Winning Strategy Helps Publisher Recaptures 10% Beneficial Interest Worth $20 Million
Challenge
A New York-based publishing company terminated the Chief Operating Officer (COO) of its European business upon discovering that the COO had diverted a substantial amount of the publishing company’s royalty payments for his own benefit. The COO was not an employee of the publishing company. For more than 25 years he had capably provided COO services under a consulting agreement between the publishing company and a “loan-out company” he owned. This unusual structure served the COO’s tax objectives. The consulting agreement granted the COO’s loan-out company a 10 percent beneficial interest in the publishing company’s business but stated that if the arrangement were terminated due to the COO’s “fraud, embezzlement or other misappropriation,” the 10 percent interest, valued at over $20 million, would be forfeited.
The former COO claimed that the publishing company was aware of and agreed to the royalty payment diversions, that the diverted royalties were offset by amounts owed to the COO, and that the “real” reason for the termination was to deprive him of his 10 percent share of the business value that he had helped create during his years of service. The publishing company and the COO engaged in commercial arbitration to resolve the dispute. By the time the arbitration commenced, the COO’s loan-out company was controlled by a liquidator.
Solution
We represented the publishing company in the arbitration proceedings. We made the strategic decision to invoke a rule that permits arbitrators to receive direct evidence in writing instead of via live, oral examination. This worked to the client’s decided advantage in two ways. First, it permitted the client’s direct case, intended to show a complicated scheme of embezzlement and deception, to be presented in advance of the hearing in a concise and easily digested package of declarations and exhibits. Second, by forcing respondents to submit a written declaration from their lone witness, the fired COO, we prevented respondents’ counsel from eliciting emotional live testimony from a potentially sympathetic witness during direct exam. The COO’s testimony for the most part was limited to answering “yes” or “no” to our carefully crafted cross-examination questions. By confronting him with the detailed documentary evidence of his wrongdoing, we were able to gain admissions which turned the tide in our favor.
Result
Following the presentation of direct evidence, the liquidator saw the writing on the wall and solicited a settlement discussion. However, the former COO refused to authorize the respondents’ joint arbitration counsel to participate. We therefore conceived and pursued a two step settlement strategy. First, we approached the liquidator’s U.K. insolvency lawyer and quickly reached a first settlement: In exchange for a small amount of cash the liquidator transferred the loan-out company’s 10 percent interest back to the publishing company. This allowed us to reach a second settlement with the COO in which the publishing company recouped more cash from the COO than it had paid to the liquidator.