IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`
`C.A. No. 2024-0726-LWW
`
`PUBLIC [REDACTED]
`VERSION AS FILED
`ON JULY 12, 2024
`
`))))))))))))))
`
`BRIAN GALE, MARK NOBLE, TERRY
`PHILIPPAS, and LAWRENCE BASS,
`
`Plaintiffs,
`
`v.
`
`VINTAGE CAPITAL MANAGEMENT,
`LLC, BRIAN KAHN, ANDREW
`LAURENCE, MATTHEW AVRIL, and B.
`RILEY FINANCIAL, INC.
`
`Defendants.
`
`VERIFIED CLASS ACTION COMPLAINT
`
`Plaintiffs Brian Gale, Mark Noble, Terry Philippas, and Lawrence Bass
`
`(collectively, “Plaintiffs”), on behalf of themselves and similarly situated former
`
`stockholders of Franchise Group, Inc. (“Franchise Group” or the “Company”), bring
`
`this Verified Class Action Complaint (the “Complaint”) asserting breaches of
`
`fiduciary duty and related claims stemming from the August 21, 2023 management-
`
`led take-private of the Company (the “Merger”), in financial partnership with B.
`
`Riley Financial, Inc. (“B. Riley”) and Irradiant Partners (“Irradiant”).
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`The allegations herein are based on Plaintiffs’ knowledge as to themselves
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`and, as to all other matters, on information and belief, including counsel’s
`
`investigation, review of publicly available information, and the review of certain
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`THIS DOCUMENT IS A CONFIDENTIAL FILING.
`ACCESS IS PROHIBITED EXCEPT AS AUTHORIZED BY COURT ORDER.
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`EFiled: Jul 12 2024 03:58PM EDT
`Transaction ID 73648030
`Case No. 2024-0726-LWW
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`

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`books and records produced by Franchise Group in response to Plaintiffs’ demands
`
`made under 8 Del. C. § 220 (collectively, the “Demands”).1
`
`INTRODUCTION
`
`1.
`
`On August 21, 2023, Franchise Group’s Chief Executive Officer, Brian
`
`Kahn (“Kahn”), along with his investment vehicle Vintage Capital Management,
`
`LLC (“Vintage”) and other Company insiders, took Franchise Group private for the
`
`unfair price of $30.00 per share (the “Merger”). Kahn, Vintage, and Andrew
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`Laurence (“Laurence”) (the Company’s Executive Vice President and also a Vintage
`
`partner) controlled approximately 43.5% of the Company’s voting power and were
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`all members of the buyout consortium.
`
`2. While the Company’s Definitive Proxy Statement (the “Proxy”) and
`
`other public filings stated that the sale process leading to the Merger began in mid-
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`March of 2023 with an unsolicited offer to acquire the Company for $30 per share
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`by Kahn’s long-time investing partner B. Riley, that was not true. Kahn had begun
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`exploring a take-private transaction at least as early as January 2023. Then Kahn,
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`through the Company, approached Jefferies LLC (“Jefferies”) about providing
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`potential debt financing for a take-private transaction and personally engaged in
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`1 On June 17, 2024, the Company certified completeness of its productions in response to
`the Demands.
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`2
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`discussions with Jefferies for the next two months. During this time, in late
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`February/early March 2023, Jefferies prepared an analysis of theoretical take-private
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`prices between $30 and $38 per share, which assumed that Kahn would roll over his
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`equity and that B. Riley would roll over its existing preferred equity and make an
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`additional equity investment. None of this information is disclosed in the Proxy.
`
`3.
`
`Approximately three weeks later, on March 19, 2023, following
`
`discussions with Kahn, B. Riley submitted its offer to acquire the Company for $30
`
`per share, conditioned on Kahn rolling over his equity in the Company. In response,
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`the Company’s board of directors (the “Board”) formed a special committee (the
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`“Special Committee”) comprised of Matthew Avril (“Avril”), Cynthia Dubin
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`(“Dubin”), and Thomas Herskovits (“Herskovits”) to evaluate the proposal. But
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`Avril, who was also the Chairman of the Special Committee, was a long-time Kahn
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`associate who was invested in and had served as an advisor to Vintage. Avril
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`immediately took control of the Special Committee and worked with Kahn to engage
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`Jefferies as the Special Committee’s financial advisor, despite Jefferies’ recent work
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`for Kahn on a potential take-private.
