US syndicated loans operations managers must bid farewell to a wannabe blockchain-based competitor to IHS Markit’s ClearPar platform based on a recent decision by a Delaware state judge who also awarded Symbiont a whopping US$70 million in its lawsuit against former partner Ipreo and Ipreo’s parent IHS Markit.
Vice Chancellor J. Travis Laster of Delaware’s Court of Chancery agreed with blochchain tech developer Symbiont that Ipreo’s takeover by IHS Markit violated the non-compete terms of Ipreo’s joint venture agreement with Symbiont creating Synaps Loans in 2016. He ruled that Synaps Loans had to be shut down, as Ipreo requested, and financial services data provider Ipreo must pay Synaps Loans about US$142 million for a court-appointed receiver to wind down operations. Judge Laster said that Symbiont’s request to allow Synaps Loans to stay in business after he appointed a trustee to break a deadlock between Symbiont and Ipreo on how Synaps Loans would be operated was impractical. His reasoning: even if mediation were successful, there was no product, no revenues, and no customers. All that would be gained, according to Judge Laster, would be a higher payout for Symbiont in damages from Ipreo for violating its non-compete terms.
After Ipreo’s court-appointed receiver made payments to creditors and cash contributors, Symbiont’s cut of the US$142 million would come to US$70 million and Ipreo’s share would amount to US$70 million; Ipreo would also receive an additional payment as Synaps Loans’ largest creditor and for its cash contribution to the firm. The US$142 million represents the profit rival IHS Markit’s ClearPar platform earned from August 2, 2018, the date IHS Markit closed its US$1.86 billion acquisition of Ipreo, until November 30, 2020. Synaps Loans was incorporated in Delaware, whose Chancery Court rules on disputes involving firms incorporated in the state.
Judge Laster rejected Ipreo’s counterclaim that Symbiont had violated its joint venture and operating agreements with Ipreo first by not producing a minimal viable product (MVP)– a platform for Synaps Loans based on blockchain technology and smart contracts. He narrowly interpreted the operating agreement as including “no mandatory delivery obligation” for an MVP on Symbiont’s part. “Rather than requiring Symbiont to deliver a minimum viable product, the operating agreement only provided that Symbiont’s cash contribution [to Synaps Loans] would be waived if Symbiont delivered a minimum viable product,” he wrote. “Ipreo tried to repackage the theory as a breach of the joint venture agreement but failed to prove that claim as well.”
Judge Laster did not rule on Symbiont’s request that IHS Markit be held jointly liable for financial damages to Symbiont, because it interfered with Ipreo and Symbiont’s joint venture. He believed Symbiont’s claim had some merit, but it would have been too complicated for him to decide.
Symbiont still ends up being compensated regardless of who pays, explained Judge Laster. IHS Markit said it would appeal Judge Laster’s ruling to the Delaware Supreme Court. Symbiont was represented by the law firms of Paul, Weiss, Rifkind, Wharton & Garrison as well as Morris, Nichols, Arsht & Tunnel. IHS Markit and Ipreo were represented by Davis, Polk & Wardell and Richards, Layton & Finger.
The US$1 trillion syndicated loans market is one of the few sectors of the financial industry that remains paper-intensive based on all the documentation that must be signed before a deal is struck between counterparties — a process loan operations executives call settlement. Based on 2019 figures, the process could take an average of 11 days to complete, but IHS Markit has said that in some cases the settlement time could be far shorter. IHS Markit’s ClearPar system, which IHS Markit acquired in 2009, holds a quasi-monopoly in the syndicated loans market. but Ipreo and Symbiont believed it was too inefficient and they could come up with a better alternative through Synaps Loans. Ipreo would provide Synaps Loans with its management and knowledge of the syndicated loans market’s workflow, while Symbiont would create a new platform based on distributed ledger technology and smart contracts. Ipreo turned to Symbiont for help after failing to compete with ClearPar using Ipreo’s patented platform Loan Trade Settlement which relied on algorithms.
