Father-son dispute hits Harbor Freight

Afamily feud over the ownership and control of Harbor Freight Tools, the multichannel discount tool retailer with more than 300 stores, is now taking place in Superior Court of Los Angeles County. The father-son struggle for control, laid out in a complaint filed July 14 by company founder Allan Smidt, is in many ways a familiar tale of cross-generational disagreements over management, growth and lifestyles.

Headquartered in Camarillo, Calif., the multichannel retailer sells imported tools, most of them house brands, through catalog, over the Internet and in nationwide outlets. Smidt, 81, has accused his son Eric, 50, of pressuring him to transfer over the ownership of Harbor Freight Tools and a sister company and then freezing him out of both businesses.

Eric Smidt has served as CEO of Harbor Freight Tools since 1999. Allan and Dorothy Smidt, 76, are now suing their only child for breach of trust, breach of contract, false representations and other causes. In addition to damages, the plaintiffs are requesting that the court rescind the agreement that transferred ownership of Harbor Freight to Eric Smidt in June 1999.

At the time, working relations between father and son were good, according to court papers. Eric had begun working for Central Purchasing, another company his father founded in 1968, when he was a teenager. Over time, he was given more responsibilities and a minority interest in the company.

Harbor Freight was incorporated in Delaware in 1997 and began doing business in California in 1998. The company was formed to develop retail stores throughout the United States. According to court papers, Allan and Eric Smidt were both named as directors, but Eric was the sole shareholder. The elder Smidt claims that his son, who also wanted a controlling interest in Central Purchasing, promised “that nothing would change, that Allan would continue to guide the company and have the final say over major corporate decisions consistent with his prior practice, and the two of them would continue to run the business together in the special relationship of father-son.”

Based on these assumptions, Allan Smidt claims he agreed to a complicated purchase agreement for Central Purchasing for $20.9 million. According to the elder Smidt, he sold his stock in the company for less than fair market value at the suggestion of his son, who agreed they would continue to share in the profits and management decisions, with Allan serving as chairman of the board.

But changes began the following year, many of which the elder Smidt opposed. In 2007, when Harbor Freight borrowed $500 million from Credit Suisse First Boston, Allan Smidt accused his son of using some of the money as “dividends” to pay for a $46 million estate in Beverly Hills, Calif., a $100 million addition to his art collection and a $20 million apartment in Manhattan.

“The leveraging of the companies has had serious negative consequences,” the complaint reads.

That same year, Eric agreed to pay his father $50 million, in annual payments of $2.5 million, for the rest of his life. according to the lawsuit. At least two payments have been missed, Allan Smidt claims.

Another point of contention between father and son is the termination and replacement of many of Harbor Freight’s long-standing management team members in 2009 and 2010. An attempt was also made in April 2010 to remove Allan Smidt as a director of Harbor Freight, the complaint states. When Smidt went to the company’s headquarters May 17, 2010, and tried to access payroll, inventory and supplier records through his office computer, he was unable to do so. Smidt says he was then escorted out of the building by Robert Rene, the company’s chief operating officer, who said, “Don’t come back.”

Eric Smidt has yet to file any legal response to his father’s complaint. But he issued the following statement to Home Channel News:

“While the lawsuit saddens me, the assertions in the complaint are completely unfounded and will be addressed in due course. The lawsuit will have no effect on the continued success of Harbor Freight Tools, which has just completed its strongest fiscal year ever.”

Harbor Freight sells a wide range of hand, power, pneumatic, automotive and specialty tools, most of which are purchased directly from overseas factories and sold as house brands. The privately held company has estimated annual sales in excess of $1 billion and has expanded from one store in Lexington, Ky., an experimental format located next to its catalog fulfillment warehouse, to more than 300 units in more than 43 states.

Harbor Freight also has more than 2 million sq. ft. of distribution space in Oxnard, Calif., a 500,000-sq.-ft. warehouse in Camarillo and a 1 million-sq.-ft. distribution center in Dillon, S.C. The company reportedly plans to relocate its marketing, merchandising and other support systems to a 90,000-sq.-ft. building in Calabasas, Calif., this month.