In Charles W. Ergen’s war for LightSquared, the fiercest fight involves a legal loophole.
It had started all so brightly for LightSquared, the broadband wireless company controlled by Philip Falcone’s hedge fund, Harbinger Capital Partners. LightSquared was created, its website says, to “unleash the boundless opportunity of wireless broadband connectivity for all†by beaming from satellites fourth-generation wireless Internet access across America. By sidestepping the need to lay expensive cable, LightSquared sought to reach previously untapped rural areas, providing full access to the Internet. Billions were invested to achieve a goal that even the president has endorsed.
The government, however, did not fully cooperate. LightSquared faltered when the Federal Communications Commission determined that the company’s satellite signals interfered with the Global Positioning System. Unable to secure an F.C.C. license to operate, LightSquared filed for bankruptcy in May 2012.
As the company teetered, Mr. Ergen and his satellite television company, Dish Network, pounced, having noticed a flaw in LightSquared’s debt documents. The documents were written to prevent a “direct competitor†of the company from acquiring its debt. This meant that Dish could not buy up the debt, but whoever controlled the debt would be in prime position to acquire the company if LightSquared filed for bankruptcy.
So Mr. Ergen, a former poker player, had his hedge fund, Sound Point Capital Management, arrange for a second company he owns to acquire roughly $1 billion worth of LightSquared’s $1.75 billion in outstanding debt. Let’s pause here to note that Mr. Ergen is not only the chief executive of Dish, but he has his own private hedge fund.
Mr. Ergen’s purchase led to Dish making a $2.2 billion bid for LightSquared’s assets, one that appears poised to succeed.
Not only are Harbinger and LightSquared fuming over this series of events, but so are some of Dish’s shareholders.
Harbinger is mad because Dish’s bid frustrated its own attempts to maintain control of LightSquared in the bankruptcy proceedings. Harbinger had proposed a plan that would have paid off all of LightSquared’s debt but kept Harbinger in control. But Mr. Ergen has enough debt to block that plan and push instead for an auction of the company’s assets.
Harbinger sued Mr. Ergen and Dish over the bond purchases in August, a case that was dismissed by a bankruptcy court, and Harbinger refiled this week. LightSquared is also seeking permission from the bankruptcy court to bring a suit on its own behalf. In a court filing, LightSquared contends that Mr. Ergen breached the debt agreement because the documents define a “direct competitor†to also be a subsidiary of a direct competitor. LightSquared is arguing that because Mr. Ergen controls both Dish and the hedge fund that bought the debt, the fund is a subsidiary of Dish.
Yet that argument stretches the plain meaning of a “subsidiary†â€" a company owned or controlled by a holding company â€" language that is not in the document. So LightSquared’s claims against Mr. Ergen are tenuous at best.
The case with Dish’s shareholders is more complicated.
If Dish acquires LightSquared, Mr. Ergen will profit in the hundreds of millions from his bond bet. This seems to be a clear conflict, and is why some of Dish’s shareholders are unhappy. Any takeover has its risks, and these will be borne by the shareholders, while Mr. Ergen will be rewarded regardless. (He is, to be sure, Dish’s largest shareholder, owning roughly 53 percent of the company.)
Typically, when this kind of situation arises, the company’s board would set up a special committee of independent directors to handle the bidding. And Dish’s board initially did this, appointing its only two independent directors to form a special committee. The two did what special committees do, and hired independent advisers and considered a bid for LightSquared.
But once the independent directors recommended a bid, a funny thing happened. The rest of the directors voted to disband the special committee and took control of the bid process.
Dish, however, did not publicly disclose to its shareholders that the special committee had conditioned its approval of the LightSquared bid on continuing to monitor the proceedings. Not only that, but the special committee also conditioned its approval on examining how Mr. Ergen’s profit from the sale of LightSquared would be divvied up between him and Dish. Upon the board’s vote to disband the special committee, one of the two committee members resigned.
At a hearing last week, a Nevada court refused to exclude Mr. Ergen from Dish’s bidding for LightSquared and re-establish the special committee. Under Nevada corporate law, a special committee is not even required, which is not the case in Delaware, where most companies are incorporated. Nevada also gives executives much wider latitude to engage in transactions that conflict with their interests as officers of their company.
The Nevada judge, Elizabeth Gonzalez, refused to find that Mr. Ergen had done anything wrong in Dish’s decision to bid for LightSquared. She instead stated that excluding Mr. Ergen from the bidding would “harm†Dish itself by depriving it of its most experienced director in its consideration of a bid for LightSquared.
On Tuesday, the auction was postponed to Dec. 10, delaying Dish’s bid to acquire LightSquared’s assets. And the bankruptcy court still has to approve the sale to Dish. In part, this will depend on whether the court finds that Dish acted in good faith in making this purchase.
One has to marvel at Mr. Ergen. Indeed, in an email to an executive at an affiliate, EchoStar, that was disclosed in litigation, one person wrote that “watching Charlie in action is fascinating if not truly awesome. He has boxed everyone in.†Mr. Ergen has both profited and arranged for Dish to get the prize. Mr. Ergen has also shown what a great poker player he is, pushing boundaries and taking advantage of every gray area in the law.
If the bankruptcy court approves the sale, there will still be more litigation, although the conflict issue will then loom larger than ever. Will Mr. Ergen share with Dish his hundreds of millions in profits from this deal? Or are they even his to share? After all, if Mr. Ergen had bought LightSquared himself, his profit would not yet have crystallized. He’d have to take on the business of actually turning around LightSquared. But now he will be paid for the bonds, while Dish and all its shareholders get the risk.
If Mr. Ergen decides to keep the money, Nevada’s pro-executive laws may very well let him. Mr. Ergen may even be justified in keeping these profits because he took the risk of buying LightSquared’s debt and Dish may have lost out on acquiring a valuable asset had he not acted. Then again, Mr. Ergen most likely bought this debt knowing that Dish was likely to bid. After all, Mr. Ergen runs the company. In the next round of shareholder litigation that may occur if Dish succeeds in buying LightSquared, this will be the claim the shareholders pursue.
Even if they lose, Mr. Ergen’s detractors, including some Dish shareholders, may still argue that just because it is legal doesn’t always make it right. Whatever the outcome, Mr. Ergen has once again shown that sometimes money and smarts can run circles around the letter if not the spirit of the law.
