Charlie Ergen’s master class in corporate governance bullying
Self-made corporate billionaires are a rare breed, and I think we can all agree that they deserve respect for their acumen and tenacity. What they don’t deserve, if they’ve accepted shareholder money through the capital markets, is unfettered control of their businesses. Public companies cannot treat corporate governance best practices as a nuisance, or worse, a hindrance – especially when the company’s interests may be at odds with those of its billionaire founder.
I bring you this public service announcement because I’m agog at newly emerged details of the goings-on at Dish Network, the publicly traded satellite television company whose shares and voting power remain firmly in the control of chairman and co-founder Charlie Ergen. I’ve written before about a shareholder derivative suit in Las Vegas state court that accuses Ergen and his friends on the Dish board of compromising the interests of minority shareholders in the company’s $2.2 billion stalking-horse bid for LightSquared, the bankrupt wireless communications company. Ergen is LightSquared’s biggest creditor; through personal investment vehicles, he acquired about $1 billion in LightSquared debt, unbeknownst to LightSquared, which on Friday sued him and Dish for secretly attempting to gain control of the bankrupt company. Dish minority shareholders in the Las Vegas suit contend that through his LightSquared investment, Ergen personally will reap windfall profits if Dish’s bid for LightSquared succeeds.
Last month, you may recall, Clark County judge Elizabeth Gonzalez granted expedited discovery to the Dish shareholders, who are trying to bar Ergen from any continuing role in Dish bidding for LightSquared. On Thursday, shareholder lawyers at Bernstein Litowitz Berger & Grossmann and Cotton, Driggs, Walch, Holley, Woloson & Thompson filed a public version of a supplemental brief disclosing what that discovery revealed.
If the brief is to be believed – and I should say here that a Dish representative says it is not, calling the filing “reckless” and “based upon numerous factual inaccuracies” – then the story of Dish’s bid for LightSquared is a rare tale of overt bullying by a controlling shareholder and abject acquiescence by his loyalists on the board of a public company. In that regard, Dish is a corporate governance failure, a company that has displayed what former Securities and Exchange Commission chair Harvey Pitt, in a declaration filed by Dish shareholders, called an “egregious…disdain” for corporate governance procedures. But at the same time the new brief documents how Dish’s two independent directors resisted pressure from Ergen and the rest of the board. One of them, former Liberty Media executive Gary Howard, eventually resigned, when it became clear that the rest of the board was not concerned about Ergen’s potential conflict. The other one, software developer and former Janus Capital CFO Steve Goodbarn, continues to sit on Dish’s board.
Ergen and Dish (and their lawyers at Willkie Farr & Gallagher and Sullivan & Cromwell) have argued since the beginning of this whole LightSquared ado that there is no conflict between Ergen’s interests and those of Dish’s minority shareholders, and it’s certainly true that all Dish shareholders will benefit if the company’s bid for LightSquared is successful. The new shareholder filing, however, shows that Dish’s independent directors had a more nuanced view than Ergen of the relationship between him and Dish’s other shareholders. That’s precisely why corporate governance conventions call for independent directors to evaluate transactions and stand up for the interests of minority shareholders. So, in a perverse way, the Dish story is also an affirmation of good corporate governance practices – a case study of an independent committee attempting to execute its duty to all shareholders.
We’ve known since September, when The Wall Street Journal reported that Gary Howard had resigned from the Dish board to protest the handling of Dish’s $2.2 billion bid for LightSquared, that there was something fishy about the process by which Dish arrived at its bid. Last week’s filing by the minority shareholders confirms that Howard resigned because the board abruptly and without warning disbanded his committee. But it also adds layers of details about the independent committee’s turbulent 10 weeks of existence and Ergen’s alleged attempts throughout to compromise the committee’s independence.
The two-member special transaction committee came into being on May 8, through a Dish board resolution that is a model of best governance practices. By then Ergen’s position as a LightSquared creditor had been revealed, and the Dish board acknowledged that the company needed independent review of any potential conflict between Ergen and other shareholders. It appointed Howard and Goodbarn – the only directors without personal or deep professional ties to Ergen – to evaluate Dish’s bid for LightSquared, including Ergen’s personal interest. The Dish board resolved not to make a bid for LightSquared without a favorable recommendation from the independent directors. Their resolution also said, according to the shareholders’ brief, that the independent transaction committee would be disbanded only if Dish declined to make an offer for LightSquared or if the committee voted itself out of existence.
