Tribune Co. v. Fitzsimons
| Decision Date | 30 November 2018 |
| Docket Number | Multidistrict Litigation No. 11-md-2296 (RJS),No. 13-cv-3738 (RJS),No. 13-cv-3737 (RJS),Master Case File No. 12-mc-2296 (RJS),No. 13-cv-3753 (RJS),No. 13-cv-3740 (RJS),No. 13-cv-3750 (RJS),No. 13-cv-3739 (RJS),No. 13-cv-3751 (RJS),No. 12-cv-2652 (RJS),No. 13-cv-3746 (RJS),No. 13-cv-3742 (RJS),No. 13-cv-3749 (RJS),No. 13-cv-3745 (RJS),No. 13-cv-3736 (RJS),No. 13-cv-3744 (RJS),No. 13-cv-3741 (RJS),No. 13-cv-3748 (RJS),No. 13-cv-3752 (RJS),No. 13-cv-3743 (RJS),No. 13-cv-3747 (RJS),12-cv-2652 (RJS),13-cv-3736 (RJS),13-cv-3737 (RJS),13-cv-3738 (RJS),13-cv-3739 (RJS),13-cv-3740 (RJS),13-cv-3741 (RJS),13-cv-3742 (RJS),13-cv-3743 (RJS),13-cv-3744 (RJS),13-cv-3745 (RJS),13-cv-3746 (RJS),13-cv-3747 (RJS),13-cv-3748 (RJS),13-cv-3749 (RJS),13-cv-3750 (RJS),13-cv-3751 (RJS),13-cv-3752 (RJS),13-cv-3753 (RJS) |
| Parties | IN RE TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION MARC S. KIRSCHNER, AS LITIGATION TRUSTEE FOR THE TRIBUNE LITIGATION TRUST, Plaintiff, v. DENNIS J. FITZSIMONS et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
This is the third Opinion and Order issued by this Court resolving claims arising out of the 2007 leveraged buyout ("LBO") of the Tribune Company ("Tribune" or the "Company") and its subsequent 2008 bankruptcy. The multidistrict litigation ("MDL") in which these claims arise includes several actions brought by Tribune's litigation trustee, Marc Kirschner (the "Trustee"), in which he seeks to recover assets for Tribune's creditors. Now before the Court are five motions to dismiss claims asserted against various individuals and entities who were involved in, and/or received payments following, the LBO transaction. (11-md-2296, Doc. Nos. 5939, 5938, 5942, 5933, 5928.) The relevant claims are asserted in several complaints, including those filed in (1) Kirschner v. FitzSimons, No. 12-cv-2652 (the "FitzSimons Complaint") and (2) eighteen tag-along actions, Nos. 13-cv-3736 through 13-cv-3753 (the "Tag-Along Complaints").1 For the reasons set forth below, all five motions are GRANTED.
Prior to filing for bankruptcy in 2008, Tribune was "America's largest media and entertainment company," owning numerous radio and television stations and major newspapers, including the Chicago Tribune and the Los Angeles Times. (FitzSimons Compl. ¶ 116.) However, in the years preceding the 2007 LBO, the newspaper publishing business - which made up approximately 75% of Tribune's revenues - experienced a consistent decline in circulation and profits. (Id. ¶¶ 122-23.) In fact, Tribune experienced shrinking profits even more acutely than the industry as a whole. (Id. ¶ 125.) Accordingly, in 2005, the Company began a strategic review of its businesses, and, in May of 2006, it entered into a leveraged recapitalization transaction. (Id. ¶ 126-27.)
Following the May 2006 transaction, 33% of Tribune stock was held by two constellations of family trusts and foundations - (1) the Chandler Trusts, which owned 20% of Tribune stock, and (2) the Robert R. McCormick Foundation ("McCormick Foundation") and the Cantigny Foundation (together with the McCormick Foundation, the "Foundations"), which collectively owned approximately 13% of Tribune stock. (Id.) Tribune had an eleven-member board of directors (the "Board"), which was chaired by Tribune's President and Chief Executive Officer ("CEO"), Dennis FitzSimons, who also served as Chairman of the McCormick Foundation and a board member of the Cantigny Foundation. (Id. ¶¶ 27, 38.) The Board also included three trustees and/or beneficiaries of the Chandler Trusts - Jeffrey Chandler, Roger Goodan, and William Stinehart Jr. (the "Chandler Directors"). (Id. ¶¶ 35-37.) Finally, the Board included seven independent members who neither served as Tribune officers nor were affiliated with the Chandler Trusts or the Foundations (the "Independent Directors") - Enrique Hernandez, Jr., Betsy D. Holden, Robert S. Morrison, William A. Osborn, J. Christopher Reyes, Dudley S. Taft, and Miles D. White. (Id. ¶¶ 28-34, 39.)
In June of 2006 - soon after the leveraged recapitalization transaction - Stinehart, acting in his capacity as the trustee of the Chandler Trusts, wrote to the Board expressing dismay over the Company's deteriorating business. (Id. ¶ 129.) In response to Tribune's troubling economic realities, Stinehart "demanded" that a special committee of independent directors be formed to "take prompt decisive action to enhance stockholder value." (Id. ¶ 130.) Accordingly, in September of 2006, the Board announced the formation of a special committee (the "Special Committee"), which was composed of the seven Independent Directors. (Id. ¶ 136.)
