Stories
As all the bidders for Siteserv were preparing to submit their round two offers on Monday, January 30, 2012, something else was happening in Switzerland. Two days earlier, on a Saturday, Robert Dix, the chairman of the Siteserv sale sub-committee, travelled to St Moritz in Switzerland to meet up with Denis O’Brien and Paul Connolly, an old friend of O’Brien who he had nominated to the board of Ireland’s biggest media group INM to represent his interests. O’Brien was one of the bidders for the building services company, and they were going to be joined by Siteserv founder Niall McFadden.
It was not a business trip. Rather it was a meeting of friends. They were meeting to go skiing, gain fitness, and maybe even lose a little weight. McFadden, Dix and O’Brien had been on bootcamp’s previously in Crete in 2010 and 2011. McFadden and Dix had flown out to Crete both times commercially, then hitched a lift back on O’Brien’s private jet (nicknamed the Silver Chicken).
For this trip to Switzerland, Dix and McFadden flew out commercially, staying in a hotel called In Lain. McFadden booked one-way flights for himself and Dix, expecting to fly back on O’Brien’s private jet. Dix said he had no such expectation, but that he hadn’t booked a flight home.
O’Brien and Connolly arrived the following day, a Sunday. Dix knew that O’Brien was bidding for Siteserv and he knew second round bids were imminent. But everyone said the bootcamp trip had been planned earlier, so it was a coincidence that it occurred at a crucial time in the Siteserv bidding process.
In an email to O’Brien on December 16 2011 via an email address called [email protected], McFadden referred to Siteserv and the bootcamp. He told O’Brien: “2. Siteserv – spoke to dermot [Hayes] – probably not much will happen in process before 9th January – apparently next bids due 29th jan – though we maybe need to speak to Brian before Xmas re follow up.”
The next line in his email was: “3. 28 jan Wildfitness – waiting on final suggestions from zoe and will revert next week, N.”
Wildfitness is the name of the high-end bootcamp that McFadden, O’Brien, Dix and Connolly were attending in Switzerland.
On the first day of Wildfitness, Monday, January 30, O’Brien, McFadden, Dix, and Connolly rose at 6.30am to do an early morning run, before going cross-country skiing.
Back in Dublin meanwhile, like all other bidders, Island Capital submitted its second-round bid.
The following day, Tuesday, McFadden met O’Brien over breakfast. One of the things he proposed was that he and Brian Harvey, his old college friend and the chief executive of Siteserv, should be allowed to acquire shares in the company O’Brien intended to acquire Siteserv through. McFadden called the deal he was looking for himself and Harvey a MIP, or management incentive plan. After breakfast, the four went back to cross-country skiing. O’Brien had a minor accident, breaking his heel, and went to hospital. Connolly went with his friend to the hospital, leaving the others to continue skiing.
At 5pm they returned to find O’Brien with his leg strapped up; it was obvious his bootcamp was over. The four men arranged to meet for dinner that night. But before that happened Dix dialled into a call with KPMG and Davy to receive an update on the second-round bids. Thirty minutes later he was done, and ready to go to dinner. An enjoyable night was had, during which nobody mentioned Siteserv, according to the men’s evidence to the commission. The next day O’Brien went home. Dix and McFadden stayed on for the rest of the week, and Dix booked flights home for himself and McFadden via Milan, getting home on Sunday, February 5. Dix paid his own hotel and bootcamp bill.
Back in Dublin, Dix chaired the sale sub-committee where second round bids were evaluated on Monday, February 6. On February 8, he met IBRC to discuss the second-round bids, and he then chaired another sale sub-committee on February 9. At these meetings Siteserv decided to grant exclusivity to O’Brien’s Island Capital bid. On February 10, he chaired another sale sub-committee confirming this exclusivity. At no point during these meetings did he disclose his bootcamp holiday with O’Brien and McFadden.
A veteran corporate financier who has worked on hundreds of deals over decades, Dix firmly denied there was anything seriously wrong with his attendance on the trip during his evidence to the commission. He said he had mentioned the trip to Hugh Cooney, the chairman of Siteserv. Cooney died in 2015, so he could not be interviewed. The Commission, in its draft report, said it found it not credible that Cooney knew of this trip, as it could find no record of him noting this to the company or its advisors.
The management incentive plan
But what of McFadden? As early as December 5, 2011, Niall McFadden started to negotiate with Denis O’Brien and Dermot Hayes in Island Capital in order to secure a share for himself and his friend Brian Harvey. As the process began, both Harvey and Hayes signed a confidentiality agreement stating that neither side could speak to the other without the written consent of Siteserv. Later Hayes was told by KPMG that he could not contact Siteserv management or employees without the prior written approval of the company’s advisors KPMG and Davy.
This was ignored. It was also, it should be noted, ignored by other potential bidders for Siteserv at times.
