A legal fight has erupted over the future of the fourth-largest bank in Minnesota.
The board of Bremer Financial has filed a lawsuit accusing the three trustees of the Otto Bremer Trust, the foundation that owns most of Bremer Financial's stock, of engaging in a "disloyal scheme" to seize control of the St. Paul-based banking company and enrich themselves through its sale, a transaction that some have estimated could gross $2 billion.
The lawsuit, filed late Tuesday, is Bremer Financial's response to actions taken recently by the directors of Bremer Trust, who have said a sale would better position the bank to compete in a changing industry and bolster the foundation's philanthropy.
The suit maintains that the trustees would benefit themselves through the sale "at the expense of communities throughout the state and the region." It adds: "These individuals recently orchestrated a series of events designed to wrest control of Bremer Financial from its independent directors and force a sale that the board does not support. This scheme has nothing to do with protecting the trust or serving its beneficiaries."
The three directors of Bremer Trust, Brian Lipschultz, Daniel C. Reardon, and Charlotte S. Johnson, also are members of the 10-director board overseeing Bremer Financial.
The three have attempted to gain voting control of Bremer Financial through affiliated investors, after the bank directors decided last summer not to put the Upper Midwest banking company up for sale.
In a statement, the Bremer Trust called it disappointing that the bank board has "chosen a path of obstruction and conflict in this matter."
"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 [founder] Otto Bremer dedicated his life and fortune to helping," the trust said, adding that the allegations are false.
According to the suit, the trustees, embracing "disloyal means," earlier this year independently hired investment banker Keefe, Bruyette & Woods to market Bremer Financial for sale and shared the bank's confidential information without Bremer Financial board approval. In August, the board of Bremer Financial voted against an auction of the company.
The Bremer Trust directors have called for a special meeting of shareholders to consider the bank's future.
In a move that the Bremer Financial lawsuit says violates founder Otto Bremer's 1944 vision of a bank operation whose profits would fuel the foundation's community giving, the Bremer Trust directors arranged to sell enough stock to give them voting control, along with several hedge funds to which about 7% of the Bremer Trust shares were sold.
In other words, the suit says, the three trustees of Bremer Trust manufactured an "unforeseen circumstance" that they contend necessitates a sale.
The Bremer Financial board noted that the trust has been overseen by a Ramsey County judge for the past 30 years, under an IRS exemption.
"This structure was put in place for the specific purpose of … complying with federal tax laws that prohibit charitable foundations from controlling the boards of for-profit companies while allowing the trust to maintain its majority economic interest in the bank," the suit said.
The three trustees, descendants of three associates who helped Otto Bremer establish the charitable foundation, say they have a fiduciary duty to maximize value for communities who benefit from the foundation and employees of Bremer, who own 8% of the stock.
They have said they doubt Bremer can compete in a banking sector that has been consolidating at a rapid pace.
The trustees expect the sale of Bremer Financial could double the value of the foundation's assets to $2 billion or more.
They said that would enable them to double the $50 million they now give away in the Upper Midwest, under IRS guidelines that require foundations to donate at least 5% of assets annually.
"Bremer Financial has paid more than $750 million since 1989 in dividends to Bremer Trust, which has received an annual average return on its equity of over 12%," CEO Jeanne Crain said in an interview Tuesday. "That is consistent with top industry performers. We are proud of being the engine that has driven [the trust's] giving. And we have a lot of stakeholders to consider, including our customers and employees."
Bremer Financial expects to provide about $80 million in dividends this year to Bremer Trust.
Lipschultz and Reardon, who make more than $550,000 annually as Bremer trustees, plus up to $125,000 apiece annually as Bremer Financial directors, receive some pay from the trust for managing the small percentage of assets in the portfolio that is not Bremer Financial stock.
That could grow to about $3 million apiece if the Bremer assets are replaced by up to $2 billion in non-Bremer assets, based on the management-fee formula stipulated in a 2017 Ramsey County court order.
However, they said earlier in a written statement that in the event of a sale "no group, no one, will make $6 million in management fees" and that any boost in compensation would have to be approved by the court.
"Otto Bremer sought to help communities, families and individuals in our four-state service area," they said in the earlier statement. "Our only motivation is to manage Bremer Trust in the manner that Otto Bremer set forth in his trust instrument and for the purposes he intended."