Plaintiff,
`
`
`
`v.
`
`PAINE SCHWARTZ PARTNERS,
`LLC, ERIC BERINGAUSE, and
`LUTZ GOEDDE,
`
`C.A. No. 2023-0621-PAF
`
`PUBLIC VERSION FILED
`JUNE 20, 2023
`
`IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`NEGOCIOS LIBERTAD LLC,
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`
`Defendants,
`
` and
`
`MVK FARMCO LLC,
`
`Nominal Defendant.
`
`VERIFIED DERIVATIVE COMPLAINT
`Plaintiff Negocios Libertad LLC brings this derivative Complaint on behalf
`
`of Nominal Defendant MVK FarmCo LLC against Defendants Paine Schwartz
`
`Partners, LLC, Eric Beringause, and Lutz Goedde, as follows:
`
`INTRODUCTION
`
`1.
`
`In September 2019, Paine Schwartz Partners, LLC (“Paine”) merged its
`
`portfolio company, Wawona Packing, with Gerawan Farming (the “Merger”).
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`Gerawan Farming was the largest stone fruit producer in the United States; Wawona
`
`Packing was the second largest. The Merger valued the equity of the combined
`
`entity, MVK FarmCo LLC (the “Company”), at $560 million.
`
`EFiled: Jun 20 2023 04:27PM EDT
`Transaction ID 70224758
`Case No. 2023-0621-PAF
`
`
`
`
`
`v.
`
`PAINE SCHWARTZ PARTNERS,
`LLC, ERIC BERINGAUSE, and
`LUTZ GOEDDE,
`
`C.A. No. 2023-0621-PAF
`
`PUBLIC VERSION FILED
`JUNE 20, 2023
`
`IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`NEGOCIOS LIBERTAD LLC,
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`
`Defendants,
`
` and
`
`MVK FARMCO LLC,
`
`Nominal Defendant.
`
`VERIFIED DERIVATIVE COMPLAINT
`Plaintiff Negocios Libertad LLC brings this derivative Complaint on behalf
`
`of Nominal Defendant MVK FarmCo LLC against Defendants Paine Schwartz
`
`Partners, LLC, Eric Beringause, and Lutz Goedde, as follows:
`
`INTRODUCTION
`
`1.
`
`In September 2019, Paine Schwartz Partners, LLC (“Paine”) merged its
`
`portfolio company, Wawona Packing, with Gerawan Farming (the “Merger”).
`
`Gerawan Farming was the largest stone fruit producer in the United States; Wawona
`
`Packing was the second largest. The Merger valued the equity of the combined
`
`entity, MVK FarmCo LLC (the “Company”), at $560 million.
`
`EFiled: Jun 20 2023 04:27PM EDT
`Transaction ID 70224758
`Case No. 2023-0621-PAF
`
`
`
`
`
`2.
`
`In a press release announcing the closing of the Merger, Kevin
`
`Schwartz, Paine’s CEO, described Paine’s vision for the combined entity:
`
`This merger represents a tremendous milestone and the type of growth
`opportunity that we can achieve by leveraging Paine’s agribusiness
`sector expertise and close collaboration with two family-owned
`businesses. We look forward to this new chapter for two companies
`that have been incredibly successful on their own, and we believe they
`can achieve even greater success through this merger.
`
`3.
`
`Paine voluntarily undertook fiduciary duties and made binding
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`contractual commitments to achieve that vision. Paine breached those obligations.
`
`4.
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`Less than four years later,
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`
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`
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`5.
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`Paine, on the other hand, profited handsomely from its destructive
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`mismanagement of the Company,
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`
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`
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`6.
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`Paine also used its control over the Company to enrich others, causing
`
`the Company to pay millions in consulting fees to other firms for work that Paine
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`had agreed to perform. Paine continued to cause the Company to pay millions in
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`fees to those advisors despite obvious signs that they were either performing poorly
`
`or doing nothing at all.
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`
`
`2
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`
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`7.
