Bren Gives His Version of Attempting to Get Irvine Heiress to Sell Her Shares

As the only shareholder who opposed Donald L. Bren’s plan to take control of the Irvine Co., heiress Joan Irvine Smith caused the company to forgo a potential $300-million tax benefit, Bren testified Tuesday.

Bren, who increased his ownership in Orange County’s largest land development firm from 34% to 92% in a November, 1983, merger transaction, said he delayed completing the buyout for seven months in hopes that Smith would change her mind.

Smith, however, instead waged an unsuccessful court battle in an effort to stop the buyout, which allowed Bren to transfer to the Irvine Co. about $560 million in debt he incurred in order to buy the stock of the company’s other shareholders.

Unable to prevent the buyout, Smith is back in court contending that the company was worth three times the $1-billion valuation used by Bren to determine how much money the other owners received for their company shares.

At issue in the trial is what amount Smith and her mother, Athalie Clarke, will get for the 11% stake they held in the company before the merger. The trial is being held in Michigan because the Irvine Co. is incorporated in that state.

Under questioning Tuesday by Irvine Co. attorney Bill Campbell, Bren portrayed himself as having bent over backward to be fair to Smith and the company’s other shareholders.

By valuing the Irvine Co. in 1983 at $1 billion, Bren told the court, he was offering a “premium” of about $250 million over the company’s actual market value in order to gain a controlling interest.

To determine the ballpark value of the company, he said he relied on studies done by the company’s financial advisers for other transactions, including the purchase of stock held by former Irvine Co. President Peter Kremer.

In retracing his moves to gain control of the company--which he contended was necessary to give the foundering firm a clearer strategy--Bren recalled that most of the opposition to his plan had faded by early 1983.

Although two major shareholders, Detroit shopping mall magnate A. Alfred Taubman and oilman Max Fisher, were initially reluctant to sell their shares, Bren said, they ultimately relented.

Bren said he paid another shareholder, New York financier Herbert Allen Sr., $1.7 million to arrange the stock sales.

Bren said he first approached Smith’s attorney, Howard Friedman, in March, 1983, with an offer to buy Smith’s stock for $110 million.

As an alternative, Bren said he told Friedman that Smith could choose to remain a shareholder and increase her ownership interest from 11% to 22% to offset the dilution of the value of her stock that would result from the company’s increased debt load.

To further sweeten the deal, Bren said he promised to indemnify the value of Smith’s stock so that it would never be worth less than $110 million. And he said he offered Smith, who had not attended board meetings for five years, the right to fill a second board position.

Moreover, Bren said he told Friedman that if Smith participated in his plan, the company could increase the tax “basis” of

its assets, which would reduce the amount of capital gains taxes it would pay as a result of future property sales. That benefit, Bren told the court Tuesday, would have increased the firm’s value by about $300 million.

Because she would not accept Bren’s merger proposals, the potential tax benefit was lost, he said.

Bren said that at first, Friedman seemed receptive to having Smith increase her ownership in a restructured firm controlled by Bren.

As Friedman sat silently Tuesday in the courtroom, Bren recalled that Friedman “liked the idea of increasing her ownership.”

He said that Friedman agreed with him that he and Smith shared “parallel goals” in their long-term approach to land development. Bren said that when they parted from the first meeting, Friedman said: “Congratulations to you for putting this concept together.”

After Tuesday’s hearing, however, Friedman said he recalled those events differently. He said he had thought Bren had offered “a very advantageous” price for Smith’s stock. But he stressed that he told Bren that “it made sense to go ahead with the merger” only “if she (Smith) was otherwise satisfied with the transaction.”

As it turned out, Friedman said, Smith decided that the disadvantages associated with the company’s assumption of Bren’s buyout debt outweighed the potential benefits of the deal.

Even after Smith refused to sell her shares or participate in a reconstituted Irvine Co., Bren said, Friedman urged him to “keep the door open” for his client to change her mind.

To give Smith time to reconsider, Bren said, he delayed his plan to use the firm’s assets as collateral for the loans he needed to buy out the other owners. As a result, he said, the Bank of America refused to finance the stock purchases. Ultimately, he said, Wells Fargo Bank provided the acquisition funds after he put up most of his personal worth as collateral.

Bren said he and his representative continued discussions with Friedman to keep him informed about Bren’s progress toward developing a new business plan for the Irvine Co. and to try to obtain the cooperation of Smith.

He said Friedman warned him that if he tried to burden the Irvine Co. with the buyout debt, “we might be on opposite sides,” apparently alluding to a possible lawsuit.

“I said I understood this was a possibility, considering Mrs. Smith’s litigious nature,” Bren told the court.

Bren said his negotiations with Friedman came to “a very strange ending” in September, 1983, when Friedman told him that Smith had called off further discussions.

The next month, the Irvine Co. board approved Bren’s plan to merge the Irvine Co. with Newco, a company created by Bren to make the stock purchases. At that time, Bren said, New York merger and acquisition attorney Marty Lipton assured the board members that it was “the fairest merger proposal he had ever seen.”

Bren mused that in retrospect, he believes that he probably would be richer today if he had been able to cash out his 34% interest in the Irvine Co. on the same terms as the other shareholders in 1983.

“In fact, if you look at the results today,” he said, “I may have been better off to have sold my stock and paid taxes and invested the money in government securities.”