HBS Star Prof In Court Over Investment Dispute - Poets&Quants

Clayton Christensen, author of The Innovator’s Dilemma and a Harvard Business School professor, is in a legal dispute with a former manager of his investment fund, Disruptive Innovation Fund. Wikipedia photo

He became famous by articulating the theory of disruptive innovation. Now one of Harvard Business School professor Clayton Christensen’s own investment funds is experiencing a different kind of disruption — in a court of law.

Christensen, whose 1997 book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail explores why some companies fail to adapt to changing competition that threatens their business model, is being sued by a former employee. The employee, Shawn Cox, says he was promised a 6% ownership stake in Christensen’s Disruptive Innovations GP, LLC — and then, as the value of that stake climbed considerably, was first lowballed in a buyout offer before Christensen and his son, Matthew Christensen, began threatening legal action to avoid having to pay altogether.

Based on legal documents filed in Massachusetts and Utah, this is what transpired. Cox went to work as a principal for Rose Park Advisors in 2010, the Christensens’ investment management firm, managing its Disruptive Innovative fund. The curious case of Cox and the Christensens began in 2013 when Cox left the Massachusetts-based Rose Park to return to Utah. Two years later, the Christensens offered to buy Cox out — but, Cox says in his lawsuit, they refused to provide financial information that would enable an accurate estimate of fair market value.

The Christensens offered Cox a sum just north of $500,000. He says the value of the 60,000 Class B membership units he accrued while a principal for Rose Park is actually at least $14 million. And now he’s seeking more for damage to his reputation and his prospects, as well as coverage of his legal fees.

ONE OF THE MOST INFLUENTIAL THINKERS IN BIZ ED

Shawn Cox

Clayton Christensen, the Kim B. Clark professor of business administration at HBS, is the author of 11 books, the most famous of which, The Innovator’s Dilemma, has been named an essential guide to entrepreneurship and fluctuating modern markets. In it he describes the concept of disruptive technologies — re-coined disruptive innovation in a later work — which are those that create a new market that will disrupt an already existing one, or a new value network that will eliminate the market for an existing product. Think Netflix upending Blockbuster.

Christensen has been named one of the most influential business management thinkers in the world, including by Poets&Quants. He also walks the talk, having founded or co-founded four companies: CPS Technologies, a developer and manufacturer of products from high-technology materials; Innosight, a consulting firm that uses his theories of innovation to help companies create new growth businesses; Rose Park Advisors, which identifies and invests in disruptive companies; and the nonprofit Christensen Institute, a think tank that applies his theories to societal issues like healthcare and education.

Rose Park was launched in 2007, the same year Matthew Christensen earned his MBA from HBS, and its Disruptive Innovation Fund was created that year. Shawn Cox joined Rose Park in 2010 and was the first investment employee at the fund. In his lawsuit he says he did investment analysis, investor outreach, and management of the fund for three years, bringing in a total of $2 million in investment capital just from his personal network.

COUPANG: JEWEL OF DISRUPTIVE INNOVATION’S PORTFOLIO

Cox graduated from MIT Sloan in 2008. From his fund, Cox Capital Partners, he says, he brought $400,000 in investments to Disruptive Innovation; meanwhile he agreed to work for the Christensens at a below-market rate on the promise of an equity stake.

That stake began at 4% grew to 4.4%, and when another member left the fund, expanded to 6%. Of course, Cox says, he knew that 4% of nothing is just as good as 6% — but he was willing to take the risk because he believed in the company. His belief was well-founded: Disruptive Innovation was about to strike gold.

The jewel of the fund’s investment portfolio is Coupang. In 2010, Disruptive Innovation helped Coupang get off the ground; by 2013 the South Korea-based mobile e-commerce company had gone global, on its way to being named one of the “50 Smartest Companies in the World” by MIT Technology Review and one of “30 Global Game Changers” by Forbes. Coupang now has offices in Beijing, Los Angeles, Seattle, Seoul, Shanghai, and Silicon Valley, and is estimated to represent about 85% of Disruptive Innovation Fund’s value.

Coupang, a South Korea-based mobile e-commerce business, is the jewel in the investment portfolio of Disruptive Innovation

After he moved back to Utah in the spring of 2013, Shawn Cox continued to do work for Disruptive Innovation. But in 2016, he says in his lawsuit, after requesting that the Christensens send him a Schedule K-1 tax form (a federal form for company partners), he was informed that they’d prefer to buy him out.

Cox says he was open to the offer. But when he asked for certain financial information, he was rebuffed. And that’s when he says the Christensens began “fabricating wildly inconsistent stories in an attempt to claim” that he no longer owned his shares.

First, Cox says, the Christensens said the agreement should be nullified because the value of the shares had increased beyond anyone’s expectations. Then they claimed not to have paid attention when they were signing a 2013 LLC Agreement and Unit Transfer Memorandum. Then they admitted to granting Cox equity in Disruptive Innovation but said they should not have.

Then they threatened to sue.

THE DISPUTE GOES TO COURT — TWICE

Cox beat them to it, suing in federal court in Utah in March 2017, seeking what he says is the value of his shares — $14 million — plus $5 million for other damages as well as attorney fees and other expenses. Scott Ford, an attorney for Disruptive Innovation and the Christensens, told the Salt Lake Tribune in March that the “claims asserted by Mr. Cox are without merit, and we anticipate filing counterclaims as a result of the wrongful conduct on the part of Mr. Cox, who was a fund operations employee.”

A month later, in April, the Christensens counter-sued in Massachusetts, claiming the signed agreement granting Cox his ownership shares should be “invalid and void” because they wouldn’t have signed it “had they known that Cox had listed himself as a Member and Class B Units holder.” But that claim was dismissed in November by Judge Edward Leibensperger of Massachusetts’ Suffolk Superior Court’s Business Litigation Session, who said that failing “to read or review” the document is not “the exercise of ordinary care.” Leibensperger added that he was “troubled by the basic argument that if something’s evident on the face of a document and you’re claiming you were duped when you elected not to read the document.”

Having had most of the claims against him dismissed — only a claim of “breach of fiduciary duty” had cleared the bar of plausibility — Cox filed a set of counterclaims in Massachusetts on Dec. 1.

AND … BACK TO THE JUDGE ONCE MORE

Attempts to reach the Christensens were unsuccessful. Shawn Cox declined to speak while the matter was being litigated. Besides seeking an order enforcing the agreements that the Christensens “knowingly made,” Cox wants the court to declare the Christensens “breached their fiduciary duty” by employing him with the promise of equity they never intended to honor. He also claims that “the Christensens have unjustly enriched themselves” by taking back the shares that he says are his.

Cox, now chief financial officer for a startup social video dating app called Ohi, says the Christensens went too far in their dispute with him by disparaging him to former investors, including those he’d brought over from his own firm to Disruptive Innovation. And, he says, they injured his reputation in Salt Lake City with defamatory statements in the local press. Cox, a Mormon, says his “reputation in both the Mormon community and investment community has been and continues to be irreparably harmed” as a result.

He’s seeking damages for the impact to his reputation, coverage of his legal expenses, and a declaration that his ownership of 6% of the Disruptive Innovation general partnership is valid.

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