Ousted Ecofibre US exec to sue company alleging "conflicted" board

An executive who headed up an Ecofibre (ASX: EOF) subsidiary in the US aimed at commercialising patents for treating endometriosis and ovarian cancer has issued a verified complaint against the Australian medicinal cannabis company in the Court of Chancery for the State of Delaware, alleging directors were "conflicted" in their dealings with the company.

Dr Alex Capano was Ecofibre's chief science officer for more than five years before she was chosen to lead EOF Bio LLC in mid-2023, focused on commercialising intellectual property developed by Ecofibre and the University of Newcastle in Australia.

In July 2023, Ecofibre announced that EOF Bio had a pre-money valuation of $30 million - a figure the court documents from Capano claim she was not consulted over, and which was allegedly "baseless" in "an effort to drive
Ecofibre stock’s value".

As recently as 31 January, Ecofibre’s chair of the health and government relations committee, Professor Bruce Robinson, commended Capano and the group's expert business and research partners for working hard to make progress on the commercialisation plan.

But according to documents filed by Capano derivatively on behalf of EOF Bio LLC in the Delaware court, after receiving "millions of dollars in minority investor capital in December 2023 and January 2024", within 10 days all of EOF Bio's employees except Capano were fired.

"Then, within the next month, Ecofibre placed Capano on 'administrative leave'," states the heavily redacted public version of the complaint. At the time of publication, Ecofibre has not made a public announcement of this decision but did report on a new CEO for the division.

Ecofibre is also yet to make an announcement to the ASX on the complaint itself. 

The plaintiff has filed the case not only against Ecofibre, but also its board members Michele Anderson, Mark Bayliss, Bruce Robinson and Vanessa Wallace, in addition to executives Jonathan Brown and Robin Sheldon.

"This action arises from wrongful conduct by conflicted, dual- and multiple-capacity directors and officers who did what was best for the parent corporations and themselves and not the subsidiary (EOF) on whose board they also served," the plaintiff alleges.

"Through their domination of EOF, the parents and the conflicted directors – who comprised the entire board of managers of EOF – were unjustly enriched at the expense of EOF [Bio] and its minority members.

"Examples of defendants’ self-dealing include negotiating agreements with the subsidiary through conflicted directors standing on both sides of the deal, and with terms that unfairly benefitted the parents at the expense of EOF [Bio]."

In January 2024, Ecofibre raised $5 million through the sale of 15 per cent of its holding in EOF Bio LLC, with expectations to move to a minority position over time.

In its half-yearly results published on 23 February, after an announced $3 million sale of its hemp food and seed business to Elixinol Wellness (ASX: EXL) and before a failed board appointment spearheaded by founder Phil Warner, the company reported that key to EOF Bio's success would be ensuring self-funding and augmenting its life-sciences commercialisation capabilities.

"In January, the business closed a US$3 million capital raise to fund the business through April," the company stated.

"In February, Simon Allen will commence as CEO, initially for four months to extend by mutual agreement should the business continue to pass through key milestones.

"Simon has a stellar track record and reputation as a biotech executive and CEO over the last 30 years. He brings extensive life sciences, partnering and capital markets experience and we look forward to him adding similar value and leadership to EOF-Bio."

Capano has sought several orders against Ecofibre and its board and executive defendants, including the appointment of a receiver pendent lite (pending the suit), a removal of the individual defendants from the EOF Bio board, and imposing a constructive trust involving the "disgorgement of all profits and other benefits obtained by defendants as a result of their conduct and the claims alleged herein".

Update (5 March): At the time of publication Ecofibre was yet to respond to request for comment on the matter, but during the afternoon of 5 March it released a statement to the ASX - one week after the court complaint was made - confirming that an employee had commenced legal proceedings against the company, its US subsidiary, and directors and officers of Ecofibre.

"The proceedings make claims in relation to the management of EOF Bio LLC, and seeks orders including unspecified damages," Ecofibre stated.

"The board considers that the legal proceedings rely on assertions that are factually incorrect and without foundation, has appointed legal advisers to vigorously defend the proceedings and is confident that it will have no bearing on the daily operations of EOF Bio LLC or Ecofibre, other than the legal expense the company may incur if these proceedings become unduly protracted.

"As previously announced, EOF Bio LLC’s new CEO, Simon Allen, has commenced and is actively executing the capital, research and commercialisation strategy of the business."