Charter Communications' bankruptcy reorganization leaves Paul Allen in smaller role
This article first appeared in the St. Louis Beacon, Feb. 16, 2009 - Paul Allen will retain a prominent but smaller role in Charter Communications after the cable TV giant completes its bankruptcy reorganization.
Assuming the plan is approved by lenders and a bankruptcy court, Allen, who will remain chairman, will no longer control the nominating and voting for all members of the board of directors.
Depending on how much stock he will own in the restructured company, Allen could control less than half of a new 11-member board.
A description of Allen's new role is contained in a new Charter filing with the Securities and Exchange Commission, adding details to the financial restructuring plan that the company announced on Feb. 12. The filing was received by the SEC about 90 minutes after markets had closed on Feb. 13, leading into the Presidents' Day holiday weekend.
On Feb. 12, Charter said it would file for a bankruptcy reorganization no later than April 1 as part of a preliminary agreement with bondholders that would cut Charter's $21.1 billion in debt by about $8 billion.
The document also says that the restructured Charter will retain at least two other top executives -- Neil Smit, the chief executive, and Michael Lovett, the chief operating officer.
Both will receive cash and bonuses "on substantially the same terms" as they receive now under their employment agreements, the SEC document says. The fate of other top executives is unknown. Their employment will be decided by board of directors "in consultation with the CEO."
INFLUENCING THE BOARD
Allen has controlled the voting for all board members thanks to a two-tier stock system: Class A stock, which trades publicly, and Class B stock, which is owned by Allen. The Class B stock represents 90 percent of the voting power for all stock issued by Charter. Each Class A share gets one vote; each Class B share gets more than 67,800 votes.
As a result, Allen controls the board. Although the borad formally nominates directors, it's a mere formality because corporate bylaws say Allen nominates and elects 11 of 12 directors by virtue of his voting power. That's what happened at the last annual meeting in April 2008.
The 12th board member was approved by a vote of Class A and Class B shareholders. This director was nominated by the board; and, once again, Allen's voting power made the election a mere formality. (Three board members resigned in September and December; none was replaced.)
However, under the system outlined in the proposed financial reorganization, all current common stock will be cancelled and two new sets of common stock will be issued.
The new stock calls for a different apportionment of power.
Allen will be issued shares of a new Class B common stock. Although it is worth 2 percent of the equity in the restructured company, this stock has 35 percent of the total voting power of all new stock, says the SEC report.
Thus, Allen has the ability to choose four directors for the 11 member-board due to his Class B stock ownership. (The number, based on his voting power percentage, is rounded up to the next whole number).
Charter also will issue new Class A shares and give certain bondholders the rights to purchase such shares depending on how much debt they hold. They can purchase the Class A shares at a discount. Charter eventually will list Class A stock on Nasdaq, enabling everyday investors to buy it.
After Charter emerges from bankruptcy reorganization, the SEC document says, each holder of 10 percent of the voting power can nominate one board member. For example, an investor owning 10 percent of Class A stock could nominate one director while a 20-percent holder could nominate two.
Except for the four directors chosen by Allen, approval of the other seven directors would require majority votes from the holders of Class A stock.
Using the restructuring document's math, Allen would need to own 20 percent of Class A stock to nominate two more members in an effort to control the board.
The restructuring agreement also says Allen will receive warrants to purchase 4 percent of the Class A stock. After the restructuring is completed, Allen has the right to exchange ownership in a Charter-related holding company for 1 percent of Class A stock.
Charter's new deal "will leave it in a much better position to compete over the long run," says Michael Hodel, a telecommunications analyst for the independent financial research firm Morningstar, in a Feb. 12 report.
Charter "has steadily bled cash over the past several years, forcing it to rely on small asset sales and the kindness of the capital markets to make up the difference," Hodel adds.
But credit markets are no longer kind. Without the proposed restructuring, Charter's enormous debt "will inhibit its ability to respond to the competition," Hodel adds. "The planned debt restructuring is ... the best strategic move the firm can make at this point."
Robert W. Steyer is a business journalist living in New York.