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The July 29, 2010 Employee Ownership Update is online and discusses the following:

  • People Just Don't Stay with an Employer as Long as They Used To and Other Myths
  • Examiner Finds Tribune Solvency Opinion in ESOP Transaction May Involve Fraud
  • Will the New Executive Compensation Rules Matter?
  • Have a "Don't Do That Story" for Equity Compensation?

The Update reviews the complex two-step Tribune ESOP Transaction:

The Tribune Company was bought by Sam Zell and an ESOP in 2007 in a complex, two-step transaction. In step one, Zell put in equity and the ESOP bought newly issued shares. In step two, a self-tender was undertaken to buy out all the shares, including Zell's, with additional debt. The result was a 100% ESOP with Zell having warrants worth 40% of the company. In question here is step two. The board hired Valuation Research to give a solvency opinion. The examiner found that the opinion lacked credibility, that projections about solvency from management were unreasonably optimistic and poorly vetted, and that Morgan Stanley's imprimatur on the transaction was overstated. In addition, the examiner said in "effect, VRC was required to add to the value derived from its analysis the value conferred on the Tribune Entities from the S-Corporation/ESOP structure as a result of the Merger, even though inclusion of this value in the determination of 'fair market value' and 'fair saleable value' was improper."

The Tribune Company subsequently Filed for Bankruptcy and Terminated the ESOP. Tribune buyout "marred," but not all flawed discusses the findings of the US Bankruptcy Court from the Report of Kenneth N. Klee, As Examiner: Summary of Principal Conclusions, Overview and Conduct of the Examination, and Factual Background:

...Klee, in his 700-page report, concluded that "Step One" of the LBO, selling Tribune Company to an Employee Stock Ownership Plan (ESOP) in mid-2007, while highly leveraged with $8.2 billion of new debt, did not appear to be doomed from the get-go, so it would not likely be found to be a fraudulent conveyance.

"Step Two," adding another $3.6 billion in debt in December 2007, was a transaction that the court would be "somewhat likely to find was an intentional fraudulent transfer," Klee said in his report.

That isn't likely to produce any payoff for the pre-LBO bondholders, since Tribune Company as it stands today appears to be worth less than the initial $8.2 billion of senior debt. If the judge agrees with Klee, however, the banks that put together Step Two could see their fees clawed back for distribution in the Chapter 11 reorganization plan.

The Update also analyzes the findings of the report.

Last week we discussed how the Final Financial Reform Bill was Signed Into Law. This table describes the type of company and the effective date that will be directly impacted by the various provisions of the law. The Update reviews the impact of prior changes to compensation rules, such as the unintended consequences of prior changes to IRC Section 162(m) - Trade or business expenses - Certain excessive employee remuneration, and is skeptical that the new executive compensation rules will matter.

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