Courtroom battle reveals rifts behind INM's AGM bloodletting
The High Court action over O'Reilly's pay-off has been all but eclipsed by the week's events, writes Maeve Sheehan
When James Osborne was voted out of the chair of Independent News & Media last Friday, reportedly saying "This concludes the AGM of NOT Independent News & Media" it marked the end of a reign of almost Tudor wife-like brevity.
But when Gavin O'Reilly resigned as chief executive of INM in April, it marked the end of his family's long-standing involvement in the newspaper group. Investors hoped his departure would also spell the end of the hostilities that divided the board since the telecoms tycoon, Denis O'Brien, began building up his 29.9 per cent stake in the business.
But there was one last fight that culminated in a dramatic corporate bloodletting at the company's AGM on Friday. The row was about O'Reilly's €1.87m exit package. A majority of INM's board had approved it but one of O'Brien's representatives on the board, Paul Connolly, challenged it in the High Court, claiming it was excessive, undeserved and unlawful. When the rest of the board recommended that Connolly should be voted off for suing his own company, O'Brien hit back. Connolly's court challenge opened on Wednesday but was quickly eclipsed by blood on the floor at INM's headquarters in City West. James Osborne, who as chairman of INM defended O'Reilly's deal on Thursday, was off the board on Friday, voted out by O'Brien. So too was Donal Buggy, the chief financial officer. Other board members had already bowed out before the AGM: Baroness Margaret Jay, a former speaker of the House of Lords; Bengt Braun, who heads a Scandinavian media firm; and Lothar Lanz, a German business executive, stepped down in advance of the AGM.
The remaining five-strong board includes two O'Brien representatives, Lucy Gaffney and Paul Connolly, and Vincent Crowley, who replaced Gavin O'Reilly as CEO. O'Brien, having made clear who now calls the shots, said in a statement afterwards that "lack of leadership has cost the company dearly over many years".
Although O'Reilly's exit package has been eclipsed by events, last week's High Court action lifted the lid on the boardroom tensions that have dogged the newspaper group. The meat was in the confidential emails and board minutes disclosed during the legal action, and which revealed in compelling detail how the company's worsening financial situation, spiralling animosity and the sheer weight of opposition from Denis O'Brien, drove the last of the O'Reillys out of INM's driving seat.
Osborne, a suave lawyer, was appointed as neutral chairman last October to smooth things over between warring factions on the board of INM.
The O'Reilly family, led by Sir Anthony, had long controlled the newspaper group. O'Brien, an emerging entrepreneur who had competed with Sir Anthony in business, set his sights on it. He made his fortune after winning Ireland's mobile phone licence in controversial circumstances. The Moriarty Tribunal found that he had funnelled hundreds of thousands of euros to Minister Michael Lowry "in clandestine circumstances" after the awarding of the licence. O'Brien ploughed €500m of it into building a majority stake in the group. He nominated his directors to the board, ramped up vociferous and public criticisms of how the company was run. Sir Anthony retired in 2009, and his son, Gavin, was appointed his successor. After a tempestuous three years, a 94 per cent fall in share price, and under fire from O'Brien and more recent major stakeholder, Dermot Desmond (who now owns 6.36 per cent), O'Reilly bowed to pressure and left with a €1.87m exit package for loss of earnings, benefits and pension.
From the outset Osborne was being petitioned about O'Reilly's performance by certain directors -- but in evidence last week he claimed his relationship with O'Reilly changed around February or March this year.
By then, according to Osborne's account, he began to share the concerns of some of the other directors. The CEO and the chairman had discussed these concerns already but on March 6 Osborne put them in writing.
Osborne's issues included the company's poor commercial performance -- two profit warnings in a year, the need for a dramatic cost reduction programme and capital; the major shareholders wouldn't stump up fresh capital without a change of management.
He moved on to O'Brien: "I have spoken to you a number of times about Denis O'Brien. I realise that Denis has made extremely hurtful comments in public concerning both you personally and the company.
"This is unfortunate but I would suggest that there is a huge difference in a shareholder criticising a CEO and the CEO being critical of a shareholder," he wrote.
He also raised O'Reilly's expenses -- referred to them in court as that "thorny" issue.
O'Reilly's family lived in London and he commuted for work to Dublin, South Africa and Australia, where he chaired an Australian media group. Most of O'Reilly's salary was paid into an offshore company in Jersey. While in Dublin he stayed in the Four Seasons but changed to an apartment in January. He travelled business class on long-haul flights only. His expenses for one five-month period were €120,000, including €75,000 on air travel and €16,000 on hotels, according to court documents.
