Former Executive of Entrepreneur Sues Ex-Partners Over Buyout Plan : Claims They Are Trying to Get Magazine at Unfair Price

Sometimes the road to entrepreneurial riches runs through rocky terrain.

Take the case of Barry L. Rupp, who this month sued two former partners in Irvine’s Entrepreneur Magazine.

Rupp alleges in his suit--filed in Orange County Superior Court--that the partners plan to buy out other shareholders of the national magazine at an unfairly low price.

So Rupp on Monday fired off his own offer of $3 a share, an offer that values the magazine at $20 million, excluding the fifth or so of shares Rupp already owns.

Here’s how the tangled dispute over Entrepreneur Magazine arose, according to Rupp’s suit and lawyers for both sides:

Rupp, Peter Shea and Reinhold Pfahler paid $3.5 million for about two-thirds of the magazine’s stock from the majority shareholder--who later turned out to be a convicted bank robber--in January, 1986.

At the time, the magazine’s operating company was in bankruptcy.

The three formed a new company called Entrepreneur Media Inc. to hold their shares. Each owned about 25% of that company. They also moved the magazine--which covers new businesses and claimed a circulation of 280,000 last year--from Santa Monica to Irvine.

Rupp’s lawyer, James F. McGee of Irvine, now says that the three intended from the beginning to take the publicly held company private.

The 1986 deal was “carefully planned to allow the buyout to proceed, but not to tip the remaining shareholders off and greatly increase the value of the stock,� McGee said.

The three quietly continued to buy more stock at $1 a share from the other shareholders.

Some shareholders, who had seen the company plunge into bankruptcy, “thought they’d died and gone to heaven� when the new group offered to buy them out, McGee said. They cheerfully sold their stock.

But Rupp and his partners had a falling out. In August, 1988, the other two fired him as chairman. His lawyer now contends that they were trying to take control from the very executive who had resuscitated the 12-year-old magazine, which is now in the black.

But lawyers on the other side say that Rupp’s management “was economically detrimental to the company.� Rupp is “out there like a bull in a china shop,� said Stephen P. Webb, a Los Angeles lawyer representing the other two partners.

With an additional--and questionable, McGee claims--issue of 1.5 million shares of stock by the magazine, the holding company raised its stake in Entrepreneur from two-thirds to about 90%.

Now Rupp contends in his suit that Shea, Pfahler and another executive, David R. Juedes, have formed a Nevada corporation to merge with their old holding company in a complicated transaction designed to get rid of the remaining shareholders with a minimum of expense and legal problems.

By incorporating the new company in Nevada, where the laws are not weighted as heavily toward shareholders, Shea and Pfahler won’t even have to notify stockholders of the buyout, Rupp contends in the suit.

Any shareholders who refuse what the two majority shareholders offer them will have to file suit as “dissident shareholders�--in Nevada.

And Rupp’s lawyer launched a more serious accusation, contending that the holding company had kept shareholders in the dark about the true worth of the magazine.

It did that by manipulating and under-reporting its assets so it would not have to comply with federal Securities and Exchange Commission regulations on financial disclosure for public companies, McGee alleged.

Lawyers for the magazine say that is all nonsense.

Forming the Nevada corporation “wasn’t done with the idea of making it more difficult for shareholders,� Ronald J. Grant said.

“It’s just an easier procedure to follow in Nevada. But the protections for shareholders are still there,� Grant added.

What’s more, the lawyers say, Rupp may be complaining now about buying out shareholders at $1 a share, but he didn’t when he was chairman of the company.

And the remaining shareholders, including Rupp, may get more than $1 a share, Grant suggested. Grant, a securities lawyer, said he has ordered an appraisal of the company that should be finished in a few weeks.

But one person who isn’t waiting for the valuation is Newport Beach resident Rupp, whose offer of $3 a share is backed by venture capitalists and private investors that Rupp has lined up, his lawyer says.

Even at $20 million, the magazine may be a good deal, since successful magazines routinely sell for 10 times yearly cash flow.

And Rupp estimates that Entrepreneur will have a cash flow of between $2.5 million and $3 million this year, according to McGee.

No court date has been set for the suit. But with all the fallout from the dispute--Rupp has filed another suit alleging that he was wrongfully fired--the flap seems likely to take some time.