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NEW YORK -- Nine months after the $1.8 billion sale of Johnson & Higgins to Marsh & McLennan Cos. Inc., a bitter fight is erupting among former J&H directors over how their shares of windfall profits were allocated.
In what amounts to a coup de grace to the famously clubby relations among top J&H managers, nine retired directors charge in a lawsuit that J&H's board of directors fraudulently manipulated the broker's corporate structure to allow the sale of its restricted stock to Marsh & McLennan.
The aim of the alleged manipulation was to keep the lion's share of the proceeds for themselves and to block the retirees from having any say in whether the sale should have gone ahead at all, the suit charges.
Named as defendants are former J&H Chairman David A. Olsen, who the suit claims pocketed about $63 million in the deal; former Vice Chairman Richard A. Nielsen, said to have received about $55 million; and the remaining 22 J&H directors, said to have received at least $36 million each.
The retiree plaintiffs include former J&H Chairman Robert V. Hatcher Jr., former Vice Chairman Kenneth A. Hecken and former Executive Vp Richard E. Meyer.
As a group, 45 J&H retirees split $297 million in the sale, Securities and Exchange Commission filings reported. The nine retiree plaintiffs received between $9 million and $12 million each, according to their lawyer, Michael L. Hirschfeld of Milbank, Tweed, Hadley & McCloy in New York.
"It is inherently wrongheaded (to think) that if you happen to be on the board of directors at the time (of the sale), you have a disproportionate share of the proceeds," Mr. Hirschfeld said. "It was pretty darned overreaching and greedy on the part of the people who did it."
"What really aggravated them," Mr. Hirschfeld said of the retirees, "is that the corporate machinery was monkeyed with in order to do it."
"It was probably a textbook case of greed and betrayal," he asserted.
J&H officials named in the complaint, now officials with Marsh & McLennan, see it differently.
The retirees "certainly received payments far in excess of what they were contractually entitled to receive," said Mr. Olsen, now vice chairman of Marsh & McLennan Cos. Inc. "We expect to be fully vindicated."
"Talk about greed and avarice," one former J&H official said. "The whole thing, when it's all said and done, boils down to a bunch of guys saying after the fact, 'We should have got more money.' "
"It's going to be real messy," he predicted of the litigation.
A statement issued for the director defendants said they were "disappointed" with the lawsuit and believe the retirees "were treated not only fairly but generously."
Meanwhile, Marsh & McLennan Cos. Inc. -- also named in the suit for allegedly aiding and abetting the scheme -- last week issued an internal memo to employees of J&H Marsh & McLennan Inc., its insurance services arm. The memo read: "This matter is a dispute between certain former directors of J&H about the allocation among themselves of proceeds from the sale of J&H. We believe we should not be involved in this matter. Beyond that, it is M&M Cos.' policy not to comment on litigation."
Mr. Olsen would not confirm his share of the sale proceeds. Mr. Nielsen could not be reached.
J&H ended 150 years of private ownership in March when it was bought by Marsh & McLennan for $1.8 billion in cash and Marsh stock (BI, March 17).
In SEC filings, Marsh & McLennan reported that $1.01 billion of the total went to J&H's active directors and shareholding managing principals; $500 million was earmarked for about 600 key J&H employees; and $297 million went to more than 40 retired directors, all of whom had returned their stock to the company on retirement in exchange for "10-year certificates." (BI, March 31).
Under longstanding corporate rules, J&H common stock could be owned only by active directors, officers or employees, and the vast majority of the stock was held by the directors. On retirement, directors exchanged their stock for certificates that would pay annual dividends for 10 years equal to amounts payable on the returned stock. The returned stock, redistributed to active directors, paid no dividends until the 10-year certificates expired.
The certificates already had become a source of tension between retirees and active directors before the sale of J&H, the complaint suggests.
By year-end 1996, the suit says, J&H was paying 75% of its annual dividends to retired certificate-holders. J&H management responded by increasing the salary pool for active directors by 50% -- to $22 million from $15.5 million -- over a period when it raised the dividend rate only 12.5%, to $180 per share from $160 per share.
After a number of the retirees complained, J&H management increased the dividend, the suit says. The retiree plaintiffs had owned between 1,970 and 4,200 shares each, with Mr. Hatcher the largest shareholder.
This disagreement was minor, though, compared with the quick souring of relations that followed the March announcement of Marsh & McLennan's takeover of J&H.
None of the retirees were told of the takeover in advance, according to Mr. Hirschfeld: "They were basically kind of stunned by the transaction. They found out when the rest of the world found out," he said.
Mr. Hecken said he had heard rumors of an impending sale and dismissed them, believing J&H corporate rules required approval by the retired directors for any sale of the company.
"It all came to us as a complete shock," he said.
At a meeting shortly after the announcement, top J&H officials offered buyouts to the retired certificate-holders, and all accepted before a two-week deadline expired.
Over the following weeks, though, the retirees discovered elements of the deal that prompted nine of them to file their lawsuit, Mr. Hecken said.
In addition to Messrs. Hatcher, Hecken and Meyer, the plaintiffs are retired J&H directors Sam W. Aiena, George D. Benjamin, Peter A. Bergsten, Robert A. Cameron, George F.B. Owens Jr. and George H. Shattuck Jr.
