Professional Documents
Culture Documents
iH&,
Plaintiff,
v.
Case No.
Resident,
Defendant.
-l
1.
agreement between
with
DHR and Hoftnann have firther breached fiduciary duties owed to Reilly, causing him
damages.
THEPARTIES
2.
-l-
3.
an
At all relevant times mentioned below, Defendant DHR was, and now is,
10 south Riverside
plaz4
Sttite 2220, Chicago, Illinois 60606. DHR is an executive search firm, assisting
businesses to recruit senior level executives. DHR does business in
cook county,
Illinois, and throughout the united states. DHR is the fifthJargest executive search firm
in the United states, with a*ual revenue of approximately $52.7 million. DHR is a
successor corporation to Hofanann Acquisition company,
sold to, and subsequently repurchased by Hofknarur and other DHR shareholders from,
Enterprise Profit solutions
stock market or securities exchange, and is not available for sale to the public
by any
other means.
4.
DHR's chairman and cEo. Hoffrnann resides at 44 Locust Road, wimetk4 minois
60093. Hoffinann also owns and controts various related business entities.
At all times
relevant hereto and for all transactions described herein, Hoffrnarur acted with
full
authority to execute contracts and do business on behalf of DHR.
5.
This Court has jurisdiction over Defendants pursuant to 735 IJ;CS S/2_
6.
209.
-2-
5/2-r0I
and,5/2-102.
ALLEGATIONS
'7
8.
as
President from 2000 to 2004. Reilly's employment duties included performing executive
searches for DHR clients. Reilly was compensated by DHR on a commission basis,
based on certain agreed-upon percentages ofrevenue paid to DHR by DHR clients.
Reilly was also compensated based on the performance of DHR employees recruited by
Reilly. Reilly's employment terms were govemed by a contract with DHR and
Hoffrnann. Reilly acted under the direction and control of DHR and Hoffnann.
9.
as a member
of
Directors.
10.
DHR and terminated all other then-existing officer and./or director relationships with
DHR.
Revised Shareholder Agreement
I
1.
as
Exhibit A). Among other areas, the Revised Shareholder Agreement govems the
disposition of shares upon a shareholder's resigration or termination from DHR.
12.
ofReilly's
-3-
:.
:.
.'ry
Reilly's shares, under terms specified in the Revised Shareholder Agreement. DHR is
first given the option to repurchase Reilly's shares within 30 days ofresignation- If DHR
does not purchase the shares within 30 days, the remaining shareholders caa purchase the
shares on a pro-rata basis.
If
then purchase all the resigning shareholder's outstanding shares at the "Appraised
value." If the shares' value has been determined by an Independent Appraisal within the
last 12 months preceding the sale date, the value of the shares would be the value
determined by the Independent Appraisal.
Ifno
13.
to resign and sell his shares, an appraisal of DHR prepared by FGMK, LLC
was provided to
Reilly
CTGMK)
to the work papers and documentation supporting the FGMK appraisal, but those requests
have been refused.
and
Reilly's
14.
DHR- Among other things, there is no indication in the report that any testing or
verification was perforrned to ensure that the information provided by DHR was
complete and accurate. Numerous assumptions were made in the report that tended to
reduce value, including inappropriate and unsubstantiated application ofboth a27%"
minorify interest discount and a 35% lack ofmarketability discount, neither of which are
called for under the Revised Shareholder Agteement. In addition, FGMK consistently
-4-
applied aggressive and inappropriate assumptions with respect to discount rates, cost
of
equity, and growth rates that all tend to reduce the value. "Cash Flow" is not defined,
and the projections of fufure cash flows are unsupported and undocurnented. There is
also a highly unusual and suspect treatment
without including the JobPlex cash flows (which could potentially add value) in FGMK's
assessment. Reilly is informed and believes DHR actually purchased JobPlex, but that it
is being characterized as aa "option" to reduce
15.
approximately 6.25%o of the total shares of DHR. However, Reilly is also entitled to
shares equal to an additional
by DHR itself in connection with its own acquisitions or in connection with determining
the value of the JobPlex
-5-
.i,,,
,'-;t,,f
16.
"low-
derogation of Reilly's rights under the Revised Shareholder Agreement and in violation
as a
17.
