Seven shareholders of the Conway technology company First Orion Corp. have filed a lawsuit against a former executive for Acxiom Corp. for using proxies granted by two of the plaintiffs to take control of the company.
The 30-page lawsuit says that Charles Morgan, chairman of First Orion’s board of directors, increased his share of capital stock in the company from 15 percent to 72 percent by using the proxies, which were given in return for a loan Morgan gave the company.
An amended version of the lawsuit was filed in the Court of Chancery in Delaware on May 23 by the plaintiffs, Keith A. Fotta, Telemark Technology Inc., Gerald A. Clark, James B. Rich, Ilene Rich, Diane Jurmain and Peter Jurmain.
First Orion, a private company, was founded in 2007 by Fotta and is the owner of PrivacyStar, a security application for smart phones that gives users the ability to block unwanted calls, find out who called through a reverse directory search, and report calls to federal regulators.
In the lawsuit, the plaintiffs assert several claims, including breach of fiduciary duty and waste against Morgan, a former chief executive of Acxiom, and Jeff Stalnaker, First Orion’s chief executive.
Stalnaker is also the former president of Acxiom’s financial services division.
Morgan was also named as a defendant in the lawsuit as a trustee of the Charles D. Morgan Revocable Trust and First Orion, as a company, is also named a defendant.
Morgan declined to comment on the lawsuit Tuesday. He did say the company plans to file a response later this week.
Megan Knight, a spokesman for First Orion, said in an e-mail that the company had no comment.
Grant Fortson of Little Rock, counsel for the plaintiffs, also declined to comment on the case Tuesday.
According to the filing, Morgan, in 2008, agreed to invest $2 million in First Orion in exchange for shares of preferred stock representing 20 percent of the company’s outstanding capital stock.
However in 2009, Morgan, after investing $1.1 million in the company, said he could not invest the full $2 million,because of “a personal unavailability of cash,” the lawsuit said.
When Morgan reduced his investment in First Orion, it “left First Orion without sufficient capital to fund operations, especially because the company was planning to launch its “PrivacyStar” smartphone application,” later that year, the lawsuit stated.
Morgan then told Fotta that he would loan the company $500,000 under certain conditions. This included Morgan receiving warrants to purchase common shares of First Orion over the next 20 years for $1.50 per share, according to the lawsuit.
The agreement was also made under the condition that if the company did not fully repay the loan by Jan. 15, 2010, then Morgan would receive one share of preferred stock of the company for each dollar advanced under the loan, according to the lawsuit.
Asked about the proxy votes, Andy Terry, a professor of finance at the University of Arkansas at Little Rock, said that stocks used by First Orion to pay back the loan is not unusual because often they do not have the cash flow to pay.
“For private companies that are in start up situations, it’s certainly normal to use stock to compensate people,” said Terry, who is not familiar with the lawsuit.
The lawsuit said that the final condition of the loan was that Morgan would received proxies for the the common stock shares Fotta and Telemark (Fotta owns 98 percent of Telemark’s outstanding stock) owned if the money was not paid back in full on Jan. 15, 2010.
Between October 2009 and January 2010, First Orion only drew $400,000 of the loan from Morgan, but the company was unable to repay that amount to Morgan. Therefore, the conditions of the loan went into effect, according to the lawsuit.
The lawsuit said that after First Orion failed to repay the loan, “It became apparent that Fotta would be denied any role in the future management of the company. In essence, Morgan told Fotta that Morgan had control of the Company; Fotta could stay if he wanted but he would not be paid.”
Then, Morgan, using the proxies, replaced Fotta with Stalnaker as a member of the company’s board of directors in January 2010, according to the lawsuit. Stalnaker was also named president and chief executive officer of the company.
At the time, the board only had two members. It now has three members. The third board member is Kent Burnett of Little Rock.
Fotta resigned from the company in a letter dated Jan. 29, 2010, but did not relinquish his stock in the company, according to the lawsuit.
The suit said that on Feb. 16, 2010, Morgan, holding Fotta and Telemark’s proxies, issued a large block of common stock from First Orion to Morgan by declaring a dividend of 73.99 shares of common stock for each outstanding share of preferred stock.
Morgan also used the proxies he held “to vote a majority” of the company’s stock in favor of increasing the authorized stock and the dividend. This increased Morgan’s share of capital stock in First Orion to 72 percent, and lowered the plaintiff’s share from 72.5 percent to 4.50 percent, according to the lawsuit.
Morgan and Stalnaker also gave Morgan warrants to purchase more than one hundred million shares of stock in First Orion that could be exercised at about 2 cents, the lawsuit states.
The plaintiffs in the lawsuit are asking that Morgan’s stock transactions and proxy votes be voided, and for court to award them damages for their losses.
Business, Pages 25 on 06/19/2013