In his letter to O'Reilly, Osborne wanted to know if there were tax implications for INM over his salary arrangement. He claimed "many directors" were of the view that he spent too much time in London. And as a by-the-way, he mentioned that a friend of his had seen O'Reilly in South Africa with his family; "so as to avoid any misunderstandings, please confirm that the company wasn't responsible for the costs of their being there".
O'Reilly covered the costs himself, according to two long letters -- one 14 pages, one eight -- defending his record. He demanded that the issues be discussed openly at the next board meeting. In them, he said the chairman once had his "unstinting confidence" but now accused him of creating a "board within a board", excluding some directors from its decision-making.
He said the board "needed to be careful" that board members were not "subtly but excessively bending to the wishes of a couple of activist shareholders, and engaging in factionalist behaviour consistent with particular shareholders' wishes, rather than in good corporate governance and sensible and considered
business decision-making in the interests of shareholders as a whole". In his second letter, he suggested that Osborne suspected O'Brien and Desmond of acting "in concert" and asked him what he was going to do about it as chairman of INM.
Two days after sending that letter, Osborne met O'Brien. His note of their conversation was produced in court. O'Brien told him he wouldn't support O'Reilly or Buggy at the forthcoming June AGM and said he wouldn't support a "rights issue" -- a way of raising capital by issuing more shares -- under current management. On March 12, Osborne was invited to a business lunch hosted by Desmond. Afterwards, they had a private meeting. According to Osborne's note of the conversation, Desmond "believed that INM deliberately closed" the Sunday Tribune -- the loss-making INM-owned newspaper it shut down last year -- to prevent him pursuing a legal action against it. Desmond "admired AJF O'Reilly but felt G O'Reilly was useless". Osborne asked Desmond how he would vote at the AGM. He said he would "definitely" oppose O'Reilly and Buggy and maybe others.
The turning point for O'Reilly's tenure came on March 13, however. Pat Gaynor, of Bank of Ireland, rang Osborne for an off-the-record, unofficial chat. According to Osborne's note of the conversation, Gaynor told him it was the "overriding view of the bank that substantial changes to management were required".
The bank wouldn't say so officially, but Gaynor said he was "authorised" to convey the message. Other banks were of a similar view. Osborne told the court last week: "Once the bank lost confidence in senior management, he said it was 'beholden on the board to do something about it'."
Osborne called on the other board members to declare where they stood. He emailed each to ask whether O'Reilly's position as CEO should be terminated with immediate effect. "You either agree or disagree. There will then be clarity and then we can move on to the issue of compensation," he wrote.
Osborne set out his own view. He believed O'Reilly did not have the support of Bank of Ireland. He said: "at least two of the major shareholders representing 30 per cent of the company" indicated they would vote against his reappointment. "I do not believe his day-to-day management of the company has been effective or that he has credibility in the financial market place," he wrote.
Osborne did not quite get the "yes or no" answers he demanded. In court last week, he said: "There were two directors who felt he should go -- were quite definite about it -- the balance took the view that we should try and work out a compromise."
Several board members seemed uncomfortable. Baroness Margaret Jay wrote: "I feel strongly that this is an inappropriate way for the PLC board to conduct business on such an important matter."
Bengt Braun wrote: "And if we can find a solution which settles the matter instantly, an extra Z months of compensation to a person who has spent his life in this company, working hard and being successful and not responsible for the current difficulties, it feels like the right thing to do no matter what some of the aggressive letters from shareholders (who feel offended by what the papers write about them) say."
Osborne last week said he felt that O'Reilly was "lining up some heavyweights" to take a court action, including the barrister Michael McDowell, a former attorney general and justice minister. He felt it in the best interests of the company to favour a settlement over litigation. Their legal advice from McCann Fitzgerald was that a shareholder approval was not required.
On April 19, the agreement was passed by seven of nine directors. Connolly said last week in court that he was against the size of the award, and had urged the package to go to shareholders. He already received legal advice that shareholder approval would be required but didn't share it with the board. Asked repeatedly why not, he said: "I just didn't do it." He regarded the deal as a "fait accomplit".
The High Court has reserved judgement on whether O'Reilly's exit deal should have been put to shareholders. Since Friday's events, it already seems like old news.