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`4.
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`Avril not only excluded the other members of the Special Committee
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`from discussions with the Special Committee’s advisors and Kahn, but he also
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`effectively delegated all Merger negotiations to Kahn, who ultimately abandoned
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`3
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`the charade of B. Riley being the acquirer of the Company and stepped in as the head
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`of the buying consortium in the Merger. During the entirety of the six-week Merger
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`process, the Special Committee made one counteroffer of $33 per share and, when
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`it was immediately rejected, simply approved the $30 original offer and
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`recommended it to the Board.
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`5.
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`Moreover, during the Special Committee process, Kahn and Laurence
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`drastically slashed the Company’s EBITDA projections used by Jefferies in its
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`fairness opinion by approximately 50% across the entire projection period as
`
`compared to the projections that Kahn had provided Jefferies for analyzing financing
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`for his potential take-private transaction. This reduction had the effect of lowering
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`Jefferies’ valuation of Franchise Group significantly, rendering the takeout price
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`unfair. Indeed, B. Riley appeared to acknowledge that the Merger was a steal,
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`publicly touting that the value of just two of Franchise Group’s individual business
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`segments were worth well in excess of the $2.8 billion Merger value.
`
`6.
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`After the Merger closed in August 2023, Kahn was implicated in a
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`multi-hundred million dollar fraud scheme, which appears to have ties to both
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`Franchise Group-related businesses and B. Riley. The fraud, which pre-dated the
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`Merger, uncovered numerous additional investment ties between Kahn, Vintage, and
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`B. Riley that were never disclosed to Franchise Group stockholders in the Proxy.
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`4
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`7.
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`For all the foregoing reasons, the Merger’s “facial” compliance with
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`the precepts of Kahn v. M&F Worldwide Corp. fails. See Kahn v. M&F Worldwide
`
`Corp., 88 A.3d 635, 645 (Del. 2014). Plaintiffs bring this entire fairness Action to
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`recover the damages to Franchise Group’s minority public stockholders flowing
`
`from Defendants’ actions.
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`PARTIES AND RELEVANT NON-PARTIES
`
`I.
`8.
`
`PLAINTIFFS
`Plaintiffs each owned shares of common stock of Franchise Group at
`
`all relevant times and each received $30 per share in cash for those shares when the
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`Merger closed.
`
`II.
`9.
`
`DEFENDANTS
`Defendant Vintage Capital Management, LLC (as defined above,
`
`“Vintage”) is a value-oriented, operations-focused, private and public equity
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`investor specializing in the consumer, aerospace and defense, and manufacturing
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`sectors.
`
`10. Defendant Brian Kahn (as defined above, “Kahn”) served as a
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`director of the Company from September 2018 until the closing of the Merger, and
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`as the Company’s President and Chief Executive Officer (“CEO”) from October
`
`2019 until the closing of the Merger. Kahn founded and has served as the investment
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`5
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`manager of Vintage and its predecessor, Kahn Capital Management, LLC, since
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`1998.
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`11. Kahn, individually and beneficially through a family trust, and through
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`Vintage, owned 41.9% of Franchise Group’s common stock before the Merger.
`
`Pursuant to amended rollover agreements executed by Kahn and other members of
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`management disclosed on August 8, 2023,2 Kahn and his affiliates rolled over
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`approximately 11.9 million shares of Company common stock, contributing
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`approximately $357 million to the post-Merger Company.
`
`12. Upon information and belief, Kahn sold approximately $64.6 million
`
`of his rolled-over Franchise Group shares to B. Riley within days after the August
`
`21, 2023 close of the Merger.3 On January 22, 2024, in the midst of heavy scrutiny
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`of his involvement with an imploded investment fund accused of defrauding
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`investors out of nearly $300 million, Kahn resigned as the post-Merger Company’s
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`CEO.
