K1 Investment Management is facing allegations that the firm exploited confidential board-level information to force a distressed takeover of portfolio company Recycle Track Systems, according to a complaint filed in Delaware Chancery Court.
In 2022, K1 invested $60 million in waste management technology platform RTS and added managing partner Ronald Cano to the company’s board.
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Two years later, a cash-strapped RTS began negotiations with lender Trinity Capital to defer principal payments on the company’s $45 million debt facility. Trinity agreed, but only if RTS raised at least $10 million in additional equity funding.
RTS secured a term sheet from an unnamed sustainable investment firm for $20 million in new equity at a $325 million valuation (and a competing offer from K1 with “predatory” governance terms). The outside firm’s was, however, contingent on Trinity granting the principal payment deferral.
After forming a special committee to evaluate the offers, RTS’ board selected the unnamed firm.
While this was happening, says the lawsuit, Cano secretly initiated talks with Trinity—without the knowledge of RTS’ other directors—over a possible K1 purchase of its RTS loan.
His objective, says the filing, was to orchestrate a distressed situation that K1 could leverage for a cut-price RTS takeover.
In December, Cano resigned from the board. Three days later, K1 acquired the loan from Trinity and then declined to grant the payment deferral, killing the contingent equity raise.
Per the complaint: “By obtaining the assignment of the loan from Trinity, K1 aimed to gain majority control of RTS either by accepting a predatory equity investment offer or forcing RTS into default, at which point K1 could acquire the entire Company at a level well below its true value.”
Under threat of imminent default, RTS rushed to find alternatives before a February 1st payment deadline.
Late last month, the company completed a $40 million raise from Edison Partners, Volition Capital, and StepStone Capital Partners.
But, the company says, it had to fight K1 through the entire process: “Cano and K1 have threatened litigation against RTS, sought to intimidate Edison and other RTS stockholders, and even dangled the prospect of handsome incentive packages for RTS’s management in an attempt to entice RTS’s management to reject the Edison transaction.”
The complaint seeks damages “at least in the tens of millions of dollars” and is awaiting initial procedural rulings. K1 has not yet filed a response.