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June 22, 2021, 1:12 p.m.
Business Models

Alden Global Capital and Tribune’s board are dancing at the edge of the law

Tribune board members acted in their own interests, not their newspaper chain’s, while Alden failed to disclose a secret investor meeting and misrepresented its cash position.

The ink wasn’t dry, but the hushed deal to finance Alden Global Capital’s takeover of Tribune Publishing fell quickly into place in May.

So quickly that the terms for saddling Tribune with hundreds of millions in debt must have been worked out well in advance by Alden and its attorneys.

Now that the purchase appears complete, the actions of Tribune’s former board come across as self-serving, while the facts suggest violations of both securities and corporate law.

Directors have a “duty to loyalty,” which means “board members must refrain from personal or professional dealings that put their own self-interest or that of another person or business above the interest of the company,” as Investopedia puts it.

But Alden’s interests were clearly ahead of others when the board overlooked the fact that Alden actually did not have the $375 million in cash it promised to buy the rest of Tribune’s shares.

Shareholders were misled when Tribune’s seven-member board repeated these claims by stating, “The Alden Funds have agreed to provide (Tribune) with an aggregate equity commitment of $375,000,000 in cash.”

Furthermore, in a Dec. 14 confidential letter to Tribune’s board that was later made public, Alden promised it would “fully finance the Transaction with cash on hand” and made the point explicit: “We will have no financing conditions and will not require third party debt or equity to finance the Transaction.”

Two months later, Alden again offered in a Feb. 16 “equity commitment letter” to pay for the purchase in cash, drawing from two Alden funds, the Alden Global Opportunities Master Fund LP, and the Alden Global Value Recovery Fund LP.

Tribune’s board must have known that Alden actually had zero intention of using its own money to complete the deal. For one thing, the two Alden funds had already filed reports showing they didn’t have that much cash. In fact, most of Alden’s investments are illiquid, as analyst Jim Baker of the Private Equity Stakeholder Project told me, and are mainly comprised of Alden’s Tribune stock and its other newspaper chain, MNG Enterprises.

If any member of Tribune’s board didn’t know this, they should have — it’s their fiduciary duty. But as I wrote in late April, it was obvious then that Tribune was going to be forced to take out big loans because the board specifically included this option in the deal’s fine print.

Aside from forcing Tribune to go into massive debt, why does this matter? Because it pushed away a competing offer that might have led to a happier ending for journalism.

Tribune’s directors rejected a higher-paying bid from Stewart Bainum Jr. — who wanted to return the chain’s papers to local control — “because Mr. Bainum has not yet secured the necessary financing for such proposal, nor can there be any assurance that he will be able to do so.” Yet the directors seemed unconcerned that Alden was equally unable to finance a deal.

Federal securities laws prohibit directors from making “intentional or reckless misrepresentations or material omissions made in offering documents or proxy solicitations,” according to the legal site Westlaw.

It’s difficult to see this as anything other than a misrepresentation by Alden and the board.

“A signed confession”

Still, there’s an even bigger problem raised by the Dec. 14 confidential letter.

The document notes that Alden founder and Tribune board member Randall Smith privately met with Bainum to work out a “joint transaction” that could facilitate Alden’s purchase of Tribune. But there’s no record showing this secret negotiation was ever presented to Tribune’s board until after the fact.

According to securities laws, the entire board should have been involved in any discussions involving a non-member, not just Smith.

“Directors have an obligation to all shareholders, not just the largest one,” said Cornish F. Hitchcock, a Washington, D.C., lawyer who has advised The NewsGuild, which represents workers at both Tribune and MNG Enterprises. (Disclosure: As a freelance reporter, I have written extensively about Alden for The NewsGuild and am a member of the Guild’s freelance unit.)

“When an offer comes in over the transom, individual directors have an obligation to present it to the board for mutual consideration,” Hitchcock said.

As Westlaw explains, “where a business opportunity becomes known to a director due to his position with the corporation, the director owes a duty to the corporation not to use that opportunity or knowledge for his own benefit.”

The board never publicly admonished Smith for privately taking steps in his own interest. Nor has the SEC taken any public action regarding Smith’s investor meeting.

Yet investment advisors tell me these acts could be violations of the law.

Smith’s private meeting, said one investor who asked not to be named because he works in the same business circles as Alden, was “a very serious breach of duty. This is extreme behavior.” With the Dec. 14 statement, the investor said, “Smith signed a confession letter.”

As for misrepresenting Alden’s cash position, the investor added, “Alden’s funds didn’t have that much cash. That raises questions about insolvency — the directors at Tribune had a duty to investigate the financial resources of the buyer.”

Exorbitant interest, jobs gone

Investors who may be shocked by Alden’s behavior probably “don’t fish in this particular pond,” Hitchcock said. In other words, it’s just the way companies like Alden do business.

Alden is, after all, a “vulture” firm that acquires distressed and bankrupt companies, but instead of building them up, it strips them for parts.

In numerous lawsuits, Alden has been sued by creditors and investors over allegations of self-dealing, withholding financial statements and other serious breaches of fiduciary duty. These claims were quietly settled in agreements that remain under seal.

“In the bankruptcy world, that’s the way the game is played,” Hitchcock said.

The Tribune board’s failure to call out Alden’s self-interest sends a message to hedge funds everywhere that they’re free to bend and even break the rules and norms of corporate ethics when they try to squeeze profits from local newspapers.

The price of this failure will be paid in the aftermath of taking Tribune private. Almost immediately, the largely debt-free chain shouldered nearly $300 million in loans for the sole purpose of making it easy for Alden to take control.

As part of the loan package, Alden is charging Tribune a 13% interest rate on $60 million it was forced to borrow from Alden’s other newspaper chain, MNG Enterprises — which screams of usury and self-dealing, even if it is legal. (All of companies involved are incorporated in Delaware, whose usury laws place no interest limit on most loans over $100,000.)

As the deal was completed, Tribune’s directors and officers rewarded themselves with nearly $12 million in payoffs after months of slashing the number of the people who actually produce the company’s core product — reporters, editors, ad salespeople, circulation staff.

This month, more than 80 employees accepted the buyouts offered immediately after Alden took control, further draining Tribune’s diminished newsrooms and permanently eliminating those positions.

Given the healthy profits Tribune has generated over the last several quarters, the cuts are there for just one reason: to achieve higher margins for Alden. Randall Smith will get richer while communities served by Tribune are starved of the information they need.

That’s not a step that smacks of long-term sustainability and corporate responsibility.

But in the world of vulture capitalists, this appears to be how the game is played.

Julie Reynolds is a freelance investigative reporter and a 2009 Nieman Fellow.

Photo by alamode used under a Creative Commons license.

POSTED     June 22, 2021, 1:12 p.m.
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