"This action involves Fiduciary Network, LLC ('FN’), a company involved in making long-term, cash flow participating, convertible loans to Independent Financial Advisors throughout the United States. Pursuant to Section 7.3 of the Agreement, the Members of FN agreed to a procedure whereby Respondent could force a sale of FN subject to certain limitations. Pursuant to Section 7.4 of the Agreement, one of those limitations was that EB has a 'Call Right’ whereby it may compel Respondent to sell its equity interest in FN to EB under a formula set forth in Section 7.5 of the Agreement. A dispute has arisen as to the effectiveness of Respondent’s 'Forced Sale Notice’ and EB’s exercise of its Call Right."2
The "Remedy Sought" was as follows:
"EB hereby seeks a declaration from the Tribunal that Respondent failed to initiate the sale process in compliance with the requirements of the Agreement; that in connection with his purported exercise of the Forced Sale Notice, Respondent withheld and misrepresented material information; and, in the event Respondent effectively exercised his Forced Sale Right, EB properly exercised its Call Right. Pursuant to Section 10.4 of the Agreement, EB further requests that the Tribunal’s fees and any associated costs of this arbitration be assessed against Respondent."
"Knowing urgency of this answer to you, I am emailing as I may not be able to reach you today. We would not exercise option if you trigger. I will do my best to reach you later." (MH Ex. 97)
Second, he sought "damages in an amount to be determined." Third, he sought the costs and expenses of this arbitration, including attorneys’ fees, pursuant to Section 10.4 of the LLC Agreement.
(a) Hurley pursued "a management led buy-out," although the "Agreement provides for the sale of the Company in its entirety" (P. 3);
(b) Hurley prepared "an extensive marketing document complete with financial projections" and "a purported equity value for [FN] of $135-170 million" (p. 3);
(c) "Hurley likewise failed to share the discussions he had with sovereign wealth funds, instead advising Friedberg that there was little interest in [FN] due to its unusual capital structure" (p. 3);
(d) When "Hurley informed Friedberg that be intended to exercise his Forced Sale right," Friedberg "requested that Hurley have [FN] management calculate EB’s Call Right price." Hurley "provided EB with a calculation that EB only later discovered was materially overstated," with the result that "EB erroneously believed that the right of first refusal protected EB’s ability to acquire [FN] at a price lower than the Call Right" (p. 3);
(e) Hurley "informed EB that, should it exercise its Call Right, the Management Team would not stay with [FN]" (p. 3);
(f) "Based on the foregoing material misrepresentations, Friedberg sent Hurley [the November 22, 2016 Waiver], in which he stated that EB did not intend to exercise its Call Right. At that time, Hurley had wrongfully led EB to believe that the Management Team would quit and had provided [EB] with an inaccurate and inflated Call Right price" (p. 3);
(g) When EB met with the Management Team, "each expressed a willingness to remain with [FN], subject to reasonable compensation packages, should EB exercise its Call Right" (pp. 3-4);
(h) "Friedberg sent Hurley an email stating that EB did not intend to exercise its Call Right based on Hurley’s material misrepresentations and omissions concerning third-party interest in [FN] and Management’s willingness to remain with [FN] should EB exercise its Call Right and the Call Right price" (pp. 4-5);
(i) "Hurley informed [Friedberg] that he was continuing to communicate with sovereign wealth funds but was not having much success" (p. 8); and
(j) Friedberg "suggested names of certain sovereign wealth funds to Hurley in order that he might make preliminary inquiries as to whether they would have any interest in acquiring [FN]" (p.8).
(a) The parties conducted discovery of each other and served subpoenas on various non-parties;4
(b) The parties served pre-hearing memoranda on May 10, 2017;
(c) The hearing on the merits was held on May 15, 2017 and June 9-10, 2017. Four people testified - - Friedberg; Alain Lebec, an EB consultant; Hurley; and Yvonne Kanner, the president and chief operating officer of FN;
(d) The parties served post-hearing memoranda on July 6, 2017; and
(e) The date for the Panel’s written statement of findings and conclusions (from Section 10.4 of the Agreement) was changed to August 7, 2017.