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`Paine controls the Company through its affiliate, Wawona Delaware
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`Holdings LLC (“Holdings”), which owns approximately 75% of the Company’s
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`outstanding Class A Common Units. Paine also controls the Company’s Board of
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`Managers (the “Board”) through Holdings’ contractual right to appoint a majority of
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`the members of the Board. As the controller of the Company, Paine owes fiduciary
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`duties to the Company for the benefit of its Unitholders, including Plaintiff.
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`8.
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`Paine also agreed to provide management services to the Company in a
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`Services Agreement executed at the time of the Merger. In the Services Agreement,
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`Paine agreed to “devote reasonable time and efforts to the performance of”
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`management services, including “identifying and assembling a highly capable board
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`of managers . . . with significant industry and operational knowledge,” providing
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`“advisory and consulting services in relation to the selection, retention, and
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`supervision of other advisors,” and providing “advisory and consulting services on
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`executive management personnel decisions [and] executive recruitment.”
`
`9.
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`Paine breached its fiduciary and contractual obligations. Paine staffed
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`the Company with Managers and officers who made disastrous business decisions.
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`Through its appointees, Paine willfully operated the Company to benefit itself at the
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`expense of the Unitholders. Despite controlling the Board, Paine repeatedly ignored
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`the Company’s governing documents by acting unilaterally on the Company’s behalf
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`and concealing material information from the independent members of the Board.
`3
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`
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`Paine also permitted McKinsey & Company, a consulting firm, to collect millions
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`in fees from the Company despite McKinsey’s failure to deliver promised reports
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`and improvements to the Company’s bottom line. Paine acted intentionally to
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`benefit McKinsey because the two entities have a longstanding, troubling
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`relationship—many Paine employees are former McKinsey employees, Paine
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`believes that its brand benefits from its association with McKinsey, and McKinsey
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`has co-invested in Paine’s funds, including by agreeing to invest in Paine’s new
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`investment fund as a limited partner.
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`10. Paine also breached multiple provisions of the Services Agreement.
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`Paine failed to cooperate with the Company’s senior executives or devote reasonable
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`time and efforts to the services it agreed to perform under the Services Agreement.
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`Paine also breached the Services Agreement by causing the Company to reimburse
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`Paine for additional services the Company never requested or agreed to and whose
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`amounts were not reasonable.
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`11. Paine also breached the implied covenant of good faith and fair dealing
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`that inheres in the Services Agreement. Paine pervasively exercised its discretion
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`under the Services Agreement to benefit Paine at the expense of the Company. Paine
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`failed to pursue the legitimate objectives of the Services Agreement in good faith by
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`selecting and retaining executives and outside advisors for self-serving ends and by
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`refusing to allow the Company to pursue financing that the Company’s financial
`4
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`
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`
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`advisor repeatedly warned was desperately needed in late 2021 and early 2022.
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`Paine further breached the implied covenant of good faith and fair dealing by using
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`its ostensible authority under the Services Agreement to circumvent the governance
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`structure in the Company’s constitutive documents. Instead of respecting that
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`governance structure, Paine directed the Company’s operations and strategy
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`unilaterally, hiring and firing executives to benefit Paine’s interests, isolating the
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`independent members of the Board from critical decisions, and unilaterally causing
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`the Board to approve Paine’s improper actions, often retroactively.
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`12. Paine accomplished its disloyal objectives through its control of the
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`Board and two loyalist CEOs that Paine unilaterally installed in 2020 and 2022:
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`Defendant Eric Beringause and Mark Rodriguez. Beringause breached his fiduciary
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`duties by failing to act on an informed basis to benefit the Company. Instead,
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`Beringause acted with gross negligence and to benefit Paine and his former
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`employer, Edgewood Consulting.
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`13. Paine aided and abetted Beringause’s breaches of fiduciary duty by
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`directing, participating in, and concealing the breaches.
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`14. Defendant Lutz Goedde, a McKinsey insider hired by Paine after the
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`Merger, aided and abetted Paine’s breach of fiduciary duty by signing an agreement
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`that purported to create new obligations of the Company to McKinsey without
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`authorization from the Company (and before Goedde even joined the Board).
`5
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`
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`15.
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`Plaintiff brings this derivative action to recover damages causedby the
`
`Defendants’ breaches of their contractual and fiduciary duties.