DHR, and in connection with the repurchase of DHR from EPS in 2000, Reilly and DHR,
acting through its duly authorized Chairman and CEO, Hofftnann, entered into an
agreement. The agreement provided certain terms in consideration for which Reilly
would continue his employment with DHR. This agreement was memorialized in a
handwritten memorandum written and sigred by Hoffrnann on November 30, 2000, and
delivered to and received by Reilly in person that same day (the 'November 2000
18.
Among other things, the November 2000 Agreement provided that Reilly
addition to Reilly's existing holdings, under the same anti-dilution provision applicable to
19.
paid commissions on a45/55/o structure: an amount equal to 45yo of the first $475,000
-6-
of
the amount of commission revenue over $475,000 received by DHR, plus any "overbill"
amounts. DHR clients pay DHR commissions based upon a percentage of a salary
amount the client agees it will pay an executive located by DHR.
DHR-recruited executive a salary above the amount previously agreed to, the additional
amount is known as an "overbill." The client then pays DHR an additional commission
based on the overbill amount.
20.
5olo
The November 2000 Agreement also provided that Reilly was to receive a
recruited, and hired by Reilly through 2000. Under DHR's override program, a DHR
employee who mentors, monitors, and manages a person he or she has brought to DHR,
provided the DHR employee and the person mentored, monitored and managed were still
employed by DHR on March
Zl
DHR from 1997 through 2000. Under the tenns of the November 2000 Agreement,
Reilly was to be paid the 5% override relating to these employees for all years through
2000, in the year 2001- No payment has been made to Reilly in the year 2001 pursuant to
the
50%
22.
In addition, the November 2000 Agreement also provided that Reilly was
to be reimbursed for his business expenses. Reilly has submitted his outstanding expense
records to DHR, aad did not retain a copy ofthose expense records, now in the sole
possession of Defendants. These expense amounts have not been paid to Reilly.
-7 -
23.
Reilly has fully complied with all his duties and obligations under the
24.
for clients Kraft and American hon Horse, clients Reilly brought to DHR. pursuant to
the November 2000 Agreement, and the parties' continuing practice and understanding,
bas
and American
Horse searches, Reilly was to eatn 45o/o ofthe first $475,000 of commission revenue
received by DHR on these contracts, and 55vo of the commission revenue received by
DHR on amounts over $475,000 of the total professional fee eamed by DHR on these
contracts- Information regarding commission revenue paid to DHR under these
agreements is under DHR aad Hofanann's
25.
$20,000 in DHR stock or cash, at his election for 2002 service, and was to be paid
$
10,000 for each year of service thereafter. These awards were issued and voted upon at
payments. To date, Reilly has not been paid these amounts for his service as a DHR
director in 2002 and 2003.
26-
entity, Hoffrnann Investment company, commenced actions against Deloitte & Touche
-8-
LLP C'D&T') and EPS, regarding these entities' allegedly fraudulent participation in the
EPS transaction, in which DHR was sold to Eps in a transaction involving a "roll up"
and consolidation of various entities.
27.
HofFnann entities entered into a settlement Agreement, pursuant to which Hoffmann and
various "DHR related persons," including Reilly, agreed to settle the dispute with
D&T.
This isreflected in a settlement Agreement entered into with D&T in or around Februarv
2002 (attached hereto as Exhibit C).
28.
as
the time of the D&T settlement, including Reiny, agreed to a pro rata
distribution of a
for
29.
Agreement.
30.
DHR and HofAnann firther settled all claims against EpS for
$1.3 million
at the
time of the EPS settlement, including Reilly, agreed to the pro rata
setflement- pursuant
to Reilly's
April l,
at
-9-
A copy of
Profit Distribution
31.
Per resolution of the board of directors of DHR on March 15, 2001, DHR
$600,000 per year. However, in violation of the duties owed to the other shareholders,
such
profit distributions were not made to other DHR equity holders. Based on Reilly's
pro rata stock ownership of DHR, Reilly is owed profit distributions for the years 2001'
2002, 2003, 2004 and 2005.
Promissory Notes
32.
