Icahn-controlled CVR Energy sues Wachtell, claims board minutes faked

By Alison Frankel
October 29, 2013

There’s an air of devilish glee in a new malpractice complaint against Wachtell, Lipton, Rosen & Katz, filed on Oct. 24 by CVR Energy in federal court in Kansas. Wachtell, as the suit explains, counseled CVR in its 2012 defense of a hostile tender offer by Carl Icahn. Icahn won the takeover fight, despite the involvement of the outspoken anti-takeover law firm and its investment-bank allies from Goldman Sachs and Deutsche Bank. So CVR is now an alter ego of Carl Icahn, who is using this suit to thumb his nose at Wachtell, his frequent opponent in takeover battles and the issuer of countless pronouncements about the scourge of activist investors like him.

Icahn’s complaint, filed by his longtime outside lawyer Herbert Beigel as well as the Kansas firm Smithyman & Zakoura, is also a bit of litigation gamesmanship. Its claims are not based on Wachtell’s anti-takeover advice – Icahn’s already won that game – but on the firm’s supposed failure to disclose to the CVR board the terms of the company’s revised fee agreement with Goldman and Deutsche Bank. According to Icahn, Wachtell should have informed CVR’s board that under the company’s second engagement letter with the banks, Goldman and Deutsche actually stood to reap millions of dollars more in fees if CVR’s takeover defense failed than the flat $9 million they’d each receive if the company succeeded in warding off Icahn’s tender offer. It’s no coincidence that Goldman and Deutsche Bank are litigating that very fee dispute in parallel breach-of-contract suits against CVR in New York State Supreme Court. The banks, represented by Stroock & Stroock & Lavan, filed their suits after the new Icahn-backed directors at CVR refused to approve $18 million in fees to each of them.

But even if you read CVR’s complaint against Wachtell with an eyebrow raised in skepticism, you have to pay attention to a suit that accuses a preeminent corporate firm of falsifying board minutes to protect fees for its investment banking friends. According to the complaint, when Wachtell submitted minutes of a Feb. 28, 2012, board meeting to CVR’s directors in May 2012, the minutes noted a presentation on the banks’ revised engagement agreements by Wachtell partner Benjamin Roth – but (again, according to the CVR suit) Roth’s presentation didn’t actually take place “in form or substance.” The Icahn-controlled company provided additional detail about the supposedly falsified minutes in a brief opposing summary judgment for Goldman and Deutsche Bank in the New York litigation, asserting that no one else who attended the 90-minute board meeting in February 2012 supports Roth’s account. “Indeed, the only witness who claims Mr. Roth made this presentation is Mr. Roth, while all others…have either testified under oath that Mr. Roth did not make such a presentation or cannot recall him doing so,” the brief said.

I should point out here that Wachtell sent me an email statement denying CVR’s allegations. “This lawsuit is entirely without merit and we will defend ourselves vigorously against Mr. Icahn’s baseless claims,” the statement said. “This is nothing more than a tactic by Mr. Icahn in his long-running battle related to a contract between a company under his effective control and its financial advisors.” Icahn GC Keith Schaitkin declined to comment; Melvin Brosterman of Stroock, who represents the banks in the New York litigation against CVR, didn’t return my call.

You’re probably wondering how Goldman and Deutsche justified charging CVR $18 million each for failing to keep the company out of Icahn’s control when they would have received a flat $9 million fee if they’d succeeded. The answer lies in a provision of the second engagement letter between the banks and CVR that said Goldman and Deutsche Bank would receive an “enterprise value” fee – a percentage of CVR’s value – if the company engaged in a “sale transaction.” If CVR’s “raid defense” worked, on the other hand, they’d receive $9 million. (Under the original engagement letters, which preceded Icahn’s hostile tender offer, Goldman was to receive $2 million and Deutsche Bank $1 million; the banks asked for new terms after Icahn’s bid launched on Feb. 16, 2012).

According to CVR, both CVR’s general counsel and the CFO who eventually signed the revised fee agreements were under the impression that the “sale transaction” provision would be triggered only if CVR were sold to a white knight rescuing the company from Icahn, not if CVR lost its independence to Icahn through the hostile tender offer. CVR’s position in its litigation with Goldman and Deutsche Bank – and now with Wachtell – is that no one at the company understood that the banks considered any change in control, including a successful Icahn tender offer at his original price, to be a sale transaction that would entitle them to fees based on CVR’s enterprise value.

The Wachtell-drafted minutes of the CVR board meeting in February 2012 indicate that CVR’s president asked Roth to outline the bankers’ fee arrangements as the Icahn tender offer launched. “Mr. Roth explained to the board that, under their respective engagement letters with the company, each of Goldman Sachs and Deutsche Bank would receive a fee based on a percentage of the company’s enterprise value if the company were sold and a different, fixed fee if the company were to remain independent after the (Icahn) proxy contest and tender offer,” the minutes said.

CVR contends that Roth cannot have said what the minutes claim. Drafts of the engagement letters from Goldman and Deutsche Bank weren’t even sent to CVR’s CFO until early March, CVR argues, so Roth didn’t even know what the new fee agreements were on Feb. 28. No one else who attended the board meeting backs Roth, CVR asserts, and Wachtell, “not surprisingly, claims to have retained no notes” of the meeting, the malpractice suit says. The firm, according to CVR, “sought to hide” its own failure to disclose the banks’ fees “through the creation of false minutes of a CVR board meeting.”

CVR also claims that after Icahn’s proxy win was assured in mid-April 2012, Wachtell drew up a chart of the fees due to CVR’s advisors. One of the Wachtell lawyers who drafted the chart noted in an email the “weird perverse incentive” that the sale transaction provision had created for CVR’s bankers. Yet according to CVR’s suit, the first the board heard about the revised engagement agreements and the possibility that Goldman and Deutsche Bank would each charge the company $18 million for a failed takeover defense was on April 18, after Icahn had already prevailed. Both the outgoing CVR board and the post-takeover board have refused to pay the fees.

There’s a good argument to be made that Roth had no reason to falsify the CVR board minutes since he could not have anticipated that CVR would refuse to pay Goldman and Deutsche Bank fees that are customary in takeover fights. Why paper over an eventuality you don’t think exists? And, of course, we haven’t seen the banks or Wachtell address CVR’s claim that other people at the crucial Feb. 28 board meeting don’t recall Roth’s presentation. The minutes themselves suggest that the Wachtell lawyer offered a quick explanation, not an elaborate dissection of the revised fee agreements with Goldman and Deutsche Bank. It could well be that Roth’s answer to CVR’s president just didn’t make a deep impression on the board.

Nevertheless, whatever happens with this case and the banks’ New York suits, Icahn is the winner in this muddle. Even if Wachtell, Goldman and Deutsche Bank prevail in court, he’s still gotten to throw some dirt.

(Reporting by Alison Frankel)

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