`
`PARTIES AND RELEVANT NON-PARTIES
`
`16. Nominal Defendant MVK FarmCo LLCis a Delawarelimited liability
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`companywithits principal place of business in Fresno, California. The Companyis
`
`in the stone fruit farming business.
`
`17.
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`Plaintiff Negocios Libertad LLC is a Nevada limited liability
`
`company. Plaintiff owns approximately 25% of the Company’s outstanding Class
`
`A Common Units.
`
`18. Non-party Daniel Gerawan controls Plaintiff. At the time of the
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`Merger, Mr. Gerawan! wasa lifelong employee of Gerawan Farming whoserved as
`
`its President. Mr. Gerawan served as the Company’s CEO from the date of the
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`Merger until December 2020. Through Plaintiff, Mr. Gerawan invested $140
`
`million in the Company, becomingits largest individual investor. Through Plaintiff,
`
`Mr. Gerawan hasacontractual right to sit on the Board and designate a second
`
`member of the Board. Duringcertain of the events at issue in this litigation, non-
`
`party Denver Schutz was Mr. Gerawan’s other Board designee.
`
`' This Complaint refers to Daniel Gerawan as “Mr. Gerawan”to distinguish
`him from the eponymous Gerawan Farming.
`It refers to other natural persons by
`their last names without intending to suggest familiarity or disrespect.
`
`6
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`
`
`
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`19. Defendant Paine Schwartz Partners, LLC is a Delaware limited liability
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`company. Paine is a private equity firm. Through Holdings, Paine controls a
`
`majority of the Company’s outstanding Class A Common Units and has the right to
`
`designate six of the eight members of the Board.
`
`20. Defendant Eric Beringause served as the Company’s CEO from
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`December 2020 until August 2022.
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`21. Defendant Lutz Goedde is a member of the Board. Goedde is a Paine
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`partner and a member of Paine’s leadership team. Paine appointed Goedde to the
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`Board in April 2022 to replace Cate Hardy, who was not a Paine insider. Before
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`joining Paine in 2021, Goedde was a senior partner at McKinsey. On behalf of
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`McKinsey, in 2015 Goedde had signed McKinsey’s “Strategic Partnership and
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`Consulting Agreement” with Paine.
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`22. Non-party Edward Haft is the Chairman of the Board. Haft is a Paine
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`Operating Director and a director of multiple Paine portfolio companies.
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`23. Non-party Steven Bierschenk is a member of the Board. Bierschenk is
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`a Paine Managing Director and a director of multiple Paine portfolio companies.
`
`24. Non-party Mark Rodriguez is a member of the Board. Rodriguez is a
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`Paine Operating Director. Rodriguez also served as the Company’s interim CEO
`
`from August 2022 to January 31, 2023.
`
`
`
`7
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`
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`25. Non-party Theodore Kruttschnitt is a member of the Board. Paine
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`remitted to Kruttschnitt a portion of at least some of the fees the Company paid to
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`Paine under the Services Agreement.
`
`JURISDICTION AND VENUE
`
`26. The Court has subject matter jurisdiction over this derivative action
`
`under 6 Del. C. § 18-1001.
`
`27. The Court has personal jurisdiction over Defendant Paine, a Delaware
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`limited liability company. 6 Del. C. § 18-105.
`
`28. The Court has personal jurisdiction over Defendants Beringause and
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`Goedde because they participated materially in the management of the Company.
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`6 Del. C. § 18-109.
`
`BACKGROUND AND SUBSTANTIVE ALLEGATIONS
`A. The Company
`
`29. Gerawan Farming was a third-generation family business and an
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`industry pioneer with best-in-class farming operations, packing practices, and
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`proprietary varieties of stone fruit marketed under the Prima brand. Gerawan
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`Farming also grew almonds and mandarins sold by other marketers.
`
`30.
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`In 2017, Paine acquired a controlling interest in Wawona Packing, a
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`stone fruit company.
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`
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`8
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`
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`31.
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`In 2019, Paine oversaw the Merger of Wawona Packing with Gerawan
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`Farming to create MVK FarmCo LLC, the largest stone fruit company in the United
`
`States. The Company does business under the name Prima Wawona.
`
`32.
