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Dow Drizzles on LBO Parade

Mark DeCambre

Thursday's shake-up atop Dow Chemical (DOW) exposes one of the seamier sides of the leveraged buyout boom.

The Midland, Mich., chemical giant fired two top officials -- director and former finance chief Pedro Reinhard and executive vice president Romeo Kreinberg -- after finding they "were involved in unauthorized discussions with third parties about the potential acquisition of the company."

And that's not all. Dow CEO Andrew Liveris said in a Thursday morning statement that the company was "greatly saddened by the disrespect shown by our former colleagues."

Liveris' comments have a Don Corleone-esque flavor. But what has yet to be disclosed is just what constitutes the alleged disrespect.

Reinhard, who tells TheStreet.com that he denies any wrongdoing, was left shaking his head.

"This is a major surprise," he says, reached on his mobile phone in New York. "I'm retired. I've been with [the] company for 35 years. Maybe there's some kind of scapegoat going on."

Dow's shares have spiked this week amid a flurry of rumors in U.K. papers about a possible takeover. The scuttlebutt prompted Dow to issue a public statement Monday disavowing the LBO rumor. Still, shares rose 5% Monday and tacked on 3% in heavy trading Thursday.

It's not unusual for directors and execs to field inquiries from private equity shops -- especially lately, with deal activity having been so strong. But Dow accuses Reinhard and Kreinberg of maneuvering to line up leading jobs tied to a buyout and subsequent breakup of Dow.

Kreinberg couldn't immediately be reached for comment. But any exec or director found putting his or her personal interests above those of shareholders could find themselves in peril, says Stuart Meissner, a private securities fraud attorney in New York who previously served under former New York Attorney General Eliot Spitzer.

"The conflict comes in because they will gain a benefit from the purchase that other shareholders will not receive," says Peter Henning, professor of securities law at Wayne State University in Detroit, referring in general to allegations of officials using their positions for personal benefit. He cites, speaking hypothetically, "at least the perceived benefit of control, through the use of their knowledge of the company."

But both accused officials have been with the company in various posts since the 1970s. The 61-year-old Reinhard is a retired board member, and Kreinberg is credited with turning around the company's plastics business.

On its face, they don't fit the profile of the striving executive. But that's a part of the challenges of the new LBO environment: What's in the best interest of the shareholders? And what's in the best interest of the executives that serve them?

A person within Dow, who declined to speak on the record, says the company was tipped off externally that its two executives were wheeling and dealing with private equity officials behind the board's back.

The tip led to an internal investigation that culminated in the dismissal of the veteran pair, the source says. It is not clear who contacted the company nor how the company's verified the information it received. It is also unclear which private equity shops were involved.

"The situation right now is that we've taken the action we've taken. What more action we take, if any, we haven't yet determined," says Dow spokesman Chris Huntley, who declined to comment further or provide any specifics behind the reason for the executives' dismissals.

"As a practical matter, the fact that this occurred and the manner in which it occurred and given the effect on the market, both the rise and drop in share price are appropriate reasons for an inquiry," says Jacob Frenkel, securities lawyer at Shulman Rogers Gandal Pordy & Ecker in Rockville, Md.

Bob Burson, senior associate and regional director at the Securities and Exchange Commission's division of enforcement in Chicago, declined to comment on any inquiries.

Reinhard says that he is seeking legal advice as well and adds that Dow "has not produced any definitive information" supporting its claims.