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$40M to Clients in Derivative Action Litigation

Key Facts

  • In 2011, (FGNT) minority stockholders filed a derivative action in Delaware Chancery Court alleging serial breaches of fiduciary duty by the defendants, the company’s majority stockholders and directors
  • Mintz represented the plaintiffs, who had never received any dividends or other financial return for their early stage investment in FragranceNet
  • After persuading the court to reject a proposed unfavorable settlement by FGNT’s Special Litigation Committee, Mintz achieved a settlement that dictated the sale of the company on favorable terms for the plaintiffs

The Situation

In the late 1990s, several investors provided capital and became minority shareholders of the Internet fragrance retailer, (FGNT). As FGNT became increasingly profitable in the early 2000s, majority shareholders paid themselves increasingly excessive compensation and engaged in self-dealing transactions, but refused to declare formal dividends or provide minority shareholders with any type of return on their investment. In 2011, the plaintiffs, three minority stockholders, alleged serial breaches of fiduciary duty by the defendants, the company’s three majority stockholders.

The Approach

After the majority shareholders rejected Mintz’s efforts to negotiate a fair resolution, the Mintz team commenced a derivative action in Delaware Chancery Court on behalf of the plaintiffs. The team first successfully opposed the defendants’ efforts to dismiss the case via a motion for judgment on the pleadings, then proceeded to persuade the court to reject a Special Litigation Committee settlement that was unfair and generally not favorable to the minority. Faced with the increasing likelihood that Mintz would prevail at trial, the majority stockholders determined that their best option was to sell FragranceNet Inc.

The Outcome

After seven years of litigation, the judge presiding on the case approved a settlement that was favorable to the plaintiffs, the minority shareholders. The settlement dictated that FGNT was to be sold for $115 million to a foreign fragrance company on terms providing for the plaintiffs to receive payment for their shares in an amount that significantly exceeded their percentage interest in the company stock — roughly $40 million.

Supporting Professionals

In an impressive collaboration between Mintz’s corporate and litigation teams, Seth Goldman and Stephen Curley led a dynamic group including Meredith Leary, Matt Levitt, Kaitlyn Crowe, Todd Rosenbaum, Jim McKnight, and Bethany Hickey.