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`In connection with the Merger, Holdings invested cash and assets
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`valued at $420 million, Mr. Gerawan invested $140 million, and Mr. Gerawan was
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`named CEO of the Company.
`
`33.
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`Immediately after the Merger, the Company hired Category Partners,
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`an industry-leading consulting firm that advises produce businesses on sales and
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`marketing strategy. Category Partners developed a comprehensive go-to-market
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`strategy for the new Company.
`
`B.
`
`The LLC Agreement
`
`34. The Company’s internal affairs are governed by the MVK FarmCo
`
`LLC Amended and Restated Limited Liability Company Agreement, dated
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`September 13, 2019 (the “LLC Agreement” or “LLCA”). A true and correct copy
`
`of the LLC Agreement is attached as Exhibit A.
`
`35. The LLC Agreement gives the Board plenary authority over the
`
`business and affairs of the Company:
`
`Except for situations in which the approval of the Unitholders is
`expressly and specifically required by the express terms of this
`Agreement or by non-waivable provisions of the Delaware Act, (i) the
`powers of the Company shall be exercised by or under the authority of,
`and the business and affairs of the Company shall be managed, operated
`9
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`
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`
`
`
`
`
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`and controlled by or under the direction of, the Board, . . . and (ii) the
`Board shall have, and is hereby granted, the full and complete power,
`authority and discretion for, on behalf of and in the name of the
`Company, to take such actions as it may in its sole discretion deem
`necessary or advisable to carry out any and all objectives and purposes
`of the Company, subject only to the terms of this Agreement.
`
`LLCA § 5.1(a). The Board is authorized to act only through written “resolutions
`
`adopted at a meeting,” through “written consents,” “by delegating power and
`
`authority to committees,” and “by delegating power and authority” to officers of the
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`Company in accordance with Section 5.6(a) of the LLC Agreement. Id. § 5.1(b).
`
`36. The LLC Agreement provides that the Board consists of “up to eight”
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`Managers. Id. § 5.2(a)(i). Under the LLC Agreement, Mr. Gerawan is entitled to
`
`designate two Managers, and Holdings designates the remaining Managers. Id.
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`§ 5.2(a)(i)–(ii). Paine controls Holdings and therefore controls a majority of the
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`voting power of the Board through its six designated Managers.
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`37. Section 5.4(b) of the LLC Agreement guarantees Mr. Gerawan a seat
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`on each Board committee other than the Audit Committee and the Compensation
`
`Committee. Id. § 5.4(b).
`
`C. The Company’s Governance Policies
`
`38. At the time of the Merger, the parties established a set of governance
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`policies for the Company (the “Governance Policies”). A true and correct copy of
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`the Governance Policies is attached as Exhibit B.
`
`
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`10
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`
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`39. The Governance Policies begin with a bold, underlined heading
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`identifying “Powers Reserved for Full Board of Managers and the Executive
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`Committee.” Ex. B at 1. The text beneath the heading provides in part: “Neither
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`MVK FarmCo, LLC, nor any of its subsidiaries, officers or employees (nor any of
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`its subsidiaries’ officers or employees) shall take any of the actions referred to below
`
`without the authorization of the Board of Managers of the Company.” Id. (defined
`
`terms omitted). With limited exceptions, the Co mpany cannot take any of the
`
`following actions without the approval of the full Board:
`
`1.
`
`2.
`
`implement, approve or amend any annual or long-term business
`or strategic plans or any annual or interim budget (the Budget)
`or related business policies, or take any actions materially
`inconsistent with duly approved annual business plans, Budgets
`or strategic plans;
`
`enter into any new line of business or otherwise change the
`nature of the business by stopping, carrying on, or materially
`altering the scale of operations;
`
`3. make, modify or approve plans, practices or policies material to
`governance outside the ordinary course of business;
`
`4.
`
`5.
