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Tronc's Back-and-Forth Boardroom Battle Royale

This is part of a series of stories that comprise TheStreet's Blue Chip Studio, which will illuminate issues related to corporate board performance, activism, dealmakers and personalities revealed by analysis of data generated by BoardEx, a business unit of TheStreet.

The man who pulls the strings at Tronc Inc. , non-executive chairman of the board Michael Ferro, has been busy trying to pull the rug out from under the white knight who saved the company last year.

Ferro, who became chairman of the former Tribune Publishing in February 2016, likely still runs the company because of a $70.5 million investment in May 2016 by Patrick Soon-Shiong, the principal of Nant Capital LLC, that served to repel an unsolicited takeover attempt by Gannett Co . Soon-Shiong bought 4.7 million shares at $15 a share, the same price Gannett was offering, to become Tronc's second-largest shareholder.

Since then Soon-Shiong has complained of unusual moves by Ferro and the company, while Ferro has tried to marginalize Soon-Shiong and remove him as a director. Then last week Nant Capital's lawyers went public with a letter to the Tronc board, which Tronc replied to in a response that was filed with the Securities and Exchange Commission on Monday, April 3.

"Nant is troubled by the company's corporate governance, or lack thereof," according to the letter to Tronc from Nant's lawyer, John Quinn of Los Angeles-based Quinn Emanuel. "Nant believes that this is one of the reasons the stock currently trades at a meaningful discount to Nant's investment basis, which is disappointing given both the company's assets and the heightened appreciation for the importance of media in society in recent months."

Tronc shares are trading at about $14.54, down about 3% from what Nant paid for the shares. Still, Tribune shares closed at $12.09 on May 23, 2016, the day Soon-Shiong made his bid. Tribune, the publisher of the Chicago Tribune and the Los Angeles Times, changed its name to Tronc in June 2016.

Quinn's letter listed several Tronc actions it described as "contrary to principles of good governance and to shareholders' best interests:"

  • Tronc terminated its 'poison pill' early and waived any restriction to trading applicable as set for by the company's insider trading policy, allowing Merrick to purchase 2.5 million shares during a blackout period.

  • Tronc amended restrictions in its investment agreement with Merrick to permit the hedge fund to increase its ownership of common stock to 30%. Previously, both Merrick and Nant had been subject to a 25% cap.

  • In March 2017, Tronc spent $56.2 million cash to repurchase shares from Oaktree Capital at a premium $15 a share.

  • Tronc moved forward the date of its annual meeting by more than 30 days.

  • Tronc's board determined it would not renominate Soon-Shiong as a director, who claims he was only notified after the nomination window had closed.

"Tronc has conducted a preliminary review of the Demand Letter and found it to be filled with misstatements and baseless innuendo," attorney Yosef Riemer at Kirkland & Ellis LLP wrote in a response dated March 28. "Any claim that Merrick and Nant were ever intended to be treated identically as stockholders is without foundation under the plain language of the agreements setting forth each party's contractual obligations and entitlements," the lawyer added.

Regarding the termination of the poison pill, which was originally adopted as part of a plan to repel Gannett, Tronc said Soon-Shiong was "present at the board meeting where in those actions were discussed at length and resolutions approving those actions were adopted." At the same Dec. 23, board meeting, the directors discussed the possibility of waiving trading restrictions imposed on Merrick and Ferro during the blackout period. Tronc also said Soon-Shiong had been notified of the date change for the annual meeting but was absent from the board meeting four days later, when a resolution was adopted.

Dana Meyer, Tronc spokeswoman, declined to comment further on the letter to the board and denied a request to interview Michael Ferro or any other directors. Separate attempts to reach out to Ferro, 51, who's also the CEO of Merrick Ventures LLC, went unanswered.

Nant's goal is to create a more active, independent board, and to be treated as fairly as Ferro's firm. Still, the acrimony today is a far cry from the amity of less than a year ago, when CEO Justin Dearborn said Soon-Shiong was "an innovative and visionary leader with proven ability to leverage technology," and became vice chairman of the board last June, following his investment.

Things were going downhill between the two groups by December, when Ferro purchased 2.5 million shares, according to a filing with the SEC. On same day as the sale, the board terminated the poison pill and allowed Ferro's hedge fund to increase his voting power.

"In general, you need to treat all shareholders the same, you can't favor a particular investor," said Charles Elson, director of Center for Corporate Governance, University of Delaware. "Poor corporate governance results from a board composition and/or structure that renders a board unable to effectively monitor management."

Dearborn, the Tronc CEO, "cannot do a single thing without Michael's blessing," according to a person familiar with the situation who didn't want to be identified in the midst of the legal wrangling.

Dearborn and Ferro have a relationship that dates at least to 2013, when the two served in similar roles at Merge Healthcare Inc., according to BoardEx, a business unit of TheStreet. Less than a month after Ferro became chairman, CEO Jack Griffin was ousted and replaced by Dearborn. Before Tronc, Ferro served on a number of private boards as well as chairman of the board at Merge Healthcare, which IBM (IBM) bought in October 2015.

Ferro has another connection on the Tronc board as well. Director Richard Reck, chair of the compensation, nominating and corporate governance committee, was also on Merge Healthcare's board during Ferro's time there, according to BoardEx. Reck is in charge of nominating directors to the board.

This year Soon-Shiong didn't make the list, possibly because because he raised uncomfortable issues, according to the person familiar with the situation, including the unequal treatment for the two director's investment agreements and other questions.

For example, Tronc said in a March 2016 SEC filing that it was paying hundred of thousands of dollars to sublease a Bombardier aircraft jet that was leased by Ferro's firm, Merrick Ventures. It cost Tronc, including proportionate share of the insurance and maintenance expenses, $8,500 per flight hour flown.

The aircraft expenses came as the company was cutting its workforce. Following an Employee Voluntary Separation Program during the fourth quarter of 2015, Tronc began outsourcing its information technology function in the first quarter of 2016, resulting in the loss of 161 positions. In the second quarter, another 59 positions were eliminated.

Other investors beside Nant have also criticized Ferro. In June 2016, Oaktree Tribune LP said Ferro "has made statements that suggest that he either misunderstands his duties to the stockholders, or has elected to further his own interests in derogation of those duties," in respect to the proposals by Gannett.

Tronc shareholders will vote on the new slate of directors at the annual shareholder meeting, now scheduled for April 18 in Chicago.

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