How Hugh Hefner is Screwing Playboy Shareholders, and Why They Should Fight Back
Talk about conflicts of interest. In the Playboy Enterprises deal recently approved by the company's board, founder Hugh Hefner is the buyer, the seller and the controlling shareholder.
No suprise, the payout for minority shareholders is about as skimpy as a Playmate's bathing suit. Yet the vote was unanimous: Hefner controls the voting stock and his board is made of old friends, three of whom have been on it for 20 years.
It's exactly this kind of transaction that should have led the board to take every possible step to make sure that all offers were treated equally and evaluated independently. They did not. Their job is to make sure that the rights of the company's other shareholders were protected. They were not.
Passing on Penthouse
If those shareholders are looking for sympathy, they may be disappointed. Some reporters, captivated by the Hefner legacy, have painted this as a bold move from the man who made the girl next door into a centerfold and his decades-younger girlfriends into reality television stars. They seem impressed that the board did not accept the original offer, and, over a period of five months, insisted on raising the price by 65 cents a share to $6.15.
But that's hardly something to celebrate. First, it's only a few pennies more than the stock was trading at 20 years ago. Second, it's less than a third of its all-time high. And most important, it's ten cents a share under the rival offer from Penthouse owner FriendFinder Networks -- an offer the board will not say it even considered.
Not just unethical
The rules on this kind of thing have been pretty clear since 1985, when the courts told the board of Trans Union that they should not have accepted an offer solely on the CEO's say-so. When an offer comes in, the board has to take a series of steps to make sure the shareholders get the best possible deal. And that means that every offer has to be evaluated.
A board can reject a higher offer if it can show that the deal isn't in the interests of long-term shareholder value. But here, the company is going private and long-term means the highest price they can get as they say good-bye.
The only long-term shareholder is Hefner himself, and the primary value he is getting from this deal is that he gets to stay in charge. Both the board and the majority shareholder have a fiduciary obligation to the minority shareholders to get them the best deal possible, and in this case that means taking the extra ten cents a share -- or forcing Hefner to match it.
In a transaction as riddled with conflicts of interest as this one, with the same party on both sides of the transaction and in control of the board, the directors should have shopped for a better option and sold to the highest bidder or they should have put it to a shareholder vote, excluding Hefner, as an interested party.
Next stop, the courts?
Hefner is not providing all of the financing for the transaction himself. Private firms are involved in the deal for both equity and debt; I am sure they are insisting on better treatment than the minority shareholders who are being bought out. I'm betting that they will insist on more oversight and accountability than the shareholders and directors they are replacing. And I predict there will be a lawsuit on behalf of the minority shareholders -- and that it will be settled, perhaps for that extra ten cents a share, before the court has a chance to apply the Trans Union test.
Nell Minow, dubbed "queen of good corporate governance" by BusinessWeek, is a member of the board of GovernanceMetrics International (formerly The Corporate Library, which she co-founded).
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