The former chief executive officer of Canada’s third-largest pharmacy chain operator is suing for wrongful dismissal, seeking $30-million in damages at a time when the company prepares to launch a $175-million initial public offering.
Brian Dawson, who in 2015 founded Neighbourly Pharmacy Inc., which until recently was known as Rx Drug Mart, alleges that he was wrongfully terminated in February, 2019, after a whistle-blower said Mr. Dawson “constantly pushed the finance team to improve [earnings]” and asked them not to correct a $1-million error in financial reporting, according to a report by accounting firm Deloitte, which was filed as part of the lawsuit.
According to Mr. Dawson’s lawsuit, he denied any wrongdoing when Neighbourly placed him on administrative leave in November, 2018, and “insisted” that an independent firm should investigate. Neighbourly’s board hired Deloitte soon after to do so.
After firing him for cause, Neighbourly attempted to buy Mr. Dawson’s 8-per-cent stake in the company for $1, according to his termination letter, which was included in the Deloitte report.
“The company intends to repurchase the [shares] at a price of $1.00 in the aggregate,” the letter read. “The [shares] do not have any value since the face value of the company’s preferred shares exceeds the value of the total equity.”
Mr. Dawson says his shares were worth more than $6.4-million in June, 2017, according to his lawsuit. The company and Mr. Dawson have not agreed on the value of the shares, and have been working with a third-party valuator.
Mr. Dawson is suing Neighbourly as well as private-equity firm Persistence Capital Partners, the company’s controlling shareholder, and Sean Karamchandani, a partner at Persistence who sat on Neighbourly’s board.
In his lawsuit, Mr. Dawson says Mr. Karamchandani instructed him to hold off on correcting the accounting error while the company fielded a $255-million takeover bid. His termination, he says, was a result of following Mr. Karamchandani’s directions.
“Sean influenced the board, either directly or indirectly, to secure Brian’s dismissal to prefer the interests of Persistence Capital Partners,” Mr. Dawson alleges in his lawsuit. Mr. Dawson’s lawsuit argues that terminating Mr. Dawson would effectively expropriate his shares, and “increase the respective ownership of the institutional investors” like Persistence.
None of the allegations have been proven in court. Lawyers for Mr. Dawson declined to comment because the case is before the courts.
“As stated in Neighbourly’s prospectus, Mr. Dawson was terminated with cause,” Neighbourly wrote in an e-mail to The Globe and Mail on behalf of itself and Persistence. “The company strongly disagrees with all of his positions as a plaintiff, believes that his claims are without merit, and intends to vigorously defend itself in this proceeding.”
According to the Deloitte report, Mr. Karamchandani denied “having any detailed knowledge that the financial records were materially misstated.” He did not immediately respond to a request for comment.
Neighbourly has not filed a statement of defence.
Neighbourly announced last Tuesday that it will list its shares on the Toronto Stock Exchange at $17 a share. The company expects trading to begin this week.
According to Neighbourly’s IPO prospectus filed last week, Mr. Dawson still holds 4.6 million shares in the company.
Mr. Dawson is seeking $25-million in damages for what he calls the company’s “oppressive conduct,” and another $5-million in punitive damages.
“In the event that the plaintiffs prevail in any of their claims, the company’s results of operations and financial condition could be adversely affected,” Neighbourly acknowledged in its prospectus.
According to his lawsuit, Mr. Dawson became aware in October, 2018, that the company had overstated its profitability by $1-million over its 2018 and 2019 fiscal years. The company had incorrectly reported the income it received from suppliers. When Mr. Dawson alerted Mr. Karamchandani, who was the board’s “point person” tasked with day-to-day supervision of Neighbourly, Mr. Dawson alleged in the lawsuit that Mr. Karamchandani asked him not to change the financial reporting yet, or inform the rest of the four-person board as the company was in talks to be acquired.
At the time, Neighbourly was the target of a bid from two private-equity firms, Bain Capital LP and Avalt, and had signed a letter of intent to solidify a deal. According to his lawsuit, Mr. Dawson was excluded from discussions with the prospective buyers. A deal was never completed.
In his lawsuit, Mr. Dawson alleges that Mr. Karamchandani said that he would need to “manage when this information was communicated to Bain,” and “repeatedly directed” Mr. Dawson not to correct the overstatement. In exhibits attached to Mr. Dawson’s lawsuit, multiple e-mails show Mr. Dawson in communication with Mr. Karamchandani, referring to instructions not to correct the error. Some of this communication was also outlined in the Deloitte report.
On Nov. 1, 2018, Mr. Dawson finally presented numbers to the board that contained the overstatement, but did not reveal the accounting error, according to the Deloitte report.
A week later, Trent MacDonald, Neighbourly’s chief financial officer, e-mailed Mr. Dawson about the overstatement. The two spoke later, and Mr. MacDonald recorded the conversation. According to a transcript of the conversation, contained in the Deloitte report, Mr. Dawson warned Mr. MacDonald about leaving behind a paper trail.
“I wished that wasn’t all in writing in an e-mail but it is what it is,” Mr. Dawson told him.
“[Mr. Karamchandani] was wanting us to stick with the old methodology, but is he aware that it’s as big as it is?” Mr. MacDonald asked.
“Yes,” Mr. Dawson replied.
The pair e-mailed again on Nov. 18, with Mr. MacDonald expressing concern that the overstatement hadn’t been corrected yet.
“This is material!! If anything is going to explode in our face, this is it,” he wrote in an e-mail.
Mr. Dawson replied that he needed board approval to change “accounting methodology,” a direction that came from Mr. Karamchandani. E-mails contained in the Deloitte report show that Mr. Dawson brought the issue to Mr. Karamchandani, and copied Mr. MacDonald.
“We have recently discovered an error,” Mr. Dawson wrote, presenting the issue as a new concern, when, according to the Deloitte report, they had discussed it for more than a month.
“We need to have a fulsome discussion about the impact of this change,” Mr. Karamchandani replied.
Three days later, Neighbourly’s board received the whistle-blower allegation against Mr. Dawson, who was then placed on leave. Mr. Dawson participated in multiple interviews with Deloitte, as part of its investigation. The report did not explicitly conclude that Mr. Dawson or Mr. Karamchandani broke any rules.
“Dawson acknowledged that he may have been seeking ways to improve [earnings] ... so long as any actions were within the appropriate guidelines and did not contravene any rules,” the report said, adding that Mr. Dawson said he did not believe he could “overrule” Mr. MacDonald.
“Dawson acknowledged that in hindsight ... it appeared that finance personnel may have believed they were acting under his direction.”
According to the report, Mr. Karamchandani “acknowledged that he may have told Dawson that board approval was required to change an accounting policy, but that the comment was made more generally as an example of activities requiring board approval, and not in the context of justifying overstated [profitability].”
According to the lawsuit, Neighbourly “resolved to terminate [Mr. Dawson] for cause” on Feb. 1, 2019, six days before the Deloitte report was released.
“The investigation has revealed, amongst other things, that you actively ensured that important financial information was not shared with the board of directors,” said Mr. Dawson’s termination letter, which was included in the filing.
The termination letter also expressed Neighbourly’s intention to buy Mr. Dawson’s shares in the company for $1.
According to Neighbourly’s prospectus, a third-party valuator was appointed in January, 2021, to determine the value of Mr. Dawson’s shares when he was terminated.
Mr. Karamchandani is still a partner at Persistence, according to its website, but he is no longer on Neighbourly’s board. Mr. MacDonald left the company last June, according to his LinkedIn profile.
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