`
`enter into transactions or contracts involving payment in excess
`of $250,000 annually or any other material contract of the
`Company or any of its subsidiaries, except to the extent provided
`for in the Budget;
`
`amend or waive any material term of any agreement or
`transaction that required, or would have required had such
`agreement or transaction been entered into after the adoption
`hereof, approval of the Board hereunder;
`
`
`
`11
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`
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`6. make any capital expenditure in excess of $250,000 except to the
`extent provided for in the Budget; provided, that approval by the
`Board shall be required for the acquisition of real property if (i)
`such real property acquisition involves payment in excess of
`[$4,000,000] in any single transaction or (ii) all real property
`acquisitions in the applicable fiscal year exceed or, upon the
`completion of the contemplated acquisition, will exceed
`[$8,000,000];
`
`7.
`
`cast any votes with respect to any investments or subsidiaries, or
`grant any proxy with respect to the voting of any units directly
`or indirectly held as to an action or transaction that would require
`approval of the Board hereunder if such action were to be taken
`by the Company;
`
`8. make any material changes to existing Company policies on
`accounts receivable, accounts payable, deferred revenue
`recognition or disposal of inventory; or
`
`9.
`
`authorize, commit or agree to take any action covered hereby,
`except in accordance with the provisions hereof[.]
`
`Id. at 1–2 (first and second brackets in original).
`
`40. The Governance Policies give the Board the exclusive power to “hire,
`
`renew, promote, elect, enter into, or terminate an employment with any employee
`
`with a gross annual base salary of $250,000 or more.” Id. at 3.
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`41. The Governance Policies provide limited exceptions to the enumerated
`
`actions for which Board approval is required: The Executive Committee of the
`
`Board can (i) “enter into transactions or contracts involving payment in excess of
`
`$250,000 annually,” including the hiring of executives, (ii) authorize capital
`
`expenditures, and (iii) make changes to the Company’s accounting policies. Id. at
`
`
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`12
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`
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`
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`1. In each case, the authority of the Executive Committee is subject to the same
`
`requirements that would have applied to the Board had the Board made the decision;
`
`any transaction, contract, or capital expenditure in excess of $250,000 other than an
`
`employment agreement for a Company executive must otherwise be “provided for
`
`in the Budget.” Id.
`
`D. The Services Agreement
`
`42. Simultaneously with the execution of the LLC Agreement, Paine and
`
`the Company executed a Services Agreement dated September 13, 2019 (the
`
`“Services Agreement” or “SA”). A true and correct copy of the Services Agreement
`
`is attached as Exhibit C.
`
`43. The Services Agreement recited the Company’s belief that Paine had
`
`“significant value . . . to offer in a variety of strategic areas” including “corporate
`
`management, business strategy, acquisitions and divestitures, private and public debt
`
`and equity financing, capital structure and other matters relating to the strategic and
`
`financial (as opposed to operational) management of businesses.” SA at 1. The
`
`agreement explained that the “Company believes this Agreement is a cost-effective
`
`way to obtain the valuable services [] herein.” Id.
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`44. Paine advertises its Portfolio Excellence Platform (the “PEP”) as a
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`provider of consulting support to Paine’s portfolio companies. In reality during the
`
`relevant time frame, the PEP was a small group of mostly junior Paine employees
`13
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`who lacked experience managing large enterprises like the Company. The
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`weaknesses of Paine’s consulting capabilities would become apparent as Paine
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`systematically dismantled
`
`longstanding Company management
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`(including
`
`terminating Mr. Gerawan in December 2020) and then failed to adequately supervise
`
`the consultants and new executives it brought in to manage the Company.
`
`45. The Services Agreement provided that “Paine shall render to the
`
`Company and its subsidiaries, in cooperation with the Company’s senior
`
`management, from time to time, advisory, consulting and other services,” including
`
`the following:
`
`i.
`
`v.
`
`assist in identifying and assembling a highly capable board
`of managers of the Company with significant industry and
`operational knowledge; . . .
`
`provide advisory and consulting services in relation to the
`selection, retention and supervision of other advisors,
`including, without limitation, outside legal counsel,
`investment bankers or other financial advisors or
`consultants, in respect of proposed material transactions or
`engagements;
`
`vi.
`
`provide advisory and consulting services on executive
`management personnel decisions, executive recruitment
`and executive compensation issues . . . .
`
`Id. § 2(a). Paine further agreed to “devote reasonable time and efforts to the
`
`performance of the Services contemplated by this Agreement.” Id. § 2(c).
`
`
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`14
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`46.
