Published On: Tue, Jan 7th, 2014

Lewis Katz Sues In Philadelphia Court For Public Auction To Break-up Media Partnership That Controls Philadelphia Enquirer

In March 2012 a group of six private investors, including New Jersey businessman George Norcross and entrepreneur Lewis Katz purchased the Philadelphia Inquirer, Daily News and Philly.com media properties.

They did so through a Delaware registered partnership called Interstate General Media.

Successful partnerships take partners who can find a way to work together for the good of their investment, and sometimes even to compromise their own ideas for the sake of a smooth running ship.

l_norcross_katz1200 Lewis Katz

Lewis Katz and George Norcross/ Photo from www.gloucestercitynews.net

In this case it seems the partners fell out fairly early on after making the investment in an ailing newspaper group they wanted to turn around, and have since been at loggerheads as to how best run the newspapers and the internet site.

Their partnership structure requires the formal approval of both of its lead investors, Lewis Katz and George Norcross, for all major decisions but the two have apparently disagreed over so many things that both sides are now trying to figure out how to dissolve the partnership.

After failing to agree terms to buy each other out they have now gone to court, separately of course and indeed to two different courts, to present their ideas for doing so. If the two partners, who are both grown men, cannot agree on a formula for divorce then a Judge will have to do it for them, just as in family law.

One of the major issues has apparently been editorial policy. Last October the two were already in a courtroom over the earlier firing, by Norcross, of Philadelphia Inquirer Editor Bill Marimow.

Katz pointed out to the court in Philadelphia then that this decision required his prior approval, which had not been given, and indeed he was in fact a supporter of Bill Marimow as Editor. In December the Judge hearing the case agreed with him and ordered the reinstatement of Mr. Marimow. This is presently in abeyance however pending an appeal by Norcross to the Pennsylvania Superior Court. In the mean time it seems nobody may be really minding the store properly, and of course the business needs to be run.

It is quite common in such private partnerships, particularly if they are real estate partnerships, to have a clause in the agreement known as a “shot-gun” whereby each party can make an offer to buy the other(s) out by “triggering” the shot-gun at a bid price of his choosing. The other parties then have the right to match the bid and buy the bidder’s interest instead at the same price. If there is no such response then the shooter gains control.

The really cool thing about the shot-gun is that it imposes good behavior on everybody to do their best to work together, as anybody can trigger the shot-gun process at any time. The danger for someone who does, however, is that you cannot bid too cheap for, if you do, your current partner has the right to just match your own bid and then take you out. So the process itself also encourages a fair price, unless one partner knows the other to be broke and unable to match an offer or to find partners with whom to do so.

On balance, the shot-gun style of partnership arrangement seems to work extremely well when it is employed. However the Interstate General Media partnership agreement apparently has no clause of any kind relating to the resolution of shareholder disputes, hence the current grid-lock. Given the experienced men involved this is a strange oversight, but maybe the deal must have been just too tempting to worry about it at the time.

Be that as it may, on Friday George Norcross asked a state court in Delaware to order a private auction amongst the current owners of the partnership in order to resolve the dispute once and for all. In such a private auction only the existing investors get to bid to each other what they think the business is worth. Then the highest bidder puts up and everybody else shuts up. Thus, with such an arrangement at least one of them gets to keep the business. On the other hand by not exposing the auction to outside bidders at all, better prices from potential third parties may not be canvassed or obtained.

In the previous fight over the firing of the Editor, Mr. Marimow, George Norcross had asked for the matter to be heard in Delaware, where the partnership is registered, while Lewis Katz had successfully claimed it should be heard before a Philadelphia Judge as that was where the business actually operates. And that is where that hearing was eventually held.

Something similar seems to be happening now with this additional dispute. Accordingly, in a Delaware Court of Chancery filing last week, Norcross, and some of the other partners who agree with his view and together form a combined 58% holding, said they had come to court to block what they termed what was to them a “surprise filing” by Lewis Katz in the Philadelphia Court of Common Pleas. They claim Katz has applied to that court for a public auction of the company to everybody, in order to dissolve the business relationship at the highest possible price.

Norcross and the partners who agree with him, took the somewhat unusual step last week, for a member of a private partnership, of issuing quite a lengthy press release outlining the steps they are taking and providing it to employees of the company as well. In it Norcross refers to the current turnaround business situation of the newspapers and a risk of possible bankruptcy if other third parties should now buy it. The actual business logic of that kind of emotional argument may be quite weak but his PR motives are very clear indeed, relating as it does to such a high profile media investment for the city of Philadelphia.

No good press release should go unchallenged when there is a law suit going on it seems. Accordingly, the lawyers for Lewis Katz also issued a, thankfully much shorter, statement of their own refuting Norcross’s arguments, re-affirming Lewis Katz’s and his co-partner Gerry Lenfest’s interest in finding a solution for the company, including making an offer of their own, and stating that in their view Philadelphia should again be the legal forum for the dispute as that is where the business is.

So now it seems it will be again up to the Philadelphia court to decide whether to take the case, and then to wrestle the sparring partners apart by selecting an auction format the court can then impose. Or, the Delaware court might assert jurisdiction itself, though one would think this is less likely given where the previous argument ended up, as courts do tend to have deference towards each other.

About Lewis Katz

Lewis Katz is co-managing partner of the Philadelphia Media Network. He is also the former principal owner of the New Jersey Nets and New Jersey Devils, a former member of the board of governors of the National Basketball Association, and a current shareholder of the Nets and the New York Yankees.

A noted philanthropist, he is the director of the Katz Foundation, which supports charitable, educational and medical causes. Recently he pledged to donate US$25 million to Temple University in Philadelphia. His US$15 million gift to The Dickinson School of Law at Pennsylvania State University helped pay for a law school building there with his name on it.

Katz is a founding partner of, and serves as of counsel to, the law firm Katz, Ettin & Levine.

A native of Camden, New Jersey Katz has established several programs to help Camden children. In 2012 he opened Katz Academy there, a charter school that teaches grades K-4.

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