Former CEO Federico Pignatelli, ousted earlier this month by a court order spurred by activist investor Oracle Partners, issued a statement today accusing members of Biolase’s board of "possible company mismanagement." He delivered a letter yesterday to the board, where he remains a director, demanding that the company turn over books and records.
Pignatelli accused several of Biolase’s board members of conspiring to eject him, naming in particular interim CEO and board member Jeffrey Nugent. Pignatelli maintained that Nugent and others were working with Oracle to the detriment of the company and its shareholders.
"Biolase’s directors have made decisions detrimental to the Company that raise serious questions regarding their independence," according to a Pignatelli’s statement (see full text below). "Mr. Pignatelli believes that Nugent and other directors are conspiring with Oracle to commit corporate waste and divest Biolase of its valuable long-standing assets in the dental field."
Pignatelli added that Oracle and its alleged co-conspirators may be after Biolase’s trade secrets, saying that the investor has no previous experience in the dental industry.
This maneuver is the latest in a Biolase civil war that’s been waged for months. Dismal 1st-quarter earnings revived a proxy war between Oracle and Biolase in May, after the investment firm accused Pignatelli of manipulating the board. Delaware’s Chancery Court later ruled that the Biolase board consisted of 4 uncontested members and Paul Clark, a Pignatelli nominee who then aligned himself with other directors seeking Pignatelli’s ouster. Biolase made Clark chairman of the board following Pignatelli’s ejection.
BIOL shares jumped 5% today, closing at $2.08. The stock has gained 7.2% over the last month, but is down 16% since the start of the year.
See the full text of Pignatelli’s statement below:
Federico Pignatelli, former CEO and current director and stockholder of Biolase, Inc. (Nasdaq:BIOL), has initiated a process pursuant to Section 220(b) and (d) of the Delaware General Corporation Law to obtain certain books and records from Biolase management relating to suspected wrongdoing, mismanagement and corporate governance failures by the company’s board of directors.
After initially raising concerns about possible company mismanagement with other members of the board, Mr. Pignatelli delivered a letter to the Biolase board of directors yesterday. He demanded inspection of the company’s books and records to investigate suspected wrongdoing by four members of the board whom Mr. Pignatelli contends are controlled by one investor, Oracle Partners, L.P., which through Oracle Investment Management, Inc. holds approximately 6.1 million shares, or 16.3%, of Biolase common stock and is the company’s largest stockholder:. Mr. Pignatelli’s letter asserts, in part:
Mr. Pignatelli is concerned that the Board is no longer pursuing the best interests of Biolase stockholders. Biolase’s directors have made decisions detrimental to the Company that raise serious questions regarding their independence. Acting in concert with Oracle’s wishes, they conspired to oust Mr. Pignatelli from his position as Biolase Chief Executive Officer and replace him with Jeffrey Nugent. They did so even though Biolase prospered during Mr. Pignatelli’s tenure as the Executive Chairman and CEO. Under his management, Biolase improved revenues from an annualized run rate of products and services revenue of approximately $20 million based on the nine months ended September 30, 2010, to approximately $56 million for the year ended December 31, 2013. During this period, Biolase expanded its product line from one well outdated WaterLase system to 3 advanced WaterLase systems and several cutting edge diode laser systems alongside a full complement of other truly innovative dental technologies such as ConeBeam digital Radiography and the top of the line 3Shape Trio CAD/CAM digital impressions. Under Mr. Pignatelli’s leadership, Biolase developed a proprietary GALAXY BioMill CAD/CAM System, and became the exclusive distributor in the U.S. and Canada of the Stratasys (SSYS) OrthoDesk 3D printers. As a result of his efforts, the market capitalization of Biolase was approximately $120 million when Oracle sued the Company.
Today, the market value of Biolase has dropped to under $73 million, and the current CEO, Jeff Nugent, has inadequate knowledge of the relevant industry to run the company. Mr. Pignatelli believes that Nugent and other directors are conspiring with Oracle to commit corporate waste and divest Biolase of its valuable long-standing assets in the dental field. Among other things, Oracle and/or its myriad healthcare holdings would benefit greatly by gaining control of undisclosed trade secret information belonging to Biolase that has wide application in the medical field beyond the dental field, including robotic and fractional based surgical applications. Oracle has no experience whatsoever with dental equipment companies. It also appears that Oracle has never previously invested in any dental equipment companies. Oracle’s representatives have stated that it has no interest in the dental business, which remains a fundamental revenue source for Biolase.
Mr. Pignatelli is also aware of facts suggesting that several Board members may have placed their own interests over the interests of Biolase shareholders. On February 28, 2014, immediately after Clark and Nugent attended their first Board meeting, they jointly requested certain inside company information, including the financial results for the fourth quarter and year-end of 2013. Biolase’s CFO circulated a draft of Biolase’s 2013 Form 10-K filing to the Board. As Clark and Nugent later admitted under oath, they then provided confidential information from this draft 10-K to Feinberg on or about March 1, 2014. In fact, Feinberg similarly admitted in his trial testimony that Clark or Nugent provided him with certain non-public, financial information about the company many days before the official 10-K was publicly disclosed and before other shareholders obtained this same information. Thus, Nugent and Clark already have provided Oracle with inside information in violation of securities regulations.
