Alawsuit challenging Herman Miller Inc.’s 2014 acquisition of furniture retailer Design Within Reach heads to trial in a few weeks with additional allegations.
Following discovery in the case this past summer, Andrew Franklin and Charles Almond, who were minority shareholders in Design Within Reach, amended their lawsuit to accuse DWR of breaching fiduciary duties. They claim Design Within Reach failed to disclose unauthorized stock options granted to executives between 2009 and 2014, and that Herman Miller “aided and abetted” the breach in its deal to buy the company.
As a result, Franklin and Almond “did not receive their fair share of the proceeds” from the acquisition in July 2014, according to the amendment pleadings filed in a state court in Delaware.
“Herman Miller knew or should have known that DWR’s minority shareholders, including plaintiffs, received far less for their DWR shares than they were entitled to receive,” the pair allege in court filings.
Herman Miller and its CEO, Brian Walker, have said in the past that the issues in this case pre-date the company’s 2014 acquisition of DWR. However, Franklin claims that during the acquisition process, Herman Miller had “direct knowledge” that the stock options were unauthorized and yet proceeded to close the deal.
Amendments to the case indicate that Herman Miller on May 28, 2014 initially offered $210 million for DWR, then lowered the offer to $178 million in July. The two companies later agreed to a final purchase price of $183 million.
“We amended the complaint to reflect what we learned in fact discovery. And what we learned was deeply troubling with respect to how the transaction and disclosures came together,” said Franklin, whose UTR LLC invested in Design Within Reach in 2008 and 2009. “Ultimately, the facts that we have gathered through depositions and our investigation amount to equitable fraud.”
“Herman Miller was consciously working on this with knowledge” of the unauthorized stock options, he said.
Prior to the stock split, Franklin held about 725,000 shares of DWR.
Other amendments to the lawsuit claim that majority shareholder Glenn Krevlin of Glenhill Advisors LLC, other defendants and Herman Miller agreed in July 2014 that when the acquisition closed, they could receive cash payments for the value of the stock options under what was called a “change in control bonus payment.”
Herman Miller declined to comment on the ongoing case.
The amended complaint is the latest addition to a case that questions the validity of Herman Miller’s deal for DWR, a retailer of high-end home furnishings.
The lawsuit accuses Krevlin, who acquired a 91-percent stake in then-struggling DWR for $15 million in 2009, and other directors and executives of self-dealing and a series of moves to squeeze out minority shareholders and enrich themselves. They include executing a 50-to-1 reverse stock split in 2010 without informing minority shareholders, and in the process violating Delaware law.
Krevlin previously delisted DWR’s shares from the Nasdaq stock exchange, although they continued to trade on the over-the-counter market.
The new claims in the case also allege an August 2014 merger notice to shareholders contained “material misrepresentations and omissions” that were intended to “induce plaintiffs to agree to receive cash in exchange for their DWR common shares as opposed to commencing litigation to seek an appraisal or other remedies concerning (the acquisition.)”
A Delaware judge earlier this year rejected efforts by the defendants for partial summary judgment that would have allowed the court to decide the case without a trial.
For Herman Miller, the DWR acquisition served as the company’s key growth strategy in the consumer market.
Today, DWR has 32 locations in 16 states and Washington, D.C., plus a store in Toronto, Ontario, and two in Mexico City. DWR opened two locations — in Edina, Minn., and Denver, Colo. — during Herman Miller’s most recent quarter to expand its studio space to more than 330,000 square feet.
DWR will add another 60,000 square feet by May 2018, Walker told brokerage analysts in a September conference call to discuss Herman Miller’s results for the first quarter of its 2018 fiscal year.
During the three-month period, the consumer division that includes DWR recorded sales of $83.2 million, up 10 percent from the same period a year earlier.
Herman Miller overall reported quarterly sales of $580.3 million for the quarter that ended Sept. 2, down 3.1 percent year-over-year from a period in 2016 that also included an additional week of sales. The company recorded net income of $33.1 million, or 55 cents per diluted share.