RKS scored a significant victory for its client Starboard Value LP on January 28, 2022, when Chancellor Kathleen St. J. McCormick of the Delaware Court of Chancery denied motions to dismiss all but one claim Starboard has asserted against Quantum Corp., its former CEO, John Gacek, and former board chair, Paul Auvil. Starboard’s claims for breach of contract, fraud, and negligent misrepresentation, among others, will now proceed against both the company and the individual defendants.
As alleged in the complaint, in 2013 and 2014, Starboard, Quantum’s then largest shareholder, entered into two agreements with Quantum, agreeing to forego proxy fights in exchange for several board seats, and the right to select a majority of Quantum’s board members if the company did not meet certain revenue targets for its fiscal year 2015. After entering into these agreements, Quantum, with the assistance of Gacek and Auvil, engaged in a scheme to improperly “pull forward” and recognize revenue contrary to U.S. Generally Accepted Accounting Principles. As a result, Quantum’s reported revenues for fiscal year 2015 appeared to meet the targets when in fact they did not, and Starboard was deceived into believing its rights to appoint a majority of board members had not been triggered, when in fact they had.
Defendants’ scheme did not come to light until 2018, when the company admitted publicly that its 2015 revenue disclosures had been false. A subsequent SEC investigation found that Quantum increased its reliance on sales tactics, leading to improper revenue recognition, in order to try to avoid the consequences of its agreements with Starboard. The SEC investigation also noted an inappropriate “tone at the top,” which led to Quantum’s misstatement of revenues.
With the Delaware Chancery Court’s order, RKS looks forward to moving the case towards trial to enforce Starboard’s rights and deliver a just result for the benefit of Starboard and its investors.