A disagreeable whiff of infighting is in the air at the normally fragrant Lush Fresh Handmade Cosmetics.
U.K.-based Lush Ltd. is suing Vancouver’s Mark Wolverton, who brought the brand to North America and built it into a regional juggernaut with 269 stores across the continent – all stemming from a single location that he and wife Karen Delaney-Wolverton opened on Denman Street with two other partners in 1996.
Lush, which operates in several dozen countries, however, claimed in a lawsuit filed July 7 in Las Vegas that Wolverton and his companies are breaching terms in a 2003 joint-venture agreement, which brought Lush to the U.S.
Foremost among Lush’s accusations is financial mismanagement – that Wolverton and his companies are funnelling money from Lush’s U.S. operations into Canadian operations, which are controlled by Wolverton.
“Wolverton has outright refused to issue shareholder dividends despite that Lush would have been otherwise entitled to at least US$18 million,” Lush alleged in its lawsuit.
“He has reduced excess cash by creating an unnecessary and bloated budget for capital expenditures; redefining payment terms to require the Lush U.S. corporations to make payments to other entities upfront; and funnelling funds to his own pockets, and to those of his personal company, under the guise of management fees.”
Lush alleged that Wolverton is flouting terms in the U.S. joint-venture agreement, such as one that gives Lush the right to appoint a corporate director who is entitled to see all financial documents.
That director is supposed to have input into corporate decisions, such as pricing and other business fundamentals at Lush’s U.S. operations, because Lush owns 53.21% of the shares in the U.S. Lush business, Lush claimed.
“Wolverton has been so adamant against allowing any corporate input from Lush that he has even denied the majority shareholder’s request to access and audit the corporate book.”
In its claim, the company said Wolverton has blocked a sequence of Lush directors from viewing the U.S. Lush’s corporate information because its finances are intertwined with Lush’s Canadian operations, which operate under a separate company and agreement that does not entitle Lush to a directorship.
“Because Lush’s director is not on the Canadian board, [Wolverton’s] rationale goes [that] she is not privy to any of the corporate information,” Lush said. “He uses one accounting team to perform audits and taxes for both the Lush U.S. corporations and Lush Canada.
“There is no wall between team members to separate their work for the U.S. entities from that for the Canadian entity. And because the financial information and funds for the U.S. and Canadian entities are wholly enmeshed, it is unclear which corporation is paying for which expenses.”
Wolverton and representatives of Lush’s U.S. and Canadian operations declined to speak to BIV but said they would file a statement of defence later this summer.
Lush’s lawsuit includes a list of additional complaints against Wolverton.
For example, Wolverton allegedly appointed Peter Higgins as “a senior officer of the Lush U.S. corporations – despite that, on information and belief, Mr. Higgins has no U.S.-based experience and continues to work, live and receive his substantial salary in Vancouver.”
Despite the allegations, Lush’s North American business has been successful.
Sales were so robust that the company doubled the size of its store at 1020 Robson Street to 2,800 square feet in 2017 and embarked on similar expansions in stores across the continent.
Mobile point-of-sale pods were brought in to speed customer service and reduce lineups.
The company has opened 20 North American stores since July 2019, and it plans to open seven more, according to Lush Canada.
Lush is requesting a range of remedies from the court, including an injunction compelling Wolverton to allow Lush access to, and an audit of Lush USA corporate books. It also wants an order that it has a right to designate a director onto the board of Lush USA and related entities. It also wants an injunction compelling an annual shareholders' meeting for each of the Lush USA corporations among other requests.
Regardless, this is not the only lawsuit that alleges Wolverton and his related companies have acted in ways detrimental to other shareholders.
Casa Margarita Enterprises Ltd. filed a lawsuit last year that BC Supreme Court Justice Anthony Saunders on July 13 ruled can proceed to a trial.
Casa Margarita alleged wrongdoing by Huntly Investments Ltd. – a company of which Wolverton is president.
Huntly owns Vancouver apartments on Bute Street and other land stretching north from Bute on Melville Street that it is in the nascent stages of redeveloping.
Casa Margarita’s lawsuit alleged that regular audits were not performed and increasing management fees were paid to other companies controlled by Wolverton and family members.
Huntly filed a response to explain the management-fee hikes.
It said that Wolverton Securities, founded by Wolverton’s late father Newton Wolverton, had been providing free operational support and office space to Huntly because of the connection to the Wolvertons.
Wolverton Securities, however, struggled after the global financial crisis, was sold in 2016 and was no longer able to provide that support. •