In the complaint, plaintiffs assert claims "against certain board managers ("Board Managers" or "Managers") of TapouT, LLC ("TapouT"), and other persons and entities (collectively, the "Defendants") involved in a transaction through which TapouT's assets were purchased by Authentic Brands Group, LLC ("ABG") and Leonard Green & Partners, L.P. ("Leonard Green"), as detailed herein (the "Transaction")."
I have previously covered some what I thought were interesting aspects of the Transaction in my post, Update: TapouT, PEM Group, the SEC, Danny Pang and the Authentic Brands Acquisition. As you may recall, in my earlier post I wondered "whether the acquisition has any connection to the SEC action against Danny Pang and PEMGroup, an Irvine, California based private equity firm that TapouT "secured a multimillion-dollar line of credit from."
In this action, plaintiffs, two individuals who allegedly "owned Membership Interests ("Interests") in TapouT throughout the entire relevant period," asserted claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty.
In summarizing the claims, plaintiffs allege that the Transaction "is, in many ways, a textbook example of how a select few managers/officers, conspiring together, can effectively scheme to strip the assets of a company from its investors for pennies on the dollar."
Specifically, plaintiffs allege that the "Transaction is littered with improprieties and rife with conflicts"  [a]nd it illustrates a clear abdication in the exercise of fiduciary duties by Daniel 'Punkass' Caldwell and Marc Kreiner the Board Managers of TapouT (TapouT's two rogue Board Managers at the time of the Transaction)."
Note: the complaint I have seen is redacted and so I am unable to see the alleged "disabling conflicts" or the monetary figures at issue.
Nonetheless, plaintiffs allege that "[i]n pursuing the unlawful plan to facilitate the acquisition of TapouT by ABG and Leonard Green for grossly inadequate consideration, through a flawed process, each of the Defendants violated applicable law by directly breaching and/or aiding the other Defendants' breaches of their fiduciary duties of loyalty, due care, independence, good faith and fair dealing."
Plaintiffs "seek to enjoin Defendants from taking any further steps to complete the Transaction (certain monies have yet to be distributed) or, in the event the buyout is fully consummated, recover damages resulting from Defendants (as defined herein) for their respective violations of law, including but not limited to, violations of their fiduciary duties of loyalty, good faith, and due care."
As you may have guessed, the crux of the complaint is plaintiffs' allegations that the company was worth far more than what was paid in the Transaction.
Specifically, plaintiffs allege as follows:
Instead, the Board of Managers agreed to a Transaction that defies all logic and reason. Despite management repeatedly (including just weeks before the announcement of the Transaction) voicing their opinion that the equity value of TapouT exceeded [redacted] million, the Board of Managers unconscionably agreed to sell the Company for [redacted].To demonstrate the value of the company, plaintiffs allege that TapouT's growth rate was so impressive that in 2008 it received three competitive offers:
In July 2008, TapouT's growth rate and realized earnings were so impressive that TapouT received three competitive offers from third party suitors [redacted]. All of these offers were rejected by TapouT's Board Managers (at the time the Board of Managers consisted of Lewis, Caldwell, and Kreiner)."Further, plaintiffs rely largely on alleged statements by Kreiner that gross revenues of TapouT in 2010 would exceed $200 million and recent alleged statements by ABG's CEO:
TapouT's management previously has recognized the tremendous value of the Company's brand. During a 2009 interview Defendant Kreiner stated that the Company was going to do $200 million in revenues in 2010. Further, Kreiner predicted that the Company had the capacity to do over $1 billion in sales by 2013. In a recent interview aired on CNBC James Salter, ABGs' CEO, confirmed that he expects TapouT's profit margins to be in excess of 50% in 2011. Therefore, TapouT will likely generate $50 milIion or more in profits in 2011 alone.As an aside, recall that in my earlier post I noted that some of the PEMGroup loans to TapouT were paid off as recently as April 2010 and recognized that this could be attributed to the significant alleged $200 million revenue figure.
I also noted that there were a number of articles from July 2010 discussing an "expanded licensing agreement with sportswear marketer TapouT" and Li & Fung Ltd., which is reportedly "the biggest supplier to retailers including Wal-Mart Stores Inc. and Target Corp." I also pointed out that according to an August 12, 2010 Li & Fung Ltd. Press Conference presentation it appeared that the TapouT "expanded" licensing deal took place in April 2010, i.e. around the time that the $7.5M revolver and Term A Loan were paid off according to the Court filings.
According to the allegations of the Complaint, "Kreiner stated that he believes that, 'the sky is the limit for TapouT,' and that he believes, TapouT is likely to be the, ''Nike of MMA.' Kreiner also routinely described TapouT's growth as, 'non-stop,' adding that TapouT, 'has chosen not to participate' in the recession. He routinely boasts, 'Everybody's cutting and we're spending.'"
Despite these alleged predictions, plaintiffs claim that the sale price to ABG was "paltry." Specifically, plaintiffs allege:
Despite these predictions of higher revenues and increased earnings, and despite repeatedly rejecting buyout offers of [redacted] on August 9, 2010, TapouT's Managers agreed to be acquired by ABG for a paltry [redacted], subject to certain other conditions. Thus, for purposes of the Transaction, TapouT is valued at a approximately [redacted] stated revenues. Such a valuation is unheard of. Prior to the ABG [sic] numerous other suitors attempted to purchase TapouT at much greater levels, Caldwell has repeatedly stated that he 'can't count how many suitors he turned away' before selling to ABG. He openly admits that he agreed to the ABG deal in part because ABG agreed to allow the him to continue working at the company. Indeed less than 6 months prior to the transaction two separate suitors offered in excess [redacted] to purchase the assets of TapouT, TapouT's Board Managers refused to respond to these offers.
Plaintiffs allege that the "Transaction is an enormous fraud on Plaintiffs who ended up receiving far less than market value for their investment and also importantly far less than was contemplated by the Written Consent which Plaintiffs signed." Moreover, plaintiffs allege that "the conduct of both TapouT and ABG, through its top management, was motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play do not apply to them."
Clearly TapouT and ABO's management thought of itself as too 'bad ass' to play by the rules. Plaintiffs as investors in TapouT are receiving an indefensibly inadequate consideration in connection with the sale. Plaintiffs are losing the opportunity to enjoy the benefit of unlocking the value TapouT management touted TapouT to have. In exchange, Plaintiffs will receive a token cash payment which is far less than they ever agreed to.Unlike them, plaintiffs allege that "TapouT's Board of Managers is highly incentivized to support the Transaction. Indeed at this point disbursements to TapouT's Managers have likely exceeded disbursements to TapouT's investors. In short, the proposed acquisition is designed to unlawfully divest Plaintiffs of the future growth potential of the company by engaging in an unfair process riddled with self-dealing."