Dish Network’s corporate governance problem

September 26, 2013

In a board meeting on July 21, the satellite television company Dish Network disbanded a two-member independent committee that had been established in May to vet Dish’s $2.2 billion bid for the spectrum licenses of the bankrupt company LightSquared. A few days later, one of the directors on the committee, Gary Howard, resigned from the board in what The Wall Street Journal has reported to be a protest over the abrupt end of the special committee, whose members expected to have an ongoing role in the bidding process for LightSquared’s licenses. Dish’s directors – including majority shareholder Charles Ergen – have said that the independent committee’s work ended when the company finalized its stalking-horse offer in LightSquared’s Chapter 11. But shareholders in a derivative suit in state court in Las Vegas say that’s not why Ergen and his allies on Dish’s board ditched the independent committee. They claim that Ergen was looking out for his own conflicting interest as the holder of $1 billion in LightSquared debt. According to the shareholders, Dish’s “fundamental corporate governance breakdown” has endangered the company’s bid for LightSquared’s licenses and exposed Dish to liability for interfering with LightSquared bankruptcy.

At a hearing last Thursday on shareholders’ motion for a preliminary injunction barring Ergen from participating in the LightSquared bidding process, lawyers for the company told Clark County District Court Judge Elizabeth Gonzalez that Ergen and the board have the exact same interests as outside shareholders. They also said, however, that Dish has formed another independent committee, this one to weigh the outside shareholders’ allegations. Meanwhile, at least three other shareholders filed their own derivative suits last week, one also in state court in Nevada, where Dish is incorporated, and two in federal district court in Colorado, where the company is headquartered. At the very least, Dish’s impetuous disbanding of the original independent committee is going to cost the company a fortune in director time and legal fees (in addition to Las Vegas firms, the company and board are represented by Sullivan & Cromwell and Ergen by Willkie Farr & Gallagher). And if shareholders’ direst predictions come true, Ergen’s supposedly untoward influence on the company could cost Dish the LightSquared spectrum licenses it so badly wants.

Ergen began acquiring LightSquared debt after the wireless networking company, which is backed by Philip Falcone and his Harbinger Capital hedge fund, entered Chapter 11 in May 2012. The Dish chairman is now LightSquared’s biggest creditor, holding more than $1 billion in secured debt. He’s also involved in bitter litigation with Harbinger, which sued Dish and Ergen in August, claiming manipulation of the bankruptcy process. Harbinger wants to hold onto LightSquared’s valuable licenses in the company’s reorganization, so it is trying to block Ergen and Dish from acquiring them. LightSquared, moreover, wants to disallow Ergen’s debt, claiming he acquired it improperly.

For shareholders in the derivative litigation, the first big question is whether Ergen’s LightSquared debt spree was for his own benefit or Dish’s. Shareholders represented by Bernstein Litowitz Berger & Grossmann and MPRI argued earlier this month in an amended complaint and motion for a preliminary injunction that Ergen improperly inserted himself into the LightSquared Chapter 11 because he knew, as Dish’s chairman, that Dish placed a high value on LightSquared’s spectrum licenses. Effectively, they accuse Ergen of driving up the cost of the licenses for his own profits on LightSquared debt. Ergen, however, has said in response to shareholder assertions that LightSquared would not permit Dish to buy its debt, so he bought it instead. In fact, he has argued, it would make no sense for him to do anything that would cost Dish shareholders money, since he owns 52 percent of Dish’s equity. “No rational person would risk losing billions in Dish for the sake of making millions in LightSquared debt,” Ergen’s brief said.

