ST. PAUL -- The three trustees of one of the Midwest’s oldest charitable trusts are defending their decision to sell stock in their major financial asset -- St. Paul-based Bremer Bank -- to nearly a dozen outside investors.
On Monday, principals of the Otto Bremer Trust filed a 43-page legal response and counterclaim to accusations of “breach of fiduciary duty, disloyalty and self-dealing,” defending themselves against claims of dishonest dealings with Bremer Bank’s board of directors.
The move comes after lawsuit filed last month in Ramsey County District Court, in which bank officials accused the trio of violating the 75-year-old bank’s organizational structure by transferring 725,000 shares of Bremer stock to private owners and courting potential bank buyers. The “class B” shares were sold at $125 per share.
On Oct. 28, the trustees transferred approximately 37 percent of Bremer Financial’s voting stock to 11 investors representing 19 out-of-state hedge funds. Critics say the goal was to replace the Bremer Financial board of directors and put the $13 billion bank up for sale. It was only the second time Bremer stock has been transferred outside the trust since 1943.
Bank officials and community leaders have questioned the potential impact of outside ownership on both the bank and the trust, which last year alone made $50 million in grants and program-related investments to more than 500 organizations in Minnesota, North Dakota and Wisconsin.
The trust uses bank dividends to fund its charitable work.
Trustees call sale necessary
In their legal response Monday, trustees S. Brian Lipschultz, Daniel Reardon and Charlotte Johnson noted the trust has owned the Bremer Financial Corporation for 75 years.
They also noted that the philanthropy’s organizational structure gives them certain powers to do what is “necessary and proper” in the case of “unforeseen circumstances.”
Changes in tax law, recent merger and acquisition offers and “recently, rapid and deep-seated changes in the competitive environment for mid-sized banking organizations such as Bremer … compelled the trustees’ conclusion that it had become necessary and proper to sell.”
The legal response goes on to state: “A sale of Otto Bremer Trust’s … stock will have extraordinary benefits for the communities (the trust) serves, potentially doubling (the trust’s) charitable assets and thereby allowing (the trust) to increase its charitable giving by $50 million per year.”
The response further states: “When Mr. Bremer created the trust, he left no room for the (Bremer Financial Corporation) board to second-guess this decision by the (Otto Bremer Trust) trustees. This should end the analysis. … (Bremer Financial Corp.) must honor that transfer.”
The legal response claims that the trust must report the fair market value of its assets each year, and then distribute at least five percent of that value to charity by the end of the following year. The trustees state they cannot abide by that requirement without selling stock.
The response states: “The events of 2019 have revealed that (Bremer Financial) shares are worth approximately double their previous valuation … greatly increasing its future charitable distribution requirements. … (The trust) cannot meet this increased distribution requirement without roughly $50 million in additional income from (the bank) each year.”
The response was filed by attorneys Todd Noteboom, Peter Schwingler and William Thomson of Minneapolis-based Stinson, LLP.
Counterclaims demand shareholders vote
In Monday’s filing, the trustees state three counterclaims. They noted the bank board has declined to recognize the new shareholders or schedule a meeting to allow them to vote on a new bank director and board leaders.
In the first claim, the trustees are seeking a judgment through the court stating that the sales of Bremer’s class B stock were valid transactions, the class B stock can be converted to class A stock that has more voting clout, and the buyers are entitled to use their class A stock in an upcoming special meeting and election.
Citing the same obstructions to shareholder voting rights, the second claim alleges breach of contract and the third, a violation of fiduciary duties.
In response on Monday, officials with Bremer Financial Corp. issued a written statement to the media: “We are aware of OBT’s filing today and believe their counterclaim is baseless. … Bremer Financial does not recognize (Otto Bremer Trust’s) purported stock transfer as valid.
“It is troubling that the … trustees have attempted to forfeit a strong, independent, community-focused institution like Bremer Bank — and the trust it fuels — to a group of out-of-state investment funds, who have neither the best interests of Bremer employees nor the communities we serve throughout Minnesota, North Dakota and Wisconsin in mind.”
Bank officials claim the trustees, who already pay themselves upwards of $347,000 to $500,000, will enrich themselves from a stock sale through management fees. The trustees noted their salaries must be approved in court and they have agreed not to increase them for two years.
“Unable to allege viable claims, plaintiffs seek to embarrass the Trustees by impugning their motives, alleging that Trustee compensation will increase if (Bremer Financial Corp.) is sold,” the legal response states. “But putting words on a page does not make them true, and Plaintiffs know — or should know — that these assertions are false.”
Founded in 1943, Bremer Bank is the fourth-largest bank in Minnesota and the 11th-largest farm and agricultural lender in the country. The charitable trust is a 92 percent shareholder in the bank, which is otherwise employee-owned.