CHICAGO –Bally Total Fitness recently filed a federal lawsuit against its second largest shareholder. The lawsuit alleges that Liberation Investments’ proposal to give shareholders the power to remove Bally CEO Paul Toback with a majority vote is illegal and invalid. Bally sued Liberation Investments L.P., Liberation Investments, Ltd., Liberation Investment Group LLC and Emanuel Pearlman for failing to disclose material facts including Pearlman’s relationship with former Bally CEO Lee Hillman. According to the complaint, Bally alleges that while Pearlman has masqueraded as a disinterested investor with the stockholders’ interests at heart, he has long been associated with Hillman, who created an aggressive accounting culture during his tenure at Bally.

In a recent release, Bally said that the stockholder proposal, which Liberation plans to introduce at the Jan. 26 meeting in Chicago, violates the most fundamental concept of Delaware law, which states that the boards of directors, not the stockholders, manage the business and affairs of a corporation.

Bally also appointed two new board members—Steven Rogers and Adam Metz—to fill the two vacant spots on the board. The company is also planning on including the two nominees recommended by Pardus Capital Management on its director slate at the shareholder meeting. By slating two nominees slated by its largest shareholder, Bally hopes to avoid the expense of a proxy fight, according to a release.

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© 2012 Penton Media Inc.