May 27, 2004 – Virgin Islands businessman Jeffrey Prosser, sole owner of Innovative Communication Corp. and a variety of other companies including the Virgin Islands Daily News and Virgin Islands Community Bank, has been ordered, along with ICC and two other members of Innovative's board of directors, to pay what could end up amounting to more than $100 million to former stockholders of his company Emerging Communications Inc.
A Delaware judge issued the order after finding that Prosser and the two board members knowingly undervalued the price of Emerging stock when Prosser bought out the company's minority shareholders in 1998. The two directors were responsible for overseeing the stock valuation and privatization on behalf of Emerging Communications' minority stockholders when the publicly traded company went private. The judge found them and Prosser guilty of neglecting their fiduciary duties to those stockholders.
In what the court called a "scheme to force out Emerging Communications minority shareholders," Prosser also was found guilty of improperly benefitting not only from the stock but also from the privatization itself.
Judge Jack B. Jacobs of the Chancery Court in the state of Delaware, where Prosser's Emerging Communications was incorporated, found that when Prosser took Emerging Communications from a public to a private corporation, he knowingly did not offer the minority shareholders fair value on the stock he purchased from them.
Innovative has been ordered to pay the shareholder who brought the initial lawsuit over the buyout price $38.05 a share on 750,300 shares plus interest of 6.27 percent compounded monthly from October 1998 to the date of the court judgment, May 5, 2004. In addition, Prosser and the two directors are liable to pay $27.80 per share on more than four million other shares of the stock.
According to the 43-page court opinion, the price Prosser paid for the stock when he took Emerging Communications from a public to a private company hung on a lowball evaluation made in March of 1998. A second stock valuation made in June of that year, which Prosser was aware of, was never given to the Emerging Communications board or to a committee formed to establish a fair market value for the stock and negotiate the buyout.
Further, the court found, those committee members were handpicked by Prosser and two Emerging Communications board members, who had the final vote on the privatization stock price, were substantially financially dependent on the millionaire magnate.
One of those board members, John Raynor, had an undisclosed deal with Prosser to receive $2.4 million over a five-year period for "past services." Neither the other Emerging Communications board members nor the special committee members were aware of Prosser's deal with Raynor when they voted in favor of privatization at a stock purchase price of $10.25 per share.
The court document shows that Prosser used the lower stock valuation to establish the price of the stock he would later purchase from the stockholders, and the higher valuation to borrow money from the Rural Telephone Finance Cooperative, which financed the privatization. Emerging Communications board member Raynor was in on the negotiations with RTFC when Prosser borrowed $60 million to purchase the outstanding shares of stock.
Because Prosser owned Virgin Islands Telephone Corp. (Vitelco), he was able to obtain below-market interest rates from what was at the time a public lending institution set up to loan money to rural phone companies for equipment, acquisitions and other utility-related needs. Vitelco was later rolled into the ICC parent conglomerate as Innovative Telephone.
Prosser also retained two entities that had previously represented a prior board committee that was supposed to represent the minority stockholders — Prudential investment bank and the law firm of Cahill, Gordon and Reindel — to represent himself and Innovative in the buyout.
Another issue raised by the Delaware judge was that the special committee to protect the stockholders never met in person. It consisted of Richard Goodwin, John G. Vondras and Shridath S. Ramphal; Vondras lived in Indonesia and Ramphal, in England.
"There were several obstacles to the ability of these three directors to operate as a fully functioning special committee," the court opinion reads. "Located on different continents, and separated by a time difference of 14 hours, the three committee members were never able to meet in person." Goodwin, according to the court records, became the point person on the process.
As chair of the committee, Goodwin directed communications to the others via telephone and fax. In so doing, the court document says, Goodwin passed much of the faxed communications through Prosser's secretary, asking her to disseminate the correspondence to the other board members.
The court called this action "careless, if not reckless," stating there was "no effective bargaining because Prosser held all the cards and misled Goodwin into believing that he and the committee's financial adviser possessed all the information that was material to negotiating a fair price." Judge Jacobs wrote: "Nothing could be further from the truth." Furthermore, Prosser potentially had access to all of the board's negotiating strategies via the faxes between Goodwin and his secretary.
After several conversations with Goodwin, Prosser said finally that $10.25 was already "straining the limits of his financing," a fact belied by other information in the court documents stating that RTFC had already agreed to financing of up to $11.40 per share based on its own evaluation that the stock was worth $28 per share. Court records indicate that Goodwin was worried that Prosser, who had already made it clear that privatization was the only course for the company, might back off, resulting in a lower stock price for the minority shareholders.
