ZEELAND — A legal dispute challenging the validity of the 2014 merger between Herman Miller Inc. and Design Within Reach could head to trial in Delaware this November.
Chancellor Andre Bouchard, who’s presiding over the lawsuit, in late January ordered the case to trial after denying a motion for partial summary judgment. The motion would have allowed the court to weigh the evidence and make a decision without going to trial.
However, Bouchard maintained in the hearing that he needed more information before he could make a decision on the lawsuit, particularly since the litigation represented “not your plain vanilla, just a clean mistake case,” according to transcripts of the proceedings obtained by MiBiz.
“I’m very concerned about the underlying transactions,” Bouchard said. “There is a real appearance here of covering up things that shouldn’t be covered up.”
Specifically, Bouchard cited the methods by which DWR executives Glenn Krevlin, John Edelman and John McPhee structured the company prior to the deal with Herman Miller as “self-dealing,” according to the transcripts.
“We have people who were fiduciaries at the time, in realtime, that were involved in these transactions that have personal financial interest in these transactions, some of which are clearly self-dealing transactions, who were involved in the ratification process itself. … That’s a point of concern,” Bouchard said. “Perhaps the record will show that it’s irrelevant what prior involvement they had in the transactions because this is just math and it’s just that simple. Maybe it will, maybe it won’t. But the factual record is just too uncertain for me.”
Bouchard also took issue with the extent to which DWR’s lawyers used attorney-client privilege to withhold documents during the discovery stage of the lawsuit and ordered DWR to release documents regarding the transaction with Herman Miller, according to the transcripts. He also ordered depositions in the case.
For plaintiffs Andrew Franklin and Charles Almond, Bouchard’s decision to move the case to trial marks a victory in what Franklin once described to MiBiz as an “odyssey” after filing the lawsuit in 2014.
“Trial is certainty that we’re finally going to get justice here,” Franklin told MiBiz. “This has been a problem for me, and all the other people in the cohort with me. … We’ve finally won our day in court, and we’re excited that we have a date now.”
RETRACING THE ‘ODYSSEY’
The lawsuit traces its roots back to 2009 when Krevlin and his firm Glenhill Advisors LLC purchased a 91-percent stake in DWR for $15 million, as the company struggled financially.
Krevlin was appointed to DWR’s board of directors following the transaction. Once on the board, Krevlin delisted the company’s stock with the U.S. Securities and Exchange Commission, although DWR continued to trade its shares on the over-the-counter market.
The following year, Krevlin piloted a 50-to-1 reverse stock split, reducing DWR’s number of authorized shares from 31.5 million shares to 630,000 shares, according to court documents.
Franklin’s lawsuit alleges Krevlin deliberately enriched himself and other controlling interests in DWR by not informing the minority shareholders of the reverse stock split or the company’s issuance of new shares.
In February 2016, DWR issued a letter to its former shareholders acknowledging defective corporate acts regarding the reverse stock split. Specifically, the letter admits DWR’s board of directors failed to inform the company’s non-consenting shareholders of a series of amendments to the reverse stock split, and to declare those amendments as advisable. The plaintiffs argue that failure to inform non-consenting shareholders breached Delaware law.
Moreover, the plaintiffs maintain that majority shareholders deliberately and artificially diluted the value of the stock “at the expense of minority shareholders,” according to court documents.
Despite DWR’s failure to inform minority shareholders of amendments to the reverse stock split, the company’s attorneys maintain executives corrected those errors through the proper legal channels.
For its part, Herman Miller declined to comment regarding the current ongoing litigation, contending the allegations took place before its deal with DWR.
“As we stated before, the issues raised in the lawsuit pre-date Herman Miller’s acquisition of Design Within Reach and have no impact on our ongoing business,” a spokesperson wrote in an email to MiBiz.
Herman Miller CEO Brian Walker struck a similar sentiment during an interview last year with MiBiz.
“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 in a previous MiBiz report. “(The plaintiffs) have issues, but they don’t have issues with us, as far as I’m concerned.”
Currently, Franklin and Almond are seeking rescissory damages, which would effectively award the plaintiffs and remaining minority shareholders based on the value of DWR at the time of the judgment, rather than at the time of the deal.
Legal experts contend the court could theoretically force Herman Miller to carve out DWR from its operations, but that action would be highly unlikely, according to an attorney who spoke with MiBiz on the condition of anonymity.
The attorney said it’s always difficult to assess whether a case like this will be settled ahead of time or actually make it to trial. However, it is in Herman Miller’s best interest to conclude the matter as soon as possible, according to the source.
“At the end of the day, if I’m Herman Miller, I don’t feel like I have a loser here, but I have to get this done,” the attorney told MiBiz. “If you’re a public company and have executives involved (in the litigation), it’s a management distraction. There are other things to focus on.”
If the case goes to trial, the attorney believes the court will force DWR’s former majority shareholders to pay the plaintiffs and other minority shareholders additional money for the transaction.
Seeking a carve-out of DWR from Herman Miller represents a last resort, Franklin said. He said he believes the matter will be resolved if he and the remaining former minority shareholders are paid rescissory damages.
“Usually when things can be remedied by money, I’ve found that’s usually the route that most things do get solved by,” Franklin said. “When you ask for rescissory damages … it’s a time shift versus what the value was then. Since the deal wasn’t done then, we want the value today.”
Regardless of what actions the court takes in the case, the lawsuit levels criticism at a top-performing business asset for Herman Miller. Since the acquisition in 2014, DWR has become a key part of Herman Miller’s growth strategy into the consumer market, generating double-digit sales growth in some quarters following the deal.
Herman Miller plans to continue to lean on DWR to drive growth under its consumer business. The company opened seven DWR stores within the last year, including two new DWR retail locations in Portland, Ore. and Westport, Conn. during the third quarter of its 2017 fiscal year, which ended March 4. Herman Miller plans to complete construction of an additional store in Atlanta by the end of its fiscal year, Walker said during a call with financial analysts in late March.
Herman Miller’s consumer division, which includes DWR, generated sales of $73.1 million during the third quarter of its 2017 fiscal year, a 4-percent increase compared to $70.2 million in the same quarter a year ago.
Sales in Herman Miller’s consumer segment grew 8 percent over the first nine months of its 2017 fiscal year, reaching $228.1 million. That compares to sales of $211.1 million in the segment in the same period last year.
For Walker, expanding the retail footprint of Design Within Reach comprises one of Herman Miller’s “primary areas of focus.”
“As I’ve described, we make targeted investments aimed at positioning our consumer business for long-term profitable growth,” Walker said during the call with analysts. “This represents one of our top priorities and we remain confident in our strategy of scaling the business by expanding our real estate footprint for Design Within Reach studios, increasing the mix of exclusive product offerings and growing our contract catalog and digital channels.”