The Lakers’ record-breaking $12.5 billion sale is getting really ugly, really fast.
We covered the basics in Part I and Part II of the investigation last week: Mark Walter is under federal investigation for allegedly transferring retiree money at his insurance companies to his personal businesses as loans without disclosing them as related-party transactions. The Department of Justice seized his phone and laptop on the tarmac in Chicago last year. Walter then revised the books at his insurance companies to say that he had done approximately $20 billion (~40% of total assets) in related-party transactions, up from the initial disclosure of $1.4 billion (~3% of total assets). Regulators usually want related-party transactions under 10% of total assets, so Walter is now trying to raise cash by selling his stake in the Lakers. Chelsea is reportedly next, but even that might not be enough, as Walter needs another ~$5 billion in capital to repay the loans before year-end.
That storyline alone could be a movie, but then again, we’re talking about the Los Angeles Lakers. There was always going to be more to the story. After ESPN’s Shams Charania reported yesterday that the Buss family had decided to sell its remaining 17.8% ownership stake in the Lakers via a majority vote, the team’s controlling owner, Jeanie Buss, issued a statement last night disputing the sale.
In simple terms, Jeanie’s siblings believe they have the contractual right to tag along with the Walter sale at a $12.5 billion valuation. But Jeanie argues they have no right to make that decision because the family trust requires her siblings to do everything in their power to make sure she stays on as controlling owner. And since the NBA requires someone to own at least a 15% stake in the team to be the controlling owner, Jeanie would effectively be fired if the family sold its stake.
It’s a messy situation, but it’s also not just family drama. We’re talking about a high-stakes legal battle for control of one of the world’s most valuable assets.
For starters, it’s important to understand how the Buss family trust is structured and why Jerry Buss structured it the way that he did. The simplest way to explain it is that Jerry Buss created a vehicle that shares the economics, but concentrates the power. The economics are shared because, rather than giving each of his six kids an equal share of equity in the team, Jerry Buss put all of the family’s equity in a trust. That means one family member can’t just cash out; four of the six siblings must approve a sale or dissolution of the trust. And then the power is concentrated because Jerry Buss named his daughter Jeanie Buss as the team’s controlling owner, requiring the other siblings to “take the actions reasonably available” to ensure Jeanie is appointed as the Lakers’ controlling owner.
Then you have the last-man-standing provision. Jerry Buss wanted to keep ownership within his direct family, so he added a provision requiring each sibling’s share to be redistributed to the remaining trust members upon their death. Jerry Buss likely did this with good intentions, but it also created a massive incentive for the family to eventually sell the team, as each of the siblings’ kids would get no inheritance if the family still owned the team upon their death (because their share would be redistributed to the other members of the trust).
That is why the Buss family decided to sell a majority stake to Mark Walter last year. Jeanie signed a five-year deal with Walter to remain the team’s controlling owner, which was allowed only because the trust kept a 17.8% stake in the team, and the Buss siblings all got hundreds of millions of dollars in cash without fearing their stake would vanish upon their death. Even if Jeanie wasn’t on board with this sale, she didn’t have a choice. Because the siblings agreed to keep a large enough stake for her to remain the team’s controlling owner, the trust met all criteria, with only four of six votes needed to approve the Walter transaction.
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