ZEELAND — When news of a lawsuit questioning the legality of Herman Miller Inc.’s acquisition of Design Within Reach made headlines this month, few people in the industry understood the complexity of the case.
Now that the dust has settled somewhat, experts have had the opportunity to review and offer some clarity on what they described as “messy” litigation — and what lead plaintiff Andrew Franklin has described as a two-year “odyssey.”
At the heart of the 2014 lawsuit, the plaintiffs allege that a 1-for-50 reverse stock split on the part of Design Within Reach (DWR) violated Delaware law. Because the alleged violations occurred prior to the $154 million deal with Herman Miller, the plaintiffs say the transaction is nullified.
Sources tell MiBiz that while the lawsuit is far from resolved, it could lead to Herman Miller paying a settlement to the plaintiffs, or in an unlikely worst-case scenario, the court could carve out DWR and return it to the control of its former owners.
Franklin and co-plaintiff Charles Almond also allege that the former DWR majority shareholders intentionally squeezed out the company’s minority shareholders. The plaintiffs maintain that the majority shareholders enriched themselves prior to the acquisition and did not not give minority shareholders full compensation for their shares.
To date, Herman Miller has not issued any public statements or U.S. Securities and Exchange Commission filings regarding the lawsuit. In an interview with MiBiz during the NeoCon contract furniture trade show in Chicago, Herman Miller President and CEO Brian Walker said while he could not comment on the lawsuit itself, the company continues to move forward after the strategic acquisition.
“The net of it is that we really like what we did with DWR, we think strategically it was the right decision, and our deal was very clear with the people we did it with,” Walker said. “(The plaintiffs) have issues, but they don’t have issues with us, as far as I’m concerned.”
However, Franklin claims that Herman Miller did not complete its due diligence during the acquisition of DWR, and the company failed to realize the alleged missteps taken by DWR’s previous owners.
“The reason (Herman) Miller has been named is because they have improper dominion over our asset, because that merger itself never happened (and) monies were paid by (Herman) Miller — unfortunately for them,” Franklin told MiBiz in Chicago, where he also was attending NeoCon.
OUTCOMES AND IMPACTS
Since the litigation is so complex, legal experts are unsure if the case will progress or be settled out of court.
While the plaintiffs have not disclosed the exact amount of damages they’re hoping to receive as a result of the litigation, the pair are seeking to be compensated for the difference between what DWR was worth in 2014 and what it is worth today, Franklin said.
If Herman Miller refuses to pay the difference, Franklin contends that he will seek a court ruling to carve out DWR from the company and put it back into the ownership of the previous shareholders. Once under their control, the group would decide what to do with the company, including a possible sale, Franklin said.
However, reselling DWR after a carve-out could be challenging because of the company’s tainted image following the litigation, sources in the legal community told MiBiz.
According to Dustin Daniels, a partner at Grand Rapids-based Miller Johnson Snell & Cummisky PLC, a carve-out marks the worst-case scenario for Herman Miller, but he doubts that a court would rule in favor of that action.
“I think that it would be very unlikely that a court would unwind the transaction,” said Daniels, who also heads up the firm’s mergers-and-acquisition practice. “I don’t know if you could practically do it (because of) the amount of damage it would cause to the business.”
Far more likely is that Herman Miller will take legal action to force Glenhill Advisors LLC and the other previous majority shareholders in DWR to settle the lawsuit with Franklin and the former minority shareholders, sources said.
“There’s something here, and normally when there’s something, people get paid,” said a West Michigan attorney who spoke with MiBiz on the condition of anonymity.
At the very least, Herman Miller will be harmed because of the distraction the lawsuit is causing, the attorney said. That’s especially true since two DWR executives, John Edelman and John McPhee, are likely wrapped up in fighting the litigation and “aren’t focused on growing the business,” the attorney said.
Edelman and McPhee joined DWR in 2010, prior to the deal with Herman Miller, according to court documents.
