BREN’S BATTLES ON THE STAND : During Trial, Developer Insists He Was the Savior--Not Villain--in Irvine Co. Buyout
Concluding 10 days on the witness stand last week, Donald L. Bren, the impeccably stylish and characteristically cool chairman of the Irvine Co., was slightly crumpled and impatient.
The pressure had been grueling. In great detail, sometimes with the aid of scribbled notes and memoranda from bygone meetings and telephone calls, he had been asked to explain how and why he took control of the Irvine Co. four years ago.
Smoothly and adeptly, during two days of initial questioning by his principal lawyer, Bill Campbell, Bren said he acquired majority ownership of the large Orange County land development company to save it from mismanagement and to protect his investment in the firm.
Then, for eight days, opposing counsel Howard Friedman asked Bren about documents that Friedman hoped would show that, far from being a white knight, Bren was an opportunist who plotted to undermine the company’s management and to acquire control at a bargain price.
Bren was the most important witness so far in a lawsuit that will settle a dispute about how much money heiress Joan Irvine Smith, and her mother, Athalie Clarke, should be paid for the 11% stake they held in the Irvine Co. before Bren’s 1983 buyout.
By the time Friedman was finished, he had raised a number of red flags regarding Bren’s methods and motives. But he had trouble refuting Bren’s basic argument that the price he paid to acquire control was effectively endorsed by the company’s other shareholders, who have testified that they still believe that they got a good deal.
Ultimately, a decision will be reached by Robert B. Webster, a retired judge serving as a court-appointed referee in the Irvine Co. trial, which is being conducted in the Detroit suburb of Bloomfield Hills. The lawsuit is being heard by a Michigan state court because the Irvine Co. is incorporated in Michigan.
Since August, Webster has been listening as Irvine Co. presented its case. Smith’s lawyers are expected to begin offering their witnesses, including a cadre of evaluation experts and Smith herself, in January.
Because of the unusual length of the trial, which is expected to continue into the spring, it is being held in a suite in a suburban office building instead of in a courtroom.
The stakes are high. Bren says the Irvine Co., in which he now holds a 92% interest, is willing to pay Smith and her mother only $88 million, less than the $114 million he offered them for their shares in 1983.
He contends that the $1-billion valuation of the company on which he based his payments to other shareholders four years ago included a $250-million premium to acquire control of the firm’s management--a bonus he is no longer willing to pay Smith and Clarke.
In turn, Smith and Clarke are demanding $500 million, which includes interest, on the premise that the company was worth about $3 billion in 1983, or about three times Bren’s valuation.
While the objective of the trial is to determine the Irvine Co.’s fair market price at the time of Bren’s acquisition, only a relatively small portion of Bren’s extensive testimony dealt with the valuation issue.
Bren is arguing that the company’s market value was determined by the price that other former Irvine Co. investors--including sophisticated Detroit businessmen such as shopping center developer A. Alfred Taubman, oilman Max Fisher and the late Henry Ford II--were willing to accept for their shares.
Bren repeatedly contended in his testimony that Smith passed up “the opportunity of a lifetime” when he gave her a choice of either selling her stock for the same price offered to other shareholders or doubling her percentage interest in the company.
Bren also claimed that he couldn’t “understand the logic” of Smith’s decision to turn down his offer. He described Smith as an unreasonable director who rejected the advice of her own lawyer in refusing to remain a shareholder after the merger.
Bren, who had become a 34% shareholder in the Irvine Co. when he joined a consortium of high-profile businessmen who bought the company in 1977, testified that as early as 1980, he began worrying about his investment.
Bren said he repeatedly complained to other directors that the company was failing to obtain necessary government approval of major new projects or to sufficiently expand its investment portfolio of income-producing shopping centers, apartments and industrial and office buildings.
Instead of following a long-term growth plan and investing in development “infrastructure” such as improved roads and sewers, Bren said, the Irvine Co. had been selling previously zoned land to builders and putting the proceeds in the bank.
In his testimony, Bren blamed Peter Kremer, the company’s former president, for “focusing myopically on short-term goals when there was much bigger business to attend to.”
