Activist enlists governance expert in battle with Knight Therapeutics.

Activist Medison escalates proxy battle

I HAVE NEVER SEEN SUCH A COMPLEX WEB OF INTERLOCKS.

An activist shareholder fighting a proxy battle over the direction being taken by Montreal-based Knight Therapeutics Inc. has enlisted a prominent Canadian governance expert to buttress its case.

In a report commissioned by Israel’s Medison Biotech Ltd., Richard Leblanc, a York University professor of governance, law and ethics says he’s never seen a case like that of Knight, in which the chief executive owns a large stake in a direct competitor, calling it a “blindingly obvious conflict of interest.”

Medison launched its proxy battle in March after its chief executive went public with concerns it had about Knight’s conservative strategy and CEO, Jonathan Goodman, who holds a 25-per-cent stake in competitor Pharmascience Inc., which is owned and operated by his brother.

Leblanc was hired to review the alleged conflicts of interest in Knight, the independence of its board and CEO, the pharma operating experience on the board, and the company’s accountability to shareholders.

In a 28-page report obtained by Financial Post, Leblanc gave Knight a “D” grade in each of these categories, excluding pharma experience for which he assigned a “C” grade.

“What you want to see as a corporate governance expert is completely independent directors and in particular, a completely independent chair,” Leblanc said in an interview. “I didn’t see that here.”

Knight spokesperson Ian Robertson wouldn’ t comment on Leblanc’s recommendations because it hadn’t seen them. In a statement, however, Robertson questioned Leblanc’s independence.

“We doubt shareholders will take seriously a stunt bought and paid for partially using their own money to mimic (Medison CEO Meir Jakobsohn’s) already disproven ideas,” Robertson said.

“A paid for, non-objective report won’t change the fact that Meir’s company Medison is in decline and he is trying to hijack Knight to prop it up.”

Leblanc acknowledged his report was limited due to the fact that he made his conclusions based solely on documentation that Medison made available to him and information that was publicly available.

Based on the information he had available, Leblanc concluded that Goodman appears to have a conflict.

The board of directors, Leblanc determined, is also lacking independence due to the relationships they appear to have with Goodman, Pharmascience, the Goodman family and other directors on the board.

Along with taking issue with Goodman’s stake in Pharmascience, Medison has also spoken out about Knight chair James Gale, who is a director of two companies that Pharmascience has invested in in the past.

Gale, according to Medison, is also a partner with the Goodman family in Signet Healthcare Management.

Knight had previously defended its board, noting that it “is comprised of highly qualified directors who are fully-engaged, know Knight well, are leaders in their respective fields and have the right mix of experience in biotech, pharmaceuticals and finance,” but Leblanc questioned its independence.

“In my 25 years of assisting and advising organizations and boards, I have never seen such a complex web of interlocks, family, associate and affiliate relationships, and competing loyalties like this,” Leblanc wrote in the report.

Leblanc made a list of 54 recommendations including that Knight establish a rigid conflict-of-interest policy and ensure that directors will be recruited independently of Goodman and have no pre-existing relationships with one another going forward.

Chief among Leblanc’s recommendations was that Goodman sell his entire stake in Pharmascience.

Two weeks ago, Goodman placed his shares of Pharmascience into a blind trust that would strip him of his ability to vote and access private company information.

Goodman has said that he cannot sell his shares in Pharmascience because they’re owned by a family holding company and that divesting of the company completely would require it to be sold.

His stake in Pharmascience has not been an issue until it was “manufactured” by Medison, Goodman has said.

Both Goodman and Knight president Samira Sakhia have said that he’s never stopped the company from pursuing a contract because Pharmascience was one of its competitors.

The blind trust wasn’t sufficient, Leblanc said, because the chief executive officer’s actions could still be “perceived to impact the value of a competing company regardless of the blind trust.”

Leblanc acknowledged that his own perceived lack of independence was a “legitimate concern,” but defended himself by saying that his name and credibility are attached to the report and that he only agreed to be retained if he was allowed to give a real opinion.

“I thought I was accurate and if not, generous,” he said.