`
`In exchange for Paine’s services, the Company agreed “to pay to Paine
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`an annual fee equal to the greater of (i) $2,000,000 and (ii) 2% of the projected
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`annual EBITDA of the Company for the next fiscal year.” Id. § 3(b). The Company
`
`also agreed to, “at the direction of Paine, reimburse Paine for its reasonable Ordinary
`
`Out-of-Pocket Expenses and Additional Out-of-Pocket Expenses.” Id. § 4. The
`
`Services Agreement defined “Additional Out-of-Pocket Expenses” to mean
`
`the amounts payable by Paine in connection with its performance of the
`Services, including, without limitation, reasonable (i) fees and
`disbursements of any independent auditors, outside legal counsel,
`consultants,
`investment bankers, financial advisors and other
`independent professionals and organizations and (ii) costs of any
`outside services or independent contractors such as financial printers,
`couriers, business publications or similar services.
`
`Id.
`
`47. The parties to the Services Agreement also “agreed that, from time to
`
`time, Paine may be requested to perform services in addition to the Consulting
`
`Services, for which Paine shall be entitled to additional compensation” (the
`
`“Additional Services”). Id. § 2(b). The Services Agreement provided that any
`
`compensation for any Additional Services performed by Paine would be “agreed
`
`upon by the parties.” Id. § 3(j).
`
`48. The Services Agreement further provided that in the event of “any
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`future merger, acquisition, disposition, recapitalization, issuance of securities,
`
`financing or any similar transaction,” Paine would “be hired as an investment
`15
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`adviser” and would receive a “Future Transaction Fee” that would “be agreed upon
`
`by the parties hereto.” Id. § 2(b).
`
`49. The Services Agreement created perverse incentives for Paine. It
`
`enabled Paine to cause the Company to execute any transaction that could be
`
`characterized as a “merger, acquisition, disposition, recapitalization, issuance of
`
`securities, financing or any similar transaction,” then force the Company to “hire”
`
`Paine as an investment advisor and demand a Future Transaction Fee as a tax on the
`
`transaction. Id. Through its control of the Company, Paine could determine the
`
`amount of the Future Transaction Fee. Worse still, Paine could force the Company
`
`to pay for someone else to do the actual work of advising on the transaction, then
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`pay the advisor out of the Company’s funds as an Additional Out-of-Pocket
`
`Expense.
`
`50. The Services Agreement included limited safeguards to prevent Paine
`
`from abusing its control over the Company.
`
`
`
`
`
`
`
`
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`Section 2(a) obligated Paine to provide consulting services to the Company
`“in cooperation with the Company’s senior management” (the “Cooperation
`Requirement”).
`
`Section 2(c) required Paine to devote reasonable time and efforts to
`performing the services contemplated by the Services Agreement (the “Time
`and Efforts Requirement”).
`
`Section 2(b) required that any Additional Services performed by Paine be
`“requested” by the Company (the “Request Condition”).
`
`16
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`
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`
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`
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`Section 2(b) also required that the amount of any Future Transaction Fee be
`“agreed upon” Paine and the Company (the “Agreement Condition”).
`
`Section 4 provided that Paine only was entitled to be reimbursed for
`“reasonable” Ordinary and Additional Out-of-Pocket Expenses. Id. § 4
`(emphasis added) (the “Reasonability Condition”).
`
`51. Paine succumbed to the perverse incentives created by its control of the
`
`Company and the lax provisions of the Services Agreement. Paine reaped millions
`
`of dollars in fees by causing the Company to enter transactions, then imposing and
`
`collecting a 2% Future Transaction Fee without any negotiation. Paine repeatedly
`
`hired consultants and outside advisors to do work that Paine itself should have
`
`performed under the Services Agreement. Those consultants frequently were firms
`
`with troubling links to Paine and its insiders at the Company. Further, when asked
`
`to certify that the amounts received from the Company as Ordinary and Additional
`
`Out-of-Pocket Expenses complied with the Services Agreement, Paine refused.
`
`52.
`
`In flouting the purposes of the Services Agreement (and breaching its
`
`fiduciary duties in the process), Paine ignored even the weak procedural safeguards
`
`in the agreement.
