Tuesday, January 14, 2014
In December, the Deal Professor, Steven Davidoff, wrote a great piece about the grey areas triggered by DISH Network Chairman Charles Ergen's debt purchase from LightSquared (a failing satellite-based broadband comany). This case has several twists and turns, and I plan to write a few posts on some of these areas. Today, we'll start with debt purchase.
As Davidoff explains, Lightsquared's debt could not (per the debt documents) be purchased by “direct competitor” (e.g., Dish Network), so Ergen used a personal investment vehicle to buy the debt. This, the Deal Professor notes, appears acceptable under the debt documents (even if it's not what was intended):
In a court filing, LightSquared contends that Mr. Ergen breached the debt agreement because the documents define a “direct competitor” to also be a subsidiary of a direct competitor. LightSquared is arguing that because Mr. Ergen controls both Dish and the hedge fund that bought the debt, the fund is a subsidiary of Dish.
Yet that argument stretches the plain meaning of a “subsidiary” — a company owned or controlled by a holding company — language that is not in the document. So LightSquared’s claims against Mr. Ergen are tenuous at best.
The acquisition itself seemed to link DISH and Lighsquared, even if that was not technically the case. Although the major outlets seemed to understand the structure of the purchase (see, e.g., here), some early takes from the blogosphere were less precise, such as this headline: Dish Snaps Up Some LightSquared Debt, which links to articles characterizing the purchase correctly. In fact, Lightsquared has its own issues with the purchase. According to a Lightsquared Special Committee Report of November 15, 2013 (pdf here):
45. Although “Lenders” have the right to assign their rights under the Credit
Agreement to third parties, the Credit Agreement contains strict transfer restrictions regarding those assignments. Specifically, section 10.04(b) of the Credit Agreement provides that a Lender can only “assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement.” The Credit Agreement proscribes that “Eligible Assignee” “shall not include Borrower or any of its Affiliates or Subsidiaries, any natural person or any Disqualified Company.” (Credit Agreement, § 1.01.) A “Disqualified Company” is “any operating company that is a direct competitor of the Borrower,” as well as “any known subsidiary thereof.” (Id.) . . . .
49. The parties intended for the transfer restrictions to be as broad as possible,
yet specific about which entities the Credit Agreement forbade from holding the LP Debt. Thus, the Credit Agreement includes a list of “Disqualified Companies.” As of October 10, 2010, EchoStar was on the “Disqualified Company” list. On May 9, 2012, LightSquared added DISH and several other entities. Therefore, DISH, EchoStar, and all entities they control directly or indirectly in any way cannot be “Eligible Assignees.”
The report further states that DISH and EchoStar personnel were used "to handle all trades . . . at Mr. Ergen’s behest."
Still, Ergen is not DISH or EchoStar, nor is he an entity. It seems to me that clauses such as this may need to consider including directors, management, and/or large shareholders of the entities they seek to disqualify if that really is the goal. Now, using DISH and Echostar to further personal investing may be a problem, and in fact, some DISH shareholder have taken issue with how things have transpired (Shareholders Sue Dish, Charlie Ergen Over $2.2 Billion Spectrum Bid). That, however, has to do with Ergen and his role with DISH, and not Lightsquared.
Expanding the limitations on credit agreements like Lightsquared's to include directors, executives, and other shareholders could be argued as excessive. It may be. It certainly would further limit the pool of potential acquirers, but that's okay, if that's the desire. Credit agreements are contracts, and the parties are free to limit their scope of dealing in this way, as well if they so choose. In fact, we see this kind of language in contests all the time: "Employees and agents of [Entity], its respective affiliates and subsidiaries and members of their immediate families and households are not eligible." This kind of language could be adopted (and even expanded) for use in credit agreements.
If that is what a company wants, though, they need to specifically do so to carry out their intent. Maybe this issue is that, with the complaints about corporations being people, perhaps that some have forgotten that people are people, too, something I have known since at least 1984.