`
`2 On August 8, 2023, the Company filed several amendments (the “Supplemental
`Disclosures”) to the Franchise Group, Inc. Definitive Proxy Statement (Schedule 14A)
`(July 14, 2023) (previously defined as the “Proxy”).
`3 Jonathan Weil, Unraveling the Money Trail at B. Riley Financial, WALL ST. J. (Feb. 12,
`2024),
`https://www.wsj.com/livecoverage/stock-market-today-dow-jones-02-12-
`2024/card/unraveling-the-money-trail-at-b-riley-financial-ghNNvsaYRCafETT6ye9z
`(hereinafter “Unraveling the Money Trail”).
`6
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`13. Defendant Andrew Laurence (as defined above, “Laurence”) served
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`as the Company’s Executive Vice President from October 2019 until the closing of
`
`the Merger, and previously served as a Company director from September 2018 until
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`May 2021. Laurence is a longtime partner at Vintage, where since 2010 he has been
`
`“responsible for all aspects of its transaction sourcing, due diligence and execution.”4
`
`Laurence replaced Kahn as the post-Merger Company’s CEO.
`
`14.
`
`Laurence owned 573,482 shares of Company common stock,
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`approximately 1.6% of the common stock outstanding.5 Pursuant to amended
`
`rollover agreements executed by Laurence and other members of management
`
`disclosed on August 8, 2023, he rolled over 573,482 shares of Company common
`
`stock, contributing approximately $17 million to the post-Merger Company. In
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`addition to equity interests in the post-Merger Company, Laurence received over $2
`
`million in cash in connection with the acceleration of his Company restricted stock.
`
`15. Defendant Matthew Avril (as defined above, “Avril”) served as a
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`director of the Company from September 2018 until the closing of the Merger, and
`
`he served as Chairman of the Board at the time of the Merger. Avril also served as
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`Chairman of the Special Committee. Additionally, Avril served on Vintage’s
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`4 Proxy at 107.
`5 Proxy at 109.
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`strategic advisory board until at least 2022 (and possibly as late as February 2023),6
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`personally invested in certain Vintage-affiliated investments, and owned a limited
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`partnership interest in Vintage.
`
`16.
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`In connection with his service on Vintage’s strategic advisory board,
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`Avril was appointed to the boards of Vintage’s portfolio companies, including
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`Aaron’s Inc. (“Aaron’s”), AP Technologies Corp. (“API”), and Babcock & Wilcox
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`Enterprises, Inc. (“B&W”).
`
`17. With respect to Aaron’s, Kahn was appointed to Aaron’s board of
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`directors pursuant to a settlement agreement to resolve a proxy contest between
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`Vintage and Aaron’s board of directors. Kahn personally designated Avril to serve
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`alongside him on the Aaron’s board as Vintage’s second board designee. In 2016,
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`while Avril was on the board of directors, Aaron’s sold its HomeSmart stores to a
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`6 It remains unclear if, and when, Avril stepped down from his position on Vintage’s
`strategic advisory board. While the Company’s Supplemental Disclosures state Avril
`served on Vintage’s strategic advisory board until 2019, Avril remained listed as a member
`of the strategic advisory board on Vintage’s website until February 2022, and the
`Company’s 2022 proxy statement filed in April 2022 states Avril was currently serving on
`Vintage’s strategic advisory board at the time of the filing. See Franchise Group, Inc.,
`Definitive Proxy Statement (Schedule 14A) (April 22, 2022), at 6. Additionally, on
`February 16, 2023, in his 2023 Director & Officer Questionnaire, Avril confirmed the
`information listed in his Proxy Statement Background was “correct and complete,” which
`included the following line: “He is currently a member of the strategic advisory board of
`Vintage Capital Management, LLC[.]” See FG_00001781, -1819 (emphasis added).
`Meanwhile, the 2023 Proxy—filed less than two months later in the midst of the Merger
`process—entirely removed the sentence referencing Avril’s service on Vintage’s strategic
`advisory board.
