IBM, Arsenal Digital sued over acquisition

Arsenal Digital's founder alleges he was swindled out of control of the managed service provider by venture capitalist firms that profited disproportionately from the IBM deal.

Arsenal Digital Solutions USA Inc.'s founder and minority shareholders have filed lawsuits seeking more money from IBM's $110 million acquisition of the managed services firm, according to court documents.

The suits allege that Arsenal's two major venture capitalist firms received an inordinate amount of the money from the IBM's acquisition of Arsenal, announced last December.

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Arsenal founder Kevin Pollard, along with his daughter Meghan Marie Pollard Leypoldt, filed suit in the 24th Judicial District Court of Louisiana Jan. 11 against Arsenal, its directors and venture capitalists. The suit claims that venture capitalists Southeast Interactive Technology Fund (SEITF) and Covestco-Seteura LLC engaged in a conspiracy to wrest control over the company away from Pollard over the last decade. Pollard tried to get a temporary restraining order against the IBM-Arsenal acquisition last December, but a court ruled that financial disputes related to the acquisition could be settled after the merger was closed, according to sources close to the case.

Delaware resident Dwight Johnson filed a class action lawsuit on behalf of Arsenal common stock shareholders Jan. 25 in the Court of Chancery in Delaware against IBM, Arsenal Digital holding company Arsenal Digital Worldwide Inc., Arsenal's directors, and officers of SEITF and Covestco. The minority shareholders allege that the venture capitalists, holders of preferred stock in the company, took $20.8 million from the sale for themselves, rather than distributing it among the owners of common stock.

The class action suit also claims that IBM aided the venture capitalist firms in defrauding shareholders out of their rightful stake in the acquisition, and that an Information Statement released to shareholders about the merger was incomplete and misleading.

Founder said he was cut out

According to Pollard's complaint in Louisiana, SEITF director Norvell E. Miller lied to him beginning in 1998 about SEITF's ability to raise capital for his online data transfer company, which he founded as Access Data Direct in 1998. After Pollard had been persuaded to accept funding from SEITF, he alleges he was then systematically cut out of the company by SEITF, its partner Covestco and Arsenal's board of directors.

Pollard's suit charges that by the time Arsenal was looking for a buyer late last summer, shares of common stock had been "cannibalized" by shares of preferred stock held by the venture capitalist directors through an unethical payment-in-kind (PIK) deal. The PIK deal also reduced the value of Pollard's common stock shares, according to the complaint.

"Now, SEITF and its partners -- are poised to sell Arsenal to IBM in a sale intentionally structured to ensure that a minimal amount will go to Pollard or other minority shareholders of the company," the complaint reads.

Shareholders call agreement 'draconian''

IBM was not originally named in either lawsuit, but an amended complaint filed Feb. 12 in Delaware added IBM as a co-defendant in the class action suit. IBM's inclusion was based on issues with the Information Statement regarding the acquisition, and the complaint seeks more information on an Indemnification Agreement for stockholders drawn up by IBM as a condition to the acquisition.

According to the class action complaint, which describes the Indemnification Agreement as "draconian," stockholders who sign it "have a portion of their merger consideration withheld and placed into escrow to indemnify IBM for certain expenses, including litigation-related expenses." The complaint also said the Arsenal directors made no attempt to negotiate a better price after IBM's original offer.

The class action suit said five of Arsenal's six directors were directly involved with SEITF or Covestco. The sixth, former Arsenal CEO Frank Brick, will receive a change of control payment of more than $1.9 million plus a $270,000 bonus if he remains with IBM for nine months after the deal closed, according to the complaint.

IBM officials declined to comment for this story and Arsenal Digital's legal representatives did not respond to requests for comment as of press time. Reached for comment, Pollard declined and deferred to his attorney, who also declined comment.

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