Fox files suit against partner Paine

Saul Fox has filed suit against Dexter Paine, his partner at buyout firm Fox Paine & Co., alleging breach of fiduciary duty, breach of contract, unjust enrichment and a misappropriation of assets.

Fox and Paine live just minutes from one another in tony Woodside, Calif., and often have met on weekends to discuss everything from investments to office space. So it is more than a bit surprising to some that the partners are embroiled in a lawsuit. “I’m really stunned by the whole thing,” says a former Fox Paine staffer, who asked to remain anonymous. “If you had told me on the day I left that [the lawsuit] would happen, I’d have called you a liar.”

Fox filed suit in Delaware Chancery Court on Aug. 27, after spurning Paine’s request for private mediation. “Fox believes he needs immediate interdiction,” says a source, claiming that a formal suit would be most expedient.

Their partnership began in 1997, when Fox, a former Kohlberg Kravis Roberts & Co. partner, recruited Paine, who at the time was working for Kohlberg & Co. They raised a $500 million first fund in 1998 and a $1 billion second fund in 2000, with each owning a 50% share. But when the firm began to raise fund III in late 2005, Fox opted out. Fox, who’s now 53 and is several years older than Paine, said he preferred to stay on to continue managing the existing portfolio of nine public and private companies.

The Foster City, Calif.-based firm raised more than $650 million for fund III in 2006. The pair reached an agreement in which Fox would remain as CEO of the management company overseeing the first two funds, while Paine would have conditional license to use the Fox Paine brand, track record and office resources for fund III, which is managed by an entity called Fox Paine Management III. The two “groups” would essentially share employees, but Paine would hire his own CFO and accountant to manage fund III, according to the lawsuit.

Fox alleges that Paine then improperly recruited FPC CFO Amy Ghisletta and breached fiduciary duties by “raiding and depriving FPC … its dedicated accountant, and numerous executives and investment professionals.” Ghisletta wrote a memo, dated Aug. 1, to all firm employees, saying, in part: “As you know, many changes have taken and will be taking place in connection with fund III. One of the most major changes is the change in your employer… [FPM III] will be your employer. ‘FPC’ will no longer be your employer.”

Fox claims to have been unaware of the memo until just a few weeks ago, as it was not shared with him or his staff. Further, he alleges that the “raiding” of employees severely diminished his ability to conduct FPC duties, and was done to essentially force him to quit. Also, Fox claims that Paine and his “raided” employees began proceedings to sell off three fund II portfolio companies, without his consent.

Paine allegedly told Fox that he would not approve further capital commitments if the sales did not proceed. Fox allegedly relented to allowing one of the companies to go and to search for a new CEO for the others. According to the complaint, however, Paine had FPM III employees direct bankers to auction off all three companies. A similar incident occurred sometime later, with Fox cutting short an Australian vacation to stop an “unauthorized” board meeting to consider a third-party buyout proposal, according to the suit.

Paine has not yet filed court documents in response, but a spokesman strongly denied what he termed “untrue” allegations. He also said: “The idea that Mr. Paine would do anything to cause harm to Fox Paine & Co. or funds I or II is ridiculous, especially given that a good deal of his net worth is invested in those entities.”