(Bloomberg) -- Franchise Group Inc. investors sued ex-CEO Brian Kahn and investment partner B. Riley Financial Inc., claiming shareholders were shortchanged in a $2.6 billion take-private buyout of the operator of franchised-retail brands.
Kahn and his allies are accused in the suit of using their control of the company to wrongfully push through a $30-per-share buyout in 2023. The firm’s brands include Vitamin Shoppe,Representatives of Kahn and B. Riley didn’t immediately respond to email and phone messages after regular business hours seeking comment.and Sylvan Learning.
Investors say in the Delaware Chancery Court suit – unsealed late Friday — that the deal undervalued their shares and Franchise Group’s proxy disclosures about who was behind the leveraged buyout were flawed. They allege that B. Riley aided Kahn in cheating them.
The former chief executive officer publicly acknowledged in a B. Riley analyst call in December that the deal amounted to “an opportunistic acquisition at a bargain-basement price,” according to the 81-page complaint.
Representatives of Kahn and B. Riley didn’t immediately respond to email and phone messages after regular business hours seeking comment.
The proposed class-action suit adds to controversy swirling around Kahn. He stepped down as Franchise Group CEO in January after questions arose about his dealings with an unrelated hedge fund that collapsed and triggered a fraud probe by federal officials. Kahn has steadfastly maintained he didn’t do anything wrong. He hasn’t been charged over the meltdown of Prophecy Asset Management in 2022 and said he lost money in the fund’s implosion.
Franchise Group shareholders accuse Kahn of using his Vintage Capital Management fund to help engineer the leveraged buyout and falsely portraying in securities disclosures that B. Riley executives came to the company with an unsolicited $30-per-share bid.
While Franchise Group’s directors set up a special board committee to consider the bid, investors complain that Kahn’s board collaborators allowed him to lead the negotiations and drive the approval process. Kahn, Vintage and another company insider controlled more than 43% of the company’s voting shares, according to the complaint.
At some point, Kahn “ultimately abandoned the charade of B. Riley being the acquirer of the company and stepped in as the head of the buying consortium,” according to the suit.
The Franchise Group shareholders faulted the board’s process for evaluating the leveraged-buyout offer, saying in the complaint it was fouled by conflicts of interest and Kahn’s status as the company’s de-facto controller. Delaware law places limits on what controlling shareholders can do in buyouts.
The case is Gale v. Vintage Capital Management, 2024-0726, Delaware Chancery Court (Wilmington).
--With assistance from David Voreacos and Donal Griffin.
©2024 Bloomberg L.P.