According to the shareholder brief, Howard and Goodbarn were taken aback when Ergen made his own $2 billion bid for LightSquared on May 15, even as Dish began the process of coming up with its own bid. You might think the potentially divergent interests of Ergen and Dish would be obvious at that point, yet when Howard and Goodbarn said they had hired independent counsel from Cadwalader, Wickersham & Taft to help them evaluate Dish’s position, Ergen allegedly balked. According to the shareholders’ brief, he told the committee that his lawyers at Willkie could advise Goodbarn and Howard as well. “Why would we have special committee counsel,” he allegedly wrote. “You are way ahead of your skis here.” The independent committee subsequently asked Ergen at least twice to provide information about his investment in LightSquared and his offer to acquire the company, but he failed to respond. According to the shareholders’ brief, he did, however, make it clear to Howard and Goodbarn that his personal $2 billion bid was a floor for Dish’s bid – and one that guaranteed his secured debt would be paid in full.
Meanwhile, the Dish board stalled on fees and indemnification for the special transaction committee, according to the shareholders’ brief. Goodbarn testified at his deposition that he believed indemnification was crucial to assuring the committee’s independence from Ergen, who had already expressed a view that the committee was a waste of money. (His money, moreover.) By failing to come through with indemnification and with the fees specified in the resolution that created the committee, Goodbarn testified, the board showed him and Howard where its allegiance lay: with Ergen.
In early July, Ergen pressed Goodbarn and Howard to move fast on Dish’s bid for LightSquared, even as the committee sent a formal letter to the Dish board announcing that it needed time to assess the company’s strategy. On July 8, Ergen’s own lawyers sent a draft of a Dish bid to the board – though the independent committee hadn’t invited the proposal and hadn’t been involved in preparing it. After a board meeting on July 18, at which Goodbarn and Howard learned for the first time that Ergen was negotiating a bankruptcy reorganization plan with other LightSquared creditors, Howard wrote in an email, “This is lunacy!”
Nevertheless, Goodbarn and Howard met for several hours with their financial advisors from Perella Weinberg Partners on Sunday, July 21 to assess Dish’s prospective offer. At a special board meeting that night, the independent committee recommended Dish make a $2.2 billion bid. But according to the shareholders’ brief, Goodbarn and Howard advised the board that their recommendation had important conditions, specifically that the independent committee remain involved in LightSquared negotiations and that Ergen turn over requested information about his own interest in LightSquared so that the committee could monitor potential conflicts.
After presenting the conditional recommendation, Goodbarn and Howard were excused from the board meeting. The rest of the board then voted to disband their committee. According to the shareholders’ brief, Goodbarn and Howard were “shocked” at the board’s action. There was no mention of dissolving the independent committee on the board’s agenda, and the board’s action supposedly violated the resolution that had created the independent committee. On July 24, after Dish announced that the board had approved its $2.2 billion offer for LightSquared upon the recommendation of an independent committee, Goodbarn and Howard informed the board that their recommendation was conditional, not absolute, and that their conditions had not been met. “The (committee) did not recommend or endorse the termination of the (committee),” they wrote. “We believe that there are continuing issues that relate to the fairness of a transaction and potential conflicts of interest with the chairman that we believe should be subject to independent scrutiny and evaluation.” The next day Howard resigned from the board. Goodbarn remains a Dish director. (He has been dismissed as a defendant in the shareholder derivative suit.)
So to recap, this large public company appropriately appointed an independent committee to evaluate a transaction in which its controlling shareholder had a substantial personal interest. The board then declined to protect the committee through indemnification while the majority shareholder made it clear that he regarded the committee as nothing more than expensive window-dressing for a deal he would actually control. When committee members dared to condition their recommendation on a continuing evaluation of the majority shareholder’s conflict, the board effectively fired them.
We have yet to hear Dish’s side of this story. Aside from disputing the facts presented by shareholders, a Dish representative declined to comment. I suspect that Dish will offer a different portrayal of Goodbarn and Howard than the shareholders. Moreover, as Dish has been saying all along, if the company’s bid for LightSquared wins, minority shareholders will benefit right alongside Ergen.
So why does the process matter? Because, as this case shows, controlling shareholders and board members beholden to them have a tendency to base their judgments about what’s right for the company on what’s right for them, assuming that their interests align perfectly with those of minority shareholders. Often that’s true. It may even be true for Dish shareholders. But without an independent evaluation, minority shareholders can’t be sure. Corporate governance isn’t a puppet show for regulators. It’s an assurance of integrity for the public markets.
Judge Gonzalez in Las Vegas will hear arguments next week on the Dish shareholders’ preliminary injunction motion to bar Ergen from participation in the company’s bid for LightSquared.
(Reporting by Alison Frankel)
(This post has been corrected. An earlier version erroneously reported that Dish director Steve Goodbarn is allied with shareholders suing the board. He is not.)