Company’s largest shareholder said move also further illustrates need for new board members
ROWAYTON, Conn. — Coliseum Capital, Purple Innovation’s largest shareholder, has filed a lawsuit to invalidate the company’s recently issued “Proportional Representation Preferred Link Stock,” saying it deprives shareholders of a “fair and democratic election of directors” during its 2023 annual meeting.
Purple’s move came a day after Coliseum recommended that the company appoint five new directors to its seven-member board. Coliseum has said that Purple shareholders “deserve a nimbler, more engaged board with a heightened sense of urgency and bias for action to help management navigate challenges ahead.”
Coliseum said that the preferred link stock, which it said was issued with without the approval of Purple’s stockholders, violates the Company’s charter and “transforms the “one share, one vote” structure used to elect company directors into a cumulative voting regime that prevents holders of a majority of the common stock from electing or removing the full board.”
It added that this is “a bad faith attempt by the Special Committee of Purple’s Board to entrench itself and thwart shareholder democracy. Specifically, the preferred stock issuance violates those provisions of the company’s charter that limit the form of stock distributions to holders of the company’s Class A shares to additional shares of Class A common stock.”
In the lawsuit, filed Feb. 21 in the Delaware Court of Chancery, Coliseum states that:
+ The named non-executive director defendants breached their fiduciary duties
+ Purple and non-executive director defendants violated the company’s charter
+ The issuance of preferred stock is invalid and void
+ Coliseum’s nomination notice is valid
Adam Gray, managing partner of Coliseum, said that the special committee’s action shows the lengths to which incumbent, non-executive directors will go to preserve their board seats at the expense of shareholders.
“To seek such board security amidst a contested election – and leveraging corporate machinations and stockholder resources to do so – is further evidence that board change is warranted,” he said. “While Coliseum has sought to work constructively with the Purple board – consistent with the collaborative investment approach we have executed successfully for the past 15-plus years – we have been left with no choice but to take the extraordinary step of a proxy contest and filing litigation seeking to ensure the election of directors is conducted in a fair and democratic manner for the benefit of all Purple stockholders.”
He added that as a longstanding Purple stockholder and a continued provider of much needed capital to the company, “Coliseum believes in Purple’s tremendous potential and the ability of Purple’s management team to steer the company toward success.”
“That said, we also strongly believe that Purple stockholders deserve a highly credentialed, nimbler, more engaged and aligned board that will not only support management, but also protect and restore stockholder value.
“Coliseum’s (board) nominees have the ownership mentality as well as right mix of operational, financial, and restructuring skill sets urgently needed to help management execute on its strategic priorities. If elected, they will bring the collaborative attitude and fresh perspectives required to reverse years of persistent underperformance and maximize value for all Purple stockholders.”
In defense of its move, Purple said that holders of PRPLS will be entitled to allocate their votes among the nominees in director elections on a cumulative basis, effectively allocating all, none or a portion of their votes to each director nominee up for election. As an example, it said that shareholders who collectively own 30% of Purple’s common stock can use the voting rights associated with their PRPLS to elect about 30% of the members of the board.
“The purpose of the PRPLS is to protect all shareholders and treat them equally,” said Paul J. Zepf, Purple Innovation’s board chairman. “Purple shareholders will have the opportunity for proportional representation on the Purple Board of Directors. By cumulating their PRPLS votes for certain director nominees, public shareholders can support the election of directors they believe will act independently to represent the interests of all shareholders in the boardroom, roughly in proportion to their collective ownership in the company.”