by Luke Jones
Posted 6/24/2013 11:17 am
Updated 8 months ago
Former Acxiom Corp. CEO Charles Morgan has filed a motion to dismiss a suit that claims he and others used dishonest stock transactions to take over the parent company of Conway's PrivacyStar.
The suit, first reported last week by the Arkansas Democrat-Gazette, was filed in May in the Court of Chancery of Delaware by Keith Fotta, owner of Telemark Inc. of Norwood, Mass., and founder of First Orion Inc., a Delaware company that owns PrivacyStar. Several other First Orion shareholders are also plaintiffs in the suit.
The suit alleges that Morgan manipulated his status as a shareholder and creditor in First Orion to oust Fotta from and seize control of the company.
First Orion was founded in 2007. Morgan in 2008 agreed to invest $2 million in the company for shares of preferred stock that made up about 20 percent of First Orion's outstanding capital stock.
Morgan invested $1.1 million in the company and received a share of preferred stock for each $1 invested. He was elected to First Orion's board of directors and Jeff Stalnaker — a former Acxiom colleague and currently the CEO of PrivacyStar — became president of First Orion.
Morgan didn't complete his pledged investment, which the suit said left First Orion without capital to fund its launch of PrivacyStar. Morgan instead loaned the company $500,000, under the stipulation that Morgan would receive warrants to purchase common shares of First Orion over the next 20 years at $1.50 per share.
Also, if First Orion didn't repay the loan by January 2010, Morgan would receive one share of preferred stock in First Orion for each dollar advanced in the loan, and Morgan would receive proxies for the stock that Fotta and Telemark owned.
First Orion drew $400,000 of the loan, but failed to pay it back by the deadline and defaulted.
Morgan then used the proxies to seize control of First Orion and replaced Fotta with Stalnaker. Morgan also used the proxies to increase his own share in First Orion to 72 percent, reducing Fotta's share from 72.5 percent to 4.50 percent, the lawsuit claims. Morgan issued a block of First Orion stock to himself by declaring a dividend of 73.99 shares of common stock per each outstanding share of preferred stock.
Fotta's suit claims that he was then denied any future role in the company.
Fotta and the other plaintiffs are demanding for the court to void Morgan's stock transactions and proxy votes and wants damages for their losses.
Fotta's suit claims that Morgan didn't complete his original investment because of a "personal unavailability of cash."
But Morgan's motion for dismissal alleges that the completion of the investment was contingent on First Orion entering into a "significant agreement" with a national telecom company, and Fotta doesn't claim that First Orion did so during his tenure at the company. Morgan claims that he actually contributed $100,000 more than required.
In Fotta's suit, he claims that he was barred from participating in the company's leadership, but Morgan's response claims that Fotta abandoned First Orion immediately.
Fotta, the motion said, was not heard from for three years after he left the company. He originally filed suit in April, and defendants moved to dismiss it. He filed an amended suit in May that included the additional plaintiff shareholders.
The motion lists four reasons why the court should dismiss the suit:
- Too much time had passed between when Fotta left the company and when he filed the lawsuit.
- Fotta's claims don't demonstrate how Morgan's use of the proxy damaged First Orion.
- Fotta's claims are barred by the proxy that Fotta signed in 2009, which allowed Morgan to "take any action regarding the stock of the company as the grantor might do."
- The Chancery's Rule 19 prevents plaintiffs from rescinding Morgan's stock dividend without naming as defendants all parties who received the dividend, including Fotta. "Plaintiffs' attempt to utilize Mr. Morgan to represent all recipients of the dividend is an improper attempt at a representative action that finds no support under Delaware law," the motion said.