Court Dismisses Minority Shareholders' Claims Against Idealab

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A court in California yet again dismissed attempts by minority shareholders, including Michael Dell's investment arm, to force Internet incubator Idealab Inc. to return their $1 billion investment.


Los Angeles Superior Court Judge Ralph W. Dau dismissed six of eight claims against Pasadena, CA-based Idealab, including accusations of breach of fiduciary duty, improper distribution of corporate assets and breach of contract.


The minority shareholder group includes Kline Hawkes LP, Moore Global Investments, T. Rowe Price Science and Technology Fund, Dell USA LP, William Morris Agency, Travelers Insurance Group and cellular service provider Hikari Tsushin Inc. They own 9 percent of Idealab.


"It's really all about money," said Steve Chadima, vice president of marketing at Idealab. "They're doing this in order to get their money back. You ride the roller coaster with everybody else. What they thought was a quick flip has turned into a longer-term investment, and we're confident we'll provide substantial returns to them in the future."


The plaintiffs in January filed suit to return the funds they invested in Idealab as part of a preferred stock financing round in early 2000 just before the stock market collapsed, driving down stock values of most Internet-related companies.


In July, the Los Angeles Superior Court dismissed all claims in the first amended complaint. The plaintiffs filed a second amendment in the same month, which was dismissed Dec. 23.


The court's order reviewed only whether a legal basis existed for the plaintiffs' claims. It did not evaluate the truth or falsity of the allegations. Thus, the plaintiffs lost on point of law, not fact.


However, Dau did allow the opposing minority shareholder caucus to file two remaining causes of action next year. One of the charges relates to accusations of inadequate disclosure of corporate records. The other asks for the removal of certain directors on Idealab's board, including founder chairman/CEO Bill Gross.


Founded in 1996, Idealab has financed high-tech companies like search engine services firm Overture, Vendari, Evolution Robotics and CarsDirect.com. It has investments in 40 public and private firms. Though it has been battered like other venture capital firms' investment in the online world, Idealab claims it still has $350 million in cash and marketable securities.


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