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Other Civil Bremer Financial Corporatio STATE OF MINNESOTA DISTRICT COURT COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT CASE TYPE: OTHER CIVIL BREMER FINANCIAL CORPORATION, Court File No. 62-CV-19-8203 RONALD JAMES, JEANNE H. CRAIN, Hon. Robert A. Awsumb MARY BRAINERD, GLENN D. MCCOY, KEVIN A. RHEIN, WENDY SCHOPPERT, and CHARLES WESTLING, AMENDED COMPLAINT Plaintiffs, -v.- S. BRIAN LIPSCHULTZ, DANIEL C. REARDON, and CHARLOTTE S. JOHNSON, individually and in their capacity as Trustees of the Otto Bremer Trust, Defendants. INTRODUCTION 1. Otto Bremer was a German immigrant who lived his entire adult life in Saint Paul. Bremer took a job in banking shortly after his arrival in Minnesota, and, as biographical materials prepared by the Otto Bremer Trust on the fiftieth anniversary of its creation make clear, his life’s work was to build community banks in the Upper Midwest. Throughout the Great Depression and World War II, Bremer saved dozens of “shaky small town banks,” investing his own funds and labor to keep them afloat. As the materials show, Bremer “wanted small town banks to thrive, separate from gigantic holding companies that set guidelines from afar and didn’t know the families who sat by loan officers’ desks.” 2. A few years before his death in 1951, Otto Bremer created Bremer Financial Corporation (then called the Otto Bremer Company) and the Otto Bremer Trust (then called the Otto Bremer Foundation). Bremer created these twin institutions to carry on his lifelong 551116.4 commitments to community banking and community philanthropy. At Bremer’s direction, Bremer Financial provided banking services to underserved communities in the Upper Midwest. The Trust supplied Bremer Financial with permanent capital to provide these services and received in return for that investment a steady and substantial annual dividend. The Trust contributed the proceeds of these dividends to the same communities served by the bank, in the form of philanthropic grants for community projects such as schools and hospitals. 3. For decades after Otto Bremer’s death, Bremer Financial and the Trust operated as the virtuous circle Bremer envisioned. The bank provided the capital necessary for community development. It generated profits that allowed the Trust to sustain important philanthropic initiatives in the same communities. And that in turn supported the life and health of the bank’s communities, enhancing their ability to thrive and generate revenue for charitable distribution. 4. Fundamental to Otto Bremer’s vision was that his trust and his bank would operate in tandem. As the Trust’s historical materials put it, “Bremer wanted to increase the benefits of living in the location of a Bremer bank.” Bremer believed that local banks were civic cornerstones that must be preserved. So he created Bremer Financial Corporation “to avoid the[] sale [of community banks] after his death.” And he created the Trust to ensure that the bank would enjoy the stability afforded by permanent capital. “The [Trust] is set up into perpetuity; it will always be there,” explained one of the Trustees in a 2008 interview. And, as its Trustees have recognized, the Trust must do its “work in places that are homes and neighbors to Bremer banks.” All this is enshrined in the Trust’s founding document, which, as one of the Defendants in this lawsuit publicly admitted, directs that the Trustees “are to never sell the bank holding company.” 5. Now, however, the Trustees seek to do exactly that: “sell the bank holding company,” for cash, in a self-interested transaction that will massively enrich the Trustees 551116.4 2 personally. That sale, if permitted, would undo core elements of Otto Bremer’s legacy—the commitment to community banking; the commitment to underserved rural communities; the legacy of cooperative engagement between the bank and the Trust; and the Trust’s commitment to work “in places that are homes and neighbors to Bremer banks.” Instead of all that, the present Trustees propose to sell Bremer to a larger national bank holding company, which will squeeze value out of the transaction by shuttering branches, shedding payroll, and reducing personalized services. 6. The beneficiaries of the proposed transaction are the three Trustees. The Trustees already cause the Trust to pay them hundreds of thousands of dollars more than other charitable trustees earn. And by virtue of their service as Bremer directors, the Trustees also earn director fees from Bremer. But by liquidating Bremer, turning the Trust into a pool of cash and marketable securities, and then paying themselves a percentage of that pool, the Trustees will be positioned to increase their compensation to far greater levels—potentially millions of dollars per year per Trustee and spectacularly more than charitable trustees normally receive. 