The Reluctant Shareholder and Other Tales Surrounding Telalink's Merger Agreement
As the summer of 1999 neared an end, so, too, did the independent life of Telalink Corporation. A “novel-thick” merger agreement with PSINet was nearing its final draft stage. Amidst the fine details being reviewed and re-reviewed, the Telalink leadership had to settle on a few things before we could sign the agreement and close the deal.
PSINet and Telalink agreed to a 15% holdback, meaning they would hold on to 15% of the proceeds of the purchase price of Telalink, about one million dollars. If, during the holdback period, PSINet discovered that there was some material deficiency in anything that we represented (say, for example, number of paying customers, revenue, pending lawsuits, etc.), then they could draw on the holdback fund as compensation for our negligence. It was like a one million dollar warranty. We had to negotiate the duration and accounting. When I say “negotiate,” I mean we asked for a one year holdback and they said the deal was off if we didn’t agree to 18 months. So, it was 18 months. We asked for the holdback money to be placed in escrow so that a third party trustee would oversee it and be at liberty to release the funds to us after the 18 month period had passed. PSINet said they would hold the money or the deal would be killed. No escrow.
It was during the negotiation about the escrow where PSINet’s initial arrogance was most evident. Their lawyer was downright snobbish. “Guys, we’re a multi-billion dollar corporation with 14,000 worldwide employees and YOU’RE worried that WE won’t pay YOUR million dollars in a year and a half. What? You think WE’RE somehow going to manage to go out of business just like that and not pay YOUR million dollars to YOU?”
Anne Arney, our lawyer, calmly explained to us how to deal with this. “It’s like this. Are you willing to do the deal and and not get the million dollars? That’s the risk.”
“Yeah! Bill had already talked the deal up by a million so that would just mean we settle for what we were originally going to agree to. Let’s do this!”
The second issue was more of an internal matter. Do we take cash, stock or a combination of both? For me, it didn’t matter. I preferred all cash but if I got stock, I was going to diversify my assets pretty quickly so either way worked for me. I can’t remember but I think Tim was the same way - either will be fine but cold, hard cash is the preferred method of distribution. Bill wanted stock. All stock. He was willing to ride that stock price up, up, up. Certainly, the past 12 months suggested this was the trend. Several other staffers were aware that we had to make a choice. They were concerned.
“All stock?” asked one of our colleagues. “How’s that going to help me buy a house? I need some cash out of this. Am I going to have to pay taxes? How long would I have to wait before I can sell? What does that cost?”
There were many curiosities surrounding the method of payment. Such curiosities turned into concerns which turned into debates. I’m not sure how it was determined but Tim, Bill and I decided to recuse ourselves from the decision and we asked Bob Collie, Scott Sears and Michele Watkins to arrive at a unanimous decision- cash, stock or a combination? They caucused and rendered a verdict- “We’ll take the cash.” And thus, it was cash for all.
Finalizing the details. it was determined that there were some assets with which to be dealt. First of all, the Nashville Regional Exchange Point (aka “NREP,” although Mr. Southeast Region President somehow managed to call it “NRAMP”) was a carrier-neutral data center that was 50% owned by ISDN-Net and 50% owned by Telalink. While it felt awkward, there wasn’t much we could do about it. So, not only was ISDN-Net NOT going to be merging with Telalink. They were, in fact, whether they wanted to or not, going to end up co-owning NREP alongside PSINet, the very company that did NOT want to acquire them and wanted instead to only buy us. Yes, it was very awkward.
Next, there was the asset known as nashville.net which Bill Butler wanted and still owns to this day. Since that time, nashville.net has been an email service and currently serves as an events app and blog for shows around Nashville. Last was the piece that Tim, Andrew and I wanted- all of the code that was used to manage website content in the websites that we hosted. PSINet didn’t want any of this. In fact, they really didn’t want any of our infrastructure. They wanted our customers. The bottom line for them the would be moving all of our customers on to their services (even if what the customers were paying for was not available in our market). So, when it came time to break away some of the assets, they had no objection to transferring all of the code that had been written over the previous five years to a new company, started by Andrew, Tim and me, called Monster Labs, Inc. - for the price of $100.00. At the time, Telalink was generating about $80,000/month in web hosting fees.
