STATE OF WISCONSINCIRCUIT COURT Nathan F. Brand 2 East Mifflin Street, Suite 901 Madison, Wisconsin 53703 FILED 07-27-2016 DANE COUNTY CIRCUIT COURT DANE COUNTY, WI 2016CV001978 Honorable John W Markson Branch 1 and Case No. ____________________ Nathan F. Brand as trustee for the Nathan and Ana Brand Family 2011 Irrevocable Trust and the Nathan and Ana Brand Children Trust 2 East Mifflin Street, Suite 901 Madison, Wisconsin 53703 and Nathan S. Brand, LLC 3711 De Garmo Lane Miami, Florida 33133 and Nathan S. Brand 3711 De Garmo Lane Miami, Florida 33133 and Nathan S. Brand as trustee for the Nathan F. Brand and Dora S. Brand Descendants Trust, the Dorothea Brand Kennedy Trust, and the Dorothea and Robert Kennedy Children Trust 3711 De Garmo Lane Miami, Florida 33133 and Ted D. Kellner, 100 East Wisconsin Avenue, Suite 2200 Milwaukee, Wisconsin 53202 and Case Code: 30703 Arthur L. Herbst, Jr. as trustee for Mohs Promega Trust 737 N. Michigan Avenue, Suite 1210 Chicago, Illinois 60611 Plaintiffs, v. William A. Linton 2800 Woods Hollow Road Madison, Wisconsin 53711 and Promega Corporation, a domestic corporation, 2800 Woods Hollow Road Madison, Wisconsin 53711 Defendants. SUMMONS THE STATE OF WISCONSIN: To each person or entity named above as a defendant: You are hereby notified that the plaintiffs named above have filed a lawsuit or other legal action against you. The complaint, which is attached, states the nature and basis of the legal action. Within 20 days of receiving this summons, you must respond with a written answer, as that term is used in Chapter 802 of the Wisconsin Statutes, to the complaint. The Court may reject or disregard an answer that does not follow the requirements of the statutes. The answer must be sent or delivered to the Court, whose address is: Dane County Courthouse 215 S Hamilton St., Room 1000 Madison, WI 53703; and to Hansen Reynolds Dickinson Crueger LLC, plaintiffs’ attorneys, whose address is: 316 North Milwaukee Street, Suite 200 Milwaukee, Wisconsin 53202. You may have an attorney help you or represent you. If you do not provide a proper answer within 20 days, the Court may grant judgment against you for the award of money or other legal action requested in the complaint, and you may lose your right to object to anything that is or may be incorrect in the complaint. A judgment may be enforced as provided by law. A judgment awarding money may become a lien against any real estate you own now or in the future, and may also be enforced by garnishment or seizure of property. Dated this 27th day of July 2016. HANSEN REYNOLDS DICKINSON CRUEGER LLC Electronically Signed By: /s/Timothy M. Hansen_____ Timothy M. Hansen (SBN 1044430) John A. Busch (SBN 1016970) 316 North Milwaukee Street, Suite 200 Milwaukee, WI 53202 Phone: (414) 455-7676 Email:
[email protected] [email protected] OF COUNSEL: SUSMAN GODFREY LLP James T. Southwick (pro hac vice application forthcoming) Alexander L. Kaplan (pro hac vice application forthcoming) Adam Carlis (pro hac vice application forthcoming) 1000 Louisiana Street, Suite 5100 Phone: (713) 651-9366 Email:
[email protected] [email protected] [email protected] STATE OF WISCONSIN CIRCUIT COURT Nathan F. Brand 2 East Mifflin Street, Suite 901 Madison, Wisconsin 53703 FILED 07-27-2016 DANE COUNTY CIRCUIT COURT DANE COUNTY, WI 2016CV001978 Honorable John W Markson Branch 1 and Case No. ____________________ Nathan F. Brand as trustee for the Nathan and Ana Brand Family 2011 Irrevocable Trust and the Nathan and Ana Brand Children Trust 2 East Mifflin Street, Suite 901 Madison, Wisconsin 53703 Case Code: 30703 and Nathan S. Brand, LLC 3711 De Garmo Lane Miami, Florida 33133 and Nathan S. Brand 3711 De Garmo Lane Miami, Florida 33133 and Nathan S. Brand as trustee for the Nathan F. Brand and Dora S. Brand Descendants Trust, the Dorothea Brand Kennedy Trust, and the Dorothea and Robert Kennedy Children Trust 3711 De Garmo Lane Miami, Florida 33133 and Ted D. Kellner, 100 East Wisconsin Avenue, Suite 2200 Milwaukee, Wisconsin 53202 and Arthur L. Herbst, Jr. as trustee for Mohs Promega Trust 1 737 N. Michigan Avenue, Suite 1210 Chicago, Illinois 60611 Plaintiffs, v. William A. Linton 2800 Woods Hollow Road Madison, Wisconsin 53711 and Promega Corporation, a domestic corporation, 2800 Woods Hollow Road Madison, Wisconsin 53711 Defendants. Complaint Plaintiffs Nathan F. Brand, individually and as trustee for the Nathan and Ana Brand Family 2011 Irrevocable Trust and the Nathan and Ana Brand Children Trust; Nathan S. Brand, LLC; Nathan S. Brand, individually and as trustee for the Nathan F. Brand and Dora S. Brand Descendants Trust, the Dorothea Brand Kennedy Trust, and the Dorothea and Robert Kennedy Children Trust; Ted D. Kellner; and Arthur L. Herbst, Jr., as trustee for the Mohs Promega Trust (collectively, “Plaintiffs”) bring this original complaint for shareholder oppression against defendants William A. Linton (“Linton”) and Promega Corporation (“Promega”) (collectively, “Defendants”). I. Preliminary Statement 1. This is an action for shareholder oppression under Wisconsin Statute § 180.1430(2)(b). Wisconsin law protects minority shareholders from burdensome, harsh, and wrongful conduct by directors and controlling shareholders, and from oppressive actions that 2 threaten the reasonable expectations underlying their investments. Plaintiffs need that protection. 2. The Plaintiffs are (or are trustees for) current and former Wisconsin residents who bought shares of Promega stock at various times over the past 30 years. They have patiently waited, for decades now, to realize the fair value of their investments. Plaintiffs’ investments in Promega were not donations. They expected to be treated fairly – the expectation of every shareholder who entrusts capital to a company – and they expected an opportunity to share financially in the Company’s success. 3. For many years Promega dealt fairly with its shareholders. Although Promega did not pay dividends, it reinvested the profits into the business, grew the business, practiced sound corporate governance, and increased shareholder value. 4. But over the past two years, Promega’s Chief Executive Officer, William A. Linton, has bullied, lied, threatened, and manipulated his way into a controlling interest in the company. Linton then eliminated the board of directors’ independent oversight by forcing out Promega’s outside directors and replacing them with company insiders completely beholden to Linton. 5. Now, Linton is implementing a “hundred year plan” under which Promega will remain a private company until at least 2078 – 100 years after its founding and well beyond the life of most shareholders. Worse, Linton intends to operate Promega in support of his pet personal venture, the Usona Institute, a non-profit psychedelic drug research institute Linton created in 2014. Indeed, now that Linton is the controlling shareholder, he no longer operates Promega for the best interests of the Plaintiff shareholders, but for himself personally, Usona, and what he calls “humanity at large.” 3 6. Under Linton’s 100-year plan, Promega and its board will not consider any opportunity for the Plaintiffs to receive a fair return on their investment until at least 2078. In implementing this plan, Linton and the board he now controls have acted with a lack of probity and good faith; their actions are oppressive and prejudicial to these Plaintiffs and violate all notions of fairness and good faith. 7. Linton knew that Promega’s shareholders and board, which had been controlled by independent outside directors, would not support a proposal to keep the company private until 2078. So Linton set out to eliminate dissent and seize control of the company through improper means to the detriment of the Plaintiff shareholders. 8. To achieve those ends, in 2014 Linton championed a Dutch auction process, through which Promega repurchased stock from shareholders at the heavily-discounted price of between $233 and $272 per share. Recognizing that many shareholders would not voluntarily sell their stock at such a discount, Linton undermined the integrity of the Dutch auction by personally engaging in a pattern of harsh and wrongful conduct designed to coerce shareholders, many of whom were Promega employees, into selling their shares at low prices, including: Eliminating positions to force employees to sell their shares; Telling shareholders that the Dutch auction was their last chance to receive any value for their investment; Misrepresenting that the Dutch auction would be oversubscribed, so shareholders needed to tender their shares below $272; and Withholding recent financial data demonstrating that Promega’s shares were worth significantly more than the auction price. 4 9. Linton’s wrongful conduct convinced shareholders to tender approximately 325,000 shares into the Dutch auction. With those shares taken out of circulation, the percentage of shares under Linton’s control substantially increased, all without Linton spending a dime of his own money. 10. The Plaintiffs here, as well as some other shareholders, were deeply troubled by Linton’s bad faith conduct during the Dutch auction and were concerned (correctly, as it turns out) that Linton would use his increased control to preclude any future opportunities for them to receive fair value for their shares. 11. In the summer of 2015, certain of these Plaintiffs took action. They formally asked the Promega Board of Directors to investigate Linton’s conduct during the Dutch auction, and they secured financing and made a tender offer to buy all of Promega’s outstanding shares for $625 each – more than double the price Promega had offered in the Dutch auction. 12. In response to the tender offer, the independent directors on Promega’s board began organizing a good faith response in accordance with well-accepted procedures for fair corporate governance. The independent directors established two special committees: one to evaluate and respond to the tender offer, another to investigate the concerns about Linton’s behavior in the 2014 Dutch auction. 13. Bill Linton’s response was quite different. Linton refused to cooperate with the independent special committees of Promega’s board. He blocked the committees’ efforts to investigate his actions. He frustrated their efforts to retain professional advisors and evaluate the tender offer. He personally attacked the independent directors and challenged their loyalty to Promega. He threatened to remove any director who acted independently and contrary to his 100-year plan. 5 14. Linton’s bullying and bad faith conduct caused the independent directors to resign en masse in September 2015. Several of the resigning board members informed Promega and Linton that they resigned because Linton intentionally and effectively prevented them from fulfilling their fiduciary obligations to Promega’s shareholders, including the Plaintiffs. 