Owners row over control of top city pub group

Court documents reveal depth of shareholder discord as merger of Capital Bars and Mercantile falls apart within a year

 

A claim that the former chief executive of Anglo Irish Bank, David Drumm, was last year proposed for the job of finance director of one of Dublin’s largest pub and hospitality groups is part of a major shareholder row before the Commercial Court.

In a letter from his solicitors lodged with the courts this week, well-known Dublin publican Frank Gleeson said Drumm was suggested for the role with the Mercantile Entertainment Group by US-based shareholder Michael Breslin.

However, Breslin and the other shareholders, in a response from their solicitors, said the claim was “malicious, scurrilous and absolutely devoid of truth” and had “no basis in fact”.

The exchange over Drumm was just one of a number of controversies covered in the correspondence which paints a picture of a severe breakdown in relations between the two sides.

The Mercantile Entertainment Group owns such well-known establishments as the Mercantile Bar and Hotel, Whelan’s, Café en Seine, and The George.

It was formed just last year from the merger of Gleeson’s Mercantile chain with former Capital Bars outlets which had been bought from its receiver by Leonard Ryan and the co-founders of the Setanta Sports Group, Mark O’Meara and Michael O’Rourke, by way of the Danu Investment Partnership.

As well as the above-named outlets, Mercantile also includes Marcel’s Restaurant on Merrion Row, Opium on Wexford Street, The Green Hen on Exchequer Street, the East Side Tavern on Leeson Street, Soder + Ko on South Great George’s Street, and Pichet Restaurant on Trinity Street.

High-profile merger

When the high-profile merger was announced last year, the media coverage failed to pick up on the extent to which two Irish businessmen resident in the US were involved as investors.

The US-based investors own 55 per cent of the group while Gleeson has 30 per cent and Danu 15 per cent.

The investment of Breslin, who built a successful scaffolding business in the US, and Maurice Regan, a successful US-based builder originally from Co Kerry, is by way of New York-based JT Magen (Capital Bars) LLC.

Drumm is reported to have done consultancy work for Breslin in the US after he quit his job with Anglo. Russell Gioiella, a US attorney who serves on the board of Ardan Advisory Ltd, the holding company that owns the Mercantile Group, acted for Drumm in his US bankruptcy battle.

Breslin is currently the subject of a €9 million judgment application before the Dublin courts from the National Asset Management Agency, arising from his guaranteeing loans issued by Anglo in 2007 to Cavan-based Car Park Solutions Ltd.

In a letter written late last week by Eugene F Collins solicitors, for Mercantile, Ardan, JT Magen and Danu, Gleeson’s claim that Breslin had suggested Drumm for the finance director role was described as “completely fictitious” and was “absolutely refuted”.

Gleeson’s purpose in making the claim must be to “cause scandal and reputational damage to the shareholders and directors of [Mercantile], including Mr Breslin, by publicly associating him with Mr Drumm”.

It was “fanciful” to suggest that in March 2016 Drumm could have been considered for the position given his personal circumstances.

Gleeson, in his letter, said he successfully resisted the proposal, which he considered “bizarre and misconstrued in the extreme”.

Gleeson’s letter, from solicitors LK Shields, was mentioned on Monday in the Commercial Court before Mr Justice Brian McGovern in a case where another US company associated with the US investors, EMI-MR LLC, of New York, is seeking a judgment order for €4.6 million against Gleeson.

Rossa Fanning SC, for Gleeson, said his client would be alleging shareholder oppression against his fellow Mercantile shareholders and that the application for the judgment order had to be seen in that context.

Aidan Redmond SC, for EMI, said his client was not a shareholder in the Mercantile group and could not therefore be involved in shareholder oppression.

Mr Justice McGovern put the case back for three weeks and asked that Fanning’s client put any allegations he wanted to make in an affidavit. The oppression proceedings will have been initiated by then, the court was told.

While the LK Shields letter says that the Mercantile group has a net value of €25 million, and that Gleeson’s share is worth €8 million, the response from the other shareholders says it is worth “substantially less” and that Gleeson agreed under the shareholders’ agreement that any dividends he might receive would be used to repay outstanding debts.

Gleeson’s letter to the other shareholders on February 14th accused them of “a campaign of corporate thuggery” and outlined a long list of issues he said constituted “a classic example of concerted shareholder oppression”.

However, the shareholders, in a letter on February 17th, contested Gleeson’s version of events and said their actions had been designed to protect the Mercantile assets.

According to the Gleeson letter, the Danu investors approached him in 2015 about the idea of a merger in circumstances where they “had no prior experience of the hospitality industry” and were extremely anxious to acquire the benefits of Gleeson’s skill, experience and contacts. Gleeson had negotiated the recession whereas most comparable businesses had been unable to continue trading.

In their response, the shareholders said it was their understanding the main driver of the merger from Gleeson’s perspective was “to find a way to restructure his substantial debt burden which was threatening his personal and corporate solvency”.

