The Billionaire Who Wasn't (36 page)

In their depositions, Miller and Pilaro argued that the Wise Man Agreement prohibited a transaction of the sort contemplated by Feeney and Parker. They claimed the sale would hurt DFS because it would damage relations with other luxury goods houses. They produced correspondence and memos purporting to show, inter alia, that Feeney had recognized the right of the other shareholders to approve or disapprove a sale of his holdings. Feeney and Parker responded with eight affidavits and boxes of correspondence. They argued that the Wise Man Agreement did not restrain a shareholder from selling and that it would not be in LVMH's interests to run DFS as anything other than an independent company. They pleaded that if the sale were blocked, they might never be able to find another buyer. They also threw back at Pilaro the statement he made at the board meeting in 1990, when Chuck's representatives were thrown out, that the will of the majority “can and does control.”

When Fleming, acting for Miller, again asked for a delay, pointing out that his client had to read through the affidavits, “a chore which unfortunately takes some period of time,” Nussbaum responded sharply: “Messrs Miller and Pilaro can complete this chore in a few hours if they sit down to read the affidavits.” As tempers frayed, Fritz Schwarz accused Miller and Pilaro of just wanting to continue their personal lifestyles.

On November 18, Chuck Feeney submitted an affidavit, sworn before U.S. Counsel Robert Dolce in London, that the assets of his General Atlantic Group, including the entire 38.75 percent interest in DFS, had been transferred irrevocably to the Atlantic Foundation in 1984, and later in part to the Atlantic Trust, “exclusively for charitable and philanthropic purposes.” This, he argued, underscored the point that they “would never have consented to any restraint” on their ability to sell the shareholding in DFS. The Atlantic Foundation had up to that point committed in excess of half a billion dollars in grants and was one of the world's largest international charitable institutions, Feeney disclosed. Satisfying the charities' commitments required that its holdings remain freely transferable so that return on investment would have an acceptable level of risk and volatility.

Only Feeney's own counsel had prior knowledge that Feeney had given everything away: Fritz Schwarz had for some time been on the board of his foundation. All the lawyers and their clients had access to his deposition, but this bombshell did not leak to the media. However, Feeney's statement was included in the documents filed before Judge Beatrice Shainswit, who was expected to issue her decision after the Wise Man ruled. It was now only a matter of time before it became public knowledge.

In an attempt to persuade Ira Millstein that Bernard Arnault was not an acceptable buyer, Bob Miller's lawyer, Peter Fleming, launched a strong attack on Arnault's business ethics in a submission to the Wise Man in early December. The French businessman could hardly be trusted, argued Fleming. The
Sunday Times
had described Arnault's four-year campaign to take over LVMH as “the most vicious corporate battle ever seen in France” and the
Mail on Sunday
had charged that Arnault raised cash for LVMH by ensuring that Christian Dior and Le Bon Marché, both of which had minority shareholders, took on large amounts of debt. He demanded that Arnault sign a tough cooperation and noninterference agreement to protect Miller's and Pilaro's interests if they became minority shareholders.

Parker was shocked when he read it. “They filed all sorts of documents about Mr. Arnault and what a bad guy he was; I was horrified to hear that in a private case such documents could be available to the public,” he said.

The antagonism between Arnault and Miller led to a minor crisis in New York's fashionable society. Miller's daughter Marie-Chantal, who had married Crown Prince Pavlos of Greece and was living in Manhattan, withdrew as cochairman of the Metropolitan Museum of Art Costume Institute
Ball—the most glittering event of Manhattan's black-tie season—on December 9 because Bernard Arnault was a guest of honor.

On December 12, the Wise Man received a letter and a box of documents from Arnault to provide reassurances to him that Miller and Pilaro would have their status as minority shareholders protected. The box contained copies of highly confidential investment bankers' reports and internal memoranda for the Wise Man's eyes only. The lawyers argued all morning over whether Millstein should read them or not and finally agreed that he should go through them in camera. Only when Millstein started poking through the LVMH documents did he realize that they were all in French, and he had to get a French-speaking colleague to help him out.

