The Courthouse News reported that Viking Range and its parent company Middleby Marshall, Inc. are suing former CEO Fred Carl, Jr. and other former Viking officers for fraud in Delaware Superior Court. The plaintiffs seek $100 million in damages. The Courthouse News reported:
The purchaser of high-end stovemaker Viking Range is seeking $100 million in damages in Delaware superior court, claiming it never would have bought the company had it been told of a defect that caused the company's stoves to turn on by themselves.Here are some choice passages from the lawsuit:
Middleby Marshall Inc. and Viking Range Corporation sued former CEO Fred Carl, Jr. and other former Viking Range officers in New Castle County Superior Court on October 29.
Middleby acquired Viking Range in 2012 for $380 million, but soon discovered the company's officers had concealed important facts about the its products.
"Had sellers disclosed the truth, Middleby would never have paid anything close to $380 million for VRC, and may not have undertaken the acquisition at all," the complaint says. Rest of article.
Viking’s value – the reason its residential cooking products command a premium price, and the reason Middleby was willing to pay a premium price to acquire VRC – rests on its reputation for high quality products and for standing behind those products with a level of service that purchasers of luxury goods expect. The information Sellers hid goes to the heart of that reputation. Had Sellers disclosed the truth, Middleby would never have paid anything close to $380 million for VRC, and may not have undertaken the Acquisition at all.
Sellers hid from Middleby, for example, 3. that VRC’s senior management, including several Sellers, had learned that certain VRC ranges – the Company’s core product – contained a design defect that allowed the ranges to turn on and heat up by themselves, without anyone touching them. Engineers and others at VRC recognized that this defect, which cut across a number of the Company’s models, implicated both safety and operational concerns. Despite that Sellers knew of this issue since at least the spring of 2011, Sellers intentionally failed to disclose it to Middleby.
This product safety issue has since led to a recall of approximately 60,000 ranges in the United States and Canada. It has also resulted in significant out-of-pocket losses and damage to the brand’s reputation and goodwill that will have an ongoing adverse effect on the sales of Viking products....
Sellers’ actions caused the financial statements of VRC at the time of the Acquisition to be severely overstated, further contributing to Middleby’s gross overpayment...
Middleby has been forced to spend millions of dollars in order to rebuild the Viking brand’s image and reputation...
Through their actions, Sellers knowingly and 7. fraudulently misled Middleby about the current profitability and future prospects for the Company. Had Sellers not concealed the truth about VRC’s business, Middleby would have paid tens of millions of dollars less for the Company, if they had bought it at all.....
Middleby has suffered total damages in an amount to be proved at trial, but in excess of $100 million.
After the Acquisition, Middleby learned that Sellers had intentionally inflated the purchase price by concealing important facts and overstating VRC’s financial statements. Among other things, Middleby discovered that Sellers had (i) intentionally concealed a product safety issue related to certain ranges; (ii) intentionally underaccrued warranty and product adjustment costs; (iii) failed to account for or disclose other liabilities thereby overstating their financials; and (iv) inflated the value of the Viking brand by downplaying the extent of customer service problems and the loss of confidence and respect at the dealer/distributor level.
70. In connection with this misconduct, Sellers not only intentionally caused VRC to breach several of its representations and warranties in the SPA, but they also fraudulently induced Middleby to enter into the SPA and complete the Acquisition at a grossly unfair purchase price of $380 million.
As demonstrated below, Middleby has suffered actual out-of-pocket losses exceeding $35 million as a result of Sellers’ fraudulent actions and VRC’s multiple breaches of representations and warranties.
72. But this $35 million is not an accurate reflection of the total Losses suffered by Middleby as a result of Sellers’ actions. Sellers understood that Middleby based the purchase price not on the book value of VRC’s assets, but rather on the value of its projected future earnings calculated by, among other things, applying a multiple of VRC’s earnings as represented by Sellers. In overstating those earnings, Sellers knew they would cause Middleby to pay a multiple of the amount of overstatement.
Apparently Viking was not doing so well.
What is more, Middleby has been forced to incur tens of millions of dollars to turn Viking around, rebuild its brand image and reputation, and allow it to achieve financial success. Middleby’s most senior executives have been forced to spend a disproportionate amount of their time fixing the issues that Sellers fraudulently hid before the Acquisition....
Viking was forced to recall 60,000 units several years ago as they suffered from a design defect that caused the ovens to turn themselves on without warning or any action by the customer. The complaint accuses Viking of knowing about this defect in 2011 and hiding it from Middleby:
Indeed, Middleby learned after the Acquisition that, as early as the spring of 2011, VRC had knowledge that liquid could pool inside the control panels of certain ranges and cause the oven or griddle to come on unexpectedly while the control knobs were in the off position. The Company even created special protocols for customer service representatives and technicians who received complaints of ovens turning on by themselves, highlighting that VRC’s senior management (which included certain Sellers) was aware of and concerned about the safety issue.
79. Middleby also learned that in 2011, after receiving multiple customer complaints regarding this safety issue, VRC engineers set out to determine whether they could replicate the problem at VRC’s headquarters. They quickly found that they could replicate the issue on VRC ranges, thus confirming that there was a serious design defect with the ranges.
Then Middleby apparently got a friendly notice from the Consumer Product Safety Commission:
On August 5, 2015, Middleby received notice that the CPSC is investigating Viking to determine whether it complied with the reporting requirements of the CPSA or committed prohibited acts under the CPSA.
Middleby also claimed that the sellers refused to meet with Middleby to resolve any of these issues. The lawsuit makes other allegations that can be read in the complaint posted below.