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Promega, CEO Linton Return Fire in Legal Battle with Shareholders

Xconomy Wisconsin — 

[Corrected 10/12/17 4:21 p.m. See below.] A little over a year after a group of shareholders of the life sciences supplies business Promega sued the company, alleging malfeasance by founder and CEO Bill Linton, Promega has begun sharing its side of the story.

In multiple counterclaims filed recently in Dane County Circuit Court, lawyers representing Fitchburg, WI-based Promega accuse some of the shareholders who brought suit against the company in July 2016 of conspiracy, fraud, and racketeering, and claim they were allegedly double-dealing in communications with fellow shareholders and leaders at Promega, and concealing their true motives.

Details of the counterclaims were first reported by the Wisconsin State Journal.

Promega, which Linton founded in 1978, is one of the area’s leading life sciences companies. It manufactures and sells more than 3,500 different life sciences research tools, such as reagents and DNA analysis kits. Total sales in 2016 were nearly $400 million, according to the company’s website. A majority of the company’s 1,400 employees are based in Wisconsin, and over the years a number of Promega spinoffs have been launched, including Epicentre, Lucigen, and PanVera.

The group of plaintiffs that sued Linton and Promega last year is led by Ted Kellner, a Milwaukee-based investor, and Nathan Brand, a Miami-based real estate developer. In the lawsuit, they claim that Linton initially acknowledged his company’s obligation to get shareholders a “fair return” on their investment. However, the plaintiffs allege that in recent years Linton has not only shirked that obligation, but he even set up a nonprofit, the Usona Institute, with the alleged goals of acquiring a controlling stake in Promega and effectively using its investors’ money to fund research into the possible therapeutic effects of hallucinogenic drugs.

In one of the counterclaims, lawyers for Promega call the notion that Linton is no longer pursuing the best interests of the company a “false” statement. They also say the language plaintiffs used to describe Linton’s behavior—that he “bullied, lied [to], threatened, [and] manipulated” other stockholders in order to bolster his stock position—is more befitting of Brand and his fellow plaintiffs.

The initial allegations and subsequent recriminations stem in part from disagreements between Promega and some of its largest stockholders over the company’s worth, which is used to determine the value of individual holdings. Feeling that they were unable to sell their shares at what they viewed as a fair price, Brand, Kellner, and others hatched an unsuccessful plan to buy Promega, according to court documents. They also discussed ousting Linton. In an e-mail message made public in court filings, Brand apparently wrote to a fellow shareholder in April 2015 that “our best hope would be … to convince the majority of the board [of directors] to fire Bill.” Ultimately, the group led by Brand and Kellner was not able to accomplish this, and decided to take legal action.

According to court files, Linton owns 792,670 of the 1.6 million-plus outstanding shares in Promega, a 47 percent stake. Brand and his family have the second-largest stake in the company—about 17 percent. It’s unclear how much stock Kellner owns.

In one of the counterclaims, attorneys for Promega say the company’s shareholders, including the plaintiffs who filed suit in 2016, “have been given repeated opportunities for liquidity at fair, equitable, and non-discriminatory prices.” However, “fair” is not how some of the company’s shareholders describe the amounts for which Promega has offered to buy their holdings.

The upper bound of the price range Promega set as part of a reverse, or “Dutch,” auction held in 2014 was “way too low,” Brand wrote in an e-mail to a fellow shareholder later that year. The message was one of dozens made public last month when lawyers representing Promega filed the counterclaims; the release of these documents is part of the “discovery” phase of the lawsuit.

The recipient of Brand’s e-mail was Paul Shain, who served on Promega’s board of directors for eight years, until 2014. Shain also owns a small stake in Promega and served as the interim general manager of Promega’s North American operations from 2012 to 2014, according to court documents. (Promega says in one of the counterclaims that Shain, who currently serves as CEO of Madison-based Singlewire Software, was never a full-time employee at the company.)

Shain is mentioned in the lawsuit that Brand, Kellner, and other shareholders filed last year. They say he was one of two longtime directors who weren’t Promega employees that Linton decided not to nominate for reappointment in 2014. In the original lawsuit, plaintiffs say Shain opposed Linton’s “100-year plan,” a vision of Promega remaining private and independent until 2078 or later.

But according to the company’s counterclaims, Shain played a central role in a proposal Brand and some of his fellow shareholders put forth to buy Promega for $625 a share, or $1.25 billion. The proposal, which Promega would later reject, involved using $600 million worth of debt to help finance the transaction, firing Linton, installing Shain as CEO, and selling the company within five years, court records show.

Attorneys for Promega allege in one of the counterclaims that Brand and Kellner misled others who own shares in the company about having all the various pieces in place to move forward with the $1.25 billion acquisition. For example, Brand and Kellner apparently said in a July 2015 letter to shareholders that they had received “strong support for the debt component of the transaction” from Barclays, an international financial services company. However, when Brand and Kellner contacted Promega’s board of directors in July 2015 saying they planned to buy the company in a “hostile takeover,” the letter from Barclays they shared with board members allegedly did not mention any firm commitment to help finance the deal, lawyers for Promega say. (The Barclays letter was not one of the documents made public along with the e-mails and notes from Brand, Kellner, Shain, and others.)

Some shareholders responded to the July 2015 letter from Brand and Kellner, asking about details of the proposed acquisition, according to attorneys for Promega. The group led by Brand and Kellner allegedly told these shareholders that “we expect Promega to grow, prosper, and remain headquartered in Wisconsin,” according to one of the counterclaims. In reality, lawyers for Promega say, Brand and Kellner’s group put together a document that mentioned the “sale of the business at the end of five years,” post-acquisition. Further, Brand, Kellner, and Shain allegedly acted duplicitously by leading fellow shareholders to believe that the goal of the proposed acquisition was to allow all shareholders to be able to get a fair return on their investment, when in fact the transaction was structured to deliver disproportionate financial benefits to the three men, attorneys for Promega say.

