Litigation Coverage: Romulus Challenges Removal of Designated Director From EquipmentShare Board, Alleges Retaliation for Investigation Into Purported Company Fraud

Relevant Documents:
Complaint
TRO Brief

Romulus Capital and its designated director on EquipmentShare.com’s board, Neil Chheda, sued EquipmentShare seeking to undo Chheda’s purported removal and applied for an immediate order to reinstate Chheda. A temporary restraining order, or TRO, is necessary to prevent irreparable harm to the plaintiffs, “particularly as the Company is making critical decisions about an imminent IPO” without Chheda’s input on the board, the plaintiffs argue.

The Business Court of Texas this morning canceled an ex parte hearing on the plaintiffs’ TRO request scheduled for today. The parties agreed to forgo the ex parte hearing and proceed with a temporary injunction hearing involving both parties on or before Nov. 5, according to a stipulation filed today. EquipmentShare agrees to refrain from making any non-ordinary-course, non-routine management decisions prior to the temporary injunction hearing, the parties say.

The plaintiffs filed the suit on Oct. 16 stating that Chheda in 2024 started to raise concerns about questionable secondary transfers of the company’s stock at “steeply discounted values” to EquipmentShare founders Jabbok Schlacks and Willy Schlacks, entities they control, and friendly third parties. The Schlackses also received undisclosed kickbacks for the transfers, the plaintiffs allege.

Chheda also raised concerns with the board that the Schlackses inappropriately profited from “sweetheart contracts” the company signed with Schlacks family-owned entities, gave favorable treatment to family members employed at EquipmentShare and obtained undisclosed personal loans from UBS by leveraging the company’s relationship with the bank, the plaintiffs claim.

Stymied by a board beholden to the Schlackses, Chheda in 2024 filed a books and records request in the Delaware Court of Chancery, the complaint alleges. The board retaliated by forming a special committee to investigate Chheda for wrongdoing and used that as a pretense to remove him from the board, the plaintiffs allege. EquipmentShare also illegally amended its voting agreement with Romulus, which guarantees Romulus as a designee on the board, according to the complaint.

EquipmentShare quickly reinstated Chheda in January after the plaintiffs challenged his removal in the Delaware Chancery Court, the complaint states. The board in June voted to reincorporate EquipmentShare in Texas to strip the plaintiffs of their protections under Delaware corporate law, the plaintiffs allege.

On Sept. 30, the board again improperly removed Chheda on a pretextual basis and in violation of the voting agreement, the plaintiffs state.

The plaintiffs argue in their emergency request for a TRO that Chheda must be reinstated immediately because they are “overwhelmingly likely to succeed on the merits.” The “undisputed” documentary record shows that EquipmentShare stripped Romulus of its contractually guaranteed board seat in a bad-faith effort to prevent the Schlackses’ fraud from coming to light, the plaintiffs state.

The plaintiffs add that they will suffer imminent and irreparable harm absent the TRO. The Schlackses will likely continue their fraudulent and self-dealing behavior unabated without an independent director on the board, the plaintiffs say. The company is also preparing for an imminent IPO, and Romulus, as a shareholder, has a right to be involved in the strategic process, the plaintiffs argue.

EquipementShare, a privately owned company with a majority of non-independent board members, is an equipment rental and asset management company that operates 252 facilities across 41 states. An Aug. 20 Bloomberg report states EquipmentShare is backed by BDT & MSD Partners and was considering moving ahead with an IPO in 2025. However, there have been no updates regarding progress of the IPO as of press time.

The Bloomberg report cited that the company was working with Goldman Sachs Group, JPMorgan Chase & Co. and Bank of America Corp. on the offering. The IPO could raise more than $1 billion. The report also noted that details of the offering might change and that more banks could be added to the lineup.

EquipmentShare was valued at $3.75 billion in 2023 when it announced a Series E deal that raised a total of $440 million, according to data provider PitchBook and cited by the Bloomberg report.

Octus’ estimate of EquipmentShare’s capital structure, pro forma as of April 11, 2024, is shown below:
 

According to a September 2024 offering memorandum, EquipmentShare disclosed the following about its related party transactions. The company purchased telematics tracker devices from an equity method investee totaling approximately $5.5 million for the three months ended June 30, 2024, and $10.9 million for the six months ended June 30, 2024. Design and development services paid to the same equity method investee were approximately $300,000 for the three months ended June 30, 2024, and approximately $600,000 for the six months ended June 30, 2024. Amounts owed to the same equity method investee, which are included in accounts payable or accrued liabilities, were approximately $700,000 as of June 30, 2024.

EquipmentShare recognized revenue from equipment sales to entities owned or controlled by members of management of $90.8 million for the three months ended June 30, 2024, and $167 million for the six months ended June 30, 2024. The equipment sold was subsequently listed on the company’s marketplace under the OWN program. Equipment rental revenue share with entities owned or controlled by members of management under the company’s OWN program was $19.1 million for the three months June 30, 2024, and $36 million for the six months ended June 30, 2024. As of June 30, 2024, the company had accrued expenses due to entities owned or controlled by members of management under the OWN program of $5.9 million.

EquipmentShare’s OWN program is a capital-light funding model where third-party investors buy equipment and lease it back to EquipmentShare. EquipmentShare then manages and rents out this equipment through its platform, sharing the rental income with the equipment owner.

As of June 30, 2024, the company had receivables due from entities owned or controlled by members of management in the amount of $37 million, included in accounts receivable.

The company leases properties, facilities, vehicles and aircraft for its operations under various lease arrangements with entities owned or controlled by members of management. Operating lease expenses associated with these arrangements were approximately $900,000 for the three months ended June 30, 2024, and $1.6 million for the six months ended June 30, 2024.

As of June 30, 2024, the company had payables due to entities owned or controlled by members of management of $5.1 million. During the three and six months ended June 30, 2024, the company purchased $111.8 million and $112.1 million, respectively, of equipment from entities owned or controlled by members of management.