When companies are making acquisitions, it is common to negotiate a management incentive plan (MIP) in order to keep talented staff from leaving the business after it is sold. Harvey was clearly management. McFadden said he considered himself “quasi management”. However, he had no management or executive role. Nonetheless from December 5, 2011, McFadden was negotiating a share in the new Siteserv as part of a MIP. The IBRC Commission said it was “satisfied” that no other bidder “apart from O’Brien” would have considered giving McFadden shares as part of a MIP.
It said McFadden’s “only real hope” of getting a shareholding in Siteserv post its sale was “if Mr O’Brien won the bid”, the commission said in its draft report.
The issue of the MIP, according to Siteserv’s advisors, was to be negotiated after Siteserv was sold. Neil Collins of KPMG told the IBRC Commission he believed the issue of negotiating a MIP was for management after the sale was finalised with whoever bought Siteserv. Hobbs said the issue of any MIP was not one for him to consider as the bank’s observer to the sale process. “It is not a factor in our negotiations. Go away. You deal with the management afterwards,” he said.
Dix agreed with Siteserv’s advisors. He said the MIP was deliberately not included in the sale process because he did not want his decision to be “influenced” by what management was being offered.
Brian Harvey had several conversations with various bidders apart from O’Brien’s team about what was in it for him during the bidding process. The IBRC Commission said, however, that none of these conversations were substantive. In contrast, his negotiations with O’Brien’s team – via McFadden – were significant and detailed. McFadden made no apology for this. “For two years I have explained to Brian how much we can make out of this if we get the right deal done,” he said.
McFadden was fond of complex deals so figuring out what was in it for himself and Harvey wasn’t easy. On January 14, 2012, Hayes sent an email to O’Brien indicating various complex structures being suggested by McFadden. Hayes suggests in this email an equity stake of 10-15 per cent for Siteserv management.
O’Brien wasn’t involved in the detail, but he was aware of it. “In the nicest possible way, this is real Niall, because everything is complicated,” O’Brien told the IBRC Commission. “And I suppose you know he was trying to look after Brian. Brian lost a lot of money on the old Siteserv.”
There was back and forth between Hayes and McFadden as they tried to reach agreement in the run up to the bootcamp in Switzerland. There McFadden had time to speak directly to O’Brien. “You’re not always going to do this over email,” McFadden mused. “There is going to be a final chat face-to-face to settle it which is what sort of happened at bootcamp.”
During his first day at camp, O’Brien sent an email to Hayes at home in Dublin at 11.20 am.
“I am with Niall McFadden at bootcamp,” he said. “We are going to talk later today about a deal for Brian and the management. Can you give me your thoughts and let me know how far you got with them. Also can you brief Leslie about this investment as I think he may want to take a piece of it.”
Leslie is a reference to Leslie Buckley, O’Brien’s long-term associate who regularly co-invests with him in businesses such as Siteserv.
On Tuesday January 31, 2012, McFadden and O’Brien had breakfast together without Dix or Connolly. Neither man can remember the details, but the chat was about what stake Harvey and McFadden would get in the business. Dix then came down to join them, halting their conversation about what was in it for Harvey and McFadden.
Despite not finishing their conversation, McFadden said he was happy afterwards. “…We have the shape of a MIP that looks like a private equity one, and if Denis wins or is the preferred bidder we’re planning the right field and I have done my job.”
Clearly, he had.
The next day at 9.40 am McFadden sent O’Brien an email setting out the terms of the deal.
The main point was that management would get 15 per cent of Siteserv on a three year earn-in basis if O’Brien’s bid was successful. The “management”, it would later emerge, consisted of just two people: Brian Harvey and Niall McFadden.
McFadden also pressed for a “superbonus” for his old college friend, but this was rejected by O’Brien as too much.
But did Harvey even know his pal was talking about him to O’Brien in Switzerland? Harvey said in evidence he didn’t know either McFadden or Dix was on the trip. The IBRC Commission said it found this “implausible and not credible”.
Asked about the significance of Harvey cutting a deal with O’Brien at this stage in the process, Neil Collins for KPMG said such an incentivisation package could give rise to a perceived or apparent conflict of interest.
Collins, like all of the advisors, and Walter Hobbs, the IBRC observer of the sales process, did not know about this MIP arrangement or the bootcamp. Collins said if he had known about it, he would have told all of Siteserv’s other advisors, as well as the sales committee and Hobbs. He said Harvey would have been required to recuse himself from further meetings about the sales process in order to ensure a proper process.
But Harvey didn’t tell the relevant people: his board, his advisors, and IBRC. Instead, he continued on in the sales process as chief executive keeping his burgeoning deal with O’Brien to himself.
