In one part of the lawsuit, Hurley's attorneys asserts that the true value of FN today is closer to $318 million. In another part, they suggest it could in the $500 million range.
Hurley did not return phone calls, but his attorneys spoke via e-mail.“Our clients believe that defendants engaged in a calculates, scorched-earth campaign to unlawfully seize control of FN,” said William Brewer III, partner at Brewer Attorneys & Counselors and lead counsel for the plaintiffs. “Defendants’ actions, we allege, intentionally depressed the value of FN, allowing them to acquire it at a bargain-basement price, and ultimately gain profits to which they weren’t entitled.”
By July 25 of this year, 23 indicative bids were received by Evercore, the investment bank. Initial interest reportedly was strong.
Then EB’s alleged “scorched-earth tactics” were initiated. EB “even threatened FN’s founder, its investment banker and its highest-bidding potential acquirer with lawsuits and reputational damage,” the complaint said. Threatening a potential acquirer is highly unusual and rarely occurs except in hostile takeovers. But Hurley and his attorneys maintain these tactics enabled EB to buy the firm “for pennies on the dollar.”
FN, along with Focus Financial Partners and United Capital, was one of the first aggregation-consolidation vehicles launched in the 2005-2007 era. Unlike most other entities, FN did not acquire majority equity interests or engage stock swaps in affiliated concerns. Instead, it opted to purchase minority stakes and provide transition financing so that founding partners could receive liquidity from next-generation advisors looking to succeed them. As a result, management still owns a controlling interest in FN portfolio companies.
When FN was launched, Hurley partnered with EB, which acquired a 75 percent stake in the firm. Their agreement was for nine years. Thereafter, either party could force a transaction. EB had a call and Hurley had a right to force a sale of the entire company. However, in order to complete a deconsolidation transaction in 2011, designed to strengthen EB's balance sheet following the financial crisis, with Virgo Investments, EB agreed to delay its call right until the earlier of Hurley exercising his forced sale right or Dec 1, 2017. If EB elected not to exercise its call, it was still protected by a right of first refusal (ROFR) at the end of the sales process, provided it paid a substantial breakup fee, believed to be 10 percent, to the high bidder.
The 44-page complaint, accompanied by more than 700 pages of exhibits and appendices, details an unpleasant relationship that was strained from the start and turned toxic early on. “For more than a decade, Milstein, with the assistance of the other defendants, demanded that FN employees agree to draconian contractual terms,” the document says. “While operating through EB, Milstein initially demanded that potential bankers for the sale process be given a highly-unattractive set of terms to dampen bankers’ interest in representing FN. Pursuant to Milstein’s directive, defendants instigated successive, baseless legal actions. They published scurrilous, material misstatements regarding FN’s finances and the integrity of its leadership team."
The complaint continued to charge that, "Collectively, these bad- faith dilatory tactics had Milstein’s desired effect of eliminating the competition and wresting control of FN from its founder for pennies on the dollar.”
Though FN acquired interests in four firms and reportedly had four other deals lined up prior to the financial crisis, that event proved to be a turning point. In August 2008 as the crisis was unfolding, the lawsuit alleges Milstein became “enraged” following a story in a New York newspaper that was highly critical of EB’s penchant for investing in new ventures.
Consequently, the lawsuit claims that Milstein sought to terminate the FN venture and told Hurley to fire all his employees and wind down FN’s operations. After discovering that the FN employees had contracts requiting EB to pay them for the contract’s duration, Milstein reportedly ordered Hurley to rehire them, which he did.