Newsonomics: Can Michael Ferro’s 'I Am Tribune' Routine Hold Up In Court?
As Gannett’s strategy to make a quick kill of Tribune Publishing goes south, could a lawsuit save it?
Large Tribune investors have all but threatened to file suit. They’ve charged that Tribune chairman Michael Ferro isn’t representing the interests of all shareholders, as a leader of a public company is obligated to do.
But as Tribune prepares to hold its annual meeting later today, electing a new board directors even friendlier to Ferro, the first lawsuit has been filed by a relatively small stakeholder: Capital Structures Realty Advisors filed its complaint of breach of fiduciary duty this morning in the Delaware Court of Chancery. Could more follow?
Tribune shareholders – older ones who have held the shares for awhile or newer speculators, such as HG Vora Capital, which took a 6.3% stake as recently as last Thursday – have standing here. “Plaintiff’s attorneys” have been making their rounds, seeing an opportunity in the case as they privately call Ferro’s handling of Gannett’s for $864 million at a 99% share price premium “the Chernobyl of corporate governance.” It’s a colorful metaphor, and those involved now note that without a lawsuit, “it may be the worst corporate governance, but it looks like Ferro may get away with it.”
The basic issue: Leaders of public corporations are legally obligated to maximize shareholder value.
First published at Politico Media
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A fairly straightforward complaint would rest on Gannett’s outsized $864 million offer, with premium of 99%, for a stock that has been dropping like a rock in Lake Michigan for two years. The argument is that a bona fide, all-cash offer must be considered. And that no matter what strategic plans Ferro may say he has for growing a company that hasn’t seen revenue growth in almost a decade, those plans pale compared to cash in hand. This suit also points specifically to the board’s adoption of a “poison pill” provision, aimed at deterring Gannett. There’s more potential fodder for a suit in what Gannett has alleged amounts to “self dealing” by Ferro; Gannett hopes to prove the chairman’s ongoing entanglements with his former newspaper company in Chicago, Wrapports, is a breach.
In fact, I’ve learned that The Tribune/Wrapports deal-making may not be over. Confidential sources confirm Ferro’s current interest in buying the aggregation-and-advertising business Aggrego from Wrapports, a company with which Tribune recently announced a business partnership.
Further, the frenetic Ferro’s interest in merging the Chicago Tribune and Sun-Times continues. He noted interest in that possibility soon after taking over control of Tribune. I’ve learned that that interest continues, and may be an active topic on the Wrapports board. Wrapports chairman John Canning was unavailable for comment on that matter.
“Tribune Publishing has no plans to acquire Aggrego or the Chicago Sun Times at this time,” Tribune Publishing spokesperson Dana Meyer told me yesterday.
(While an acquisition of the Sun-Times by Tribune would likely have a tough time in a Department of Justice anti-trust review, Ferro’s penchant for deal-making makes it a live possibility. Buying Chicago’s second paper might send still another message to suitor Gannett that the new Tribune is going full-speed ahead on its own strategy.)
Today’s suit makes this simple argument: Ferro has a “fiduciary duty” to at least negotiate a sale in good faith – if not just to take the cash, divvy it up and run. Two investors have previously made the point crystal clear (and their arguments figure in the shareholder action filed today). “We see very substantial risk that through pursuing an independent course, Tribune will destroy enormous shareholder value,” wrote Oaktree Capital Management’s John Frank last week. Oaktree has been Tribune’s second-largest shareholder at 14.8%, before the Soon-Shiong investment. “We expect you to carry out the fiduciary duty that you owe to all shareholders, and believe that the only possible conclusion consistent with your fiduciary duty is to engage with Gannett with the objective of maximizing value to all Tribune shareholders.”
Oaktree also urged Tribune to appoint a committee of independent (of Ferro) directors to consider the Gannett bid, a request Tribune summarily rejected.
On Friday, Towle & Co., a 4.4% owner, excoriated Tribune’s governance practice, in rejecting outright Gannett’s approach.
“Stacking the Board and ownership in favor of one particular view is not good governance. In fact, your brazen efforts of late have disrupted our belief in fair play. We now believe your primary interest is self-interest. You have fully demonstrated a lack of concern for the majority of unaffiliated shareholders whom we believe want a fair and reasonable transaction with Gannett.”
So, then, might Towle file a lawsuit?
That’s unlikely, Woody Towle, CEO of Towle and Co. told me Tuesday. “We’re not in the business of doing that [suing]. We’d be reluctant to do that.”
Meanwhile, Oaktree declined to comment on its intentions.
While the rejectionist Tribune board movements may be publicly characterized as world-class poor corporate governance, it’s not a Wall of Shame awards from investing maven Jim Cramer that will win the day in court.
