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From Securities Regulation Daily, April 28, 2014

Deadlocked LLC to be dissolved, liquidated in private auction

By Mark S. Nelson, J.D.

A deadlocked Delaware limited liability company whose managing members agreed that judicial dissolution was needed, but disagreed on the type of auction process to use in selling the business, must be dissolved and liquidated via a private, English-style, open outcry auction, said the Delaware Chancery Court. In reaching this conclusion, the Chancery Court distinguished an earlier Delaware case in which the parties battled over whether there would be a competitive bidding process, and found the public auction theory testimony here unconvincing (In re Interstate General Media Holdings, LLC, April 25, 2014, Parsons, Jr., D.).

Venerable assets. The case arose from a deadlock between the managing members of Interstate General Media Holdings, LLC (IGM), which, at the behest of a former Pennsylvania governor, came to own several “venerable news publications,” including the Philadelphia Inquirer. Knight Ridder first acquired most of what would become IGM’s news assets for $55 million in 1969.

Through a succession of deals in the 2000s, IGM acquired (“rescued,” according to some) its news assets from a hedge fund group, which had bought them for $139 million in a bankruptcy sale from Philadelphia Media Network LLC (PMN), which in turn acquired them from a series of owners who succeeded Knight Ridder. Although IGM’s news assets had been sold for more than $500 million as recently as 2006, PMN’s bankruptcy had whittled their value down to their 1969 level of $55 million.

IGM was structured as a Delaware LLC to manage PMN’s assets, with General American Holdings, Inc. (General American) and Intertrust GCN, LP (Intertrust) as the managing members, represented by George E. Norcross III and Lewis Katz, respectively. Norcross and Lewis had veto power over IGM’s management committee and six-member board; their ongoing disagreements over how to manage the business ultimately led to deadlock. H.F. “Gerry” Lenfest, IGM’s chairman, sided with Intertrust in the dissolution litigation. The parties agree that judicial dissolution and an auction are needed, but still disagree over the type of auction to be held.

Intertrust petitioned for dissolution in Pennsylvania; General American sought dissolution in Delaware. The Newspaper Guild of Greater Philadelphia, Local 38010, AFL-CIO, CLC, a labor union, intervened on behalf of its members, who are employees of IGM’s news publications. The union, however, did not side with General American or Intertrust because it could bid in either a private or public auction if it had enough financial backing.

Open outcry. General American argued that a private, English-style auction limited to IGM’s members and the union would maximize IGM’s value. Respondent Intertrust urged the Chancery Court to order a public auction in which each bidder would submit a single, sealed bid.

Vice Chancellor Parsons began by finding that IGM’s deadlock had dimmed PMN’s business prospects. The Vice Chancellor said that while PMN did not face a “dire” situation or “financial cliffs” (it had recently begun to stabilize), it still faced many challenges in leveraging its advertising revenues while managing twin, unsustainable strategies of raising prices and cutting costs. As a result, an auction would be needed within a reasonable time frame, but not the shortest period.

The Vice Chancellor then engaged in a fact-specific examination of how IGM should be dissolved. IGM’s LLC agreement was inapt because the parties did not specify how to wind-up IGM, but instead invoked the Chancery Court’s discretion. As a result, the Vice Chancellor said the LLC agreement was “irrelevant” on the question of what type of auction to use.

As for whether to conduct a public or private auction, the Vice Chancellor said the evidentiary record here (unlike the Bentas “paper” record) favored the private approach. Even though the goal of value maximization is in step with the Chancery Court’s Bentas, opinion, the auction process here would be irreversible and, unlike Bentas, the parties desire competitive bidding.

The Chancery Court found it unlikely that a public auction would entice new bidders; the union’s six, once-interested bidders had backed-out, apparently upset with by the $77 million floor. Likewise, General American’s expert testified that bidders would be dissuaded by IGM’s valuation multiple (8 times projected EBITDA), which was more than twice that of all but one major news asset sold after the 2008 financial crisis. This expert witness said the sale of theWashington Post to Amazon.com founder and CEO, Jeff Bezos, was the only recent newspaper deal done at a high multiple (17 times projected EBITDA).

The Chancery Court also found it unlikely that new bidders would emerge given the “seller-friendly basis” for either a public or private auction. IGM’s auction would be “as is, where is,” and the winning bidder could not bring any claims against IGM’s members.

Moreover, the Chancery Court found no apparent benefit to conducting a sealed bid auction instead of an English-style auction. For one, sealed bids would not further level the playing field for General American and Intertrust because they have roughly equal access to IGM’s financial and other information.

The Chancery Court also was unpersuaded by Intertrust’s auction theory. Intertrust told the Chancery Court that a public, sealed bid auction would maximize value for IGM by forcing bidders to make their best bid early out of fear they could lose to another bidder, while the English method’s use of bid increments could result in the seller losing a significant amount of the asset’s value. The Chancery Court discounted testimony by Intertrust’s auction experts: one expert’s testimony was based on an assumption that IGM’s auction would be public; the other expert disputed American General’s claim that English-style auctions always achieve maximum value, but did not state a view on the question of whether to use an English-style auction or sealed bids.

As a result, Vice Chancellor Parsons said that American General’s and Intertrust’s valuations of IGM are mostly in-sync, and they both have “toeholds” which should lead them to bid competitively based of their sizeable stakes in IGM. Put another way, American General and Intertrust are each buyers and sellers with an incentive to push the sale price ever higher. The Vice Chancellor also said both likely bidders have sophisticated backers and that neither is likely to have an obvious advantage in an English-style auction that needs to be curbed by the Chancery Court’s intervention.

The case is No. 9221-VCP.

Attorneys: P. Clarkson Collins, Jr. (Morris James LLP) and Robert C. Heim (Dechert LLP) for General American Holdings, Inc. Jody C. Barillare (Morgan, Lewis & Bockius LLP) for Interstate General Media Holdings. Collins J. Seitz, Jr. (Seitz Ross Aronstam & Moritz, LLP) and Richard A. Sprague (Sprague & Sprauge) for Intertrust GCN, LP, Intertrust GCN GP, LLC and H.F. Lenfest. Sean Michael Brennecke (Klehr Harrison Harvey Branzburg LLP) for The Newspaper Guild of Greater Philadelphia, Local 38010, AFL-CIO, CL.

Companies: Interstate General Media Holdings, LLC; Philadelphia Media Network LLC; General American Holdings, Inc.; Intertrust GCN, LP; The Newspaper Guild of Greater Philadelphia, Local 38010, AFL-CIO, CLC; Knight Ridder; McClatchy; Alden GlobalCapital

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