*****
Back in St Moritz, O’Brien had gone home having hurt his heel. The bootcamp trip was still not over, and while on it, McFadden wrote an email to Hayes in O’Brien’s Island Capital on February 2, 2012, at 5.26 pm.
He said in this email that he had heard Anchorage was “apparently” working with AIB on its bid.
He also said: “I understand the board [of Siteserv] will meet Monday to consider offers and bring the best three forward. That’ll probably be Island, Anchorage and McCourt.”
Anchorage was indeed working on a deal with AIB. McFadden said he heard the information about AIB “on the street.” The Commission disagreed with him, and said it was “of the view that McFadden obtained this information from someone inside the Siteserv sale process”.
The three names mentioned by McFadden were the top three at that time – in the same order as in his email – as identified by Davy / KPMG back home in Dublin.
McFadden accepted in his evidence that there were only two scenarios for having the detail: either he had “deduced” the three names himself or Harvey or Dix had told him them.
McFadden insisted he had “deduced” the names and it was a “coincidence” he got them all right.
The IBRC Commission said it believed this explanation was “not credible”. It then turned to who it believes told McFadden the three names. McFadden said Dix did not give him the information, and Dix agreed with this. The IBRC Commission said it accepted this evidence ruling Dix out.
It then turned to Harvey. The IBRC Commission said Harvey knew the top three bidders. Both Harvey and McFadden admitted that they spoke on February 2, 2012.
“I’ve no recollection of speaking to anyone on the phone that week while I was away,” McFadden said. “Except the discovery informs me that I did. So, my memory is I didn’t but discovery suggests I must have.”
McFadden then said if he did receive a phone call from Harvey, it was after 5.26 pm when he sent his email to Island listing the three bidders. So, therefore, Harvey couldn’t have told him.
The IBRC Commission said McFadden’s evidence on this matter was “evasive and misleading”.
Brian Harvey has denied giving McFadden the information. He also suggested it wasn’t important information in any event, as the race was still running.
The IBRC Commission said it believed that Harvey was the source of information. It said Harvey knew the information, and that Harvey had reason to support O’Brien’s bid as it would personally benefit him, and he was friends with McFadden who was negotiating on his behalf.
O’Brien for his part said the email was just “back channelling” and made no difference to the price he was prepared to pay for the business.
In its draft report, the IBRC Commission said there was no evidence that O’Brien or Island Capital “ever sought this information or solicited in any way, or did anything improper to obtain it”.
“An error of judgement”
There is a certain inevitability about business deals: people meet and information leaks. However, when the bootcamp trip was uncovered during the IBRC Commission, a number of underbidders complained. John O’Connor of Lincolnshire told the commission: “That a representative of the company, who I presumed was charged with ensuring that – I keep going back to the level playing pitch – is at a bootcamp with one of the bidders just does raise an eyebrow, it would have to.”
Anchorage advisor Dan O’Connor in his evidence said: “…to go away to a bootcamp with one of the bidders is an interesting error of judgement. I can’t say what was said or whether it afforded an advantage or otherwise but it just strikes me as odd.”
At the time Anchorage (and the other bidders) didn’t know of the bootcamp, but they did sense something felt strange. On February 27, 2012, Anchorage became aware that an unnamed bidder had been granted exclusivity.
They complained to Kyran McLaughlin in Davy that they believed the bidding was “rigged” and that Ireland appeared to be a “banana republic.” They said they did not believe the process had been “run in a neutral fashion”.
The IBRC Commission examined the boot camp trip in detail. It found in its draft report: “Mr Dix did not disclose his bootcamp trip to the board, the sale sub-committee, the company’s advisers, Mr Hobbs or the bank at any time.
“Mr Dix’s relationship with Mr O’Brien, his friendship with Mr McFadden, and his trip with them to bootcamp, would, if known at the time, have given rise to a perception on the part of a reasonable, objective person that Mr Dix was not impartial in his role as chairman of the sale sub-committee.”
Dix accepts he should not have gone, saying it was an “error of judgement”. But he does not accept he favoured the O’Brien bid unduly as a result. The Commission does not say Dix gave O’Brien any inside information at bootcamp. The Commission said O’Brien was “not at fault” for going on the trip, and said there was “no evidence” he sought to discuss Siteserv on it. From O’Brien’s perspective the IBRC Commission finds nothing wrong about the trip.
A “very dangerous situation”
The day after Robert Dix came home from bootcamp in St Moritz, he chaired a meeting of Siteserv’s sale sub-committee. At this meeting a decision was taken to recommend O’Brien’s bid and Anchorage to go forward to a third and final round of bids. Soon afterwards on February 8 Siteserv’s sale subcommittee and its advisors met IBRC executives Pat Walsh and Karl Cleere to update them.
Walsh, the more senior executive in IBRC, said he would prefer if three bidders went into the final round to ensure competition if one dropped out.
