Amar Varma, et al. v. Extreme Venture Partners Fund I LP, et al.

(Ontario) (Civil) (By Leave)


Commercial law - Partnerships, Breach of fiduciary duty - Commercial law — Partnership — Breach of fiduciary duty — Disgorgement of profit — Did the Court of Appeal extend the equitable remedy of disgorgement in a manner that undermines doctrines of corporate law and fiduciary responsibility? — Do directors and officers of a corporate general partner owe fiduciary duties, both to the corporation itself and to the limited partnership?.


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The respondent Extreme Venture Partners Fund I LP (Fund I), is a venture capital fund registered as a limited partnership, and was established in November 2007 to provide seed capital to start-up technology companies. The respondent EVP GP Inc. (EVP GP) was incorporated as the general partner of Fund I and as such was responsible for managing its business. Share capital of EVP GP were personally owned by Messrs. Sharma, Bashir and Teslia as well as by the applicants Varma Holdco and Madra Holdco, two holding companies respectively owned by Mr. Varma and Mr. Madra. Messrs. Sharma, Bashir, Teslia, Varma and Madra were members of the board of directors of EVP GP. Messrs. Varma and Madra were also serving as managing directors of EVP GP.

In December 2011, Messrs. Varma and Madra registered another fund, the respondent Extreme Venture Partners Annex Fund I (Annex Fund I) without telling Messrs. Sharma, Bashir and Teslia. Annex Fund I obtained $5 million in financing from Northleaf Capital Partners in exchange, apparently, for confidential information about Fund I’s portfolio and investment strategy. Consequently, Annex Fund I invested in six of the most successful portfolio companies of Fund I before it closed down in 2013. Among the investments of Fund I was Xtreme Labs, a mobile software development lab business co-founded by Messrs. Madra and Varma, who were also its managing directors and co-CEOs. In March 2012, Messrs. Madra, Varma and Palihapitiya met to prepare an offer by Mr. Palihapitiya for the purchase of Xtreme Labs without informing the other members of the board of directors of Fund I of their involvement in the preparation of the offer. The offer was submitted to the rest of the board of Fund I, the respondents, Messrs. Sharma, Bashir and Teslia, Fund I and EVP GP, who eventually agreed to sell their shares in Xtreme Labs to Mr. Palihapitiya’s holding company, the applicant El Investco I Inc. for US$18 million. In October 2013, Mr. Palihapitiya negotiated the selling of Xtreme Labs to Go Pivotal Inc. for US$60 million. However, some assets were carved out of Xtreme Labs by Messrs. Varma, Madra and Palihapitiya prior to the sale and transferred to another holding company of which they were the sole shareholders. Among the assets that were carved out was a 13% equity interest in Hatch Labs, which developed the mobile dating application Tinder. The stake in Hatch Labs was sold to a large American corporation for US$30 million in March 2014.

As a result, the respondents filed two claims against the applicants. The first claim alleged that Messrs. Varma and Madra surreptitiously established and operated Annex Fund 1 in breach of their fiduciary and contractual duties. The second claim alleged that Messrs. Varma and Madra misrepresented the financial status of Xtreme Labs and concealed material information from the respondents and that Mr. Palihapitiya as well as Messrs. Varma and Madra conspired with one another to cause the respondents to sell their shares of Xtreme Labs at a discounted price and realized the true value of the company for themselves within the next 18 months. The Superior Court of Justice allowed both claims. The Court of Appeal dismissed the appeals filed by the applicants and allowed the cross-appeal by the respondents.