`
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`subsidiary of Buddy’s Home Furnishing (“Buddy’s”), a portfolio company of
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`Vintage. Due to Avril’s ties to Vintage, Avril abstained from the board’s vote on
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`the HomeSmart transaction.
`
`18. With respect to API, Kahn became the chairman and CEO of API in
`
`connection with a merger whereby Vintage became API’s majority stockholder.
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`Following that merger, Avril joined Kahn on API’s board of directors, and
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`Defendant Laurence joined API’s management.
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`19. And finally, with respect to B&W, Kahn and Avril each joined its board
`
`of directors in connection with a voting agreement with Vintage. Avril also served
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`as a director of B&W alongside Bryant Riley (“Riley”). Moreover, prior litigation
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`in this Court involving Avril, Kahn, and B. Riley confirmed that Avril “had social
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`ties with Brian Kahn,” had previously “noted his lengthy relationship with Kahn in
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`an email[,]” and sent a text message to a potential director at B&W “highlighting the
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`benefits of working with Vintage and Kahn.”7
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`20. Defendant B. Riley Financial, Inc. (as defined above, “B. Riley”) is a
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`diversified financial services platform that provides investment banking, brokerage,
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`wealth management, asset management, direct lending, business advisory, valuation,
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`and asset disposition services to a broad client base spanning public and private
`
`7 Parker v. Avril, C.A. No. 2020-0280-PAF (Del. Ch.) (Dkt. 124).
`9
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`companies, financial sponsors,
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`investors, financial
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`institutions,
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`legal and
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`professional services firms, and individuals. B. Riley also opportunistically invests
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`in and acquires companies or assets, owning and operating several uncorrelated
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`consumer businesses and investing in brands on a principal basis. Riley is the
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`founder, director, and co-CEO of B. Riley.
`
`21. Defendants Vintage, Kahn, and Laurence are referred to herein
`
`collectively as the “Controller Defendants.”
`
`22. Defendants Kahn and Avril are referred to herein together as the
`
`“Director Defendants.”
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`23. Defendants Kahn and Laurence are referred to herein together as the
`
`“Officer Defendants.”
`
`24.
`
`The Controller Defendants, the Director Defendants, the Officer
`
`Defendants, and B. Riley are referred to herein collectively as the “Defendants.”
`
`III.
`25.
`
`RELEVANT NON-PARTIES
`Franchise Group, Inc. (as defined above, “Franchise Group” or the
`
`“Company”) was a Delaware corporation that owned and operated franchised and
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`“franchiseable” businesses, with business lines including Pet Supplies Plus, Wag N’
`
`Wash, American Freight, The Vitamin Shoppe, Badcock Home Furniture & more
`
`(“Badcock”), Buddy’s, and Sylvan Learning. On a combined basis, the Company
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`10
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`operated over 3,000 locations predominantly located in the U.S. that are either
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`Company-run or operated pursuant to franchising and dealer agreements. Before the
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`Merger, the Company’s stock traded on the Nasdaq under the ticker “FRG.”
`
`26. Bryant Riley (as defined above, “Riley”) is B. Riley’s founder, co-
`
`CEO, and Chairman of its board of directors. Riley owned 1,804 shares of Company
`
`common stock. Pursuant to Riley’s Schedule 13D/A filed on August 9, 2023, Riley
`
`rolled over all of his Company common stock into the post-Merger Company and
`
`agreed to vote his shares in favor of the Merger.
`
`27. Cynthia S. Dubin (as defined above, “Dubin”) served as a director of
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`the Company from May 2021 until the closing of the Merger. Dubin also served as
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`a member of the Special Committee.
`
`28. Thomas Herskovits (as defined above, “Herskovits”) served as a
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`director of the Company from October 2015 until November 2017, and then from
`
`March 2018 until the closing of the Merger. Herskovits also served as a member of
`
`the Special Committee.
`
`29.
`
`Irradiant Partners (as defined above, “Irradiant”) is an alternative
`
`investment manager, with total assets under management in excess of $9.1 billion,
`
`that focuses on credit and private equity opportunities. Irradiant was an existing
`
`Company lender prior to the Merger and led debt financing for the Merger.
