Lawsuit reveals details on the company’s deal with Oak Hill and its subsequent fall from prominence.
Oversee.net was once a high-flying darling of the domain name industry. It was rolling in dough–over $200 million a year in revenue at one point. It threw lavish parties for its clients, taking them to the Playboy Mansion in Los Angeles and to shoot AK-47s in Prague.
But the story has an unhappy ending. While we already knew some of the story about the company’s fall, including the precipitous decline of domain parking that hurt its DomainSponsor business and its ill-advised purchase of SnapNames, Domain Name Wire has uncovered new revelations thanks to a lawsuit filed this year.
Oversee.net co-founder Frederick Hsu, through the Frederick Hsu Living Trust, sued Oak Hill Capital Partners and many former board members and executives earlier this year, alleging (pdf) that they undertook a campaign to sell off the company’s productive assets to “tunnel” money to investor Oak Hill.
To understand the allegations, you need to understand the history of Oversee.net.
Domain Name Rocket Ship
Frederick Hsu co-founded Oversee.net with Lawrence Ng in 2000. The company amassed a large portfolio of domain names and its DomainSponsor domain parking service became an industry leader.
Then, the first week of 2008, the company announced that it acquired domain name registrar Moniker. Just weeks later, the company revealed a $150 million investment from Oak Hill Capital Partners. This valued the company at $400 million, according to a court filing.
Weaknesses Show and the Sell-off Begins
Soon thereafter, Oversee.net’s rocket-ship trajectory started to taper off.
Earlier in 2007 (shortly after the SnapNames acquisition but before the Oak Hill investment), eNom and Network Solutions announced a collaboration to launch NameJet. Not only would this create competition for SnapNames, but it also meant that one of SnapNames’ best inventory partners, Network Solutions, was gone. (It turns out Oversee.net knew Network Solutions was leaving before it completed the deal.)
SnapNames went further south in 2009 when the company discovered that an employee had been bidding against customers using the screen name ‘halvarez’.
Meanwhile, the DomainSponsor business peaked just as Oak Hill made its investment.
According to court documents published during a lawsuit brought by former Moniker CEO Monte Cahn, domain monetization generated $153 million for Oversee.net in 2007. That number dropped to $129 million in 2008, $102 million in 2009 and $92 million in 2010.
Oversee.net subsequently sold SnapNames and Moniker in early 2012. It sold DomainSponsor in 2014. And it sold off some of its “vertical sites” after that, leaving it as just a shell of its former self and without an engine to generate substantial profits.
Oak Hill’s Partial Exit
The Hsu trust’s lawsuit sheds some light on what might have been going on behind the scenes at this time.
Like many outside investors do, Oak Hill wanted protection when it committed $150 million to Oversee.net. It demanded redemption rights that would allow it to redeem its preferred stock for $150 million in cash starting in February 2013 if Oversee.net had “legally available funds” to do so.
In 2009, after Oak Hill’s initial investment, co-founder Lawrence Ng sold much of his common stock to Oak Hill for $24 million. This gave Oak Hill more control of the board. Hsu tried unsuccessfully to block the deal.
Oak Hill exercised its option to redeem its preferred stock for $150 million in February 2013.
But the company didn’t have $150 million. Instead, it redeemed $45 million. It redeemed a further $40 million after Oversee.net sold DomainSponsor to Rook.
Hsu’s trust argues that Oversee.net hatched a plan in 2011 to liquidate its assets in order to provide the cash necessary to redeem as much of Oak Hill’s investment as possible on the February 2013 option date. It alleges that the board had conflicts of interest that led to it approving the deals as part of this plan. It also alleges that Oversee.net did not have “legally available funds” to disburse to Oak Hill because the Oak Hill investment functioned like debt once the redemption request was formally made in 2013.
The lawsuit alleges that former Oversee.net CEO Jeff Kupietzky had an incentive to set the divestitures in motion because he received a $632,813 bonus after the first redemption. (It’s worth noting that Kupietzky left Oversee.net in August 2011, before the divestitures and redemption. It appears from the lawsuit that he received the bonus after leaving the company.)
It also alleges that other managers, including Kupietzky’s replacement CEO Debra Domeyer, had a similar incentive but it only kicked in if Oak Hill was able to redeem a total of $75 million of its original investment.
This, Hsu’s trust argues, is part of the reason she worked to sell off the DomainSponsor business. The lawsuit alleges that she pocketed a $587,184 bonus when this happened.
Hsu’s original filing suggests that the DomainSponsor business was sold for $40 million, the exact amount of Oak Hill’s second redemption.
The defendants in the trust’s lawsuit argue (pdf) that Hsu is questioning regular decisions made in the course of running a business, among other defenses. They are asking for the case to be dismissed.
Of course, this brings up an interesting question. Hsu is unhappy that the company was gutted to return some of Oak Hill’s investment. But would common shareholders have ever seen a payout given the decline in domain parking and the poor fate of the SnapNames acquisition?
After all, Oak Hill is still in the hole for $65 million, not including its $24 million investment for Ng’s shares. If the company is able to recover more money, it would go to Oak Hill, not the common shareholders.
This case serves as a reminder to founders of what can happen when they bring in outside investors.