Siteserv said it only wanted two bidders, but Walsh was insistent. He said he would talk to others in the bank and come back with a decision the following day about how many bidders should be taken forward.
As this meeting was ongoing, Dermot Hayes, on behalf of Denis O’Brien, sent an email to KPMG at 3.41 pm saying the businessman was prepared to offer a headline price of €48 million for Siteserv less €1.5 million in deductions in return for two weeks of exclusivity. Hayes did not mention tax or the Petroplus issues; this was taken by Siteserv to mean they were prepared to suck both of these up. KPMG forwarded the email to Davy, something that would be expected. Siteserv never disclosed this exclusivity request to Hobbs or IBRC’s executives, but it was discussed instead after they left the meeting.
Later that evening KPMG spoke to Hobbs. The email from Hayes was not mentioned. KPMG was employed by Siteserv, so anything it said had to be approved by the company. Siteserv did, however, tell Hobbs at 9.26 pm that one of its biggest customers had named it a “high risk supplier”. This was because of the level of its debts on top of a recent media report in The Sunday Independent it was for sale. Hobbs told Siteserv this was something he needed to tell IBRC about.
Within half an hour he had done just that, briefing IBRC that Siteserv was now in a “very dangerous situation” and that decisions needed to be made fast. Hobbs said he believed Siteserv should go forward to a third round of bidding with just two parties and that it should try to select a winner as soon as possible.
The next morning Walsh rang KPMG stating that despite the late-night warning, IBRC still wanted three bidders to go into the final round of bidding. Collins again did not mention the Island Capital/Hayes email. Yet again, Siteserv had not told him to do so.
Later Walsh, Cleere and Hobbs would tell the IBRC Commission that they believed they should have been informed about the Hayes email sooner as it was relevant to their considerations.
In a meeting on February 9, 2012, the subcommittee took the decision to grant exclusivity to Denis O’Brien’s bid. Siteserv sought approval for this decision from Anglo and the bank granted this on the basis of the information that had been furnished to it.
But the IBRC Commission would conclude in its draft report that Dix “did not disclose” and Harvey “concealed” from the bank information that was material to the bank’s decision.
Going exclusive gives any bidder an advantage over other bidders as they are usually allowed to find out more about the business. Bad news reached IBRC in thirty minutes. News of the O’Brien email was not so prompt.
Within reach
On Monday February 27, 2012, Anchorage increased its offer for Siteserv to €52 million. It couldn’t understand what was going on, so it opted to expedite matters with its new bid.
There were still conditions to its bid, but, on a headline level, the offer was above that of O’Brien.
On February 29, Anglo told KPMG that any “chipping” of the price offered by O’Brien could end his exclusivity as the bank would have to return to its credit committee for additional approval.
On March 1, 2012, O’Brien submitted his “final offer” for Siteserv. This offer was €45 million, some €3 million less than the €48 million maximum he had previously offered. His team also raised an issue about working capital saying there should be a provision in it – in O’Brien’s favour – of £750,000 which related to a troubled supplier contract. There were also various other issues O’Brien raised concerns about.
O’Brien was perfectly entitled to do all this, as he would not have known of IBRC’s ‘no chipping’ instruction. A copy of this “final offer” letter from O’Brien was not given to IBRC by Sitserv.
The effect of this lower O’Brien offer put Anchorage’s new offer almost €7 million in front (at a headline level as no price is ever fixed until it is paid).
Siteserv decided not to engage with Anchorage’s higher bid, but instead carried on with O’Brien.
After receipt of O’Brien’s “final offer” letter, a call was held to discuss it between Dix and Siteserv’s advisors KPMG and Davy. Hobbs, representing the bank, was not asked to join the call.
Dix told Davy to tell O’Brien’s team that the €3 million price reduction was not acceptable either to the company or IBRC. On Friday 2 March, O’Brien’s Island Capital met with KPMG to discuss the bid further.
O’Brien had been granted exclusivity based on a €48 million price and that he had no issues with the potentially troubled Petroplus contract; now things had changed.
Eventually it was agreed by Island Capital that O’Brien would pay a headline price of €48 million. Notes of the meeting prepared by Neil Collins of KPMG’ state: “Price: suggestion – do something in working capital.”
Based on its reading of Collin’s various notes of the meeting, the IBRC Commission found “two separate issues of headline price and working capital adjustments had become linked.” Collins explained this by saying that in deals there is a “kind of a horse trade”, a not unreasonable stance provided everyone relevant knew about it.
Nicolas O’Gorman, who worked with Davy, also had notes. They state: “Over the course of this meeting it was agreed that Island would revert to their original pricing in exchange for certain concessions on working capital items which in the company’s advisors’ view was reasonable.”
Neil Devereaux, the CFO of Siteserv, said he asked Collins after his meeting with Island: “Are we done yet?” and Collins said: “No, they need a reduction of €1.8 million.”
