The founder and former CEO of Top 40 distributor Zorch International Inc. (asi/366078) is suing the company, its current CEO, a venture capital firm, former board members and others over a recent deal that saw the Chicago-based distributorship sold to Satori Capital LLC, a private equity firm. Current Zorch CEO Michael Wolfe told Counselor that the suit lacks merit and he expects the courts to dismiss it.
Zorch founder Nicole Loftus
Nicole Loftus, who founded Zorch in 2002, filed the lawsuit this month in the Circuit Court of Cook County Illinois. Loftus, who helped spearhead Zorch into the top 10 of Inc.’s list of the nation’s 500 fastest-growing companies in 2008, is joined in the suit by four other plaintiffs – all Zorch shareholders who say they were negatively impacted by the sale to Satori, according to filed documents. Among others, defendants named in the lawsuit include Zorch, Wolfe, Bridge Street Capital LLC, Satori and William Kaczynski, who is identified as a Bridge Street investor who also served as chairman of Zorch’s board of directors.
The suit alleges breach of fiduciary duty, civil conspiracy, fraud and more in asking the court to void the sale of Zorch to Texas-based Satori on the grounds that the deal violates the Illinois Business Corporation Act. The suit also asks for defendants to pay damages. Among other sought-after remedies, Loftus and her co-plaintiffs want the court to impose a constructive trust on proceeds/benefits defendants received as a result of the sale.
“Either through an acquisition or starting again from scratch, I will finish what I started with Zorch because I believe in the model, the industry and the power of branded merchandise,” Loftus told Counselor.
Due to the ongoing litigation, Wolfe said he could not speak to the specifics of the case. He did, however, tell Counselor that the sale to Satori was valid and conducted properly, noting an “overwhelming majority of shareholders enthusiastically approved the transaction.” He also said that the courts dismissed similar suits that Loftus filed earlier this year.
“The plaintiff (Loftus) was a fractional shareholder who had no significant involvement in Zorch for over half a decade at the time of transaction,” Wolfe told Counselor. “Her previous lawsuits were quickly found by the courts to lack merit. We expect the same outcome in this additional suit.”
Wolfe said that the suit is not having – and will not have – an impact on Zorch’s operations or financial strength. “We’re continuing to grow rapidly,” said Wolfe, who has told Counselor Zorch’s revenue increased about 13% in 2017. Zorch ranked 39th on Counselor’s most recent list of the largest distributors in the industry, with reported 2016 North American promotional product revenue of $42.9 million.
In February 2018, Zorch announced that Satori Capital had acquired a controlling interest in the distributorship. Terms of the deal were not revealed, but Loftus’ filing indicates Satori’s offer was $20 million, with nearly $16.2 million due at closing.
According to the narrative put forward in the lawsuit, the sale to Satori was the culmination of alleged corporate intrigue with Bridge Street dating back years. For example, the suit alleges that Bridge Street forced Loftus to resign in 2013 after the Michigan-based private equity firm and its affiliates gained about 75% ownership of the distributorship and appointed all five members of the board of directors. As part of investing about $7.5 million in Zorch over the course of about four years, Bridge Street engaged in a “cram down” strategy to seize control of the distributorship, the lawsuit alleges.
“Venture firms, such as Bridge Street, seek to take positions in a company and then ‘lie in wait’ until the company is vulnerable for money,” the lawsuit says. “Then Bridge Street springs the cram down on the shareholders, severely dilutes the other shareholders’ ownership interest, and takes over the company, including the board and management. That is exactly what happened to Zorch.”
Still, Loftus isn’t suing about the alleged “cram down” from five and six years ago. Rather, she asserts that Kaczynski and the Zorch board, controlled by Bridge Street, illegally rushed into the sale to Satori. They allegedly did so because Bridge Street was under pressure in 2017 to return a final distribution of proceeds to its investors.
Loftus’ suit alleges that Kaczynski/Bridge Street kept shareholders outside Bridge Street’s circle, including herself and fellow plaintiffs, in the dark about the sale until it was essentially a done deal. Loftus asserts that she was lied to that a fair sale process would occur. That process should have included soliciting bids from her – as the most likely buyer – and other potential buyers, the lawsuit says.
For years, Loftus expressed a desire to buy Zorch back. Her lawsuit says in January 2018, she secured backing from LLR Partners, a Philadelphia-based private equity firm, to buy Zorch for a price of $23 million. However, Bridge Street didn’t want to consider the offer because that would have held up the sale to Satori and delayed the payout to Bridge Street investors, according to the suit. Bridge Street wouldn’t consider Loftus’ offer even though it was for $3 million more than Satori’s, with more cash ($19.2 million) due at closing, the suit says.
“Due to conflicts of interest arising from the duties owed to the Bridge Street investors, Bridge Street and the Individual Director Defendants sold Zorch in a rush,” the lawsuit maintains. “The net result was that no one received his, her or its original investment back except for Bridge Street and its affiliates. Several shareholders, including three plaintiffs, received nothing … This is a textbook case about what a company should not do when they put a company up for sale.”