January 20, 2007
Cablevision Systems' LBO
The LBO offer for Cablevision Systems, a publicly owned company, is a classic illustration of problems created by a two-tier voting stock. The founding family, the Dolans, owns 20 percent of the equity but control, thanks to a two-tier voting stock classification, 70 percent of the voting power. The Dolans have offered by buy the company (an LBO) and declared that they will not vote to sell the company to any other suitor. The Cablevision board has declined the offer, stating that the price is too low. The board is in a pickle. The board's fiduciary duties to the company require that it negotiate for a fair price (otherwise dissenting shareholders can sue to block the deal) but the board is effectively disabled from soliciting other offers that are serious. The Dolans, as shareholders, have no duty to sell. Moreover, come the next board election, the Dolans can replace them. Of course the new directors will have the obligation to negotiate hard as well, but who would want the job?? The law provides answers but common sense sees practical problems. The ultimate solution depends on a judge approving whatever deal is negotiated. Shareholders who buy stock in a company that has a two-tier voting stock classification are, in essence, relying on judges to protect them in deals.
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