In his complaint, Gary Gannaway says he was misled by Frankly Inc. and its principals when he agreed to take some of its stock as partial payment for WorldNow when he sold the digital platform company to Frankly in 2015 for $26 million. In response, Frankly says Gannaway’s “mess of allegations” have no merit and asks the court to dismiss the complaint on legal and substantive grounds. Contrary to Gannaway’s central claim, it says, there was never a “developed plan” to integrate WorldNow and Frankly tech.
In 1994, Gray Gannaway sold Genesis Entertainment, a programming syndication company he founded 11 years earlier, to billionaire businessman Ron Perelman. Gannaway walked away with a small fortune ($80 million by some accounts), enabling him to launch another company in 1998 to exploit the then-new medium of the internet.
WorldNow developed website platforms and, later, video players and mobile apps and sold them to some of the same broadcasters to whom Gannaway had once sold TV shows. It also aggregated its clients’ digital offerings into an ad network reaching millions of users.
But WorldNow never took off as Gannaway hoped it would, even after investing $36 million in it. So, in 2014, with revenue of $26 million and EBITDA of $6.2 million, Gannaway began looking for a way out.
On Aug. 25, 2015, following a courtship of several months, Gannaway sold his 62% interest in WorldNow to Frankly Inc., a publicly traded social media company based in San Francisco, for $25.7 million — $8.5 million in cash, $11 million in a promissory note and 10% of Frankly’s stock, then valued at around $6.2 million. The deal valued the company at around $45 million.
But unlike his Genesis exit, his WorldNow exit has not gone smoothly.
Although Frankly made good on the note a year after the closing as promised, its stock has plummeted and the value of Gannaway’s ownership stake has fallen to less than $600,000.
Gannaway is calling foul, claiming in a suit in the federal district court of San Francisco that Frankly and its principals misled him about its finances and operations prior to closing.
According to his 122-page complaint, the “misrepresentations and omissions” not only artificially inflated the value of the stock, but also caused him to pass on what would have been a more lucrative offer for the company.
Instead of stock that Gannaway was led to believe would be worth 10 times more by now, the complaint says, he holds stock that is worth one-tenth of what it was at closing.
“In over 30 years of owning businesses I’ve never sued any company or any individual,” Gannaway told TVNewsCheck in an email. “I never would have sold my company to Frankly and acquired in return almost 10% of Frankly’s stock, if I had known upfront [that] Frankly’s chat business and its purported 50 million users were nothing but a complete farce.”
In addition to the company itself, Gannaway’s complaint names as defendants Frankly CEO Steve Chung; Frankly COO-CFO Louis Schwartz, who was WorldNow’s chief strategy officer at the time of the sale; SKP America, a subsidiary of the South Korean telecommunications giant SK Telecom, which owns a quarter of Frankly; and JJR Private Capital LP, headed by Ron Schmeichel, a former major shareholder.
The suit seeks $20 million in damages, including $5 million from Schwartz alone.
Raycom Media, which was a 38% shareholder in WorldNow at closing and is, consequently, a large shareholder in Frankly, is not mentioned in the complaint.
Asked for comment by TVNewsCheck, Frankly called the allegations “entirely without merit” and promised to “vigorously defend against them.”
On Tuesday, that defense took the form of a 35-page motion to dismiss that derides Gannaway’s complaint as “a mess of allegations” and a “jumble of purported misstatements and omissions.”
The motion rebuts Gannaway’s charges point-by-point, while also pointing out what it believes are the complaint’s many legal flaws.
It also asserts that, whatever the merits of Gannaway’s claims, they are undone by the fact that Gannaway signed a release as part of the sale agreement that absolves Frankly of all such claims.
Gannaway first sued Frankly in July. Frankly responded with a motion to dismiss. Instead of answering that motion, Gannaway filed an amended complaint on Oct. 12 as the law allows.
The amended complaint lays out in great detail Gannaway’s entire case against Frankly, citing “confidential” witnesses who will back up its claims.
It alleges that between Jan. 5, when Frankly began trading on the Toronto stock exchange, and the closing on Aug. 25, the defendants “made a series of material omissions and consequential misrepresentations regarding Frankly, its technology, its capital resources, its legal rights and its ability and intent successfully to converge the assets of Frankly and WorldNow so as to create … promised synergies and prodigious revenue enhancement.”
At the heart of complaint is the charge that Frankly soon after the closing began abandoning its “core operations” that were to help produce synergies and growth and that it had trumpeted in press releases and other statements.
“Frankly Chat, its white label B-to-B chat as a service and its SDK [software development kit], as well as Frankly’s newly acquired photo blogging service Muzy and its claimed 35 million new users, all disappeared in a virtual instant,” the complaint says.
“Those highly touted social media products, platforms and technologies which defendants successfully exploited artificially to inflate Frankly’s stock price and induce plaintiffs to accept Frankly’s otherwise less enticing offer, were gone before the end of 2015.”
The suit takes special aim at Schwartz, the one-time of head of digital for WWE, whom Gannaway hired in early 2015 to help him sell the company.
The suit says Schwartz breached his fiduciary duty by failing to disclose “contrary or negative information” about Frankly and by “steering the deal” to Frankly out of his own self-interest.
According to the complaint, Schwartz was “guaranteed a well-paid position with Frankly, but not with any other interested bidder.”
The complaint does not identify other bidders.
In its motion to dismiss, Frankly doesn’t deny that it shut down its pre-existing businesses after the closing.
But, it says, the complaint fails to show there was ever a “developed plan” to integrate the WorldNow and Frankly platforms.
“Instead, plaintiffs point only to a series of vague graphics from a pitch book … and certain forward-looking goals for the two companies.
“None of these statements promises convergence of the two companies’ platforms or that synergies will be achieved, nor would any reasonable investor rely on the vague depictions on which plaintiffs base their allegations.”
And the complaint errs in suggesting the Frankly made the statements “deliberately and recklessly” to mislead Gannaway into making the deal, the motion says.
“In this case there are proper business reasons for pursuing growth in some business segments over others, which is an inference that is much stronger than plaintiffs’ accusations of fraudulent intent.”
When the sale was announced on July 29, 2015, Chung told TVNewsCheck that integration of the WorldNow and Frankly technologies was central to the deal. “If you take a leading news platform like WorldNow, and you take a leading mobile messaging platform like Frankly, you essentially have a synergistic relationship that is really innovative and market leading that nobody else in this space is able to do,” he said at that time.
Frankly will offer WorldNow clients and other broadcasters “engagement” with viewers, he also said. “What news organizations truly want today is to be relevant, to have a dialogue with their audience and to have that in real time.”
Frankly’s motion also argues that the court should dismiss the charges against Schwartz, JJR, Schmeichel and Schwartz on jurisdictional grounds.