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In Battle Between Promega and Shareholders, Linton Heads to Court

Xconomy Wisconsin — 

To say that Bill Linton has a long-term vision for Promega, the Fitchburg, WI-based biotech business he founded in 1978 and continues to lead as chairman and CEO, would qualify as an understatement. In 2013, he told the Isthmus newspaper that he was working to arrange a corporate structure that would allow Promega “to celebrate its 100-year anniversary as a private company, as an independent company.”

Linton’s commitment to organic growth—and avoidance of a merger or acquisition that could force the company to relocate—has been a boon to the state’s life sciences sector, and to the business community in general. A majority of the company’s 1,400 employees are based in Wisconsin, and over the years a number of Promega spinoffs have been launched, including Epicentre, Lucigen, and PanVera.

Promega, a manufacturer of reagents and other life sciences research tools, has not relied solely on revenues and retained earnings to create those jobs and scale up its operations. Like many other firms, it has allowed investors to put money into the company in exchange for shares of stock.

Until recently, these shareholders had mostly remained patient. Because Promega was profitable and growing, their thinking went, plowing proceeds back into the company would further increase the value of their shares. The ultimate result would be a larger return when the company had its eventual exit, these investors believed.

But when Linton spoke of his 100-year plan, some shareholders began wondering when, if ever, they’d see a return, and whether Linton was still acting with their best interests in mind.

What followed has been a bitter standoff between Linton and some of the shareholders to whom he and his company have a fiduciary duty. The clash reached new heights last Wednesday when a group of plaintiffs led by Ted Kellner, a Milwaukee-based investor, and Nathan Brand, a Miami-based real estate developer, filed suit against Linton and Promega in Dane County Circuit Court. The lawsuit, which details the shareholders’ motivations and requests, was first reported by the Wisconsin State Journal. (You can read the full text of the lawsuit at the end of this article or by clicking here.)

Dan Ghoca, general counsel at Promega, provided a statement about the lawsuit to Xconomy, via an e-mail message.

“On Wednesday, a few shareholders of Promega filed a lawsuit, on their own behalf, seeking to force the company to purchase their shares,” Ghoca wrote. “We believe the allegations lack merit and we will take all appropriate steps to defend the interests of the company and all of its constituents and, most importantly, to continue the outstanding performance of the business.”

Following a review of the lawsuit and conversations with several Promega shareholders, what emerges is a perception of two Bill Lintons: the visionary who started a business and oversaw its transformation into an industry leader, and the Linton of the past few years, who plaintiffs say “bullied, lied, threatened, and manipulated his way” to a controlling interest in the company, according to court documents.

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Richard Cuellar, a Promega shareholder and former employee who is not one of the plaintiffs named in the lawsuit, joined the company in 1997 to work in its licensing department. By the time he left, in 2004, he had been named director of corporate development. Two years after Cuellar’s departure, which he says was amicable, he moved to Canada. Today he is based in the Ottawa, Ontario area.

During his stint at Promega, Cuellar worked on the company’s luciferase assay system, a toolkit which he says researchers can use for tasks like measuring enzyme concentrations. At the time, he says, luciferase was one of Promega’s two biggest product lines, along with ribonuclease inhibitors.

Cuellar’s stake in Promega is small, at least compared to the holdings of some of the plaintiffs in the lawsuit. Still, he says he’s getting close to retirement and “would like to get some cash,” preferably in the next couple years. He says he was excited to hear about the offer the group led by Kellner and Brand made last year to acquire Promega, as the windfall would have given Cuellar an opportunity to invest his money elsewhere.

Cuellar questions some of Promega’s expenditures, such as the Feynman Center, a 260,000-square-foot facility built to allow manufacturing of materials in a way that meets standard FDA specifications.

Linton “built that new pharmaceutical production [good manufacturing practice] laboratory there, but he hasn’t really used it,” Cuellar says. “Theoretically, that was going to be a big production operation when Promega started developing drugs, or something like that. But as far as I can tell, he’s not doing that yet.”

Cuellar adds that the Feynman Center is in accordance with Linton’s affinity for showy spaces. “Bill often spends more than he has to for the bells and whistles on buildings,” he says.

Asked whether he believes this or any of Linton’s other actions violated his fiduciary duty to shareholders, Cuellar points to the fact that Promega is still growing. “The company has always made a lot of money,” he says. “I really can’t complain about the way [Linton] has grown the company.”

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During Promega’s first 25 years in business, shareholders seemed to have an overall positive view of Linton’s leadership, plaintiffs say in the lawsuit.

The plaintiffs, whose investments in Promega date as far back as 1988, provide several examples to bolster their argument that Linton for years acknowledged his company’s obligation to get shareholders a “fair return” on their investment.

“When [the] Plaintiffs invested in Promega, all signs pointed to Promega being on a path to an IPO, sale, or merger,” the lawsuit says, and that the plaintiffs had an “expectation that Promega would offer shareholders an opportunity to exit at a fair value.”

There is evidence in the lawsuit to support these claims: Boehringer Ingelheim, a German pharmaceutical company, acquired 20 percent of Promega’s capital stock in 1990; multiple internal discussions about selling the company or taking it public took place between 1989 and 2003; and venture capital funds, such as Greylock Partners (now based in Silicon Valley), invested in Promega.

In 2000, Promega got as far as identifying underwriters and engaging Robert W. Baird & Co., a Milwaukee-based financial services firm, to assist with a public offering. But according to the lawsuit, Linton cancelled the planned IPO later that year, citing poor market conditions.

