Dish board: Plaintiffs’ lawyers are true villains of governance saga
Oh, those greedy contingency-fee lawyers. Is there nothing they won’t do to wring a few million bucks in fees from corporate defendants blamelessly and selflessly going about their business? Dish Network’s majority shareholder, Charles Ergen, and his friends and colleagues on the board performed a great service for the company’s minority shareholders when they secured Dish’s spot as the stalking-horse bidder for LightSquared spectrum licenses. Sure, Ergen had his own personal interest in the LightSquared deal because he’s the biggest creditor of the bankruptcy company. But Dish’s board went above and beyond Nevada’s statutory requirements for transactions in which a director has a conflicting financial interest. It appointed a special transaction committee of independent directors, who hired their own lawyers and financial advisors. With help from Ergen, his personal lawyers and Dish managers, the independent committee came up with a $2.2 billion bid, which the board voted to approve and the bankruptcy judge overseeing LightSquared’s Chapter 11 subsequently deemed the leading offer in the LightSquared auction process.
Everyone agrees Dish will be better off if it succeeds in acquiring the LightSquared licenses. Yet plaintiffs lawyers are trying to handcuff Dish as the auction process goes on, blocking Ergen – who knows the wireless business better than anyone, having built Dish from scratch into a $20 billion business – and nearly everyone else on the Dish board from staying involved. And Ergen isn’t even conflicted anymore! Dish’s stalking-horse bid will pay off all of the LightSquared debt Ergen holds, and then some. So why are these lawyers, who purport to represent the interests of Dish minority shareholders, meddling with the company’s prospects of winning the LightSquared licenses? For the money, of course. You know how this racket works. They file their shareholder derivative suit, litigate for long enough to make themselves a nuisance, then agree to settle for some paltry consideration and a nice chunk of dough.
Or so says Dish, in briefs filed Thursday night by Dish’s board, Ergen and a special litigation committee the board appointed right before a hearing last month in Las Vegas state court on the minority shareholders’ request for expedited discovery. If you’ve been following the Dish corporate governance saga – which I last wrote about on Monday – then you may have more than a few reservations about Dish’s spin on what are suprisingly undisputed facts, including the abrupt dissolution of the special transaction committee when its two members informed the board that they intended to continue to monitor the deal for Ergen conflicts.
Plaintiffs lawyers at Bernstein Litowitz Berger & Grossmann and Cotton, Driggs, Walch, Holley, Woloson & Thompson have made a persuasive case – including a declaration from former Securities and Exchange Commission chair Harvey Pitt – that Ergen was determined to thwart the independent transaction committee and direct Dish’s bid himself, despite his personal financial stake as a LightSquared creditor. Minority shareholder counsel Mark Lebovitch of Bernstein Litowitz told me in an email that Dish’s attempt in the new briefs to shift attention to plaintiffs lawyers is mere tactics. “It’s not surprising that people struggling to justify Ergen’s and his board’s alleged breaches of the duty of loyalty are trying to change the subject,” his email said. “The fact of the matter is that we have one goal – to remedy what the former chairman of the SEC described as the Dish Board’s appalling disregard for the most basic of corporate governance norms.”
Clark County Judge Elizabeth Gonzalez will hear arguments Monday on the minority shareholders’ motion for a preliminary motion. So, to give you a complete version of the record in this much-discussed case, let’s look at what Dish has to say about Ergen and the LightSquared bidding.
The most comprehensive review of events comes from the special litigation committee, which is composed of longtime Dish director Tom Ortolf and new director George Brokaw, who joined the board after James Howard resigned, reportedly to protest the dissolution of the special transaction committee. (The litigation committee’s filing, signed by its counsel at Young, Conway, Startgatt & Taylor and Holland & Hart, is fashioned as a report rather than a brief, but it also argues against granting the minority shareholders a preliminary injunction.) According to the litigation committee, the minority shareholders disregarded crucial context in their depiction of events: Last May, when Dish first considered the possibility of acquiring LightSquared assets, it was in the midst of an attempt to acquire Sprint, a much bigger deal that would have considerably depleted Dish’s resources. At the time, the new Dish briefs explain, LightSquared was a backup target.
