Saturday, May 22, 2021
I’ve been fascinated by the battle over the Tribune Publishing Company, because it’s a fairly stark example of directors’ obligation to maximize shareholder wealth conflicting with the broader interests of society, and is a textbook case for M&A classes.
Tribune Publishing has a troubled history, but was managing to turn a profit; Alden Global, a hedge fund with a 32% stake in the company, offered to buy out the remaining shareholders at a premium of around 35% (compared to the stock price prior to the announcement of its offer). Alden, owner of several newspapers, is known to run them ruthlessly, selling real estate, making significant cuts to newsrooms, and causing local coverage to suffer. The macro consequences are significant: as local news declines, corruption grows and services to residents are reduced.
That said, Alden’s papers have profit margins of about 17%; by contrast, the New York Times’s profit margin is 1%. From a fiduciary duty standpoint, the Tribune Board’s obligation here was a no-brainer; it was unlikely that any kind of long term plan would give shareholders as much value as Alden’s offer.
Reporters at the Tribune papers, of course, protested, but that was Alden’s problem, not the Board’s: if reporters chose to revolt over the sale, maybe even to the point of damaging the properties, the Tribune shareholders would still be cashed out and laughing all the way to the bank. Delaware offered no space for the Tribune Board to worry about the broader impacts of the sale on newspaper quality.
Enter Stewart Bainum Jr, a wealthy hotel magnate who wanted to buy just the Baltimore Sun and run it as a nonprofit – I gather on a model similar to the Salt Lake Tribune. But he felt he had been betrayed in negotiations by Alden, and instead decided to make a bid for the whole company. He joined with another billionaire, Hansjorg Wyss, to tentatively top Alden’s bid, which allowed the Tribune Board to share confidential information under the merger agreement. However, Wyss was not as altruistically-minded as Bainum; once he saw the financials, he dropped out, apparently because he realized the Chicago Tribune would never be a national paper. Bainum was unable to put together a new bid, and shareholders voted in favor of the deal yesterday.
But there was one bit of last minute intrigue. Patrick Soon-Shiong, the billionaire owner of the Los Angeles Times, held a 24% stake in Tribune, and he alone could block the sale because the merger agreement required two-thirds approval by the non-Alden shares. If he voted against it, the deal would be sunk. A few days ago, he told the Washington Post – improbably – that he had forgotten the shareholder meeting was set for May 21, and hemmed and hawed over how he planned to vote .
The day of the vote, he released a statement that he would “abstain” because he was a “passive” investor in Tribune – as though anyone could be passively invested while owning 24% of a high profile public company.
More importantly, he didn’t really abstain – he simply submitted a blank proxy card, and the Board voted his shares in accord with its recommendation, i.e., in favor of the sale. This initially caused some confusion in the reporting, because the proxy statement instructions distinguished between blank proxy cards submitted by shareholders of record, and blank proxy cards submitted by beneficial owners (i.e., holders in street name):
If you are a stockholder of record and you return your signed proxy card but do not indicate your voting preferences, the persons named in the proxy card will vote the shares represented by that proxy as recommended by the Board of Directors. If you are a beneficial owner and you return your signed voting instruction form but do not indicate your voting preferences, please see “What are ‘broker non-votes’ and how do they affect the proposals?” regarding whether your broker, bank, or other holder of record may vote your uninstructed shares on a particular proposal.
The proxy statement later explained that broker non-votes were, functionally, votes against. Soon-Shiong, with his large stake, was a record stockholder, and so his blank card was a delegation of voting power to Tribune’s Board – a vote in favor – despite his claim of abstention.
Why, then, did he not simply vote for the deal?
I assume because reporters across the country have been concerned about this sale for months – including reporters at Soon-Shiong’s LA Times. If he voted in favor, he would potentially have sown distrust in his own newsroom, and he thought he could square that circle by appearing to take no position. But taking no position wasn’t really an option for him: given the two-thirds voting requirement, if he had truly abstained, so that his votes simply weren’t counted one way or another, that would have been enough to block the deal. Even choosing not to decide would have been a decision.
Or is that really true, though? Because there was a third option available. He could have chosen echo voting – voting his shares in exact proportion to the votes of the other non-Alden shareholders. That would not have had no effect – his mere presence would have made it possible for Alden’s bid to succeed – but he would have delegated his decisionmaking to the other shareholders, which would have been a much more “passive” move than delegating it to Tribune’s Board. We don’t have the exact vote count yet, but apparently around 81% of the non-Alden shares voted for the deal. If that’s right, it means with echo voting, the vote probably would still have favored the deal, but it would have been a squeaker. I look forward to seeing the final totals.