By Casey Sullivan
Sept 7 (Reuters) - The Boston law firm Ropes & Gray has been
sued in San Francisco Superior Court for its alleged role in the
unraveling of marketing services company EMAK Worldwide Inc.
EMAK Holdings Inc, the successor of EMAK Worldwide, said in
court papers that legal advice provided by Ropes & Gray in a
2009 proxy contest contributed to EMAK Worldwide's financial
woes and helped push the company into bankruptcy. The company is
the parent of several advertising agencies and emerged from
Chapter 11 in June 2011. It is asking for unspecified damages.
In an 18-page lawsuit filed on Aug. 30, EMAK said Ropes &
Gray "breached its duty to exercise reasonable care, skill, and
diligence and to act competently" when it advised the company in
2009 on a stock transaction that granted preferred shareholders
a new right to vote in a proxy contest.
EMAK at the time was engaged in a battle with its former
CEO, Donald Kurz, and was seeking to prevent him from regaining
control of the company's board of directors. By granting
preferred stockholders roughly 28 percent of the voting power in
electing directors, EMAK hoped to prevent Kurz from wresting
control of the board.
Once EMAK granted the new voting rights, Kurz and a group of
supportive shareholders filed a motion in Delaware Chancery
Court challenging the move. Kurz and his shareholder supporters
argued that under Delaware law, a company's board of directors
can't make a decision for "the sole or primary purpose of
thwarting a shareholder vote" without compelling justification,
according to court papers.
Before the Delaware court issued a ruling in the case, EMAK
agreed to rescind the transaction. Vice Chancellor Travis Laster
ordered EMAK to pay a $2.5 million fee to cover the legal costs
of the opposing shareholders, a financial burden that forced the
firm to file for Chapter 11 bankruptcy, according to EMAK's
lawsuit against Ropes & Gray.
A Ropes & Gray spokesman did not respond to a request for
EMAK also said the court battle over the stock transaction
cost it more than $5 million in legal fees, according to court
documents. It did not specify what percentage of those fees were
collected by Ropes & Gray, its lead counsel.
Kurz temporarily won, then lost control of the board after
EMAK rescinded the transaction, according to EMAK lawyer Ray
Gallo. Kurz subsequently took a position at Omelet, a branding
company, according to Omelet's website.
In its lawsuit against 1,000-lawyer Ropes & Gray, EMAK
claims former Ropes & Gray attorney Christopher Austin, who
worked as EMAK's lead lawyer during the proxy battle, breached a
duty to EMAK by not fully vetting the legality of the stock
transaction before it was signed.
Austin was the co-head of Ropes & Gray's technology company
and venture capital practice group. He left the firm in February
2010 and is now with Goodwin Procter. Austin did not return
requests for comment.
In its lawsuit, EMAK said Kurz corresponded with Austin via
email the day the transaction was signed by EMAK's board of
directors. Citing Delaware law, Kurz warned Austin that the
transaction was illegal. But Austin, whose client EMAK blamed
Kurz for the company's poor performance, ignored Kurz's warning,
EMAK's lawsuit said.
Gallo said in a statement, "EMAK regrets that the parties
have been unable to resolve this matter informally." A Goodwin
Procter spokesman referred comments to Ropes & Gray.
The case is: EMAK Holdings, Inc, as successor to EMAK v.
Ropes & Gray, No. CGC-12-523843.
For the plaintiff: Ray Gallo, Dominic Valerian and Patrick
Chesney of Gallo.
For the defendant: Not immediately available.
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