My article of August 5 led to a handful of readers querying how the interests of a company and its owners ever could, realistically, diverge or be in conflict. I think the recent saga concerning the sale of Liverpool Football Club underscores the point I originally tried to make. If you recall, I had argued that what is in the company’s best interest isn’t always the same as what is in the shareholders best interest.
For those of you who didn’t follow the Liverpool FC drama here is a summation: On April 16 Tom Hicks and George Gillett (co-owners of LFC) put the club up for sale having bought it in 2007 for £174m in a leveraged acquisition. The club allegedly received two (firm) bids, one from NESV (New England Sports Ventures) (owners of Boston Red Sox baseball team) and another from Singapore billionaire Peter Lim which was muted to be £20m higher.
The owners of LFC wanted to reject the bid of circa £300m from NESV given that it was the lowest of the two bids and (perhaps more importantly) because the bid was below the market value of the club. In fact, Fish & Richardson, the law firm representing Hicks & Gillett, declared that the Board of Directors of LFC were in favour of selling LFC “at a price they know to be hundreds of millions of dollars below the true market value”, that they were acting as “pawns” of the club’s bankers (the Royal Bank of Scotland) which was owed £240m in loans and £40m in fees, and that the directors had “wholly abdicated the fiduciary responsibilities that they owed in the sale [of the club]”.
The owners, Hicks and Gillett, tried to sack the directors (managing director Christian Purslow and commercial director Ian Ayre), who sanctioned the sale of LFC to NESV. Conversely NESV claimed that it had acquired LFC through “a binding agreement with the Board of Liverpool FC” and that the deal must go through. The legal deadlock was eventually resolved by the High Court and the sale was allowed to go through despite the forced-out owners claiming damages of more than £1bn and the filing of restraining order in another jurisdiction.
I think that this case highlights the relative ease in which the “interests of the company” as defined/interpreted by the board of directors on the one hand and the shareholders on the other, can diverge quite radically. This is not to say that I necessarily agree with Hicks and Gillett, in fact I don’t, but you can’t say that they didn’t have a point; especially if it is true that the board chose the lowest of the two bids and the fact that the directors’ valuation of the club only took into account the clubs liabilities (i.e. bank loan and bank fees) and not its fair market value.
This is why I am all for having non-executive directors at board level with real power and authority. I genuinely think that if there had been a proper and independent NED at LFC, the whole matter need not have been so acrimonious and the sale of the club would probably have been handled better. Granted, the issue was complicated by the fact that LFC was in breach of its loan agreement with the Royal Bank of Scotland and this is what motivated the fire-sale of LFC.
That having been said, we can easily apply this example to Malta and understand the strategic benefit of having a NED as a guarantor of the company’s interests without undermining the (sometimes conflicting) interests of all parties. I say this because the LFC fire-sale arguably looked out for the interests of the club at the expense of the shareholders.
And for those of you who think that I am in favour of one stake-holder (shareholders) at the expense of another (the directors), I am not. The Kraft takeover of Cadbury in January of this year was identified as a sell-out by the directors in the narrow interests of the shareholders rather than for the overall benefit of the company itself. Hence, the NED is needed, or has a role to play, not just so as to look out for the interests of the shareholder(s) but to balance out the interests of all concerned, and that’s why I am advocating an expanded role of the NED.
True, I am only quoting UK examples but I could quite easily quote Maltese ones since the same clash of interests can be found in Maltese companies and Maltese company law doesn’t adequately cater for such a scenario. As I have pointed out in a previous article, the non-executive director currently isn’t even recognised by the law.
The time, therefore, certainly has come for the regulator to issue a set of guidelines (a precursor to legal amendments) about the composition of the board of directors. Such guidelines should not just indicate the right-mix of skills and experience of the Board but also define the role and responsibility of each board director, including, in particular, the all important non-executive director.
The guidelines need to be cognisant of scenarios in which the shareholder’s point of view about what is in the company’s best interest clashes with what the board of directors perceives to be in the best interests of the same company. The LFC example quoted above raises pertinent questions: Could LFC have been sold for a higher price? Could the loan agreement with Royal Bank of Scotland have been extended so as to avoid the fire-sale?
Did the directors of LFC follow the instructions of the shareholders, the bank and/or both? What if the LFC sale to NESV did not go through, would this have resulted in the club being put into administration and hit by a nine-point penalty hence any sale was, in the final analysis, the right sale? What sort of shareholders were Hicks and Gillett: short term versus long term investors? Did Hicks and Gillett have the clubs best interests at heart?
I think that in Malta we can learn much from this highly publicised case and apply such learning to amending/updating our own company law. I ask again: In whose interest is it anyway?
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Mr Fenech is managing director of Fenci Consulting Ltd.