Rounding third and headed for home, there was just one more seemingly simple task and that was to have a shareholder meeting to approve the merger. Without much concern on our end, PSINet insisted that 100% of the shareholders approve the plan. “Who would object?” I thought. “The original investors are going to make about 5 times their money. We had been issuing restricted shares to staff based on performance and some of them would receive quite a nice return for no cash invested. How could anyone be against this deal? This is a no-brainer! We’re almost there!”
Well, indeed, the chickens had seemingly been counted before they hatched. Here’s the scene:
Official correspondence was sent out around October 10, 1999 (certified with return receipt requested) to all Telalink Corporation shareholders announcing that a meeting would be held in the evening (after dinner was served) at the University Club of Nashville, Tennessee to vote on Telalink Corporation merging with PSINet Inc. If approved, the deal would close on November 22, 1999. The proposed details of the merger were included along with a form naming either Thomas Conner, William Butler or Timothy Moses as proxy authorized to vote in their absence. Even if a shareholder was going to attend, we asked that everyone submit a proxy just in case, for whatever reason, they had to change their plans at the last minute. We even named proxies for each other. And so we waited for the documents to be returned (which included postage paid envelopes).
Staff members and local family signed immediately. No sweat. We expected those to be approved, signed and returned immediately. I received a few phone calls from minority shareholders who were curious about what all of this meant. They just wanted to know was this a big happy event or was this a last act of desperation? These were mainly a handful of retired folks, friends of various family members, who put up $2,000, $5,000 or maybe a little more as a favor. “This is a VERY good thing!” I would assure them. “We are so grateful for your support over these past five years and we are very excited that you will be rewarded with a substantial cash return on your investment.” Aside from a few technical details regarding the process or receiving verbal regrets in response to the invitation accompanied by a promise to return the proxy statement right away, the calls were largely of a congratulatory nature.
Every shareholder responded affirmatively by the deadline, about ten days out from our meeting on November 7… except one, a minority shareholder whose investment was near the smallest amount. He had not replied to our request for a response.
“Not a problem,” I thought rather confidently to myself. “I know this person pretty well and he lives and works very close by. I’ll just give him a call. He’s probably just been too busy and needs to be nudged. I will offer to go to his place and pick everything up to make this as convenient as possible.”
The call went something like this:
“Hello, Mr. Shareholder?”
“Oh hi, Thomas!”
“Hey, I just wanted to make sure you got everything and that you were ready to sign off on the agreement and come to the shareholder meeting. Of course, I also wanted to make sure that all of your questions are answered.”
“Yeah, thanks for the call. You need to call my lawyer. His name is _________ and I can have my secretary get you his number.”
“Your lawyer?” My breathing became shallow and my mouth got dry.
“Yes, he advised against this and said you need to work it out wit him.”
I nearly dropped the phone.
“Ohhhh, okay, then. I’ll call him right away. Thank y…” My voice trailed off. My heart was beating so fast that I was getting light-headed.
“Don’t worry, Thomas. You’ve got this,” I said to myself. “You’ve dealt with enough lawyers, tax accountants and auditors, IRS agents, state revenue auditors, due diligence analysts, angry customers and difficult staffers. This lawyer can’t possibly be that difficult.”
I called the lawyer.
“Yes, Mr. Conner. I know who you are. I’ve looked over the merger proposal that you sent to my client and he will not sign this or anything like this. This deal is nothing but a ‘get-rich’ deal for you and your friends. My client isn’t getting anything but crumbs. I’m going to look into this a little more in detail but we may need to file a lawsuit against you for fraud.”
“Ummmm…..I…..exactly….did you say…..uhhh……so…..”? The lump in my throat which had obstructed any discernible word finally shrunk enough. “Sir, I beg your pardon but there HAS to be a misunderstanding of some kind. I don’t think I believe what I am hearing. Maybe I need to have our lawyer contact you?”
