- Judge denies defendants’ motion to declare lawsuit moot
- Urges two sides to reach settlement
- Allows case to head for trial in December
Princeton Ventures, Brazos Private Equity and their portfolio company European Wax Center should settle before their contract dispute goes to trial in December, a vice chancellor in Delaware Chancery Court proposed.
Vice Chancellor Travis Laster denied a motion by Princeton and Brazos to declare EWC’s lawsuit against the firms moot because they have moved to redeem their investments in the company.
“I think we need to have resolution of this case. We will get resolution of this case one way or another in December,” Laster said in his July 20 ruling, according to a transcript.
“It would be fantastic if you-all could achieve resolution of this earlier. I would encourage you-all to do that. You have it in your power to do that. But I am not going to help you-all put it on a longer timeline.”
Fight for control
In 2013 Princeton and Brazos invested an undisclosed amount in EWC for a 30 percent stake.
The court dismissed the case against two individuals: Princeton Ventures Founder and Managing Partner James Waskovich Jr and Brazos Co-Chief Executive Jeff Fronterhouse. But Laster has rejected the firms’ motions to dismiss the case outright.
At issue is a contention by the Coba family, EWC’s founders, that it was duped into agreeing to an investment deal that gradually turned over majority control of the company to Princeton and Brazos. EWC has asked for either contract reformation or rescission.
The defendants argued that the complaint is without merit and an attempt to “rewrite a core provision in the agreement because plaintiff has belatedly become unhappy with the deal it struck.” The firms argue that a provision that gradually gives them ownership of the company over time was part of the deal terms from the beginning.
“The language and mechanics of the accretion provision that the parties agreed upon in the operating agreement are clear, and were thoroughly reviewed by sophisticated counsel throughout the negotiation process,” according to the defendants’ motion to dismiss.
In June, the firms moved to redeem their investment in EWC, and in July they filed motions for the judge to consider the lawsuit moot since they were redeeming their investments. They also asked the judge to stay litigation until the redemption process was complete, which was rejected.
The Cobas argued successfully that the core argument in the case over ownership accretion would affect the amount the firms could redeem, making the lawsuit still very much active.
The Cobas also argued a claim for fraudulent inducement, which has not been dismissed. That claim stands up even if the firms redeem their interests in the company, the Cobas said.
The firms claim that a contract provision gives holders of Series A preferred shares an interest in the company that, upon conversion into common units, incrementally increases their ownership and voting rights at a compounding rate of 8 percent annually. That right can be offset only by a non-pro-rata payment to the preferred-share holders if they consent to such payment, according to court documents.
The Cobas, on the other hand, argue that the Series A holders’ percentage ownership would remain unchanged as long as they receive an amount equal to an 8 percent annual return in dividends or distributions, the complaint said.
The Cobas said they provided this return through more than $3 million of tax distributions. As well, the Cobas say that return was achieved by the defendants agreeing to forgo millions in distributions as part of a tax make-whole provision that the firms proposed. That provision was designed to compensate the Cobas for a tax hit from the deal closing in 2013 rather than in 2012, court documents said.
The Cobas also claimed that an amendment to the investment agreement allowed for attorney fees, interest expense and other costs related to a loan the company paid on behalf of the defendants could be offset against any amounts distributable to Series A holders, the documents said.
Defendants argued that none of the distributions the Cobas cited constituted a paid return on investment to the preferred-share holders, and that a paid return is the only thing that would reduce the preferred holders’ as-converted equity share, according to documents filed by the defendants.
“Regardless whether the agreement is reformed, the preferreds’ as-converted ownership has accreted without diminution because EWC has not issued any dividends or distributions constituting a return, much less an 8 percent return,” the defendants said in documents.
“And according to the agreement’s redemption procedures — which EWC does not dispute — the preferreds are now entitled to their as-converted ownership share of the company as of the date of the redemption request.”
The defendants also argued that the company has not suffered injury: the proposed contract reformation is moot; that rescission is impossible after four years of EWC’s growth; and damages related to contract rescission would be improper considering that the company is better off after the four-year investment.
The judge agreed with the Cobas on one issue — that the tax distributions reduced the equity accretion of the preferred holders, based on the language of the contract, according to the transcript. Because of that, the case is not moot, he said.
David and Joshua Coba first opened a European Wax Center in 2004. European Wax Center has nearly 850 locations, the website says. The business generated adjusted EBITDA of $20.4 million for the year ended Dec. 31, 2015, court documents said.
Fronterhouse and Waskovich did not respond to requests for comment.
Action Item: Reach James Waskovich here: firstname.lastname@example.org
Judge gavel, scales of justice and law books in court. Photo courtesy ©iStock/BrianAJackson