At the end of last month, EMAK Holdings Inc had filed a lawsuit against the Boston law firm Ropes & Gray in San Francisco Superior Court for its role in destroying the marketing services company EMAK Worldwide Inc. Court papers showed that EMAK claimed the legal advice provided by Ropes & Gray in a 2009 proxy contest helped to increase the financial woes of EMAK Worldwide and force the company into bankruptcy. After emerging from Chapter 11 bankruptcy in June 2011, the company is going after the law firm for professional negligence and unspecified damages.
The 18-page lawsuit against Ropes & Gray claims the law firm “breached its duty to exercise reasonable care, skill, and diligence and to act competently” in a stock transaction that granted preferred shareholders a new voting rights in a proxy contest.
At the time concerned, EMAK was battling its former CEO, Donald Kurz, and trying to prevent him from regaining control of the company’s board of directors. The company hoped to attain its objectives by granting preferred stockholders new voting powers in the election of directors.
However, after EMAK granted such voting rights to preferred shareholders, the move was challenged in court by Kurtz and others in the Delaware Chancery Court. Before the court could issue a ruling, EMAK decided to rescind the move. Subsequently, Vice Chancellor Travis Laster ordered the company to pay a $2.5 million fee as legal costs to Kurtz and other plaintiffs – a financial burden, which according to EMAK, drove the company into Chapter 11 bankruptcy.
EMAK also said that the court battle cost it more than $5 million in legal fees. The company has alleged that former Ropes & Gray attorney Christopher Austin, who was the lead lawyer in the concerned case, breached a duty to EMAK by not fully vetting the legality of the stock transaction before it was signed.
Austin had left Ropes & Gray in February 2010 to join Goodwin Procter, but at the time of the referred case he was the co-head of Ropes & Gray’s technology company an venture capital practice group.
The lawsuit mentions that Kurz corresponded with Austin via email on the very day the transaction was signed by EMAK’s board of directors, and that Kurz had warned Austin that under Delaware law the transaction was illegal. However, Austin ignored the warning, did not inform EMAK properly, and did not investigate the legal status of the transaction thoroughly before allowing it to pass despite warnings.