A battle is underway for control of Austin-based My Fit Foods.
The chain, which has grown to more than 80 locations in five states since its 2006 debut, sells a variety of prepared meals to fitness-minded consumers.
A lawsuit filed in Travis County District Court alleges that a plan proposed by an investor would leave an entity linked to My Fit Foods founder Mario Mendias with a stake in the company of less than 1 percent. The suit alleges breach of implied duty of good faith and fair dealing, breach of duty of loyalty and breach of contract. It seeks between $1 million and $50 million in damages.
State records list Mendias as a managing member of MFF Legacy Holdings, the entity that filed the lawsuit.
In August 2012, according to court documents, San Francisco-based investment group TSG5 AIV 1 invested $40 million, giving the group an ownership stake and one seat on the company’s board of managers.
Representatives for both the plaintiff and defendants in the case did not return messages from the American-Statesman seeking comment.
The company’s CEO was replaced in April 2013, according to the suit. At that time, TSG reportedly invested $2 million more, giving it a 53.73 percent share in the company.
Soon thereafter, TSG wound up with three seats on the board, giving it a majority. Mendias was worried he was losing control of the company, the suit states, but a TSG representative allegedly told him “there was no cause for concern.”
But that wasn’t the case, Mendias claims.
“The reconstitution of the board and the ouster of the CEO also allowed TSG to effectively take over all aspects of the company, including its operations,” according to the suit.
Thanks to its continued expansion, the company was listed as being worth $88 million by mid 2013, the suit states, with Legacy’s share of the company valued at $32 million.
However, TSG reportedly began implementing cost-cutting measures that “proved financially disastrous for the company,” according to the suit.
Saying My Fit Foods needed to raise more capital, TSG early this year authorized the issuance of $5 million worth of shares of the company. Through the terms of the transaction, “TSG would recover three times the money it invested in this transaction before plaintiff would see a dime,” the suit says. “In addition, if plaintiff did not contribute a proportionate share of the $5 million, or $1 million, then the voting power and value of its equity would be diluted by 5 percent.”
The company’s financial situation apparently didn’t improve, according to the suit, and it was determined My Fit Foods needed “an immediate infusion of cash.” TSG managers in May announced plans to issue 50 million common units at the “paltry” price of 10 cents per unit, according to the lawsuit.
The proposal “shocked” Mendias. Meanwhile, one of the non-TSG board members suggested that TSG seek a bridge loan instead.
“Despite knowing of the dire financial condition of the company for at least a few months without informing the Legacy board members, defendants said they could not wait and approved the resolution over the opposition of board member Mendias and without the approval of the other Legacy board member,” the suit alleges.
The resolution meant that “if Legacy did not purchase its entire allotment, TSG would do so. This in turn would mean that Legacy’s equity interest would rocket down from 46 percent to 1 percent,” according to the lawsuit.
The plan by TSG’s board members meant Legacy had to come up with $2.3 million almost immediately, the suit says, or Legacy’s entire interest would be “effectively wiped out.”
A trial date has not been set.