America's Growth Capital, LLC v. PFIP, LLC

73 F.Supp.3d 127

AMERICA'S GROWTH CAPITAL, LLC d/b/a AGC Partners

v.PFIP, LLC d/b/a Planet Fitness.

Civil Action No. 12–12088–RGS.

United States District Court, D. Massachusetts.

Signed Dec. 19, 2014.

David H. Rich, J. Owen Todd, Edward Foye, Todd & Weld LLP, Boston, MA, for Plaintiff.

Kathryn E. Wilhelm, Peter L. Welsh, Deanna B. Fitzgerald, Jesse M. Boodoo, Ropes & Gray, Boston, MA, for Defendants.

FINDINGS OF FACT, RULINGS OF LAW, AND ORDER AFTER A JURY–WAIVED TRIAL

STEARNS, District Judge.

Based on the credible testimony and exhibits offered at trial, as well as the stipulations of the parties, I make the following findings of fact.

BACKGROUND

1. Founded in 1992, defendant Planet Fitness is a national gymnasium franchise.¹ Michael Grondahl, his brother Marc Grondahl, and Christopher Rondeau were the sole owners of Planet Fitness from its inception until November 8, 2012, when the October 23, 2012 agreement to sell Planet Fitness to TSG Consumer Partners (TSG) was consummated.

2. Plaintiff AGC Partners is a 50–person boutique investment bank with offices in London, Boston, New York City, San Francisco, and Minneapolis. It was co-founded in 2003 by Ben Howe, who is AGC's CEO and the Head of Investment Banking for AGC's Boston office. Howe has more than twenty-five years of experience as an investment banker. During his career, Howe has participated in over 300 mergers and acquisitions.²

3. Richard Moore was the General Counsel and Executive Vice President of Planet Fitness from July 23, 2012, through November 8, 2012. Prior to joining Planet Fitness, Moore was an associate attorney in the Private Equity Group at Ropes & Gray, LLP, where Planet Fitness was a client. Moore reported directly to Grondahl, and served as the point-of-contact on contractual matters relating to the sale of Planet Fitness.³

4. David Kirkpatrick worked as an independent financial consultant for Planet Fitness from September of 2011 through November of 2012. Kirkpatrick “spearheaded the mini-auction process” that resulted in the sale of Planet Fitness to TSG from an office at Planet Fitness where he worked some forty to fifty hours per week.⁴

5. Craig Benson is a former Governor of New Hampshire who served as a member of an informal “advisory board” that counseled Grondahl on business matters. After the sale of Planet Fitness to TSG, Benson became a member of the new company's Board of Directors.⁵

6. Russell Workman, Lenny Li, and Jason Coppersmith were AGC employees who helped package the sale of Planet Fitness. Workman and Li worked as project managers, while Coppersmith served as an analyst.

7. In the spring of 2012, Planet Fitness began discussions with two competing companies, The Invus Group (Invus) and Equinox Holdings Inc. (Equinox) regarding the sale of Planet Fitness.⁶ By July of 2012, Grondahl and his co-owners had soured on the negotiations. Grondahl in particular believed that the offers tabled by Invus and Equinox, both below $400 million, seriously undervalued Planet Fitness's true worth.⁷

8. With Grondahl's permission, Benson and Kirkpatrick approached Howe in July of 2012, to enlist AGC in the quest for additional suitors. Benson and Kirkpatrick, the former CEO and CFO, respectively, of Cabletron, had worked with Howe previously and thought highly of his abilities.⁸ During an initial call, Benson told Howe that “the founders of Planet Fitness were frustrated, didn't trust bankers, and were hesitant to hire any banker at this stage because of their failures in the past and were looking, if they did do something, to move very quickly.”⁹

9. On July 17, 2012, a first meeting with AGC took place at Planet Fitness's headquarters in New Hampshire. Benson, Kirkpatrick, Grondahl, Marc Grondahl, and Moore attended for Planet Fitness, while AGC was represented by Howe, Li, Coppersmith, and Elizabeth Cieri (an AGC intern). Grondahl emphasized his desire to avoid wasting time with lukewarm prospects and to conclude a deal in 2012, before the expected increase in the capital gains tax.¹⁰ To this end, Kirkpatrick was identified as the Planet Fitness team member “running point” on the financial side, including business operations, due diligence, and financial modeling.¹¹

10. On July 18, Howe followed up with a “pitch letter” email to Planet Fitness outlining the “AGC Gameplan.” Ex. 6. In the email, Howe proposed that AGC be compensated by (1) a “$100K non-creditable” retainer; (2) a financing fee (noting “[a]lthough we would normally charge 1.25%, we will drop it to 0.75% because of the relationship with Craig and David ....”); and (3) a success fee (of .05% “for a transaction consummated with a public shell and 0.75% +3% above $450M for a transaction consummated with any other party”). Id. Kirkpatrick asked Howe to hold off until the Planet Fitness owners made a decision about the Invus offer (Planet Fitness was under an exclusivity agreement with Invus at the time). During the next week, Howe emailed Benson, Kirkpatrick, and Grondahl touting his engagement, writing that “[a]t a minimum I should be good for leveraging up the price 20% .... [W]hen I sold SS & C to Carlyle Group ... [I] sold the company for 18x EBITDA¹² at $1B.”¹³

