The acquisition of Colonie-based Auto/Mate by DealerSocket, a Texas company, has been temporarily blocked by a judge in Delaware.
A restraining order was granted on Friday in the Delaware Court of Chancery after the founder of DealerSocket, Brad Perry, filed a lawsuit against Vista Equity Partners — the private equity firm that owns DealerSocket.
In the lawsuit filed last week, Perry claims Vista's deal to purchase Auto/Mate was a scheme to cover losses in the private equity company's investment fund.
Perry said the Auto/Mate acquisition "had been secretly negotiated despite the Vista Interested Directors intentionally lying to the Disinterested Directors that they were 'passing' on the deal."
Specifically, he alleges the Auto/Mate deal was secretly structured to use a Vista-provided infusion of equity that "effectively dilutes the minority shareholders in favor of Vista."
The lawsuit looks to stop the merger of the companies, which both develop software for car dealerships. Perry is represented by Thomas E. Hanson Jr. with Barnes & Thornburg LLP.
A bond brief DealerSocket submitted Tuesday night in response to Perry's lawsuit called Perry's accusation "utter fiction." It said the company will defend its case in a Feb. 11 preliminary injunction hearing.
DealerSocket’s CEO Sejal Pietrzak also wrote a letter to customers, which was provided to the Business Review. The letter said the lawsuit is a disagreement between the company's founders and other board members over the valuation and economic terms of the Auto/Mate transaction.
"Ultimately, our board agrees on the strategic value of combining DealerSocket with Auto/Mate, and all of our board members, including myself, unanimously voted to approve the deal, except our two founders, due to economic terms related to it," Pietrzak said in the letter. "I am disappointed that these legal filings are causing a delay in completing this acquisition and ultimately delaying our ability to offer our dealers the strategic benefits of a combined offering. I look forward to completing the next steps and welcoming the Auto/Mate family to DealerSocket soon."
It is not yet clear what this means for Auto/Mate, which has been looking for a buyer for several years. The last attempt to acquire Auto/Mate — by a large competitor — was blocked by the Federal Trade Commission because of its potential impact on competition in the auto dealer software industry.
Auto/Mate declined to comment on Perry's complaint as it is not a party to the lawsuit.
The company employs around 189 people, with offices in Colonie and Phoenix, Arizona. It develops software that lets car dealerships manage operations like parts, warranties and other functions that require communicating with manufacturers, such as Subaru and Toyota.
CDK Global, with more than $2 billion in annual revenue, and Reynolds & Reynolds are the giants in the industry.
In 2017, CDK Global moved to acquire Auto/Mate. That prompted an investigation by the Federal Trade Commission, and in March 2018 the FTC challenged the deal. The commission concluded the small company in upstate New York was the only brake on the two billion-dollar market leaders.
The government said an independent Auto/Mate meant lower prices, better innovation, higher-quality service and more favorable contract terms for dealerships.
It was a rare decision by the FTC, which has blocked few mergers in recent years. It ended up putting a spotlight on Auto/Mate — and that attention ended up boosting the business, fueling its biggest growth in years.