Groove backers left short
Firm fetched less than shareholders had invested in it
Financial backers failed to recoup their investments in Groove Networks Inc., and rank-and-file employees weren't compensated for stock they'd been given in the Beverly software company that has agreed to be purchased by Microsoft Corp., according to documents filed in a lawsuit brought by a former Groove executive.
A judge in Wilmington, Del., yesterday denied a motion by Michael Matthews, who had been Groove's executive vice president for sales and marketing, to block the $120 million acquisition deal. Its price tag was among financial information contained in the lawsuit that wasn't disclosed when Groove and Microsoft unveiled the deal March 10.
While the deal will now go forward, and could be completed next week, Delaware Chancery Court Judge William B. Chandler III will permit Matthews to file an amended complaint challenging allocation of the merger proceeds among different groups of stockholders. In his initial complaint, lodged March 25, Matthews alleged that Groove and its directors violated the company's certificate of incorporation and breached their fiduciary duty by not adequately compensating employees who'd been issued common and junior preferred stock.
M. Duncan Grant, a lawyer for Matthews, said his client had not yet determined whether to file a new complaint.
In a statement yesterday afternoon, Groove said Matthews was the only one of the firm's principal investors not to approve the deal with Microsoft. The statement said the other principals continue to support the deal. ''Groove Networks and Microsoft are proceeding toward closing of the transaction according to the terms of the merger agreement," it said. Microsoft officials declined to comment.
Because the sale price was less than the $155 million invested in Groove, the cash-for-stock deal provided no payout for an unspecified number of employees who had been given Groove shares. Groove did set aside some money to be paid to current employees who remain with the firm after the Microsoft purchase takes effect. That will come in the form of ''reward retention bonuses," half of which would be paid one year and the remainder two years after the deal is complete.
Matthews' suit named as defendants the company, its founder and chief executive Ray Ozzie, and a pair of directors, James Breyer and John P. Stenbit. Ozzie, a pioneer in collaboration software and the creator of Lotus Notes, will become a Microsoft senior vice president and chief technical officer upon completion of the deal.
According to the complaint, Ozzie, together with Microsoft and Accel Partners, a Palo Alto, Calif., venture capital firm that employs Breyer -- all part of a class of senior preferred shareholders -- owned 77.7 percent of the total outstanding shares of Groove. Other financial backers in the eight-year-old company included Intel Capital and Mitch Kapor, founder of Lotus Development Corp. of Cambridge.
The complaint said Ozzie would get $382,966 under the deal, while Breyer would receive about $1.7 million and Accel about $3.4 million. Microsoft, Groove's largest investor, would recoup about $80 million, it said. The document doesn't indicate how much each of those parties invested. It also said a March 4 letter from the board apprising Groove stockholders of the acquisition didn't mention the separate deal in which Ozzie would become a Microsoft executive.
''Stockholders were not provided with the supposedly final merger agreement . . . until 9:53 p.m. on March 8, 2005," the complaint said. ''Stockholders were then asked to give their written consent no later than 9 a.m. the following morning, thus giving stockholders zero business hours in which to conduct their review of (and seek advice regarding) the supposedly finalized merger documents."
Robert Weisman can be reached at weisman@globe.com.
