Zell and Tribune Class Action Lawsuit
Tribune, Zell Named in Employees' Suit discusses how six current and former L.A. Times reporters have filed a federal class action lawsuit (CV08-06040) alleging that Sam Zall and other Tribune officials failed to uphold their fiduciary duty to the ESOP:
The lawsuit, filed in a Los Angeles federal court, alleges Tribune and Mr. Zell have failed to uphold their fiduciary duty to the company's employee stock-ownership plan, Tribune's majority owner. The lawsuit also claims Mr. Zell and other Tribune officials have improperly raided worker pension funds.
"Zell and his accessories threaten to destroy the Tribune Company and its assets," the lawsuit says. "They are doing so illegally, without consideration for the employee-owners."
In December, Mr. Zell led an $8.2 billion buyout with an unusual twist: The stock plan, known as an ESOP, became the majority owner, while Mr. Zell invested about $315 million in exchange for a promissory note and warrants to buy 40% of the company. The deal weighed down Tribune with nearly $13 billion in debt, but the ESOP structure allowed Tribune to avoid most federal income taxes.
The lawsuit, which seeks class-action status, encapsulates months of employee frustration about Mr. Zell and the buyout deal. As deteriorating newspaper advertising and the deal's debt weigh on Tribune, Mr. Zell has slashed employee rolls and pared news pages at company papers. He has invested in other areas of the company, including Tribune's local television stations.
The plaintiffs are or were newsroom employees for the Los Angeles Times, Tribune's biggest paper and the nexus of complaints about Mr. Zell's oversight of Tribune. The plaintiffs are Dan Neil, a Pulitzer Prize-winning columnist for the L.A. Times; Jack Nelson, a former Washington bureau chief for the paper, and four former writers: Corie Brown, Henry Weinstein, Myron Levin, Walter Roche Jr.
Zell Calls Suit Claims 'Frivolous' discusses Sam Zell's response to the lawsuit:
In a statement Wednesday, Mr. Zell said the lawsuit's allegations are "frivolous and unfounded." He said Tribune would seek to dismiss the case. The plaintiffs are seeking class-action status.
Mr. Zell, who has cast his efforts to remake Tribune as a collective undertaking, has said employees on the whole have embraced changes.
In a note to employees Wednesday, he cast the lawsuit as an affront to that spirit of togetherness. "There is a difference between questioning authority or challenging the 'business as usual attitude,' and maligning the company in public," Mr. Zell said. "That's just bad judgment and does no one any good."
We have discussed the Tribune Company ESOP buyout at length in this blog. Employees File Lawsuit Over Tribune ESOP discusses the complaint and the size of the plans and the potential attorney's fees:
The complaint is not a good read from a pension geek standpoint. In 115 pages, the complaint failed to tell a clear ERISA-related story typical of defined benefit plans which are converted to ESOPs which then lead to litigation. I am hopeful that the forthcoming motions to dismiss or motions for summary judgment will provide more details about the frozen Tribune Company Employees' Pension Plan which was merged into the Times Mirror Pension Plan which had an ESOP then merged into the Times Mirror Savings Plan, and at some point these plans became the Tribune ESOP.
A quick check of the filed Form 5500s reveal that these are not small plans. For example, the Tribune Company Employee Stock Ownership Plan for 2003 had over 11,000 participants and beneficiaries, and total assets of over $800 million. The Tribune Company Master Retirement Savings Trust had over $2.2 billion in assets for the 2006 plan year listed on Schedule H of Form 5500. A really interesting part of this litigation to watch will be the ultimate attorneys fees awarded when this litigation ends.
Putting Newspapers On Trial discusses the case and the state of the newspaper industry:
Sam Zell was sued in Federal Court in California yesterday by a group of current and former Tribune Company employees. They did a lot more than go after the billionaire they say ruined their company--you could make the case that they've put the fast-changing newspaper business on trial, too
A case like this seems inevitable. Zell has been something of a lighting rod for all that journalists fear about the future of newspapers since taking over Tribune. He has evaluated reporters by how many column inches they produce, turned editorial publications like the Los Angeles Times Magazine over to advertiser control and laid off at least 1,000 employees
Zell himself is only named in two of the complaint's eight counts. Most counts focus on Tribune's existing and past board of directors, as well as various trustees for the ESOP. The complicated structure of the multi-part buyout deal may be the reason why. Zell was only personally involved in it during an early stage loan to Tribune that funded the repurchase of some of its stock.
At that time, he allegedly convinced the ESOP to pay too much for Tribune in acquiring the rest of its public stock--$38 per share versus a more reasonable value of something under $10.
"The factual scenario is something of a novel one," says Ian Downes, an ERISA litigator with the law firm Dechert. He says cases like this one could drag on for years and can result in millions of dollars in attorney's fees for a plaintiff's firm involved in the suit.
Does a Dying Industry Guarantee Pension Litigation? also ponders the issue:
One thing in particular caught my eye in the article, which relates to its discussion of the underlying problems in the newspaper industry and how it relates to the lawsuit; one of the class plaintiffs comments that those problems are not with the product turned out by the reporters, but with the industry's difficulties with "monetizing the product online." As someone who used to read three newspapers a day in law school and now skims three or more a day on-line and on my blackberry without spending a dime for the content, I can only say amen to that. I am not sure, though, that this point really has anything to do with the validity or viability of the suit itself, other than to the extent of pointing out the underlying problems that gave rise to the transaction that allegedly harmed the ESOP participants and gave rise to the class action. Either way, the story illustrates an important point, which is that there is a need for caution in any transaction of this nature that is going to impact the dollar value of stock held in ESOP plans, in light of fiduciary obligations that run in tandem with such plans.