Collins produced a working capital report on February 29, 2012, that showed a working capital adjustment in favour of O’Brien of €1.37 million. This was less than Island Capital thought reasonable, as they believed they had agreed a €1.8 million revision.
O’Brien felt his reduced offer was justified, but to maintain good relations with IBRC, he instructed that the price paid should be €48 million.
Island Capital rang back and told KPMG it would pay a headline price of €48 million and accept the working capital movement in its favour of €1.37 million. This meant Siteserv would get €430,000 more than previously.
However, when KPMG produced its new working capital report, it showed a €1.79 million movement in O’Brien’s favour. KPMG said in its evidence that there were various reasons for this which it detailed. It said the adjustment was the right one and it “would have happened either way”. The rules around calculating working capital are not set in stone, and the IBRC Commission accepts this.
However, the IBRC Commission concludes that the issues surrounding working capital were not “disclosed” to IBRC by Siteserv. Not only did IBRC not get to see O’Brien’s “final offer” document, the commission said it also was “fixed with this €1.8 million reduction in the proceeds of sale for Siteserv without ever being made aware of that agreement.” On Sunday March 4, the board of Siteserv met along with its advisors KPMG and Davy, as well as Hobbs. At this meeting the board resolved to approve O’Brien’s bid and recommend to the bank that it be accepted. Siteserv was now almost in Denis O’Brien’s hands.
*****
On March 5, 2012, Anglo / IBRC received a document entitled “Project Cable – indicative schedule of proceeds to IBRC.” The document was sent to IBRC for consideration, unlike the O’Brien final offer letter. Hobbs said of it: “I think I probably didn’t see this [final offer] letter at the time but I knew about it through phone calls.” He suggested it might have come up in a face-to-face meeting but didn’t have any detail. The IBRC Commission found that Hobbs was not given the final offer letter and he was “not told clearly” by Siteserv of the contents of O’Brien’s final offer but was instead informed on “general terms” that O’Brien was looking for a reduction.
The IBRC Commission said it found the decision by Siteserv not to disclose the final offer letter from O’Brien was “on the balance of probabilities, deliberate and not accidental”.
The Commission said, “the decision not to disclose to the bank the final offer letter was made by Robert Dix.” The Commission also found that Hobbs did not consider issues around working capital to be part of his role. It found that neither the bank nor Hobbs received the working capital report of February 29, 2012, and that neither knew of the “€1.8 million working capital reduction agreement”.
The Commission said this was “deliberate.” Dix admitted in his evidence that if IBRC had all the information it might have been enough for the bank to insist on ending O’Brien’s exclusivity period allowing Anchorage back in. The IBRC Commission found there is “no evidence” that Dix much considered ending O’Brien’s exclusivity in order to fully consider Anchorage’s offer.
****
The consequences for IBRC of all these non-disclosures were important. Karl Cleere of IBRC said if he had known more about it, he was certain that the bank would have discussed running Island Capital and Anchorage against each other in a third round of bidding.
Pat Walsh of IBRC said the matter would have gone back to the bank’s credit committee again to seek its consul if the bank had known of the various issues it wasn’t told about. He said the bank would have considered reopening the race to allow a run-off between O’Brien and Anchorage if it had known everything.
In its draft report, the IBRC Commission found Siteserv’s decision not to disclose important information to the bank – specifically the O’Brien final offer letter and the working capital reduction – were “not reasonable from the perspective of the bank”.
It adds: “The bank had explicitly required that the sale process be conducted with demonstrable integrity. However, contrary to that requirement, these non-disclosures undermined the integrity of the Siteserv sale process and tainted it with impropriety.”
The IBRC Commission then tries to calculate how much state-owned IBRC lost out on. It found that the Anchorage offer at €52 million “could have provided up to €5.8 million more for the bank than Mr O’Brien’s €48 million offer after he had reversed his €3 million headline price reduction of 1 March 2012 and negotiated the €1.8 million working capital reduction”.
The Commission said that “even” if Anchorage had also price-chipped its offer it “could” still have provided a better outcome for Siteserv and IBRC.
This is all hypothetical, as Anchorage was not allowed to proceed.
The Commission said there is no evidence that O’Brien or Island Capital played any part in the non-disclosure of important information to the bank. The Commission concludes that neither of them had anything to do with this. It also said it was a matter for O’Brien and his advisors what price they were prepared to pay and how they negotiated it. Whatever was done was done without O’Brien or Island’s knowledge or request.
