In August 2019, New York private equity firm Goode Partners hitched a ride with Strong Roots, the plant-based frozen food manufacturer founded by Dublin businessman Sam Dennigan just four years earlier.

What had started off as a domestic business had quickly mushroomed into a multi-million euro success story distributing healthy, sustainable non-meat products into major UK and Irish supermarket chains.

Kale and Quinoa burgers, Spinach Bites, and Cauliflower Hash Browns lined the freezers of Dunnes Stores, Asda, Sainsbury’s, Marks & Spencers, Tesco and Super Valu.

There was no underestimating Dennigan’s ambition. His next goal was to tap into the US market. Just before the pandemic struck, the 35-year-old told Forbes that he was expecting to do worldwide sales of €60 to €70 million last year. A deal with US hypermarket chain Walmart across 2,000 stores was in the offing.

That kind of expansion required serious investment which is where Goode Partners, who led a 2019 funding round, came in. They were experienced hands having previously backed well-known brands like fashion retailer AllSaints and headphone makers Skullcandy.

At the time, Goode wrote to potential investors in the company that they were “extremely excited” about participating in Strong Roots next phase of growth. They had spent three months watching Dennigan operate and were impressed. What they were offering was a “true partnership between Sam and Goode”, they said.

The funding round raised €15.5 million, enough to help CEO Dennigan start his American expansion. He even relocated to New Jersey.

In exchange, the US investors took a minority 38 per cent stake in Strong Roots, held in B shares. An exit plan for Goode, whether through a sale or IPO, was roughly pencilled in for 2023..

The investment valued The Root System Holding Company Ltd, the company behind Strong Roots, at nearly €40 million – a huge achievement for Dennigan, who remains the majority stakeholder in the business along with his company Mindville Ltd.

But in recent months, the “true partnership” with Goode has turned sour with the shareholders embroiled in a bitter and potentially damaging legal battle over profits and corporate governance. The US backers have sued claiming their shareholder rights are being infringed but Dennigan claims their real motivation is to seize control of the business and engineer a sale.

The dispute was entered into the commercial division of the High Court by Mr Justice David Barniville on Monday having been told that the case was of “significant and pressing commercial urgency”.

While last year’s sales figures may not have matched Dennigan’s ambitions, the company is in the black. So where did it all go wrong?

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Last December, Strong Roots brand ambassador Roz Purcell, the Irish model, prepared a “delicious vegan platter” showing off the frozen food company’s Spinach Bites, and Broccoli & Purple Carrot Bites, along with crispy vegetables and dips to enjoy during the Christmas season. The video reached 176,000 people, 5,000 views and 357 saves.

This is just one of the nuggets of information packed into the food manufacturer’s business review of December 2020, distributed in a board room pack to directors ahead of a meeting in January. It is a detailed document, charting everything from why some shoppers are switching to Linda McCartney frozen foods (an aggressive discount strategy) to value share, household penetration, costs savings, sales forecasts, and the impact of Covid-19 on in-store promotions. The breakdowns look at the company’s different markets – mainly Ireland, the UK, and the US, delving into the company’s impact by product category and by supermarket from Dunnes Stores to Tesco to Asda.

The 2020 review shows it was a fairly good year in Ireland for the Dublin-based firm with a 9.8 per cent growth in net sales (gross sales of €5.68 million in the Irish market) and increased margins due to scaled-back marketing costs.

But a deal with US chain Walmart was delayed by a month, and overall, global sales fell below the group’s targets.

The executive summary described the very challenging and uncertain retail environment that prevailed in 2020 as a result of the Covid pandemic. Sales in the UK and the US fell short of revised forecasts, in the former because of the company’s inability to maximise on the launch of its Little Roots vegetable range, in the latter because the pandemic hampered its opportunities to grow distribution. According to the review, a big challenge in the US was the necessity to deal with excess stock that was brought into the business in late 2019 in anticipation of a faster ramp of sales than actually occurred.

The accounts show the company pulled in gross sales over €21.7 million, around €4.5 million below what it had predicted.

On a positive note, the review says the business still experienced substantial growth in the UK despite the impact of covid and Brexit. While the ability to explore new markets was limited, new distribution deals were secured in countries like Australia setting it up for 2021. EBITDA for the year to date was just under €3.87 million.

The December management accounts showed the gross profit of the company for the 2020 year to date was over €4.6 million.

And there lies the rub.

“Flawed, void and of no effect”

On the foot of the December accounts, the US private equity stakeholders, Goode Strong Roots Holdings and Goode Strong Roots Co-Invest, claim the 2020 profit target has not been met. They say it was agreed by the shareholders that if annual profits for the year fell below the threshold of €7.3 million, that would count as a default, or an “equity covenant breach”. They say there is a significant shortfall in gross profits of some €2.6 million.

The Goode shareholders claim such a breach allows them to serve a notice for enhanced voting rights and to appoint further directors to the board of the company in order to protect their investment. Acting on the claim, they nominated three additional company directors – Walt Freese, Ryan Pitt and John Struckell. However when the board met on March 2, the majority of Strong Roots’ directors refused to recognise the new appointees.

Further steps by Goode to appoint new directors and convene board meetings were deemed not to be in order by the frozen food business and its chair Geoff Read. Read is a former CEO and chairperson of Ballygowan Spring Water.

Then, last month, the minority US stakeholders passed an “unanimous shareholder resolution” to appoint the new directors. This was purportedly executed on Dennigan’s behalf by Goode director Daniel Bonoff acting under power of attorney. But in legal correspondence to the board, the CEO’s lawyers LK Shields described the move as “flawed”, “void and of no effect”.

