United States District Court, D. Massachusetts
[Copyrighted Material Omitted]
For America's Growth Capital, LLC, doing business as AGC Partners, Plaintiff: David H. Rich, J. Owen Todd, LEAD ATTORNEYS, Todd & Weld, Boston, MA; Edward Foye, Todd & Weld LLP, Boston, MA.
For PFIP, LLC, doing business as Planet Fitness, Defendant: Kathryn E. Wilhelm, LEAD ATTORNEY, Deanna B. FitzGerald, Jesse M. Boodoo, Ropes & Gray - MA, Boston, MA; Peter L. Welsh, LEAD ATTORNEY, Ropes & Gray LLP, Boston, MA.
FINDINGS OF FACT, RULINGS OF LAW, AND ORDER AFTER A JURY-WAIVED TRIAL
Richard G. Stearns, UNITED STATES 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.
1. Founded in 1992, defendant Planet Fitness is a national gymnasium franchise. 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.
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.
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.
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.
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. 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.
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. 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. 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. 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.
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% % 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 EBITDA at $1B." 
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."  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."  Howe then contacted Kirkpatrick who told him to limit the initial Request for Proposal (RFP) solicitations to a maximum of fifteen bidders.
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. 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.
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. The same day, Howe spoke with Moore and mailed him a draft of the Engagement Letter.
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.
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. 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. Grondahl testified that his involvement was limited
to a review of Exhibits A and B of the final draft.
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.
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."  Moore replied that AGC should " send [NDA's] my way for review."  He also informed Li that his full title was " Executive Vice-President & General Counsel." 
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."  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."  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." 
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). 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."  Howe responded by asking, " Do you have any time tomorrow morning to go through the current set of private equity firms?" 
20. Howe also wrote separately to Moore and Kirkpatrick on August 6, requesting an executed copy of the Engagement Letter. 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."  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 table. You realize this may totally f[__ ] the Invus deal up? I'd like to see his list before we sign anything." 
21. On August 7, Moore wrote back to Howe, requesting, among other changes in the Engagement Letter, that the " [d]efinition of Strategic Transaction [be] limited to the list of PE shops -- please add exhibit." 
22. Later that day, Howe responded to Kirkpatrick and Benson with a second draft of the Engagement Letter, with the following cover note.
Help me get this engagement letter put to bed today. . . . We can agree to limit the scope of the engagement to a list that we have attached to our engagement letter, but obviously if anyone else approaches the company, that party would be added to the list. Because we're already giving a significant discount on the fee, we wouldn't want Bain or anyone else further reduced. We've attached that list as Annex B to the engagement letter.
Howe suggested modifying the " Term and Termination" section of the August 7 draft as follows:
5. Term and Termination: . . . AGC will continue to be entitled to . . . (ii) its full Strategic Transaction Fee provided for herein in the event that . . . the Company consummates or enters into an agreement providing for a Strategic Transaction with a party contacted by or which contacted AGC, contacted by or which contacted the Company or its affiliates or agents, or which had communications with AGC, the Company or its affiliates or agents, prior to the expiration or termination of this engagement;
. . . .
An initial list of potential Strategic Partners is set forth in Annex B hereto and made a part hereof. The parties agree that each will provide the other, upon the expiration or termination of this agreement, with a list of any party contacted by or which contacts it or its affiliates or agents, or which had communications with it or its affiliates or Agents, during the term of this engagement, which list shall supplement and become part of Annex B upon such delivery to the other party. The parties agree that the purpose of Annex B is to assist in the administration of this agreement and failure by the Company or its agents to include a person or entity on the list as required does not affect the Company's obligations under this Section 5. The confidentiality
provisions set forth in Section 8 hereof shall also survive any termination or expiration of this agreement.
Annex B contained a list of " initial potential Strategic Partners." All of Howe's proposed additions to Paragraph 5 were removed from the final draft of the Engagement Letter.
23. Moore submitted the draft of Annex B to Grondahl, who crossed four names (TA Associates, Huntsman Gay, Golden Gate, and TPG) off the list. Moore relayed Grondahl's deletions to Howe by telephone. Howe objected to the names being struck. Moore agreed to leave the names on the list for the time being and to revisit the issue with Grondahl. Moore (with Kirkpatrick's support) told Howe " to continue full speed ahead on those names," and that " it was a matter of bringing those parties to a serious bid, and if we did, they would let Mike [Grondahl] know . . . that we'd overcome whatever his issue was." 
24. At 4:20 p.m. on August 8, Howe sent Moore a third draft of the Engagement Letter, with the assurance that, " We modified the successes fee to 0.95% and eliminated the kicker," and noting that the list of potential prospects remained attached, " but obviously if anyone else approaches the company, that party would be added to the list."  Annex B of the third draft was almost identical to the version in the second draft - " An initial list of potential Strategic Partners" -- and still included Golden Gate, Huntsman Gay, and TA Associates.