Additionally, current and former directors with loyalties to Oracle appear to have misappropriated corporate opportunities belonging to Biolase. In September 2013, Alexander Arrow, a former director and former President of the Company, and Dr. Frederic Moll held a secret meeting with Feinberg and Neocis, Inc. ("Neocis"), a start-up company developing robotic health care technologies. As a result of that meeting, rather than working out a potential deal for Biolase, Mr. Pignatelli believes that certain directors personally invested in Neocis. Further, Moll potentially misappropriated a Biolase corporate opportunity when he diverted potential investors in Biolase to Auris. Moll is Chairman and Chief Executive Officer of Auris.
The Board has not conducted appropriate due diligence into available financing opportunities for Biolase. During Mr. Pignatelli’s tenure as CEO, Piper Jaffray and Northland were both interested in providing financing to Biolase. The Board carelessly fired Mr. Pignatelli before any financing deals could be consummated at the very time when Mr. Pignatelli was needed most to raise capital. Instead, the Board’s Finance Committee, formed after Oracle seized control over the Board, appears to be re-examining a financing deal with Oracle. But such a deal is not in the best interests of the company, will dilute the equity of existing shareholders and likely will give Oracle a controlling equity interest in the company. Indeed, we understand that the repeal of a poison pill currently is being considered to benefit Oracle. Based upon the aforementioned potential misconduct, certain former and current Board directors appear to have contributed to significant damage and corporate waste to Biolase as described herein. In addition, the reputation of Biolase has been seriously damaged and its management has lost credibility with shareholders.
The letter also makes reference to investigating the purchase of Biolase common stock by director Paul Clark in the days immediately preceding the November 12, 2013 filing by Oracle of a Schedule 13D with the U.S. Securities and Exchange Commission reporting that Oracle beneficially owned 2.6 million shares, or 7.4%, of Biolase. Oracle has testified under oath that it informed Mr. Clark of its upcoming plans to file a Schedule 13D prior to reporting its position publicly, and Mr. Clark has testified under oath that he purchased 88,000 shares of Biolase common stock in open-market transactions while in possession of that information three and four days prior to the date of the public filing. Mr. Clark also sits on the board of directors of Agilent Technologies, Inc. (NYSE:A).
In addition, on June 26, 2014 Mr. Pignatelli participated in a meeting of the Biolase board of directors. Commenting on that meeting, he said, "Within a few hours of receipt of my letter the Biolase board of directors took actions that I believe were intended to shield themselves from liability for their wrongdoing. Knowing that I had raised serious concerns about their conduct, a majority of the board – comprised of all four of the current directors mentioned by name in my letter as being under the control of Oracle – voted to change Biolase’s Bylaws to make directors less accountable to their shareholders and make it harder for shareholders and directors to bring suits based upon the very types of misconduct of the type described in my letter. In particular, the four directors mentioned in my letter voted to change the Bylaws to stipulate that shareholders can only bring shareholder suits in Delaware, which is a jurisdiction known for being protective of director interests, requires the posting of a substantial bond and is geographically inconvenient to many Biolase shareholders.
"Additionally, the four directors mentioned in my letter voted to change the Bylaws to provide that a director, including me, who brings an action against the Board must reimburse them for their legal expenses if a Delaware court finds that the claiming director ‘does not obtain a judgment on the merits that substantially achieves . . . the full remedy sought,’ regardless of whether that director has prevailed on several other claims of misconduct of the type described in my letter. While I dispute the legality and enforceability of these amendments, they are clearly designed to chill actions taken to protect all shareholders and hold the board accountable for misconduct of the type described in my letter.
"Lastly, the four directors mentioned in my letter voted to reduce the size of the Board to no less than three and no more than five members, and then nominated themselves along with me for those seats, furthering insulating themselves from outside influence. These actions are not just directed at me, they are designed to curtail the rights of any shareholder or director who dares to hold management accountable for the type of misconduct described in my letter."
Mr. Pignatelli added, "I believe the reputation of Biolase has been seriously damaged and its current management has lost credibility with shareholders and employees. I am fully committed to working on behalf of the best interest of all Biolase stockholders, and not merely a select few, and to realizing the value inherent in our company and its technologies. Biolase is fortunate to be built upon a foundation of talented and loyal employees, and I owe it to them as well as to my fellow stockholders to identify wrongdoing, mismanagement and corporate governance failures when I see them, and to pursue appropriate actions."
Federico Pignatelli has served on the Biolase board of directors continuously since 1991 and currently is the beneficial owner of approximately 1.8 million shares, or 4.8%, of Biolase common stock. He served as executive vice chairman from 1994 through 2006, and as interim chief executive officer from September 2006 to January 2007. He served as chairman of the board of directors and as chief executive officer from September 2010 through June 2014, during which time and at his request he was paid an annual salary of $1.
Baker Marquart LLP
Ryan Baker or Jamie Marquart