Fox Paine: A House Divided

Saul Fox and Dexter Paine used to be tight. The name partners of buyout firm Fox Paine & Co. lived just minutes from one another in tony Woodside, Calif., and often got together on weekends to discuss everything from investments to office space. So it is more than a bit surprising that Fox is now suing Paine, alleging breach of fiduciary duty, breach of contract, unjust enrichment and a misappropriation of assets.

“I’m really stunned by the whole thing,” says a former Fox Paine staffer, who preferred to remain anonymous. “If you had told me on the day I left that [the lawsuit] would happen, I’d have called you a liar.”

Fox filed suit in Delaware Chancery Court on August 27 – after spurning Paine’s request for private mediation. “Fox believes he needs immediate interdiction,” says a source, claiming that a formal suit would be most expedient.

To understand the case, one must understand that Fox and Paine were no longer in the exact same business. The partnership had begun in 1997, when former KKR partner Fox recruited Paine, who at the time was working for Kohlberg & Co. They raised a $500 million first fund in 1998 and a $1 billion second fund in 2000 – with each owning a 50% piece of the firm’s management company. But when it came time to raise Fund III, Fox opted out. He was several years older than Paine, and said he’s prefer to instead stay on to continue managing the existing portfolio of nine public and private companies.

The pair reached an agreement whereby Fox would remain as CEO of the management company overseeing the first two funds, while Paine would be given conditional license to use the Fox Paine brand, track record and office resources for Fund III. The two “groups” would essentially share employees, but Fund III would hire its own CFO and accountant. For future clarity, the Fox-run management company will be called FPC, while Fund III with be called NewCo.

What happened next, according to Fox, borders on the bizarre. Fox alleges that Paine improperly recruited FPC chief financial officer Amy Ghisletta. Making matters worse, Ghisletta wrote an August 1 memo to all firm employees, saying, in part: “As you know, many changes have taken and will be taking place in connection with Fund III. One of the most major changes is the change in your employer… [Newco] will be your employer. ‘FPC’ will no longer be your employer.”

Fox claims to have been unaware of the memo until just a few weeks ago, as it was not shared with him or his employees. Further, he alleges that the “raiding” of employees severely diminished his ability to conduct FPC duties, and was done to essentially force him to quit. Perhaps more importantly, Fox claims that Paine and his “raided” employees began proceedings to sell off three Fund II portfolio companies, without Fox’s consent. Moreover, Paine allegedly told Fox that he would not approve further capital commitments if the sales did not proceed. Fox relented to allowing one of the companies to go and to search for a new CEO for the others. According to the complaint, however, Paine had Newco employees direct bankers to auction off all three companies. A similar incident occurred sometime later, with Fox cutting short an Australian vacation to stop an “unauthorized” board meeting to consider a third-party buyout proposal. Again, bizarre.

Paine has not yet filed court documents in response, but a spokesman strongly denied what he termed “untrue” allegations. He also said the following: “The idea that Mr. Paine would do anything to cause harm to Fox Paine & Co. or Funds I or II is ridiculous, especially given that a good deal of his net worth is invested in those entities.”

Well, yes and no. Paine’s response is perfectly logical with one big caveat: He was out raising a new fund (which has since closed, albeit unannounced). More than a few firms rush existing portfolio companies to the exit when securing new LP commitments, in an effort to show additional realizations. I’m not saying that’s necessarily what happened in this case – I honestly have no idea – but it’s not implausible. It’s also possible that Fox is suffering from a case of seller’s regret – having not sufficiently monetized the brand equity he had helped to build. Perhaps a cautionary tale to other founding GPs who are looking to exit come the next fund…

*** I’ve posted the entire complaint here
*** Get supporting exhibits here: