A legal dispute over ownership of the popular fact-checking site Snopes.com is threatening the existence of the online sleuthing service, which now says it is in dire financial straits. As a result, Snopes on Monday started soliciting donations through a GoFundMe campaign and approached its $500,000 goal in its first day of fundraising.
Visited by more than 18 million people a month, Snopes' mission is to dispel urban legend and internet myths. The company, whose profile was raised during the 2016 presidential race, now has a staff of 16 employees. Its fact-checking capabilities were further validated when the organization was one of several selected last year to help Facebook sort the real news from the fake stuff.
Snopes, however, could run out of money. The company, which generates revenue through advertisements, says all funds have been withheld since April by its advertising partner, San Diego-based internet media company Proper Media. The matter is further complicated as Proper Media's CEO Christopher Richmond and President Drew Schoentrup together hold a 40 percent stake in Snopes parent company, Bardav, Inc.
Now the companies are embroiled in a contentious battle over who governs the popular site and its finances, with the San Diego Superior Court of California set to determine the outcome.
"We are in danger of having to discontinue operations," said David Mikkelson, Snopes co-founder and CEO .
Established in 2003, Bardav, Inc. was the joint venture of Mikkelson and his then-wife Barbara Mikkelson, who each owned one share and 50 percent of the company. The couple divorced in 2015. In July of 2016, Barbara sold her stake for $3.6 million to the five directors of Proper Media: Richmond, Schoentrup, Ryan Miller, Vincent Green and Tyler Dunn.
Barbara's stake, according to cross complaints, was divided into fractional shares, with Richmond and Schoentrup each holding 20 percent interest in Bardav; and Miller, Green and Dunn each holding 3.33 percent.
Prior to the sale, however, Bardav had contracted Proper Media to handle all advertising services on Snopes.com, with the companies agreeing to share revenue earned from ads on the site. According to the agreement contained in legal documents, Snopes was entitled to a baseline payment of $85,000 per month, plus 50 percent of net revenue over $85,000. Proper Media's take was the remaining 50 percent of revenue above $85,000.
The contract is, however, subject to a termination clause, and Mikkelson, who continues to own 50 percent of Bardav, attempted to terminate the deal with 60 days notice in March.
"(Proper Media is) claiming I cannot terminate the contract because it requires approval of (Bardav's) board of directors," Mikkelson said in a phone interview. "I am the only director. Barbara was the other director, and she resigned when she sold her share. … There are now one or more vacancies on our board."
Proper Media counters that Schoentrup is also a board member.
In May, Proper Media filed suit in San Diego against Bardav and Mikkelson. The suit alleges, among other things, that Mikkelson attempted to gain, through conspiracy, a controlling interest of the business, has tried to block Proper Media from its share of company profits and misused corporate funds for personal expenses. The media company, which also owns TVtropes.org and sells advertisements on behalf of publishers, is also seeking to get Mikkelson removed as a director of the company.
Bardav and Mikkelson countersued in June, arguing that Proper Media has not paid Snopes its share of advertising revenue since Mikkelson attempted to terminate the advertising contract.
Motions by both the plaintiffs and defendants are scheduled to be heard on Aug. 4, but time is of the essence for Snopes, which requires an excess of $100,000 per month to manage operations. The court recently awarded Bardav a one-time, $100,000 payment from Proper Media, but the funds aren't enough to cover site costs and legal expenses, Snopes said.
Monday, Snopes, went public with its financial plight, soliciting readers via e-mail and a post on the website for $500,000 in donations to keep the site afloat.
"Our legal team is fighting hard for us, but, having been cut off from all revenue, we are facing the prospect of having no financial means to continue operating the site and paying our staff (not to mention covering our legal fees) in the meanwhile," Snopes said in a post published to its website.
Meanwhile, in an emailed statement, Proper Media's lawyer Karl Kronenberger asked the media to, "conduct its own fact-check of the fundraising plea posted today on Snopes.com. … Today's post only confirms Proper Media's allegations that Mr. Mikkelson has drained the company's bank accounts and is unable to operate Snopes profitably without Proper Media's expertise and management."
Court documents contain a number of salacious allegations made by Proper Media, Bardav and Green, who now works for Snopes and is countersuing Proper Media. The case, however, hinges around the ownership structure of Bardav.
Both sides maintain that Bardav is an S corporation, which means the company can pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes, thus avoiding double taxation on corporate income. In order to receive the tax break, the organization can only have shareholders who are individuals, not corporations.
Proper Media holds that the five individuals who were sold an ownership stake in Bardav assumed ownership "for the benefit of Proper Media," meaning Bardav can, in theory, remain an S corporation. That would also make Proper Media the beneficial owner of 50 percent of the company, giving it equal footing with Mikkelson.
Bardav asserts, on the contrary, that each of the five shareholders have individual ownership claims, as opposed to joint power.
"The question is going to turn on the sale documents between the (ex)-wife and the individuals," said Michael Chasalow, a USC professor of law, and an expert in corporate law and governance. "Did (Barbara) sell or attempt to sell five pieces of the one share or did she sell one piece to five people?"
If the latter is true, the sale to five people would mean that half of Bardav is owned by a partnership, and Bardav is no longer an S corporation. The partners would have collective rights to the 50 percent interest, Chasalow said. That would seemingly benefit Proper Media's claim, albeit changing its tax status.
However, if Barbara Mikkelson sold her single share in five, fractional pieces, then there would six owners, with each owner maintaining individual rights to the shares.
Presumably, if the court finds that there are six owners, and not two, then that would benefit the defense, as that would leave Proper Media plaintiffs Richmond and Schoentrup with a minority stake.
Regardless of the legal outcome, Snopes' readers are keeping the lights on for the time being. As of 8:55 p.m. PT, campaign donations totaled $404,444.
The case of Proper Media versus Snopes goes to court Aug. 4 for a hearing on two motions. Proper Media will argue that Mikkelson is unfit to serve as a director of the company. Bardav will seek the release of advertising revenue accrued since April.