Arcturus Board Sues Ex-CEO, Alleges Deceit, in Prelude to Proxy Fight

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Alcobra, an inactive biomedical startup based in Tel Aviv, Israel, that was registered to trade its shares on the Nasdaq exchange. The deal enabled Arcturus to raise capital as a public company, and “to accelerate the development of our RNA medicines,” according to a Sept. 27 statement announcing the deal.

The combination with Alcobra, though, included some intellectual property that had been under development that didn’t fit with Arcturus and its focus on RNA therapeutics. At least part of the merger process involved paring some unwanted programs from their combined drug development pipeline.

This was apparent when the reverse merger closed in November. Arcturus issued a statement that noted that Alcobra had agreed to sell its lead drug development program (for deterring amphetamine abuse) to an unnamed investor group before the merger closed.

According to the board’s lawsuit, though, Payne was fired “primarily due to his attempted transfer of substantial amounts of intellectual property for no consideration and for no articulable business reason” to another company. This claim appears to refer to a different drug development program held by Arcturus, but representatives for the company did not immediately respond to a request for clarification Thursday.

The board’s lawsuit alleges that since the merger closed in November, “the post-merger value of [Arcturus shares] declined nearly 50 percent, from a high of $10.30 per share to $5.75 per share as of March 23, 2018. This represents a market cap loss of more than $45 million.” The stock closed in regular trading Thursday at $5.50 a share.

The board’s suit against Payne alleges that during an Arcturus board meeting in September, Payne minimized the significance of a proposed amendment to an existing joint venture between Arcturus and Providence Therapeutics, a private biotech based in Calgary, Alberta, Canada. According to the lawsuit, Providence is operated by Bradley Sorenson, Payne’s longtime friend and occasional business partner who also owns a 5.6 percent stake in Arcturus.

According to the lawsuit, the amendment that Payne downplayed would have transferred Arcturus’s rights to “valuable cancer vaccines” to Sorenson and Providence at no cost. Instead of approving the amendment, however, the Arcturus board decided to postpone action, and referred the matter for legal review. The lawsuit alleges that Payne subsequently lied to Sorenson by telling him the Arcturus board had approved the measure. By late November and December, Arcturus board members allegedly confronted Payne about his purported misrepresentations—and fired him on January 25. The company disclosed Payne’s termination on Feb. 2.

The board’s lawsuit against Payne asks a San Diego judge to award Arcturus tens of millions of dollars in monetary damages for Payne’s alleged misconduct as CEO, and to prohibit him from further influencing the company’s business. The 19-page complaint lists other allegations against Payne as well, including that he operated a “lucrative side business” while working as Arcturus CEO, rallied shareholders in February to block the board’s routine approval of a corporate auditor, and encouraged Chivukula to breach deals he had reached as part of his separation agreement with the company.

In its open letter to shareholders, the Arcturus board added, “Our ongoing investigation continues to reveal additional details surrounding Payne’s concerted attempts to deceive, manipulate and lie to Arcturus shareholders, partners and other stakeholders.”

Payne confirmed Wednesday that he has filed a lawsuit of his own against Arcturus in Israel, where the umbrella company that operates Arcturus is domiciled. He also remains as a director on the umbrella company’s board. Payne would not discuss details of his claims against the company, and did not immediately respond to a request for a copy of that complaint.

Arcturus Complaint by BVBigelow on Scribd

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