7. Trustee Brian Lipschultz admitted these self-interested financial incentives in a text message sent right when this litigation started: “Maybe the trustees are motivated by money. But isn’t this a free society where the individual can make their own choices? Or is this simply Minnesota money envy at play once again?” Ex. 1. (Lipschultz allowed months’ worth of his text messages to be deleted, even after this litigation started, and then dropped his cell phone in a lake. This message was recovered from a recipient’s device.) 8. The details of the Trustees’ scheme are rooted in Bremer’s unique capital structure. In 1969, to curb the problem of charitable self-dealing, Congress passed legislation that prohibited charitable trusts from controlling the business and affairs of private corporations. The law gave 551116.4 3 trusts 20 years to comply. And so, in a 1989 reorganization, the Trust received nonvoting Class B shares of Bremer stock and the bank’s employees received voting Class A shares. The purpose of this reorganization was to vest control of Bremer in its employees, provide the Trust with a continuing stream of dividend income to fund its charitable work, and thereby ensure the continuation of Otto Bremer’s vision for a permanent partnership between community banking and local philanthropy. 9. The arrangement worked according to plan for the better part of thirty years. Exactly as the reorganization contemplated, Bremer’s employee-shareholders have consistently elected independent directors to govern the business and affairs of the company. Under the supervision of independent management, the bank has generated substantial dividend income for the Trust, year after year, even through the market turmoil of 1999-2000 and the Great Recession of 2008-09. 10. But in recent years, new Trustees took over at the Otto Bremer Trust. As detailed in this Amended Complaint, these Trustees have undertaken a concerted campaign to increase their personal income from both the Trust and Bremer. Last year, as the culmination of this plan, the Trustees decided to try to force a sale of the company, notwithstanding Otto Bremer’s intent and over the objection of Bremer’s independent directors. Beginning in June 2019, the Trustees and their financial advisor commenced extensive unauthorized discussions with potential acquirers of Bremer, falsely representing that Bremer was available for sale and that the independent directors supported such a transaction. To advance these discussions, the Trustees shared confidential Bremer information with its competitors. All this constituted a breach of fiduciary duty. 11. When the rest of the board refused to approve the sale scheme, the Trustees pursued a different one—to eliminate the disinterested directors, take control of Bremer’s board, and then 551116.4 4 sell the bank and reap massive personal financial rewards. Their plan was to sell their nonvoting Class B shares to pliable hedge-fund buyers, which would immediately convert them into voting Class A shares. Then, the Trustees and the hedge funds, acting in concert, planned to vote the independent directors off the Bremer board and sell the bank without regard to the best interests of Bremer and its stakeholders, including its employees and the communities it serves. By Lipschultz’s design, the sale of Bremer that this hostile takeover aims to achieve would yield “tens of millions of dollars per year of expense takeout” achieved by eliminating Bremer jobs and Bremer branches. Said Lipschultz: “I’d favor eliminating as much as possible”—as many Bremer jobs as possible—“and just paying us for it.” Ex. 2. 12. So, in October 2019, the Trustees strategically purported to sell a small portion of the Trust’s nonvoting shares to 19 investment vehicles, which then purported to convert those shares into voting shares. The buyers in the Trustees’ scheme are hedge funds with no ties to the communities the bank serves. As another text message reveals, the Trustees selected these hedge funds as partners because they “only care about making money” and are “willing to do whatever is necessary” to aid the takeover scheme. Ex. 3. 13. The result of these transfers and conversions, if given effect, would be to give the Trustees and their hedge-fund accomplices a bare majority of Bremer’s voting power. The Trustees would then remove the independent directors from Bremer’s board, install new directors selected with their hedge-fund allies, and sell the bank off. In this scenario, as detailed below, the Trustees would further enrich themselves, and the hedge funds would receive a substantial short- term profit. 14. Since this litigation commenced in late 2019, the Trustees have done everything within their power to avoid producing relevant evidence from their files. But even though 551116.4 5 discovery is still at an early stage, the limited evidence the Trustees have made available undermines nearly every aspect of their position. The Trustees say that Bremer has no right to even bring its claims; but the evidence shows that the bank has a supreme interest in preserving the intent of Otto Bremer’s vision.
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