15. Linton used this crisis to further cement his control by filling those vacated board seats with Promega employees under his direct control and wholly lacking in independence. 16. Linton and his submissive new board made no attempt to negotiate a better offer or pursue any other alternative. They simply rejected the $625 offer, despite its obvious benefit to Promega’s shareholders other than Linton. On information and belief, Linton and the new board took none of the steps that an independent board acting in good faith is required to take in response to a tender offer. 17. Today, Promega is far different than when Plaintiffs invested. When Plaintiffs invested, Promega had no majority or controlling shareholder; now, Linton controls the company following a series of company share repurchases that increased Linton’s ownership percentage without requiring him to purchase any additional shares. When Plaintiffs invested, and consistently over the last three decades, Promega had independent directors overseeing the company and monitoring Linton; today there are no independent directors. Linton has improperly gained complete control over a board entirely beholden to him for their jobs and positions. Instead of building towards a fair return on shareholder investment, Linton has declared that Promega will remain under his (and Usona’s) control for decades to come. Plaintiffs are stranded as shareholders in a valuable company but with no prospect of receiving a fair return. Bill Linton expropriated Plaintiffs’ investments for his own purposes. 6 18. Mr. Linton and his current board’s burdensome, harsh, and wrongful conduct is a substantial departure from the standards of fair dealing and good faith to which these Plaintiffs are entitled and on which they relied in making their investments in Promega. The Defendants’ conduct has frustrated Plaintiffs’ expectations as shareholders and threatens to render their investments valueless. Plaintiffs have been pushed to their limit. Through this action the Plaintiffs seek to protect their rights as minority shareholders and obtain a fair price for their shares. II. Parties and Jurisdiction 19. The Plaintiffs are (or are trustees for) current and former Wisconsin residents and long-time Promega shareholders, having acquired their stock in the 1980s, 1990s, and 2000s. 20. Plaintiff Nathan S. Brand, LLC is a Florida Limited Liability Company headquartered in Miami, Florida. Nathan S. Brand, LLC owns 137,152 shares of Promega common stock acquired by Nathan S. Brand. 21. Plaintiff Nathan S. Brand (“Brand”) is a Florida resident and University of Wisconsin graduate who began investing in Promega in 1990. He also serves as trustee for the Nathan F. Brand and Dora S. Brand Descendants Trust, the Dorothea Brand Kennedy Trust, and the Dorothea and Robert Kennedy Children Trust, each of which hold Promega shares acquired by both Brand and his father, Nathan F. Brand. Nathan S. Brand, as trustee, is designated to act on behalf of beneficiaries who own 123,177 shares of Promega common stock. 22. Plaintiff Nathan F. Brand is a Madison, Wisconsin resident who attended the University of Wisconsin and graduated from Ripon College. He began investing in Promega in 1988. He also serves as trustee for the Nathan and Ana Brand Family 2011 Irrevocable Trust and the Nathan and Ana Brand Children Trust, both of which hold Promega shares acquired by 7 Nathan F. Brand and his son, Nathan S. Brand. Nathan F. Brand owns and, as trustee, is designated to act on behalf of beneficiaries who own, 69,979 shares of Promega common stock. 23. Plaintiff Ted D. Kellner is a Milwaukee, Wisconsin resident and University of Wisconsin graduate. Mr. Kellner began investing in Promega in 1993. Mr. Kellner owns 32,728 shares of Promega common stock. 24. Plaintiff Arthur L. Herbst, Jr., as trustee for Mohs Promega Trust, is an Illinois resident. The Mohs Promega Trust holds Promega shares acquired by University of Wisconsin graduate Frederic E. Mohs during the 1990s. Mr. Herbst, as trustee, is designated to act on behalf of beneficiaries who own 17,284 shares of Promega common stock. 25. Defendant Promega Corporation is a private, closely held corporation headquartered in Dane County, Wisconsin. Promega’s principal place of business is located at 2800 Woods Hollow Rd., Fitchburg, Wisconsin 53711. 26. Defendant William A. Linton is Promega Corporation’s Chief Executive Officer and the Chairman of its board of directors. Mr. Linton is a Wisconsin resident. 27. This Court has personal jurisdiction over both defendants pursuant to Wis. Stat. §§ 801.05(1)(b), (c), and (d), because they reside and conduct substantial, non-isolated activities in Wisconsin. Additionally, this Court has personal jurisdiction over both defendants pursuant to Wis. Stat. § 801.05(3) because their actions within this state gave rise to Plaintiffs’ damages. 28. Venue is proper in Dane County, pursuant to Wis. Stat. §§ 801.50(2)(a) and (c) because Plaintiffs’ claims arose in this county, a substantial part of the events or omissions giving rise to Plaintiffs’ claims occurred in this county, and Defendants conduct substantial, nonisolated activities within this county. 8 III. Factual Background 29. Founded in 1978 and incorporated in 1980 under the name “Biotec, Inc.,” Promega develops and sells products for the life sciences industry. 30. Promega’s early shareholders were primarily company employees. But Promega needed additional capital to grow, so it reached out to potential investors, including venture capital firms and members of the local business community. Plaintiffs’ early investments in Promega Corporation 31. The Plaintiffs began acquiring shares in Promega in the late 1980s. They were drawn to Promega because it exhibited strong growth potential and provided an opportunity to invest in Wisconsin. 32. Independent Directors: Promega was also appealing because its board was controlled by outside directors and there was no majority or even controlling shareholder. Independent directors are important for good corporate governance because they have fewer opportunities for conflicts of interest, are not subject to the same pressures from company management as those whose professional standing within the company and compensation are determined by company management, and bring perspectives available only with distance from the company’s day-to-day operations. 33. Until 2015, Promega’s directors came from outside the company and were independent from Linton’s control. When Nathan F. Brand first acquired his shares in 1988, Promega had five directors other than Linton and all five were outside directors: a. Ian R. N. Bund joined the board in 1986. Mr. Bund was not a Promega officer or employee. He was a Managing Director at MBW Management, Inc. 9 b. Donald C. Paul joined the board in 1983. Mr. Paul was not a Promega officer or employee. He was a Vice President at Oscar Mayer. c. Frank J. Pelisek joined the board in 1986. Mr. Pelisek was not a Promega officer or employee. He was a Partner in the law firm of Michael, Best & Friedrich. d. William S. Reznikoff joined the board in 1981. Mr. Reznikoff was not a Promega officer or employee. He was a biochemistry professor at Johns Hopkins University. e. Robert A. Comey joined the board in 1987. Mr. Comey was not a Promega officer or employee. He was a Vice President at InvestAmerica Venture Group, Inc. 34. Plaintiffs invested in Promega expecting Promega would continue to be managed by outside directors independent of Linton’s control. Until 2015, Linton spoke in favor of independent directors and reiterated to Plaintiffs on numerous occasions the importance of having a board dominated by independent directors to provide oversight for shareholders. 35. No Controlling/Majority Shareholder: No shareholder owned a majority of Promega’s outstanding shares when Plaintiffs invested and no single shareholder could exercise control. This is important protection for minority shareholders who might otherwise be subject to the whims of that majority shareholder. The absence of a controlling shareholder was an important foundation for Plaintiffs’ decisions to invest in Promega. 36. In 1988, Linton was Promega’s largest shareholder, but he owned only 32.5% of the outstanding shares. By 1995, Linton’s percentage had decreased to 27.8%. Plaintiffs invested in Promega expecting the company would continue without a controlling shareholder. 10 37. Future Fair Value Opportunities: When Plaintiffs invested in Promega, all signs pointed to Promega being on a path to an IPO, sale, or merger. These events result in each shareholder receiving (or obtaining the right to receive) his or her representative share of the enterprise’s value unreduced by any minority or marketability discounts. This type of return is referred to as “fair value.” 38. By 1988, Promega already had obtained substantial equity investments from venture capital funds, including Doan Resources L.P., MorAmerica Capital Corporation, Venture Investors, and Silicon Valley firm Greylock Partners. These investors provide capital to emerging private companies anticipating a return on their investment through a transaction that yields fair value, such as an initial public offering, merger, or sale. The fact that Promega solicited and received capital through equity investments from venture capital funds demonstrated to Plaintiffs and other investors that Promega was committed to provide its shareholders with a fair value return. 39. So too did Promega’s use of stock options to attract and retain quality employees. Promega began issuing stock options in 1981 and continued for many years. The entire premise of Promega’s stock option plan was that these options had future value tied to Promega’s performance and, if Promega succeeded, the option-holders could reap financial reward by exercising their options and receiving value for their Promega stock. 40. Promega and Linton continued to raise shareholder expectations about a future fair value event long after the Brand family’s initial investments. 41. In August 1990, Promega entered into an investment agreement with the German multinational firm Boehringer Ingelheim International GmbH (“Boehringer”) through which Boehringer acquired approximately 20% of Promega’s capital stock for $45 per share. 11 Promega’s solicitation of an investment of this size from an investor like Boehringer, a rational economic actor interested in earning a fair value return on its investment, demonstrated that Promega would work to provide a fair value return to its shareholders (including Boehringer). 