While the so-called hostile takeover attempt led by Brand and Kellner would ultimately founder, the two were “ultimately successful in sowing fear and dissension” among members of Promega’s board of directors, lawyers for the company say. As a result, they say, five of the board’s seven members resigned in September 2015. Linton then appointed four other Promega employees to the board.

One of the board members who stepped down that month was Antonio Mello, a professor at the University of Wisconsin-Madison, attorneys for Promega say. Several months prior, in May 2015, Brand, Kellner, and Shain were allegedly discussing different options for getting what they deemed to be a fair amount of money for their shares in Promega. According to one of the counterclaims, they sent a letter to Mello and other Promega board members claiming that “a large group of shareholders had become increasingly concerned with the actions of [Promega’s] management toward shareholders.”

Not long after sending the letter, attorneys for Promega say, Brand wrote to Kellner and Shain about different things they could try to secure Mello’s support. Brand, who along with Kellner is a major donor to UW-Madison, allegedly wrote that “[h]opefully [Mello] knows where his bread is buttered and exactly who Mr. Kellner is. If he is a problem, we might want to get a copy of our … letter into the hands of our good friend Mike Knetter.” Knetter is the former dean of the university’s business school, where Mello teaches. Brand also floated the idea of having the school take away Mello’s parking spot or season tickets to Wisconsin Badgers home football and basketball games, according to court documents filed by Promega lawyers.

Brand, who Promega lawyers call the “ringleader” of a “conspiracy” to force the company’s board into purchasing certain stockholders’ shares for allegedly overly high prices, seemed bellicose in an e-mail to Shain about turning both Promega’s board and shareholders against Linton.

“I am prepared to spend and take whatever actions are necessary to get us where we need to go,” Brand said, according to court records. “The board better fully understand this because once his [sic] train leaves the station, there is no turning back and things will get very hot and ugly for [the board] in a hurry … Bill and these directors will be like Hitler and the Nazis trying to win a two-front war. I guarantee they will have the same ugly result.”

The e-mails sent between Brand, Kellner, and Shain that have been added to the case file include some nasty comments. For example, in early 2015 Brand apparently described a desire to “beat the crap out of” Linton and on other occasions discussed a potential plan to “dig up dirt” and “blackmail Bill.” The recently released documents also include a handwritten note that appears to have been sent by Brand to Linton, saying that if he and others on Promega’s board agreed to pay “the right price” for Brand’s family’s shares, they would “go away forever.” But, Brand allegedly warned, “If you don’t play ball, we will be a thorn in your side for the next 10 years.”

Nevertheless, some of the court documents appear to bolster the claim by plaintiffs that Linton and other leaders at Promega have been resistant to bring in an independent group to assess the value of the company.

In October 2014, Linton apparently sent an e-mail to Brand in which he said that Promega’s “board and management team has concluded that an independent valuations appraisal is no longer needed.” Part of the reason they reached that conclusion was that Promega had discontinued the granting of new stock options, Linton allegedly wrote. Around that same time, Brand hired a forensic accountant named Cindy Jones to appraise Promega’s stock, according to court documents filed by Promega attorneys. Without revealing the valuation Jones came up with, they write in the counterclaims that her appraisal was “fundamentally flawed.”

While the two sides disagree over how much Promega is worth today, it appears that its stock has been rising in recent years.

According to lawyers for Promega, a 2013 assessment by Los Angeles-based Marshall & Stevens valued the company’s shares at $259 apiece. The price range for the Dutch auction in 2014 (between $233 and $272 a share) is in line with that valuation.

Promega held two stock buybacks in 2016, court records show. In the first repurchase period, the company bought back more than $51 million worth of its stock at an average share price of $382.98. In the second, Promega repurchased $28 million-plus worth of shares, and the average price was $406.53 a share. Those averages are below what Brand allegedly described as a “fair price” of $575 per share in a 2014 e-mail to Shain. (There is another scheduled stock buyback window, which opens on Nov. 1, according to the company’s counterclaims.)

Promega spokeswoman Karen Burkhartzmeyer says that on separate occasions in 2015, 2016, and 2017, the company commissioned independent firms to appraise Promega’s stock. Burkhartzmeyer declined to reveal the names of those firms, or the amounts they estimated Promega was worth. [An earlier version of this article incorrectly stated that the most recent independent valuation of Promega that the company views as credible was performed in 2013. We regret the error.]

Moreover, lawyers for Promega say that with the exception of one dividend paid to shareholders in 2007 following a court victory (that was unrelated to the current case), the company “had not paid dividends and did not plan to pay dividends in the foreseeable future”—a plan that the company’s management and board reiterated following the Dutch auction. Promega instead intends to continue retaining virtually all of its earnings in order to fuel the company’s growth, the company’s attorneys say. That could potentially have been one of the signals to Brand, Kellner, and others who filed suit last year that they would have a hard time turning their shares in Promega into cash in the future.

James Southwick, who leads the legal team representing Brand, Kellner, and other plaintiffs in the original lawsuit, declined to comment on the counterclaims attorneys for Promega filed last month. “The plaintiffs stand behind the claims made in their original complaint, and look forward to resolving their claims and the counterclaims in court,” Southwick says.

The plaintiffs in the case now have the opportunity to respond to the counterclaims, but must do so by Nov. 2. Judge Valerie Bailey-Rihn has not yet set a trial date in the case.