Unknown knowns
Courtesy of Niall McFadden, Brian Harvey now had the shape of a deal in place with Denis O’Brien in relation to himself. Harvey would emerge from the wreckage of the old business he ran as a shareholder in the new company that owned Siteserv if O’Brien won. Very few people however knew of this. Harvey attended a Siteserv sale committee meeting on February 5, 2012, where it was decided to take only Island and Anchorage into a third round. Harvey did not tell the meeting, Siteserv’s advisors, or the bank’s representative Hobbs, of his and McFadden’s personal arrangements with O’Brien.
When the decision was taken at Siteserv’s board to grant O’Brien exclusivity, Harvey agreed with the recommendation. Again, he failed to disclose his private deal with O’Brien.
He did however provide some assistance to the O’Brien bid that others didn’t get. O’Brien had said he was going to pay for the business from his own resources, but then he changed his mind and decided to borrow some money from AIB to help fund it. There was nothing wrong with O’Brien doing this, but it did create an issue for Hayes as the bank sent over reams of questions about the business of Siteserv. On February 13, 2012, Hayes sent an email to Harvey asking him to help answer them. AIB also wanted to meet Harvey, and he did in Island’s offices on February 14, 2012. None of Siteserv’s advisors nor Hobbs were informed of these interactions.
Harvey and Hayes said O’Brien’s bid was exclusive, so he was entitled to this assistance.
Cutting a deal
Meanwhile Niall McFadden still felt more could be done for Brian Harvey. On February 16, 2012, he wrote to O’Brien and Hayes with some suggestions for what might be included in a letter to Harvey setting out the MIP plan. He now put forward another idea: that O’Brien would take Harvey’s personal loans out of IBRC as part of the deal to buy Siteserv.
“I think IC [Island Capital] should say that they wished to buy B’s [Brian Harvey’s loan] (c. 1.5m – have not checked) at the same % of face value as the overall deal (ie c. 30% or c.500k) and then Brian will waive (to avoid tax) his bonuses due (c. 250-300k which will form part of the completion cash calculation I suspect) and top it up with some of his sale proceeds (the balance of which he will put into the deal)…this is the most tax effective way of dealing with this Anglo will see Brian’s booty (bonus and shares) being used up, which are the optics we need to create,” McFadden wrote.
McFadden attached to his email a letter he wanted Island Capital to sign and put on its headed notepaper for Brian Harvey setting out the terms of the management incentive plan.
The terms of the deal McFadden outlined would see O’Brien buy Harvey’s personal loans at a 70 per cent discount i.e., roughly the same as the discount it was buying Siteserv’s loans from IBRC.
In other words, McFadden proposed that O’Brien would pay €510,000 for Harvey’s personal loan of €1.7 million from IBRC, a transaction that would free Harvey from the bank.
Harvey would then say he had waived his bonus. But actually, the plan was to use his bonus to buy shares in the new vehicle buying Siteserv.
“This entire plan was a scheme to ensure that Mr Harvey never paid tax on his bonus and that there would be no signs that a bonus had ever been paid to him,” the IBRC Commission said in its draft report.
At this stage Harvey said his bonus was €300,000 (but it later turned out to be €350,000).
McFadden referred to this dance around Harvey’s bonus as a “bonus barter”.
Hayes wrote to O’Brien outlining the plan to buy out Harvey’s personal loan as part of the Siteserv deal. He said: “This seems ok as long as there’s no cash cost to you.” Hayes then wrote back to McFadden after speaking with O’Brien with a revised proposal. This said that senior management would be issued 15 per cent of the shares in the company that bought Siteserv, and that these shares would vest over three years.
In Hayes’s letter he refers to shares being granted to Brian Harvey, Neil Devereux, TJ Malone and “possibly” Stephen Flounders, who were all key members of management.
There is no mention of McFadden in Hayes’ amended draft letter. As it would turn out McFadden wasn’t forgotten about. It would be only he and his friend McFadden who would get the shares.
Niall McFadden’s bankruptcy
Niall McFadden’s financial problems were not just with IBRC. In 2010, two years before the sale of Siteserv, another financial institution called National Irish Bank, obtained judgments totalling €15.2 million against him. IBRC followed by securing a judgment of a further €15 million more. In May 2011 the Commercial Court in Dublin heard that McFadden was insolvent with debts of €100 million. The court heard that McFadden’s liabilities to Anglo were €65 million, and the value of his unencumbered assets were £500,000.
During this case, NIB’s senior counsel John Hennessy, SC for NIB, cross-examined McFadden about his debts.
During the 2011 case, Mr Justice Peter Kelly asked McFadden if his complex business affairs in Ireland, Britain and the Isle of Man were structured in order to reduce his tax bills. McFadden, The Irish Times reported, replied it was to “maximise returns for investors”.
McFadden was however still some way from bankruptcy. It was only on October 27, 2013, that The Sunday Times reported that he was judged bankrupt in the High Court. The paper said this had happened on June 10, 2013, and that McFadden was now due to make a full disclosure of his assets to the High Court. Not disclosing assets in a bankruptcy situation is a serious matter, so presumably McFadden did so fully, including any interest in Siteserv.
