The second largest stakeholder in Primo Water Corp. is calling for ending the executive chairman role held by Billy Prim and a major shakeup of its nine-member board of directors.

An activist hedge-fund group, Legion Partners LP of Beverly Hills, Calif., released its letter to Primo’s shareholders on Monday. The Winston-Salem bottled-water company also submitted the letter as a regulatory filing.

Chris Kiper and Ted White, Legion’s managing directors, pulled no punches in their 11-page letter, which expressed a lack of confidence in Prim, chief executive Matthew Sheehan and the board.

The Legion officials want an independent chairman and approval of several new independent board members.

The Legion officials said “we contend Primo is an incredible business with significant scale, but is being held back by a lack of critical expertise on the board and an inability or unwillingness to objectively evaluate the performance of management and directors.”

Susan Cates, Primo’s lead independent director, said in a statement in response to the Legion letter, that “Primo Water is an innovative business that is providing clean drinking water in an environmentally responsible manner to millions of consumers across the country.

“I believe the company is positioned well to create long-term shareholder value.”

Over the past 18 months, Legion has raised its holdings to 3.57 million shares and 9.1% of Primo’s outstanding shares. Capital Research Global Investors of Los Angeles, owned a 10.6% stake, or 4.16 million shares, as of July 31.

Prim held just under 1.9 million shares, which represented a 4.7% stake as of March 28. Prim also has 762,236 deferred stock units that he could acquire over the next three years.

Legion bills itself as “deep value, long-term-oriented active investors.” Its strategies include gaining representation on corporations’ boards of directors to “impact policies or strategic direction or, in some cases, simply advocating specific business activities for the fundamental benefit of a portfolio company.”

Kiper and White said they have tried to discuss their concerns with management and the board. In January, Legion submitted candidates for Primo’s board who were rejected.

Cates said Primo’s board “has engaged regularly in dialogue with our shareholders, including Legion Partners, about further refinements to our strategy, board composition and operations.

“Our discussions with many of our top shareholders have been thorough and valuable.”

Among Legion’s claims:

  • Primo has had “significant operational and financial under-performance” under Prim.

Primo’s share price closed at $13 Tuesday, up 18 cents. Its 52-week price range is $10.70 to $19.58.

  • “Alarming conflicts of interest” with board members Richard Brenner, Malcolm McQuilkin and David Warnock because of their ties to Blue Rhino Corp., which Prim founded. Blue Rhino was sold to Ferrellgas Partners LP for $343 million in April 2004.
  • Paying $35.6 million in what Legion termed “excessive pay packages” in 2015-16 to Prim, Sheehan and former chief financial officer Mark Castaneda.

Legion cited the decision by the Primo board to establish a “value creation plan” for Prim, Sheehan and Castaneda in 2015 after the share price fell from $12 to $1.39.

Primo created an “award pool” of $28.5 million for fiscal 2015 in which Prim received 872,642 deferred stock units, Sheehan 725,740 and Castaneda 580,699.

For fiscal 2016, Primo created an award pool worth $19.3 million with Prim getting at least 30% of the amount, along with Sheehan 25% and Castaneda 20%.

Altogether, the value of the deferred stock units for the two years was $14.38 million for Prim, $11.68 million for Sheehan and $9.59 million for Castaneda. Legion said those deferred stock units “have not been adequately disclosed in the company’s prior proxy filings.”

The Primo board’s compensation committee terminated the value creation plan on Dec. 22, 2016.

The board determined the value creation plan “had met its intended purpose of incentivizing the company’s executive officers and officers to improve the company’s adjusted EBITDA.” EBITDA stands for earnings before interest, taxes, depreciation and amortization.

Primo declined to comment about the executive compensation claims by Legion.

“We do not believe Mr. Sheehan is capable of crafting the investor relations story or communicating the details in order to improve the company’s valuation,” Legion said it has recommended a chief executive to the board.

“We suspect that the board will undertake half-measures, including adding one or more new directors handpicked by a board controlled by Billy Prim,” Legion said.

“In our view, Prim, McQuilkin, Brenner, and Warnock have served too long (on the board) and need to be replaced with new, truly independent directors who offer fresh perspectives and experience that better fits the company’s opportunities and needs.”

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