DAVIDsTEA Investment Partners Sue to Remove Executive Chairman

Shares of DAVIDsTEA fell to a 12-month low of $2.30 last week following a proxy fight, board resignations and a shareholder’s lawsuit seeking to remove co-founder Herschel Segal as executive chair. The company operates 240 tea shops in the U.S. and Canada.

Shares were $30 when the company went public in 2015 and were trading at $5.60 a year ago Tuesday.

In December 2017 the company announced it was considering strategic alternatives including refinancing and restructuring. Losses tripled ahead of a vicious proxy fight that culminated in June with the exit of chief executive Joel Silver. Segal, who initiated the proxy battle, resigned from the board last March on word the company was considering a sale. In response he recruited a slate of seven potential directors to replace the existing board. He prevailed, but in the weeks since he became executive chair two members of the newly elected board have resigned. These include lead director M. William Cleman and Roland Walton, former president of Tim Hortons Canada. Neither commented publicly on their decision.

In late July, three Highland Consumer Fund partnerships, which together own 12.8 percent of the Montréal-based company, filed suit in Quebec Superior Court naming Segal and his investment firm, Rainy Day Investments (RDI), which owns 46.4 percent of DAVIDsTEA.

Segal says the lawsuit is without merit. He said that the company, which is not named as a defendant, will defend its directors and management team, according to reports in the Financial Post.

The Highland Funds are managed by Porchlight Equity Management. Porchlight Senior Managing Director Peter Cornetta, in an Aug. 7 press release, wrote “it is surprising and disheartening that two newly minted directors who were nominees of Mr. Segal have suddenly resigned in quick succession, following a hotly contested shareholders’ meeting held only weeks ago.”

The resignations “raise concerns about the loss of their respective experience and fears that their resignations indicate a dysfunctional relationship between the independent directors and Mr. Segal,” said Cornetta.

“Considering the efforts undertaken by Mr. Segal to reconstitute the board, and his achieving this, the remaining directors of DAVIDsTEA owe shareholders an explanation as to what went wrong,” wrote Cornetta, explaining “that’s why we have gone public with our request.”

Segal did not respond, and the filing to remove Segal and elect a new board followed. Segal called the suit a distraction and pledged that the company will become profitable within a year. He said he intends to focus on its Canadian roots.

Source: Financial Post, Bloomberg