“When you’re a fiduciary, you owe them a duty of loyalty, you owe them a duty of care,” explains one highly regarded Delaware corporate governance expert, who asked to remain confidential. “The argument here would be, he’s breached his duty of care because he hasn’t fairly and reasonably entertained the prospects of this deal. Further, that he hasn’t gathered together all of the materials that a reasonable person would consider before accepting or rejecting it and hasn’t spent sufficient time analyzing it. His actions are tantamount to being irrational. That’s the argument for breaching duty of care.”
Adds Robert Heller, an L.A.-based 30-year-veteran of business law, “Insofar as the breach of fiduciary duty claim, that’s a little more complicated because you have to look at the facts and decide, ‘Well, okay, he didn’t act in the best interests of the corporation and the shareholders, he acted in his own self interest.’ If it impacted or reduced what the shareholders would get, then he’s breached his fiduciary duty, but there’s going to be a burden on the shareholders to establish that they were harmed as a result of what Ferro did.
It’s not Ferro’s position as chairman, the experts say. Though he is clearly in control of Tribune, his less-than-33% stake means that he’s not a “controlling stockholder,” under Delaware law. It’s his position as a director that drives Ferro’s legal responsibilities, just the same as it does for the other directors. All of those directors are covered by insurance, in case of such shareholder suits.
Among all that’s happened, attorneys pay some scrutiny to Gannett’s claims that in a May 12 meeting Ferro boldly put himself front and center to any sale.
Both in a public letter and SEC filing, Gannett says Ferro demanded “a piece of the action” to allow a deal to go forward. According to Gannett, Ferro said he would agree to a sale provided that he would have a “significant role” in the merged company and become its “largest shareholder.”
For its part, Tribune shot back that those comments – apparently taken from notes of the two Gannett executives were “grossly mischaracterized and taken out of context.”
Tribune declined specific comment to Gannett’s three claims:
1) That Ferro wanted “a piece of the action”:
2) That Ferro wanted a “significant role” in merged company
3) That Ferro wanted to emerge as Gannett’s “largest shareholder.”
It is those charges that amplify this charge of self-dealing, though those may be more glaring in the court or public opinion than in court itself.
Legal experts tell me that charge probably stands subordinate to the wider claim of failure to provide “care and loyalty,” the basis of today’s Delaware legal action, but could resonate more widely.
“If Ferro gets ‘a piece of the action’, this gives him a conflict of interest and he no longer has as strong an incentive to negotiate for the best possible price for the other shareholders,” John Coffee, director of the Center on Corporate Governance at Columbia University Law School and Adolf A. Berle Professor of Law at Columbia Law School told me. “However such conflicts of interest are not unlawful and management buyouts occur all the time in which such conflicts are obvious. I suspect that Gannett’s point is that Ferro or others were riding their self-interest and should not be trusted by Tribune shareholders–in short, we are into a mudfight, possibly for good reason.”
Attorney Heller makes the point that conflicts are inevitable – but might place the onus of responsibility on Ferro.
“Basically, even if he’s still dealing, even if he didn’t disclose it, if he could establish that was fair and reasonable to the corporation, that would eliminate the breach of loyalty issue, the self-interest issue. There’s several ways to avoid exposure to that. One way is if it’s still fair and reasonable to the corporation. The burden of proof is on him [Ferro] to establish that.
Ferro’s major argument against a Gannett purchase has been that his own strategy will provide more shareholder value over time.
That’s a fair claim, says our Delaware attorney – but must be substantiated.
“If an offer would disrupt what they think is a strategic plan that in the long run would bring better value to the investors and allow the corporation to survive and accomplish that mission, that’s fair. But it can’t be a sham. It can’t be a just a construct to say no. You have to be able to support that.”
Then, there’s the question of when a suit may be filed. If it gets filed soon – and insiders expect the more activist, speculation-oriented investors to do that if anyone does – its purpose would be to force Tribune’s board to negotiate with Gannett. A plaintiff could ask for injunctive relief, getting the case expedited.
Yet, in John Coffee’s opinion, it may be too early to do that.
“Tribune shareholders would have been damaged if Ferro (or similarly situated person) sold the company at a cheap price to Gannett,” Coffee told me. “But that did not happen. Conceivably a disgruntled small shareholder can assert that he lost a premium because Tribune has resisted Gannett’s advances, but this deal is not dead and may yet occur at a higher price. Gannett will most likely use it as evidence of a claimed fiduciary abuse that in their view should lead a court to require the Tribune board to accept the offer and not adopt defensive measures. That however would be an unlikely and rare outcome — at least at this early stage.”
Coffee makes the point of differing interests — and how that could drive a legal case.
“There are very different lawyers with different incentives,” he says. “The bidder wants to be able to characterize the target as not negotiating in good faith and thus to have a chance to convince the court that some defensive tactic adopted by the target is a fiduciary breach. It has no interest in damages.
Before today’s suit was filed, Coffee predicted to me that a suit would come soon.