42. Another aspect of the Boehringer transaction confirmed Plaintiffs’ expectation that Promega would offer shareholders an opportunity to exit at a fair value: Promega’s August 31, 1990 letter to shareholders announcing the transaction detailed a recent offer to purchase Promega that the board considered in October 1989. The letter explained that the potential purchaser sought “an exchange of all Promega Shares for common stock of [the acquiring company] on the basis of one share of Promega stock for approximately one share of the acquiring company’s stock.” The acquiring company’s stock was valued at $24 per share at the time of the offer but declined to “approximately $10 per share” shortly after “the date on which the offer was to close.” 43. According to the August 31, 1990 letter from Promega’s Board of Directors: “It was the consensus of the Directors that given the consideration offered, the performance of Promega’s business operations and the forecasted performance of business operations which have been under development, the offer was inadequate and not in the best interest of Promega and its shareholders.” This disclosure confirmed to shareholders that Promega’s board would focus on the best interests of its shareholders as a whole when considering such opportunities. 44. Relying on the independence of the board, the absence of a controlling shareholder, and the evidence that Promega would provide its shareholders an opportunity to sell their shares at fair value, the Brand Family increased its investment in the company and Ted Kellner and Fred Mohs began investing. 12 45. Promega and Linton continued to cultivate those expectations. Throughout the 1990s, Plaintiffs purchased additional Promega shares. Promega plans to conduct public offerings but backs away 46. In June 2000, Linton reached out to Nathan F. Brand, Nathan S. Brand, and Ted Kellner to discuss Linton’s plan to conduct an initial public offering of Promega’s stock. Linton told Kellner that Promega had engaged R. W. Baird & Co. to advise on the public offering. After years of owning Promega shares (12 years for the Brand family and 7 years for Kellner), it appeared they would receive a fair return on their investment. 47. By June 15, 2000, Linton had identified underwriters for the IPO and contacted the Brand family. Linton requested that both Brand and his father, Nathan F. Brand, agree to certain “lock-up” restrictions to facilitate the planned Promega IPO. Nathan F. Brand agreed to the lock-up restrictions on all 222,911 shares then under his control. 48. On June 21, 2000, Linton informed shareholders that Promega “regularly considers” transactions that would provide shareholders fair value for their shares and alerted them to the potential for an upcoming IPO: “As you know, Promega is committed to taking every appropriate opportunity to build value in the financial returns on your holdings. As such, Promega regularly considers various capitalization options available to continue building the long-term strength of the company, including an initial public offering.” 49. Upon information and belief, Linton cancelled the IPO later that summer due to market conditions. But Linton’s willingness to take Promega public confirmed Plaintiffs’ expectation that they would have future opportunities for a fair value return. Based on that understanding, both the Brand family and Kellner purchased additional shares of Promega. 13 50. Promega continued to tell shareholders that it was working towards an initial public offering. Promega’s proxy statement for the July 11, 2000 shareholder meeting proposed changing Promega’s bylaws regarding transfer restrictions. The proxy stated: “In the proposed Amended and Restated Bylaws, after a public offering, the restrictions on transfer become null and void and of no further effect.” The bylaws were then amended to render the transfer restrictions enforceable “only until the completion of an initial public offering of the Corporation’s common stock pursuant to an effective registration statement under the Securities Act of 1933, as amended, and thereafter shall be null and void and of no further effect.” 51. On January 10, 2003, Linton again reached out to Brand to discuss a potential IPO. Linton and Brand discussed how the market likely would value Promega, with Brand explaining the substantial benefit to Promega shareholders that an IPO would offer. This again confirmed Linton’s then expressed long-term plan to provide a return to shareholders based upon their percentage ownership unreduced by any discounts. Linton abandons Promega’s minority shareholders 52. Despite the repeated reinforcement of Plaintiffs’ expectation that Promega would provide shareholders with an opportunity to receive fair value for their shares, such an event never occurred. And shareholders have not received any other return on their investment because, with the exception of a single dividend in 2007 following a litigation recovery, Promega has never paid a dividend to its shareholders. 53. By 2014, Linton had abandoned any plan to return fair value to plaintiffs. Instead, Linton began focusing on what he calls Promega’s “hundred year plan.” 54. Linton’s 100-year plan represents a dramatic change in Promega’s trajectory. Rather than working to return value to investors, Linton’s new ambition is to ensure that 14 Promega will “celebrate its 100-year anniversary as a private company, as an independent company.” The 100-year plan, by definition, rules out the IPO that Plaintiffs anticipated and discussed with Linton, and also rules out other potential events that would yield fair value – a sale, for example – during Plaintiffs’ lifetimes. Under Linton’s new plan, Plaintiffs are blocked from receiving a fair return on their investment until 2078, at the earliest, and maybe forever. 55. Linton’s decision to implement his 100-year plan without getting approval from or even consulting his minority shareholders, despite having spent decades creating and reinforcing their expectations of future fair value, demonstrates a lack of fair dealing and probity in the affairs of the company to the prejudice of Plaintiffs. Linton announces and implements his 100-year plan 56. Before 2014, Linton did not have the power to force his 100-year plan on Promega and its shareholders. That is because he owned significantly less than 50% of the company’s outstanding shares and Promega’s board was controlled by outside directors. Those directors would not shackle themselves or Promega’s shareholders to a plan that prevented the board from even considering corporate action that would result in fair value and that would effectively cede control of Promega to a non-profit organization. So Linton set out to gain control over Promega by increasing his stake in the company and ensuring the board acceded to his personal preferences for Promega’s future. 57. In January 2014, Linton told the board that he wanted Promega to conduct a large buy-back of outstanding Promega shares. Linton hoped to reduce the number of Promega shareholders and outstanding shares, thereby increasing his own ownership percentage such that he would obtain actual or effective control. Linton also told Promega’s board for the first time about his ultimate ambition: He wanted to obtain a controlling interest in Promega and then 15 transfer it to a non-profit organization that would conduct and support research into potential medicinal uses for hallucinogenic drugs. Linton made similar representations to Ted Kellner and, separately, to attorney Wayne R. Lueders, trustee of the Lore B. Seegert Marital Trust, when Lueders contacted Linton to discuss selling the trusts’ shares. 58. Upon information and belief, outside Promega director Richard Pauls, a longtime board member and chairman of the audit committee, was so incensed by Linton’s plan to keep Promega private for many decades to come and to give effective control of Promega to a nonprofit that Pauls resigned from Promega’s board. Other board members were similarly troubled by Linton’s shifting priorities. 59. The board refused to approve Linton’s initial, large buy-back proposal and insisted that any such program be limited to ensure that Linton would not obtain a majority of Promega’s outstanding shares. Instead, the board – then filled with a majority of independent directors – insisted that any share repurchase program limit the extent of Linton’s personal ownership to 45% of Promega’s outstanding shares. 60. On May 5, 2014, Linton announced that Promega would repurchase shares through a process typically known as a “Dutch auction share repurchase.” In a Dutch auction, the company permits shareholders to tender their shares at a price within a pre-set range. The company then has the option (but not the obligation) to purchase some or all of the tendered shares. Consistent with the Board’s directive, the Dutch auction was structured so that Linton’s personal ownership was limited to 45% of Promega’s outstanding shares. This prevented Linton from obtaining majority control over Promega without paying a premium for the benefits of control. 16 61. Nevertheless, Linton championed the Dutch auction because it provided an opportunity for him to materially enhance his personal control using Promega’s funds to repurchase stock at less than fair value, so that he ultimately could obtain a controlling interest in Promega and transfer it to his soon-to-be founded non-profit, Usona. 62. Current Promega board member Craig Christianson confirmed this improper motivation in conversation with Promega shareholders. As one shareholder explained: [W]hen Mr. Linton with the board’s support proposed the “Dutch Auction”, I strongly disagreed with his approach, valuation and obvious conflict of interest and tried to speak with him directly. He refused to take my call and passed me to a Mr. Craig Christianson who as I recall was Promega’s General Counsel. Although he appeared to accept most of my concerns, he said that he had known Linton for many years, knew how strongly he felt about his medical research organization and that as such, we were unlikely to change his views or Promega’s direction. 63. The Dutch auction notice concealed the true impact it would have on Linton’s ownership percentage. The offering notice reported that Linton controlled 31% of Promega’s common stock, owning 719,435 shares and zero stock options. In truth, Linton controlled far more stock. In addition to the 719,435 shares in his own name, Linton controlled tens of thousands of additional shares, including (a) 24,000 shares held by his wife, Mary Linton, (b) 36,501 shares held by Fitchburg Research Park Associates in which Linton holds a controlling interest as the sole general partner, (c) 13,000 shares held by the William A. Linton 2002 Irrevocable Trust, (d) 9,000 shares held by the Linton Family Trust, and (e) 3,402 shares held by Orion Five, LLC. 64. Contrary to the auction notice, which represented that Promega made no recommendation as to whether any shareholder should tender their shares, Linton personally and improperly embarked on a campaign to pressure shareholders to sell their shares during the Dutch auction. 