September 11, 2013
Of Boards and Special Committees
Posted by Usha Rodrigues

Today's WSJ brings news of behind-the-scenes drama at the Dish Network, and it sounds way fishy to me.  Dish's founder and controlling stockholder, Charlie Ergen, bought up the debt of competitor LightSquared on the cheap while the company was in bankruptcy.  Then Dish cast its acquisitive eye on LightSquared.  Prudently, it formed a special committee consisting of Stephen Goodbarn and Gary Howard, two of Dish's independent directors, because of the conflict of interest the situation posed.  A Dish bid could net Ergen millions, after all.  (The WSJ describes these 2 as the only independent directors out of the 8 member board, but that seems unlikely, given that the audit committee is required to be composed of 3 independents.  The company's last proxy lists Tom A. Ortolf as the last audit committee member; presumably he is independent). Then things get interesting...

So here's the basic timeline:  Ergen buys up LightSquared debt (unclear when).  In July, a special committee consisting of Goodbarn and Howard is formed to consider a Dish bid for LightSquared. The special committee recommends a bid. But the members "expected the committee to have an ongoing role in the deal discussions." July 21, in a surprise move, the board disbands the committee.  July 23, Dish bids $2.2 billion for LightSquared.  July 25, independent director (and late special committee member) Howard resigns, without citing any specific reason for his departure.

What's left out of this account is what else was going on at Dish at the time.  In June the company was fighting with Sprint to acquire Clearwire, and bowed out June 26th.  And in June Dish also gave up on a bid for Sprint to SoftBank.

So, to review, Dish gives up on two major acquisitions in June. The next month it decides to buy a company Ergen owns a significant interest in. The acquisitions are of vastly different orders of magnitude, admittedly, but one possible inference is that Ergen wanted to have cash on hand to buy out a company that would enrich him personally.  These negative inferences are just why it is wise to employ a special committee in these types of negotiations.

So why disband the special committee so quickly?  One of the WSJ's sources explains "Mr Ergen stood to profit even if another company ended up buying LightSquared, which meant he wasn't motivated to force a Dish bid for personal gain."  Um, yeah, that doesn't make any sense at all.  There's no evidence that there were or are other companies sniffing around LightSquared, or at least willing to pay this much, so Ergen's motive for forcing a bid seems pretty potent.  Even if the only effect of the Dish bid is to scare up a competing, higher bid, that's still good for Ergen.   Particularly in light of the June happenings, these events just seem questionable.

Situations like these highlight how important the role of the board is and should be in conflict situations.  The board shouldn't have the power to dissolve a committee; indeed, the role of the whole board should be to focus on these conflict-of-interest type situations.



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