LG Breached Contract in Firing Founders of Startup It Acquired

Two of ad tech firm Alphonso Inc.’s founders shouldn’t have been terminated under the terms of an agreement with an LG Electronics Inc. affiliate that acquired it, the Delaware Court of Chancery ruled Thursday.

The interim CEO of Alphonso, put in place by a board of directors controlled by LG, was nevertheless bound by a stockholders’ agreement to use “reasonable efforts” to protect the rights of the founders, Vice Chancellor Nathan A. Cook said, and he breached that clause of the agreement when the founders were terminated.

Although the interim CEO, Adam Sexton, was an employee of Alphonso and permitted more flexibility in deciding to terminate the company’s founders, he acted “at LGE’s and the LG-Affiliated Directors’ behest”—but for Alphonso—in deciding to terminate the founders, Cook found.

The interim CEO “exercised a power that he believed to be within the scope of the authority held by Alphonso’s CEO,” the judge said. “But he overlooked the express bargained-for contractual efforts obligation that Alphonso agreed to as a party to the Stockholders’ Agreement.”

As a result, “the non-executive-officer employee founders are entitled to designate directors under the terms of the stockholders’ agreement.”

The suit, filed in April, accused LG affiliate Zenith Electronics LLC and its affiliated board members of fabricating a reason to fire Alphonso’s senior management in a scheme to eliminate veto rights held by the board’s minority bloc so they could rewrite an “advertising inventory” agreement to “siphon value” to LG by extracting above-market prices from the captive partial subsidiary.

After “trying to bully and intimidate Alphonso’s management into renegotiating,” the LG-linked board members ambushed and ousted them, citing “a host of meaningless platitudes and pretextual excuses,” according to the complaint.

LG Electronics Inc. defended the ousting of Alphonso’s senior leaders and board members as necessary changes to cleanse a toxic partnership.

“The Alphonso board was a hot mess,” an attorney for Zenith, William Savitt of Wachtell, Lipton, Rosen & Katz, argued during a December hearing. “No one got along. There was cursing and screaming and disrespect.”

Ross Aronstam & Moritz LLP and Davis Polk & Wardwell LLP represented the plaintiffs. Morris, Nichols, Arsht & Tunnell LLP and Wilmer Cutler Hale Pickering & Dorr LLP represented the individual defendants. Morris Nichols and Freidman Kaplan Seiler Adelman & Robbins LLP also represented Zenith. Heyman Enerio Gattuso & Hirzel LLP represented Alphonso.

The case is Chordia v. Lee, Del. Ch., 2023-0382, opinion 1/4/24.