Romney Said Share Class Was Favor to Staples Founder

Highland Capital Partners Chairman Tom Stemberg
Thomas "Tom" Stemberg, chairman of Highland Capital Partners and founder and former chief executive officer of Staples Inc. Photographer: Andrew Harrer/Bloomberg

Republican presidential candidate Mitt Romney, as a board member of Staples Inc., voted to set a low price on the stock and create a new class of shares as a “favor” to its co-founder who was involved in a divorce.

Romney, in testimony in 1991 in the divorce case of Staples co-founder Tom Stemberg, said the special class of shares in the office-supply retailer was created because Stemberg “needed a settlement with his wife.”

The testimony, made public yesterday, deals with the investment in Staples by Bain Capital LLC, the private-equity firm Romney co-founded. He addressed the valuation of the company, the value of the stock Stemberg’s wife received in the divorce settlement and his business relationship with Stemberg.

The testimony was released by Massachusetts Probate Judge Jennifer Ulwick after a hearing in which Stemberg’s ex-wife urged its disclosure, initially requested by the Boston Globe. At a hearing in Canton, the judge said that while Romney’s testimony would be released, a confidentiality agreement between the ex-spouses remains in effect.

Gloria Allred, a women’s rights lawyer, appeared in court with Stemberg’s ex-wife, Maureen Sullivan Stemberg, and said she backed the Globe’s request to unseal the documents. She criticized the decision to keep the confidentiality order in place, saying her client wanted to talk about Romney’s testimony.

Romney’s Lawyer

Asked for comment, Andrea Saul, a spokeswoman for the Romney campaign, referred to a statement from Romney’s lawyer, Robert Jones.

“These tabloid charges being shopped by Gloria Allred, one of President Obama’s most prominent supporters, are absolutely false,” Jones, a lawyer with Ropes & Gray LLP in Boston, said yesterday in the statement. “Every time a court has reviewed the allegations of her client over the past 24 years, they have been rejected. There is no new information here.”

At the Republican national convention, Tom Stemberg, 63, spoke on behalf of Romney, the former governor of Massachusetts, who was given his party’s nomination for president in the Nov. 6 election against President Barack Obama.

Stemberg is the co-founder and managing general partner of Highland Consumer Fund, a venture capital fund that focuses on retail and consumer service companies. It is affiliated with Cambridge, Massachusetts-based Highland Capital Partners LP.

Initial Investment

Framingham, Massachusetts-based Staples, now the largest U.S. office-supply chain, grew with the help of Bain. Romney said that when initially presented with the proposal for an office-supply chain in about 1985, “I didn’t think it was a very good idea,” according to the transcript. Later, he said, he was “impressed with the quality of the thinking.”

Romney’s 1991 testimony came over several days during an evidentiary hearing in probate court on a request by Stemberg’s ex-wife to rescind her marital separation agreement.

Bain’s initial investment was 80 cents for each preferred share, according to the transcript, or $1.5 million.

In September 1987, Staples’ board set a share price of 0.1 cent, according to the testimony. Romney, who was on the board, testified that the stock may have been worth $1.30 at the time.

Joseph Walsh, the lawyer for Stemberg’s ex-wife, asked Romney if, by setting such a low price, “you’re in any way violating any fiduciary duty to your company?”

Romney answered, “I don’t believe so.”

‘Worth More’

“It was my true belief that one could justify 1/10 of one cent as the value of the common stock, but that the stock was probably worth more than that,” Romney testified.

Romney valued the shares of Staples at about $1.50 to $2 a share in late 1987 and early 1988. Bernard Dwork, a lawyer for Tom Stemberg, said Stemberg’s wife negotiated a sale of her shares during the same period at $2.25 to $2.48, according to the transcript.

“In my opinion that’s a good price to sell the securities at,” Romney testified.

Questioned about the valuations of several classes of Staples stock at various times, Romney said, “I’m not great at math when I’m on the stand.”

According to the transcript, Romney disagreed several times with Stemberg about valuations of the company. Offerings of Class B and C shares were made at $2.10 and $2.90 a share, respectively, and in both cases Romney said he thought those prices were too high.

‘Your View’

“If the company had followed your view they would have ended up with a lower per share price than the market cleared, right?” Dwork asked Romney.

“That’s correct,” he replied.

“And although you told him you thought he was wrong, he was right, wasn’t he?” Dwork said.

“That’s correct,” Romney answered.

The testimony shows that in 1987 Sears expressed interest in buying Staples. Bain proposed a $100 million sale price, Romney said. Sears’s response was $40 million and a deal wasn’t pursued.

While considering a possible Sears offer, Staples valued the company at $100 million to $130 million, or about $6 to $7.50 a share. Romney said “the dream was that we would be public someday” at $6 to $7 a share. He said Stemberg told the board it shouldn’t accept less than $7.50 a share in a buyout. Romney testified that he “would have been willing to accept a good deal less.”

‘The Future’

Romney was asked whether Stemberg had told the directors to “look to the future and not to the present value” of the shares. He replied that although he didn’t recall Stemberg saying that, future value “is clearly how we value a business.”

Staples had its initial public offering of stock in April 1989. Shares were priced at $19 each, or 74 cents after adjusting for eight stock splits, the company said on its website.

Bain typically sought a 10-to-1 return on its investment in startups over five years, Romney said. That worked out to a 58.5 percent “internal rate of return,” he said.

Romney also said that a new class of preferred shares was created specifically for Stemberg.

“It was initiated as a favor,” Romney testified. “Tom needed to have a settlement with his wife.” Romney said creating the new shares wasn’t his idea.

‘Potential Lawsuit’

Romney was asked whether there “could be a potential lawsuit by common shareholders for suddenly inserting for the benefit of Mr. Stemberg” a class of new shares that had preference over common shares.

“There was a discussion as to what was in the best interests of the common shareholders as well as the other shareholders,” Romney testified. “A specific discussion of a potential lawsuit I don’t recall being raised.”

The testimony also includes Romney’s criticism of Staples’ operational performance in its earliest years. Romney said a particular concern was the amount of time shoppers had to wait in line.

“I was shopping there myself and found it a frustrating experience,” he said.

He said there had been a disagreement with Stemberg about the need to hire a chief operating officer.

Tom Stemberg’s lawyer, Brian Leary, told the judge yesterday that Romney’s statements were a “primer” on Staples’ early development. Lisa Arrowood, a lawyer for Staples, said the company didn’t oppose the release of Romney’s testimony.

Gag Order

Allred opposed a confidentiality order that was left in place, telling the judge she wants her client to be able to talk about Romney’s testimony.

“She needs to be able to speak,” Allred said. “She apparently is the only person in the U.S., maybe in the world, who cannot speak about Governor Romney.”

The judge said Maureen Sullivan Stemberg could file a new motion to modify the gag order in the case. Allred said it was “the most comprehensive gag order I have ever seen in my 36 years of practicing law.”

Allred declined to comment further on the case after yesterday’s hearing.

Allred’s clients have included Sharon Bialek, the woman who accused Herman Cain, a Republican candidate for president, of sexual harassment, which led to his withdrawal from the race.

She also represented Jodie Fisher, who said former Hewlett-Packard Co. Chief Executive Officer Mark Hurd made improper sexual advances toward her while she was under contract to handle company events. Hurd resigned from Hewlett-Packard in 2010 after it found he had violated company conduct standards.

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