Promissory Note with Reilly (the "Reilly Note"), in which DHR agreed to pay Reilly
$180,000, with interest from the date of issuance at 1.75% above prime rate as
determined by Harris Bank, payable monthly. Five principal payments of 20o/o of the
principal value each were scheduled under the terms of the Note, with the five paym.ents
being due on February
principal payment was not made on this Note, and outstanding principal and interest is
owed on the Reilly Note (attached hereto as Exhibit D).
33.
Note from Victor Arias, a DHR stockholder and noteholder (the "Arias Note"). Reilly
assumed all rights and obligations held by Arias under the Arias
contained the same terms and payment due dates as the Reilly Note with a total principal
amount of$135,000. The February 15,2005 principal paynent was not made on the
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Arias Note, and outstanding principal and interest is owed on the Arias Note (aftached
hereto as Exhibit E).
34.
connection with the repurchase of DHR from EPS. Hofftnann misappropriated a DHR
line of credit with Key Bank, and used the line of credit to pay down a note in the amount
of $2.7 million payable to Bank of America- In cormection with the repurchase of DHR
from EPS in 2000, DHR raised capital from its shareholders to accomplish the
repurchase. A total of $ I 0.75 million in capital was raised from the DHR shareholders.
DHR was re-purchased from Bank of America (EPS' investment bank in the DHR
transaction) for $5.75 million. Each DHR shareholder, including Reilly and Hoffrnann,
repurchasqd DHR stock in the repurchase from Bank of America, using a combination
cash and
of
$300,000 in equity, and assuming $2.7 million in personal debt to Bank of America. At
the time, DHR negotiated and secured an operating line of credit with Key Bank.
HofFnann used this line of credit to pay Bank of America the $2.7 million owed in
personal debt for the DHR repurchase. This Key Bank line of credit was an asset
of
and
its shareholders made in connection with the repurchase of DHR, Reilly, and each of the
other shareholders who were repurchasing shares of
Dlfi,
personal debt pro rata following the buy back of DHR. Irr using the Key Bank line
of
credit, Hoffrnann was personally enriched at the expense ofDHR, and its shareholders,
each
ofwhom
also held notes from DHR and who were to be paid pro rata on the note
- 11-
35.
approximately $5 million cash, with all cash from the sale accruing to the sole JobPlex
shareholder, Hofftnam.
36.
million and the third party had offered $2.5 million cash to purchase JobPlex.
37.
inflated price of$5 million, and Hoffrnann, as the sole JobPlex shareholder, was thus
personally enriched at the expense ofDHR and its shareholders.
38.
shareholder, was thus personally enriched, in the amount of the option expense to DHR,
at the expense
39.
ofDHR
40.
misappropriating and wasting DHR assets for the benefit of himself and family members,
has acted in an illegal, fraudulent and oppressive manner toward
4ff0.'..
4I.
of
fiduciary duty, and intentional and fiaudulent acts, Reilly has suffered various damages.
Reilly has been damaged in at least the following respects: (i) Defendants have failed to
make override payments to Reilly in the amount of at least $625,000; (ii) Defendants
have failed to make commission payments to Reilly on the American kon Horse and
Kraft accounts; (iii) Defendants have failed to repurchase Reilly's shares at their fair
value as required under the Revised Shareholder Agreement, (iv) Defendants have failed
to pay Reilly total principal of$245,000 and interest due of at least $6,590 on the two
outstanding Subordinated Promissory Notes; (v) Defendants have failed to pay Reilly
profit dishibutions ofat least $650,000; (vi) Defendants have failed to pay Reilly $30,000
as compensation for
Reilly's service
as a
pay Reilly $81,880 and issue 409,640 shares of DHR rmder the terms of the D&T
Settlement Agreement; (viii) Defendants have failed to issue Reilly the additional 10%
of
the total equity of DHR; (ix) Defendants have failed to pay Reilly at least $13,000 under
the terrns of the EPS Seftle.ment; and (x) Defendants have failed to reimburse Reilly for
his business expenses.
COLINT
42.
I:
43.
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44.
Reilly has complied with all his duties and obligations under the
45.
following respects:
46.