By agreeing to a takeover by IHS Markit, Ipreo allowed IHS Markit to become an “affiliate” of Ipreo, wrote Judge Laster in his opinion. Under Ipreo and Symbiont’s agreement, Ipreo and its affiliates were prohibited from engaging in other businesses that served the same market at Synaps Loans. He rejected Ipeo’s argument that the term “affiliate” only applied to entities that were affiliates at the time Ipreo’s contract with Symbiont was signed. The non-compete provision remained effective for one year after Synaps Loans’ CEO resigned. “Once IHS Markit did not allow the Company [Synaps Loans] to operate independently the Company’s demise was only a matter of time,” wrote Judge Laster. “The Company’s board of directors has been deadlocked since the CEO-director resigned in November 2019. It is no longer reasonably practical to carry on the Company’s business.” Joseph Salerno, who became Ipreo’s managing director in June 2013 also served as the CEO of Synaps Loans from its inception until November 2019 when he became head of IHS Markit’s Debtdomain unit. IHS Markit inherited Debtdomain through its takeover of Ipreo, which purchased Debtdomain in June 2013. Salerno had worked as a consultant for Debtdomain from February 2011 until then.
Although Judge Laster ruled against Ipreo’s countersuit against Symbiont, his detailed explanation of Ipreo’s relationship with Symbiont after their joint venture was signed highlighted a messy marriage before IHS Markit entered the picture. The bone of contention between Ipreo and Symbiont centered on whether Symbiont could meet its contractual commitment to deliver the promised platform. Symbiont experienced some software glitches and delays in deliverables, which it downplayed much to Ipreo’s dismay. In his opinion, Judge Laster indicated that problems emerged from the start of Symbiont and Ipreo’s relationship because Symbiont was short-staffed.
As a result, the demonstration of the platform to potential investors in Synaps Loans was postponed from November 2016 until March 2017. When the demonstration finally took place, it was under highly scripted conditions because of Symbiont’s concern a “concurrency bug” would emerge during the presentation which would cause transactions to be lost when users executed them simultaneously. Salerno agreed to the recommendation of Symbiont’s chief technology officer Adam Krellenstein that if the concurrency bug were to appear, they were to inform the potential investors that it was an “intermittent minor error” that didn’t show up in testing. The glitch didn’t show up during the demonstration, prompting Symbiont’s Chief Executive Officer Mark Smith to call the demonstration a “resounding success” but Salerno had reservations saying that Symbiont had not met its goal of debuting a “production ready version” of the platform, based on Ipreo’s evaluation.
In May 2017, the dissent between Ipreo and Symbiont grew as Symbiont had difficulty meeting its commitment to Ipreo. Symbiont failed to deliver the MVP by May 11, 2017, as agreed, and the following day Salerno issued a memo outlining 19 gaps between the existing platform and the requirements in the “statement of work” (SOW) or the criteria for an MVP which Symbiont had to fulfill. Among those criteria were replication, security, scalability, consensus, auditability, privacy, and upgradability. Smith vehemently disagreed with Ipreo’s analysis and agreed to demonstrate the platform on June 2, 2017, to prove Ipreo wrong. However, three days before the demonstration was to occur Smith told Salerno Symbiont needed more time to prepare and Krellenstein asked Salerno to waive the requirements of the SOW. (A footnote in the court documentation indicated that Krellenstein continually complained to Smith that Salerno’s gripes were unfounded).
Salerno refused Krellenstein’s request and when the demonstration to Ipreo finally took place on June 16,2017, the new platform still had performance issues which Symbiont refused to acknowledge, wrote Judge Laster’s in his ruling. Ipreo concluded that the platform could not operate at scale without an overhaul, but Symbiont disputed Ipreo’s opinion. Symbiont had good reason not to want to acknowledge any shortcomings. Under the terms of the joint venture agreement, Symbiont would have to pay Synaps Loans US$360,000 in cash if it couldn’t deliver an MVP in time. Salerno gave Symbiont until August 11, 2017, to come up with an MVP but when it became obvious Symbiont couldn’t meet that deadline, Salerno agreed to waive the cash contribution and requirements of the SOW on the condition Symbiont could devote sufficient manpower to deliver the MVP. That verbal agreement was sealed in a December 2017 written agreement, but based on Judge Laster’s ruling Symbiont didn’t keep its word. Of the two full-time developers working on the MVP, one left Symbiont in mid- 2017 and the other one, who had no experience in blockchain or smart contracts, stopped working on the project in November 2017. Symbiont ultimately turned its attention to numerous other clients and soon made giant fund manager Vanguard its number one priority.