Gleeson had total exposure of €24 million to Bank of Ireland and there was a significant shortfall in the value of the security attached to the loans “which eventually necessitated Bank of Ireland incurring a loss of in excess of circa €12 million”. Gleeson’s loans were held in the banks “challenged loans division” for a number of years, the letter said.

The bank sought that the loans be discharged by mid-2016. Contacts through Grant Thorton, which acted for Gleeson, the Breslin family, Ardan and Danu, led to the merger proposal.

While Gleeson said Danu had no prior experience of the industry, the Breslin family had and the combined Breslin and Danu interests are “significantly larger in scale” than those of Mercantile.

The merger allowed for the discharge of Gleeson’s Bank of Ireland liabilities, the Eugene F Collins letter said. This rescued Gleeson “from a very dangerous personal and corporate situation”.

After the merger, Gleeson was made the chief executive, and members of his management team remained with the group.

According to Gleeson, it quickly became apparent that the majority shareholders had “unrealistic expectations in respect of the business”. According to the shareholders, their expectations were largely based on projections provided by Gleeson “upon which his equity allocation in the enlarged group was based”.

Disputes broke out over the majority shareholders giving directions to the general managers in charge of the various bars and restaurants, prompting Gleeson, according to his solicitors, to express his concerns to Pat Burke, a former Grant Thornton accountant who subsequently took on a role with the US investors.

The row continued and, by late 2016, it became clear the majority shareholders were, according to Gleeson, “intent on undermining Gleeson’s position as managing director”.

“This resulted in an extraordinary development on the evening of November 4th, 2016, when [Gleeson] was advised by Pat Burke, in Marcel’s Restaurant, that his employment would be terminated.”

Demerger talks

Talks began about a demerger, with Burke acting for the majority shareholders, and Tony Carey of Cooney, Carey acting for Gleeson. The price offered to Gleeson was not acceptable to him, according to his solicitors. According to the shareholders, three options were put to Gleeson, called deals 1, 2 and 3, but none of them produced a way in which the partnership could be renegotiated.

Meanwhile, the Christmas trading period was approaching and, according to Gleeson, he was mindful of the need to make a success of it. But his ability to influence the group’s performance evaporated when, in the wake of the demerger offer being declined, the board of Mercantile “took the extraordinary step, on December 21st, of serving Gleeson with a document entitled Notice of Garden Leave.

Gleeson was told he was being removed from his duties until further notice, and should not enter any group premises. He was to continue to be paid.

The shareholders, in their letter, said Gleeson acted in defiance of what was a board decision and “attended at the premises of the group, gave directions to managers that they were to continue to report to him, and incurred a substantial bill for food and drink on December 30th for which he did not pay and which remains unpaid”.

Gleeson was suspended on full pay in early January and was asked to address certain concerns as to his conduct. He has yet to respond, the shareholders said. A third party has been appointed to conduct a fact-finding exercise.

There is no co-ordinated campaign against Gleeson, the shareholders have said. Their concerns about Gleeson’s conduct relate exclusively to his role as chief executive.

Gleeson alleges that the “campaign of corporate harassment” against him includes a €1.59 million payment demand from Ardan, a tax-related demand of €142,612, and demands on Leafwell Ltd, trading company of Le Petit Parisien, and Pap Fred Ltd, trading company of the South William Bar, under section 570 of the Companies Act (Gleeson has business connections with both).

Gleeson said it was “blindingly obvious” that part of the motive for a disciplinary process he is now facing is to deprive him of entitlement to salary payments of €720,000 and to reduce the size of his holding in the Mercantile group to 25 per cent.

The shareholders, in their letter, gave their justifications for all these events and said Gleeson freely entered into an agreement whereby, if he was dismissed, a certain number of his shares in Mercantile would go to the other shareholders.

The summary judgment proceedings initiated against Gleeson on January 19th are in relation to €4.68 million owed to EMI-MR Investments LLC, and it was when this application came before the Commercial Court on Monday that the LK Shields letter was mentioned.

In an affidavit to the court, Burke said two loans totalling €4.6 million and carrying interest rates of 10 per cent, were given to Gleeson in February 2016 with part of the reason being to help him fund the refinance/purchase of Gleeson’s pub, Mulhuddart, and the Bottom of the Hill, Finglas, and to assist repayments to the Bank of Ireland. The loans were now in default.

Gleeson, in his solicitor’s letter, said the loans were advanced to facilitate the Mercantile/Capital merger and were procured by the majority shareholders from a company which they control.

The judgment application “is plainly calculated to pressurise and undermine our client”, the LK Shields letter said. The overall situation constituted “shareholder oppression”, something prohibited under section 212 of the Companies Act.

The law prohibiting such behaviour allows for the courts to compel the majority shareholders to buy out the oppressed shareholder, at a price that would be set by the court, Gleeson’s letter noted.