Brazos, Princeton Ventures in contract dispute with European Wax Center founders

The Coba family, which founded European Wax Center, is seeking to reform a deal contract signed with Princeton Ventures and Brazos Private Equity in 2013 that the firms say gradually turns majority ownership of the company over to them, according to a complaint filed in June.

The lawsuit, filed in Delaware Chancery Court, named the firms; Princeton Ventures Founder and Managing Partner James Waskovich Jr, and Brazos Co-Chief Executive Jeff Fronterhouse as defendants. The lawsuit seeks either contract reformation or rescission.

Court Vice Chancellor Travis Laster in November dismissed the defendants’ motion to dismiss the case outright, enabling it to continue. The judge also dismissed the case against the two individuals, Waskovich and Fronterhouse.

‘Surreptitious takeover’

“Princeton and Brazos are simply trying to twist a highly technical reading of Section 12.1 [of the contract] into a surreptitious takeover of the company,” the complaint said, “even though during the negotiations the Cobas terminated discussions over control issues more than once, and only agreed to the deal after defendants repeatedly reassured the Cobas they would always hold a majority stake and control the company.”

The defendants argue the complaint is without merit and an attempt to “rewrite a core provision in the agreement because plaintiff has belatedly become unhappy with the deal it struck.” The firms argue that a provision that gradually gives them ownership of the company over time was part of the deal terms from the beginning.

“The language and mechanics of the accretion provision that the parties agreed upon in the operating agreement are clear, and were thoroughly reviewed by sophisticated counsel throughout the negotiation process,” according to the defendants’ motion to dismiss.

Waskovich emailed a statement Jan. 9: “The investment by Brazos and Princeton in EWC was a highly negotiated deal with sophisticated parties and counsel on both sides. All changes to the LLC Agreement throughout the negotiations, including the provision at issue, were redlined and reviewed by both sets of counsel, and the final language in the executed LLC Agreement is clear.

“We are pleased that the Court dismissed the claims against the individuals, and we look forward to securing the dismissal of the balance of the claims as well. Despite this recent claim of a shareholder misunderstanding, Brazos and Princeton remain enthusiastic about their investment in EWC and the general outlook for the company.”

Brazos and Princeton Ventures invested an undisclosed amount in European Wax Center in 2013, attaining a 30 percent stake. Brazos has been gradually winding down and Fronterhouse went on to form Riata Capital Group in 2015.  Fronterhouse remains listed on Brazos’s website as co-CEO.

The provision

The disagreement turns on a provision in the contract the firms claim gives holders of Series A preferred shares an interest in the company (upon conversion into common units) that incrementally increases their ownership and voting rights at a compounding rate of 8 percent annually. That right can be offset only by a non-pro-rata payment to the preferred shareholders if they consent to such payment, court documents said.

“The accretion provision thus provides important protection to the preferreds by allowing them to elect to participate in the company’s potential growth through an accreting equity interest (if the company performs well), or instead to elect to receive non-pro-rata distributions in lieu of equity (if the company performs poorly),” the documents said.

The Cobas, on the other hand, argue that the Series A preferred shareholders’ percentage ownership would remain unchanged as long as they receive an amount equal to an 8 percent annual return in dividends or distributions, the complaint said.

The only way the family would agree to a deal was if it retained control of the company, the complaint said. The family rejected several proposals that handed too much control to the firms, the complaint said. The Cobas walked away from the deal in late 2012 over a provision that gave the firms the ability to select the COO and CEO, the complaint said.

There were three ways the contract could have been fixed to take control away from the family — either mutual mistake or unilateral mistake, under which the family requested contract reformation; or by fraud, in which the Cobas requested rescission of the contract, the complaint said.

David and Joshua Coba first opened a European Wax Center in 2004. There are now more than 700 European Wax Center franchise agreements and more than 550 open locations. The business generated adjusted EBITDA of $20.4 million for the year ended Dec. 31, 2015, court documents said.

Action Item: Read about the Delaware Chancery Court here:  http://courts.delaware.gov/chancery/

Graduates from the law school hold up gavels in celebration during their commencement at Harvard University in Cambridge, Massachusetts, on May 27, 2010. Photo courtesy Reuters/Adam Hunger