The session ended on a sour note, with Nussbaum accusing Miller and Pilaro of putting their heads in the sand. It was a good deal, he said. “Miller knows it. Pilaro knows it. They know it. They know they will be benefited by this transaction. But it's not going to be theirs anymore. It's not going to be ‘my company' anymore, as Miller tends to say. It's not going to be ‘my baby.' That's what this is about. This is not about economics and harm; this is about ego and prestige.” Fleming was outraged: “Take that back, Bernie, strike that,” he said. The Wise Man intervened to say, “It's an argument, but I promise you it's not going to be the basis of my decision.”

At this point, Tony Pilaro tried to strengthen his and Miller's case by raising doubts about the future of DFS's license in Honolulu. The Hawaiian authorities could withdraw the duty-free concession if DFS changed hands. The issue was on the agenda for a meeting of the Board of Land and Natural Resources in Honolulu on December 13. The eight-member board was expected to go along with any new ownership arrangement, but at 5:30 AM Hawaii time, Tony Pilaro telephoned John Reed, the head of DFS in Honolulu, and pleaded with him to get approval of the sale taken off the agenda until the new year. Reed reported the request to DFS headquarters in San Francisco and was advised that it would be inappropriate to intervene. DFS chairman Myron Ullman in turn informed Ira Millstein confidentially about what was going on.

When the eight members of the Board of Land convened at their office on Punchbowl Street, Honolulu, on December 12, one of the them asked Reed why they should be involved in a dispute among the DFS owners. Reed replied, “I'll tell you what this is all about. We have minority owners that are now big fish in a big pond, and if this transfer goes through, they
will be little fish in a big pond. Secondly, if this transfer goes through, the minority owners will not receive any dividends for five years.” According to Anthony Takitani, a lawyer representing Miller and Pilaro at the meeting, Reed went on to claim that the dividend money would be used instead for LVMH's debt service. The board made clear that the sale of DFS would cause no problems.

Bernard Arnault had in fact already told Millstein two days earlier that while LVMH could not continue to pay 90 percent of the dividends to the shareholders as had been the case historically, it would pay “a more customary minimum 50 percent.”

Tony Pilaro then made a direct appeal to Millstein, quoting what Reed had said. “The clarion bells are ringing, Ira,” he wrote on December 14. “Bob and I are not protected. We have close to $2 billion at risk. . . .” If they became minority shareholders to Arnault, he and Miller would not get any dividends because Arnault was going to have to pay off his debts and the Wise Man should protect them. He enclosed records showing DFS dividends had gone up from $34 million in 1977 to $309 million in 1995. In just under two decades, $2.85 billion in cash had flowed into the accounts of the four owners. These were the stakes involved in the Wise Man's decision. “You can, you should, and I pray you will protect us,” wrote Pilaro, concluding with a request to the Wise Man to either stop the sale or order Feeney and Parker to sell them 9 percent of the shareholding to give them majority control over LVMH.

As he drafted his arbitration, the Wise Man received a final appeal on December 15 from Peter Fleming, in which he attacked Arnault for his “basic disdain of minority shareholders” and accused Alan Parker of “shamelessly” seeking to avoid his obligations under the Wise Man Agreement. He enclosed a letter from Miller's eighty-year-old nominee on the DFS board, Lawrence Lachman, who as head of Bloomingdale's had transformed it from a New York department store into a national chain. Lachman warned of the damage a great company could suffer from combining a retailing and a manufacturing operation. Bloomingdale's succeeded, he said, because he had gotten rid of an in-house manufacturing company for drugs and cosmetics that was losing money.

On getting copies of the letters, Nussbaum wrote to accuse Miller of seeking delay through Lachman, and said Reed could not possibly know about LVMH plans for dividends.

The Wise Man was finally ready to issue his decision on Tuesday, December 17. Feeney walked through the chilly streets—snow was forecast—to the offices of Cravath, Swaine & Moore, at the Worldwide Plaza on Eighth Avenue and Fiftieth Street, to await the ruling. If it was in his favor, the sale would be confirmed and the ownership transferred right away.