25. On August 9, Howe sent another Process Update listing twelve interested parties, ten " contacted" parties, and three " passed" parties. Ex. 32. Howe separately provided a fourth draft of the Engagement Letter noting, " Here is what I think we agreed to -- we're dropping our fee from .95% to .75% with a fee of 0.5% on a list of 7 parties to be specified as an annex to the letter . . . ."  The August 9 draft revised the definition of Strategic Transaction Fee so as to entitle AGC to a fee of 0.75% on consummation of a sale to any party, except for those listed on Annex B, for which AGC would be paid a smaller fee of 0.5%. Annex B still contained only one list, but now that list bore the title, " Legacy Strategic Parties," identifying those parties for which AGC would only earn a 0.5% fee as opposed to its full fee. As of August 9, only Bain appeared on this list, although there were spaces left blank for other parties to be inserted.
26. By Friday, August 10, AGC had submitted RFP packages to some 20 private equity firms and other possible investors, prompting Howe to forward another Process Update. Howe also emailed
Moore and Kirkpatrick asking for an executed Engagement Letter, suggesting that " If there are still open items, let's get on the phone and talk about them." Ex. 34. Moore responded to Howe's email by writing, " Hey Ben, no issues; just trying to finalize with Wells the few they have and also the principals weren't all here today." 
27. Three days later, on August 13, Moore responded to the Process Update stating, " Wells gets Equinox because of prior contract . . . Wells gets Apax, Onex, and Blackstone [and] Wells also gets Advent, Carlyle and Berkshire as they are 'Not Interested' in your plan. Only fair to give Wells a shot at them. If you don't have an Apollo NDA executed by Friday Wells gets them. Wells has the right to present options to us that you have not and they get those. Please write this up and we'll execute." 
28. Howe replied almost immediately by sending a fifth revised draft, noting that it was " modified . . . for us to work with Wells Fargo."  Howe, however, added only Apax, Equinox, and Onex to Annex B, and explained that AGC would " like to keep Blackstone out of Annex B if possible because we requested approaching them earlier and David asked us to exclude them from the launch list."  He concluded with the plea to " Please send back a signed clean copy today. Call me if there are any other issues."  In the same email, Howe also proposed thirteen new " financial partners" " that we will launch to with your ok." 
29. Seven minutes later, Moore wrote back, " Not sure we're on the same page. You get .65 [fee] for those you've reached out to and [are] working with (and that's open ended for others you may reach out to and work with). You get .5 for Bain."  Moore and Howe emailed back and forth on which entities were " Wells shops" or " William Blair shops," with Moore insisting, " We aren't trying to take anything away from you; rather we just want to be realistic -- if Wells has a connection that you don't then Wells should get that bite at the apple. This is important given our tight time frame." 
30. Howe simultaneously emailed Benson, Kirkpatrick, and Moore detailing the work AGC had done to that point on the Planet Fitness sale, adding, " We're now ready to get the engagement letter put to bed."  Howe noted Moore's " expanded  list of Wells names" in his proposed fee structure, complaining that " It was obviously a surprise to us on Thursday to find out that were now going to co-advise with Wells Fargo . . . ." 
31. Benson addressed Howe's email later that night, omitting Howe from the addressee line and adding Grondahl, protesting that " having 12 banks all soliciting bids makes us look like N.H. hicks. . . . We should hire one bank not 12 and we should beat the hell out of them to get it done . . . . [and] pay them on all of the deals so they want to close any [sic] one of them and be done with it."  Moore responded, " Understood. Will work with Ben to solidify
him as lead banker."  Grondahl responded with the query, " I thought Wells was fired?" 
32. On August 14, Howe sent Moore and Kirkpatrick another Process Update and requested a telephone call to discuss a " [g]reen light on reaching out to thirteen additional private equity firms . . . ."  Moore responded by telling Howe to " Hold [off] on reaching out to any new PE shops. I'll call you shortly." 
33. Later that afternoon, Moore wrote to Howe proposing to include Apollo " on [Wells'] list," while still " appear[ing] on [AGC's] .5 list," and stating that the " final" Wells' list would include Equinox and Invus, for which AGC would receive no fee, and Apollo, Apax, Onex, and Blackstone, for which AGC would (if successful) earn a fee of 0.5%.
34. Howe responded an hour later with a sixth draft of the Engagement Letter, requesting that " If Mike is ok with this deal, please sign the letter and send it back."  The sixth draft provided that AGC would receive a Strategic Transaction Fee of 0.75% for a completed deal with " any of the parties listed in Exhibit A" and a fee of 0.5% for " any of the parties listed in Exhibit B." This was the first of Howe's drafts of the Engagement Letter to include the Exhibit A and Exhibit B lists. In the cover letter accompanying the draft, Howe wrote, " We have amended the engagement letter so that AGC is paid nothing for a deal with Invus, only 0.50% for the names on Exhibit B managed by Wells Fargo and William Blair and 0.75% for the AGC list plus any names you add to it in writing. We are ...