"After meeting with Mr. Milstein, Mr. Friedberg tried to reach Mr, Hurley by phone to tell him that EB did not intend to exercise its Call Right... When Mr. Friedberg failed to reach Mr. Hurley, he sent him the November 22 email...." (EB Post-Hearing Memorandum at p. 14).
EB recognizes further that the "urgency" in the email "was due to the upcoming Thanksgiving holiday and Mr. Hurley’s need to make a decision as to whether to trigger his Forced Sale Right by December 1." (EB Post-Hearing Memorandum, p. 14). We conclude that EB fully intended for Hurley to rely on his e-mail in connection with the December 1 Forced Sale Right.
"He was asking what our intention was. And I said we would not exercise our call option."
"We never said we would waive our call option. And we had a period of time after he exercised his for sale trigger right that we were still allowed to exercise our call option." (Tr. 89-90).
When pressed further whether he was "content to tell [Hurley] that you would not exercise if he did that," Friedberg answered:
"Yes, we told him we would not. We didn’t say we hereby waive it. We simply said we would not."
"And he chose not to call me up and ask what that meant." (Tr. 91).
And when he was asked "when you told Mr. Hurley you would not exercise, what did you mean?", he answered:
"I meant that based on the information we had at that time, and the information available to us, including what his company had - what we had received from him on the option price and the market feedback he had given us, we didn’t intend to exercise. We still had 40 days to decide to exercise."
"CHAIRMAN MILLSON: I don’t understand what you just said there.
"If you say you’re not going to exercise, then how do you have 40 days to exercise?"
"THE WITNESS: We said we would not exercise. We didn’t say we will not exercise and waive our right to exercise."
"CHAIRMAN MILLSON: So will not exercise when??
"MR. CHERNOV: Can you explain, Mr. Friedberg, how the 40 days works, with the for sale provision and the call right?."
"THE WITNESS: After he exercises his for sale right, we have 40 days to decide whether or not to exercise our call right."
"Q. Mr. Friedberg, could you under the LLC agreement, invoke your call right in December or November 2016 before Mr. Hurley invoked his for sale right?"
"A. No. We could not exercise our call right under the LLC agreement until December 1, 2017."
"CHAIRMAN MILLSON: But you could waive it before then?"
"THE WITNESS: We could have waived it."
"CHAIRMAN MILLSON: So what did you mean you had 40 days after he exercised his call right to exercise your call right if you said we would waive our right?"
"THE WITNESS: Well, I meant what I said. But let me give an example. Let’s assume that subsequent to this happening, somebody walked in and made an unsolicited bid for the equity of the company for 150 million dollars three days later. We would have exercised our call right. Something can change."
"This happens in the takeover world all the time. People shake hands on a deal, they intend to something, and then sometimes a bid comes in that upsets the marketplace." (Tr. 98-100).
"In the 11 years since the beginning of [FN], I have been to the bank three times. I have met Mr. Milstein twice. I have met Mr. Friedberg in person three times, Mr. Lebec twice and Mr. Staudt once." (Tr. 1032).10
"... I gave [Friedberg] an ultimatum. ... [I]t concerned what was going to happen with the [Call Right].... I was in an impossible predicament. My partners were getting ready to waltz out. The only way I was going to keep my partners on is if they were convinced that Emigrant wasn’t going to exercise the option, and we were going to line up some potential bidders for a sale process that would commence [after] December 1st... ." (Tr. 793).
Hurley testified further:
"I told him he had to make a decision [on the Call Right] and ... I was not going to risk my credibility ...." (Tr. 794).
And that it was "decision time" because if "they were unwilling to commit to getting rid of the option, I had to assume they were going to exercise it," at which point there would be a "train wreck" because his colleagues would leave (Tr. 795-96).