About thirty lawyers, investment bankers, bank officials, signatories, and assistants gathered in a conference room in the firm's elegant premises, decorated in Italian green-and-crimson marble and German wood. Papers were laid out on the table for signatures. Someone carried in a fax machine and plugged it into a socket. The LVMH lawyer arrived. He had been walking around for days with checks for hundreds of millions in his pocket, recalled Alan Parker. Letters, legal documents, and deposit slips were laid out on the table. An official from J. P. Morgan turned up wearing sneakers so he could run to the bank with the checks and deposit slips: He wouldn't even try to find a taxi in the pre-Christmas gridlock on the Manhattan streets. The money would have to be lodged immediately: A billion dollars for one overnight was worth tens of thousands of dollars. Another bank in New Jersey was on standby to keep its clearing operation open if Millstein ruled in their favor after bank closing hours. Everyone waited, sipping cups of coffee.

“If the decision went in our favor, we would have to close within minutes because there was the risk that the losing party would immediately go to court and enjoin the arbitral provision, thereby making this whole litigation public and slowing things down,” said Harvey Dale. “But the courts will never reverse a closing if it has already occurred. So a lot of things had to happen very fast, and this was a complex closing. A lot of moving parts had to be brought together.”

At 3:30 PM, the fax machine rang. Eleven pages of Millstein's decision spilled out before the words “the sale may proceed” appeared. The Wise Man made one condition—that the minority partners be protected and LVMH sign a specified cooperation agreement to allow DFS to continue independent operations, something to which Arnault had already agreed.

Somebody said, “Let's go!” and the room suddenly stirred into life. The purchase checks were signed, “$700 million here and $400 million there,” said Chris Oechsli with a laugh. The man in sneakers from J. P. Morgan set off at a run. The LVMH lawyer signed the cooperation agreement and a copy was rushed by messenger to Ira Millstein's office seventeen blocks away
on Fifth Avenue. A letter was faxed to the New York Supreme Court, signed by Chuck's lawyer, Fritz Schwarz, asking that if Miller and Pilaro applied for an injunction, Feeney should be given an opportunity to oppose it. It wasn't necessary. “After the ruling, we fully anticipated that they would try to file an injunction to stop the checks clearing, but they didn't,” said Parker. It was 8:00 PM before the final document was signed and witnessed and the checks cleared by J. P. Morgan.

Chuck Feeney received $1.6275 billion in cash from Bernard Arnault for his foundation. Alan Parker received $840 million.

Miller and Pilaro were half expecting to lose. “Ira came down with his decision at 3 o'clock,” Pilaro recalled. “Immediately thereafter the transaction closed with Chuck and Alan. Immediately! So clearly, all their lawyers were well aware in advance that the decision would be positive to them, and the closing was held.”

Chuck Feeney, Alan Parker, and a dozen of the lawyers held a celebration champagne dinner that evening in an alcove at Lattanzi's, a family-owned restaurant on West Forty-sixth Street famous for its Roman-Jewish cuisine. Among the guests were two senior members of the team employed by LVMH—the producers of Moët & Chandon—though as Oechsli noted, it was the DFS sellers who paid for the champagne. They could afford it.

CHAPTER 25

Erreur Stratégique

Bob Miller and Tony Pilaro had not given up. Though they failed to seek an immediate injunction to stop the sale on the day of the Wise Man's ruling, they returned to New York Supreme Court after the new year and asked Judge Shainswit to rule that the Wise Man had exceeded his authority, and that his decision to allow the sale should be voided. Said Pilaro, “We were seeking some very rapid action.” On Friday, January 10, 1997, the judge ordered Chuck Feeney and Alan Parker to show cause within one month why the Wise Man decision should not be overturned.

But the following morning, LVMH assumed control over DFS as a thirty-day antitrust period expired. The shares and the funds were transferred and the operation completed. Arnault had succeeded in winning control, though the market hammered LVMH stock price on fears that the DFS purchase might impact on the profitability of the French fashion empire.

Pilaro also sought to take an action against Ira Millstein personally for ignoring the “clarion bells” and allegedly breaching the “power in trust” in him by allowing a sale to a competitor. His law firm, Skadden, Arps, Slate, Meagher & Flom, declined to take the case, however, and he let the matter drop.