“False and misleading answers”
Niall McFadden set up a meeting between Denis O’Brien and Brian Harvey in the Four Seasons Hotel in Ballsbridge, which took place at noon on Sunday, March 4, 2012. Harvey prepared an agenda for this meeting and sent it to McFadden, who came back with some suggestions. In the hours before this meeting the board of Siteserv met to approve in principle the sale of Siteserv to O’Brien.
The board “unanimously” gave its approval subject to some outstanding points being clarified, and approval from IBRC. Harvey “concealed” at this meeting, the IBRC Commission said, his financial interest in the O’Brien bid.
Harvey said he didn’t believe he made “any secret” of his meeting with O’Brien in the luxury hotel. “I’m not saying I put an ad in the paper,” he admitted. “I didn’t go around shouting about it.”
Dix and KPMG both said they did not know Harvey was meeting O’Brien after the Siteserv meeting. Devereux said Harvey told him he was meeting O’Brien, but on the following day, not immediately afterwards. Hobbs said it might have been “mentioned casually” but he couldn’t remember any detail.
When Harvey got to the Four Seasons, McFadden joined him and O’Brien. Harvey said at his meeting he did not discuss his and McFadden’s MIP with O’Brien, but he did discuss his personal loans owed to IBRC at a “very, very high level”.
O’Brien said they mainly discussed Harvey’s personal financial affairs, while McFadden could not recall the meeting.
From the IBRC Commission’s point of view, this confirmed that from at least March 4, 2012, Harvey had an additional reason to do a deal with O’Brien. The tycoon was the only bidder considering sorting out his personal debts at the same time as buying Siteserv.
On Tuesday of that week, Devereux rang him to ask him how the meeting went with O’Brien. Harvey said he still hadn’t met O’Brien, according to notes of the call made by Devereux.
Devereux said he was by now conscious of his responsibilities as a director of a public company, so he had started to take notes of all his interactions with Harvey. He was now concerned. Devereaux asked Harvey directly if there was a MIP package with O’Brien, and he was told there wasn’t one.
After this conversation, Devereaux suspected that there was a MIP, but he wasn’t part of it.
He asked TJ Malone if there was one, and Malone said he hadn’t heard of one either. Devereaux contacted Arthur Cox on March 12, 2012, to ask what the rules were around disclosing MIPs ahead of Siteserv’s forthcoming egm to approve the sale of the business to O’Brien. Fortified, he met Harvey for coffee later that day and told him Arthur Cox’s advice was if Harvey had a “deal” with O’Brien he must disclose it to the board of Siteserv. The board could then take advice on what needed to be disclosed to shareholders. Harvey said he could not recall this conversation, and that at the time he was telling the truth as the MIP deal hadn’t been fully agreed.
The Commission said it believed Harvey was giving “false and misleading answers” to Devereaux. It said also that Harvey and McFadden didn’t want Devereux to know that McFadden was involved in the transaction, as they feared he would tell the company’s advisors and IBRC. McFadden referred to Devereux as a “snitch” and he didn’t want him to know about his involvement. The Commission found that Devereux had “acted properly” at all times. He was not offered any shares in the company that bought Siteserv called Cathkin Holdings until the correct time, some 17 days after the transaction.
As CFO, Devereux was told he could buy 1 per cent of the company over three years at a specified price. This compared with the 6 per cent of “free” shares Harvey received, plus 3 per cent more in exchange for his bonus, and the 4 per cent of the company to be received by McFadden. Devereux left the company shortly thereafter so he never became a shareholder.
Stories and reality
Things were now really progressing. On Wednesday March 14, 2012, the day before the board of Siteserv met to sign off on the sale of the business to O’Brien, Harvey again wrote to him. He again asked O’Brien for assistance with his “personal situation.” At 2.30 pm on March 15, 2012, McFadden met with Hayes to finalise the MIP deal. Thirty minutes later IBRC was due to sign off on the sale of the business to O’Brien, to be followed immediately afterwards by the board of Siteserv approving it. McFadden says he can’t recall his meeting with Hayes. But there is an email detailing his proposals for the MIP that would see “the CEO & Co” take the “lion’s share” of the available shares. The ‘CEO & Co’ was Harvey and McFadden only. Hayes made a counteroffer, but both agreed that Harvey would get at least 6 per cent of the company for “free” under the MIP.
McFadden then sent an email to Hayes setting out two scenarios called “story” and “reality.” In the “story” version of the world McFadden said Harvey would receive his bonus of €300,000 (which was more in the end) and pay tax of 55 per cent on it. In the “reality” scenario McFadden said Harvey would “waive” his bonus and therefore not pay tax on it, while in “reality” still getting his bonus but using it to buy shares in the new Siteserv company. The Commission said it found “as fact” that based on the above Harvey had reached a deal with O’Brien on March 15, 2012, giving him 6 per cent of the company, plus an option to buy more taking his potential holding to 9 per cent.
