Loria Can Play Hardball
David Johnson/ The Gazette
Tuesday, June 13, 2000
Jeffrey Loria has the power to push his local partners out of control over the destiny of of the Expos baseball club if they fail to provide the extra operating money he is demanding, The Gazette has learned.
The contract signed last December between Loria, a New York art dealer and the 15 local shareholders spells out a formula to reduce the equity of the local partners - who together hold 76 percent of the club - if they refuse to put up the money. Loria claims he needs to pay the bills and operate a winning team.
Loria, who owns 24 percent of the club, issued a cash call this spring and the local owners came up with the $16.5 million he wanted.
At a meeting May 18, Loria reportedly asked for another $15.5 million and warned his local partners that he will require an estimated $40 million more in operating capital next year.
The local shareholders, outraged, have been meeting behind closed doors to decide how to respond.
The local shareholders have refused to comment on the record, but some of them are said to believe that Loria is deliberately inflating the baseball club's true cash needs, in an attempt to wear down and buy out his recalcitrant local partners.
And they're considering court action against Loria, on the grounds that his cash demands are unreasonable and that he is not acting in the best interests of the partnership. They're afraid he might try to move the club south of the border. Club bylaws prohibit a move unless owners holding 70 percent of equity approve it.
The December contract obtained by The Gazette reveals that the local owners are in a weak position. The owners are members of a limited partnership, with Loria as managing general partner, a setup that gives him sweeping powers. The local shareholders have no choice legally but to do what Loria says in most matters.
The contract allows Loria to demand cash from his partners any time he "reasonably determines" that more money is needed to run the ball club. When he asks for money, the local owners - a collection of individuals and corporations including BCE and Canadian Pacific - have up to 45 days (until July 3, in this case) to respond.
A refusal, by even one partner, to pay its share would kick off a complicated process. If partners No. 1 through No. 14 were ready to pay, for example, but No. 15 was not, then any of the first 14 partners could pay the share of No. 15 - and would aquire more ownership of the team, ownership aquired from No. 15.
In the process Loria issues a "valuation notice" - a statement of how much a team is worth - and each partner's equity is calculated as a proportion of this amount.
Here's why the valuation estimate is important: if nobody wants to pay the cash-call shares of partner No. 15, in this example, then Loria reduces the valuation by $25 million according to the contract and goes through the cash call process again.
So shareholders now willing to step forward to satisfy the cash call would be rewarded with more equity in the club if they had invested after the first valuation notice.
And - here's the key to the whole arrangement - Loria could also bring in new investors, provided they are "not affiliated" with him and provided Major League Baseball agrees - giving them equity in the club.
The arrangement, spelled out in dense paragraphs in legalese, calls for the cash-call/valuation-notice process to repeat itself "until sufficient funds have been timely obtained." The net impact, legal experts say, is that Loria or other investors could conceivably take over the Expos for a pittance if his local partners were to refuse repeated cash calls.
"This clause of having the valuation of the team decrease is an incentive to have the other partners chip in," said Francois Richer, a professor of accountin at the Ecole des Hautes Etudes Commerciales. "And if they don't, if they stubbornly refuse, then he'll be able to get this ball club cheap."
Neither Loria nor the local shareholders are talking on the record about the dispute. One insider, however, said Loria is clearly testing his local partners' commitment to rebuilding baseball in Montreal on his terms.
Since taking over as general partner from Claude Brochu last December, Loria has raised the payroll from $17 million last year to $31 million - and counting. He's encouraging general manager Jim Beattie to improve the team through trades, even at the expense of more payroll hikes.
Some critics have speculated that Loria is deliberately trying to build a "cost structure" the Montreal market can't afford - as part of a strategy to facilitate a move to a large U.S. market.
On the revenue side, Loria has chosen not to broadcast Expos games on television, or on English radio, rather than accept broadcast frees that would have been the lowest in baseball. Similarly, he has tried to squeeze a lot more money out of sponsors. One major sponsor, Ford Canada, recently left the team rather than pay more.
These two moves haven't helped the cash side of operations. On the other hand, attendance is up 60 percent this year as the much-improved and better-paid Expos vie for a playoff spot.
A court battle over Loria's cash needs could turn on a clause in the partnership agreement requiring Loria to act in the best interests of the partnership, not the team. However, the agreement does allow Loria the power to decide what those best interests are.
"The partnership isn't the same thing as the team," said Guy Lachapelle, an expert in corporate law with the Centre for the Study of Regulated Industries, an arm of the McGill University faculty of law, after reading the contract. "But what colours everything, I think, is that the limited partners brought Loria in to keep the Expos in Montreal. That was the purpose of the deal. It wasn't to move the team south.
"So basically you could say one should not forget the whole intention of the deal. When you look at the interests of the partnership per se, it's basically to run a good bsuiness, to try to make money, and to try not to lose money. If you're a director or an officer of a company, you have to act in good faith. But the basic rule there is you should act in the best interests of the company, not in your own interests. Those are very basic principles of corporatate law."
The local shareholders never expected to find themselves in such a bind. Last year, they made no secret of the fact that they didn't want to inject new money into the franchise. Their refusal to do so led to the recapitalization drive that resulted in a tentative agreement whereby Loria and some unnamed U.S. investors were to inject $75 million into the club, and new local investors another $75 million.
In return, each of those groups would get 35 percent ownership shares, with existing local shareholders falling to 30 percent. Some of the new money was to go toward the club's proposed new downtown stadium.
Loria put up $18 million of the $75 million last fall, and three new local investors $3 million, to buy out Claude Brochu and shares he held in trust. The $3 million was put up by Montreal businessman Stephen Bronfman, Loblaws grocery chain and the Jean Coutu pharmacy chain - bringing the local ownership group to 15 in number. The three were to put up the bulk of the cash for the remaining $72 million.
But the recapitalization effort has broken down, as relations between Loria and the old and new local investors have taken a turn for the worse.
The local investors are upset Loria wants to increase spending on the downtown stadium, originally estimated to cost $200 million. Loria is now proposing to spend an extra $70 million to put some sort of roof on it. Local shareholders say he's broken with the original business plan.
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