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`11
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`SUBSTANTIVE ALLEGATIONS
`
`I.
`
`VINTAGE AND B. RILEY FORM THE COMPANY
`30.
`In July 2018, Vintage and B. Riley invested in Franchise Group’s
`
`predecessor, Liberty Tax, Inc. (“Liberty Tax”). Vintage acquired the equity interests
`
`in Liberty Tax held by the company’s founder and former CEO, as well as a former
`
`director, for $8.54 per share (the “2018 Transactions”). Thereafter, Vintage retained
`
`approximately 1.5 million shares of Liberty Tax common stock and assigned to B.
`
`Riley and another investor the right to purchase approximately 3.5 million shares.
`
`31. As a result of the 2018 Transactions, Vintage and B. Riley obtained
`
`14.8% and 22.1% of Liberty Tax’s voting power, respectively, and both also
`
`received board representation. In 2019, Vintage appointed Kahn, Laurence, and
`
`Avril to Liberty Tax’s nine-member board of directors, and B. Riley appointed Riley
`
`and Kenneth Young (“Young”), B. Riley’s President.
`
`32.
`
`In July 2019, Vintage and Liberty Tax entered a series of strategic
`
`transactions, including a tender offer of Liberty Tax’s outstanding common stock
`
`for $12 per share and the acquisition of Buddy’s (the “2019 Transactions”). As a
`
`result of the 2019 Transactions, Vintage’s stake in Liberty Tax grew from 14.8% (as
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`of October 29, 2018) to 37.0% (as of July 26, 2019). Liberty Tax also changed its
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`name to “Franchise Group, Inc.”
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`33. On March 31, 2020, Riley and Young “voluntarily resigned from the
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`Board” of Franchise Group, “effective immediately.” None of the Company, B.
`
`Riley, Riley, or Young provided explanations for these resignations.8 Thereafter,
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`Avril, Vintage’s designee, assumed the role of Chairman of the Board.
`
`II.
`
`VINTAGE AND B. RILEY’S TIES EXTEND BEYOND
`FRANCHISE GROUP
`34. Kahn and Riley, through their investment firms Vintage and B. Riley,
`
`are repeat co-investors and financing partners. Their relationship spans decades.
`
`Rent-A-Center
`A.
`35. On June 18, 2018—prior to B. Riley’s and Vintage’s investment in
`
`Liberty Tax—Vintage announced that it acquired Rent-A-Center, Inc. (“Rent-A-
`
`Center”) for $15 per share in cash, representing total consideration of approximately
`
`$1.365 billion (including net debt). B. Riley served as an equity and debt participant
`
`in the transaction.
`
`36.
`
`In a corresponding press release, Riley said: “We have worked with the
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`Vintage Capital team for over two decades and have seen firsthand their experience
`
`8 March 31, 2020 is the same day that Deloitte & Touche resigned as an auditor for a fund
`affiliated with Kahn. As described at ¶¶ 129–138, this fund appears to have been a vehicle
`used by Kahn and his co-conspirators to defraud investors out of nearly $300 million.
`Deloitte & Touche reportedly resigned after uncovering the fraud. Jonathan Weil, How an
`Unremarkable Deal Became a Big Threat to a Small Investment Bank, WALL ST. J. (Feb.
`12, 2024), https://www.wsj.com/finance/how-an-unremarkable-deal-became-a-big-threat-
`to-a-small-investment-bank-f819a169 (hereinafter “An Unremarkable Deal”).
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`in the space. We are excited to work with them and leverage the resources across
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`the B. Riley Financial platform.”9 Kahn added: “Having worked with the B. Riley
`
`team on multiple deals, I have a great deal of respect for their willingness to think
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`differently to get deals done.”10
`
`37.
`
`The Rent-A-Center transaction never closed, resulting in Kahn—with
`
`B. Riley serving as a guarantor—being on the hook for a significantly above-market
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`termination fee.