Later that day IBRC signed off on the deal selling Siteserv to O’Brien for a headline price of €48 million, with net proceeds going to the bank of €44.3 million. The balance of Siteserv’s loans of €119 million were then written off by the state-owned bank.
Over in Siteserv its board then met to sign off on the sale. The draft minutes of this meeting – which were never signed – saw Harvey declare he had no personal interest in the outcome of the meeting. Harvey, according to the draft minutes, then voted the deal through along with everyone else.
The Commission found Harvey had a “significant financial interest” in the O’Brien bid and a “clear conflict of interest” between his company and his own interests. It said the fact that Harvey voted for the O’Brien sale without disclosing this was “manifestly improper and wrong”.
The sale was now official, but McFadden still wasn’t satisfied. On March 25, 2012, he asked Hayes for a 1 per cent transaction fee which equated to €480,000. McFadden also estimated that Siteserv was worth €12 million, meaning Harvey’s 9 per cent share was already worth €1 million, and his own 4 per cent stake was worth €480,000. He also said he thought Devereux and TJ Malone should be offered no free shares, but instead they should have to buy in over time after the deal was done.
Six occasions
It was now time to get approval for the sale of the listed company Siteserv to Denis O’Brien at an egm. As documents were being prepared for this Harvey did not disclose his deal with O’Brien. Arthur Cox said in evidence it believed this should have been disclosed to Davy in order to determine did this have to be disclosed to shareholders. Siteserv knew the meeting was likely to be contentious, so Davy prepared a Q&A which it circulated to Harvey and its board to help them answer any questions from shareholders or the media.
This included a question asking was McFadden going to be a shareholder in Siteserv in the future. “Its ownership is none of Siteserv’s business,” was the prepared response. Other answers included: “There has been no incentivisation arrangements agreed.” Another question was whether any inducements or bonuses were to be paid, to which Davy said the answer was no. The IBRC Commission said Harvey knew some of these answers were “false and misleading”, but he approved them. The IBRC Commission said Harvey had a “manifest conflict of interest” when he voted through the sale of the company. It said the various “undisclosed negotiations” led to an “extraordinary situation” where Harvey and McFadden negotiated 15 per cent of the new company without the board of Siteserv, the sale subcommittee, the corporate advisors, the CFO, the lawyers, Hobbs, IBRC and Siteserv’s shareholders knowing anything about it. It found on six occasions Harvey acted in “favour” of the O’Brien bid. These were:
- Disclosing “confidential information” about the top three bidders to McFadden who passed it on to Island on February 2, 2012.
- Granting exclusivity to O’Brien as part of the sales subcommittee on February 9, 2012 – whilst “concealing” his “significant financial interest” in O’Brien’s bid.
- Voting in favour of this exclusivity being extended at the Siteserv board meeting of February 10 2012.
- Participating in the meeting that continued this exclusivity on February 27, 2012.
- Voting in favour of the sale to O’Brien at the board meeting of March 4 2012 – while “concealing” his financial interest.
- Doing the same at the board of directors’ meeting on March 15 2012.
The IBRC Commission described this as a “pattern of secret negotiations” while “concealing” it from relevant parties that led it to find that “Mr Harvey improperly favoured Mr O’Brien’s bid on a number of crucial occasions putting his own financial interests, ahead of the best interests of the company, and its main creditor, the bank”.
In relation to Island Capital, the IBRC Commission said it had “ignored” the confidentiality agreement and process letter governing the sale. It said it appeared O’Brien did not read these documents, and his position was that in deals these were often ignored. Other bidders also ignored elements of the agreement and letter, supporting O’Brien’s position. The advisors to Siteserv didn’t agree, saying they believed these documents should be “followed”. Hayes and Harvey’s position was there was nothing untoward from their point of view in anything that happened between them. The IBRC Commission said that was “not the issue.” O’Brien and Hayes were entitled to do what they wanted, but Harvey had different obligations as the CEO of a public company that answered to a board and shareholders.
The Commission also noted that in the end O’Brien had done nothing for Harvey in relation to his personal borrowings from IBRC. The Commission said that while it found that Harvey had taken actions to favour O’Brien, neither O’Brien or Hayes “ever asked him to do these things on his behalf or regarded these actions of Mr Harvey as being part of a bargain between them.”
The Commission also found that Davy and KPMG were entitled to assume that Harvey would follow the rules and not engage in “undisclosed negotiations” or “conceal significant information” and so on. It said it “makes no criticism” of either on this matter.
But as all of this was going on within Siteserv, just what was happening within the IBRC?