(A)
Defendants have not issued Reillv the additional l0oZ of the total
equity interest in DHR;
(B)
Defendants have not paid Reilly the 57o override commissions for
associates hired in 2000:
(c)
Reilly has not been paid the 45l55olo commission structure on the
Kraft and American kon Horse accounts.
of
Reilly, on or about May 16, 2001, Decemb er 27,2O01, and December 21,
2004, and on various other occasions notified DHR. through Hofftnann, ofhis desire to
obtain the additional l0% equity interest in DHR pursuant to the November 2000
Agreement.
(iii) failing to
COUNT
48.
II:
1A
as
set
49.
between DHR and its shareholders, including Reilly. Reiliy has fulfilled all his duties
and obligations under the Revised Shareholder Agreement.
50.
of
failwe to repurchase Reilly's shares, under the terms of the Revised Shareholder
Agreement.
52.
as
53.
valid and binding agreement between DHR and its directors. Reilly has fulfilled all
duties and obligations as a DHR director for the period at issue, and is owed a total
of
$30,000 for his service as a DHR director for the years 2002 and 2003.
54.
55.
of
DISTRIBUTION
56-
57.
profit
distributions is a valid and binding agreement between DHR and its shareholders.
Reilly
has performed all duties and obligations as a DHR shareholder and
has not been issued
profit distributions.
58.
59.
of
60-
61.
- 16-
62.
COUNT
63.
VI:
64.
as
failing to issue Reilly $40,964 cash for each of the years 2004 and 2005, and in failing to
issue Reilly 409,640 shares of DHR stock. Reilly has performed all his obligations under
the
65.
failing to issue Reilly the pro rata settlement payment due to Reilly. Reilly has
performed all his obligations under the EPS Settlement Agreement.
66.
the
D&T
COUNT
67.
YII:
as
-17-
set
68.
including but not limited to duties ofloyalty and good faith, to DHR and its shareholders.
DHR is a closely-held corporation, as its shares are not publicly-traded through any stock
market or securities exchange, and Hoffrnarur is the controlling DHR shareholder.
69.
belief, other acts of self-dealing by Hofhnann, the assets of DHR have been
misappropriated and wasted to enrich Hoffrnann and at the expense of Reilly, whose
ownership interest in DHR has lost value and been damaged as a result of the
self-dealing.
70.
obtain a fair or accurate appraisal or to repurchase Reilly's DHR shares at their fair value
as required under the
judpent
72.
as
if
set
-4 I .
fiduciary duties owed to Reilly, Hoffnann has acted in a manaer that is illegal,
oppressive and fraudulent
-18-
13.
access
supporting documents, Reilly cannot independently assess the accuracy and validity
of
74.
audit
ofDHR,
ofDI{R,
appropriate under 805 ILCS 5/12.56 to remedy the acts ofself-dealing, fraud and
oppression cornmitted by Hoffrnarur, and to enforce Reilly,s righs under the Revised
Shareholder Agreement.
WHEREFORE' pursuant to 805 ILCS 51r2.56(s), plaintiff requests that the coun
enter
relief
as
of
this coun
75.
as
76.
77.
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78.
Pursuant to the Illinois Wage Payment and Collection Act, 820 ILCS 115,
full,
at the time
79.
Pursuant to the Illinois Wage Payment and Collection Act, 820 ILCS
of
calculalion." The statute defines "Final Compensation" as: "wages, salaries, eamed
commissions, earned bonuses, and the monetary equivalent of eamed holidays, and any
other compensation owed the employee by the employer pursuant to an employnent
80.
Defendants DHR and Hoffinann, with the intent to secure for themselves
hinder the payrnent owed to Reilly, have willfitlly refused to pay Reilly his final
compensation, totaling at least $625,000.
81.
Alternatively, Hoftnarm,
as the
knowingly permitted and allowed DHR to violate provisions of the Illinois Wage
Payment and Collection Act.
82.
On
demand to DHR and Hofhnann for all fiaal compensation due and owing to
and
-20 -
Reilly. DHR
Hofuann,
as
follows: Awarding
awardiug
commissions and othcr compensation duc pursuant to 820 ILCS 115, and
Dated: AugustS-,2005
tial.
Submitt4
Richdl..
Fcnton
JcfferyS. Davis
8fiX)SeasTowcr
Qbicago, IL 60606
(312) 8768000
(3L2) 876-7934 (tu)