`
`38. On December 18, 2018, Rent-A-Center terminated its merger
`
`agreement prior to closing because “Rent-A-Center did not receive an extension
`
`notice from Vintage Capital at or prior to 11:59 p.m., Eastern Time, on December
`
`17, 2018, which was the deadline set forth in the Merger Agreement.”11
`
`39. On March 14, 2019, this Court affirmed the validity of Rent-A-Center’s
`
`termination of the merger agreement with Vintage.12 According to Reuters, “Rent-
`
`9 Press Release, Franchise Group, Inc., B. Riley Financial Assists Vintage Capital in
`(Jun.
`18,
`2018),
`Announced
`Acquisition
`of
`Rent-A-Center
`https://markets.businessinsider.com/news/stocks/b-riley-financial-assists-vintage-capital-
`in-announced-acquisition-of-rent-a-center-1027176494. (emphasis added).
`10 Id. (emphasis added).
`11 Press Release, Rent-A-Center, Inc., Rent-A-Center Terminates Merger Agreement with
`Vintage Capital (Dec. 18, 2018), https://investor.rentacenter.com/news-releases/news-
`release-details/rent-center-terminates-merger-agreement-vintage-capital.
`12 Vintage Rodeo Parent, LLC v. Rent-a-Center, Inc., 2019 WL 1223026 (Del. Ch. Mar.
`14, 2019).
`
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`A-Center also maintains that Vintage owes it a $126.5 million termination fee, which
`
`was guaranteed by Vintage Capital’s banker, B. Riley Financial Inc.”13
`
`40. On April 22, 2019, Rent-A-Center announced that it had agreed to settle
`
`all litigation with Vintage and B. Riley and that it would receive a payment of $92.5
`
`million.
`
` As described below at Paragraphs 129–138, Kahn may have
`
`misappropriated investor funds from one of his affiliated investment vehicles to
`
`cover the termination fee that Vintage owed to Rent-A-Center.
`
`B&W
`B.
`41. B. Riley and Vintage also provided capital to B&W, a publicly traded
`
`thermal energy company. On August 9, 2018, B&W “amended its first-lien
`
`revolving credit facility and received a commitment for a Last Out Loan that will
`
`provide net proceeds of $30 million from Vintage Capital and backstopped by B.
`
`Riley.”14
`
`42. Approximately one year later, on July 29, 2019, B. Riley entered into
`
`an amendment and restatement of certain loan obligations with Vintage. As part of
`
`the loan, Vintage agreed to pledge as collateral 5,000,000 shares of B&W.
`
`13 Brendan Pierson, Rent-A-Center not bound by merger deal with Vintage Capital -judge,
`REUTERS (Mar. 14, 2019), https://www.reuters.com/article/idUSL1N21122N/ (emphasis
`added).
`14 Press Release, Babcock & Wilcox Enterprises, Inc., Babcock & Wilcox Announces
`(Aug.
`9,
`2018)
`Second
`Quarter
`2018
`Results
`15
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`43.
`
`Then, on February 9, 2021, B. Riley and Vintage entered into an
`
`agreement pursuant to which B. Riley would purchase approximately 10.7 million
`
`shares of B&W common stock from Vintage.
`
`44. As with the Rent-A-Center deal, B. Riley’s and Vintage’s investment
`
`in B&W culminated in litigation before this Court.15 Plaintiffs in that action alleged
`
`that B. Riley and Vintage sought to lower the cost of acquiring a majority stake in
`
`B&W by driving it to the brink of bankruptcy.16 On February 17, 2023, Bloomberg
`
`reported that B. Riley and Vintage agreed to resolve the B&W litigation for $4.75
`
`million.17
`
`American Freight
`C.
`In February 2020, B. Riley served as an advisor and provided financing
`
`45.
`
`support—by arranging and placing a $675 million credit facility—to Franchise
`
`Group in its acquisition of American Freight. Riley emphasized his connection to
`
`Kahn when he stated that he was “pleased to work with Brian Kahn and his team on
`
`https://www.babcock.com/home/about/corporate/news/babcock-wilcox-announces-
`second-quarter-2018-results.
