Disputes Divide Tech Companies

Shareholder and director disputes can shred a promising company faster than new technology becomes obsolete.

In a high-profile case in Benton County, Vision Technologies Inc. executives, shareholders and an inventor dragged each other through the mud, alleging everything from sexual harassment to embezzlement to threats of violence. It all culminated when a member of management was “physically removed from the premises” by a Benton County Sheriff’s deputy prior to a 2007 shareholders’ meeting, according to court documents.

The company makes military-grade remote video cameras and systems for external use on navy destroyers and tanks.

The VTI suits — a total of six were filed and are now closed — read like a dry John Grisham novel, chock-full of conspiracies and secrecy surrounding the company’s financials.

Few disputes will get so molten, but even medium-tempered fights can dissolve a company or the founders can find themselves looking in from the outside.

Steven Brooks is a partner at Friday Eldredge & Clark LLP’s Rogers office. A large part of his practice is related to private securities offerings and corporate structuring. He works with many start-ups and technology-based companies coming out of the University of Arkansas.

He has not been involved in the VTI suits and did not speak directly about them.

There are several tactics founders and inventors can use to try to protect their companies and the integrity of their boards, he said.  

“Be protective of your capital structure and don’t give too much away in terms of equity,” Brooks said.

Clawback clauses (the ability to recover money in certain instances) and day-to-day operation duties can also be written into contracts.

It’s important to pay close attention to the capital and management structure on the front end of company development, Brooks said.

“The second thing is to make sure the investors are a strategic match,” he said.

Investors with sufficient money might not come with a sufficient appetite for risk.

And if an investor does not meet certain qualifications, he or she could possibly cause securities violations for the company, Brooks said.

It’s sometimes better for a company to turn down an investor, no matter how pressing capital needs are, Brooks said.

Then there’s securities law. Brooks said companies should be aware they must comply with applicable federal and state securities laws.

“Too often, this gets overlooked in the search for capital, but can cause longer term problems if investor expectations are not met,” he said. “A little time invested on the front end with good securities counsel can avoid many problems.”

But in the end, Brooks said, there’s really nothing a lawyer can do to completely insulate a company from disgruntled management, financial issues or shareholders’ dissatisfaction with management.

“The composition of the board is what it is,” he said.

Inventions

In another dispute that’s still ongoing, Tom and Nancy Muccio and their son, Mike, moved their case to Washington County Circuit Court in an attempt to regain control of BioBased Technologies Inc. of Fayetteville.

This after a bankruptcy judge approved a restructuring plan proposed by other shareholders, which included Johnelle Hunt and Phil Phillips.

To be fair, the shareholders brought money — between $2 million and $3 million to the table — but according to court documents, hard feelings over management were circulating before financial woes took hold.

BioBased is best known for its soy-based spray foam insulation, which is its primary consumer product. It also manufactures Agrol, a family of bio-based polyols for use in polyurethane products such as rigid and flexible molded foam, which has an application for automotive dashboards.

Meredith Lowry is a patent attorney for Keisling & Pieper PLC of Fayetteville. Her practice involves intellectual property, trademarks, copyrights and commercial litigation.

She’s not involved in the BioBased or VTI cases and did not speak directly about either. 

She said when it comes to inventions, they’re owned by the people who invent them, not necessarily investors in the company.

“Patent protection is a small part of the process,” she said. “We usually try to figure out if they want to produce their invention or sell the patent.

“In that case you’re not so concerned about the business structure of the company.”

Both VTI and BioBased remain in business, manufacturing and selling products.