Vernon W. Hill ll, the banking, real estate and fast-food mogul, was so impressed by Wharton grads Chris and Natasha Ashton and their start-up pet insurer, Fetch, that he detailed the "true American success story” of this “up-and-coming, husband-and-wife management team” as a model of "building a serious new company from scratch” in a book he wrote in 2012
But Hill didn’t explain, in Fans Not Customers: How to Create Growth Companies in a No-Growth World, how to smoothly part from partners such as the Ashtons, once he wasn’t a fan anymore.
Hill’s moves to push the married co-CEOs out — which included ordering the company’s replacement chief executive and its general counsel to say things that weren’t true, the two men testified — came to light, in a rare chronicle of private-company maneuvering, during a trial late last month in Delaware Chancery Court, that favorite venue for settling grievances between corporate partners who no longer get along.
Hill, who controls banks in Philadelphia and London and rides a private jet between his Moorestown mansion, Venice glassworks and vacation spots such as St. Bart’s, has worked with many successful business people. He once got his pre-presidential golfing buddy Donald Trump to trash-talk Citibank and Chase Manhattan and promote his rival Commerce Bank -- though, unlike Citi and Chase, Hill avoided lending to Trump’s Atlantic City casinos, which went bankrupt.
Hill invested in the Ashtons’ company (now based in Newtown Square), became chairman of its board (he’ll collect more than $800,000 as a Fetch consultant this year), and convinced a friend, billionaire Wall Street hedge fund manager Stephen A. Cohen, to invest more, giving the pair and allied investors majority control. He mentored the Ashtons at regular lunches at Philadelphia’s Palm, and hosted them at his Moorestown estate, Villa Collina. He and his wife, Shirley, “saw a lot of ourselves in Chris and Natasha,” he wrote in his book.
But by 2017, the business romance between Hill and the Ashtons had faded, and the firm, which sells Petplan dog and cat veterinary policies to 200,000 Americans and publishes pet-health magazine Fetch! was seeking a buyer, according to court testimony.
Impatient with a slowdown in both Petplan growth and talks with acquirers, chairman Hill and his allies on the board took away the Ashtons’ titles as co-CEOs last year, then fired them from their jobs (which paid $360,000 a year each) when they stopped showing up. The Ashtons filed a wrongful-discharge lawsuit in Philadelphia, demanding three years’ compensation in severance pay they say they are entitled to; the case is scheduled for Common Pleas Court in 2020.
But when Hill tried to force through changes in Fetch’s profit-splitting agreement demanded by its insurance provider, AXA XL, the Ashtons called it a bad deal for Fetch, which they still co-owned. In a Chancery lawsuit, they said Hill was wrongfully breaching their shareholders’ agreement, which give them the right to approve or block such deals.
In court, Hill’s allies portrayed the Ashtons as a visionary couple, less suited to running a maturing company.
“When I got there it was pretty apparent that the business had outgrown them, and it had been mismanaged,” testified Fetch’s new chief executive, Paul Guyardo, who met Hill through Philadelphia advertising executive Brian P. Tierney (a member of The Inquirer’s ownership board) when both served as directors of the former NutriSystem Inc.
Guyardo, a digital marketing specialist whose resume includes Discovery television, Kmart, DirecTV and Home Shopping Network, took charge at the end of January.
Guyardo said he’d been forced to address such pressing issues as a high claims-losses ratio — confirmed by XL officials — along with expired state licenses, a “very cheap” information technology system that threatened to "break " the company, the lack of a business plan, failure to track consumer metrics, and a failure to pay promised compensation to chief technology officer Vikram Menon.
Claims by a small group of Petplan clients were driving up everyone’s costs, Guyardo added. Under the Ashtons’ regime, “one policyholder had an 18-year-old cat on life support for two years,” costing $147,000 in claims while paying less than $12,000 in premiums, he testified.
He said Petplan should still enforce its “covered for life guarantee” and renew policies despite multiple claims -- but those owners should be willing to pay, for example, a 30 percent deductible on renewal, instead of the original 10 percent, so they’d have to “think a little harder” before ordering costly procedures. Harsh? Better than having “to raise prices for all of your customers,” Guyardo said, under questioning by Hill’s lawyers, led by Elizabeth S. Fenton of Saul Ewing Arnstein & Lehr.
The Ashtons opposed the change, but the company implemented it anyway, Guyardo said. Company reports show claims losses are down and sales are up since the founders were replaced.
