HarbourVest Partners, a Boston-based funds-of-funds managers, along with several fellow limited partners in Brantley Partners V LP, a $150 million private-equity fund raised in 2007, appear to have made quick legal work of ousting Brantley Partners, Beachwood, Ohio, as general partner back in 2010. That partnership featured a no-fault divorce clause. HarbourVest had committed to the fund as part of a deal to purchase an interest in the predecessor fund on the secondary market, according to a source familiar with the case. An executive at HarbourVest cited legal restrictions for being unable to comment for this column.
But Brantley Partners put up a bigger fight hanging on to management of the predecessor Brantley Partners IV LP, a $125 million fund raised in 1999 that featured a for-cause divorce clause. Litigation begun in August 2010 to oust Brantley Partners as GP resulted in a counter-claim and didn’t get fully resolved until late last year when a confidential settlement was reached, according to our source. The litigation in Delaware Chancery Court even outlived one of the main protagonists, Robert P. Pinkas, the founder of Brantley Partners, who died last March.
For-cause divorce clauses are a standard corporate-governance term in most North American buyout funds. Provided the GP engages in bad behavior spelled out in the partnership agreement, such as committing fraud, LPs can vote (two-thirds is a common threshold) to remove the GP or dissolve the fund. Nearly three-quarters of North American buyout funds have such clauses, according to the PE/VC Partnership Agreement Study 2012-2013, published by Thomson Reuters. With the no-fault divorce clause, by contrast, LPs do not need a reason to remove the GP or dissolve the fund provided a high enough percentage vote to invoke it. Such clauses have, for obvious reasons, been a tougher sell with GPs, who fear they could be kicked off the job too easily. Fewer than half (37.5 percent) of North American buyout funds have them, according to the study.
HarbourVest, Cigna and Permal Capital Management “led an effort” to remove Brantley Partners as GP of Fund V, according to the September 2010 counter-claim filed by Pinkas. Specifically, investors filed suit in April of that year to confirm that the GP had, in fact, been removed. By September the parties had settled the suit, and Brantley Partners had handed the keys of the fund, since renamed Emerald Partners V LP, to an interim fund manager, financial advisory shop Conway MacKenzie Inc. The fund, which still has six active portfolio companies, including Cleveland-based executive relocation service provider Dwellworks, has been managed since early 2011 by Kirchner Group, according to Paul Choy, managing director. The firm plans to sell its remaining holdings over the next two to three years.
The legal effort to remove Brantley Partners as GP of Fund IV got underway with the filing of a complaint by a number of limited partners in August 2010. Fund IV investors included, along with HarbourVest Partners, Connecticut General Life Insurance Company, Landmark Partners, Lexington Partners, Phoenix Life Insurance Company and Prudential Insurance Company of America.
In their complaint the investors accused Pinkas and Brantley Partners of using Fund IV, which at as a “personal piggy bank.” They alleged that the firm had overcharged investors for management fees by millions of dollars, used the fund to improperly reimburse itself for millions of dollars in expenses, and failed to offset management fees with fees paid the firm by a portfolio company, Streamline Foods. The investors also alleged that Brantley Partners didn’t have the people or resources to continue to manage the fund. Noting that the partnership agreement allowed “a majority of interest” of the LPs to remove the GP for “cause” with 30 days notice, the investors asked the court to confirm that the GP had in fact been removed as of May 17, a month after notice was given.
In his September 2010 response and counter-claim Pinkas and Brantley Partners denied all the allegations made by the investors. They urged the court to withhold from confirming that the GP had been removed from Fund IV, which at the time still had five active portfolio companies. And they alleged that a former Brantley Partners partner had breached his fiduciary duties to the fund, in party by soliciting consulting contracts with portfolio companies, and that certain LPs “aided and abetted” him; the ex-partner and LPs denied the allegations. According to a second source the charges against the ex-partner were dismissed by the court in early 2012.
The litigation has now been resolved with at least two major settlements. In the first, the parties agreed to transfer management of the fund to Conway MacKenzie, which took over in 2011, according to our first source. That left the case open as the parties continued to litigate to try to recover damages from actions alleged in the complaint and counter-claim. The court approved a final settlement, and dismissed the case in mid-November.