Why Invigor is suing Kit Digital

Australian IT investment company Invigor has launched legal action against Kit Digital amid claims the US-based organisation breached part of its June acquisition contract for the assets of Hyro.

Invigor last week announced it would commence legal proceedings against Kit Digital for breaching the share purchase agreement (SPA) entered by the two companies mid last year.

The transaction was fraught with difficulty since talk of a takeover first arose in late 2011, as the companies struggled to agree on a price.

A cash and scrip deal was eventually put on the table, which included an offer from Kit of 2 million shares. At the time they were worth over $US8.00 but subsequently fell to almost half that.

Kit responded by agreeing to set a floor price to protect Hyro from further price volatility. The deal closed at $2 million in cash with the remaining $15.2m to be paid in 1,839,841 Kit shares.

In November last year Kit announced it wouldn’t be able to file its third quarter accounts due to a dispute with its auditor. It also said it would have to restate accounts from 2009 and the accuracy in previous reports couldn’t be relied on. 

As a result, its share price went from around $US2.30 to $US0.60. Kit’s shares were worth $US8.57 seven months prior.

In December it was delisted from the NASDAQ for failing to comply with accepted accounting standards. Its local arm suffered the fallout, entering administration this month and shedding around 70 jobs.

Invigor claims Kit is refusing to honour the top-up protection under the acquisition contract. It said Kit is falling back on rule 144 of the SEC which states stock has to be publicly trading and accounts have to be filed in order for Kit to honour the agreement.

“Our legal advice and our position is that there is a breach of contract,” Invigor board member Greg Cohen told CRN. “We are suing them to recover the $15.2 million plus damages. We’re firmly of the belief that they are in breach of contract and we are now a major unsecured creditor of theirs.”

Cohen and brother Gary Cohen were vehemently opposed to the takeover, after both joined the company as part of a complete revamp of the board mid last year. The company was rebuilt from the ground up thanks to a major investment from equity firm Marcel Equity, owned by the brothers.

“We didn’t support this transaction to begin with,” he said. “We are a totally new board, we took over the requirements of this deal, we fought against it although in the end we accepted because that’s what the majority of shareholders decided they wanted.”

Cohen said Kit’s actions and the outcome of the court case would significantly impact Invigor’s future.

Invigor has filed notice on Kit and is awaiting a response.