Ergen proposed this backup plan to the board at a Dish annual meeting on May 2, 2013. At that meeting, he also informed the board for the first time that he had bought up hundreds of millions of dollars in LightSquared debt through a personal investment vehicle, after Dish’s treasurer informed him that Dish itself was prohibited from buying LightSquared debt under LightSquared’s credit agreement. Ergen told Dish’s board on May 2 that he might make an offer for LightSquared’s assets under his own name, but only “to create and preserve the opportunity for Dish or EchoStar (another Ergen-controlled company) to acquire LightSquared,” according to the litigation committee report.
So according to Dish’s brief, filed by Sullivan & Cromwell and Brownstein Hyatt Farber Schreck, when the board resolved at a follow-up meeting on May 8 to appoint a special transaction committee with two independent directors to consider the LightSquared bid, there was no urgency to the committee’s work. The company was still focused on Sprint. The Dish board and the special litigation committee also point out that merely by establishing a committee, the board was going out of its way to protect minority shareholders. Nevada corporate law does not require the appointment of a special committee when a director is conflicted. According to the board and the litigation committee, Ergen had every right under Nevada law to be involved in discussion of the LightSquared bid, as long as he didn’t take part in the board’s vote on Dish’s offer. The special transaction committee was a corporate governance bonus, they say.
Ergen was not present at the May 8 meeting when the special committee was appointed. In fact, according to Ergen’s lawyers at Willkie Farr & Gallagher, he wasn’t informed of the committee’s existence for another two weeks. That’s a point of contention with the minority shareholders, who claim that Ergen’s campaign of undermining the independent committee began on May 15, when Ergen submitted his own $2 billion bid for LightSquared without informing the Dish special committee.
The minority shareholders argue that Ergen’s $2 billion bid protected his personal investment in LightSquared debt by setting a floor for other bidders – including Dish. Valuing the spectrum licenses at $2 billion meant that Ergen’s LightSquared debt would be completely paid off. Any competing bids, including one from Dish, would also have to cover Ergen. But he and the Dish board say Ergen was always acting on behalf of Dish, a company in which most of his personal fortune is tied up. “Plaintiffs theory…requires that Mr. Ergen risk the value of his investment in Dish to secure some incremental return on his LightSquared debt interests,” the Dish board’s brief said. “This makes no economic sense. It strains credulity to believe that Mr. Ergen would risk billions to make millions.”
Nor was Ergen attempting to impede the special litigation committee when he initially balked at paying for its lawyers and financial advisers, according to briefs from Ergen and the board. Fifty-three cents of every dollar Dish spends comes from Ergen’s pocket, his brief said, so, of course, he considered it wasteful to expend shareholder money on the LightSquared bid when the company’s primary target in May and June was Sprint. When he told the special transaction committee in May that it was “getting ahead of its skis,” Ergen’s brief said, he meant only to suggest that the Sprint proposal was still active, so LightSquared was still Plan B.
The board and the litigation committee don’t dispute that Ergen’s lawyers eventually submitted a draft LightSquared acquisition proposal to the entire Dish board, without involving the transaction committee. The litigation committee also concedes in its report that the two members of the special transaction committee engaged in extensive negotiations with the board about their indemnity and fees, without reaching an agreement that satisfied the committee members’ concerns about protecting their independence. The Dish board, moreover, does not deny the minority shareholders’ arguments that Ergen repeatedly refused to supply the transaction committee with requested information about his LightSquared investment. The board brief says Ergen’s information wasn’t critical to the transactions committee’s mission: The two directors on the committee knew Ergen had a big stake in LightSquared debt, and additional information was “irrelevant” to their determination that $2.2 billion was a fair bid for Dish to offer LightSquared.
