While Carl Icahn suffered a defeat at
when a majority of its shareholders voted against his bid to buy the auto-parts maker, the billionaire investor still walked away from the vote with a hefty pile of profits.
In the end, the real losers at Lear could be Chairman and CEO Bob Rossiter, other top executives at the company and its board of directors. They all embraced an offer to sell Lear that has been roundly condemned as not in the best interests of shareholders. In doing so, their own conflicts of interest have been brought to light.
On Monday, a majority of Lear's shareholders voted to block Icahn's $2.9 billion bid to buy the company, even after he sweetened his original offer to $37.25 a share from $36 a share just one week before the vote.
At that point, it was becoming clear that shareholders were largely opposed to the deal. All three major shareholder advisory firms -- Institutional Shareholder Services, Glass Lewis & Co. and Proxy Governance -- were recommending that investors veto the transaction. Also, a lawsuit brought by Classic Fund Management, which owns a 5.4% stake in Lear, revealed that Rossiter had a personal financial interest in consummating the deal.
Delaware State Court Vice Chancellor Leo E. Strine Jr. ruled in June that Lear could go ahead with its planned shareholder vote on Icahn's offer, noting that the company had not acted improperly. The judge did, however, require the company to disclose information about Rossiter's retirement package that gave its longtime CEO an incentive to sell the company.
"The Lear stockholders are entitled to know that the CEO harbored material economic motivations that differed from their own that could have influenced his negotiating posture with Icahn," Strine wrote in his opinion.
Rossiter's supplemental retirement plan will be valued at $14.6 million when he turns 65 in 2011, but he can cash out at a 9.6% annual penalty before then. If he retires now, he'll be entitled to only $10.4 million, or 70% of his total benefits.
Also, Rossiter can't easily liquidate his equity position in the company due to management blackout trading periods and the negative signal such a sale would send to the market.
In the event of a bankruptcy, Rossiter would be treated like an unsecured creditor. Classic Fund Management alleged that Rossiter was so worried that Lear would file for bankruptcy in 2006 and wipe out his retirement savings that he improperly favored a deal with Icahn, who's also led activist shareholder efforts at
Institutional Shareholder Services noted in a report that the buyout would have allowed Rossiter to sell his equity stake in Lear in one lump sum without violating trading restrictions or sending a negative signal to the market.
It also would have allowed him to access the full amount of his retirement package within two years -- instead of waiting until 2011 -- and it would have kept him working as executive chairman with a $50,000 jump in annual salary and a 150% bonus not contingent on performance.
The deal would have also allowed Rossiter to participate in further upside at Lear through stock option grants -- along with the company's president and chief operating officer, Douglas DelGrosso, and its chief financial officer, James Vandenberghe. Together, the three executives would have received an additional 1.6% equity interest in the company. Currently, those executives collectively hold a 1% stake.
"Perhaps more concerning is that the three executives stand to cash in their current equity interest in Lear rather than roll over their interest to the private company," said Glass Lewis in its report ahead of the deal vote.
Lear spokesman Mel Stephens says that the company's executives approved the deal because they found Icahn's original bid -- which offered a 4% premium over Lear's stock price at the time -- to be fair.
"We weren't looking to sell the company when the offer came along," he says. "They evaluated it at the time and concluded that they thought it was fair given everything they looked at."
Richard Pzena, CEO of Pzena Capital Management, holds an 8.6% stake in Lear and was an outspoken opponent of the Icahn deal since it was announced. He said he understood why the company's top executives embraced the offer, but he is "not comfortable with why the board went along with it."
Lear formed a special board committee to oversee negotiations with Icahn that included directors James Stern, Larry McCurdy and Henry Wallace. Glass Lewis said that while the directors on the committee qualified as independent, "the track records of two of the three special committee members are not without fault."
Glass Lewis noted that Stern chairs Lear's nominating and corporate governance committee and that director David Spaulding remains on the board despite receiving a 43% withhold vote at last year's annual meeting.
"In our view, the nominating and corporate governance committee should heed the voice of shareholders and act to remove directors not supported by the shareholders or correct the issues that raised shareholder concern," said Glass Lewis in its report. "We do not believe this has been done here."
McCurdy served on the compensation committee in 2006, during which time the company paid more compensation to its top executives, while performing far worse than its competitors. The company received a grade of F on Glass Lewis' pay-for-performance scale last year.
"It appears to us that members of this committee have not effectively served shareholders in this regard," said Glass Lewis.
When the company recently negotiated a higher price from Icahn in a last-ditch effort to win approval, it added insult to injury by approving a termination fee of roughly $25 million in cash and stock to be paid to his firm,
American Real Estate Partners
, in the event that the deal was voted down.
Institutional Shareholder Services said it was "concerned over the potential coercive effect of the new breakup fee arrangement."
The firm argued that because of the looming shareholder rejection, the board was in a strong negotiating position.
"Lear shareholders are left to wonder why its board felt so fearful that Icahn would walk that it capitulated to his demand for such an unusual break fee arrangement, despite the fact that a significant percentage of the company's long-term shareholders apparently have faith in the stand-alone option" it said in its report.
In addition to the fee, Lear agreed to allow Icahn to increase his stake in the company to 27% from 24% without triggering legal provisions in place to block a takeover attempt. The company already let him exceed the original 15% limit last October.
An Icahn representative said the financier is unavailable for comment because he is on vacation.
In the end, Icahn walked away from the vote with a hefty payoff and a big stake in a company whose stock is rising. Shares of Lear closed up $2.45, or 6.5%, to $39.95 Tuesday, a day after the deal was blocked. Its top executives and board of directors are left to ponder their future.
"We don't anticipate any changes
in the company's management and its board of directors," says Stephens. "We pretty much plan to do business as usual."