Wednesday, June 11, 2014
On May 28, 2014, the company owning The Inquirer (Philadelphia), the Daily News and other properties, was sold for $88M in a court-ordered, private, English-style auction. On petition for dissolution of the company, Vice Chancellor Parson (Delaware) ordered judicial dissolution and the private auction in an opinion issued on April 24, 2014.
This case presents a fascinating set of facts, unique legal analysis and discussion of LLC management, and the pitfalls of deadlock. The opinion also discusses the consequence of judicial dissolution versus private agreements (buy outs and dissolution procedures). It would make a great case for class room discussion, exam fact patterns and casebook inclusions.
Facts. The facts can be quickly summarized as follow: Interstate General Media LLC (IGM), a Delaware limited liability company, acquired the company (PMN) that owned The Inquirer, Daily News and other properties in 2012 for $55M. General American Holdings, Inc., a company controlled by George E. Norcross, III held a 54% interest in IGM. Intertrust GCN LP, a company controlled by Lewis Katz held a 26% interest. Both Norcross and Katz, as representatives of their respective companies which were joint Managing Members, served on IGM's 2- member Management Committee. The Management Committee controlled the daily operations of the company and decisions required unanimous consent. Disputes arose between Norcross and Katz concerning personnel, editorial freedom and the direction of the paper. The parties reached an irresolvable impasse over the firing of The Inquirer's Editor without Katz's approval. With the management committee in deadlock, the parties sought judicial dissolution of IGM.
LLC Agreement. The LLC agreement deferred dissolution matters to the court and didn't proscribe dissolution procedures. Noting the freedom of contract in LLCs, the choice not come to an agreement regarding dissolution at the outset of the relationship provided V.C. Parson with the justification he needed to fashion a unique remedy for the now-deadlocked parties.
"It is well-settled under Delaware law that LLCs are creatures of contract rather than statute, and that those who form LLCs are given great latitude in defining their rights and obligations by mutual agreement. Based on that freedom, the parties to the LLC Agreement were free to craft whatever procedure they wished to govern IGM’s dissolution. That freedom included the ability to proscribe the use of judicial dissolution altogether as a means to dissolve the Company. Instead, however, the parties chose not to exercise their contractual freedom in that regard and explicitly recognize the possibility of a judicial dissolution under Del. C.§ 18-802, and, in that context, submitted themselves to the discretion of the Court to determine how IGM should be dissolved."
The Auction. V.C. Parson's opinion outlines the different options and precedent for court-ordered dissolution and various mechanisms to maximize value. Having completed an evidentiary hearing on the matter, V.C. Parson had ample facts to weigh in crafting the appropriate remedy. He rejected General American Holdings (Norcross) plea for a public auction, instead preferring a private auction similar to the one proposed by Intertrust GCN (Katz). The court's discussion of the auction options and the role of auctions is a great, and informative, read. Ultimately, V.C. Parson concluded that there were no serious public bidders who would participate in a public auction and that the procedures would increase the costs of dissolving the company.
"I conclude that a public auction is unlikely to yield an additional ―serious bidder for IGM. Because IGM more likely than not would not realize any benefit from a public auction and because a public auction would both take longer and be more expensive to execute than a private auction, the value of IGM, and, thus, the value of IGM’s Members’ ownership interests, will be maximized by a private auction conducted among its interested Members, General American and Intertrust."
Instead, he ordered a private, English-style open auction where the parties, plus the Guild (the union for the papers) would submit bids and have 10 minutes to increase their bid to surpass the highest bidder. The opening bid was set at $77M reflecting the original purchase price ($55M) plus existing debt. V.C. Parson noted that both Norcross and Katz, and substantial interest holders in IGM were both a buyer and a seller and therefore had adequate incentives to bid at a premium.
"[W]hen one side reaches the highest price it was willing to pay for the asset, it still has an incentive to keep bidding because even if it ultimately loses the auction, because it is also a seller, it will benefit from driving the price as high as possible."
Additionally, the parties had equal access to confidential information about the company and no apparent material advantage over the other.
The Forecast. A quick search of Delaware cases in WestLaw indicates that this remedy is unique-- no other published opinions mandate an open, English-style auction. V.C. Parson's opinion makes it clear that "determining the value maximizing process by which an entity should be liquidated is both a fact-intensive and fact-specific endeavor that must be tailored to the particular circumstances and realities in which the entity is operating." This isn't like to ignite a new trend in company dissolutions, but the opinion's careful analysis of factors for and against options may be a blueprint for how to litigate these issues in the future.