`15 Parker v. Avril, C.A. No. 2020-0280-PAF (Del. Ch.).
`16 Mike Leonard, B. Riley, Vintage Capital Pay $4.75 Million to End Babcock Case,
`BLOOMBERG (Feb. 17, 2023), https://news.bloomberglaw.com/securities-law/b-riley-
`vintage-capital-pay-4-75-million-to-end-babcock-case.
`17 Id.
`
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`this transaction and look[ed] forward to continuing to serve as a strategic partner to
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`Franchise Group.”18
`
`Other Financings
`D.
`46. On January 5, 2023, The Friendly Bear reported that Kahn had pledged
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`various stockholdings to B. Riley, according to Uniform Commercial Code (“UCC”)
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`filings. B. Riley made at least ten different loans to Kahn and entities he controlled
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`from 2018 through 2023, according to financing statements filed with state agencies
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`in Nevada, Delaware, and Florida.19
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`47.
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`The total dollar amount of all loans that B. Riley made to Kahn is
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`currently unknown. However, a July 2023 slide presentation by the investment bank
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`Nomura, which provided financing to B. Riley as part of the Merger, included
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`information about B. Riley’s loans over the years to Kahn. The earliest one it listed
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`was a $37 million loan in July 2019, and by mid-2023 the principal balance on
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`Kahn’s loans was $154 million.20
`
`18 Press Release, B. Riley Financial, Inc., B. Riley Financial Affiliates Serve as Advisor and
`Provide Financing to Support Franchise Group’s Acquisition of American Freight (Feb.
`24, 2020), https://ir.brileyfin.com/2020-02-24-B-Riley-Financial-Affiliates-Serve-as-
`Advisor-and-Provide-Financing-to-Support-Franchise-Groups-Acquisition-of-American-
`Freight.
`19 An Unremarkable Deal.
`20 Id.
`
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`III.
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`B. RILEY FINANCES VARIOUS COMPANY-RELATED
`TRANSACTIONS, AND FRANCHISE GROUP SEEKS TO
`RAPIDLY DE-LEVER
`48. On November 11, 2020, B. Riley provided funding to Bebe Stores, Inc.
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`so it could acquire 47 Buddy’s rent-to-own franchises from Franchise Group.
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`49. A year later, in November 2021, Franchise Group acquired Badcock for
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`$580 million in cash (the “Badcock Acquisition”). To finance the Badcock
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`Acquisition, the Company entered into first and second lien credit agreements that
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`provided $575 million in term loans.21 The Company also maintained a revolving
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`loan facility with certain lenders, and, in August 2022, Franchise Group entered into
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`the Third Amendment to the Company’s Third Amended and Restated Loan and
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`Security Agreement, which increased the Company’s senior secured revolving loan
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`facility thereunder (the “ABL Revolver”) to $400 million.22
`
`50.
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`Following the Badcock Acquisition, Franchise Group disclosed that its
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`“acquisition strategy and capital allocation plan” going forward contemplated
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`“evaluat[ing] alternatives for certain non-core assets to rapidly de-lever the
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`Company back to its target net leverage ratio” and “explor[ing] partnerships with
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`21 Proxy at 19.
`22 Id. at 20.
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`third-party consumer finance vendors in order to facilitate Badcock’s transition out
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`of underwriting, holding and servicing consumer credit accounts.”23
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`51.
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`To achieve the latter goal, Franchise Group unsurprisingly turned to B.
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`Riley.
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`52.
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`In December 2021, B. Riley and Badcock entered into a Master
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`Receivables Purchase Agreement (the “Receivables Agreement”), pursuant to which
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`B. Riley paid $400 million to acquire Badcock’s existing portfolio of consumer
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`credit receivables.24 B. Riley would, per the Receivables Agreement, continue to
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`purchase additional Badcock consumer credit receivables from December 20, 2021
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`through an undefined future date that Badcock and B. Riley would “specify in
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`writing in their sole discretion.”25 In connection with entry into the Receivables
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`Agreement, Riley stated: “[t]his transaction is also a continuation of our commitment
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`to enable Franchise Group’s success as a leading operator in the franchising
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`sector.”26
`
`23 Id. at 19.