The claims made by the US investors have been rejected by Dennigan who is being sued as a shareholder along with his company Mindville. The food company is, so far, not a party to the legal proceedings although it may apply to be joined when the matter returns to court in a fortnight.

On behalf of Dennigan, LK Shields set out in correspondence why the CEO rejects the Goode shareholders’ claims that an equity covenant breach has occurred. “We are instructed that gross profits exceeded the sum of €7,373,000…the Group is not in a default period”. It continues that the rights asserted by the investors under the Shareholders’ Agreement “(and which underpin this latest aggressive action on their part) simply do not arise”.

It is Dennigan’s case, seemingly backed by the company, that Strong Roots met its 2020 gross profit target, under the agreed accounting strategy which, he says, differs to the one used in the management accounts.

It is claimed that in late 2019 it was agreed to change the format of the management accounts to provide for more clarity on the day-to-day running of the company. This meant the gross profit was calculated on a different basis than it would be under the shareholders’ covenant, which is gross sales minus the cost of goods sold. This new approach to the accounts was recently reversed but it is said to explain why the December figures don’t appear to stack up.

In an email to the chair of the board last March, Dennigan said if the December 2020 management figures were calculated the old way, gross profit for the year would be €7.8 million, some €300,000-plus more than the breach level. This was calculated on the basis of a sales figure of €21,713,616 and a cost of goods figure €13,934,506.

According to Dennigan’s email, the revised approach used in the December accounts stated gross profit “after some costs of sales, which have often altered and changed over time as requests have been made, as well as other items which can be deemed either above or below the line legally, especially when there is a varied view on their application as sales or marketing costs”.

The CEO states: “I have been attempting to have pre-emptive discussions on a potential equity covenant breach with Goode for nearly a year, as we knew it would be close and we wanted to understand their position, they would not engage, but after crossing the new year above the threshold, then not hearing from them until recently, we were surprised at their miscalculation and actions.”

However, the investors claim Dennigan’s accounting method leaves out two cost items – storage and distribution, and discounts – which they allege are meant to be calculated into the company’s gross profits.

Further financial information provided by Dennigan at a follow up board meeting on March 12 was deemed inconsistent with company accounting procedures by the US stakeholders, filings show.

Goode’s lawyers at the time Matheson wrote that: “Mr Dennigan’s actions as a director and employee in purporting to restate or revise the financial information presented in the 2020 Accounts in a manner which is wholly inconsistent with the established and customary accounting practices of the Company are clearly self-serving.”

The legal letter also states that the US private equity investors intend to appoint an independent accountant to analyse the methodology used to arrive at the financial information provided to the board in March, and more generally to assess the group’s balance sheets.

Other issues raised by Goode in the court case include the claim that the investors were not kept informed of material events in the business like talks running up to the resignation of the former chief financial officer and the actual and threatened delisting of product lines. They also allege the CEO refused to attend pre-agreed, bi-weekly investor update meetings and that they were refused specially requested company information. These claims are rejected.

Justice Barniville was told by barrister Neil Steen, for Dennigan, that the company is solvent and has no problem at all paying debts as they fall due. He said since December 2019 gross profit targets have been twice revised downwards to €5.38 million and then to €4.617 million by unanimous board agreement. The company, Steen said, had exceeded those revised targets. He indicated that Strong Roots is trading to the plan unanimously agreed by the board on January 2.

An act of alleged aggression

Dennigan’s side claims the private equity investors are making false and baseless allegations that are damaging to the company in order to advance their agenda of selfishly engineering a forced sale of the company. His lawyers say they are concerned there may be a calculated smear campaign against him. Such claims are denied.

In a letter to the board, Dennigan’s lawyers LK Shields state that the shareholders’ agreement and the constitution of the company set out that the board composition is to be maintained at a 2:1 ratio in favour of the majority stakeholders. In the case of a default, the CEO’s lawyers maintain that the only extra right afforded to Goode is to nominate additional directors – as opposed to any automatic right to appoint them. It says: “Furthermore, in their letter the Investors are very critical of the Board for not simply capitulating in the face of their aggressive and unlawful actions. Their criticisms in this regard are simply without merit.”

The investors deny they are motivated by bad faith or that their actions may damage the company. They say they have sought to protect the value of their investment in the food company and prevent any further erosion of value for all stakeholders. Their then lawyers Matheson (they are currently represented by Arthur Cox) wrote to board members on St Patrick’s Day outlinging “very serious concerns” about the management of the company and claiming a loss of confidence in Dennigan and the board.

In correspondence, Mason Hayes & Curran, the law firm acting for the company, suggested that the shareholders engage in mediation rather than going down the litigation route. But mediated talks did not happen. The firm also said it was difficult to understand why the investors were not prepared to wait and discuss matters as planned at a scheduled board meeting on April 28 (today), as had been agreed by its members.

In respect of the attempt by Goode to appoint additional directors last month, the company expressed concern that there may be “profound” tax implications of changing the composition to comprise a majority of directors who are resident in the US. Citing a report by accountancy firm Grant Thornton, they said this could create “a taxable presence in the US potentially resulting in complex tax issues and significant additional costs for the company”.

Rejecting this contention, Goode’s lawyers note “that the potential tax implications of our clients’ enhanced rights have no bearing on the legal question of whether an equity covenant breach has taken place”. They add that Grant Thornton “has not obtained or provided US tax advice, in particular the precise US tax law on corporate tax residence”.