“The professional plaintiff’s firm wants to get the court to recognize its role and so may file early, in order to distinguish itself from the horde of other such firms that file later. Its goal is to convince the court that it prevented a cheap sale and thus should receive a portion of any increase in the sale price. For example if the initial offer was $10 per share and the final successful offer is $14 and the difference is $400 million, it wants the court to agree that its tenacity caused that increase and award it say $20 to $40 million. To achieve this or any fraction of that amount, it has to be very visible before the court. Few plaintiffs are focused on damages if the deal collapses, although in pure theory that can be asserted too.”
“I Am Tribune”
While lawyers parse the relationship of Michael Ferro’s self-regard, self-interest and that more legal no-no “self-dealing,” more casual observers are left to marvel at the impact one person has had on the publisher of such notable news companies as The Los Angeles Times and Chicago Tribune, two among the nine metro dailies Tribune owns, as the fourth largest newspaper company in the U.S.
In the run-up to this noisy “we won’t sell” campaign, there’s little doubt that Ferro has aimed to make himself synonymous with Tribune. His actions say “I Am Tribune,” as he has reshaped the company in four months.
In quick order, he replaced CEO Jack Griffin with his own guy, non-media business exec Justin Dearborn. Then, he replaced the company’s top leadership and axed its publishers. He moved a half-dozen former managers who had worked for him into place in Tribune, and began negotiating deals with several of the companies with whom he had formerly been associated.
In the meantime, he moved to consolidate his board control, choosing three new board members, all of whom he has ties to. For a $44 million, 16.6% stake in Tribune, Ferro had won effective control of the country’s fourth largest newspaper publisher and made the company his own. The fact that he would double that investment in four months apparently leaves him undeterred in rejecting Gannett and pursuing his dream of an artificial intelligence-centric, next-gen “newspaper” company. (Or, alternatively, dealmaker Ferro may be wilier than people give him credit for, aiming to wring even more than a doubling of his investment out of an exasperated Gannett.)
You can’t get much more alpha than Michael Ferro. The Tribune Publishing chairman doesn’t just like center-stage; he often occupies the whole thing. The 49-year-old Ferro’s Uninterruptus nature (“Can Gannett pry Michael Ferro from Tribune chair?“) has been legendary in Chicago, and now it’s gone widescreen, across the country. Even in that May 12 will-you-sell, won’t-you-sell meeting with Gannett CEO Bob Dickey and its board chairman Jeff Louis that stretched to almost two hours, it was Ferro who demanded most of the oxygen. His longtime corporate sidekick Justin Dearborn, whom Ferro named CEO of Tribune after unexpectedly showing Jack Griffin the exit in January, didn’t say too much. And the executives of the U.S.’s largest newspaper company, and second largest worldwide, didn’t get in too many words either. In his actions, Ferro has been operating more like a private company CEO though he is in fact a public company non-executive chairman.
Maybe that’s unsurprising. Ferro got his Tribune stake in January through a private placement of shares, which greatly diluted the value of existing shareholders. Then last week, Ferro himself put together an even bigger private placement, when he sold L.A. investor Patrick Soon-Shiong $70.5 million worth of new Tribune stock, at $15 a share.
To the extent that investors want to push the issue of Ferro’s self interest, they may find fertile ground in his known business dealings since he joined Tribune, in addition to those newer ones I’ve noted above. Mindful of perception of conflict of interest, Ferro told his own Chicago Tribune that he had donated his approximate 40% interest in Wrapports to a foundation. Wrapports, of which he had been the lead owner and chairman, owns the Chicago Sun-Times, the Chicago Tribune’s news competitor, as well as several other businesses.
In short order, Tribune then entered into an announced business partnership with one of those businesses, Aggrego, and sources inside the company tell me, it is proceeding with one for TheCube.com, another Wrapports investment. A Tribune spokesperson has noted that no agreement has been reached with TheCube.
Asked to comment on the quick deal-making between Tribune and Wrapports, Tribune has pointed to Ferro’s statement that he had donated his Wrapports stake. Ferro has refused to detail where that approximate 40% stake went, other than to say it was given to a charity.
It is, in fact, the L.A.-based California Community Foundation (CCF), that received a donation of Ferro’s Wrapports shares, sources indicate.
Taleen Ananian, spokesperson for the foundation, says that CCF doesn’t comment on donor-contributed funds. On key question, then, with Ferro’s (former?) Wrapports stake, has been who controls its voting rights? “The shares have no voting rights,” Tribune Publishing spokesperson Dana Meyer said today.
Is there a conflict of interest in a Ferro-led Tribune doing business with a recently-Ferro-led Wrapports? Legally, likely not. Yet, the appearance of conflict prompts questions. Ferro exudes charm, at least among an older, monied, male demographic, willing to support his ambitions. In doing what appears to be chummy business deals with investors he himself brought into Wrapports, the ever-spinning world of Michael Ferro just picks up a little more speed.