11. On July 27, 2012, the Invus exclusivity agreement expired. Grondahl wrote immediately to Howe, asking him to “go get me the 18x[.][O]ur [I]nvus deal is not looking good and our exclusive is up.”¹⁴ Howe responded to the email one minute later stating, “I'm ready to rock and roll. When can you meet?” Grondahl replied, “[I] am away for 10 days [so] you will need to work thru [K]irkpatrick.” Id. Howe wrote back asking if Grondahl had “5 minutes for a call this afternoon.” Grondahl replied, “I'm at an MX race in Tennessee I won't b[e] around till a week from [M]onday.”¹⁵ Howe then contacted Kirkpatrick who told him to limit the initial Request for Proposal (RFP) solicitations to a maximum of fifteen bidders.¹⁶

12. On July 31, Howe emailed Kirkpatrick, enclosing a copy of a “cover note that I will be sending out tomorrow morning to the PE firms,” together with a list of the fifteen firms he proposed to contact.¹⁷ Howe added that “[w]e'll shoot you a draft engagement letter tomorrow on the hopes that Mike wants to drive a full-scale sale process starting next week.” Id. Kirkpatrick told Howe that Moore would review the proposed Engagement Letter for language and potential conflicts of interest.¹⁸

AUGUST 1—AUGUST 17, 2012

13. On August 1, AGC began contacting the fifteen private equity firms that Howe had listed in his email to Kirkpatrick.¹⁹ The same day, Howe spoke with Moore and mailed him a draft of the Engagement Letter.²⁰

14. Between August 1 and August 17 (when the Engagement Letter was finally executed), AGC reached out to some twenty potential investors on behalf of Planet Fitness, generating interest from at least fourteen of them. With these fourteen, AGC coordinated data room access, created and delivered management presentations and valuation guidance, scheduled WebEx and in-person meetings, and secured Non–Disclosure Agreements (NDAs) from eleven of the potential bidders.²¹

15. Between August 1 and August 17, Planet Fitness and AGC also negotiated the terms of the Engagement Letter, with Howe and Moore exchanging nine different drafts.²² Benson participated briefly in an attempt to persuade Howe to lower AGC's requested fee, but took no part in the negotiations over the other material terms of the Engagement Letter.²³ Grondahl testified that his involvement was limited to a review of Exhibits A and B of the final draft.²⁴

16. Howe based his initial August 1 draft of the Engagement Letter on AGC's standard sell-side commitment contract. On behalf of AGC, Howe proposed that his firm be paid a Strategic Transaction Fee of 0.75% of the Aggregate Consideration for Planet Fitness up to $450 million, plus 3% of any portion of the Aggregate Consideration in excess of $450 million.²⁵

17. Despite the absence of an executed contract, AGC continued to work on the RFPs. Lenny Li, the responsible AGC project manager, emailed Moore to introduce himself with the query, “I assume we should send all proposed NDAs to you for review, but let us know if we should be sending them to somebody else.”²⁶ Moore replied that AGC should “send [NDA's] my way for review.”²⁷ He also informed Li that his full title was “Executive Vice–President & General Counsel.”²⁸

18. On August 2, at 8:47 a.m., Howe emailed Moore the first of many AGC “Process Updates” describing the responses of the firms that AGC had initially approached, as well as proposing five additional equity investment firms “to be contacted.”²⁹ Howe wrote, “[w]e've listed 5 names in the ‘to be contacted’ bucket that we would like to reach out to. Attached are their profiles. We'll talk about these names on the call. With your ok, we'll go out to these guys today.”³⁰ After a phone call between Moore and AGC, Moore responded by email, “Hey guys—I can't give you Leonard Green. Apologies for not bringing that up on the call.”³¹

19. On August 5, Howe sent Planet Fitness another Process Update listing several parties as “interested,” including TA Associates, Huntsman Gay, Golden Gate, and Texas Pacific Group (TPG).³² On August 6, Grondahl responded, “[t]o save time, Golden Gate, Huntsman Gay, TA [Associates], and TPG should be disqualified. We have either been down the path or are too small.”³³ Howe responded by asking, “Do you have any time tomorrow morning to go through the current set of private equity firms?”³⁴

20. Howe also wrote separately to Moore and Kirkpatrick on August 6, requesting an executed copy of the Engagement Letter.³⁵ Moore then emailed Grondahl, “Ok to sign engagement letter with Ben?,” informing Grondahl that Howe “wants 0.75% fee plus 2.5% for any amounts above $450m.”³⁶ Grondahl responded to Moore fifteen minutes later with the instruction, “Only for the firms he has listed[,] and Bain is .75 regardless of the value because he didn't really bring them to the...