A group of minority shareholders of light-sport aircraft manufacturer Icon Aircraft has filed a lawsuit in Delaware Chancery Court against their Chinese majority shareholder counterparts, including Shanghai Pudong Science and Technology Investment (PDSTI), alleging that the latter illegally breached their fiduciary duties and have been attempting to facilitate “expropriation of Icon’s intellectual property [IP] in aircraft design, aircraft manufacturing, and advanced carbon-fiber structures manufacturing to China.”
The “Icon Recovery” group filing the lawsuit is said to comprise 35 members in all, including Asset Management Company Venture Fund, former board member and former Boeing chairman Philip Condit, company co-founder Kirk Hawkins, and co-founder Steen Strand, among others. The members are seeking to halt the transfer of the IP to China, dismiss associated board members, and “enjoin…all mismanagement.” In addition, the members are said to have the desire to raise awareness of their experience as a cautionary tale for other companies that may be seeking to secure investments from Chinese firms.
The company acknowledged that “a small number of shareholders and directors of Icon Aircraft have initiated litigation in Delaware Chancery Court against certain other company shareholders, directors, and officers” and added that “this is an active legal matter, and thus, we will not provide further comment at this time.”
“Since becoming the controlling stockholder of Icon in 2017, PDSTI has disregarded its duties to minority shareholders, seized control of the management of the company, operated Icon as its own property, and systematically dismantled the company, thereby destroying the value of Icon and its shares, all in support of its goal to expropriate Icon’s intellectual property to China,” the lawsuit alleges.
According to the lawsuit, PDSTI executives represented themselves as venture capitalists with the interest in creating a successful company in the U.S. But by May 2020, board members had indicated their desire to transfer Icon technology to China. Further, executives indicated that PDSTI, which the lawsuit claimed is nearly a 50 percent stated-owned entity under the People’s Republic of China, “would only keep the business nominally alive and in an idle state of low to no production, while PDSTI worked to set up a joint venture in China,” the lawsuit claims.
PDSTI refused to invest the money required to make the company successful, would not permit outside investment in an effort to ensure it retained majority control of the company, and diluted the shares of minority shareholders to weaken their stake, the lawsuit further alleges. In addition, the lawsuit claims the majority shareholders provided only limited access to funding.
“PDSTI inappropriately forced its will on Icon by restricting Icon’s access to its own operating capital,” the lawsuit contends. “PDSTI accomplished this by requiring funds from its purchase of Icon stock to be deposited in a bank account at the East West Bank, which PDSTI controls,” the lawsuit states, adding Icon was not permitted to draw on those funds without PDSTI authorization. “By refusing to release funds as required PDSTI—the controlling stockholder—has continually put Icon in or near the zone of insolvency and damaged Icon’s operational stability.”
These investors, the complaint said, are attempting to arrange for an affiliated Chinese entity, Flying Tech, to enter into an IP licensing agreement with Icon, thereby setting up Icon to lose control, and associated value, of its technology.
In addition, PDSTI has threatened to remove and/or removed directors who did not vote in accordance with the PDSTI “wishes,” the lawsuit said. Such messages were conveyed to Condit, who ultimately left the board, and David "Skip" Fleshman, who was removed.
“It is disturbing what is happening to Icon under the control of PDSTI as is described in the lawsuit,” Condit said in a statement regarding the lawsuit. “I joined Icon’s board because I believed in the company’s mission, the qualifications of the founding team, and the exceptional design and engineering in their aircraft. I believe strongly that good governance is at the very heart of a trustworthy economic system. The board has a fiduciary responsibility to all shareholders and without that trust, critical investments cannot be made. If Chinese investments are masquerading as venture capital to gain access to U.S. technology, it violates this trust.”
Condit continued that, as the lawsuit explains, “The investments by PDSTI in Icon were never intended to make the company successful. Rather they were part of a plan to gain technology and defraud minority shareholders.”
“It was clear to me that PDSTI has little interest in operating Icon for its success here in the U.S.,” Fleshman agreed. “Their decision-making and board oppression were to serve their interest in China at the expense of the U.S. shareholders and the company itself.”
Another member who left the board included aviation veteran Linden Blue, vice chair at General Atomics. PDSTI also removed Hawkins as CEO after he attempted to raise additional capital for the company, including entering late stages of a buyout by Yamaha Motor Co. and working with investment bank Baird & Company on the launch of a pre-IPO, $200 million equity raise.
Instead, PDSTI has provided “dribs and drabs of liquidity” to avoid complete insolvency, the lawsuit claimed and on multiple occasions, “PDSTI threatened to withhold cash entirely” if management plans did not meet with PDSTI’s vision, according to the lawsuit.
Icon was founded in 2006 to develop an aircraft that met the FAA’s newly created light-sport category regulations. It developed the amphibious A5 that brought numerous innovations to the market, including its spin-resistant airframe design, panel-mounted angle-of-attack indicator, and foldable wings.
The company handed over the first customer copy in 2015 and claimed to have orders for 1,250 and plans to build 500 a year by 2017. But with ongoing financial issues and ensuing layoffs that were said to have been complicated by the U.S./China trade war, Icon had delivered a total of 122 through the end of 2020, according to General Aviation Manufacturers Association data. Icon has incorporated a few upgrades, including making the Garmin GX3 Touch flight display available as an option.
The minority investors noted that Chinese investment in the company came as the government was pursuing a five-year plan to “achieve significant results in innovation-driven development” with aerospace among the key target industries. PDSTI, through PK Capital, became a minority shareholder in Icon in 2015, initially purchasing $100 million in shares. By 2017 PDSTI had become a majority shareholder ultimately having control over six of 11 seats on the board, whether they were filled or not.
Icon executives initially agreed to set up a subsidiary in China with an eye on expanding the business and this market. “It is now apparent that PDSTI had more insidious purposes for wanting to set up a Chinese subsidiary—PDSTI wanted to move Icon’s aviation technology to China,” it said. “Had these intentions been revealed to Icon and its shareholders, PDSTI would have never been allowed to gain control of the company.”
During a December 2020 board meeting, Hawkins and Strand were first made aware of the plan for an IP licensing arrangement with the PDSTI affiliate Flying Tech. “The fact that PDSTI is an investor does not give PDSTI authority to accesses Icon’s sensitive IP and raises the question of when and why PDSTI has accessed Icon’s IP,” the lawsuit stated. Since PDSTI controls the board, it “can force through whatever resolutions are in its own interest.”
The lawsuit claims that, as a result of the actions of its Chinese majority shareholding interests, Icon’s “design, manufacturing, and sales capabilities have been reduced…Icon has insufficient capital and has been in or near the zone of insolvency.”
The minority shareholder shares have been “improperly and bad faith diluted through PDSTI’s self-interested conduct,” the lawsuit alleges.