Neil v. Zell
| Decision Date | 11 March 2010 |
| Docket Number | No. 08 C 6833.,08 C 6833. |
| Citation | 677 F. Supp.2d 1010 |
| Parties | Dan NEIL, Corie Brown, Henry Weinstein, Walter Roche, Jr., Myron Levin and Julie Makinen, individuals, on behalf of themselves and on behalf of all others similarly situated, Plaintiffs, v. Samuel ZELL; Greatbanc Trust Company, a Delaware corporation; EGI-TRB, L.L.C., a Delaware corporation; Tribune Company Employee Benefits Committee, Gerald Agema, Harry Amsden, Chandler Bigelow, Michael Bourgon, Donald Grenesko, James King, Luis E. Lewin, Ruthellyn Musil, Susan O'Connor, John Poelking, Naomi Sachs, Irene Sewell, Gary Weitman, Jeffrey S. Berg, Brian L. Greenspun, Betsy D. Holden, William A. Osborn, William Pate, Mary Agnes Wilderotter, Mark Shapiro, Frank Wood, Dennis J. Fitzsimons, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
Daniel M. Feinberg, Todd F. Jackson, Angelica Jongco, Nina Wasow, Lewis, Feinberg, Renaker & Jackson, PC, Oakland, CA, Gerald S. Ohn, Joseph W. Cotchett, Laura Schlichtmann, Philip L. Gregory, Cotchett Pitre and McCarthy, Burlingaihe, CA, Hina E. Sodha, Michael M. Mulder, Paul William Mollica, Thomas R. Meites, Meites, Mulder, Mollica & Glink, Chicago, IL, for Plaintiffs.
Craig Christopher Martin, David J. Bradford, Amy Danielle Wills, Barry Levenstam, Douglas Allen Sondgeroth, Jenner
& Block LLP, Chicago, IL, for Defendants.
Plaintiffs are six current and former employees of Tribune Company who participated in the company's Employee Stock Ownership Plan ("ESOP"), which was created in 2007 as part of a deal that converted Tribune Company from a publicly traded company to a private company wholly owned by the ESOP. They seek to represent a class of participants in the ESOP. Defendants include GreatBanc, the trustee of the ESOP; members of the committee that oversaw the ESOP; members of Tribune Company's Board of Directors; and Samuel Zell. Zell was instrumental in structuring the going-private deal, which made him the CEO of Tribune Company after the deal was completed in December 2007. Tribune took on $8.3 billion in new debt to finance the deal but was unable to repay that debt when profits declined, and the company is now in bankruptcy.
In Claim One, Plaintiffs allege that, by carrying out the transaction, Defendants violated their fiduciary duties under the Employee Retirement and Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq. Among other allegations, Plaintiffs allege that the deal was imprudent because of the great amount of debt Tribune took on. In Claim Two, Plaintiffs allege that several parts of the deal were prohibited transactions under ERISA. They allege that the ESOP paid too much for its shares of Tribune Company, that the purchase was improper because those shares were not immediately marketable, that Tribune Company paid too much for the shares it bought to take the company private, that it was improper for the ESOP to bargain away its voting rights to Zell, and that a voting agreement with the Company's biggest shareholder was impermissible. Defendants have moved to dismiss both counts. For the reasons that follow, Defendants' motion is granted in part and denied in part. Claim One is dismissed, except for the claim of fiduciary breach against Defendant GreatBanc and the claim of knowing participation in a fiduciary breach against Defendants Zell and EGI-TRB. Claim Two is dismissed as well, except for the claims that GreatBanc breached its fiduciary duty by agreeing to the direct and indirect purchases of Tribune stock and by agreeing to the Investor Rights Agreement and the claim that Zell and EGI-TRB knowingly participated in an ERISA violation.
On June 10, 1847, the Chicago Tribune printed its first edition on a hand press in a run of 400 copies. TRIBUNE COMPANY:: HISTORY, http://www.tribune.com/ about/history.html (last visited Dec. 7, 2009). By 2006, Tribune Company was a publicly traded company worth billions that owned, among other assets, 10 daily newspapers, 25 television stations, more than 50 websites, significant real estate holdings, and, most importantly to some readers, the Chicago Cubs. (Compl. ¶ 59.) As the media industry reacted to the rise of the internet, profits at Tribune and its competitors declined and shareholders began to agitate for change. Katharine Q. Seelye, Tribune to Consider Selling Some Media Assets, N.Y. TIMES, Sept. 22, 2006, at C1. In response, in September 2006, Tribune created a special committee of its Board of Directors to consider structural changes to the company, including a sale of some or all of its assets. Id.; (Compl. ¶ 60). Over the next six months, the Board and the Committee considered several options, including various plans to sell the company; a plan to spin-off the Broadcasting and Entertainment Group; and an ESOP transaction, proposed by Samuel Zell, that would take the company private and make the employees the owners. (Compl. ¶¶ 62, 65, 75.)