For Herman Miller, the acquisition of DWR has given the company a successful high-end retail outlet for its products and has contributed to double-digit sales growth in some quarters following the deal. The company paid off the $124 million in debt it incurred from the DWR transaction in the third quarter of its 2016 fiscal year, which ended Feb. 27.
Since the lawsuit is still in the discovery phase and the court has yet to set deposition dates, sources in the legal community expect the litigation could continue on for quite some time.
“I can’t in good faith give you any idea when this is going to get resolved,” Franklin said.
Plaintiff Franklin alleges that the trouble began when Glenhill Advisors, led by Glenn Krevlin, one of the defendants in the lawsuit, invested $15 million to acquire a 91-percent stake in DWR in 2009, as the company struggled financially.
Krevlin was appointed to DWR’s board of directors shortly after his investment and delisted the company’s stock with the U.S. Securities and Exchange Commission. The company continued to trade its shares on the over-the-counter market.
In August 2010, DWR executed a reverse stock split, reducing the number of its authorized shares from 31.5 million shares to 630,000 shares, according to court documents. Franklin alleges that Krevlin deliberately enriched himself and other controlling interests in the company by not informing the minority shareholders of the reverse stock split or the company’s issuance of new shares.
Franklin owned approximately 725,000 shares prior to the reverse stock split, according to court documents. He was paid approximately $23.90 per share when the deal with Herman Miller closed on July 28, 2014. Still, Franklin contends he did not receive fair compensation for his shares.
A SELF-SERVING LAWSUIT?
While Franklin appears to have the interests of the other minority shareholders in mind, Daniels and other legal sources believe Franklin is using the much larger Herman Miller to pressure Glenhill Advisors and other majority shareholders to settle the lawsuit.
In many ways, the lawsuit comes off as self-serving for Franklin, Daniels said.
“The interesting thing is you don’t have any context about what exactly happened,” Daniels said. “In hindsight, it’s easy to look back and to paint a picture based on your point of view.”
It’s unclear through an analysis of the documents if Glenhill Advisors’ actions were self-serving and unfair to the minority shareholders, or if they were required to “finance the company given its current state,” Daniels said.
Some in the legal community have cited the troubled transaction as possibly being a product of sloppy legal work on the part of Herman Miller, which paid $2.2 million to lawyers and other advisers for work on the deal, according to the firm’s 2015 annual report.
However, Daniels believes the only trouble for Herman Miller could stem from the extremely technical and arcane stipulations in Delaware law.
“The complaint happened well in advance of the acquisition by Herman Miller, so it’s unclear how much of that was disclosed — and to what level — for Herman Miller,” Daniels said.
For his part, Franklin denies using Herman Miller as leverage to garner a payout.
“It’s not leveraged,” Franklin said. “It’s one of those things where (Herman Miller) is not doing, I believe, what they ought to to try to help sort the situation out, and I don’t know why.”
ADMITTING DEFECTIVE CORPORATE ACTS
Key to the lawsuit is a Feb. 25 letter from DWR to its former shareholders and a filing with the state of Delaware, both of which acknowledge “defective corporate acts.”
The documents suggest that DWR board members breached Delaware law by failing to declare the reverse stock split “advisable” to shareholders. The two documents also state DWR broke Delaware law by failing 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.”
Franklin points to those documents and a Delaware court filing by Herman Miller as proof the company knew that its acquisition was invalid, or at least troubled.
“They’ve backed themselves into a paradox,” he said. “If they know the merger is invalid, why haven’t they disclosed it? Alternatively, if they’re sure it’s valid, why are they seeking court intervention (through filings with Delaware)?”
At the time this report went to press, Herman Miller had not disclosed the litigation or the defective corporate acts in SEC filings.
However, Daniels thinks Herman Miller’s lack of disclosure regarding the lawsuit means the company believes it’s not material for shareholders.
“I think Herman Miller has the best perspective on the merits of this lawsuit and how material they deem it,” Daniels said. “I think by not disclosing it, they’ve made the call that (disclosing the lawsuit) is not necessary.”