"Then almost impulsively, there was a pause and almost impulsively be said, 'Look, we are not going to exercise this option. You come to me before it’s time to actually trigger and I will put it in writing. Quit worrying about this.’" (Tr. 797; emphasis added).
Hurley testified that Friedberg encouraged him to work with Watson to start lining up prospective investors, especially sovereign wealth funds, which had a very long learning process (Tr. 797).
"ARBITRATOR MOXLEY ... So the question ... is whether implicit in the notion that Mr. Hurley is going out there to talk to sovereign wealth funds in the notion that this likely will include the piece where the management stays on ... "
"THE WITNESS: Yes, I think that that is a reasonable conclusion, that any sovereign wealth fund that were to buy this company would expect management to stay on." (Tr. 1129).
"ARBITRATOR MOXLEY: ... I understand that because you have a right of first refusal... you have ... the break-up fee, right? Otherwise, why would anybody ever participate in the process? ... But this is kind of a consolation prize."
"THE WITNESS: It is a fair way to look at it." (Tr. 1123-24).
This was contrasted with the Call Right:
"ARBITRATOR MOXLEY ... Then you don’t have any break-up fee,... and it means that anybody he’s talked to in the interim he wasted their time and he put his reputation at risk because he discussed something with them that wouldn’t happen.
"So it seems logical that he wouldn’t want to do it if [EB] were going to exercise [its] right or at least without telling people ... this was a risk . ..."
"THE WITNESS: That’s right. Logical that he would have told people that we are confronted with a call option, but... it might come to market." (Tr. 1124-25).
"Every three to four weeks we’d have a call." (Tr. 858). These calls were initiated by Hurley (Hurley Tr. 860; Friedberg Tr. 78).
"The essence of those calls is that owing to the complex capital structure of Fiduciary Network, he was having difficulty communicating with the various institutions with whom he was having conversations."
"That these institutions were organized with debt professionals and with equity professionals. And each of them was looking at it from their own perspective. And there was little ability to integrate those two issues out there."
"The other, at one point in time, we also had a conversation that he was having difficult finding debt financing at a lower cost. People that would provide him with debt financing at a lower cost than we were providing. And that he intended to discuss securitization with one advisor."
"And he later reported back to me that there was not enough debt in FN to securitize it." (Tr. 76-77).
Hurley testified likewise:
"I explained what we were working on. I made it... clear we were talking to sovereign funds, but debt was a problematic issue .... And that we were talking to the families ... Most of our conversations focused on the debt because that was the big element." (Tr. 859).
"Anyway they [EB wants] to sell and exit and so do you. So it’s a short term issue." (MH Ex. 74).
Hurley considered Watson’s e-mail as being consistent with what Friedberg had said on March 31, 2016 about EB’s intent (Hurley, Tr. 861).
"Mark [Hurley] asked me to calculate what the EB Option Exercise Price would be based on our current estimates. (MH Ex. 91; emphasis added).
She stated further:
"As you can all see in my analysis (attached) it is estimated to be approximately $27.5 million."
Since the latest finalized financials as of November 16, 2016 were for the period ending June 30, 2016, FN had to use estimates to arrive at the exercise price. Lebec knew and conceded that the November 16 calculation by Ms. Mills was an estimate:
"[W]e all agree it is an estimate. No one knew what the numbers were. It was an estimate with respect to September. We didn’t have numbers for September either." (Tr. 590: see also Tr. 478).
"Should EB exercise the option upon MH’s trigger of the Forced Sale Right, it would be based on the 7 quarters ending Q3 2016, not Q4 as estimated by Kelly. Overall valuation would be about $2.5 million lower, so exercise price should be just about $27 million. Still, the 14 times EBITDA multiple is way above current market, even if it is one of trailing 7 quarters, especially considering how much FN capitalizes in loan origination costs." (MH Ex. 93).
