By Alison Frankel
NEW YORK (Reuters) - In an order issued late Friday, Judge Elizabeth Gonzalez of Nevada state court in Las Vegas effectively informed Dish Networks Chairman Charles Ergen and his fellow board members that Dish's peculiar corporate governance practices pose real risks to them and the company.
Gonzalez, who is presiding over a shareholder derivative suit against Dish's board, granted expedited discovery to minority shareholders who claim that Ergen is conflicted in Dish's $2.2 billion stalking horse bid for spectrum licenses belonging to the bankrupt wireless communications company LightSquared. The judge also scheduled a November 12 hearing on the shareholders' motion for a preliminary injunction to bar Ergen - who is LightSquared's largest creditor, holding $850 million in debt acquired through a personal investment vehicle - from participating in Dish's attempt to acquire the LightSquared licenses.
Gonzalez's order comes despite Dish's 11th-hour attempt last month to forestall the minority shareholders' suit by appointing a purportedly independent litigation committee, and despite arguments by the special committee's counsel at Young Conaway Stargatt & Taylor and Holland & Hart that permitting the shareholders to proceed would interfere with Dish's ability to acquire those strategically crucial LightSquared assets. It seems clear to me that after a scant two months of litigation in the derivative suit, the judge is skeptical that Dish can muster an independent board committee - or even that its directors are trying very hard to assure any such committee's independence.
The minority shareholders, represented by lead counsel at Bernstein Litowitz Berger & Grossmann, have given Gonzalez good reason to wonder. As I told you in late September, the derivative litigation was sparked by the Dish board's decision in July to disband a previous special committee, this one tasked with overseeing Dish's bid in the LightSquared auction. That two-member committee had been appointed to ward off any suggestion that Ergen's personal stake in LightSquared was influencing Dish's offer for the bankrupt company's chief asset. But days before Dish submitted its $2.2 billion bid in LightSquared's Chapter 11, the special committee was dissolved. Dish has said that its work was concluded, but committee member Gary Howard subsequently quit Dish's board in what The Wall Street Journal reported to be a protest over its cancellation.
Outside shareholders asked for hurried-up discovery and a preliminary injunction, arguing that they needed to protect Dish's bid. LightSquared and its own controlling stakeholder, Philip Falcone's Harbinger Capital, were so suspicious of Ergen and Dish that Dish was barred from acquiring LightSquared debt. Harbinger later sued Ergen and his company (in an adversary proceeding in LightSquared's Chapter 11) for conspiring to circumvent that bar. Harbinger has also advanced a reorganization plan for LightSquared that would permit the hedge fund to retain the spectrum licenses.
Dish's lawyers at Sullivan & Cromwell told Gonzalez in September that the derivative suit - and not Ergen's supposed conflict - imperiled Dish's bid for LightSquared. They asked the judge to deny the shareholders' injunction and discovery motions, arguing that any information obtained by the minority shareholders would boost Harbinger in LightSquared's adversary proceeding.
Nevertheless, Dish was sufficiently worried about the derivative suit that last month, right before a hearing in Judge Gonzalez's courtroom, the Dish board suddenly appointed a new two-member special litigation committee to evaluate the claims of minority shareholders. Notably absent from the supposedly independent committee was director Stephen Goodbarn, who had been on the previously disbanded special committee (and, unlike fellow member Howard, didn't resign from the board). Gonzalez said at last month's hearing that she'd give the new committee the benefit of the doubt. She ordered minority shareholders to serve a demand on the committee, who she ordered to respond by October 3.
Shareholders sent their demand on September 27. "We note our concern that even if the (special litigation committee) members would otherwise like to act independently, Mr. Ergen may simply be too much of a micromanaging controlling shareholder to properly empower and not interfere with the SLC's actions," wrote Mark Lebovitch of Bernstein Litowitz in a letter to the committee. "The risks created by Ergen's undisclosed debt purchases have materialized, and are being exacerbated by Ergen's refusal to permit independent directors to control Dish's actions in the bidding process. The board's refusal to isolate Ergen from influencing Dish's bid is itself an act of bad faith. Put simply, if any truly independent board learned that one of its directors was the largest creditor of the company's principal takeover target with a personal financial interest in any bid, that independent board would surely isolate the director/creditor from the company's assessment and execution of its bidding efforts."
