Carl Icahn's planned purchase of auto parts maker
is the latest deal to raise thorny questions about how cozy top executives are getting with private equity buyers.
Lear on Friday delayed a planned shareholder vote on the $5.3 billion buyout, giving investors more time to evaluate its terms. The company said in a letter to shareholders that it continues to support the Icahn plan, which has come under fire from some Lear stockholders and corporate governance gadflies.
Friday's move by Lear -- which moves the vote to July 12 from June 27 -- comes at a time when questions are emerging about how management should conduct itself when courting private equity buyers, and how much disclosure companies should provide about merger talks.
A Delaware judge ruled last week that Lear, a Southfield, Mich., maker of car interiors, must give shareholders additional information about its CEO's renegotiated perks before the merger can go forward.
Judge Leo Strine Jr. said Lear chief Robert Rossiter "harbored material economic motivations" in finding a private equity buyer to acquire the company. Strine ruled that Rossiter didn't act improperly, but wrote that the motivations "could have influenced his negotiating posture with Icahn," who bid $36 a share for Lear back in February.
Shareholder advisory firms Institutional Shareholder Services, Proxy Governance and Glass Lewis are advising clients to vote against Icahn's bid. The advisory firms say the $36-a-share offer is too low, and they questioned Rossiter's decision-making. Lear rose a penny Friday to $36.46.
Worries about the long arm of private equity are nothing new. Earlier this spring,
fired senior officers Pedro Reinhard and Romeo Kreinberg, alleging that the pair tried to arrange a buyout without the board's consent.
Reinhard is suing Dow for libel and breach of contract, and Dow filed a countersuit saying the executive breached his fiduciary duty. Kreinberg later filed his own suit against Dow, claiming he did nothing to merit dismissal.
Strine's ruling in the Lear case, which went against a group of shareholders who claimed the company had failed to seek the highest bid, underscores that shareholders must beware of potential management conflicts that might not seem evident at first blush.
The decision "re-emphasizes the Delaware court's focus on conflicts of interest and the need to provide stockholders with adequate disclosure," says attorney Kevin Miller at Alston & Bird in New York.
Companies must disclose to shareholders obvious conflicts, including familial or economic ties that the company's management might have with the acquire. But Strine's ruling says less-glaring motivations can also play a part in the outcome of an M&A deal and thus must be put on the table for shareholders to evaluate.
Strine compelled Lear to disclose that Rossiter could look to benefit from finding a private equity offer for the firm.
The 60-year-old Rossiter, who was hired to act as sole negotiator by a special committee set up to attract buyers for Lear, feared seeing his equity value in Lear wiped out should the company have to file for Chapter 11 bankruptcy, given its troubled condition and the downturn in the automotive market, Judge Strine writes in his ruling.
The court notes that even before Icahn came onto the scene with his offer to buy out Lear, Lear's CEO was hoping to renegotiate his retirement package. Under that deal, he looked to receive $14.6 million once he retired -- but would have seen a significant reduction penalty for cashing out before his 65th birthday.
Moreover, Rossiter couldn't cash out of Lear without further dragging down the stock, since his sale might have potentially been perceived as a vote of no-confidence in the automotive company's outlook.
"Rossiter faced a conflict between his desire to secure his retirement nut and his desire to continue as CEO," Judge Strine said in court documents, adding that a private equity buyer allowed him to solve this situation.
Strine said the CEO did not act improperly and that Rossiter has been a loyal CEO to Lear shareholders. But the judge also noted that since the deal allowed Rossiter to stay on with a renegotiated employment contract that gave him the ability to access his retirement plan early without penalty, shareholders should have been informed.
"A reasonable stockholder would want to know an important economic motivation of the negotiator singularly employed by a board to obtain the best price for the stockholders," Strine wrote. "When that motivation could rationally lead the negotiator to favor a deal at a less than optimal price."