`24 Id.
`25 Franchise Group, Inc., Current Report (Form 8-K) (Dec. 21, 2021) at Ex. 2.1.
`26 Press Release, B. Riley Financial, Inc., B. Riley Financial Purchases Receivables
`Portfolio in Connection with Franchise Group's Recent Acquisition of W.S. Badcock
`Corporation (Dec. 20, 2021) https://m.insidertracking.com/b-riley-financial-purchases-
`receivables-portfolio-in-connection-with-franchise-group-s-recent-acquisition-of-w-s-
`badcock-corporation.
`
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`53.
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`Following the Badcock Acquisition, beginning in late 2021 and
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`continuing throughout 2022, Franchise Group purportedly solicited proposals from
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`other third-party consumer finance vendors to facilitate Badcock’s complete exit
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`from its consumer credit business.27 Yet, by the time of the Merger, Franchise Group
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`and Badcock supposedly had not been able to “find a satisfactory solution” with
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`third-party consumer finance vendors.28
`
`54.
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`Thus, beginning
`
`in November 2022,
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`the Company “initiated
`
`discussions with certain of its lenders to consider modifications to the Company’s
`
`financing arrangements that would permit Badcock to finance its accounts
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`receivables outside the scope of the covenants under the Company’s financing
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`facilities.”29
`
` The undisclosed lenders communicated
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`that “the necessary
`
`amendments to [Franchise Group’s] financing facilities to accommodate the
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`necessary working capital financing would likely come at a significant cost to the
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`Company and ultimately may not be approved by the lenders.”30
`
`55. Getting the message, in mid-January 2023, the Company pursued an
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`upsizing of its credit facility to “provide additional capacity to finance working
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`27 Proxy at 20.
`28 Id.
`29 Id.
`30 Id.
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`capital, including, if necessary, Badcock accounts receivables.”31 To do so, the
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`Company turned to its FRG First Lien Credit Agreement—one of the two loans used
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`to finance the Badcock Acquisition—and determined to pursue an amendment of its
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`terms for a third time to upsize its credit facility.32 Franchise Group also disclosed
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`that it intended to finalize the transition from in-house financing by the end of June
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`2023.33
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`56.
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`The January 18, 2023 Board minutes indicate that the Company initially
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`considered
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`34 Franchise Group intended to
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`
`
`
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`the January 18 meeting indicate that the
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`
`
`35
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` The Board resolutions to
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`31 Id.
`32 Id. at 19–20.
`33 Id. at 20.
`34 FG_00003050.
`35 FG_00003051.
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`57. On February 2, 2023, Franchise Group completed the upsizing of the
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`FRG First Lien Credit Agreement and obtained an incremental term loan facility in
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`the principal amount of $300 million.36
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`IV.
`
`KAHN AND LAURENCE SET THE STAGE FOR A
`TRANSACTION BY CAUSING FRANCHISE GROUP TO
`REPURCHASE MILLIONS OF OUTSTANDING SHARES IN
`LATE 2022
`58. On May 18, 2022, as the Company purportedly solicited potential
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`buyers and financing for the Badcock receivables, the Board approved a stock
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`repurchase plan whereby the Company, at the discretion of management (i.e., Kahn
`
`and Laurence), could repurchase up to $500 million of its outstanding shares of
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`common stock over the next three years.37 The stock repurchase plan superseded a
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`previous repurchase plan that was in place since June 2016, which authorized up to
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`only $10 million in share repurchases.38 Under the previous plan, the Company did
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`not make any repurchases of its common stock in fiscal years 2018 through 2021,
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`36 Proxy at 20.
`37 Franchise Group, Inc., Current Report (Form 8-K) (May 19, 2022) (stating “[t]he actual
`timing, number and value of shares, if any, repurchased under the program will be
`determined by management in its discretion[.]”).
`38 Franchise Group, Inc. (f/k/a Liberty Tax, Inc.), Annual Report (Form 10-K) (June 29,
`2016) at 31