17 65. One shareholder recounted that Linton was “adamant” that the shareholder sell his shares in the auction: “Bill Linton called me on a Sunday morning, which was Mothers’ Day. He encouraged me to sell my 6,724 shares in the Dutch auction. I told him I was not interested at the time. He was very adamant about it. He said there was a 100 year plan in place and it would be unlikely the company would be buying the shares in the future.” 66. Another explained that Linton called her repeatedly and “pressured” her to sell: “I am now 77 yrs old. At the time of the Dutch Auction, I had 1,612 shares. I did not plan to sell them at the auction because I wanted to continue the investment in Promega and to use the stock if my health takes a downturn in the future and I need extra care. Bill Linton called me on the phone and said that I should sell the stock in the Dutch Auction because Promega planned to stop buying back any stock for the next 5 or more likely 10 years. At first, I said I was not interested. He called me again and emphasized the situation that there would be no buyback for years to come. I felt pressured and then decided to sell 1000 shares in the auction.” 67. Yet another said Linton “pressured” him by insisting there would be no other liquidity options for at least ten years: “I am another former employee that received a phone call from Bill last summer warning me that Promega would not be repurchasing stock for another ten years, so I had better sell some in the Dutch auction if I would need the money sooner than 2024. I felt pressured, so sold 1000 shares, keeping 1580 since Promega has always been a good investment for growth.” 68. There are many more similar stories, and Linton has since confirmed that he spoke “with over 150” Promega shareholders during this time. 69. Shareholders who anticipated needing cash at any point in the foreseeable future sold at the depressed auction price so that they would not be stuck holding stock indefinitely. 18 The upshot is that Linton forced his most economically vulnerable shareholders to sell their stock for far below its fair value by telling them there would not be any future dividends or opportunities for liquidity. 70. Upon information and belief, Linton also abused his authority as CEO, and acted to further his own interest, by (a) pressuring Promega employees who owned stock to tender their shares to the auction, and (b) retaliating against those who refused by terminating their positions at Promega. 71. Linton’s conduct during the Dutch auction is a clear departure from the standards of good faith, probity, and fair dealing with which Linton was obligated to comply. Linton used his power and position as CEO to directly harm certain Promega shareholders by pressuring them to sell their shares, and harmed all minority shareholders by increasing his shareholding position and effective control through these improper tactics. 72. Linton also coerced shareholders to sell for far less than their shares really were worth. Linton and Promega concealed from their shareholders the true value of Promega’s stock. Promega did not conduct a valuation to determine a fair price for the Dutch auction. Instead, Linton set the auction price at between $233 and $272 per share, which roughly correlated to an out-of-date valuation that Promega previously commissioned. 73. Linton knew that the Dutch auction price dramatically undervalued Promega’s stock. It did not matter to him, however, because he intended to retain the vast majority of his shares. So he personally benefitted from the below-market auction price. Indeed, the lower the auction price (and the more shares tendered) the greater the benefit to Linton. 74. Linton not only pressured shareholders to sell, he pressured them to sell low by misrepresenting that the Dutch auction would be oversubscribed and that Promega would acquire 19 only the lowest priced shares. In reality, however, Linton knew that the Dutch auction would not be oversubscribed: Linton spoke to many of Promega’s shareholders and knew that Promega’s largest shareholders (including Plaintiffs) did not plan to tender their shares and that many of the smaller shareholders were very reluctant to sell. 75. Linton also misrepresented to shareholders that he personally intended to tender thousands of his shares at a low price, and therefore shareholders wishing to sell their shares would need to submit them at a low price, too, or they would not be purchased. In truth, Linton did not intend to tender a large number of shares at a low price and, in fact, did not do so. 76. Linton’s oppressive and bad faith tactics during the Dutch auction convinced shareholders to tender approximately 325,000 shares, or nearly 15% of Promega’s outstanding shares, into the Dutch auction. 77. Linton’s improper conduct during the Dutch auction was designed to and did increase Linton’s control over Promega without requiring Linton to pay for his increased influence. Linton personally benefitted by having the company pay to acquire Promega stock at substantially below fair value, both because he was Promega’s largest shareholder and because his ownership interest increased as a result of these buybacks. 78. And Linton’s harsh and coercive treatment of Promega’s shareholders reduced the value of Promega’s outstanding shares, injuring those shareholders who tendered their stock at an unfairly low price as well as those shareholders who did not tender their stock and now are suffering under Linton’s increased control. 20 Linton registers his non-profit, Usona 79. The Dutch auction was an initial step in Linton’s long-term plan. The next step occurred on July 9, 2014, when Linton registered Usona Institute, Inc. with the Wisconsin Department of Financial Institutions. 80. According to its website, Usona conducts and supports research into using psychedelic drugs to meet the “needs of people with psychological distress.” Usona’s website offers information about LSD, psychedelic mushrooms, and other drugs that Usona intends to study for potential medicinal value. 81. Linton’s goal in founding Usona was (and remains) to acquire a controlling interest in Promega and then to transfer that interest to Usona. And, after founding Usona, Linton began encouraging his shareholders, including Fred Mohs, Ted Kellner, and the Brand family, to donate Promega shares to Usona. 82. The connection between Usona and Promega is as clear as it is concerning to minority shareholders: Usona’s Articles of Incorporation list three directors: Linton, Promega’s CEO; Craig Christianson, Promega’s general manager, North America, and corporate secretary; and Richard Langer. Usona’s Articles of Incorporation list Usona’s mailing address and the addresses of all three Usona directors as 2800 Woods Hollow Road, which is the same address as Promega’s headquarters. 83. Promega’s 2015 “Corporate Mind” statement provides: “In 2014, Promega’s founder, chairman & CEO created Usona Institute, a non-profit medical research organization. Usona will offer guidance for Promega’s board that is focused on the shared goals to better human life through compassionate, scientific exploration.” 21 84. Similarly, Promega distributed this diagram demonstrating Usona’s influence on Promega’s management team: 85. Troublingly for Promega’s shareholders, who invested in a for-profit enterprise, Usona’s Articles of Incorporation provide: “No part of the assets or net earnings of the Corporation shall ever be used, nor shall the Corporation ever be organized or operated, for purposes that are not exclusively charitable or educational within the meaning of section 501(c)(3).” Usona’s Articles of Incorporation also provide: “The Corporation shall never be operated for the primary purpose of carrying on a trade or business for profit.” 86. Plaintiffs never expected – and no reasonable shareholder would expect – that their investments would be used to fund a non-profit’s research into hallucinogenic drugs, let alone that Promega would itself be controlled by a non-profit. Independent directors and shareholders question Linton’s conduct 87. Upon information and belief, longtime independent directors Paul Shain and Peter Tong were particularly concerned by Linton’s efforts to transfer a controlling interest in Promega 22 to Usona and they actively opposed his 100-year plan. Despite years of exemplary service, in July of 2014, Linton did not nominate them for reappointment to the board. 88. On July 19, 2014, Linton wrote to Brand and falsely explained that he chose not to re-nominate Shain and Tong to the board because he wanted to increase board independence: “In talking with over 150 of our shareholders in the past couple of months, there was support for a bit more independence on the part of our Directors, and that has always been my goal in forming the board.” In reality, Linton chose not to re-nominate Shain and Tong because they were acting as proper fiduciaries and expressed concern about Linton’s efforts to acquire a majority position and transfer his interest and control to his non-profit. 89. Indeed, despite claiming to favor “independence on the part of our Directors,” Linton nominated Bruce Fetzer to the Promega board. Although technically an outsider to Promega, Fetzer was not independent. Fetzer had a key conflict because he was on Usona’s board of trustees. Linton knew that Fetzer shared his goal of transferring control of Promega to Usona, and Linton placed Fetzer on both Promega’s board of directors and on Usona’s board of trustees to facilitate his 100-year plan. 90. At the July 2014 annual shareholder meeting it was evident that Linton and Promega were dramatically changing the way Promega treated its shareholders. Historically, Promega provided shareholders with full financial statements, including the company’s balance sheet, in connection with annual shareholder meetings. At the 2014 meeting, however, shareholders were shown only an incomplete income statement and no balance sheet. 91. Promega also did not provide shareholders with an updated valuation of the company in connection with the 2014 annual meeting. An updated valuation would have shown 23 that Linton had pressured Promega’s shareholders to tender their shares during the Dutch auction at well below a fair price. 