The Other Players
The court determined the relative culpability of all Emerging Communications directors individually, finding Raynor and Salvatore Muoio, a investment adviser specializing in telecommunications, guilty of failing in their fiduciary duties. Raynor was guilty in part, Jacobs said, because he "actively assisted Prosser in carrying out the privatization … and acted to further Prosser's interests in that transaction" against the interests of the company's minority stockholders.
Jacobs found Muoio guilty because he felt that Muoio — with his expertise in the telecommunications area — knew that the transaction was unfair to the minority shareholders. Jacobs wrote that either "Muoio made a deliberate judgment that to further his personal business interest, it was of paramount importance for him to exhibit his primary loyalty to Prosser," or he "consciously or intentionally disregarded his responsibility to safeguard the minority stockholders from the risk of which he had unique knowledge." Muoio as of mid-1997 was on an annual $200,000 retainer for providing banking and financial advisory services to Prosser. According to the court document, Muoio sought an additional $2 million for serving as a financial adviser on another of Prosser's acquisitions.
Raynor was not the only other director found by Jacobs to be dependent on Prosser's largess, although his financial dependency was the most glaring. From 1987 through 1998, Atlantic Tele-Network (which, with Prosser as co-owner, had bought Vitelco in 1987) and Emerging Communications (which Prosser formed after splitting with his ATN partner in 1996) constituted Raynor's largest single client. In 1998, the year of the privatization, a $25,000-a-month retainer from Prosser and $5,000 a month in expense payments were Raynor's only income. "As a highly paid consultant to, and later full-time employee of Prosser and his companies, Raynor was clearly beholden to Prosser and, thus, not independent,"
the judge wrote.
Shridath Ramphal was less dependent on Prosser financially — although 22 percent of his income from 1993 to 1995 came from Prosser. Ramphal had another connection to Prosser: His son-in-law Sir Ronald Sanders had a close relationship with the St. Croix businessman.
After the privatization, both Ramphal and Sanders were appointed to the Innovative board. Sanders, who was a high commissioner to London for the Bird administration in Antigua, was recently given additional duties with Innovative after the Bird government was swept from power in March. His new appointment, noted in an Innovative news release, came less than a week after the Bird defeat.
The other three Emerging Communications directors — Goodwin, Vondras and Terence A. Todman — received compensation of $100,000 a year for serving on a board that met three or four times in 1998. Goodwin and Vondras also received $50,000 and $15,000, respectively, for their services on the special committee. Prosser had personally appointed each one of them, court records show. Unlike with the cases of Muoio and Raynor, however, the judge did not find the actions of the other board members egregious enough to find them guilty of failing in their fiduciary duties.
Jacobs wrote of Ramphal, Goodwin, Vondras and Todman that it has not been proven that any of the four "knew or had reason to believe that the merger price was unfair." He added: "This is not to suggest that these directors covered themselves in glory, or merit commendation for the manner in which they discharged their responsibility as fiduciaries. But it is to say … that there is no persuasive evidence that the fiduciary violations of the ECM [Emerging Communications] directors other than Prosser, Raynor and Muoio implicated conduct more egregious than breaches of their duty of care."
Jacobs ordered the attorneys for the parties in the case to confer and submit a final agreement for payment based on his opinion.
No appeal can be made until the final agreement is signed by Jacobs, legal sources say, after which the defendants would have 30 days to appeal.
The Chancery Court
The Delaware Chancery Court is the only court of its kind in the world, according to several legal experts. It is renowned for its impeccable judgments and, as with all courts in Delaware, is "completely free of politics," according to John Reed, a corporate lawyer with Duane Morris LLP.
In fact, Reed said, 60 percent of the Fortune 1000 companies and half of the publicly traded companies in the country were attracted to incorporate in Delaware largely because of the court system "which is by law politically balanced" and the unique nature of the Chancery Court, which is specifically charged with settling corporate disputes.
Reed and several other legal specialists said the court is "rarely" overturned by a higher court. One source — an editor of a daily Delaware newspaper — said he knew of only "maybe four times in 15 years" that a higher court had overturned a Chancery Court decision. And in Delaware there is only one higher court — the State Supreme Court, on which Jacobs now serves. As there is no intermediary court, Reed said, all appeals go straight to the top.
