Consultants back Dow Chem’s claim that fired execs plotted LBO

November 12, 2007, 6:38 PM UTC

In the litigation stemming from Dow Chemical’s (DOW) firing of two top executives last April for allegedly plotting a leveraged buyout, the company submitted startling affidavits last week from two industry consultants who support its claims.

The fresh allegations relate to the intrigue that surrounded an apparent bid to put together the largest leveraged buyout in history – a $50-60 billion deal for the chemical giant.

Dow terminated the two executives shortly after Dow’s CEO, Andrew Liveris, learned of their alleged activities from Jamie Dimon, the CEO of J.P. Morgan Chase, whose London affiliate had been involved in the bid discussions. The bid ultimately fell apart.

In May the fired executives — former director J. Pedro Reinhard and former senior executive vice president Romeo Kreinberg — sued Dow for defamation, while Dow sued the executives for disloyalty and the disruption to its business operations caused when the bid became the subject of sporadic British press reports beginning in January.

The incident has attracted wide attention in the business community both because it involves the machinations of executives at the very pinnacle of the chemical and banking industries, and because it implicates difficult legal questions about the legal duties of loyalty senior executives and board members owe to CEOs and other board members.

The consultants’ affidavits, filed in federal court in Bay City, Michigan, on November 5, place Reinhard and Kreinberg at LBO-related meetings earlier than had previously been known and depict them negotiating the compensation packages they sought at a post-LBO company, at which time Reinhard allegedly would have acted as chairman and Kreinberg as “chief of day-to-day operations.” The affidavits were first reported by Bloomberg, here.

The consultants’ declarations must be read with caution, however, since one of the two accusing consultants acknowledges ongoing consulting contracts with Dow, while the other has signed an unusual “cooperation agreement” with Dow under which he receives €3,000 a day (almost $4,500) for making himself available to Dow in the case. (Under the contract, available here, Dow also agrees to pay Wilson’s travel and attorneys fees and not to sue him for damages for his role in the affair.)

In addition, almost all the documents that have been unearthed in litigation so far remain under seal, and even many of those made public have been heavily redacted, making interpretation perilous.

Gary Naftalis, an attorney for Reinhard, downplays the significance of the consultants’ affidavits: “This is a very small piece of a very large evidentiary picture, which plainly shows that Pedro Reinhard acted properly at all times.” Lead attorney for Kreinberg, Stanley Arkin, declined comment, as did David Bernick, lead counsel for Dow Chemical.

Kreinberg and Reinhard have previously maintained that they did nothing wrong; that in their senior positions they were expected to engage in discussions of the sort that were occurring; and that when Dow CEO Liveris found out about those discussions he seized upon them as a pretext for getting rid of two powerful executives whom he viewed as threats. Kreinberg has also alleged that Dow CEO Liveris was himself talking to investment banks, including JP Morgan Chase, about the possibility of doing an LBO of his own during the same period. (Last month Kreinberg also sued JP Morgan Chase; the bank has called the charges “legally and factually unfounded,” and has moved to dismiss them.)

The two affidavits filed Monday were signed by Edward Wilson, an industry consultant and former longtime Dow employee, and Terrence Ruane, who consults for Dow on its petrochemical joint venture in Oman, a role in which he worked for Kreinberg. Here is Wilson’s affidavit; and here is Ruane’s affidavit.

In their submissions, both men allege that in July 2006, Ruane had Wilson calculate the break-up value of Dow, which he then gave to Ian Hannam, a top banker at JP Morgan Cazenove, a JP Morgan affiliate in London.

In September 2006 Ruane met with Omani investors and confirmed their interest in “investing” in the commodities piece of Dow’s business. Ruane says he reported their interest back to Kreinberg and Reinhard, and then met with Reinhard and JPM-Cazenove banker Hannam in mid-October 2006 to discuss “a potential leveraged buyout of Dow.”

On October 30, Ruane met with both Reinhard and Kreinberg in London, where they again discussed the potential LBO.

On December 6, 2006, Ruane, Reinhard, and Kreinberg met again to discuss the LBO, this time in Oman.

On January 18 and 19, 2007, Ruane, Kreinberg, and Reinhard gathered yet again in London, with JPM Cazenove banker Hannam present on this occasion as well as consultant Wilson, who had earlier done the breakup calculation. Wilson claims that at this meeting “we discussed acquisition strategy, how the company would be managed, and who would run it after it was acquired. The plan was to have Mr. Kreinberg in charge of the day-to-day operation of the acquired company, while Mr. Reinhard would serve as the chairman. . . . We also discussed compensation schemes.”

Ruane says that until early January the LBO discussions had assumed that “the transaction would be approved by the Dow board of directors, though not necessarily by the CEO initially.” By February, however, it had become “more evident,” Ruane writes, that the executives “might not be able to obtain the full support” of the board. “The project continued to move forward nonetheless.”

During the January meeting, the first brief news report concerning a possible LBO bid for Dow was published in the Financial Times. Dow claims that this caused great “disruption” and distraction to the company, prompting its board to discuss the rumors at its regularly scheduled board meeting on February 14. Reinhard was in attendance but volunteered no information, Dow has asserted in its complaint.

On February 27, two more LBO-related meetings were held at the Compleat Angler hotel outside London, according to Ruane. At the first, Kreinberg and Reinhard met with a representative of the Omani investors, who’d allegedly wanted to meet one another in person before going further, while at the second meeting Kreinberg and Reinhard met with representatives of JP Morgan.

In his third-party complaint filed against against JP Morgan last month, Kreinberg acknowledged attending these meetings, but said that he had gone expecting to talk to Ruane about Dow’s troubled joint venture in Oman. Kreinberg said that he had been surprised when representatives of JP Morgan Chase turned up and wanted to discuss a buyout.

Both Wilson and Ruane partially contradict Kreinberg’s account. “Both Mr. Reinhard and Mr. Kreinberg knew . . . that the purpose of the meeting was to discuss the potential buy-out of Dow,” writes Ruane. Wilson claims that by this time Reinhard’s and Kreinberg’s post-LBO compensation packages, though not yet signed, had been agreed to in principal by all parties.

Ruane does acknowledge, on the other hand, that Kreinberg and Reinhard didn’t know that the JP Morgan Chase contingent would be present until shortly before the meeting. He also says that he later learned that Kreinberg and Reinhard had told the bank representatives there that Dow CEO “Liveris’s ultimate approval would be necessary for any buyout proposal to be successful.”

After that, on March 5 in Switzerland, Wilson met one more time with Reinhard to discuss the LBO and details of Reinhard’s and Kreinberg’s proposed compensation packages, according to Wilson. Wilson also claims that at some point he advised Kreinberg and Reinhard that “the only ethical way for them to proceed was to resign their positions with Dow,” but that “this advice was rejected.”

On February 25 and March 12 two more newspaper accounts of the proposed LBO had appeared, causing more consternation at Dow, according to its complaint. Yet when its board discussed these matters at a March 16 meeting, Reinhard again stood silent, Dow alleges.

It’s a messy record, and getting messier, but at the moment, the ball seems to be in the executives’ court to come forward and explain exactly what they were doing and why they felt they had no duty to share information about it with Dow’s board.

Meanwhile, the parties have agreed to question Wilson under oath by mid-December. In his affidavit, Wilson had noted, tantalizingly, that he possessed “considerably more knowledge relating to these events,” which, due to confidentiality agreements, he couldn’t reveal until ordered to do so by the court.