92. On September 19, 2014, Brand met with Bill Linton to discuss, among other things, the potential for shareholder liquidity. By this time, Linton had made it clear to Brand that a fair value event was off the table for at least another 65 years because Promega was only in year 35 of Linton’s new 100-year plan. Brand sought to avoid the dramatic negative consequences of Linton’s 100-year plan and offered to let Promega purchase the Brand family’s shares, along with the shares of other outside shareholders, for $550 per share (still well below fair value). Brand’s offer would have significantly reduced the number of outside shareholders. Linton refused Brand’s offer and explained that he did not need to purchase these shares because Promega’s shareholder base was “aging.” 93. By email on January 26, 2015, Linton confirmed to Kellner his 100-year plan to have Usona hold a controlling interest in Promega and even asked Kellner to support that antishareholder endeavor. Linton wrote: “Usona Institute, the medical research organization created in July of last year, is the beneficiary of my personal holdings, with its primary affiliation with the UW Hospitals and Clinics. When we next meet, I would like to take you through the mission for this new organization and see if this is something that you would like to be involved with in some way.” 94. Brand and other outside shareholders were concerned that Linton’s ambition – forcing Promega to remain a private company under his and then his non-profit’s control through 2078 – would render their shares valueless. They were also concerned that Linton’s newlyexpressed focus on “constituencies” other than Promega and its shareholders would cause Linton and Promega to ignore their obligations to shareholders in making decisions about the 24 company’s future. These concerned shareholders began investigating ways to protect their substantial investments in Promega. 95. On May 1, 2015, Brand and Ted Kellner wrote the Promega board to express their concerns about board turnover and Linton’s efforts to seize control over the company for the benefit of his non-profit, Usona. Brand and Kellner explained: “During the last year, a large group of shareholders has become increasingly concerned with the actions of management towards shareholders. We have observed changes in composition and priorities of the Board of Directors, changes in corporate governance, the elimination of stock valuations, inadequate quarterly financial reports and increased activity by the company to acquire shares at a below market price. The offering document used in the Dutch Auction last spring indicated that its purpose was to provide some liquidity for those shareholders who needed or desired liquidity and yet is has been made clear by the CEO during the last year that his objective is to have the company owned by his new nonprofit, Usona, which directly conflicts with the interests of outside shareholders.” 96. In their May 1, 2015 letter, Brand and Kellner formally requested that the board create a “fair and equitable process” to buy-out the minority shareholders, which “would then permit the changes desired by the CEO.” Promega refused Brand’s and Kellner’s request. Linton improperly increased his ownership and control by granting himself additional options 97. In addition to his conduct during the Dutch auction, Linton also increased his ownership interests through stock options. 98. Historically, Promega provided stock options as means to attract talented employees. But when Linton shifted his focus to acquiring a majority interest in Promega, 25 Linton informed shareholders that Promega no longer needed stock options to entice top talent and would discontinue its stock option program. 99. There were 42,100 options available for granting when Linton discontinued the program in 2014. By the summer of 2015, however, those 42,100 options had disappeared from Promega’s books. 100. Linton refused to account for the missing options when directly asked about them at the 2015 shareholders’ meeting and, instead, directed questions to the board. The board has not responded to shareholder questions about these options. 101. Upon information and belief, Linton took for himself the 42,100 un-granted stock options, further increasing his control over the company, without having to pay for that additional interest. A shareholder group forms and offers to buy Promega 102. Faced with Linton’s 100-year plan and without any other option for fair value, several Plaintiffs and other shareholders formed an investor group with the goal of purchasing Promega at a fair price and then running the company for the benefit of Promega’s shareholders. 103. The investor group obtained a substantial capital commitment from Madison Dearborn Partners, LLC, a well-respected private equity firm in Chicago, and debt financing from Barclays Bank PLC. 104. On July 10, 2015, the investor group wrote to the Promega board of directors and made an opening offer to buy Promega’s outstanding shares for $625 per share in cash – more than double the Dutch auction price. They requested a response from the board by July 24 and an opportunity to meet and discuss the proposed transaction. 26 105. On July 23, 2015, Promega’s board (through its outside counsel) asked for more time to consider the investor group’s proposal. 106. On July 24, 2015, Kellner and Brand wrote a letter to their fellow shareholders on behalf of the investor group revealing the $625 per share offer and encouraging shareholders to attend the July 28th annual meeting in person. The letter also identified concerns about Linton’s treatment of outside shareholders: Over the past several months, we have been working to engage Mr. Bill Linton and the Promega Board of Directors in a dialogue to address our growing concerns about the fair and equitable treatment of all shareholders and our perceived divergence in alignment between Mr. Linton and the Promega shareholders. Mr. Linton has mentioned on several occasions his desire to keep Promega a private company under his control, in the support of his medical research organization, Usona Institute (http://www.usonainstitue.org). To that end in our view, he has made several changes to the Board of Directors, reduced information flow to shareholders, and effected company-funded share repurchases (including those held by company employees) in an apparent attempt to gain majority control of our company. 107. Many shareholders reached out to Kellner and Brand expressing support and a desire to sell their shares at the $625 price. Many more lamented having sold during the Dutch auction and recounted incidents in which Linton improperly pressured them to sell. 108. On August 28, 2015, Kellner and Brand informed Promega’s board of Linton’s harsh and wrongful treatment of Promega’s shareholders: We have been advised that many shareholders were told that there would be very limited future liquidity, and that Mr. Linton’s stated intent was to create a medical research foundation and donate his shares to that organization – effectively freezing any remaining shareholders with an illiquid and, practically speaking, worthless security. It appears that Mr. Linton’s actions were designed to help him achieve majority control of Promega, which we believe was inconsistent with the disclosure in the Dutch Auction materials and placed Mr. Linton in a clear conflict of interest position. Kellner and Brand asked the board of directors to “investigate these allegations on behalf of all shareholders.” 27 109. Meanwhile, outside shareholders also began contacting the board to express their concerns about Linton’s coercive tactics during the Dutch auction. As one shareholder explained at the time: “I’m writing you today because I am concerned about something that occurred last year. I received a phone call at home from Bill Linton. He wished me well on my retirement from Promega and then advised me that I should participate in the Dutch auction and sell some/all of my 2580 shares back to the company. He warned me that Promega would not be repurchasing any shares for 7 to 10 years after the 2014 auction so if I thought I would need any of that money, I had to act now.” 110. Another shareholder explained that Linton approached him during the Dutch auction and said that “he planned no further stock redemption offerings, and had no plan to ever pay dividends in the future,” that “he would not be selling the Company to provide a shareholder exit for at least 60 years,” that “he sees no future exit opportunities for shareholders to receive fair value for their shares,” and that “he believed the auction would be oversubscribed, so it might be wise not to request the higher price ($272.).” This shareholder also encouraged the board “to seriously consider” the $625 per share offer and that, if not satisfied, to “get its own valuation and solicit other offers.” 111. Other shareholders wrote to the board and encouraged them to accept the tender offer. One such letter on behalf of a trust holding 17,000 Promega shares stated: “In my opinion the offer by Mr. Kellner and Mr. Brand to buy the shares at $625 indicates that there is a serious buyer who believes that this is the minimum value of the stock with serious future potential. I am concerned if myself as Trustee and other shareholders have been treated fairly. I would sell my stock at $625 per share and believe the Board must take action on this offer and seriously consider what is in the best interests of all shareholders.” 28 112. At this point, the Promega Board was faced with clear evidence of Linton’s misconduct in connection with the Dutch auction. Upon information and belief, at the urging of Promega’s shareholders, the Promega board met on or around August 27, 2015 and decided to form two special committees to (a) investigate Linton’s behavior during the Dutch auction and (b) evaluate the investor group’s purchase offer. Linton forces the outside directors to resign and replaces them with his subordinates 113. Consistent with recognized fiduciary duties, the Promega board special committee evaluating the investor group’s purchase offer hired an outside advisory firm – Perella Weinberg Partners L.P. – to assist in its consideration of the investor group’s offer. In early September 2015, representatives from Perella Weinberg spoke with representatives from the investor group and shared the process that the special committee would use to evaluate the offer. 114. However, in a continuing pattern of disregard for his fiduciary duties, Linton began a campaign to stop Promega’s directors from performing their obligations to Promega’s shareholders in connection with the tender offer and from investigating Linton’s improper conduct during the Dutch auction. Linton refused to cooperate with the board’s investigation, personally attacked the independent directors, threatened them with litigation, and blocked the board from meaningfully considering the investor group’s offer. 