The defendants in addition to Messrs. Olsen and Nielsen are former directors Norman Barham, now a vice-chairman of J&H Marsh & McLennan; William C. Baumann; S. Robert Beane; Rodney D. Day III; John V. Deitchman; Theodore J. Fuller; John W. Gussenhoven; Brian R. Hall; William S. Jennings; John P. Keyser; Willis T. King Jr.; Christine LaSala; James W. McElvany; John A. McMahon; Gardner M. Mundy; Alan G. Page; Thomas G. Patzau; Joseph P. Platt; Joseph D. Roxe; Gerald R. Swanson; Richard E. Valliere; and Rufus J. Williams III.
The nine retirees charge that J&H's board cheated them in allocating the vast sale proceeds and accuse them of breaches of contract and fiduciary duty, violations of securities law and common law fraud.
According to the complaint, the alleged scheme turned on a set of March 1997 amendments the J&H board made to the company's articles of incorporation and bylaws.
The amendments, made without notice to the retirees, removed the restrictions on the ownership of J&H stock, allowing sale to third parties.
Under the previous corporate rules, the sale to Marsh & McLennan would have to be structured as a sale of J&H's assets, not its stock, the complaint says. Under this structure, the proceeds of the asset sale would have been distributed as dividends to J&H shareholders, meaning the retiree certificate-holders would have been entitled to 75% of the purchase price.
Once the restrictions were removed, the J&H board was free to sell its stock to Marsh & McLennan, and a management committee assumed power to allocate the proceeds, awarding more than $900 million to the active directors, the suit says.
Any asset sale under the prior corporate structure also would have to be approved by retirees representing two-thirds of the outstanding 10-year certificates, the suit says.
"By eliminating the requirement to obtain.*.*.approval, the incumbent directors disenfranchised the retired director plaintiffs and eliminated their ability to influence the determination of the amount they would receive.*.*.or to block the sale from occurring," the complaint says.
"That had to be based on a fear that we would veto (the sale) or a fear that they would have to change the allocation of the proceeds," Mr. Hecken added.
The retired directors' complaint cites other examples of alleged unfairness in the deal, including that:
* Mr. Beane, one of the director defendants, had elected to retire early, effective Jan. 1, but was allowed to "unretire," collect a director's share of the proceeds and retire again.
Retirees attended a December 1996 dinner honoring Mr. Beane, but "we didn't know it was a false retirement party and that they were 60 days away from selling the company," Mr. Hecken said.
Mr. Beane declined to comment.
* The director defendants, who owned differing amounts of J&H stock, arranged stock transfers among themselves on the eve of the deal to equalize their shares of the proceeds and "facilitate approval of the transaction."
Mr. Olsen and Mr. Nielsen opted out of this arrangement, however, preserving much larger shares for themselves and creating ill feeling between themselves and the other active directors, several J&H sources confirm.
* Active directors who were less than one year away from retirement -- including Messrs. Olsen, Nielsen, Keyser and Patzau -- collected more than three times as much as a retiree in his first year of retirement holding a certificate for the same number of shares.
Though not mentioned in the suit, another bone of contention was a $125 million pool of J&H retained earnings that J&H kept in addition to the $1.8 billion purchase price.
Mr. Hecken said he believes J&H management allocated roughly half of this cash to the active directors, with the majority of the remaining cash going to retired certificate-holders and a smaller portion going to "super-retirees" whose 10-year certificates had expired. These super-retirees also received relatively little of the sale proceeds, though, and after some complained to J&H management, their part of the cash pool was roughly doubled, Mr. Hecken said.
The certificate-holders were "infuriated" to discover, though, that the added payments to the super-retirees were coming out of their share of the pool and not from the active directors' share, he said.
At a March 19 meeting, shortly after the sale was announced, J&H's senior management and a lawyer with Sullivan & Cromwell, the broker's outside counsel, met with the retirees, presented the deal as a fait accompli, and urged them to accept offers -- good for two weeks -- to buy back their certificates, the suit says.
Sullivan & Cromwell, the suit notes, also represents several retired directors in estate planning matters.
The J&H managers failed to disclose several pertinent facts, though, including that they had agreed with Marsh & McLennan to induce the retirees to sign the buyouts and therefore were not representing the retirees' interests, the suit says.
Retirees also asked about the shares being taken by active directors and were falsely told that the information was not available. In fact, J&H management had already agreed on the specific amounts with Marsh & McLennan, the suit charges.
Asked why retirees didn't raise their objections before accepting the buyouts, Mr. Hirschfeld said he believed they were both stunned by the whole deal and under tremendous peer pressure to go along, in keeping with J&H's "tradition of collegiality."
"The impression they got was that everyone had gone to the mat for them and had beaten up Marsh to get this good deal for them," he said.
"There was not any great hue and cry because we didn't have the facts and were in a high degree of emotional shock," Mr. Hecken added.
Included in the buyout agreements retirees signed were waivers in which they agreed to take no action against the active directors or Marsh & McLennan as a result of the sale.
The alleged non-disclosures and fraud, though, make these waivers unenforceable, Mr. Hirschfeld said.
Meanwhile, Marsh & McLennan may be picking up the tab for the possibly lengthy litigation to come: As part of the stock purchase agreement, Marsh & McLennan agreed to indemnify J&H directors and officers for any legal expenses and judgments relating to the sale, except those stemming from bad faith actions, documents show.