Cablevision Power Play Alarms Wall Street, Governance Experts

After Cablevision Systems Corp. Chairman Charles F. Dolan replaced three directors with four of his friends this week, corporate governance experts, legal experts and investors cringed.

“This isn’t corporate governance -- it’s King Lear,” said Columbia University law professor John Coffee. “He just wanted to reestablish control of his own house.”

Dolan’s maneuver came in response to a board vote to pull the plug on his pet satellite-TV project, Voom. That was part of a feud with his son, Cablevision Chief Executive James L. Dolan, over the future of the Bethpage, N.Y.-based company.

What made Charles Dolan’s actions all the more extraordinary was that they flew in the face of a trend toward more board independence, prompted by accounting scandals at such companies as WorldCom Inc., Enron Corp. and Adelphia Communications Corp.

Merrill Lynch & Co. analyst Jessica Reif Cohen called what Dolan did “remarkable” in the post-Enron era. Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, called it “dicey.”

Some investors said Dolan’s power play was the latest reminder of the dangers of a system of dual-class shares, under which special stock carries disproportionate voting clout. Though Dolan and his family own less than 2% of Cablevision’s equity, special voting stock enables them to call the shots.

Many of the nation’s media conglomerates, including News Corp. and Viacom Inc., have similar structures.

Critics say these dual-class structures leave equity shareholders vulnerable to abuse. Cable mogul John Malone was criticized for cutting owners of voting stock, like himself, a better deal when selling cable company Tele-Communications Inc. to AT&T; Corp. in 1999.

“The Securities and Exchange Commission has been hostile to this structure, but shareholders invest in these companies knowing they have lesser rights,” Coffee said.

In addition to its cable systems, Cablevision owns Madison Square Garden, the New York Knicks basketball team, the New York Rangers hockey team and such cable channels as American Movie Classics and the Independent Film Channel.

Analysts fear that the boardroom coup will be a drain on the company if Dolan gets his way. He wants to keep Voom alive even though the satellite service ran up $661 million in red ink last year while attracting fewer than 50,000 customers.

On Thursday, with the new board members installed, Cablevision said it would delay shutting down Voom pending negotiations to sell the remaining assets to a private company set up by Charles Dolan. (Cablevision had agreed to sell most Voom assets in January to satellite giant EchoStar Communications Corp.)

The old board had cut off negotiations about the assets with Dolan.

Worried about Voom’s drain on Cablevision, investors drove down the company’s shares Thursday by $1.59, or 5.3%, to $28.65 on the New York Stock Exchange.

Bear, Stearns & Co. analyst Raymond Katz cut his rating to “underperform,” saying Voom could cost $600 million a year.

Many on Wall Street speculated that with his new control of the board, Charles Dolan would fire his son. Many analysts predicted that the Dolan would even sell Cablevision or some key cable systems to keep Voom alive.

Yet governance experts noted Thursday that the new directors had the same fiduciary responsibilities as the ones they replaced. Analysts said it behooved those new directors to take a hard look at funding Voom’s losses.

“These guys are not exactly pushovers,” said money manager and former Viacom Chief Executive Frank Biondi, one of the four new Cablevision directors. The three others are Malone, former ITT Corp. Chairman Rand Araskog and cable pioneer Leonard Tow.

Although Charles Dolan is within his legal rights to remove directors, he could run afoul of the law if he tries to personally buy the remaining Voom assets.

“If he wants to buy Voom from Cablevision, that could be considered a self-dealing transaction because Dolan controls both the seller and the buyer,” Coffee said.

Coffee said the new directors would also be open to shareholder lawsuits because their predecessors had just determined that Voom was not viable. “These longtime friends of Dolan’s wouldn’t look very independent,” he said.

Some of the top law firms in New York advised Charles Dolan against replacing directors who voted to kill Voom.

On Thursday, Cablevision’s independent directors said Dolan was breaking an agreement by soliciting customers for Voom after the board voted to fold it.

In another development, Cablevision disclosed in a regulatory filing an SEC probe of the company’s announcement just before Christmas that it would scrap a spinoff of Voom and its announcement Jan. 20 that it would sell the assets.