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Genapsys Founders Lose Bid to Dismiss Bankruptcy Case

This story has been updated to include additional information about Sequencing Health, the proposed "stalking-horse" bidder in the sale of Genapsys' assets.

NEW YORK – Genapsys Cofounder and former CEO Hesaam Esfandyarpour has lost a bid to avert Genapsys' bankruptcy proceedings.

In an order issued Thursday afternoon, US Bankruptcy Judge Brendan Shannon denied Esfandyarpour's motion to dismiss the firm's Chapter 11 case in the US Bankruptcy Court for the District of Delaware. 

Shannon denied the motion "for the reasons set forth on the record" as part of hearings that took place Monday and Tuesday. He did not elaborate.

At the hearing, Esfandyarpour's lawyers argued that a July 11 board meeting to approve entering bankruptcy and subsequently sell the firm's assets was improperly notified and conducted and thus void. Moreover, they said that the board — reestablished in the days following a different court ruling that removed all but three members — was improperly constituted.

"Bylaws matter and failure to follow that has consequences," Christopher Samis, an attorney representing Esfandyarpour, said at the hearing. "We think [Genapsys] gambled with the kill shot goal of freezing out founders, seizing the fruits of their labor, and wiping out their shares and the shares of others. We think it's a gamble that shouldn’t be allowed to play out."

Genapsys attorneys argued that the board was properly constituted. Their written reply to the motion to dismiss was filed under seal but at the hearing they also alleged that Esfandyarpour had fraudulently altered documents related to a trust holding voting shares of the company associated with board member Hamid Moghadam, a director representing Series C investors.

The result likely means that Genapsys can proceed to a sale of its assets. Separately, the firm told the court that it has found a so-called "stalking horse bidder" to provide a minimum bid in the sale. Sequencing Health, a firm registered in Delaware last month, has made an offer valued at approximately $42 million, including $10 million in cash and the assumption of debt owed to Oxford Finance.

A Friday court filing revealed that Sequencing Health is affiliated with several major investors in Genapsys' 2021 $70 million Series D financing round, including Farallon Capital Management and Soleus Capital.

The motion was the latest in a long line of legal battles between Esfandyarpour and the other directors of the Redwood City, California-based sequencing technology firm.

Just days before the bankruptcy vote, a judge in the Delaware Court of Chancery had removed most of the board, including current CEO Jason Myers, leaving Esfandyarpour; Robert Zollars, an independent director; and Harish Soundararajan, representing Series D investors.

The governance battle resumed immediately with Zollars allegedly voting to appoint Myers and Fredrik Eliasson to the board and to remove two individuals whom Esfandyarpour believed he had the votes to appoint to represent common shareholders.

According to the motion, obtained by GenomeWeb, "[Genapsys] denied Esfandyarpour the ability to participate at the July 11 meeting — they muted Esfandyarpour on the Zoom meeting." At the hearing, his attorneys also alleged that Genapsys turned off the chat and "raise hand" functions.

"With no way to meaningfully participate as a director to register his objection to the unlawful meeting, he immediately left the meeting and again made a record of protest of this unlawful action promptly after the meeting," they wrote.

Whether Esfandyarpour can appeal the decision isn't clear. His lawyers did not immediately respond to a request for comment.

Genapsys has said that it wants to complete the sale by mid-September.