Victor, N.Y. More than half of the
shareholders of what had been one of the region’s fastest growing
businesses, Ecovation Inc., have filed a lawsuit seeking $100 million
in damages from the company’s top brass. The plaintiffs — more than 100
minority shareholders — claim in the civil suit that Evocation’s board
of directors, chief executive officer and controlling shareholders
breached their fiduciary duties and committed a variety of improper
transactions, including a merger with the Minnesota-based Ecolab
Inc.
earlier this year.
Ecovation, based in Victor, was
founded some 13 years ago and, as of July, had about 70 employees. The
company produces energy and clean water in a special process of
treating waste from the food and beverage industry.
Ecolab, a Fortune 500 company,
purchased Ecovation in February. Last year, Ecovation was at the top of
the Rochester Top 100 list of the fastest-growing privately held
companies. An Ecolab executive, Michael J. Monahan, said in an
industry conference call last month that the economy had caused a
number of Ecovation projects to be delayed but insisted the business
would see more growth in 2008.
The state Supreme Court lawsuit was
filed in the Ontario County Clerk’s Office Wednesday, Aug. 13. The
plaintiffs are being represented by New York City attorneys from the
firm Thacher, Proffitt & Wood.
An employee who answered the phone
at Ecovation Thursday afternoon said the firm had not yet received a
copy of the suit and declined to comment.
In addition to Ecovation’s board of
directors, Chief Executive Officer Diane Creel and controlling
shareholders, the lawsuit names Ecolab as a defendant. It claims the
merger with Ecolab was improper and violated Ecovation’s own
“certificate of incorporation,” by allocating merger proceeds to
favor
controlling shareholders W. Jerome Frautschi and Pleasant T. Rowland
as
well as Ecovation CEO Diane Creel.
Frautschi and Rowland, who are
married, founded the popular American Girl doll company. Working
with Creel, the suit alleges, they
lent funds to Evocation, at
“exorbitant” interest rates. Ecovation, the suit claims, lost
money
under Creel and got more capital — some $60 million — from Frautschi
and Rowland.
The court papers claim Frautschi and
Rowland, with the help of Creel, used their positions as lenders to
extract Ecovation stock warrants and shares for a penny apiece, well
below its market value. Frautschi and Rowland — who have homes
in
Aurora, N.Y., and Wisconsin — took majority control of the stock
ownership “to take the lion’s share of the merger consideration,” the
court papers claim.
The plaintiffs say the alleged
scheme ended with the $210 million merger fund being distributed
unfairly: The common shareholders received 1.2 percent of the
consideration, while Frautschi, Rowland and Creel received more than 60
percent.
“In short, the merger has
allowed Frautschi and Rowland
to take far more for themselves than that
to which they are legally or equitably entitled,” the suit said. “The
windfall that (the defendants) generated for themselves is no accident.
Rather, it is the result of a carefully planned and deftly engineered
scheme.”
In addition to seeking $100 million
in damages, the suit also calls for a judge to rescind the merger of
Ecovation and Ecolab.
Industrial Technologies
Ventures L.P.
announced that it has filed a suit in Rochester, accuses Ecovation CEO
Diane Creel and Ecovation investor Jerome Frautschi of colluding to
squeeze-Industrial Technologies and other investors out of the company
before the lucrative takeover deal closed. According to its
court
complaint, Industrial Technologies first invested in Ecovation in 2002
and at one time owned some 17% of Ecovation's series A preferred shares
and had put some $4.4 million into the Victor company. Two trust funds,
the W. Jerome Frautschi Revocable Trust and the Pleasant T. Rowland
Living Trust are also named as defendants in the court action. Both
funds are named as lenders to the Victor firm. In the Ecovation action,
Industrial Technologies claims in court papers that Creel continually
pressured the Ecovation board to up her compensation and painted an
overly dire picture of the firm's finances to convince its directors to
sell a controlling interest in the company to the Frautschi and Rowland
funds for as little as a penny a share. Industrial Technologies
is
seeking unspecified compensatory and punitive damages for alleged
breaches of fiduciary duty by Creel, Frautschi and the Frautschi and
Rowland funds' alleged
breaches of fiduciary duty.
