June 26, 2013 1:14pm PT by Eriq Gardner
Maker Studios Power Struggle Detailed in Former CEO's Lawsuit
Danny Zappin, the former chief executive of Maker Studios, is among those suing over an alleged conspiracy to take control of the digital media company and divert assets.
Maker Studios is one of the leading producers for YouTube's channels initiative and has worked with Snoop Lion, Robert De Niro's Tribeca Enterprises and Kevin Smith. Time Warner is one of Maker's biggest backers, reportedly sinking $25 million into the company.
The complaint filed Tuesday in Los Angeles Superior Court discusses a power struggle at the company and offers the version of the story from those who lost it. Besides Zappin, company co-founders Scott Katz, Derek Jones and Will Watkins are suing Maker Studios, several of the company's other co-founders, board members, investors, lawyers and others.
According to the complaint, Ynon Kreiz "was dissatisfied by just being a Board member and wanted to become the CEO of Maker and touted [to venture capital board members] that he could turn Maker into a $1,000,000,000 company in three years; but, in order to do so he, would need to be assured, among other things, that he could not be fired from his position of CEO should the VC Board Members be able to secure such a position for him."
Kreiz is currently the chairman of the company's board and was previously chairman and CEO of Endemol Worldwide Distribution.
The lawsuit says that the board members, in alleged breach of their fiduciary duties, "entered into a series of quid pro quo agreements, including employment agreements, whereby they either caused stock to be issued" so as to create a favorable voting block that would control the company.
As a result of the moves, individuals including co-founders Lisa Donovan and Ben Donovan "obtained lucrative employment benefits for themselves." In particular, the lawsuit speaks about the issuance of equity grants.
In May 3, Maker's board is said to have approved Zappin's separation agreement, which gave him an option grant for 60,000 shares at $.87 per share and an opportunity to sell up to 1.6 million shares of common stock.
"The employment agreements with Lisa and Ben Donovan were a critical part of the scheme to oust Zappin from Maker and strip the rights of Common Stock shareholders," says the lawsuit.
The plaintiffs say that a combination of events, from the right to sell certain shares and the immediate vesting of 50 percent of all unvested stock allowed those adverse to Zappin to gain advantage. At the same time, Zappin says he informed Maker COO Michael DiSanto he might not sell his shares and "was forcefully told that he had to sell at least 600,000 shares or he would not get favorable treatment from the board."
"Moreover," the lawsuit continues, "DiSanto and the Interested Parties secretly kept their 'scheme' from Mr. Zappin, and in fact, stated that had Mr. Zappin known of their 'scheme', he would not sign the separation agreement."
Zappin sold those 600,000 shares, which he says reduced his control of the common stock to 21.47 percent while increasing the control of one of the company's other investors.
At a meeting on May 3, the Board is alleged to have approved an amendment to a Voting Rights Agreement which changed the composition of the Board and paved the way for getting rid of Zappin. The former CEO says he was "fraudulently induced" into approving amended articles of the charter.
Zappin says he got legal advice from DiSanto and thought he could trust him when allegedly DiSanto was appointed by the others in the claimed conspiracy to be his "handler" for purposes of tricking him into not questioning what was happening. DiSanto was later appointed director, according to the lawsuit.
Alleging various claims including breach of fiduciary duty, constructive fraud, fraudulent concealment and misrepresentation, conversion and more, the plaintiffs are seeking a determination of the validity of these actions, injunctive relief, removal of the company's board, a constructive trust over Maker, and further compensatory and punitive damages.
“The lawsuit is without merit and the allegations are baseless," a rep for Maker tells THR. "We regret that Danny is taking this step and involving the company he co-founded in litigation.”