Reed said losing lawyers often don't bother to appeal because "they know the opinion of the Chancery Court was correct." The court "generally gets it right," he said, and therefore attorneys "usually accept the decision," which is based solely on facts. Higher courts usually do not question the fact finding of lower courts, and therefore the basis for overturning a decision would be strictly "the law," Reed said.
Charles Elson, law professor at the University of Delaware, was quick to praise Jacobs, as well.
"Jack Jacobs is as good as they get," Elson said. "He is thought of as a careful, judicious thinker."
Elson reiterated that the Chancery Court is "almost never" overturned on issues of law and even more rarely on the facts of a case. He added: "The Chancery Court is the best, most prestigious business trial court in the U.S."
How It All Started
In 1987, Prosser and Cornelius Prior formed Atlantic Tele-Network in order to purchase Vitelco, a cash cow by anyone's standards, from ITT. As a monopolistic public utility with a guaranteed 11.5 percent rate of return on its local telephone service, it was an attractive acquisition. The company became even more attractive 10 years later, when under the sole leadership of Prosser, it was granted five year's worth of nearly full tax breaks by the V.I. Industrial Development Commission, later renamed the Economic Development Commission.
When Prosser and Prior split in 1996, ATN stock was valued by two investment banks to be worth between $20 and $30 per share, mostly because of Vitelco, according to the court document. Prior left the relationship retaining GT&T, a Guyana-based telecommunications company, while Prosser kept the Virgin Islands portion of ATN, which became first Emerging Communications and later, through a maze of complicated legal maneuvering, Innovative. Both were publicly held companies at the time of the split. ATN is still publicly held.
After the break-up Prosser ended up with 52 percent of Emerging Communications' 10,959,131 shares of stock. Because Emerging Communications was widely misunderstood to be a Third World entity not under the jurisdiction of U.S. law, stock prices were depressed initially. The court document states: "That perception, Prosser knew, was unfair because ECM [Emerging Communications] had all the characteristics of a U.S. telephone company." The document goes on to say that "Prosser exploited the market unfairness by proposing the privatization at a price" based on then-current depressed market price.
After operating Emerging Communications for 10 months as a publicly owned company, Raynor said, Prosser decided to "flip the transaction," becoming a buyer of Emerging Communications stock, rather than a seller.
At the time of the split between Prosser and Prior, the court document says, Prosser had placed a value of $13.25 per share on ECM. Five months later as a buyer of the stock, he initially proposed to pay only $9.125 per share.
ICC Response
In a fax sent Thursday morning, the Source asked ICC spokesman Holland L. Redfield II, vice president for corporate affairs, to answer three questions. Redfield responded within a couple of hours via e-mail and fax asking that he be quoted "verbatim," as the issues were "highly technical." The Source agreed to his request, but not to a further request that it print his entire response that was "highly technical" and not within the newspaper's purview to study and report on with the expertise that would be required. However, the Source left open an offer to print Redfield's complete response as an Open Forum letter.
Following are the Source questions and Redfield's answers.
V.I. Source: Do you plan to appeal the judgment?
ICC: Yes. But, just to be clear, the decision that was reached on May 5th in the Delaware Court — is just that, a decision and not a judgment. As of today, no judgment has been entered with the Court.
V.I. Source: On what basis will you file an appeal?
ICC: In fact, we have multiple grounds on which to file an appeal. At the outset, it is important to note that throughout the transaction that took Emerging Communication Corporation private, many of the world's leading law and investment banking firms provided their advice and guidance to the board — which was followed — to ensure that the transaction was fair and equitable. The firms involved included Prudential Securities; Cahill Gordon & Reindel LLP; Paul, Hastings, Janofsky & Walker LLP; and Houlihan Lokey Howard & Zukin.
V.I. Source: By our estimation this judgment is in excess of $100 million. Is this figure accura
te? If not, what is your estimate?
ICC Answer: Again, just to be clear, no judgment has been entered in this case. And because the Court’’s decision is a matter of public record, it would be premature for us to provide an estimate. Importantly, I would add that in today’’s litigious business environment all multi-national companies are subjected to litigation from time to time. Innovative Communications is well positioned to move forward with our business plan to grow the company and continue to provide quality telecommunications services to our all of our customers. Our confidence in winning this appeal and continuing to build a growing company remains steadfast.
Editor's notes: Click here to read the entire Memorandum Opinion of the Delaware Court of Chancery.
In May, Jeffrey Prosser filed a lawsuit alleging defamation against V.I. Source Inc. and journalist Melvin Claxton as a result of a speech given at a public meeting by Claxton. (See "Pulitzer Prize Winner Takes News Owner to Task".)
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