Litigation with Former Management
On May 11, 2017, the Company appointed an independent committee (the “Special Committee”) of the board of directors to conduct an investigation into certain of the Company’s past business practices encompassing each of (a) Thomas A. Hyde, Jr., the Company’s then-President and Chief Executive Officer, and (b) Robert L. Winspear, the Company’s then-Chief Financial Officer, Vice President and Secretary and certain matters relating to the Company’s obligations under its credit facility with GACP Finance Co. After conducting its investigation, the Special Committee determined that (i) Mr. Hyde and Mr. Winspear made payments to themselves of deferred compensation in contravention of the Loan Agreement, (ii) such bonus payments violated a prohibition under the Loan Agreement of making any payments of Subordinated Indebtedness (as defined in the Loan Agreement), and (iii) as a result of such bonus payments, the Company did not have a sufficient cash balance on hand to meet the financial covenants under the Loan Agreement.
On May 15, 2017, following the completion of their investigation, the Special Committee resolved to terminate each of Mr. Hyde and Mr. Winspear, effective immediately, and on May 17, 2017, the Company delivered to each of Mr. Hyde and Mr. Winspear a letter terminating their employment and their status as officers. Mr. Hyde and Mr. Winspear informed the Company that they disputed the Special Committee’s authority to terminate each of their respective employments and officer status, alleging the termination was not a valid action taken by the Company and refusing to recognize the termination letters. On June 4, 2017, Mr. Hyde and Mr. Winspear were formally terminated again for cause at a meeting of the Company’s board of directors. Notwithstanding the formal termination, Mr. Hyde and Mr. Winspear ignored the directive of the Company’s board of directors and continued to report to work at the Company’s offices and to act as executive management, including holding themselves out as such to the Company’s lenders, employees and third parties.
On June 4, 2017, the Company filed an Original Petition and Application for Temporary Restraining Order and Temporary and Permanent Injunctions (the “Pleading”) to initiate a lawsuit against Mr. Hyde and Mr. Winspear in the 134 th Judicial District Court in the District Court of Dallas County, Texas (the “District Court”), in Cause No. DC-17-06555 (the “Lawsuit”). In the Pleading, the Company alleged that Mr. Hyde and Mr. Winspear (together, the “Defendants”) caused violations of the Company’s loan agreement with GACP by paying themselves excessive bonuses in violation of their fiduciary duties (including the duty of loyalty) to the Company, and the Company requested a declaratory judgment that the Defendants were no longer employees or officers. In addition, the Company alleged that it would suffer immediate and irreparable injury without an adequate remedy at law if the District Court did not issue injunctive relief as set forth below. The District Court initially entered a temporary restraining order (the “TRO”) to, among other things, preserve the status quo between the parties pending a temporary injunction hearing (the “Injunction Hearing”). The status quo under the TRO, in effect for only two weeks, allowed the Defendants to continue to carry out their responsibilities in their current roles, subject to certain restrictions set forth in the TRO.
On June 19, 2017, the District Court held the Injunction Hearing. On June 20, 2017, the District Court (a) granted the Company’s application for a temporary injunction against the Defendants (the “Injunction”), and (b) found that the Defendants violated their fiduciary duties (including their duty of loyalty) owed to the Company by causing payments of $750,000 in bonuses to themselves, and that the Company’s board of directors had terminated both Defendants’ employment agreements and removed both Defendants from their positions as officers. The Injunction also enjoins the Defendants from, among other things, (a) coming within 100 feet of any property owned, leased or occupied by the Company; (b) accessing any of the Company’s computer systems equipment, bank accounts or other assets; and (c) holding themselves out as the Company’s employees or officers to any of the Company’s regulators, investors, shareholders, employees, customers, suppliers, lenders or vendors.
On June 30, 2017, the Defendants filed their Original Answer, in which they generally denied the allegations contained in the Company’s Pleadings. The District Court set the date for a full trial on the merits of the Company’s claims against the Defendants for March 2018. The Company intends to vigorously pursue this matter and to protect the integrity of the actions of its board of directors. The Company has incurred significant expenses related to this lawsuit to date and may continue to incur expenses related to this lawsuit. The Company cannot predict the outcome of this lawsuit or for how long it will remain active.
