Private equity feud inches closer to court
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It's been 16 months since H.I.G. Capital and Audax Group sued each other, in a case that could pierce a "corporate veil" that private equity uses to shield itself from liability.
The big picture: Settlement talks remain possible, given that a trial wouldn't likely commence until 2026, but each side appears to be getting more entrenched.
- The company at the heart of their dispute has since gone bankrupt and come out the other side, with neither H.I.G. nor Audax retaining an equity stake.
- That said, the two firms remain locked in litigation, each surviving motions to dismiss the other's case.
Catch up quick: H.I.G. bought a telecom software company called Mobileum in 2022 from Audax for $915 million, including a $100 million equity rollover from Audax.
- H.I.G. claims to have subsequently determined that Audax engaged in "systemic fraud" to inflate the company's revenue, thus tricking H.I.G into overpaying by around $250 million. Its suit names Audax, several Audax funds, and three Audax executives.
- Audax fired back in a countersuit, arguing that H.I.G. breached its contract by not consulting Audax on major business decisions after the transaction and by leaving it out of a special committee formed to investigate the alleged fraud. Its suit names H.I.G., two H.I.G. executives, and an affiliated executive.
Fast forward: H.I.G. was allowed by a court to move forward with its case, but not without some judicial wrist-slapping. Specifically, the firm and its CEO, Sami Mnaymneh, both were ordered to produce more documents to support their claims of fraud.
- Audax, meanwhile, on Feb. 14 was allowed to move forward with its case against the H.I.G. individuals, but not against the firm.
- Both firms publicly reacted positively to the recent ruling, even though it was both a win and a loss.
The bottom line: The private equity industry has much more to lose from this case, in terms of setting legal precedent, than do either H.I.G. or Audax in terms of damages. As this keeps moving toward trial, don't be surprised if peers begin to apply pressure to settle.