In January 2007, private-equity investor Sam Zell emerged as a bidder for Tribune (Id. ¶ 145), and, on February 2, 2007, Zell - in association with Equity Group Investments ("EGI"), a company in which he owned a controlling interest - proposed that EGI-TRB, an affiliate of EGI, buy all of Tribune's outstanding stock pursuant to a merger. (Id. ¶¶ 76-78, 145-46). Over the course of the next several weeks, Zell negotiated his proposal with Tribune and the Special Committee, which sought the views of the Chandler Trusts and the Foundations on a number of occasions. (Id. ¶¶ 147-51.) Zell and EGI also negotiated directly with the Chandler Trusts. (Id. ¶ 151.) Throughout these negotiations, Morgan Stanley advised the Special Committee, and Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill Lynch") and Citigroup Global Markets, Inc. ("Citigroup") advised the Board as a whole. (Id. ¶¶ 14-15, 90, 92, 127, 137, 155-56, 167, 336-38.)
Kazan3 prepared projections forecasting Tribune's financial health through 2011 (the ''February Projections") while simultaneously "negotiat[ing] with Zell over the amount of the special money incentives they would receive if the LBO was consummated." (Id. ¶¶ 170-74.)
Ultimately, Zell and EGI submitted a revised proposal whereby Tribune would enter into a two-step LBO transaction. (Id. ¶¶ 119, 150.) In the first step ("Step One"), Tribune would borrow approximately $7 billion and execute a tender offer, purchasing about 50% of Tribune's outstanding shares at $34 per share. (Id. ¶ 211.) In the second step ("Step Two"), Tribune would borrow another $3.7 billion, purchase its remaining shares, and merge with the newly formed Tribune Employee Stock Ownership Plan ("ESOP"). (Id. ¶ 211.) At the conclusion of the LBO, Tribune would become a private company, wholly owned by the ESOP. (Id. ¶ 355.) Zell's proposal also included financial benefits that would be awarded to the Officer Defendants, and to the officers and directors of Tribune's subsidiaries, if the LBO was consummated.
As the deal with Zell was being negotiated, Tribune hired additional financial advisors to perform various roles necessary to ensure a successful transaction. On February 13, 2007, the Board hired accounting firm Duff & Phelps to provide a solvency opinion for the LBO.4 (Id. ¶ 176.) And on February 26, 2007, the Board hired GreatBanc Trust Company ("GreatBanc") to serve as trustee of the ESOP and to evaluate the LBO transaction on the ESOP's behalf. (Id. ¶ 177.) Duff & Phelps also agreed to provide a separate, but substantially identical, solvency opinion to GreatBanc to assist it in assessing the LBO. (Id. ¶¶ 178-79.)
By March 28, 2007, however, Duff & Phelps advised the Board that it could not provide an opinion as to Tribune's post-LBO solvency unless it incorporated what the Duff & Phelps team considered an impermissible consideration: $1 billion in tax savings that Tribune expected would result from converting the Company into a subchapter S corporation following the LBO. (Id. ¶¶ 180-82, 185, 187.) Accordingly, the Board terminated Duff & Phelps' engagement to issue a solvencyopinion. (Id. ¶ 187.) Nevertheless, on April 1, 2007, Duff & Phelps issued a "viability opinion" for GreatBanc's benefit, in which it concluded that "the fair market value of Tribune's assets would exceed the value of its liabilities on a post-transaction basis" and that Tribune "would be able to pay its debts as they became due." (Id. ¶¶ 188-89, 193.) According to the Trustee, this opinion was "the equivalent of a solvency opinion," with the exception that it took Tribune's expected tax savings into account. (Id. ¶ 189.)
On April 1, 2007, the same day Duff & Phelps produced its viability opinion for GreatBanc, GreatBanc's ESOP Committee approved the LBO. (Id. ¶ 193.) Also on that day, the Special Committee unanimously recommended that the Board approve the LBO. (Id. ¶ 211.) Accordingly, a majority of the Board - that is, six of the Independent Directors and FitzSimons - voted to approve the transaction. (Id.) Dudley S. Taft, the seventh Independent Director, was absent at the time of the vote, and the Chandler Directors abstained; however, no director casted a dissenting vote. (Id.) Tribune then executed a voting agreement and registration rights agreement with the Chandler Trusts in which the Trusts agreed to vote their shares in favor of the LBO in exchange for preferential registration rights. (Id. ¶ 204.) This agreement "virtually guaranteed shareholder approval for the LBO." (Id. ¶ 205.) On April 2, 2007, Tribune publicly announced that it had agreed to Zell and EGI's proposal. (Id. ¶ 226.)
Knowing that a solvency opinion would be required before the transaction could close, and in light of the fact that Duff & Phelps had declined to produce such an opinion, Tribune management began soliciting bids from other valuation firms. (Id. ¶¶ 197-98.) On April 11, 2007, Tribune formally engaged Defendant Valuation Research Corporation ("VRC") - a "lesser known solvency opinion firm" - to provide two solvency opinions that would be presented to the Board prior to the consummation of each step of the LBO. (Id. ¶¶ 198, 201.) VRC's engagement letter provided that it would rely on a definition of fair value that included Tribune's expected tax savings. (Id. ¶ 201.)
On April 23, 2007, EGI-TRB made a $250 million investment in Tribune in exchange for nearly 1.5 million shares and a $200 million promissory note, payable...
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