Ergen placed his own $2 billion bid for LightSquared in May 2013, whereupon Dish set up a two-member independent committee to evaluate its options. (Shareholders say it’s a mark of Ergen’s iron-fisted control of the company that only two of Dish’s eight directors could be appointed to the independent committee.) According to the shareholder suit and The Wall Street Journal, the directors on the independent committee – Gary Howard and Stephen Goodbarn – expected the committee to continue to represent Dish as the LightSquared spectrum license auction continued. (It’s scheduled to conclude in December.) Shareholder counsel Mark Lebovitch of Bernstein Litowitz told Judge Gonzalez last week that Howard and Goodbarn toyed with the idea of requiring Ergen to turn over some of his profits on LightSquared debt to Dish public shareholders. Shareholders have also suggested that the special committee directors may have contemplated a deal with LightSquared that would have included a haircut on Ergen’s secured debt. (Ergen’s lawyers have called that argument a red herring, asserting that Ergen will be paid in full under any contemplated LightSquared reorganization plan.)

The special committee apparently signaled its expectation of a continued role in the deal as Dish finalized its offer to LightSquared in July. The shareholders’ preliminary injunction motion offered an adjective-laden description of what happened next: “Ergen’s reaction to this modest assertion of authority by the special committee paints a stark picture of a heavy-handed and disloyal controlling shareholder,” the brief said. “On July 21, 2013 (a Sunday), the committee was suddenly, and to the surprise of Howard and Goodbarn, disbanded.” Two days later, Dish offered $2.22 billion for LightSquared’s licenses, even though no other prospective buyers had emerged to top Ergen’s $2 billion bid. And two days after the offer, according to shareholders, “Howard resigned in protest to the committee being prevented from protecting Dish’s interests.” (Gregory Markel of Cadwalader, Wickersham & Taft, who represents both Howard and Goodbarn, declined to comment.)

Whatever the intentions of Ergen and the other Dish directors (including Ergen’s wife and longtime business partner), disbanding the special committee was not a good idea. Even if, as Ergen and his lawyers argue, his ownership of LightSquared debt does not create a conflict between him and other Dish shareholders, corporate governance principles favor independent committees. Ergen is certainly correct that no rational stakeholder would sacrifice billions for the sake of millions, but when he and the rest of the Dish board did away with the special committee before Dish even placed its bid for LightSquared’s licenses, they provided ammunition to LightSquared, Harbinger and Falcone in their efforts to block Dish and Ergen from acquiring the assets. By disregarding appearances, Dish bolstered its opponents’ arguments that it is misbehaving.

“Any independent board here would say…because of the ongoing (Harbinger) lawsuits we need independent process,” Lebovitch said at last week’s hearing. “That’s Corporate Governance 101.”

Dish nevertheless claims that it is the derivative litigation – and not Dish’s board – that is boosting the company’s foes. Dish’s response to the motion for expedited discovery said that the shareholders suing the board appear to be acting “in concert with Harbinger” to endanger Dish’s bid for LightSquared licenses. “Thus, rather than helping Dish to win the LightSquared assets, plaintiffs’ (injunction) motion, if successful, could harm Dish,” the brief said. Dish and Ergen also say that granting the shareholders discovery would interfere with the board’s business judgment – an unheard-of intrusion in the midst of a crucial bidding process.

Despite its protestations about the propriety of its disintegration of the old special committee, Dish surprised shareholders last week by establishing a new independent committee, on the eve of the preliminary injunction hearing before Judge Gonzalez. The company told the judge that the new litigation committee will be tasked with reviewing the shareholder allegations to decide whether they have merit. As of last week, the two-member committee hadn’t yet hired counsel, but Judge Gonzalez said she considers the formation of the litigation committee to be “a very important step.” She instructed shareholders to serve a demand on the committee this Monday and ordered Dish to respond by Oct. 3.

The committee’s workload will probably increase thanks to the additional shareholder derivative suits filed last week by Robbins Arroyo, Motley Rice and other firms. And, of course, Dish is still deep in litigation with Harbinger in the LightSquared Chapter 11, where Harbinger is due to reply on October 9 to Dish’s motion to dismiss. I’m sure Harbinger’s lawyers are also paying close attention to the derivative case.

Robert Giuffra of S&C, who represents Dish in the Harbinger and derivative litigation, declined to comment. Ergen counsel Tariq Mundiya of Willkie did not return a call.

(Reporting by Alison Frankel)

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That may be helpful as corporate governance in any field helps in maintenance of systems, principles and processes through which a company drives

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