115. Upon information and belief, Linton’s mistreatment of the board’s special committees caused Perella Weinberg to resign its advisory role in early September. Perella Weinberg notified Madison Dearborn Partners that it was no longer advising Promega’s special committee and explained that decision was motivated by Linton’s improper conduct. 116. On September 20, 2015, five of Promega’s seven directors tendered their resignation, effective September 19, 2015. The resigning directors were Richard Brown, Gail 29 Marcus, Antonio Mello, Marty Rosenberg, and Chris Van Ingen. All but Mr. Rosenberg were independent directors. 117. These directors resigned because Linton prevented them from performing their fiduciary obligations and protecting the interests of shareholders. The resigning directors submitted a resignation letter to Promega explaining the basis for their decision. Upon information and belief, their resignation letter confirms that Linton abused his authority as CEO by preventing a meaningful investigation into Linton’s conduct during the Dutch auction and by thwarting the board’s attempt to conduct a good faith process of evaluating the investor group’s offer. Upon information and belief, the resigning directors also explained that Linton had refused to allow the board to address the important issues regarding corporate governance and CEO performance raised by Linton’s conduct. 118. Later, in November 2015, when Promega informed its shareholders that all of the independent directors had resigned, Promega falsely claimed that the resigning directors “all have conveyed to the Company that they hold no animosity or hostility toward the Company or its management.” In truth, these board members resigned precisely because Linton improperly interfered with their efforts to meet their fiduciary obligations to Promega’s shareholders. 119. With the resignation of five of Promega’s seven directors, there were only two remaining directors – Linton and Bruce Fetzer. Linton used his relationship with Fetzer, a trustee of the Usona Institute, to orchestrate a complete take-over of Promega’s board by replacing the directors who resigned with four Promega employees under Linton’s direct control. 120. The four replacement board members that Linton and Fetzer appointed were (a) Craig J. Christianson, Promega’s General Manager, North America, and founding board member and current Treasurer of Usona, (b) Randall Dimond, Promega’s Vice President and 30 Chief Technical Officer, (c) Penny Patterson, Promega’s Senior Director for Corporate Affairs and Marketing Services, and (d) Charles York, Promega’s Vice President of Manufacturing Operations. All four report to Linton and lack independence. 121. Fetzer supported Linton’s efforts to fill the board with his subordinates because Fetzer had a conflict of interest. He was a member of Usona’s board of trustees and Usona stood to benefit from obtaining Linton’s controlling interest in Promega – something that could be accomplished only with a board dominated by insiders who fear reprisal from Linton. Shareholders were not given an opportunity to vote on the newly-appointed directors, because they were appointed to fill interim vacancies – vacancies caused by Linton and his oppressive conduct. 122. On September 28, 2015, just days after Fetzer supported Linton’s slate of insiders to replace the independent directors, Fetzer resigned from Promega’s board, ceding total control to Linton and his handpicked insider directors. 123. Linton’s successful efforts to replace Promega’s independent directors with company insiders occurred less than a year after Linton (a) admitted to Brand that Promega’s shareholders wanted “more independence on the part of our [Promega’s] Directors,” and (b) tried to assuage Brand’s concerns regarding Linton’s increased ownership in Promega by promising that an independent board “has always been my [Linton’s] goal in forming the board.” 124. By replacing the outside directors with Promega insiders, Linton knowingly acted with disregard for the best interests of Plaintiffs as minority shareholders and in direct contradiction to their expectations. 31 Linton’s new board delays and then rejects the tender offer 125. The newly-constituted board promptly replaced the Company’s outside counsel with the law firm von Briesen & Roper. On October 1, 2015, attorneys from von Briesen & Roper contacted the investor group and asked for yet more time to consider the offer. 126. On October 7, 2015 – nearly three months after their initial bid for Promega – Kellner and Brand again wrote to the Promega board seeking a substantive response to their offer and demanding information regarding Linton’s recent board take-over: [T]he recent developments involving the appointment of Company insiders to the Board of Directors are, in our judgment, consistent with the historical failure of leadership at Promega and the apparent self-dealing of its principal shareholder . . . . We believe we are entitled to know the underlying facts about the events leading up to the mass exodus of Promega directors – notably, comprising all directors other than Mr. Linton. That type of collective action, particularly at the beginning of the evaluation of a compelling business combination proposal, is unprecedented and raises many troubling questions. . . . We are gravely concerned that the newly appointed directors are all employees of the Company reporting either directly or indirectly to Mr. Linton. A board consisting solely of inside directors is in no position from a fiduciary perspective to consider our proposal, particularly in light of Mr. Linton’s conflict of interest and apparent desire to manage the Company for his own personal interests. 127. Kellner and Brand also requested (a) a copy of the board members’ resignation letter; (b) a written explanation for why those board members were replaced with Promega employees rather than independent directors; and (c) that the board convene a special shareholder meeting pursuant to Section 180.0702(a)-(b) for the purpose of discussing the director resignations and providing a non-binding advisory vote regarding the investor group’s proposal. 128. Rather than engage in good faith with the investor group, Linton’s board of directors denied them access to the requested information, threatened them with litigation, and refused to hold the requested shareholder meeting and vote. 32 129. Instead, the new board called an “informational” meeting for November 6, 2015, although very little information was provided. The meeting notice identified the following limited purpose: “Management of the company will report on specific information relating to the company’s business and affairs. No other matters will be addressed at the meeting. The meeting is strictly for information purposes only, and no matters will be submitted to the shareholders for action or vote at the meeting.” This is reflective of Promega’s recent lack of transparency brought in with Linton’s control and 100-year plan. 130. On October 28, 2015, before the informational meeting with shareholders, Linton’s new board rejected the investor group’s offer in a three-sentence letter to the investor group. The letter stated: “The Board determined that the offer was not in the best interest of our business, our shareholders or our many constituencies.” There was no suggestion from Linton or Board that the offer was too low. Rather, the board acted in accordance with Linton’s 100-year plan, which precludes any sale at least until 2078. 131. Linton and his insider directors effectively ruled out any sale after considering Promega’s “many constituencies,” no doubt including Usona, which is a self-dealing conflict situation for Linton, without any apparent consideration of the offer’s adequacy. Moreover, the board rejected the offer without ever discussing it with the investor group or seeing if the investor group (or a competing bidder) would offer a higher price. The board also rejected the offer without the requested shareholder vote, or even an open discussion with shareholders about the investor group’s proposal. These actions by Linton and the board demonstrate total disregard for the interests, expectations, and desires of shareholders in favor of Linton’s personal and disloyal focus on Usona. 33 132. On October 29, 2015, the Wisconsin State Journal published an article regarding the board’s decision to reject the investor group’s offer. The article quoted UW-Madison School of Business professor Michael Gofman, who explained the three potential reasons for the board’s decision: “Option one, the board of directors thinks that the offer is too low relative to the true value of the company and it is in the best interests of the shareholders to reject it. Option two, they think that accepting the offer would generate value to the shareholders, but by rejecting it they expect to receive an improved offer that would benefit existing shareholders even more,” and, a “third possibility, he said, is that that directors’ incentives are not well aligned with the interests of the shareholders.” 133. It is clear that option three – misalignment of interests between directors and shareholders – is what motivated the board’s decision here. The board was not motivated by option one (offer too low), because it had just conducted a Dutch auction at prices less than half what the investor group offered. And the board subsequently released a new valuation concluding that, as of September 30, 2015, the “current value for Promega common stock on a minority basis interest” was $383 per share. Thus, the investor group offered shareholders a substantial premium over Promega’s own valuations. 134. The board also was not motivated by option two (expecting a higher offer), because the board made no attempt to negotiate a higher price or to entertain offers from other potential purchasers. Indeed, there was no negotiation whatsoever. The board merely rejected the offer and then refused to answer the investor group’s questions about that decision. Moreover, upon information and belief, the new board made this decision without taking the expected and appropriate step of first consulting with outside investment bankers and independent counsel. 