The Utah Supreme Court heard arguments Monday from a group of investors who are challenging the dismissal of a case they filed against six founding members of Lehi multilevel-marketing company XanGo LLC.
The legal issue that the justices will consider is whether 4th District Judge Fred Howard rightfully dismissed the case and correctly applied Utah Rules of Civil Procedure.
The investors, who identified themselves as Angel Investors LLC and as a "few neighbors and friends" who "pooled their savings and invested it in an unknown startup company called XanGo," filed lawsuits in 2006 and 2007 against the company, which sells juices and personal-care products.
The original court complaints are sealed, but at the court proceeding Monday, the Angel Investors' attorney, Mary Anne Wood, said the investors "became concerned by evidence of extravagant lifestyle and compensation" of the six founders — Aaron Garrity, Bryan Davis, Gary Hollister, Gordon Morton, Joseph Morton and Kent Wood.
The investors claim XanGo paid the founding six men high salaries, paid for luxury automobiles and houses, covered family vacations and even the purchase of a piano for personal use, Wood said. When some minority investors began to question the expenditures, "XanGo's founding members began buying minority interest from the original investors" by taking loans from XanGo, instead of the company buying back the interests, according to a brief for the Supreme Court.
The investors believe more of the company's profits should be distributed to them. They say the money they have received from the company so far was used to pay taxes.
The six founding members control 86 percent of the company. Fourteen percent is owned by minority investors. The Angel Investors own at most 1 percent of the company, according to court documents. Other minority investors have not joined the Angel Investors' lawsuit. The Angel Investors say the other investors are XanGo employees or relatives of company executives.
The Utah County judge dismissed the case, finding that the Angel Investors did not represent other XanGo investors. Other investors submitted affidavits to the judge saying that they did not want the company involved in such a lawsuit.
"While this issue has never been directly decided by Utah's appellate courts, this issue is one of significant public policy which implicates a very important aspect of corporate governance, i.e., a minority member's ability to challenge oppressive and wrongful conduct on the part of majority members, regardless of how unpopular the suit may be from the perspective of other members," an Angel Investors brief says.
However, Mark James, an attorney representing the six founding members before the Supreme Court on Monday, used case law to defend the dismissal of the case, citing other federal cases. "This court has indicated in such cases it would freely look to the federal courts in interpreting Rule 23.1," James said, in reference to a state civil-procedure rule at issue.
Federal courts study the rules and "don't look to the merits of the case," and the Utah Supreme Court should do the same in the XanGo case, James said.
E-mail: lhancock@desnews.com