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An independent proxy advisory firm is recommending that Montreal-based drug company Knight Therapeutics Inc., which is in the midst of an activist battle with shareholder Medison Biotech Ltd., elect more independent directors to its board.

Institutional Shareholder Services, or ISS, is also recommending shareholders vote against Medison chief executive Meir Jakobsohn, who has sat on Knight’s board since the two companies took ownership stakes in one another in 2015, at the company’s annual meeting on May 7.

ISS said in a report Thursday that Israel-based Medison Biotech, which owns a 7.3-per-cent stake in Knight, has “highlighted legitimate concerns” about the Canadian company’s strategy, which have contributed to its lagging share price over the past two years.

“The dissident campaign has also raised several questions regarding the structure of the current board, which, at the very least, seems to fall short of the broader Canadian market with respect to overall independence," ISS said in the report.

But the advisory firm noted that, while some change to Knight’s board is likely warranted, Medison has failed to make a compelling case for why it should take control. And, ISS added, if Medison’s plan for Knight is fully implemented, it may expose the Canadian company, which has been very measured in deploying its capital, to “significant risks.”

Knight, which markets drugs that it licenses from large pharmaceutical companies, was founded in 2014 by Jonathan Goodman, an entrepreneur who previously built Paladin Labs Inc. with the same strategy and eventually sold it for US$2.95-billion.

The relationship between Knight and Medison fell apart in 2018, when both companies tried to negotiate a separation agreement but failed. Medison has since launched an activist campaign, claiming that Knight is too risk averse and has been hoarding too much cash.

Earlier this month, Medison put forward a slate of candidates for Knight’s board of directors in what Knight alleges is an attempt to gain control of the company and to access its $750-million in cash.

Medison, meanwhile, has alleged that Mr. Goodman’s passive investment in pharmaceutical company Pharmascience Inc., which is owned by his father and brother, represents a conflict of interest. Mr. Goodman has denied that allegation, saying that although his outside interests are widely known and have never been considered a conflict in the past, he has entered into a blind-trust voting agreement for his stake in his family’s business.

ISS is recommending that shareholders vote for two of the nominees that Medison has put forward and withhold votes for three others. The firm also recommends that shareholders withhold votes for two non-independent incumbent directors, including Mr. Jakobsohn, and vote for the six remaining nominees put forward by Knight’s management.

“It appears that the company would benefit from the election of independent directors with relevant operating experience in the pharmaceutical industry," ISS said in its report. "Such a reconstituted board might be better able to strike the right balance from a capital allocation perspective, by not being overly risk averse (a factor possibly contributing to the company’s declining share price) and not exposing the company to unnecessary risks (a potential downside to the dissident’s plan).”

Mr. Jakobsohn said he appreciates ISS’s recommendation that change is needed at Knight, but urged shareholders to vote for all of Medison’s board nominees, rather than just two of them.

“Without real change, there can be little hope that Knight will ever be worth more than the cash and financial assets on its balance sheet,” Mr. Jakobsohn said in a statement.

Knight also issued a statement Thursday, which says the ISS report supports Mr. Goodman and his team.

“ISS and analysts are validating what we have been hearing loud and clear from shareholders: Knight is on the right track and benefits from the leadership of the current experienced and qualified directors who have track records of building successful companies,” Mr. Goodman said.

“No one wants a Knight controlled by Meir Jakobsohn, his nominees who have no entrepreneurial pharma experience, and that will pursue his risky scheme to gamble with Knight’s cash.”

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