News

Greed between the lines

Angered by golden parachutes designed by its own executives, Pizza Inn is suing the law firm that helped them revise their employment agreements.

October 19, 2004

Pizza Inn is suing its former legal counsel for its role in creating huge severance packages designed to line the pockets of four of the chain's executives in 2002.

According to a copy of the lawsuit obtained by PizzaMarketplace, Pizza Inn, based in The Colony, Texas, accuses the law firm of Akin, Gump, Strauss, Hauer & Feld and J. Kenneth Menges, Jr. (a lawyer with that firm) of breaching fiduciary duties by scheming with Pizza Inn officers to rewrite employment agreements and amend company bylaws that would ensure their spots on its board of directors.

Though not a defendant in the suit, Pizza Inn's former general counsel and senior vice president of corporate development, Keith Clark, is named as having assisted Akin Gump, (also his former employer) in rewriting employment agreements for himself, CEO and President Ronnie Parker, CFO Shawn Preator and senior vice president of franchise operations Ward Olgreen. As a result of those changes, if those officers left for "good reason" or were removed from their posts, they would receive payouts totaling $7.4 million -- more than twice Pizza Inn's 2003 profit of $3.1 million.

Akin Gump also is accused of conspiring with the officers to amend Pizza Inn's bylaws "to substantially hinder or eliminate the ability of shareholders to change the composition of the Board of Directors." Those changes restricted shareholders' ability to call a special meeting or raise issues at shareholder meetings.

Calls to Pizza Inn and Akin Gump were not returned by press time.

Ongoing skirmish

When Pizza Inn former CEO Jeff Rogers sold 2.9 million shares of common stock to Newcastle Partners on Dec. 6, 2002, the transaction gave it a 32.5 percent slice of the struggling chain and made it the majority shareholder. (Newcastle now owns 36 percent of the company.) Immediately, speculation grew within Pizza Inn that Newcastle might make changes to the executive board, and according to the lawsuit, on Dec. 18, 2002, Parker, Clark, Preator and Olgreen, along with Akin Gump, changed Pizza Inn's bylaws and their employment agreements. Securities and Exchange Commission filings showed that in the event of a change of control, Parker would have pocketed $5.4 million, Olgreen $630,000, Clark $605,000 and Preator $597,000. (See Battle for the Board at Pizza Inn and SEC filing details battle for Pizza Inn board.)

The suit also accuses Akin Gump of advising Pizza Inn's board to reject Newcastle's nominations to the chain's board.

Additionally, Akin Gump assisted Pizza Inn's board in the preparation of a proxy statement to shareholders, which urged them to reject Newcastle's slate of directors. The proxy statement, released to the SEC, cautioned shareholders that the election of Newcastle nominees might result in a change of control, which would trigger their executives' lucrative severance packages. (See Pizza Inn board 'frustrating' Newcastle proxy solicitation by delaying annual meeting again.)

The proxy battle twice forced the postponement of Pizza Inn's 2003 annual meeting, where shareholders would elect the new board. When the meeting finally took place on Feb. 11, 2004, 87 percent of shareholders voted for Newcastle's nominees. (See Newcastle gains control of Pizza Inn board.)

On April 6, Pizza Inn hired the law firm of Thompson & Knight to perform an independent analysis to determine whether the election had effected a change of control. Two months later, the attorneys concluded that hadn't happened. (See Board battle over 'change of control,' millions in parachute payouts, ends at Pizza Inn.)

On June 16, Clark announced his resignation from Pizza Inn, and on June 22, he sold off more than 97,000 shares of Pizza Inn stock. Two days later, he told Pizza Inn that, as spelled out in his employment agreement, the company had undergone a change of control and that it owed him a lump sum payment of $605,882.

Pizza Inn refused to pay, and the conflict is now in arbitration.

According to the attorney representing Pizza Inn in the case, Clark's refusal to accept the Thompson & Knight determination forced the company to protect itself by suing Akin Gump.

"That caused the company to need to take some steps to protect itself for the benefit of shareholders," said Bill Brewer, of Dallas-based Bickle & Brewer. Asked why Pizza Inn hasn't moved to sanction the three remaining officers for their actions, Brewer said, "They put erasers on pencils for a reason, and everyone makes mistakes. So far the only individual that has sought to exacerbate the situation is Keith Clark."

Damages done

Though the suit does not mention a dollar figure, Pizza Inn is seeking a broad range of damages, penalties and interest, as well as disgorgement of all fees paid to Akin Gump. It also wants a jury trial.

"The company is most interested in a return of the fees that shouldn't have been paid to Akin Gump, because they were not in the best interest of Pizza Inn," said Brewer. "Beyond that, the company believes that Akin Gump is responsible, at least in part, for any damages that fall to the company from these various agreements."

Additionally, Pizza Inn wants Akin Gump to turn over all documents and copies of correspondence related to all services rendered by the firm. According to the suit, Akin Gump has not met its requests.