ConsenSys AG Shareholders Readying Legal Action Over Share Valuation

At issue is the valuation of key pillars of the Ethereum ecosystem, including MetaMask and Infura.

AccessTimeIconNov 2, 2021 at 5:30 p.m. UTC
Updated May 11, 2023 at 7:09 p.m. UTC

A group of former employees and shareholders of Ethereum development firm ConsenSys are alleging ConsenSys AG, led by billionaire Joseph Lubin, improperly valued key assets in its portfolio prior to an asset transfer involving banking giant JPMorgan.

According to documents seen by CoinDesk, the group intends to request that a Swiss court review an asset transfer between ConsenSys AG and ConsenSys Inc., with a particular focus on Web 3 wallet MetaMask and blockchain infrastructure product Infura, two of the most foundational pillars of the present-day Ethereum ecosystem.

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  • A debt burden – a $39 million personal loan founder Joseph Lubin made to ConsenSys AG (also known as Mesh) – was also reportedly swapped with the assets.

    “We are aware of a small single-digit percentage of shareholders who are disgruntled with ConsenSys Mesh with respect to the ConsenSys Software Inc. transaction,” a ConsenSys spokesperson said in a statement to CoinDesk. “We believe that these shareholders are confused on a number of key factual points, and we have been working to share information with them that we think will further clarify the record and give them a greater understanding of matters they do not yet accurately understand.”

    The incipient legal action comes as ConsenSys looks to re-enter “growth mode,” having formed partnerships with major banking entities such as JPMorgan and Mastercard in recent months.

    As ether, the native asset of the Ethereum blockchain, surges to new highs, ConsenSys has renewed its push for “Enterprise Ethereum” integrations with major corporations, albeit with a decentralized finance (DeFi) twist different from similar efforts in 2018.

    Arthur Falls, a former employee pushing for the court review of asset valuations, told CoinDesk that in addition to the shareholder value differences at stake, there’s a matter of clashing ideologies between Ethereum’s peer-to-peer ethos and its key infrastructure now partially controlled by Wall Street middlemen, including JPMorgan, which, as part of the transaction at play, now owns 10% of ConsenSys Software Inc.

    “ConsenSys AG developed the portal through which most people interact with Ethereum, which is MetaMask, and the way most software interacts with Ethereum, which is Infura,” Falls said in an interview. “Now that it’s in the hands of JPMorgan, UBS and Mastercard, how are those custodians going to feel about decentralization?”

    Changing entities

    At the core of the desired court review is the exchange of assets between two legal entities: Swiss company ConsenSys AG and American company ConsenSys Software Inc.

    According to documents viewed by CoinDesk, a valuation by accounting firm PwC dated July 16, 2020, priced ConsenSys AG assets including Infura, MetaMask, Truffle, PegaSys, CoDeFi, as well as ConsenSys subsidiaries in France, the U.K., Ireland, Australia and Hong Kong, at a total valuation of $46.6 million.

    The entirety of ConsenSys AG was valued at $332.3 million by a separate firm in June 2019, per documents viewed by CoinDesk.

    At issue is which valuation was then used in a transfer of the listed assets from ConsenSys AG to ConsenSys Software Inc. in exchange for 10% of ConsenSys Software’s shares, as well as the transfer of a $39 million loan Lubin had previously made to ConsenSys AG to ConsenSys Software Inc.

    As part of the asset transfer, JPMorgan also acquired 10% of ConsenSys Software Inc. in exchange for its Quorum blockchain business, documents show.

    “Mesh has a long history of spinning out projects successfully to maximize value for our shareholders, with contemporaneous benefit to our broader Web 3.0 vision and strategy. The ConsenSys Software Inc. transaction is no different,” a spokesperson said of the asset exchange.

    ConsenSys Software Inc. is now looking to raise $250 million at a $3 billion valuation, sources told CoinDesk in October. The figure is derived in large part from the success of MetaMask’s Swaps feature, which has driven over $9 billion in trade volume and was launched just three months after PwC’s valuation put a mere $4.4 million price tag on the wallet interface.

    “It is undeniable that the business fundamentals and operating environment are entirely different today than at the time of transaction,” the ConsenSys spokesperson said of the valuation. “We are grateful that after many years of hard work the company and the ecosystem are now doing very well and crossing the chasm into mainstream adoption.”

    Valuation battles

    Falls says he intends to request that a Swiss court evaluate whether ConsenSys AG’s assets were properly valued at the time of the sale.

    According to Falls, the legal action has been six months in the works. Other shareholders in the group seeking judicial review have asked to inspect certain documents, including the ConsenSys AG board resolution to sell the assets, and have been asking Consensys AG for a full list of its board members. Falls said both asks have been pushed back.

    “It’s just been delay after delay after delay, and so we said, ‘To hell with it, we’re going to court,’” Falls said.

    A spokesperson for ConsenSys noted that a meeting is scheduled for November, when the company will explain the transaction in greater detail.

    A lawyer familiar with the matter who asked not to be identified noted that PwC conducted its valuation using the Swiss Practitioner Method, which uses a weighted combination of discounted cash flow and asset recreation cost to arrive at a valuation.

    “The problem is that a startup like ConsenSys often has intangible assets, and they don’t generate cashflows or profits, so it results in an incredibly low valuation,” the lawyer said, querying whether such valuation is appropriate when used for valuations seen in mergers and acquisition deals, such as the type ConsenSys Software Inc. engaged in with JPMorgan and Quorum.

    Per Falls, ConsenSys AG minority shareholders have repeatedly requested to have an independent special audit, but the requests were reportedly voted down.

    The former employees and shareholders say they expect to make their initial filings in court in December.

    High stakes

    Lubin was recently crowned Ethereum’s “Wall Street whisperer,” and is increasingly seen as having significant influence over how major enterprises get involved with blockchain technology.

    A funding round for ConsenSys in April included major entities like UBS, Mastercard, JPMorgan – a sign that ConsenSys AG’s former products could be used for major banking applications.

    “These were chosen partners that tell us the future of these products,” says Falls.

    Falls says he believes both MetaMask and Infura – what he calls “the crown jewels” of ConsenSys – could have been decentralized and tokenized, and that their projected use is “completely anathema” to the peer-to-peer principles of the space.

    Meanwhile, a number of teams are looking to bring “institutional DeFi” – with its known counterparties and compliant custody arrangements – to the marketplace.

    “Forget about the shareholders for a minute,” Falls said. “Think about the consequences of the change in the influence over these infrastructure pieces.”

    Update (Nov. 2, 21:14 UTC): Adds “AG” to headline for clarity.


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    Andrew Thurman

    Andrew Thurman was a tech reporter at CoinDesk with a focus on DeFi.