As a showdown stockholders meeting draws near for San Diego’s Arcturus Therapeutics (NASDAQ: ARCT), a proxy battle is boiling down to an argument over who represents the best interests of shareholders in the tiny RNA drug company.
In an April 3 letter addressed to the company’s four board members, Arcturus co-founder and ex-CEO Joseph E. Payne claimed that he’s supported by a majority of shareholders. He alleged that the board members who voted to fire him earlier this year of “harming Arcturus and the constituencies [they] were appointed to protect.”
The boardroom fracture began last fall, as the privately held biotech agreed to a reverse merger with Alcobra, an inactive Israeli biomedical startup that was still listed on the Nasdaq exchange. The merger enabled Arcturus to become a public company, making it relatively easier for Arcturus to raise capital and accelerate its development of RNA medicines.
But what had been a behind-the-scenes boardroom battle spilled into the open on Feb. 2, when the Arcturus board announced it had fired Payne as President and CEO. Since then, Payne, who holds a 13.7 percent stake in Arcturus and is the company’s single biggest shareholder, has mounted a proxy challenge that asks shareholders to replace the incumbent board with an alternative slate of four directors he has nominated. The battle for control of the company is expected to be decided at a shareholders meeting set for May 7.
According to the board’s lawsuit, Payne was fired “primarily due to his attempted transfer of substantial amounts of … intellectual property” for free to Providence Therapeutics, a Canadian biotech operated by Payne’s longtime friend, Brad Sorenson.
In his April 3 letter, Payne declared that the board’s allegations against him are “baseless and defamatory.” And he leveled some allegations of his own—asserting that Arcturus board members “violated their fiduciary duties and applicable U.S. and Israeli laws.” Payne also warned, “I am putting each of you on notice that you will be held personally accountable to the fullest extent of the law for your breaches of fiduciary duty and your attempts to misrepresent facts and mislead investors.”
In last week’s letter to shareholders, the Arcturus board members alleged that “Payne consistently abused his authority, and continues to demonstrate a willingness to mislead shareholders for his own personal and financial gain.”
In his response, Payne told the board that “a united majority” of Arcturus shareholders “voted against both your literal and figurative agendas” at a February 26 meeting in which a majority of shareholders rejected a routine appointment of the company’s independent auditor. Instead of heeding this message of rejection, Payne wrote, “you responded with desperation to entrench yourselves. Instead of filing a current report on Form 6-K to announce the results of the vote, as is good market practice, you chose to put out a press release to blame me for your failures. You now see fit to waste more shareholder resources by launching a frivolous legal complaint against me and engaging a team of expensive spin doctors to launch a personal attack.”
Payne wrote that he is “ready and willing to respond to every lie or half-truth contained in the March 28 press release and the now-pending court action.” He acknowledged knowing Sorenson, whom he described as “an active supporter and investor in Arcturus.”
But Payne did not directly address the board’s allegation that he was fired primarily because he tried to transfer intellectual property to Sorenson’s company. Rather, Payne wrote, “The record will reflect that every executed agreement between Arcturus and Mr. Sorenson’s company was approved by the board of directors and provided value to Arcturus.”
Another sore point for the board was a side business, apparently selling certain lab products, which Payne operated while serving as Arcturus CEO. In his letter, Payne maintained, “there was nothing wrong with my decision to spend a few hours a year on a non-competing business that was started over ten years before Arcturus was formed and that was fully disclosed to the company.”