34 135. It was the misalignment between directors and shareholders: Linton and the board he controlled were not concerned with the best interests of Promega’s outside shareholders. Linton and the board rejected the investor group’s offer because it conflicted with Linton’s own personal interests: his personal desire to keep Promega a private company and under his and, later, Usona’s control until at least 2078. Had Linton and the board considered Promega’s shareholders, rather than facilitating Linton’s plan to benefit his personal research organization, Usona, they would have either accepted the investor group’s offer or at least negotiated with the investor group to see whether a higher price could be secured. 136. On November 6, 2015, approximately 130 shareholders (80 in person and 50 telephonically) gathered before the Promega shareholder meeting. They discussed whether the investor group’s offer could be resurrected and how to respond to Linton’s seizure of control and plan to run the company to benefit Usona rather than Promega’s shareholders: 137. It was evident from this meeting that outside shareholders overwhelmingly supported selling the company for $625 per share. 35 138. At the November 6, 2015 shareholder meeting that followed, Linton and the Promega board refused to answer a single shareholder question and failed to explain why rejecting the investor group’s offer was in the shareholders’ best interest. Instead, they gave prepared remarks and instructed shareholders to email their questions to the board. After the shareholder meeting, Kellner emailed a list of questions to the board seeking the board’s perspective on why they rejected the investor group’s offer. But the board refused to answer. 139. On January 18, 2016, Kellner and Brand wrote a letter to Promega’s shareholders reaffirming their commitment “to pursuing the fair and equitable treatment of all shareholders with regard to our investment in Promega.” The letter explained that the board had provided “no meaningful explanation of why the Board rejected our offer . . . . From a shareholder perspective, our offered price should at least have generated further inquiry into the market value of the company, which the company does not appear to have done.” 140. Kellner and Brand again heard from shareholders who expressed their frustration with the board’s rejection of the investor group’s offer. Linton cements his control 141. Having rejected the investor group’s offer, Linton moved to solidify his control over Promega by further increasing his ownership percentage and by preventing any new outside directors from jointing the board. 142. Linton wanted to increase his control over Promega without spending his own capital. Therefore, Linton formulated a repurchase policy to encourage shareholders to tender their shares to Promega during certain 30-day windows. That way, Promega’s capital would be used to acquire the shares, not Linton’s, but after the purchase Linton would control a larger percentage of Promega’s outstanding shares. 36 143. Unlike the Dutch auction approved by outside directors in 2014, however, Promega’s new repurchase program places no limits on Linton’s ownership percentage. Further, the new share repurchase policy does not warn shareholders about Linton’s percentage ownership, his effective or actual control, or the risk of him acquiring even more control by having Promega acquire additional outstanding shares. Thus, the new repurchase program provides Linton an opportunity to (a) increase his overall interest in Promega, which, upon information and belief, now approaches or exceeds 50%, without spending his own money; and (b) have Promega acquire shares at a below-market price. 144. The first window opened in March 2016. During the 30-day window, Promega rejected at least some shareholder offers to sell above the $383 price identified in the repurchase policy as “the most recent valuation” price. Because even that “valuation” price is a significant discount to the fair value of Promega’s shares, and because Promega has rejected efforts by shareholders to sell at a higher price, the share repurchase plan does not offer shareholders an opportunity to sell their shares at a fair price. In fact, Kellner tendered his 32,728 shares for $625 per share (the same price offered by the investor group) and Promega refused to buy even a single share at that price. 145. The March 2016 share repurchase continued Linton’s effort to increase his personal ownership percentage and gain control of Promega without spending any of his own money. As of March 31, 2000, there were approximately 3,280,000 outstanding Promega shares. By March 31, 2010, Promega’s repurchase efforts reduced that number to 2,397,000. By March 31, 2014, just before the Dutch action, the outstanding shares had fallen to 2,250,000. Two years later, on March 31, 2016, there were only 1,887,000 outstanding shares of Promega stock. According to Promega’s 2016 Annual Report, less than a month later, on April 26, 2016, 37 Promega spent an additional $51.7 million repurchasing shares, further reducing the number of outstanding shares by approximately 130,000 (Promega has not disclosed precisely how many shares it purchased with that money). 146. Linton’s share repurchases since 2000 have cut in half the number of outstanding Promega shares, thereby effectively doubling Linton’s percentage ownership in the company. As a result, Linton acquired effective control over Promega without spending any of his own money. This directly harmed the Plaintiffs, who (as shareholders) funded Promega’s repurchase efforts but (as minority interest owners) were shut out of the control benefit that Linton seized and are now subject to Linton’s oppressive conduct. 147. On February 22, 2016, Brand and Kellner again wrote to Bill Linton to express their concerns about Linton’s 100-year plan: “It is clear that you are determined to acquire 100% control of Promega, which is at odds with the best interests of 300 outside shareholders of the company, many of whom have been loyal to Promega for as many as 35 years.” Brand and Kellner proposed a solution that would permit Linton to move forward with his plan, while protecting Promega’s minority shareholders: Promega would “repurchase shares from all interested shareholders” for $575 per share, with the initial $385 per share paid in cash and the remaining $190 per share paid over a 5-year period at an interest rate of 5%. 148. On March 4, 2016, Promega’s board rejected that proposal from Brand and Kellner, claiming that the proposed transaction was “not in the best interests of the Company or its shareholders, employees or customers.” This was further confirmation that Plaintiffs have no opportunity to exit their investments at a price even approaching fair value and demonstrated that Linton has cemented his control over Promega without paying anything, let alone a premium for that control. 38 149. Linton and Promega have also refused shareholder efforts to return control of Promega’s board to outside directors and have rejected efforts to place even a single outside director on the board. In particular, on March 28, 2016, Brand tried to nominate at least one outside director to the board. That nomination was rejected. 150. Similarly, on April 1, 2016, Brand wrote to the board identifying potential outside directors and asked for the board’s “support in working collaboratively to identify a couple of outside directors to join the board at the next annual shareholder meeting in July.” Brand informed the board that his goal was “not to create a proxy fight, but rather to jointly, with the company, present a slate of directors that can fairly and independently represent all shareholders moving forward.” But on April 12, 2016, Craig Christianson, a board member at both Promega and Usona, responded on behalf of Promega and rejected Mr. Brand’s request. 151. Linton recently confirmed that he has no intention of bringing outside directors back to the board, whether this year or anytime in the future. On May 6, 2016, Linton participated in a panel discussion hosted by the International Forum on Consciousness and expressed contempt for both outside directors and for his shareholders. Linton identified having outside, independent directors on the board and allowing “people from the outside” to “own[] stock in the company” as his two “mistakes and failures” at Promega. When asked about what he would have done differently, Linton said: “knowing what I know now, first of all, yeah, I would make very different selections as to board members, with the experience and the wisdom that I have now. And not that anybody on the board was doing anything that they considered wrong, it was just putting people in very difficult positions who were outsiders . . . .” 152. Now that Linton improperly has acquired control of Promega, Linton and the current board are working to deprive minority shareholders from having any say in the 39 constitution of the Promega board. They have violated Promega’s by-laws in order to keep Linton and his handpicked board in control. 153. Specifically, Article 3.09 of Promega’s bylaws, titled “Vacancies,” provides: “Any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, may be filled until the next succeeding annual election by the affirmative vote of a majority of the directors then in office.” Therefore, under the bylaws, the directors whom Fetzer and Linton appointed in September 2015 (namely, Craig Christianson, Randall Dimond, Penny Patterson, and Charles York) can serve only “until the next succeeding annual election,” which occurred at the annual meeting on July 26, 2016. 154. But Linton and his unelected board chose not to comply with Promega’s bylaws. In a blatant example of bad faith, disloyal conduct, and self-dealing, Linton and the remaining board members opted to deprive shareholders of their right to vote on whether the unelected insiders whom Linton and Fetzer appointed should remain on the board. They did not put any of the unelected directors up for election at the July 26, 2016 annual meeting as required. The upshot is that Linton, with the uncritical support of his personally-selected insider board, now controls Promega, and shareholders have been stripped of their right to vote on whether those insiders should continue to serve on the board. In sum, shareholders no longer can expect that they will be treated fairly or that Promega will be managed by independent directors, or even by directors not wholly subservient to Linton. Linton’s conduct is oppressive and has defeated Plaintiffs’ expectations as shareholders 155. Linton has taken Promega and changed its purpose from a company focused on creating shareholder value to one increasingly focused on propping up Linton’s non-profit Usona. 