NORTH MANKATO — The transition of power from the first to the second generation at family-owned MICO Inc. was more like a corporate version of Mortal Kombat, pitting two brothers against a third.
The infighting included humiliation, recrimination and intimidation in an interfamilial battle that spanned nine years, spawned one lawsuit, a three-phase trial and a $21.8 million court award to the brother who was pushed out of the business by the other two.
The story involves Brent and Dan McGrath and half-brother Larry McGrath. They are the surviving sons of Gordon McGrath, an entrepreneur who bought North Mankato-based MICO in 1960, made it a global player in the hydraulic brake business, and left the company to Brent and Dan when he died in 2004.
The dispute, detailed in court documents, offers a textbook example of what can go wrong when a business patriarch transfers the company he grew and nurtured to his adult children.
“This is a tragedy that could have been avoided from a business perspective,” said family business consultant Tom Hubler, who was retained by MICO early on to try and smooth the brothers’ ruffled feathers. “It’s also a tragedy from the family’s point of view.”
Through their attorneys, the three brothers and Glenn Gabriel, a former company executive, declined to comment for this story. But a District Court judge’s opinion awarding damages to Dan McGrath — and a December decision by the Minnesota Court of Appeals — provide an inside account of how the family relationship deteriorated. The lower-court decisions, which included the $21.8 million, were upheld by the state Supreme Court on Feb. 19.
“In the last decade, there’s been a renewed call for honesty, civility and professionalism on Wall Street. The same rules apply to Main Street,” said Douglas Peterson, one of Dan McGrath’s attorneys. “The courts are saying no one’s above the law. They’re saying if you did what these defendants did, you need to be held accountable.”
Transition of power
Brent and Dan followed different career paths on their journey to ultimately owning the family company.
Brent, the older of the two, started working for MICO in 1976. Along the way he earned a bachelor’s degree in business administration and later a law degree.
Dan’s route to company executive was more circuitous. He earned a college degree in psychology and religion history and planned on going to graduate school. But at the urging of his dad, Dan decided to join the company full time and in 1982 began working in MICO’s marketing department.
In 2002, while Gordon McGrath and his wife, Phyllis, were still alive, Brent McGrath, now 60, was elected president by the company’s closely held board of directors. Dan, now 53, was elected executive vice president.
It was clear Gordon McGrath, also known as Mac, wanted Brent and Dan to run the company together, according to the findings of Nicollet County District Judge Todd Westphal, who presided over the 2010 MICO trial.
“Mac and Dan had a number of discussions which conveyed the understanding that if Dan remained at MICO and dedicated himself to the job that he would have a position with MICO with growing responsibilities and duties including being part of top management,” Westphal wrote.
North Mankato-based MICO is an industry leader in the design and manufacture of hydraulic components and brake systems for heavy-duty vehicles such as large farm tractors and construction equipment. MICO was once called Mankato Industrial Co. and made machine parts during World War II.
Its headquarters is a one-story stone building on the North Mankato hill above the Minnesota River valley. The building, on Lee Boulevard, is not far from the printing empire of Minnesota Timberwolves owner Glen Taylor and the home of Angie’s Kettle Corn. MICO employs about 280 people.
Although the privately held company doesn’t disclose sales or profits, evidence and testimony provided in the lawsuit and trial indicated that MICO is a healthy company that weathered the recession with sales of $44.4 million in 2010, compared to a record $53.3 million in 2007. Projected sales for 2011 were $52 million.
After their parents died, Brent and Dan each owned 50 percent of MICO’s voting shares. Brother Mark, who died in 2007, and Larry, Gordon’s son from an earlier relationship, composed the company board of directors along with Brent and Dan.
Larry, a California resident, was the oldest of the siblings. He ran his own business, a consulting firm called McGrath & Associates, which provided information service products to the medical diagnostic industry. Judge Westphal described Larry as “a sophisticated businessperson.”
Dan was almost immediately on the outs with Brent, Larry and Gabriel, the former director of public safety for the city of Mankato who was hired to be Brent’s right-hand man at MICO.
First, Brent and Gabriel fired one of Dan’s key lieutenants over Dan’s objections “to force Dan to leave MICO and/or to sell his shares cheaply,” the District Court found. But when Dan offered to sell his shares for $3.9 million in 2004 — they had a market value of nearly $8 million — his brothers did not respond.
But they were talking among themselves.
In August 2004, Brent sent an email to Larry saying, “The situation at MICO is untenable. It is inevitable that either Dan or I will have to leave.”
By November, Brent was more adamant, telling Larry he no longer wanted to see Dan in the office. “The primary condition is that Dan works from anywhere that is not 1911 Lee Blvd. (MICO’s address).”
Rivalry among siblings is not uncommon in family-owned businesses, said Ritch Sorenson, academic director of the Family Business Center at the University of St. Thomas.
“Two-thirds of family businesses don’t make it to the second generation,” Sorenson said. “The greatest amount of conflict occurs when the second generation of a family business is run by siblings. Men tend to be more competitive and less willing to cooperate.”
About a year after his father died, Dan was demoted in May 2005 and put on a performance-improvement plan. He was stripped of his direct reports and put under Gabriel’s supervision.
Dan wrote a September 2005 email saying “the demotion is the latest event in what I perceive to be an effort to drive me out of the company.”
But Dan’s circumstances would get worse.
He was placed on an involuntary leave of absence in December 2005. Later, in trial, Brent testified the board voted to place Dan on leave because of poor performance. But Westphal was not swayed. He called the testimony “evasive and deceptive.”
Dan returned to work in February 2006 with the assignment of setting up a European distribution network. But he was not allowed to work out of the MICO headquarters.
Westphal later determined that “Gabriel hindered Dan from communicating with other employees, removed him from email groups, kicked him out of meetings that he was invited to attend, prevented him from attending regular sales meetings, and reprimanded employees who did communicate with him, and publicly humiliated and insulted him,” the judge wrote.
Dan’s efforts to convene a board meeting to discuss his relationship with Gabriel and the sale of his stock were rebuffed. After one of those attempts, in August 2006, Dan received an email from Brent saying, “I have been trying to think of a good reason to attend. I couldn’t think of one. I won’t be attending.”
Dan finally sued on Oct. 2, 2006. Four days later, the board voted to put Dan on administrative leave and cut off his executive bonus and profit-sharing.
The case went to trial and in February 2011, Westphal ruled that the company was to purchase Dan’s shares for $11.5 million. With compensatory and punitive damages, including $2.8 million in attorneys fees, the total award was $21.8 million. Higher courts upheld the award.
Dan McGrath so far has collected about $17.3 million, said his attorneys, Peterson and Daniel Oberdorfer of the Minneapolis-based law firm Leonard Street and Deinard.