“I’m happy to tell your lawyer the same thing, sir. You can’t just trample over my client’s rights as a minority shareholder and expect him to just agree to anything you tell him to do.”
“Yes, sir. Thank you for your time, sir. Have a good day.” I was in full eeyore mode by this point. My voice was monotone and very soft. I sat at my desk and stared at my computer. “We are soooo doomed” was all I could think.
I got up and walked over to tell Tim and Bill. The solemn message soon evolved into pronouncements of rage.
“WHAT!!!!????” said Anne Arney over the phone. “How could he say that? Who is this lawyer?
I usually remember names but perhaps the sheer hauntedness of the words exchanged with our shareholder’s lawyer was just too severe. Perhaps, just as Lord Voldemort was “He-Who-Must-Not-Be-Named,” I must have convinced myself to block this monster’s name from my memory because I cannot remember….not that I would share such a detail with the public.
I gave Anne the lawyer’s name.
“Him??? Are you kidding???!!!” Anne was incredulous. “I know him. Don’t worry, Thomas. I will straighten him out. He has no idea what he’s talking about. Just wait until I talk to him.”
Anne is usually quite mild-mannered, soft-spoken and mostly calm. Not this time. She was incensed.
For 1.6 days, I brooded and waited by the phone. Every minute felt agonizingly slower than the one preceding it. I couldn’t focus much. Everything we had to do to close this deal. Everything that we had done over the previous five years. Every battle, external and internal, that we had faced. Every risk that we undertook. It had all come down to one minority shareholder’s lawyer slamming the brakes on us. I waited, accompanied by the sound of not much more than my heart beating. Finally, the phone rang.
“Hi, Thomas. It’s Anne Arney. I talked to the lawyer. The shareholder will sign. This is no longer a problem.”
Anne was back to her calm, steady self.
I became euphoric. “He will???!!! What did you say to him?”
“Let’s just say that I was successfully able to turn all of his objections into a clear demonstration of his lack of understanding. Basically, the lawyer didn’t understand that Telalink wasn’t just a passive investment for you and the others but that this was your job for the last five years. The lawyer thought you guys were trying to get a big payoff without investing much in it while his client was only getting a 500% return.”
“Without investing much……” Oh, only our LIVES! I thanked Anne, hung up and told the others. “We’re back on track. NO ONE is to do anything dangerous before that shareholders meeting or the closing for that matter. EVERYONE will be safe, sound and cautious!”
The next morning, I was headed to work. Stopped at a four way stop, I looked in my rear view mirror and who, of all people, got out of the car behind me and ran to my window, which I rolled down. It was none other than our reluctant shareholder.
“I’ll sign! I’ll sign!” he said. “I’m really sorry for the misunderstanding!”
“No problem!” I said. I thought something different. Since then, we’ve had a laugh or two about it.
100% of the shareholders had approved the merger. 100% of our proxy forms were in hand. The meeting would be a formality.
November 7, 1999. A nice dinner at the University Club, Some nice words exchanged. My friend, Jim Brown, who was a local broker for J.C. Bradford, was asked to be present in case, for whatever reason, we needed a licensed securities dealer to be named by the company to act on our behalf for any transactional needs. Anne Arney and Ramin Olson, a recent Vanderbilt law grad and attorney working with Anne at Doramus & Trauger at the time, attended to keep order of things and to answer any legal questions.
There was but one vote.
“All in favor of approving the plan for the merger of Telalink Corporation with PSINet, Inc, say ‘aye””
A chorus of “Ayes”
“All opposed, say ‘nay’”
I thought of my dad and how much I wished he could been there for this moment. There just aren’t too many times in one’s life when you get to experience such a precise moment of affirmation for your work. Somehow, I think my dad could have used one more of those before he died.
The resolution passed unanimously.
It was time to order some plane tickets and make reservations for a hotel in New York.
November 22, 1999, here we come!
AUTHOR: Thomas Conner
Thomas Conner is the co-founder, president and chief financial officer of Sitemason, a hosted, supported alternative to Wordpress and Drupal, built for agencies, freelance designers and developers.