Format of Inquirer auction could start to take form

A fast-talking, gavel-wielding auctioneer probably will not be part of the deal, but how The Inquirer and its parent company are sold at auction might be decided after hearings this week in Delaware.

Two of its owners argue for public bidding by qualified candidates willing to submit a single sealed bid. Three others prefer a private auction, almost akin to a poker game, with back-and-forth bidding until all but one group folds.

The hearings, which start Monday before Delaware Chancery Court Vice Chancellor Donald F. Parsons Jr., could include testimony about the formation and finances of the parent company, Interstate General Media Holdings L.L.C., and the perceived need for a speedy resolution to a dispute that all say has paralyzed the management of the region's largest news outlet.

Three of the five owners are listed as potential witnesses, including George E. Norcross III, who led the push to have the dispute heard in Delaware and did not testify in the November hearing in Philadelphia Common Pleas Court that laid bare his long-simmering conflict with Lewis Katz. The two men together make up the IGM management committee that is to make major decisions for the company.

Lawyers involved in the matter were unsure whether the testimony this week will get as personal as in November, when a Philadelphia judge listened to dueling claims of newsroom meddling by the owners and details of the dispute that led to the abrupt but temporary ouster of Inquirer editor William K. Marimow.

Parsons is expected to hear dense testimony from experts on auctions, and how it might apply in this situation. He could rule within days.

"I'd like to tell you there is a whole body of law on this, but there really isn't," said Larry Hamermesh, a professor at Widener University's Institute of Delaware Corporate Law. "This is not a typical case."

Lawyers for owners Katz and H.F. "Gerry" Lenfest have recruited auction experts Jeremy Bulow of Stanford University and Guhan Subramanian, a professor tenured in both the Harvard Business School and Harvard Law School.

According to an e-mail from one of Norcross' attorneys contained in court documents, Norcross might testify about his view of the "intent of the parties" who signed their partnership agreement in March 2012 and "the harm to the company that would result from a public auction, his experience with the due diligence and other challenges" associated with acquiring IGM, including the agreements with IGM's unions.

Neither Marimow nor publisher Robert J. Hall - central figures in the fall hearing - is on the witness list. Hall's contract expired last year, and Marimow's is set to end this month. Katz and Lenfest's lawyers have asked Parsons to keep both in place until ownership is settled.

Parsons' decision won't automatically end the litigation. Appeals can be made to the Delaware Supreme Court. A Katz-Lenfest appeal is pending in Pennsylvania over the decision to send the case to Delaware.

IGM employs about 1,800 people at The Inquirer, the Philadelphia Daily News, three websites, and a printing plant in Conshohocken. IGM is registered in Delaware, which is why the case is being heard there.

Katz and Lenfest prefer a public auction with single, sealed bids. Norcross and fellow owners Joseph Buckelew and William P. Hankowsky prefer a private auction among the current owners with ascending bids until no one wants to go higher.

"Auctions closed to outsiders are rare in my experience," said R. Preston McAfee, a director of strategic technologies at Google and an authority in the academic world of economics and auction theory.

"To make the most revenue, an ascending auction with no limit to competition is usually best," McAfee, who has no connection to the IGM case, said in an e-mail.

Norcross said in a January letter to Katz, which he later released to employees, that he wanted a private auction because "a sale among current owners is also the least costly way to solve our differences." Norcross' attorneys cited cases where companies were allowed to complete transactions without exhausting every opportunity to get the highest price.

The Newspaper Guild, which represents 478 newsroom, advertising, and finance employees, also will have a role. On Monday, Parsons said the Guild could legally intervene in the case. On Thursday, the Norcross group said it no longer objected to having the Guild independently bid - using money from outside investors - in a private auction. Katz and Lenfest have not objected.

Under the Norcross group's revised proposal, filed Thursday, a court-appointed trustee would conduct a private auction by April 30. Bidders would have to make a $5 million deposit within five days of Parsons' order. The minimum bid would be "not less than the original purchase price," plus current debt.

Norcross' group did not specify that figure. The original partnership agreement, submitted as evidence by both sides, says the partners paid $61.1 million to buy the properties and start the company in March 2012. Bids would rise in $1 million increments until no one raised the ante. The winner would have to pay in cash within 48 hours or lose the deposit.

Under the Katz-Lenfest plan, a court-appointed auctioneer would conduct a sealed-bid public auction within 45 days of Parsons' giving the order. In the first 30 days, the auctioneer would market IGM to potential bidders. No later than two days before the auction, the auctioneer would invite qualified bidders to submit a bid with a $4 million deposit.

Animosity among the owners has meant no meaningful negotiations in recent months, but the auction hearings could change that, reviving ideas or interest, according to people involved in the case. And Parsons has some latitude to choose a different way of deciding who gets a business that is in some distress.

"It's hard for a judge to put much weight on emotional concerns, except for one thing," said Hamermesh, who does not know the players or personalities. He said judges generally lean toward a public auction, but "if two groups far and away have invested an incredible amount of emotion and money, there are other ways to do this. Each could put a number on the table as either a buyer or a seller. Maybe that would solve it."

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