The parent company of California brand Bloom Farms can continue its Series E financing, following a Thursday court ruling in a broader case involving the company.
An investor sued American General Resources LLC (AGR) last month over its business practices related to corporate governance and financial management at Bloom Farms. The defendants have called the investor’s demands baseless and unreasonable.
Plaintiff Jeff Menashe is CEO of cannabis and alcohol investment banking firm Demeter Group. He was also a board manager at AGR. Defendants are Bloom Farms CEO Michael Ray, Chief Strategy Officer Vladimir Efros and AGR.
The lawsuit alleges defendants misled Menashe about AGR before his June 2019 investment of $5M. It also alleges AGR revised down its historical net income after Menashe’s investment, moved the date for positive net income forward and did not disclose a brewing prosecution against the then CFO’s involvement in a separate solar energy “Ponzi scheme.” He left the company and in October 2019 pleaded guilty to two counts of federal securities fraud.
This week’s ruling from Delaware’s Court of Chancery involves a narrow issue in the case.
Menashe had argued AGR’s operating agreement required his consent, as a Series D manager, to allow Series E financing that gives those investors preference in liquidation. An earlier ruling had granted plaintiffs a restraining order on the closing—but not shopping—of Series E financing pending a decision on the operating agreement’s requirements on the issue of liquidation preference.
This week’s ruling found that AGR does not need to seek approval from the Series D manager to change its operating agreement and issue Series E financing.
“The right for Series D unitholders to maintain priority over all other classes, in perpetuity, in the event of liquidation is not expressly granted,” the ruling stated.
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“The Operating Agreement did not expressly grant any underlying right that would purportedly be removed by amending the Operating Agreement to accommodate a Series E issuance,” the ruling stated. “Defendants are permitted to move forward in closing the Series E financing.”
The narrow issue in the ruling deals with interpreting the company’s operating agreement on the preference of investors who might get some of their investment back in case of bankruptcy, according to Menashe’s attorney Gerard Fox. Menashe had argued that the company needed his consent as a manager on the subordination of his share to a new set of shares.
“It’s a small issue in the case,” Fox said. He plans to appeal the ruling next week.
The case is ongoing. Those broader issues include the allegation that the defendants defrauded Menashe into investing $5M.
Bloom Farms declined to comment on the favorable ruling.