An ESOP is "a type of pension plan intended to encourage employers to make their employees stockholders." Steinman v. Hicks, 352 F.3d 1101, 1103 (7th Cir.2003). Congress has encouraged the creation of ESOPs by "giving tax breaks and by waiving the duty ordinarily imposed on trustees by modern trust law. . . to diversify the assets of a pension plan." Id. Significantly, Congress intended ESOPs to serve dual purposes, as both "an employee retirement benefit plan and a technique of corporate finance that would encourage employee ownership." Martin v. Feilen, 965 F.2d 660, 664 (8th Cir.1992) (internal quotation omitted). Employees may be involved in the decision to create an ESOP, but, because the ESOP is a technique of corporate finance and because of the generally voluntary nature of the system governed by ERISA, no such employee input is required. See Michael W. Melton, Demythologizing ESOPs, 45 TAX L.REV. 363, 381 n. 86 (1991). Employee ownership does not require direct employee control; instead, control can be given to the plan's fiduciary, who must manage the plan prudently under ERISA § 404, 29 U.S.C. § 1104. In February 2007, because it was considering Zell's ESOP plan, Tribune Company hired GreatBanc to serve as trustee of the possible ESOP. (Compl. ¶¶ 43, 69.) Presumably, Tribune intended to avoid a conflict between its own interests and that of its employees, who would become owners of the company if the deal went through.
After considering the options, Tribune decided on Zell's ESOP deal. (Id. ¶ 75.) The deal involved several parts, all of which were formally agreed to on April 1, 2007. First, the ESOP Trust was established effective February 7, 2007, and the ESOP Plan was established with an effective date of January 1, 2007. (Defs' Ex. 15, at 1, Ex. 20, at 1.) The document establishing the Plan states that the Company's Board of Directors is responsible for appointing the Plan's trustee as well as the members of the committee responsible for administering the Plan. (Defs' Ex. 20, at 1-2.) That committee, the Employee Benefits Committee ("EBC"), was given discretion to authorize the trustee to act without the committee's direction with regard to "any matter concerning the purchase, sale, or voting of Company Stock, including the financing and other matters incidental to such purchase or sale." (Id. at 53.)
Second, the ESOP bought 8,928,571 newly issued shares of Tribune Company's common stock from Tribune Company at $28 per share. (Compl. ¶ 89.) The ESOP paid for the purchase with a promissory note in the principal amount of $250 million to be paid to Tribune Company over 30 years. (Id.) Thus, the transaction created a leveraged ESOP in which "the loan, including interest, is repaid by the trustee from the cash contributions of the employer." Dan M. McGill & Donald S. Grubbs, Jr., FUNDAMENTALS OF PRIVATE PENSIONS at 678 (6th ed.1989). Those cash contributions were made possible by Tribune's elimination of matching contributions to the Company's 401(k) Plan. (Compl. ¶ 109, 114.) As a condition of the stock purchase, the ESOP was prohibited from reselling its shares. (Id. ¶ 90.) As required by the purchase agreement, GreatBanc obtained an analysis of the deal from an outside consulting firm. That analysis, set forth in a letter by the consultant, Duff & Phelps, LLC, concluded that "the terms and conditions of the Proposed Transaction are fair and reasonable to the ESOP from a financial point of view." (Defs' Ex. 25, at 7.)
Third, EGI-TRB, an entity controlled by Zell, invested $250 million in Tribune Company in exchange for 1,470,588 shares of Tribune Company's common stock and a promissory note from the Company in the principal amount of $200 million, which the Company repaid after the merger. (Compl. ¶¶ 44, 91.) The difference between EGI-TRB's investment and the principal of the promissory note, $50 million, represents a share price of $34 per share. Also in exchange for EGI-TRB's investment, the parties agreed to the Investor Rights Agreement, which gave Zell and EGI-TRB rights of corporate governance following the merger. (Id. ¶ 78, 93.) That is, although the ESOP would have complete ownership of the Company, Zell would have the power to manage it under the Investor Rights Agreement, which requires the ESOP to vote its shares in favor of Zell and two directors of his choosing. (Id. ¶ 169.) As part of the Agreement, Zell was appointed to the Tribune Board on May 9, 2007. (Id. ¶ 95.) In another agreement, the Chandler Trusts, Tribune Company's then-largest shareholders, agreed to vote their shares in favor of the deal. (Id. ¶ 92.) Tribune Company filed a shelf-registration statement as part of the agreement with the Chandler Trusts.1 Presumably, the statement allowed the Trusts' later sale of their shares, but Plaintiffs have not explained in detail how the Trusts benefitted from the agreement. (Id.)
On April 25, 2007, after the ESOP and...
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