Trump Media co-founders sue company, alleging a scheme to dilute shares

Trump Media & Technology Group owns social network Truth Social. (Jonathan Raa/NurPhoto/AP)

The co-founders of former president Donald Trump’s media company filed a lawsuit Wednesday, claiming that Trump and other leaders had schemed to deprive them of a stake in the company that could be worth hundreds of millions of dollars.

The case could complicate a long-delayed bid by Trump Media & Technology Group, owner of the social network Truth Social, to merge with a special purpose acquisition company called Digital World Acquisition and become a publicly traded company.

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That merger deal, which could value Trump’s stake in the company at more than $3 billion, would offer the former president a financial lifeline at a time when he is facing more than $454 million in penalties from a civil fraud judgment this month in New York.

The case is one of three lawsuits filed this week that detail bitter recriminations among people key to the Trump company’s earliest days. The filings will probably serve as the opening salvo in what could be all-out legal warfare ahead of the March 22 shareholder vote on whether to go ahead with the merger.

On Tuesday, Digital World and Trump Media sued Digital World’s former chief executive, Patrick Orlando, and its sponsor, Arc Global Investments II, in a Florida court, alleging that Orlando had threatened to block the merger to “obtain a windfall by way of extortion” and accusing him of “avarice [and] incompetence” that had caused “extensive reputational harm.”

On Thursday, Arc filed its own lawsuit, telling a Delaware chancery court that Digital World, its current chief executive, Eric Swider, and three board members had miscalculated Arc’s stake in a way that would deprive it of more than 2 million shares. In a motion to expedite, Arc’s attorneys accused Digital World of “gamesmanship” and “strong-arming tactics” related to the dispute.

Arc, a subsidiary of the Shanghai-based investment firm Arc Capital, provided Digital World’s early funding and is managed by Orlando, whom Digital World’s board fired last year.

The suit against Orlando alleges that he received a letter from the Securities and Exchange Commission, known as a Wells notice, indicating that officials had considered charging him for violations of federal securities laws but that the matter was still pending. The SEC and an attorney for Orlando did not immediately respond to requests for comment.

The Trump campaign referred comment to Trump Media, which did not respond to requests for comment. Digital World also did not respond.

Digital World’s share price Thursday plunged almost 9 percent, to $41, amid the turmoil. Considering that Digital World has said in an SEC filing that Trump will receive 78 million shares in the post-merger company, the drop equates to a roughly $300 million loss in equity for Trump’s stake.

The co-founders’ lawsuit is led by Andy Litinsky and Wes Moss, who met Trump as contestants on his reality show “The Apprentice.” The men pitched Trump on the idea of a Trump-branded tech start-up and social media platform in early 2021 after he lost the White House and was banned from Twitter, now called X.

Trump agreed to the deal and was given 90 percent of the company, according to a motion for expedited proceedings filed Wednesday in the Delaware Court of Chancery by the co-founders’ partnership, United Atlantic Ventures. The partnership took 8.6 percent, while an attorney on the deal, Bradford Cohen, was given the remaining 1.4 percent, the motion states.

UAV launched the Trump Media business, hired employees and raised funding while receiving no “fee or payment for its work,” the motion said. And though Litinsky and Moss left Trump Media that year amid a dispute with its current leadership, UAV retained its shares, according to a SEC filing this month from Digital World.

The filing said that Trump was set to receive 78 million shares in the post-merger company - a stake worth more than $3 billion at Thursday’s share price - and that UAV would receive more than 7 million shares, a stake worth nearly $300 million. “Throughout TMTG’s corporate history,” the motion states, “UAV’s 8.6 percent ownership interest has been recognized and honored.”

But UAV’s attorneys allege in the motion that Trump has recently attempted to “drastically dilute” the partnership’s stake as part of what they called an “11th hour, pre-merger corporate maneuvering” tactic designed to increase the amount of authorized stock, from 120 million shares to 1 billion shares.

UAV’s attorneys wrote that the “dilution scheme” had “no legitimate business purpose” and suggested that Trump and the Trump Media board planned to issue the new shares to “Trump and/or his associates and children,” watering down UAV’s stake to less than 1 percent.

UAV was “promised 8.6 percent of this company and sadly its business partners are baselessly trying to renege,” said the partnership’s lead attorney, Christopher J. Clark of Clark Smith Villazor, in an interview with The Washington Post describing the lawsuit. “They feel like: We made Truth Social for you. You get 90 percent. But some people just aren’t happy with 90 percent.”

Clark has represented high-profile defendants including Hunter Biden, Elon Musk and billionaire businessman Mark Cuban. After representing President Biden’s son for several years in negotiations related to a Justice Department investigation, Clark stepped down in August due to the possibility that he could be called to testify as a witness on Hunter Biden’s behalf.

In the filing, Digital World said the proposed issuing of 1 billion shares in “New Digital World” stock was part of a set of post-merger business changes. The SEC declared this month that the merger’s registration statement was effective, clearing the way for Digital World’s shareholders to vote to finalize the merger in a meeting next month.

Digital World acknowledged the UAV dispute in the SEC filing, saying it had received letters starting last month from a UAV lawyer asserting that the partnership still had the right to appoint directors to Trump Media’s board and to “approve or disapprove of the creation of additional TMTG shares.”

UAV, the filing said, argued that its original services agreement with Trump from 2021 remains in effect. Digital World said in the filing that the agreement was “declared void” by a Trump attorney “nearly two and a half years prior.”

Digital World said in the filing that Trump Media had said it “strongly disagrees with UAV’s assertion to any rights with respect to TMTG under the Services Agreement and that it believes TMTG has valid defenses to the potential claims by UAV.”

The filing said a UAV representative sent a text message this month to a Trump Media noteholder suggesting that UAV might seek to “enjoin,” or block, the merger. The filing also noted that a UAV attorney had sent a letter to Trump Media threatening “legal action regarding UAV’s alleged rights in TMTG, including, if necessary, an action to enjoin” the merger.

Digital World said in the filing that the legal dispute could prevent or delay the merger deal, “significantly impact” the company’s future performance, or “negatively impact investor confidence and market perception.”

Delaware, where Trump Media was incorporated, is a common state for American business registrations, and its chancery court is a mainstay for corporate litigation.

A sealed legal complaint was filed in the case late Wednesday. Under Delaware chancery law, it won’t be made public for another five days as both sides discuss potential redactions. A copy of the motion for expedited processing, which outlines the dispute, was publicly visible in court records.

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