Huge Chinese DOOH network suing its backers

December 28, 2010 by Dave Haynes

One of the bigger DOOH networks in the world, VisionChina Media Inc., is going after some of its investors with a lawsuit claiming it was duped into pay way too much for the Nov. 2009 acquisition of another firm,  Digital Media Group.

VisionChina Media and its wholly-owned subsidiary Vision Best Limited launched an action Monday  against Shareholder Representative Services, LLC, Gobi Partners, INC., Gobi Fund, INC., Gobi Fund II, L.P., Oak Investment Partners XII, L.P., Sierra Ventures IX, LP, NIFSMBC-V2006S1 Investment Limited Partnership, NIFSMBC-V2006S3 Investment Limited Partnership, Thomas Gai Tei Tsao, and other as-yet unnamed defendants. The claim was filed by NASDAQ-listed Vision in the Supreme Court of the State of New York.

The summons and notice alleges that defendants Gobi Partners, Inc., Gobi Fund, Inc., Gobi Fund II, L.P. (collectively, “Gobi”), Oak Investment Partners XII, L.P. (“Oak”), Thomas Gai Tei Tsao and other as-yet unnamed participants engaged in an unlawful scheme to induce VisionChina Media and Vision Best, through false, deceptive, and misleading statements concerning Digital Media Group’s financial condition and performance, to pay a grossly inflated price to purchase Digital Media Group’s shares. The summons and notice alleges that each defendant named in the action has received, or is scheduled to receive, ill-gotten gains from this unlawful scheme. The summons and notice further alleges that VisionChina Media and Vision Best are owed indemnification from an escrow fund, established at the time of the purchase, as a result of breaches of representations and warranties contained in the merger agreement.

According to the summons and notice, VisionChina Media and Vision Best are seeking relief including: a declaration that they are not obligated to pay further installments totaling US$60 million in consideration for the acquisition; a declaration that VisionChina Media and Vision Best are not obligated to pay any unpaid escrowed cash or shares in the escrow fund and ordering that such cash or shares be returned to VisionChina Media and Vision Best; restitution of all cash and stock wrongfully received by the defendants as a result of the unlawful scheme; compensatory damages from Shareholder Representative Services, LLC., Gobi, Oak, Tsao and other as-yet unnamed participants in the unlawful scheme in an amount to be determined at trial but not less than US$80 million; punitive damages from Shareholder Representative Services, LLC., Gobi, Oak, Tsao and other as-yet unnamed participants in the unlawful scheme in an amount to be determined at trial; and interest, attorneys’ fees and disbursements, costs, and other relief that the court deems just and proper.

As of September 30, 2010, the carrying values of the goodwill and intangible assets, determined based on provisional estimation, in connection with the acquisition of Digital Media Group were US$ 89.5 million and US$ 85.1 million, respectively. Management of the Company is currently carrying out a test on annual goodwill impairment in accordance with the requirements of US GAAP. Management of the Company does not preclude the possibility of an adjustment to the carrying values of such goodwill and intangible assets, including a non-cash impairment charge.

VisionChina Media has more than 128,000 digital displays on mass transportation systems in 23 Chinese markets, including Beijing, Shanghai, Guangzhou and Shenzhen.

The original deal was US$160 million in cash and shares, “payable by the Company to eligible shareholders of Digital Media Group in three installments over the next two years.”

Rooting around didn’t turn up much background on what has made this boil up.