ZEELAND — Herman Miller Inc.’s highly praised $154 million acquisition in 2014 of high-end furniture retailer Design Within Reach Inc. may not legally have occurred.
That’s according to a pair of former Design Within Reach (DWR) shareholders who filed a lawsuit in December 2014 against the company’s current and former owners. The lawsuit, which has since been amended, alleges the company violated Delaware law in how it executed a 1-for-50 reverse stock split, a move that predated its acquisition by Herman Miller.
At issue is DWR’s withholding of key information from minority shareholders, according to court documents first reported on this week by the New York Times.
While plaintiffs Andrew Franklin and Charles Almond name Herman Miller in the lawsuit, the pair appear to be using the office furniture manufacturer as leverage to put pressure on the former majority shareholders of DWR, according to a lawyer who spoke to MiBiz and asked not to be named in this report.
Franklin and Almond seek undisclosed damages in the case, according to the court documents.
The lawyer described the lawsuit as an “unusually messy situation.”
For one, if the reverse stock split did not occur from a legal standpoint, it means Herman Miller purchased far fewer shares than was required to complete the 2014 acquisition of DWR under Delaware law, making the transaction null, according to multiple sources.
High-profile acquisitions can often bring about lawsuits from unhappy shareholders, but this deal appears to have some unique characteristics, said Christine Baker, managing director of business valuation services at Grand Rapids-based Charter Capital Partners.
“I’ve heard of dissenting shareholder suits not infrequently,” Baker said. “But someone asserting that the deal never actually closed is a new one to us, especially for companies that have to report so much in a public way. That’s kind of stunning.”
The deal has been beneficial in driving earnings at Herman Miller. For the Zeeland-based office furniture manufacturer, the result of undoing the deal with DWR and carving out the business from its operations could have far-reaching ramifications, Baker said.
Since the time of the acquisition, Herman Miller has invested heavily to integrate DWR into its operations and financial reporting structures. Moreover, adding DWR’s portfolio of retail outlets has helped drive double-digit sales growth in some quarters in the years following the deal.
“You can sort of feel what would happen to Herman Miller’s stock price if the court decided these guys are right and the deal never happened,” Baker said. “If they trust management at Design Within Reach enough, they may try to protect that deal and keep it in place. It would be a heck of a lot of expense and hassle for them to say, ‘We have to unwind the integration of (DWR)’s financials out of our financials.’ That’s going to cost a lot with their auditor.”
In addition to potentially putting downward pressure on Herman Miller’s stock price, unwinding the deal could also give investors reason to be concerned.
“The Street dislikes uncertainty,” said Bob Burton, managing director at Lambert, Edwards and Associates Inc., a Grand Rapids-based public relations and investor relations firm. “To the extent this introduces some uncertainty, it probably weighs on the related stocks to some degree (but) it’s hard to tell how much.”
Burton also serves as the chair of the National Investor Relations Institute’s certification council.
A spokesperson for Herman Miller declined to comment on the ongoing legal proceedings.
NOTIFICATION AT ISSUE
The crux of the suit originates from when Glenn Krevlin and his investment firm, Glenhill Advisors LLC, acquired a 91-percent stake in the company in August 2009 for $15 million after it sustained heavy losses in the economic downturn.
Two months later, the company delisted its stock with the U.S. Securities and Exchange Commission, but continued to trade on the pink sheets.
In August 2010, DWR sought to execute a reverse stock split to reduce the number of its authorized shares from 31.5 million shares to 630,000 shares.
Franklin and Almond alledge that Krevlin, who was named to DWR’s board of directors shortly after his 2009 investment, intentionally pushed out minority shareholders by withholding information about the reverse stock split and the issuances of new shares.
In a Feb. 25, 2016 letter from DWR to its former shareholders that was obtained by Fast Company, the company acknowledges a “defective corporate act” regarding the initial reverse stock split. The letter admits that DWR’s board of directors breached Delaware law by failing “to declare the reverse stock split amendment ‘advisable.’”
The letter also notes DWR failed to send notice to “non-consenting stockholders informing them that the reverse stock split amendment had been adopted by non-unanimous written consent of the stockholders,” as required under state statutes.
The company corrected its mistakes to be in accordance with Delaware law by passing a resolution that preceded the letter to shareholders.
For its part, Herman Miller claimed a lack of knowledge regarding the majority of the allegations leveled by Franklin and Almond, many of which took place before its deal to acquire DWR.
“I didn’t see where (the plaintiffs) were saying, ‘We want you to undo the deal,’” said Baker of Charter Capital Partners. “They were saying they wanted to be fairly compensated for their portion.”