Examiner Faults Response To Buyout Solvency Opinion

On Dec. 8, 2008, all but eight of the 128 Tribune Company corporate entities filed for relief under Chapter 11 of the Bankruptcy Code.¹ Tribune is a leading media and entertainment conglomerate that owns nationally recognized print and internet-based media operations reaching more than 80 percent of U.S. households, as well as a major league baseball team. Approximately one year prior to their filing, Tribune completed an ESOP-based² leveraged buyout to a group managed by Sam Zell, an experienced distress investor. As the cornerstone of its chapter 11 plan, Tribune proposed the settlement of various causes of action among its senior and junior lenders, giving rise to bitter disputes within the senior secured lending group and their adamant opposition to the plan. Not surprisingly, an indenture trustee for junior bondholders sought and obtained the appointment of an examiner to investigate the debtors’ potential causes of action in connection with the ESOP LBO against the debtors’ former and present management, former and present board members, the debtors’ lead lenders, and the various advisors. The inquiry was to include claims for fraudulent conveyance, breach of fiduciary duty, aiding and abetting the same, and equitable subordination. In addition, the examiner was directed to examine any defenses such parties could assert.

The examiner’s report became available on July 26, 2010. Doubtless, the most crucial among the findings relate to the lack of candor and affirmative misrepresentations of the Tribune’s management, as well as the resulting effect upon the solvency expert, the work of the other advisors and, in turn, the lenders. The report also raises substantial questions about the responsibility of Tribune’s board and the agent lenders in responding to proffered expert opinions that served as turnkeys for the transaction. If transactional lawyers have overlooked the bankruptcy court decision in TOUSA³ or the Delaware Chancery decision in the Insilco,⁴ the Tribune examiner report serves as a stark reminder that the process and procedures adopted in such transactions will be reviewed in hindsight and likely subjected to in-depth scrutiny for their adequacy and effectiveness. While the scope of the report encompasses 2,000 pages, the central theme is the management’s integrity and financial projections, and its effect on the board’s responsibility and that of the agent lenders. As such, the report signals, if not demands, some change in the general focus of transaction planning.