When Minority Shareholders Are Virtually Ignored in a ‘Sale’
You may not know what the Endeavor Group is. But you have certainly had a lot of contact – a lot! – with their ‘product.’ The Endeavor Group is one of the major players in the entertainment and sports industries, “with a reach across talent representation, sports properties, events, content production, and marketing.”
The Endeavor Group was formed in 2009 when the William Morris Agency merged with Endeavor Talent Agency. They are headquartered in Beverly Hills.
They are an enormously influential company that manages to keep a reasonably low profile even while listed on the NYSE. They are worth billions. How many billions is one of the reasons they were all over the news on May 17th.
Endeavor Goes Private . . . (Probably)
Endeavor announced that it was going to delist from the New York Stock Exchange and go private. The deal is led by their largest shareholder, Silver Lake Capital which already owns 71% of Endeavor. Under the plan, Silver Lake will buy all the remaining shares for $27.50/per share for a total of $13 billion. Some shareholders, like Endeavor’s co-founder, will be given the option to rollover their shares into the new, private company.
Other similar shareholders – but with much less equity – have no option other than to take the cash.
The ‘Negotiations’
Endeavor agreed to the deal without agreeing to hold a shareholder vote “where a majority of the investors not participating in the consortium would have to approve it.”
Obviously, without a "majority-of-the-minority-investors" threshold, the vote was an early season succession done-deal formality, since the shareholders who control the company are the ones buying out the minority investors.
Endeavor, though, did try. The special committee of independent board directors that negotiated the deal for Endeavor tried to convince Silver Lake to sign off on the vote. They stressed that their corporate governance documents called for such a vote.
The Lawsuit
The first lawsuit was filed last week. The Swedish bank Handelsbanken filed in Delaware and accused Endeavor of “selling itself too cheap” while citing the failure to hold the shareholder vote. They claim that the company was “trying to shortchange investors,” while squeezing them out of the ‘new’ company.
The bank objects to the preferential treatment of some shareholders at the expense of others. They have labeled the deal a “squeeze out merger”, that clearly violated the ‘equal treatment provision’ in Endeavor’s charter, agreed to in 2021. From the lawsuit:
- In violation of the equal treatment provision, Class A stockholders are being treated differently based on their identity. On the one hand, preferred insiders have the ability to roll their equity into the post-squeeze out company. On the other hand, the unfairly low consideration of $27.50 per share is being foisted on the company's public Class A stockholders.
- Simply put, the squeeze out does not respect the public Class A stockholders’ charter-enshrined right to ‘have the right to receive, or the right to elect to receive, the same form of consideration’ as the consideration received by the preferred, insider Class A stockholders. Moreover, there was no vote or waiver pursuant to this provision permitting the disparate treatment the squeeze out contemplates. Thus, the squeeze out plainly violates the charter.
A Trend by Controlling Shareholders/Investors
According to Reuters, there is a growing realization by controlling shareholders of companies that “the financial benefit of depriving minority shareholders of a deal veto outweighs the legal risks.”
In other words, it’s more cost-effective to go to court.
Another Kind of Squeeze
Suppose they were commenting on the lawsuit – which they certainly are not – Silver Lake would point out that they are acting from experience. Other companies, like Weber Grills, would agree.
The rationale for not holding a shareholder vote when taking a company private: “Skipping the vote . . . prevents hedge funds and other activist shareholders from making deal price demands and allows a transaction to close more quickly.”
In 2013 Silver Lake opted for a vote of minority shareholders when it announced a deal to take Dell Computers private. After Carl Icahn and other ‘activist’ investors agitated for more money, Silver Lake was forced to offer about an extra $350 million to complete the deal.
Not holding a vote, however, will most likely begin to have a pre-the-deal-closing effect on a company’s stock as investors bet “they would be sold at a lower premium.”
It’s a very real Catch-22. One in which shareholders who are about to be squeezed out also have to worry that the value of their stock will drop before a deal is consummated, making any such deal a lose-lose proposition for them.