Lebec, who is "quite familiar with the option price formula" (Tr. 576), informed Friedberg on November 16, 2016 that his own estimate was $500,000 lower than the FN calculation (MH Exs. 92-93). Lebec reported to Friedberg that Mills’ calculation was an "exercise price" of $27.5 million and he "did his own calculating and came up with 27" (Friedberg, Tr. 81). Friedberg "trusted his numbers that he gave me." (Tr. 81).
That’s what the ... high end of the range of that valuation of the business would be, and based on the market feedback we’d received from [Hurley], which gave us no reason to think it might be higher than that." (Tr. 82).
(a) EB’s Call Right price was at $27 million (Tr. 85);
(b) EB thought the market value would be around $20 million (Tr. 85);
(c) If Hurley exercised his Forced Sale Right, and he did not have a better number than $20 million and EB did not exercise its call right, Hurley was "taking a chance that [EB] would buy the company" with the ROFR, in which EB only had to match the best bid. (Tr. 85).
"It seemed strange, based on what we knew that, that he would be asking the question if we intended to exercise our call right if he had market information that was consistent with our expectation is [sic] that the best price he might get was something in 20 million dollars or less."
"So we didn’t know what he was going to come back with. It wouldn’t have surprised us at all if he came back and said, look, I decided not to do anything here. Why don’t we let this run another year and let’s see if we can reach a deal about it, changing something here, because that’s what he’s been doing every year." (Tr. 87).
"We are in business." (MH Ex. 180).
"And it was our expectation that if he objected, that there was information that he had that he had not shared with us." (Tr. 125).
Friedberg made this very clear:
"ARBITRATOR BRODSKY: If you didn’t intend to waive your option, what was the purpose of telling him on November 22nd we would not exercise option if you trigger?"
"THE WITNESS: Well, the context of that was that we didn’t think he would exercise his option. It didn’t make economic sense for him to. And we would have been surprised if he did."
"Once he did, we figured there must be information there that we don’t know. And we requested that information. We still had time to make a decision on that, to make a decision to use our call right." (Tr. 111-12).
"I explained to him there was a lot of anxiety at the firm regarding this meeting. And I reminded Mr. Friedberg that they were asking to meet with people who had previously been fired by the bank". (Tr. 1056).
Friedberg said that "there was no agenda" and added that as Hurley had "triggered the process ... they had to consider putting a bid, and that’s why they wanted to talk to the partners of the Firm." (Tr. 1056). Likewise, Hurley testified that Friedberg requested that he facilitate the meeting with FN management so that EB could put in a higher qualifying bid than Virgo, to figure out if FN would still have management (Hurley, Tr. 870).
"I told him I didn’t understand why they were talking about owning Fiduciary National... that it didn’t fit in with what the bank did ... especially without the management team". (Tr. 1062-63).15
At the time of this meeting, Kanner did not intend to stay at FN if EB bought out the management team (Kanner, Tr. 1069-70). Kanner was "very uncomfortable" at this meeting:
"I was politely trying to say that we should separate ... [b]ut at the time, the next members of the board .... I was trying to respectfully say to them that it was time to separate." (Tr. 1070).
Although she does not know if she "directly told [the EB executives that she] would leave" (Kanner, Tr. 1086-87), Kanner believed that she made the "message" of separation clear to the EB executives on December 16, 2016 (Tr. 1070).
"We should discuss... the state of play with non-Mark Management. It is not positive. It is not just Mark stirring the pot. I don’t know how we put the genie back in the bottle post recent meetings at Emigrant (not well received) and what they (as much as Mark) believe ... was an about face on the call option, which they feel very strongly was an agreement with them as well." (MH Ex. 142).
We note Friedberg’s response:
"Had they been honest with us, we might not have exercised the call option." (MH Ex. 142).
From the perspective of the finder of fact, however, this was not a matter of Hurley or FN management not being honest with EB. Instead, EB assumed that it understood what was in the minds of Hurley and FN management, but actually misjudged the factual situation, and failed to reach out and clarify what the true facts were. After the fact, EB has sought to justify its actions based upon alleged misrepresentations when, in fact, the situation EB found itself in was due to its own choices.
