Earlier this year shareholders of a fast-growing medical device company in Minnetonka were greeted with letters warning that a disgruntled board member with a large financial stake was trying to wrest control through a proxy fight that could leave the company irreparably damaged.
That board member, New Yorker Lewis C. Pell, has since won control at Cogentix Medical. Pell’s allies now control the board, while his rivals, including the now-former CEO and two board members, are out. And shareholders of the Minnetonka-based med-tech company are left to wonder what they have in their portfolios, especially given last week’s warning that gaps on the board could trigger a Nasdaq delisting.
“It’s a bloody shame,” said Wayzata money manager Richard W. Perkins, a longtime investor in Cogentix’s predecessor company, Uroplasty. “This guy [Pell] was not about to give up. … The company has a new president and new board of directors, and we’ll just have to see what happens.”
Cogentix sells urology and endoscope technology, mainly to doctor’s offices. The company was formed last year through the merger of two long-running med-tech microcaps: Minnetonka’s Uroplasty, run by board chairman and CEO Rob Kill; and New Jersey’s Vision-Sciences, where Pell was co-founder and chairman. The combined company is incorporated in Delaware and headquartered in Minnetonka.
In February, Pell aired concerns about executive pay, unsatisfactory performance and “empty vision” by Cogentix management and soon launched a proxy contest asking shareholders at the annual meeting in May to vote Kill and his allies off the board. Pell announced a slate of directors, including himself, who would oppose Kill and create a new majority.
Kill’s allies were loath to work with Pell, who had been reprimanded by Cogentix’s audit committee shortly after the deal closed for reportedly threatening to have Kill fired, court records say. In an e-mail later cited in a court ruling, nominating committee chairman Kevin Roche wrote that he would support Kill and never give in to “Trump-like bullying” from Pell.
Roche and his allies formed a plan to reduce the size of the board. Though presented as an efficiency move, the plan would have had the effect of giving shareholders a say over just one seat on the board in the May voting, instead of three. Pell sued to stop it, and won, after a Delaware judge found that reducing the seats up for election undermined shareholder democracy. Neither Pell nor Roche could be reached for comment through their attorneys.
Pell’s lawsuit was resolved through a legal settlement guaranteeing that Kill and his allies would leave the board and not stand for re-election, and that a new CEO would be installed. Shareholders approved Pell’s slate of three candidates at the May 24 meeting. About 30 percent of the proxy votes for Pell were withheld.
Pell denies claim by foes
In an interview Thursday, Pell said he’s only looking out for the best interests of Cogentix shareholders. He doesn’t believe the proxy fight will have a lasting impact on the company.
He flatly denies one of the most controversial claims made in vitriolic proxy letters, which is that he could benefit from a bankruptcy at Cogentix by dint of $28.5 million in loans to his former company that were transferred to Cogentix. That debt, which made him Cogentix’ largest debtholder, would be repaid before other claims in a liquidation, one of Roche’s letters said.
“My intent … is not to go bankrupt. And whatever it takes to prevent that from happening, including me putting more money in, I’ll do,” Pell said.
Pell has a long history in business. In 1977, the New York Stock Exchange permanently barred him from working with any NYSE member after he admitted to secretly transferring money between customers’ accounts at a large brokerage in the early ’70s. Since then he has forged a successful entrepreneurial career, including founding or helping to found at least 11 different med-tech companies that were sold to large acquirers including CR Bard, Medtronic, Boston Scientific, and Johnson and Johnson.
In all that time, Pell told shareholders, he has never had to publicly push for change like he has at Cogentix.
Cogentix stock dropped 30 percent in the weeks after Pell unveiled his proxy proposal. A sell-off on May 31 left the stock at 71 cents a share, its low for the year. Pell bought $400,000 worth of Cogentix stock that day, securities filings say.
Cogentix has never been a huge corporation, but it made headlines for its fast growth in 2015. In the Star Tribune 100 list of the state’s biggest public companies, Cogentix rose in the rankings faster than any other company.
That growth was fueled largely through the March 2015 merger between Uroplasty and Vision-Sciences Inc.
The year before the deal, Uroplasty had $25 million in revenue and specialized in medical devices for urologic disorders, including the Urgent PC nerve stimulator for overactive bladder. Vision-Sciences had $17 million in revenue and specialized in flexible imaging systems used in the body and the related EndoSheath antimicrobial barrier for reusable scopes.
The marriage of the two companies, first suggested by bankers for Vision-Sciences, was supposed to accelerate overall growth by giving Uroplasty’s larger sales force a wider portfolio to sell. And indeed, sales did climb in the months after the deal.
Behind the scenes, though, tensions ran high.
“Disputes immediately arose between the leaders of the two predecessor companies,” Delaware Chancery Court judge J. Travis Laster wrote in his May 19 legal opinion that blocked the plan to shrink the board of directors before the shareholders’ votes.
“On the day after the merger closed, Kill visited Pell … in Orangeburg, New York. Kill and Pell dispute what was said, but it is clear that the meeting did not go well. By the end of the week, Pell was threatening to have Kill fired as CEO.”
On May 24, Cogentix shareholders elected Pell and the two candidates he proposed as directors. Kill resigned from the company with a $1.5 million severance package. Roche and another Kill ally, former Allina Health CEO Ken Paulus, also resigned from the board.
“We won the proxy because many of the big guys understood what I bring to the table. And we’re not going bankrupt,” Pell said.
Perkins, the longtime Uroplasty investor, said he has no plans to unload his position in what is now Cogentix because of his strong confidence in the new CEO, Darin Hammers, who was appointed to the job as part of the legal settlement.
“You’ve got a guy running it who is good, he knows what he’s doing. If Pell will just stay out of his way, he’ll make this thing the success that it was always supposed to be,” Perkins said.
Hammers said the recent uncertainty has not led to unusual staff turnover and everyone at the company was excited to get back to business.
“The reasons for merging these two companies a year ago still remain. The two companies, independently, did not make money,” Hammers said. “We will make money for our shareholders this year, and that expectation will continue.”