A new lawsuit filed Tuesday marks a sharp escalation in the battle for control over Bremer Bank.
Bremer Financial Corp. and seven of its directors have sued the remaining three directors, trustees of the Otto Bremer Trust, accusing them of divulging confidential information to outsiders and selling stock in violation of the Trust’s founding documents in an effort to force the sale of the bank. The directors accuse the trustees of pushing the sale, despite the board’s direction to cease, in an effort by the trustees to increase their own compensation.
Key to the dispute is Bremer’s unusual ownership structure. Otto Bremer, the founder, transferred all shares of the bank to the trust with the direction that it never sell that stock unless “it is necessary or proper to do so owing to unforeseen circumstances,” according to the complaint.
But in the 1960s, after federal tax law changed to penalize nonprofit foundations that control for-profit businesses, that structure was revised. The trust retains more than 90% of the financial stake in the bank, but only three of 10 board seats and 20% of the voting shares, with the remainder of voting shares controlled by Bremer employees and directors.
Minority shareholder lawsuits are not unusual, but Bremer’s complicated ownership structure could be unprecedented in Minnesota case law, said Blake Nelson, a business attorney with Hellmuth & Johnson in Edina.
“I doubt there’s been anything like this that has happened in Minnesota,” Nelson said. “Just the structure of this organization is probably solitary.”
According to the complaint, the trustees (whom it accuses of having increased their own compensation by more than 1,000% over the course of a decade) engaged an outside search firm to market the company for sale without board approval, sharing confidential information in the process, and continued those efforts even when directed by the board to put them on hold.
When the board voted in August not to pursue a sale, the trustees allegedly followed through on prior threats and began selling nonvoting shares at below-value costs to outside hedge funds, which in turn are seeking to convert those shares to voting stock to oust the current non-trustee board members. Two of the trustees also allegedly stand to gain personally through a 0.3% “investment advisory fee” they receive for the trust’s non-Bremer assets.
In a statement released Tuesday after the lawsuit was announced, the Otto Bremer Trust denied wrongdoing and claimed it is the other board members and bank management who have a conflict of interest.
“It’s disappointing that [Bremer Financial Corp.] has chosen a path of obstruction and conflict in this matter,” the unsigned statement read. “In doing so, they are acting in a manner that seems certain to hurt the bank and its employees, to waste the resources of the company and to hurt the people Otto Bremer dedicated his life and fortune to helping.”
The case will likely hinge on the requirement in the original trust instrument that the trust not sell any bank stock unless “unforeseen circumstances” intervene, Nelson said. As presented in the complaint, that language appears to set a high bar for the trust to take such an action.
“From what I have read, this just seems more of like a business decision. It doesn’t seem like an unforeseen circumstance,” he said. “It just seems like there’s some people who have a differing opinion on how to run the business.”
The complaint is also notable in its length and specificity, Nelson said, comparing the filing to a “36-page movie script” describing internal board deliberations and other key details. That’s all the more unusual coming only three weeks after the trustees publicly announced their interest in exploring a sale.
“People file detailed complaints, but it appears that their strategy is to really get this out in the public and sort of sour everyone on the trustee side before they can even get rolling, and to sour a sale,” Nelson said. “Who’s going to touch this right now?”
The complaint rejects the argument made by the trustees that a merger will enable Bremer to better compete in a changing financial industry. Instead, according to independent financial advisers retained by the board, “Bremer’s standalone value was almost exactly the same as the price that would be expected in a sale of the Company. But in a sale scenario, Bremer would almost certainly lose its brand and culture, and would lose the opportunity for future upside,” according to the complaint, as well as other negative community impacts such as employee layoffs and branch closures.
A Bremer Bank spokesperson declined to comment on the consequences of a sale beyond the claims made in the complaint.
The case is in Ramsey County District Court, file no. 62-CV-19-8203.