"Please be organized to present the critical points in the process from the time that Mark triggers. Also how Virgo fits into the process and their rights." (MH Ex. 101).
On November 26, 2016, a few days before a scheduled meeting with Milstein, Lebec sent Friedberg a "short outline of the Forced Sale Process", which stated:
"EB and Virgo each separately free to pursue purchase of FN .."Hurley has 10 days to accept (highest) [offer]." (MH Ex. 101).
(a) Friedberg, when asked whether he had asked to see the confidential information memorandum that he assumed Hurley was using (Tr. 1121), said no - "I assumed it wouldn’t have anything in it I didn’t know." (Tr. 32);
(b) Friedberg, although he received at least half a dozen calls from Hurley about the FN management outreach (Tr. 75), did not ask Hurley any questions about this information, even though he purportedly thought Hurley’s questions "strange," "puzzling," etc. (Tr. 87, 184);
(c) EB never asked Mills any questions about her Call Right Price estimate (Friedberg, Tr. 280, Lebec Tr. 586), despite her invitation (MH Ex. 93);
(d) EB never asked Virgo about Hurley’s marketing outreach or the attitude of MH management; and
(e) EB never asked Hurley any questions about his exercise of the Forced Sale Right.19
"After Receiving The Third Quarter Financials, Calculating The Call Right, And Meeting With Senior Management, EB Determined That the Call Right Better Protected Its Ownership Interest In Fiduciary Network Than The ROFR." (EB Post-Hearing Memorandum at p. 15).
This argument incorrectly assumes that EB may ignore the November 22, 2016 Waiver. Thus, EB states, "Messrs. Friedberg, Lebec and Milstein met on or about November 29, 2016, and discussed whether the Call Right or the ROFR better protected EB’s ownership interest...." (EB Post-Hearing Memorandum at p. 15), EB further justifies the completion of the Third Quarter Financials - not available to anyone at the time of the waiver - as a factor for its change of heart, because, through them, EB purportedly realized that Mills’ estimate was $3.4 million "too high." (EB Post-Hearing Memorandum at p. 22). But both Friedberg and Lebec knew Mills was using estimated fourth quarter financials to make her estimate and that such estimate may have been on the high side.
"[W]hen Party A defends his conduct by an allegation that Party B has waived the right he now seeks to enforce, Party A often does so because he has acted in a way inconsistent with the continuing existence of the right that Party B has waived, and is placed in a worse position because of it." (Id. at *34).
(a) "Courts in Delaware will not allow a waiving party to rescind its waiver if the non-waiving party has relied to her detriment on the waiver or would be prejudiced by its revocation." (Id. at *38-39).
(b) "On the other hand, our courts are willing to allow a waiving party to change her mind in the absence of such detrimental reliance on other prejudice." (Id. at *39).
(1) Hurley’s Forced Sale Notice was timely and effective in accordance with Section 7.3(a) of the LLC Agreement;
(2) EB Safe’s Call Right Notice is invalid, ineffective, and null and void;
(3) The Sale Process shall proceed in accordance with Section 7.3 of the LLC Agreement;
(4) All dates, time periods, and deadlines under Sections 7.3 and 7.4 of the LLC Agreement are stayed and suspended between December 19, 2016 and August 7, 2017;
(5) The full twelve-month period permitted for the Sale Process to obtain a letter of intent or agreement in principle with a third party bidder, as specified in Section 7.3(e) of the LLC Agreement, shall begin on August 7, 2017;
(6) EB’s Call Right effective as of December 1, 2017 pursuant to Section 7.4(a) of the LLC Agreement shall be stayed and suspended for a period of twelve months from August 7, 2017, or upon termination of the Sale Process, whichever is later;
(7) Hurley is the prevailing party in the Arbitration pursuant to Section 10.4 of the LLC Agreement; and
(8) EB’s claims in this arbitration are denied and dismissed, except to the extent preserved by the Stipulated Order Regarding Withdrawal of Damages Claims, dated June 9, 2017.
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