`
`
`
`
`
`
`
`Paine pervasively failed to cooperate with senior Company management,
`including during multiple searches for replacement CEOs, breaching the
`Cooperation Requirement.
`
`Paine persistently failed to devote reasonable efforts to the performance of the
`services it promised to deliver, breaching the Time and Efforts Requirement.
`
`17
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Paine repeatedly caused the Company to pay for Additional Services that the
`Company did not request. Because the Request Condition was not met as to
`those payments, the payments breached the Services Agreement.
`
`There never has been a negotiation or agreement between the Company and
`Paine about a Future Transaction Fee. Because the Agreement Condition was
`not met as to the Future Transaction Fees, those transactions breached the
`Services Agreement.
`
`Finally, Paine caused the Company to reimburse Paine for expenses to
`consultants like McKinsey that were not reasonable.
` Because the
`Reasonability Condition was not met, those payments breached the Services
`Agreement.
`
`E.
`
`Paine’s Relationship with McKinsey
`
`53. Paine has a longstanding relationship with McKinsey. Multiple
`
`principals and employees of Paine (including Goedde) are former McKinsey
`
`consultants, engagement managers, and partners. Paine’s relationship with
`
`McKinsey is, in Paine’s own words, unique.
`
`54. Goedde’s career is instructive. Goedde worked at McKinsey before
`
`joining Paine. In 2015, while he was a McKinsey principal, Goedde signed a five-
`
`year “Strategic Partnership and Consulting Agreement” between McKinsey and
`
`Paine.
`
`55. Goedde later would be identified in a 2020 McKinsey pitch to Paine for
`
` with the Company, which Paine then awarded to
`
`McKinsey. Less than a year later, Goedde joined Paine as a partner. At Paine,
`
`Goedde purported to amend the Company’s multimillion-dollar agreement with
`
`
`
`18
`
`
`
`
`
`
`
`
`
`McKinsey despite lacking any authorization to act on the Company’s behalf. After
`
`that, Paine placed him on the Board, where he and Paine failed to disclose to the
`
`Board that, without authorization, he had amended the Company’s agreement with
`
`McKinsey. The Company only learned of the amendment when McKinsey disclosed
`
`it to the Company’s interim CEO, who then shared it with the Board.
`
`56. Paine also favors McKinsey for reputational reasons, as Paine has
`
`associated its brand with McKinsey to attract investors.
`
`57.
`
`In its marketing materials, Paine has promoted its “strong connection
`
`to McKinsey,” which “generates extensive knowledge to appropriately source,
`
`diligence and execute M&A opportunities.”
`
`58.
`
`In a 2018 interview, Schwartz described Paine’s unique “partnership
`
`with McKinsey,” explaining, “They take risks on our investments and are aligned
`
`with us economically – they don’t [do] that with other private equity firms.”
`
`59. The relationship between Paine and McKinsey deepened after the
`
`Merger. McKinsey has since committed to invest in Paine funds as a limited partner.
`
`60. The high value that Paine attributes to its association with McKinsey
`
`created a conflict of interest for Paine. The significant financial and business ties
`
`between Paine and McKinsey suggest an understanding that Paine will direct its
`
`portfolio companies to retain McKinsey as a consultant, even when McKinsey is not
`
`the best option.
`
`
`
`19
`
`
`
`
`
`
`
`
`
`61. Paine has rewarded McKinsey through fees paid by the Company and
`
`promises of more fees.
`
` Paine’s
`
`designees on the Board demanded that the Company schedule an additional
`
`
`
` payment to McKinsey that was not owed under any written agreement
`
`between the Company and McKinsey. Paine used its control over the Board to put
`
`the interests of McKinsey over the interests of the Company.
`
`F.
`
`Paine Secretly and Unilaterally Engages McKinsey Without Consulting
`Mr. Gerawan or the Board.
`
`62.
`
`In late 2020, Paine initiated a strategy to drain cash from the Company
`
`to enrich itself and McKinsey. Part of that strategy was to remove Mr. Gerawan as
`
`CEO, because he would have objected to the planned 2021 transfer from the
`
`Company to Paine and McKinsey.
`
`63.