40 156. Plaintiffs are now faced with a company that looks far different than the one in which they invested: a. Promega is now controlled by a single shareholder (Linton) who runs the company and has removed all checks on his conduct by filling the board with company insiders under his control. b. Linton has declared that Promega will not pay any future dividends, and that Promega will remain a private company under Linton’s control until at least 2078, thus locking Plaintiffs as minority shareholders into an illiquid investment with no opportunity to sell their shares at a fair price. c. Minority shareholders cannot even expect that Linton as the controlling majority and his board will fairly consider future liquidity opportunities because those opportunities conflict with Linton’s personal preferences to keep the company private for many decades to come and transfer his interest to his non-profit. d. Linton no longer is focused on creating shareholder value, but is instead working to shift control of Promega to his non-profit psychedelic drug research organization Usona. 157. By implementing his 100-year plan, Linton has transformed Promega from a private, closely held company into a different type of business organization altogether, focused not on Promega’s shareholders but instead on Linton’s personal interests in the medical benefits of psychedelic drugs. 158. Although some states allow for-profit companies to change their corporate form and re-organize as “public benefit corporations,” that change requires a shareholder vote and appraisal rights for dissenting shareholders. This protects the reasonable expectations of 41 shareholders who invested their money with the company before the change and who do not want to participate in the newly formed “public benefit company.” 159. For example, Section 362 of the Delaware’s General Corporation Law permits public benefit corporations to be “managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation.” Before an existing company can become a public benefit corporation, however, Section 363 requires a 2/3 vote by the shareholders and obligates the company to buy-out dissenting shareholders at “the fair value of the stockholder’s shares of stock.” 160. Applied here, Plaintiffs invested in Promega as a private, for-profit company dedicated to its customers and shareholders. Linton’s repurposing and reorganization of Promega to benefit his interest in Usona is self-dealing and a marked departure from the plan on which Plaintiffs relied when investing in the company. And by cutting off all avenues for Plaintiffs to obtain fair value for their shares, Linton and Promega have, in substance, expropriated Plaintiffs investment for Linton’s own purposes. In Delaware and the other states that permit companies to re-organize as so-called benefit corporations, this would require a shareholder vote and entitle dissenting shareholders (such as Plaintiffs here) to appraisal rights. In Wisconsin, Linton’s improper conduct amounts to shareholder oppression. IV. Claim for Relief Count 1 – Relief Pursuant to Wis. Stat. § 180.1430(2)(b) for Shareholder Oppression Against all Defendants 161. Plaintiffs repeat and reallege the preceding paragraphs as if fully set forth herein. 162. Plaintiffs are shareholders in Promega. 42 163. Linton and his handpicked board control Promega. 164. Linton and Promega have acted and will continue to act in a manner that is oppressive towards Plaintiffs, including by frustrating the expectations forming the basis of Plaintiffs’ investments in Promega and by engaging in burdensome, harsh, and wrongful conduct. 165. Defendants have frustrated Plaintiffs’ reasonable expectations as shareholders: a. Plaintiffs acquired their Promega shares expecting that there would be no controlling shareholder, thus ensuring that each plaintiff would retain a say in Promega’s operation. But Linton has seized a controlling interest in Promega and is now running the company for his own purposes. b. Plaintiffs acquired their Promega shares expecting that independent directors would hold a majority of the seats on Promega’s board and use their position to advocate for the shareholders. But Linton forced the independent directors to resign and replaced them with Promega insiders reporting to Linton. Linton now controls the board and uses it for his own purposes. c. Plaintiffs acquired their Promega shares expecting that there would be opportunities to liquidate their stock at a fair price, including through an initial public offering, merger, or sale. But Linton and Promega have implemented Linton’s 100-year plan, foreclosing any possibility that Plaintiffs might obtain a fair price for their shares during their lifetimes, and certainly no sooner than 2078. d. Plaintiffs acquired their Promega shares expecting that Promega would remain a reputable company in the life sciences space. But Linton has risked that reputation by associating Promega with research into psychedelic drugs. 43 166. Defendants have engaged in a course of burdensome, harsh, and wrongful conduct exhibiting a lack of probity and fair dealing in Promega’s affairs: a. Linton and Promega falsely claimed that neither the company nor management was taking a position as to whether shareholders should tender their shares into the Dutch auction, when Linton, in his capacity as CEO, spoke to approximately 150 shareholders and tried to convince them to sell. b. Linton threatened Promega employees during the Dutch auction to coerce them into selling their shares, and fired those who refused. c. Linton lied to shareholders, falsely claiming the Dutch auction would be oversubscribed so that they would tender their shares at a lower price. d. Linton lied to shareholders, falsely claiming that he intended to sell a large number of shares into the Dutch auction at a low price and therefore they needed to set a similarly low price for their shares. e. Linton and Promega concealed Linton’s ownership interest in the company so that shareholders would be more likely to tender their shares into the Dutch auction. f. Linton pressured and threatened outside shareholders to sell their shares into the Dutch auction for less than fair value so that Linton could increase his ownership interest in Promega. g. Linton attacked Promega’s independent directors and thwarted their investigation into Linton’s oppressive conduct. h. Linton prevented Promega’s independent directors from considering the shareholder group’s purchase offer. 44 i. In direct contradiction to shareholders’ desire for more independence on Promega’s board, Linton forced Promega’s outside directors to resign and replaced them with company insiders loyal to Linton. j. Linton and Promega falsely reported to their shareholders that these outside directors left on their own accord and on good terms with the company. k. Linton and his handpicked board of company insiders rejected the investor group’s offer without a shareholder vote or even a discussion with shareholders about the offer. l. Linton and his handpicked board of company insiders rejected the investor group’s offer without first giving it fair consideration. m. Linton and his handpicked board of company insiders have stripped shareholders of their right to vote on who serves on Promega’s board. n. Linton and Promega have used share repurchase plans to cajole shareholders into selling their stock back to the company at less than a fair price. o. Linton and Promega have demonstrated a lack of probity by failing to inform shareholders that participating in Promega’s share repurchase plans would lead to Linton obtaining a controlling interest in Promega. p. Linton and Promega have expressly stated they have no intention of paying future dividends, and they have removed all opportunities for shareholders to redeem their shares at a fair price and foreclosed meaningful liquidity for at least the next 62 years. q. Linton and Promega are using the company to prop-up Linton’s non- profit, Usona, and intend to transfer a controlling interest in Promega to Usona. 45 167. Through his willful and oppressive conduct, Linton has treated some of Promega’s shareholders (i.e., Plaintiffs and other minority shareholders) in a wrongful manner to which other shareholders (i.e., Linton as the majority shareholder) were not subjected. Unlike Plaintiffs as minority shareholders, a. Linton earns substantial ongoing compensation and benefits from Promega; b. Linton used his position at Promega to obtain his controlling interest; c. Linton controls the board and thus chooses its members, whereas Plaintiffs have been deprived of their basic right to vote on board members; d. Linton’s 100-year plan benefits him personally as the majority who desires to cede control to Usona, an organization founded and supported by Linton, at the expense of minority shareholders whose shares will be rendered valueless when the company is controlled by a non-profit; and e. Linton’s majority stake in Promega is uniquely situated such that Linton still maintains the optionality to sell at fair value in the future should he so desire (whereas Plaintiffs who own illiquid minority interests in a company controlled by Linton are completely subject to his improperly-acquired control). 168. As a direct result of Defendants’ wrongful conduct, Plaintiffs are stuck as minority shareholders in a corporation (Promega) where, despite owning a substantial portion of the outstanding shares, they have no say in Promega’s operation and no opportunity to realize a fair return on their investment. 169. To allow the current directors and officers to manage Promega will result in continued oppressive conduct adversely affecting Plaintiffs and the other minority shareholders. 46 Relief Requested 170. Plaintiffs request the following relief, as allowed pursuant to the above facts, applicable statutes, and case law: The remedies available under Wis. Stat. §§ 180.1430(2)(b) and 180.1432 and the Court’s equitable powers, including, but not limited to a judicial order requiring that Defendants acquire Plaintiffs’ shares at a fair value; That the Court award compensatory damages; That the Court award Plaintiffs their reasonable attorneys’ fees and costs accrued in the prosecution of this action; and That the Court award any other relief it deems just and equitable under the circumstances. 47 Dated: July 27, 2016 Respectfully submitted, HANSEN REYNOLDS DICKINSON CRUEGER LLC Electronically Signed By: /s/Timothy M. Hansen_____ Timothy M. Hansen (SBN 1044430) John A. Busch (SBN 1016970) 316 North Milwaukee Street, Suite 200 Milwaukee, WI 53202 Phone: (414) 455-7676 Email:
[email protected] [email protected] OF COUNSEL: SUSMAN GODFREY LLP James T. Southwick (pro hac vice application forthcoming) Alexander L. Kaplan (pro hac vice application forthcoming) Adam Carlis (pro hac vice application forthcoming) 1000 Louisiana Street, Suite 5100 Phone: (713) 651-9366 Email:
[email protected] [email protected] [email protected] 48