Minority shareholders’ best evidence of corporate governance dysfunction at Dish is, of course, the abrupt termination of the special transaction committee on July 21, after the board voted to approve the $2.2 billion bid the committee recommended. Shareholders contend that members of the transaction committee were essentially fired because they conditioned the proposed bid on an ongoing role for them in the LightSquared auction process. The committee had been raising questions about Ergen’s interest in LightSquared and whether Dish minority shareholders might be entitled to share in any profits he realized from the sale of LightSquared assets. Minority shareholders’ theory is that the board dissolved the transaction committee to protect Ergen. (Ergen was not present at the July 21 meeting.) Shareholders asserted in a brief filed last week that the dissolution of the transaction committee violated the very May 8 Dish board resolution that established it.
Not so, according to Dish’s board and its litigation committee. For starters, the Dish board says that the May 8 resolution addressed the expiration of the committee, not its termination. “The section of the resolution relied on by plaintiff actually discusses events that would cause the authorization provided to the special committee to ‘expire,’ not the conditions for termination,” the board brief says. “Thus, in the May 8 resolution, the board set an outside limit on the term of the special committee but did not abdicate its statutory power to terminate the role of the special committee should the board determine termination is (as it was) appropriate within the exercise of its business judgment.”
Once the board determined that LightSquared’s $2.2 billion bid mooted any conflict with Ergen, according to the board and the litigation committee, it decided there was no need for an independent transaction committee. “It appears that the directors present at the July 21 board meeting believed that the board had the authority to terminate the STC, and they proceeded on that basis,” the litigation committee report said. The board was more aggressive in its defense of the dissolution: The board has the right to exercise its business judgment. “The perceived conflict had been resolved: Once Dish made its binding $2.22 billion bid, Mr. Ergen’s financial stake was no longer affected by any future Dish decision-making with respect to its proposed acquisition,” the brief said. “At any rate, even in interested transactions, Nevada law does not require recusal or the creation of special board committees. Nevada statutory law flatly contradicts plaintiffs’ arguments.”
The Dish filings, remember, are intended to ward off an injunction, and both the litigation committee report and the board brief argue that there’s no need for such a drastic action and no justification for it under Nevada law. The more moderate litigation committee report reminds Judge Gonzalez she need not worry about Dish dropping a potential cause of action against Ergen because its members can investigate and pursue any lost opportunity claims if they’re warranted. The board, meanwhile, plays to Nevada parochialism, arguing that the minority shareholders and their expert, former SEC chair Pitt, are stuck on irrelevant Delaware standards, even though the only thing that matters in Nevada’s wide latitude for the business judgment of boards.
And besides, Dish’s board argues, minority shareholders in the company knew exactly what they were getting when they acquired Dish shares: a stake in a company with a powerful controlling shareholder. With Dish stock trading at a 10-year high, and poised to go higher once the LightSquared deal goes through, they should be grateful to Ergen, not wasting millions of dollars of corporate money on corporate governance frippery that could cost the company critical assets. “Plaintiffs should not be permitted to disrupt the status quo that the board of a Nevada corporation has full control over the affairs of the corporation or to take continued actions to hamstring Dish’s efforts to secure strategic assets on the basis of speculation, innuendo and misdirection,” the brief said. “This court should decline this invitation, which is made for no purpose other than to facilitate some future demand for attorneys’ fees by plaintiff’s counsel.”
I have to agree with Bernstein Litowitz that blaming plaintiffs lawyers for suing in these circumstances is a red herring. A more provocative argument was advanced this week by Ronald Barusch, a retired partner at Skadden, Arps, Slate, Meagher & Flom, in The Wall Street Journal. Barusch blamed a corporate legal system that depends on contingency-fee lawyers to police corporate governance violations. Barusch takes an extremely cynical view of the motives and tactics of plaintiffs lawyers – I don’t share his cynicism – but he makes a valid point about the gap between corporate governance standards and meaningful regulation. If plaintiffs lawyers don’t sue to protect shareholders against breaches of duty by board members, no one does.
So, regardless of what Judge Gonzalez decides after Monday’s hearing, and later on, when minority shareholders argue for money damages from Ergen and the other board members that allegedly breached their duty of loyalty, Dish shareholders should welcome the scrutiny their directors are under. If their actions were indeed appropriate under Nevada law, the market will at least know what it means to buy Dish stock.
For more of my posts, please go to WestlawNext Practitioner Insights