IHS Markit’s subsequent takeover of Ipreo put the final nail in Synaps Loans’ coffin. By late 2017 Synaps Loans had won over Citi, Credit Suisse, US Bank and Deutsche Bank as potential investors. The four banks insisted that a fifth bank also participate before they would fork over the cash and Salerno found BNP Paribas to be a viable fifth candidate with Nasdaq Ventures as a back-up in case BNP Paribas didn’t come through. However, as soon as IHS Markit announced in May 2018 that it would take over Ipreo, BNP Paribas withdrew its interest and Citi followed. Citi, Credit Suisse, and US Bank had been willing to invest $17.7 million for a combined 38.8 percent stake in Synaps Loans.
It is unclear why IHS Markit proceeded with Ipeo’s acquisition despite concerns the deal might violate the non-compete provision of Symbiont’s agreement with Ipreo. Based on Judge Laster’s ruling IHS Markit did not buy Ipreo solely because of Synaps Loans’ technology with the intent of shutting down any competition to ClearPar, as Symbiont alleged. It was simply a bonus. However, IHS Markit refused to carve out Synaps Loans from its takeover and by Symbiont’s account IHS Markit had already tried to sabotage Synaps Loans. Symbiont alleged that in April 2018 when IHS Markit thought Credit Suisse would switch from using ClearPar to using Synaps Loans’ platform it offered Credit Suisse a generous discount to remain as its client. However, that claim could not be proven.
IHS Markit also ultimately decided not to buy out Ipreo’s stake in Synaps Loans. Instead, it wanted to reach an agreement with Symbiont to purchase Symbiont’s share of Synaps Loans. However, despite plenty of discussions between IHS Markit and Symbiont no deal ever materialized as IHS Markit continually stalled. In August 2018, after IHS Markit finalized its purchase of Ipreo, Smith asked IHS Markit for US$13 million for Symbiont’s share of Synaps Loans, a long-term revenue share and guaranteed use of Symbiont’s technology. However, IHS Markit never followed up with a response. In January 2019 IHS Markit returned to the table with an offer of US$5 million. That offer would also have required Symbiont to build and service a platform for Synaps Loans, which Symbiont would license to Ipreo for per-trade royalties; Salerno would work for Ipreo. Smith countered with a request for US$15 million and the dissolution of the joint venture with the technology and intellectual property rescinded. IHS Markit agreed to Smith’s proposal verbally in March 2019, but never put anything in writing. While Smith was negotiating with IHS Markit he was also working with Salerno to create a separate new venture to automate the syndicated loan market using blockchain, but that plan fizzled.
In April 2019 IHS Markit poached Salerno with a lucrative job offer which included an annual salary of US$300,000– US$50,000 more than his existing salary. The compensation package also included a minimum bonus of US$300,000 for his first year at IHS Markit and an additional bonus of US$1.5 million at the end of three years. IHS Markit agreed to buy Salerno’s shares in Ipreo Sub, a company which owned Ipreo’s stake in Synaps Loans, for US$3 million. Symbiont filed suit against Ipreo and IHS Markit the following month.
Even if IHS Markit had not acquired Ipreo, it is unclear whether Ipreo and Symbiont would have been able to launch a technically sound and scaleable platform to compete with IHS Markit’s ClearPar. Granted, Synaps Loans lost top notch investors because of IHS Markit, but Ipreo and Symbiont had a long way to go before they could claim success. A footnote in Judge Laster’s opinion indicates that Symbiont’s Krellenstein finally acknowledged shortcomings in Symbiont’s work in March 2018 saying ” I don’t think we have an MVP yet.” The same footnote said that a new Symbiont developer in July 2018 described the smart contracts on the Symbiont-built platform as a “mess” and unuseable. All that is certain is that a promising venture intended to squash IHS Markit’s quasi-monopoly in the syndicated loans market has died and one of its founders — Symbiont– will end up a lot richer for legal reasons.
Editor’s note: This article was originally published on August 30, 2021 and was updated on September 5, 2021 to incorporate additional information from Judge Laster’s ruling.