Ex JVP partner sues Erel Margalit; JVP: Claim is baseless

Erel Margalit Photo: Shahar Azran

Glen Schwaber charges in the Delaware court that Margalit and JVP transferred preferred shares in the portfolio company at below market price.

Former JVP partner Glen Schwaber has filed a lawsuit in the US against JVP founder and chairman Erel Margalit, and against JVP. In the suit, Schwaber claims alleged wrongdoing in 2019 in a self-dealing transaction in which Margalit and his associates caused JVP's fourth fund to sell their entire preferred equity stake in a valuable venture-backed company to new JVP related-party entities that Margalit created and controlled, through an unfair process and at a below-market price. Armed with inside knowledge as a company board member (and later chairman), Margalit exploited the below-market buyout to transfer significant value and all of the upside from the injured funds to the new related-party entities.

JVP responded, "This is a suit lacking any legal and business foundation, which contradicts the law, by a former employee of JVP who left the fund in 2006, more than 15 years ago, and in contravention of the law and the agreement with him, and any accepted business practice, is trying to create for himself rights out of nothing in past funds that no longer exist."

"Globes" has decided not to name the JVP portfolio company involved in the affair because the legal documents filed in Delaware by the Glenn Agre Bergman & Fuentes law firm against Erel Margalit and JVP redact the name of the company at JVP’s request. Schwaber is challenging the redactions in the Delaware court.

JVP was founded in 1993 by Margalit and Schwaber worked as an active partner between 1998 and 2006. After leaving JVP he set up the Israeli MoreVC fund, where he is still a partner.

JVP's fourth venture capital fund closed at over $420 million in 2000. Schwaber was one of its partners and investors and as a partner is entitled to fees based on the profits recorded, even after he left JVP, and as long as the fund exists.

JVP's fourth fund was spread over 10 years as is the norm for such funds incorporated in Delaware although its validity was extended again and again. According to the suit, Margalit led a process of liquidating the fund starting in 2018 by selling the holdings still in the fund. The main holding in the fund was the company mentioned in the suit, of which JVP was the biggest shareholder.

The fourth fund had started investing just as the dot.com bubble burst - a problematic time for the tech market. But the fund had its successes with Israeli company CyberArk, which held an IPO on Wall Street in 2014 and Swedish company Qlik, which held an IPO in 2010, as well as with the company mentioned in the lawsuit. The Qlik and CyberArk exits came during the extended lifetime of the fund so that all its partners and investors received their part of the exit.

But Schwaber's lawsuit claims that as part of the fourth fund's liquidation process led by Margalit in 2019, preferred shares were 'rolled over' to other business entities controlled by Margalit in order to end the life of the fourth fund.

Roll-overs are an acceptable practice in the venture capital fund world as long as two legal criteria are met - that it is done through fair process and at a fair price. Schwaber contests that this process was not fair and was conducted beneath the genuine price and was a "breach of fiduciary duty and a breach of contract." The sale of the fund, Schwaber charges, damaged the fund, its investors and itself and was done to benefit Margalit.

Schwaber alleges that the real value of the portfolio company was kept confidential and was known to very few people including Margalit who served as a director of the portfolio company and is today chairman of it. Schwaber claims in the lawsuit that Margalit exploited insider information about the company which had seen a sharp rise in its valuation in recent years in order to enrich himself at the expense of the fund's investors.

Schwaber specifically claims that Margalit took advantage of the especially low valuation in which the deal was conducted between other shareholders in the company. On the basis of this reduced price, Schwaber claims that Margalit transferred the holdings in the company to other new business entities.

Schwaber said that only in February 2021 did he discover the real value of the company and only after investigating the matter found that the value attributed to the company when its holding were transferred ignored indications of the real value and set the price, without any negotiations, or auction process, or financial advices that provided a fair opinion.

The plaintiff further claims that Margalit transferred partially misleading information to some of the investors in the fourth fund at the last minute in order to push them to agreeing to the sales deal for the holdings. Only some of the investors received an opportunity to keep their holdings in the company through the new entities, while others did not. Most of the investors in the fund chose to sell their holdings in the company at the price offered and as far as is known have not sued JVP over the matter.

JVP, Margalit and Schwaber have been in talks on this matter since June 2021 but have been unable to reach agreement. The sides went to mediation on the matter confidentially in Delaware but this week Schwaber decided to file a lawsuit.

Schwaber is asking the judge to order that the final closing of the fourth fund in January 2020 be cancelled in an attempt to revive his rights in the portfolio company.

Schwaber declined to comment beyond what is said in the lawsuit.

JVP said, "The lawsuit completely contradicts the laws of the State of Delaware and was born after a former employee read an article in the newspaper about the success of a JVP portfolio company - a success in which he was not involved and was formed more than three years after the official closing of the fund and more than 15 years after he himself left.

"According to the laws of the State of Delaware, where the fund was incorporated, the fund is a legal entity with a limited lifetime. After the lifetime of the fund ends - all rights related to it end and no longer exist. The plaintiff is attempting to act in contradiction to this basic rule. JVP worked precisely according to the law and accepted business practice - ended the fund, sold its assets and returned the value to its investors.

"JVP has built over 150 companies over the years, with a substantial number of them becoming market leaders of an international caliber, and which have created some of Israel's biggest exits. The fund, for which the plaintiff is making claims, is a fund from 2000, which despite experiencing two world crises, doubled its value significantly for investors and created leading international companies such as Qlik and CyberArk.

JVP has paid and pays its employees past and present according to its agreements with them and fully. The plaintiff decided to leave the fund right at the start of its operations because he did not believe in it or the companies in it. JVP continued to believe in the companies and built them successfully, which as stated led to the fund bearing significant value.

"Following this, the percentages gained by the plaintiff and other former employees in the fund, in a period that they worked at JVP, formed substantial value. The plaintiff, over more than 13 years, even though he no longer worked at JVP, was not involved in managing the fund and was not responsible for building the value it yielded - received astronomical amounts, which totaled more than $10 million!. As stated, the plaintiff does not make do with the huge amount he received and on the basis of a newspaper article is opportunistically trying to invent reasons that contravene the law and the agreement."

Mr. Schwaber’s lawyer, Jed Bergman of Glenn Agre Bergman & Fuentes, said in a written statement : "Mr. Schwaber is bringing this case on behalf of Fund IV and its investors, who were harmed by Margalit’s secretive, self-interested, and below-market buyout. Our lawsuit asks the court to do what Delaware law specifically allows: revive the fund, which JVP improperly cancelled in violation of Delaware law, so we can pursue these claims on the fund’s behalf, correct this wrongdoing, and force Margalit based on governing Delaware law to compensate all Fund IV investors for the gains he improperly took for himself. JVP’s focus on Mr. Schwaber personally is an irrelevant attempt to distract from what our lawsuit alleges: that Margalit cheated his investors for his own personal gain."

Published by Globes, Israel business news - en.globes.co.il - on December 9, 2021.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2021.

Erel Margalit Photo: Shahar Azran
Erel Margalit Photo: Shahar Azran
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