Fredericton-based KnowCharge Inc. is suing the New Brunswick Innovation Foundation, the First Angel Network, and some of their current and former officers, seeking $11 million in damages.

KnowCharge, a 10-year-old company that makes static-electricity-resistant packaging for the electronics industry, filed the suit last month in the Court of Queen’s Bench in Fredericton, naming five defendants:  NBIF; FAN; Ross Finlay, a Co-Founder and Director of FAN; NBIF Chief Executive Calvin Milbury; and Joe Allen, who was NBIF’s Director of Investments until December 2017, and now heads the accelerator programs at University of New Brunswick.

The court document alleges that Milbury, Finlay and Allen breached their fiduciary responsibilities to KnowCharge and that the funding organizations enabled them. The 94-clause filing details the relationship of the parties over the past nine years, during which time NBIF invested $700,000 in the company and FAN members $438,831.

“Litigation is always a last resort, but unfortunately all attempts (over several years) to resolve amicably were not only rebuffed, but positions have hardened,” said KnowCharge CEO Rob Morrow in an email to Entrevestor last week.

Finlay and NBIF Chair Cathy Simpson (speaking on behalf of the Foundation, Milbury and Allen) declined to comment, saying the matter is now before the court. (Disclosure: NBIF is a client of Entrevestor.)

Morrow and Co-Founders Edgar Gallibois and Chris Marshall founded KnowCharge to commercialize technology that solved a problem for the electronics industry. The company has said that about 6 to 8 percent of electronics goods are ruined because of static electricity in packaging, but it has come up with special paper that protects against static electricity.

The court documents say the company raised $150,000 from NBIF in 2009. Two years later, the company raised another round of funding, securing $438,831 from 27 members of FAN, and a further $200,000 from NBIF.

Parental Marketplace: A Rental Service for New Parents

Under the funding agreement, FAN and NBIF were each permitted to appoint one director to the five-member board, and selected Finlay and Milbury respectively. Morrow and Gallibois represented the co-founders. 

Once the four directors were chosen, said the document, “fundamental disagreements over the direction of KnowCharge arose. These disagreements generally divided along the lines of founders and funders, with the founding shareholder representatives Morrow and Gallibois in disagreement with the funder nominees Milbury and Finlay over corporate strategy.” The document also notes that the shareholder agreements granted NBIF and the FAN members the right to “put options” on their shares – that is, the right to make the company buy back their shares after five years.

The four directors were unable to agree on a fifth member, and that effectively gave NBIF and FAN a veto over the board, said the document.

By May 2014, the company needed new capital. Morrow (who said he had been working without compensation for some time) received a term sheet from Toronto-based Green Century Investments, or GCI, outlining a $4 million investment program that valued KnowCharge at $8 million. The document said GCI would make the investments in several tranches over three years, and included a “pathway” to the new investor gaining 50 percent of the company.  

Morrow and Gallibois favoured the GCI investment, believing it would offer the company an opportunity to secure grants from the Atlantic Canada Opportunities Agency and the government of New Brunswick. However, the court document said the offer was opposed by Milbury, who doubted GCI was a good long-term partner for KnowCharge, and Finlay, who said the investment was too complex and that a recent purchase order could attract other investors.

At a May 2014 board meeting, Milbury and Finlay proposed KnowCharge make a counter offer, in which GCI’s first round of investment would buy out NBIF and the FAN members. The document says Morrow and Gallibois doubted it would work and believed any requirement to buy out existing investors would be “a barrier for any new investment.”

The four directors debated the response, and the documents say the GCI proposal was “rejected through a series of untenable counteroffers directed by Milbury and Finlay.”

Island Capital Invests in Moncton-based Garago

Milbury said NBIF would invest a further $500,000 in the company, said the document, enough to unlock non-dilutive funds offered by ACOA and the New Brunswick government. However, this financing was proposed at $2.15 per share, compared with $4.0665 per share set out in the first tranche of the GCI proposal.

By October, six shareholders affiliated with FAN agreed to commit a total of $60,000. Morrow asked NBIF to come in with $250,000, but Milbury said he first had to exhaust options of other sources of funding, said the court papers.

In the ensuing months, the company and its investors made several proposals as Morrow tried to find other investors. By the end of 2015, the company had raised no new investment. In January 2016, Milbury resigned from the board and was replaced by Allen, said the document, and a new chair and independent director joined the board. Also that month, NBIF issued the company a convertible debenture worth $175,000.

KnowCharge says in the court document that this debenture gave NBIF “explicit control” over the company as it couldn’t change its business or raise capital without NBIF approval.

The court filing goes on to say that Morrow was close in February 2016 to signing a multi-million-unit order with a global customer, Avnet-Premier Farnell, and that GCI was again interested in investing in KnowCharge. However, Morrow learned that GCI declined to invest after receiving “negative information” about KnowCharge from Allen, said the document.

In July 2016, NBIF issued a second $175,000 debenture to the company, with the same conditions as the first, said the court filing. “With the adoption of the Second Debenture, NBIF had now gained full and complete control over KnowCharge,” said the filing.

KnowCharge said it has asked repeatedly to alter the terms of the debentures, saying they prevent the company from raising new equity investment. NBIF has declined to do so, the company said.

In an email to Entrevestor, Morrow said the company is still operating, though it recently had to put a major strategic customer on hold.