Patriarch Partners Chief Executive Officer Lynn Tilton lost a challenge to her removal by Zohar investment funds from the boards of some portfolio companies she claimed to control.
Tilton improperly granted herself permanent control over board seats at three companies within the Zohar funds she once managed and the funds are the firms' proper owners., a Delaware judge ruled Thursday.
Patriarch's Tilton stepped down as manager of Zohar's distressed-debt funds last year after coming under fire from investors and the U.S. Securities and Exchange Commission about her handling of the entities. She then permanently appointed herself to the boards of three of the companies Zohar managed.
That move caused an improper transfer of "the voting rights attached to the portfolio companies' shares in violation'' of agreements covering the firms, Delaware Chancery Court Judge Joseph Slights ruled.
"We strongly disagree with this ruling and will immediately appeal to the Delaware Supreme Court,'' Richard White, a Patriarch spokesman, said in an emailed statement.
The Zohar funds' managers challenged Tilton's refusal to step down from the boards of distressed companies such as FSAR Holdings Inc., Universal Ltd., and UI Acquisition Holding Co. They also accused her of overcharging the companies for management fees.
Patriarch stepped down as manager for the Zohar funds in the wake of disputes with MBIA Inc. and minority investors about the performance of the entities. Investors questioned whether Tilton was unfairly enriching herself at the expense of the companies she was supposed to be trying to turn around.
More than $800 million of debt insured by MBIA is at stake in one of the funds. Patriarch had sought to push one Zohar entity into bankruptcy and impose a reorganization plan that it said would pay MBIA in full.
During a trial in Wilmington, Delaware, Tilton disputed that she charged excessive management fees to the Zohar portfolio companies and countered that the monies were used to help operate the businesses. The fund manager also argued she'd invested her own money into the companies and she controlled the firms rather than the Zohar funds.
In his 96-page ruling, Slights noted Tilton, a sophisticated investor, acknowledged Zohar's ownership of the companies "in several documents she herself executed.'' Since the Zohar funds were the proper owners of the portfolio companies' shares, fund managers "had the authority" to oust Tilton as a director, the judge added.
Earlier this year, Tilton convinced an SEC administrative law judge to reject regulators' allegations that Patriarch Partners bilked investors out of more than $200 million.
The case is Zohar II 2005-1 Ltd. v. FSAR Holdings Inc., 12946, Delaware Court of Chancery (Wilmington).