In its response on behalf of the committee, Young Conaway said that Dish board members Tom Ortolf and George Brokaw need four months to conduct interviews and review documents, and hoped to complete the committee's investigation by January, after the LightSquared auction concludes. That timetable would moot the minority shareholders' request for an injunction, but the letter said that there's no need to move more quickly since the LightSquared bankruptcy judge has just approved Dish as a stalking horse bidder, despite the ruckus kicked up by Harbinger and Dish's minority shareholders. That approval, according to the special committee, removes any appearance of a conflict between Ergen and Dish since any active bid in the LightSquared auction would pay off Ergen's secured debt in full, eliminating any personal interest Ergen might have in the auction process. Better simply to let the Dish board concentrate on the LightSquared auction, the special committee argued, rather than to distract directors with the baseless concerns of minority shareholders. "Responding to expedited discovery and preparing for the requested evidentiary hearing on the motion for a preliminary injunction would consume valuable time," the Young Conaway letter said. "This time might otherwise be invested in the efforts to acquire LightSquared."
The special committee letter disclosed that Ortolf is a longtime business partner of Ergen's and that Ergen's wife is the godmother of Brokaw's son. It didn't mention - though Bernstein Litowitz found out anyway - that Ortolf's son is a former Dish employee and his daughter currently works at the company. In a fiery status report submitted to Judge Gonzalez last Thursday, the minority shareholders argued that Ortolf and Brokaw cannot possibly be considered independent, given their close personal ties to majority shareholder Ergen. If Dish's board really wanted an independent committee to evaluate the shareholder derivative claims, the report said, it would have appointed Goodbarn, who has demonstrated his willingness to stand up for minority shareholders. (Minority shareholders have dropped Goodbarn as a defendant in their suit and are now describing him as the lone independent member of Dish's board.) Instead, directors appointed a captive committee as a litigation tactic, according to the status report.
"The (committee's) assessment of plaintiff's claim is so flawed that it shows it cannot be trusted," the report said. "The (committee) clearly has not reviewed any documents outside the court filings and has not bothered to speak with anyone involved in the prior special committee, including Mr. Goodbarn. The entire premise of this case is that the board's premature termination of the special committee when it asserted independence from Ergen illustrates why independent leadership is needed now. The (committee's) refusal to look at the very documents that would either support or refute plaintiff's claim for injunctive relief illustrates the lack of good faith of their position."
Judge Gonzalez's order Friday doesn't discuss the merits of either side's argument, but she does say that she reviewed all of the briefing. So we can assume that in granting the minority shareholders' motions, she decided their concerns about a tainted bidding process, Ergen's alleged conflicts and the committee's independence outweighed Dish's arguments for leaving any investigation in the hands of the special litigation committee and permitting directors otherwise to concentrate on the LightSquared auction. Dish is going to have to produce documents and gear up for depositions while the auction process is under way - just what its directors didn't want to do.
What would have happened if Dish had appointed a special litigation committee without the sort of ties Ortolf and Brokaw have to Ergen? We'll never know, just as we'll never know whether Dish directors could have entirely avoided litigation with minority shareholders by keeping the previous special committee intact for the duration of the LightSquared auction. That's apparently not how Ergen and his board roll on matters of corporate governance. In appointing what seems to be a compromised second special committee, they seem not to have learned much from the consequences of disbanding the first committee.
In response to my query, a Dish spokesman directed me to the board resolution appointing Ortolf and Brokaw, which states the board's belief that the two are independent. I should also note that it's possible Judge Gonzalez's order Friday doesn't reflect the merits of the minority shareholders' arguments but just permits them to move ahead so that their injunction claim isn't mooted without discovery.
(Alison Frankel is a Reuters columnist. The opinions expressed are her own.)
(Reporting by Alison Frankel; Editing by Ted Botha)