duties.”
The judge ordered Mr. Palihapitiya, Mr. Madra, Mr. Varma and their personal holding companies to pay damages of $3.36-million for the sale of Xtreme Labs at an undervalued price. She ordered Mr. Palihapitiya (along with his holding company), Mr. Madra and Mr. Varma to pay US$12.33-million related to the sale of Hatch Labs.
Justice Conway also ordered Mr. Madra and Mr. Varma to pay $250,000 in punitive damages in relation to a second venture-capital fund they established in 2011 without disclosing it to the plaintiffs, who were their business partners at the time.
She was sharply critical of the defendants in her ruling, stating she did not find the three men to be credible witnesses. “I found their testimony to be creative and contrived, and an attempt to get around the contemporaneous e-mails and documents that contradict their version of events,” Justice Conway wrote.
“Mr. Varma and Mr. Madra are disappointed by the decision and intend to appeal,” Ira Nishisato, a lawyer for two of the defendants said Wednesday.
Counsel for Mr. Palihapitiya did not immediately reply to a request for comment.
Megan McPhee, who represented the plaintiffs, stated, “Our clients were deceived by their own partners, who have sought to paint this as a simple case of seller’s remorse."
“The judge found that, in fact, the defendants engaged in a conspiracy to effectively steal the company from our clients,” Ms. McPhee said, adding, “Our clients have been completely vindicated, and we’re very happy with the decision.”