He accused Kremer of severely damaging the company’s public image by failing to understand the depth of residents’ anger over increases in rents on home sites that the company leased to them in Newport Beach.
Political fallout from the filing of a class-action lawsuit on the leasehold issue caused the Irvine Co. to delay plans to expand the Newport Center retail and office complex, a project that would have added $200 million to the value of the company, Bren said.
In a confidential summary of company problems that Bren sent to fellow directors Taubman and Fisher in February, 1982, he warned: “If the trend continues, I believe a strong case can be made that there will be no significant value growth of the Irvine Co.”
Bren told the court he felt compelled to find a way to take control of the company when Taubman, who was chairman at the time, told him that he was considering liquidating the company’s assets. In earlier testimony, however, Taubman denied that he had ever discussed liquidation with Bren.
But Bren testified that Taubman told him in February, 1982, that he believed that the value of the Irvine Co. as a real estate investment had peaked after the 1977-80 inflationary spiral. In 1982, Bren noted, Orange County was in a deep real estate recession.
Bren told the court that, in contrast to Taubman’s pessimistic forecast, he had believed that he could turn the company around through better planning.
Friedman presented the judge with another view of Bren’s buyout, using strategy memoranda written by Bren and some of his closest advisers.
Under questioning by Friedman, Bren testified that some major Irvine Co. shareholders, including Taubman and New York investment banker Herbert Allen Sr., were content with their investments when Bren initially approached them in the fall and summer of 1982. But by February, 1983, Bren acknowledged, they were ready to sell out.
While Bren contended that he was surprised by the other shareholders’ change of heart, Friedman accused Bren of having contributed to the turnabout by criticizing the company’s management and prospects.
Friedman told the judge that he intended to show that in 1982, Bren created “an orchestrated climate” in the higher ranks of the Irvine Co. “designed to soften up other shareholders for the ultimate transaction which Mr. Bren was planning.”
To that end, Friedman chronicled Bren’s persistent efforts to oust Kremer from the presidency and Bren’s campaign to wrest the chairmanship of the company from Taubman, ultimately settling in late 1982 for a co-chairmanship that lasted until the buyout.
Bren denied there was any “tension” between Bren and Taubman, characterizing their differences as philosophical in nature. He said Taubman lacked a long-range investment commitment to the Irvine Co. and was insensitive to the needs of the Orange County community.
Friedman, however, cited a Sept. 29, 1982, letter from Taubman to Bren that chided Bren for writing a memorandum criticizing the company’s performance and distributing it to other board members.
Taubman complained in the letter that Bren’s memorandum “cuts at the very fabric of strong and cohesive leadership and appears only to serve as a divisive and ill-advised forum for your views.”
In an attempt to undermine Bren’s credibility, Friedman noted that over a five-year period, Bren routinely cast his votes as a director and member of the company’s executive committee in favor of policies that he now criticizes.
Friedman also pointed out that Bren approved salary raises and hefty bonuses for Kremer, whom he blamed for most of the company’s past troubles.
Defending his voting record, Bren said he “went along” with the majority opinion at Taubman’s request to prevent discord on the board.
Friedman also attempted to refute Bren’s account of the seriousness of the Irvine Co.’s business problems in the early 1980s. He cited 1981 board minutes saying that “despite a generally weak economy and a chaotic financial market,” the Irvine Co.’s financial results “were at all-time highs.”
Another issue raised by Friedman was whether Bren paid a below-market price for Irvine Co. stock in 1983 because he took advantage of an unfairly restricted market for the company’s shares.
Under Friedman’s questioning, Bren acknowledged that the board had a longstanding policy of refusing to pursue inquiries from brokers and potential buyers of the company.
In response to Friedman’s questions, Bren said Allen reported to the board in 1982 that a group of Arab investors had told him that they might be willing to pay as much as $1.6 billion for the company.
Bren also said another purchase inquiry was made by a broker purporting to represent the wealthy Bass family of Fort Worth, Tex.
In his testimony, Bren insisted that his negotiations with the other shareholders were extensive and that he refused to budge from his $1-billion valuation of the company.