There are few details in the lawsuit indicating whether, between 2003 and 2013, there was any talk among company leaders, shareholders, or its board of directors about an IPO, merger, or acquisition. But plaintiffs say that in 2014, the year after Linton’s comments about Promega’s 100-year anniversary appeared in print, his plan to keep the company private and independent began coming into focus.

On July 9, 2014, Linton co-founded the Usona Institute, a nonprofit that has the same mailing address as Promega, the lawsuit says. According to Usona’s website, its mission is to conduct and support research that will help scientists and society better understand “therapeutic effects of [the hallucinogenic compound] psilocybin and other consciousness-expanding medicines.”

Plaintiffs in the lawsuit allege there is a “clear” and “concerning” connection between Promega and Usona, and that Linton’s goal in founding the nonprofit is to acquire a controlling interest in Promega, and then transfer that interest to Usona.

“Plaintiffs never expected—and no reasonable shareholder would expect—that their investments would be used to fund a nonprofit’s research into hallucinogenic drugs, let alone that Promega would itself be controlled by a nonprofit,” the lawsuit says.

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In January 2014, several months before Usona launched, Linton revealed to Promega’s board his “ultimate ambition” to obtain a controlling interest in the company, plaintiffs say in the suit. After the board rejected his initial buyback proposal, Linton introduced a plan under which Promega would repurchase stock from shareholders, through a reverse, or “Dutch,” auction. The auction was structured so that it could not result in Linton’s personal stake exceeding 45 percent of Promega’s outstanding shares, the lawsuit says. Plaintiffs say Linton agreed to that condition, knowing that it wasn’t likely to keep him from getting what he wanted.

“The Dutch auction [process] concealed the true impact it would have on Linton’s ownership percentage,” the lawsuit says. Linton reported controlling 31 percent of Promega’s stock on an offering notice, plaintiffs say in the suit, but he actually controlled far more stock, including shares held by his wife, and shares held in multiple trusts.

Promega bought back about 15 percent of outstanding stock in the company in the Dutch auction, the lawsuit says. It paid between $233 and $272 a share, which plaintiffs call a “heavily-discounted price” that Promega set without conducting a valuation to determine a fair price.

“Linton set out to eliminate dissent and seize control of the company through improper means, to the detriment of the plaintiff shareholders,” the lawsuit says.

During the process, Linton tried to force some shareholders—many of whom were Promega employees—into selling their shares, plaintiffs say in the suit. His tactics included threatening to fire employees if they didn’t sell, and telling shareholders that the Dutch auction was their last chance to receive any value for their investment, the lawsuit says.

As of March 31 there were about 1.9 million outstanding Promega shares, according to the lawsuit. That’s down from about 2.3 million in March 2014, just before the Dutch auction.

In July 2014, not long after the auction, Linton declined to nominate two longtime directors for reappointment to Promega’s board, plaintiffs say. Both were from outside the company and “actively opposed [Linton’s] 100-year plan,” the lawsuit says. At a board meeting that year, Promega did not show its full financial statements to directors, as plaintiffs say it had done in the past.

Kellner and Brand wrote a letter to Promega’s board in May 2015 in which they expressed concerns about board turnover and what they viewed as Linton’s effort to seize control of the company, the plaintiffs say in the suit. In the letter, they asked the board to create a “fair and equitable process” to buy the holdings of minority shareholders.

After the board declined to do what Kellner and Brand asked, the two men assembled a group of Promega shareholders to try to purchase the company. The group secured the backing of Barclays, a U.K.-based bank, and Madison Dearborn Partners, a private equity firm based in Chicago. In July 2015, they wrote a letter to Promega’s board offering to buy the company’s outstanding stock for $625 a share in cash. That would have valued Promega at about $1.25 billion, according to a State Journal report.

Then, last September, five members of Promega’s seven-person board resigned, the lawsuit says. Plaintiffs claim in the suit that several of those who left say Linton prevented them from fulfilling their fiduciary obligations to the company’s shareholders. Linton then appointed four other Promega employees to the board, the lawsuit says, which rejected the $625 a share purchase offer in October.

Thomas Ragatz, whose family has owned stock in Promega since the 1980s, says that with no directors from outside the company, there’s little reason to believe Promega’s new “puppet board” can provide the oversight and scrutiny many other boards do. Ragatz is a retired attorney but is not closely involved with the group that filed suit.

It appears that Kellner, Brand, and other plaintiffs moved away from the idea of buying the company, and felt that a lawsuit was their only recourse.

In the lawsuit, the plaintiffs request a judicial order allowing them to sell their shares to Promega at what they call a “fair value.” They are also seeking compensatory damages, and “any other relief [the court] deems just and equitable under the circumstances.”

The plaintiffs and their legal teams may be in for a protracted and costly battle. The Swiss pharma giant Roche sued Promega in 1992, claiming the company had used Roche’s technology for copying genetic material without authorization. Thirteen years later, Roche settled for an undisclosed amount. Promega shelled out “tens of millions of dollars in legal fees,” Linton said in the Isthmus article from 2013, but he and others at the company got the outcome they wanted.

Asked if the Roche lawsuit saga suggests that Linton is someone who won’t back down without a fight, Ragatz, the attorney and shareholder, says “you can certainly read it that way.”

It will be up to Judge John Markson to determine whether the actions Linton and Promega have taken around the company’s ownership structure and board seats violate a Wisconsin statute that protects minority shareholders from “burdensome, harsh, and wrongful conduct” by directors and controlling shareholders, as plaintiffs aver in the lawsuit. Or the court could rule that the defendants did not act illegally, and that Linton’s moves to create the future he wants were merely those of a calculating businessman.

Lawsuit filed against Promega and Bill Linton