Ex-Facebook exec, venture capitalists lose appeal over secretive Tinder sale

An Ontario judge has dismissed appeals by a former Facebook executive and two Toronto venture capitalists to overturn a 2019 decision that found they owed more than US$15-million in damages and lost profit to the investors’ former business partners after the sale of a company that held an interest in the dating app Tinder.

Justice William Hourigan took the original Superior Court of Justice decision further Wednesday, ordering that the appellants pay the entire US$29.5-million profit from the sale, plus costs and interest, to the venture capitalists who successfully beat the appeal. Doing so, the judge said, would serve as a deterrent for similar business practices in the future.

“It sends a message to the marketplace that in Ontario and Canada, if you’re doing business in a partnership, fiduciary duties, being candid and honouring one’s obligations matter,” said Won Kim, a lawyer for Ravinder (Ray) Sharma, Imran Bashir and Kenneth Teslia, the venture capitalists who beat the appeal. “It’s not the Wild West or catch-me-if-you-can.”

The decision is the latest volley in a nearly decade-long battle over claims of a hidden interest in Tinder that tore a rift among partners at the Toronto venture fund Extreme Venture Partners.

In 2012, Extreme Venture Partners sold a software company called Xtreme Labs to Chamath Palihapitiya, a Silicon Valley investor and former Facebook executive, valuing the company at US$18-million. At the time, Xtreme Labs had a 13-per-cent stake in another company called Hatch Labs – which had developed a dating app called Tinder.

Court filings show that two principals of Extreme Venture Partners, Amar Varma and Sundeep Madra, kept an interest in Xtreme Labs after the 2012 sale. Mr. Varma, Mr. Madra and Mr. Palihapitiya later sold Hatch Labs to an American company in 2014 for US$29.5-million.

By then, Tinder had begun its ascent as a global dating-app giant. Now owned by Match Group, it’s become one of the world’s predominant dating apps. It brought in US$1.4-billion in revenue in fiscal 2020 and reported 6.7 million paying subscribers at the end of that year.

Amid Tinder’s explosive growth, three other Extreme Venture Partners stakeholders, Mr. Sharma, Mr. Bashir and Mr. Teslia, later launched a lawsuit against Mr. Varma, Mr. Madra and Mr. Palihapitiya, claiming $200-million in damages amid allegations that included conspiracy and concealing their investment in Tinder.

In May, 2019, Justice Barbara Conway of the Ontario Superior Court of Justice ordered the lawsuit respondents to pay US$3.36-million in damages for undervaluing Xtreme Labs at the time of its sale and US$12.33-million to compensate for their lost share of income from the sale. In her decision, Justice Conway said she didn’t find the three defendants credible as witnesses.

But Mr. Palihapitiya and the duo of Mr. Varma and Mr. Madra each launched appeals of the decision. In court filings, Mr. Varma and Mr. Madra’s counsel argued that there had been legal errors in the original case, including around the value of the award to their former colleagues. Mr. Palihapitiya’s lawyers argued that, among other matters, Justice Conway “erred in finding that Palihapitiya had knowingly assisted in the breaches of fiduciary duty.”

But Justice Hourigan of the Court of Appeal for Ontario wrote on Wednesday that he sided with Justice Conway on numerous matters, including her calculations of the value of awards – and her view of the appellants, “whose sworn testimony was routinely contradicted by the written record.”

He did, however, agree with the lawyers for Mr. Sharma, Mr. Bashir and Mr. Teslia that forcing the appellants to hand over all of their profits from the Hatch Labs sale would serve as an example to deter similar behaviour in the future.

But he cautioned that such a decision should depend on the circumstances of a case. “Equity seeks what is fair and what is fair should be determined with flexibility, not by means of hard and fast rules,” Justice Hourigan wrote.

Counsel for Mr. Palihapitiya, Mr. Varma and Mr. Madra did not immediately respond to requests for comment.

With a report from Christine Dobby

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