`
`In November 2020, Paine secretly solicited bids from consulting firms
`
`to
`
`whether
`
` Paine never involved the full Board in a discussion of
`
` even though Board involvement was required
`
`by the Company’s Governance Policies. The Board never discussed whether a
`
` was necessary—and, if so, what its goals should be,
`
`when it should start, and who should do it. Despite having agreed to the Cooperation
`
`Requirement, Paine completely excluded Mr. Gerawan, the Company’s CEO, from
`
`its plans.
`
`
`
`20
`
`
`
`
`
`
`
`
`
`64. Paine’s internal November 2020
`
`
`
` a document that was never shown to the Board, listed proposals
`
`from four consulting firms, including McKinsey and AlixPartners, LLP. Paine
`
`identified AlixPartners’ proposal as clearly superior, noting its
`
` and
`
`AlixPartners proposal would cost
`
`
`
`
`
` The
`
`65. By contrast, Paine concluded that McKinsey’s proposal was flawed and
`
`overpriced. Paine’s analysis observed that
`
` McKinsey’s
`
` its
`
` Paine noted that McKinsey
`
`
`
`
`
` in the due diligence McKinsey had performed for Paine before the
`
`Merger. And the proposal was
`
`
`
`
`
`66. The only strengths that Paine identified in McKinsey’s proposal were
`
`McKinsey’s
`
` the Company, McKinsey’s
`
` and, disturbingly, McKinsey’s
`
`
`
` a
`
`
`
`67. Paine rated AlixPartners’ proposal as superior to the McKinsey
`
`proposal. An objective comparison of the two proposals confirms that Paine’s
`
`ranking was correct. AlixPartners was more qualified for the assignment.
`
`
`
`21
`
`
`
`
`
`
`
`
`
`68. Paine nevertheless retained McKinsey. Paine did not tell the Board
`
`about the AlixPartners presentation or about Paine’s conclusion that AlixPartners
`
`was better suited to the assignment.
`
`69. The award of the
`
` to McKinsey violated the
`
`requirement in the Governance Policies that any contract for more than $250,000 be
`
`approved by the full Board.
`
`70. The award of the
`
` to McKinsey also violated the
`
`duty of loyalty that Paine owed to the Company as its controller. Paine should have
`
`secured Board approval before beginning the process, should have involved the
`
`Board in the decision, and should have disclosed all conflicts of interest. Paine did
`
`none of those things.
`
`71. The hiring of McKinsey was a willful breach of the Governance
`
`Policies and Paine’s fiduciary duties.
`
`72. Had Mr. Gerawan been involved in the process, he would have
`
`questioned the need for this massive and expensive consulting project. He also
`
`would have pointed out that, if a consulting firm were needed at all, then
`
`AlixPartners’ proposal was obviously superior.
`
`73.
`
`In late 2022, after two years of McKinsey’s
`
`the Company hired AlixPartners
`
`
`
` and made an AlixPartners executive the Company’s interim CEO.
`22
`
`
`
`
`
`
`
`
`
`
`
`
`
`G.
`
`Paine Terminates Mr. Gerawan Without Notice and Fails to Oversee the
`Transition to New Management.
`
`74.
`
`In December 2020, Paine terminated Mr. Gerawan without notice and
`
`replaced him with a CEO chosen by Paine. Mr. Gerawan’s employment agreement
`
`included a thirty-day notice period in the event of his termination. Paine ignored
`
`that provision, so there was no transition period between the outgoing and incoming
`
`CEOs.
`
`75. After terminating Mr. Gerawan, Paine immediately locked him out of
`
`his Company email account. From the moment of his firing until he left the Board
`
`earlier this year, Paine failed to listen to Mr. Gerawan or seek his advice on Company
`
`operations or decisions.
`
`76. Also during December 2020, the most senior member of the PEP team,
`
`Adam Fless, resigned and joined AlixPartners. Paine did not replace Fless until
`
`months later. As a result, there was a void in Paine’s consulting unit just when Paine
`
`and the Company needed seasoned leadership to oversee McKinsey and the CEO
`
`transition—a violation of the Time and Efforts Requirement in the Services
`
`Agreement.
`
`77.
`
` The LLC
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