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Item 3. Legal Proceedings

2025-12-17 compared with 2014-04-01 · 2 added, 111 removed, 3 unchanged (97% of the section changed)

Legal Proceedings

Champion Window Arbitration Claim —In

January 2006, we sold our 31.5% ownership interest in Champion Window, Inc.

(“Champion”), a portfolio company of the

Fund, to Atrium Companies Inc.

(“Atrium”) pursuant to a Stock Purchase Agreement (“SPA”) dated December

The SPA contained certain limited rights of indemnification for Atrium in connection with its purchase of such ownership

More than five years after the closing

of the sale of our Champion interest, Atrium filed suit in the District Court of Harris County, Texas against two former officers

of Atrium’s subsidiary, Champion, alleging, amongst other matters, that the former officers breached their fiduciary duties

to Champion by hiring undocumented workers.

This action was commenced primarily as a result of an investigation by the U.S.

and Customs Enforcement agency (“ICE”) into Atrium’s hiring practices.

On March 12, 2012, to protect its interests,

we filed a Petition in Intervention in the State Court Action seeking a declaration from the Court that Equus did not owe any obligation

to indemnify Atrium or Champion for any penalties, costs or fees associated with the investigation by ICE.

On March 16, 2012, Atrium and Champion

filed a claim with the American Arbitration Association in Dallas, Texas, against Equus and a number of the other sellers under

In September 2013, all of Atrium and Champion’s claims including claims against its former officers described above,

were also consolidated in the Arbitration Action.

In the Arbitration Action, Atrium and

Champion seek damages arising from Equus’

and the other sellers’

indemnity obligations set forth in the SPA.

claims it is entitled to indemnification under the SPA for costs it has incurred in responding to an ongoing investigation by ICE.

Atrium entered into a Non-Prosecution Agreement with ICE.

It appears that one condition of the Non-Prosecution Agreement required

Atrium to pay ICE $2,000,000.

Atrium and Champion asserted two counts of breach of contract against Equus, both arising out of

the alleged obligation to indemnify Atrium and Champion pursuant to certain provisions of the SPA.

Atrium and Champion also asserted

claims for fraudulent inducement against two former officers and directors of Champion.

Through the arbitration, Atrium and Champion

seek to recover an unspecified amount in the form of alleged “losses, damages, assessments, penalties, interest, reasonable

attorneys’

and accountants’

fees, settlement costs, and other costs and expenses arising directly or indirectly out

of or incident to,”

the alleged breach of the indemnity provisions in the SPA.

As a consequence of their fraudulent inducement

claim against the two former officers and directors, Atrium and Champion alternatively seek equitable rescission of the SPA and

exemplary damages from the two former officers and directors.

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Atrium and Champion have yet to specify

the amount of damages they seek from Equus or the other sellers pursuant to the alleged indemnity obligations under the SPA.

and Champion have disclosed the payment of $2 million to ICE to resolve the investigation and avoid prosecution for their hiring

We filed an answer to Atrium and Champion’s

claims on December 6, 2013.

In our answer, we denied that we owed any indemnity obligations to Atrium or Champion under the SPA

and further denied that the Fund is in any way liable to Atrium or Champion.

To the extent Atrium and Champion are able to establish

a right to an indemnity, we will further contest the amount of the claimed indemnity, inasmuch as we believe (among other defenses)

that the indemnity obligation can only exist, if at all, with respect to damages arising as a direct and proximate result of employees

who were hired prior to the closing date of the 2006 sale of Champion and remained in continuous employment after the 2006 sale,

and not to any employee who may have been hired in the six years after the sale.

While we believe the Atrium claim is

without merit and we intend to continue to vigorously dispute the claim, there is a reasonable possibility of an adverse ruling

which may require the Fund to indemnify Atrium.

If Equus is required to indemnify Atrium and Champion, we estimate that such indemnity

obligation could vary from $2.0 million to $3.0 million.

Pursuant to the SPA, the indemnification obligation of Equus and the other

sellers is several and not joint, and any such indemnity, however uncertain, would likely be reduced proportionately to our percentage

ownership in Champion at the time of sale, which was 31.5% of Champion’s shares outstanding.

Indemnification Settlement —Effective

June 13, 2013, the Fund entered into a settlement agreement with Sam Douglass, a former director and executive officer of the Fund,

in respect of a claim for indemnification pursuant to the General Corporation Law of Delaware and an indemnification agreement

entered into by the Fund with Mr.

Douglass on May 3, 2001.

The settlement agreement provides for the reimbursement to Mr.

of actual expenses incurred, excluding any fines or penalties, in connection with an enforcement action initiated by the Securities

and Exchange Commission against Mr.

Douglass in 2009.

The settlement payment of $125,000 was made on June 24, 2013.

Lawsuit Settlement —On August

12, 2012, Paula Douglass filed a lawsuit against the Fund and members of the Board of Directors in the District Court of Harris

County, Texas.

Douglass’

complaint alleged various causes of action, including minority shareholder oppression, dilution,

and breach of fiduciary duty, and sought unspecified damages and attorney’s fees.

Effective June 13, 2013, the Fund entered

into a settlement agreement with Ms.

Douglass, Sam Douglass, as well as certain trusts controlled by them.

Pursuant to the settlement

agreement and in view of the estimated costs of protracted litigation and the associated disruption to the operations of the Fund,

the Board of Directors approved a payment of $402,254, in complete settlement of the lawsuit, as being in the best interests of

the Fund and its shareholders.

The settlement payment was made on July 30, 2013.

Douglass filed a motion to dismiss the lawsuit

with prejudice on August 8, 2013.

Settlement—

On June 9, 2011, RNR Production, Land and Cattle Company, Inc.

(“RNR”) filed a lawsuit

against the Fund and members of the Board of directors in the district Court of Harris County, Texas, seeking

various monetary and equitable remedies, including a motion for a temporary restraining order against the Fund from holding

its annual meeting of shareholders.

The Fund prevailed against the motion but agreed to a nuisance settlement with RNR in

exchange for a one-time payment of $200,000 which was paid on September 2, 2011,

Settlement—

On March 10, 2010, American General Life Insurance Company (“American General”) filed a

complaint against the Fund in the District Court of Harris County, Texas in connection with an office lease entered into

by our former administrator with American General.

The complaint by American General sought to hold the Fund liable for

unpaid rent, improvements, and attorneys’

fees totaling approximately $450,000.

We agreed to a settlement with American

General in exchange for a one-time payment of $120,000, which was paid on June 7, 2011.

From time to time, the Fund is also

a party to certain proceedings incidental to the normal course of our business including the enforcement of our rights under contracts

with our portfolio companies.

While the outcome of these legal proceedings cannot at this time be predicted with certainty, we

do not expect that these proceedings will have a material effect upon the Fund’s financial condition or results of operations.

From time to time, the Fund is a party to certain proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies.

While the outcome of any potential legal proceedings cannot at this time be predicted with certainty, we do not expect that any such proceedings will have a material effect upon the Fund’s financial condition or results of operations.

Mine Safety Disclosures

Not applicable.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K/A

Item 3. Legal Proceedings