As recently as Easter Sunday -- the night before the trial started -- Guyardo said he, Hill and other outside investors tried to convince the Ashtons to support the changes XL demanded, which would cut payments to Petplan unless claims-to-premiums ratios went down. XL officials testified this was needed to reverse their losses, which approached $3 million over the last two years.
But the Ashtons continued to maintain that they had the expertise to win a better deal. “We felt like we were being bullied,” testified Chris Ashton, describing that Easter call. He and his wife said they would sign a new XL agreement if they could be guaranteed they would still have future approval rights. XL officials declined.
Questioned by the Ashtons’ lawyers, led by Garrett B. Moritz of the Wilmington firm Ross Aronstam & Moritz LLP, Guyardo acknowledged he had less insurance experience than the founders. He confirmed he had told colleagues he realized imposing the changes would “violate the Ashtons’ [approval] rights.”
Guyardo also admitted he lied to XL officials, on Hill’s instructions, when as a Petplan management consultant and soon before he was named CEO he told them last winter that his board had ended acquisition talks to sell the business to private-equity investor Leonard Green: it was really Green who pulled out.
“You lied to XL so Mr. Hill could save face?” asked another Ashton lawyer, Adam Gold.
“Yes," said Guyardo. “It’s the first time I have told a lie in my professional history,” he added. "And I regret having said it.”
The company’s longtime general counsel, Robert Borghese, who was the Ashtons’ professor at Wharton and became a close family friend, also depicted Hill as browbeating him into writing a legal justification to bypass the Ashtons -- over his own objections.
Hill testified that Borghese gave him a "legal opinion” that if the Ashtons opposed policies that benefited the company in order to benefit themselves personally, their vote against the new insurance deal could be disregarded.
But Borghese testified he didn’t really believe that -- because the Ashtons owned about a third of the company, its shareholder-rights agreement, which Borghese helped write, really did give them the right to block the change.
Still, because Hill kept demanding it, Borghese gave Hill the justification he asked for. In court, Borghese maintained this wasn’t a true corporate legal opinion -- just a prepared “argument” he gave Hill because the chairman kept telling Borghese to “circumvent” what the agreement actually said.
Borghese later resigned. And then he apologized to the Ashtons, confessing what he’d done, in a meeting at the King of Prussia shopping center.
“When Mr. Hill asks you to do something, you never say no, do you?” asked Roger Stronach, one of the Ashtons’ lawyers.
“No,” said Borghese.
Did Fetch, the company he worked for, suffer because the Ashtons were “squeezed” out and their shareholders’ agreement breached? asked Stronach.
“Fetch lost enormous value as a result of the departure of the Ashtons,” and they were right to demand a better bargain than XL offered, agreed Borghese. The Ashtons were "grossly, unfairly squeezed out of their own company.”
The road ahead
At the end of the trial, the judge, Vice Chancellor Kathaleen St. Jude McCormick, called attention to what she called the “unusual” fact that the man who wrote the argument the company used to defend the case -- Borghese -- "stated under oath that he now believes it to have been an aggressive approach, and baseless.”
She added that company documents filed late in the process showed Fetch’s breach of the Ashtons’ rights was “blatant and known.”
She noted she had already agreed to consider the Ashtons’ motion for Hill’s side to pay the couple’s legal fees because Hill in his pretrial deposition had refused some questions, read a note from one of his lawyers despite claiming he didn’t (it was captured on video), and walked out before his deposition was over, all of which the Ashton side said violated Chancery rules.
She stopped short of saying she would rule for the Ashtons, but underlined that Hill’s lawyers should “relay to your clients” all these points “as they look down the road and perceive issues that lie ahead of them.” That puts pressure on Hill’s side to pay them to make the litigation and their claims on the company they founded go away.
At least until McCormick rules, Petplan is implementing the new XL agreement. Once the fight is settled, the company board will be able to lock in long-term insurance agreements, or sell the business. Guyardo says the company has been talking to at least one insurer and one private equity company that are interested.
The Ashtons are already considering a possible next business. Maybe based on pet food, Chris Ashton said.
Meanwhile, Fetch is hiring for its staff of 200, and writing more Petplan policies.
“Fetch has always had a gigantic upside," Hill said in a statement after the trial. “It has a bright future, if it has an underwriting agreement that’s stable, and makes sense.”
He added: "Disagreements between founders and majority shareholders are unfortunate, but often inevitable.
"We are extremely pleased with our new CEO, Paul Guyardo. Under his leadership, the entire Petplan team remains highly motivated to serve and expand our customer base and determined to build on the success of the company for the future.”