Fox Paine & Co. Has Become Fox Vs. Paine

Saul Fox and Dexter Paine used to be tight. The name partners of buyout firm Fox Paine & Co. lived just minutes from one another in tony Woodside, Calif., and often got together on weekends to discuss everything from investments to office space. Those days are gone.

Fox, 54, is now suing Paine, 46, alleging breach of fiduciary duty, breach of contract, unjust enrichment and a misappropriation of assets in a suit filed in Delware Chancery Court last month. Paine fired back on September 14 with a countersuit contending that Fox essentially checked out of the partnership.

“I’m really stunned by the whole thing,” a former Fox Paine staffer told Buyouts. “If you had told me on the day I left that [the lawsuit] would happen, I’d have called you a liar.”

Paine had requested mediation, but “Fox believes he needs immediate interdiction,” a second source said, adding that a formal suit would provide the most expeditious relief. Through a spokesman, Paine strongly denied what he termed “untrue” allegations. “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,” the spokesman said.

If the suit seems confusing at first, it helps to know that Fox and Paine, despite appearances to the contrary, were no longer joined in the exact same business.

The partnership began in 1997, when Fox, a former partner at Kohlberg Kravis Roberts & Co., recruited Paine, who at the time was working for Kohlberg & Co., the buyout firm started by former KKR founder Jerome Kohlberg. Fox Paine & Co. raised a $500 million first fund in 1998 and a $1 billion second fund in 2000, with each owning half of the firm’s management company.

But when it came time to raise Fund III, Fox opted out, according to the suit. He was several years older than Paine, and preferred instead to manage only the existing portfolio of nine public and private companies.

The pair reached an agreement whereby Fox would remain CEO of the management company overseeing the first two funds, while Paine would obtain conditional license to use the Fox Paine brand, track record and office resources for Fund III, according to the suit. The two groups would essentially share employees, but Fund III would hire its own chief financial officer and dedicated accountant. (For clarity in this story, the Fox-run management company will be called FPC, while the firm managing Fund III will be called Fox Paine.)

This agreement, signed in February 2006, soon soured, according to the suit. Fox alleges that Paine improperly recruited FPC’s CFO, Amy Ghisletta, who subsequently wrote an August 1 memo to all firm employees, saying: “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. … [Fox Paine] will be your employer. ‘FPC’ will no longer be your employer.”

Fox claims to have been unaware of the memo until a month ago because it was not shared with him or his employees. 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.

Paine, in his countersuit, said Fox’s portrayal of a “raid” on his employees is Fox’s “attempt to re write history.” Switching the employees to Fox Paine was done “at Saul’s request,” according to Paine’s countersuit.

In his most pointed allegation, Fox claims that Paine and his former employees began trying to sell off three Fund II portfolio companies without Fox’s consent. Such a move would violate the division-of-labor agreement both men signed, which essentially forced Paine to relinquish any control over Fund I and Fund II in exchange for using the Fox Paine name to raise and manage Fund III, according to the suit.

Fox relented and allowed Paine to sell one of the companies and search for new CEOs for the other two. According to the complaint, however, Paine had Fox Paine 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.

Aside from seeking an unspecified amount in damages and restitution, Fox has asked the court to prevent any former FPC employees from doing work for NewCo and to keep Paine from using any firm resources that Fox once agreed to share.