Senate report warns of breach of duty in "done deal" Polytechnic-NYU consolidation

Two-and-a-half months after the board of Polytechnic University (Poly) in Brooklyn voted to approve a controversial consolidation into much larger New York University (NYU), the chairman of the State Senate Committee on Higher Education has raised some serious questions about the deal, though it's unclear whether those questions--outnumbered by allegations dismissed--are enough for the state Department of Education or the Board of Regents to withhold their approval.

State Senator Kenneth LaValle, a Republican who represents eastern Long Island, did not issue a statement accompanying the release of the report (PDF and embedded below), titled Proposed Affiliation: Polytechnic University and New York University, which appeared yesterday afternoon on his web site. Nor does the report offer final recommendations.

That may indicate he considers the results inconclusive: while the report rejects most charges made by Poly alumni that the consolidation into NYU is a sweetheart deal, it does conclude that the Poly board, in its eagerness to approve the merger, in three instances did not act with the duty of care and/or loyalty required by a fiduciary, notably negotiations conducted in secret, the exclusion of dissident board members from working committees, and the failure to update a three-year-old appraisal of the university's valuable Downtown Brooklyn property.

There's little precedent regarding such findings; thus, it's hard to predict what the Department of Education and Board of Regents might do. Still, the report throws some cold water on the exuberant press release issued by Poly on March 6 and partially validates a statement made by a faculty member, who told LaValle's office that the plan was presented by the board as a "done deal."

[Updated Wednesday 1:45 pm: Poly board chair Craig Matthews commented, "I would just affirm that after an intensive four month review, the Senator found no basis to object to the merger, no evidence of fraud or impropriety and affirmed the propriety of the process. We are pleased that we can now proceed with the next step which is approval by the Board of Regents."]

NYU's Brooklyn opportunity

Poly, a small engineering school at Brooklyn’s MetroTech that draws mainly on local students, offers NYU, a Greenwich Village-based university with international reach, two things it needs: an engineering school and, crucially, land, including air rights subject to a letter of intent Poly has signed with Forest City Ratner, its neighbor and lead partner on MetroTech.

Poly would gain the umbrella and cross-pollination of a larger university, and significant potential increase in revenue: improved opportunities for grant funds and a larger and better-qualified student body, compounded by NYU’s higher tuition. Poly has been struggling, and the "merger"--the two universities' term of choice--would help it with enrollment, collaborative research, library resources, and overall financial reach.

However, NYU would gain control of Poly with no money down, offered to loan Poly $50 million over five years, according to LaValle's report (confirming previous reports), based on the engineering school’s unused air rights.

While a February 7 "Sense of the Board" vote indicated more than a supermajority (75%) supported the merger, the vote was postponed a month so LaValle could investigate charges raised by three dissident trustees, including conflict of interest, failure to do due diligence, secret negotiations, and failure to consult faculty. After the board voted its approval in March, LaValle expressed dismay that the board acted before his report was issued.

Issues dismissed; "done deal" claimed

LaValle's report first dismisses alumni claims that 1972 legislation that required NYU, then experiencing fiscal crisis, to let its school of engineering and science merge with Poly, subsequently barred NYU's re-entry into the field of engineering.

The report then goes through several allegations of conflict of interest. A few are summarized below.

While one Poly trustee is a partner with the law firm represeting the university in negotiating with NYU, the board had gotten a legal opinion that there was no conflict of interest and thus acted in good faith.

While the Poly board did not explain why it concluded that the use of an accounting firm that had previously done work for NYU to evaluate NYU's financial condition was not a conflict of interest, the choice was "conceivable." Though it would have been more sensible to avoid the appearance of impropriety, "there is insufficient evidence" to conclude the decision was a breach of fiduciary duty, the report concludes.

While Poly denies that President Jerry Hultin was promised a position with NYU, one Advisory Trustee recalls two NYU officials saying Hultin would head the "new Poly." Still, there's no evidence of a concrete promise, and Hultin would be a natural candidate, the report says; hence, no conclusion of misconduct.

While Poly did not conduct a faculty vote, it offered numerous meetings and noted that ten of eleven department heads supported the affiliation. One faculty member who wished to remain anonymous contacted LaValle's office and claimed that board members "consistently characterized the affiliation as something of a 'done deal'" and that faculty members could view the merger agreement only in the presence of a Poly administrator and were not permitted to take notes. Still, given the "overwhelming support" of the faculty, it does not appear that Poly trustees breached their fiduciary duty, the report concludes.

Money issues

The Polytechnic Alumni Association points out that the board long claimed that Poly was not financially viable without the merger, due to debts dragging the school into the red, but, in a May 2007 court filing, had claimed that the university had $154.6 million in assets.

While the Alumni Association has complained about the terms of the deal, given the promise of loans rather than cash, "it takes more than unfavorable terms and questionable decisions by the Board to conclude there was a breach of the fiduciary duty," the report concludes.

What's acting in good faith?

The Business Judgment Rule “bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment," the report states.

The report cites three areas of concern that are not protected by the Business Judgment Rule. "While some of the remaining allegations suggest a significant lack of diligence or good faith on the part of Polytech, they are not substantiated by evidence which definitively says that the Board did not uphold the duty of loyalty and care owed to the institution," the report states.

The three areas:
(1) The affiliation negotiations between Polytech and NYU were being conducted by President Hultin some six months before they were announced to the rest of the Board. "There is no legitimate excuse for not holding these meetings sooner particularly when, by Polytech’s own admission, preliminary discussions began some three years prior," the report states.

2) Board members not supportive of the affiliation were excluded or marginalized from the working committees set up address the affiliation. "Additionally, the statements made by Deborah L. Devedjian, a Polytech Trustee who is not an alumnus of Polytech and has no obvious bias in favor of the Polytech Alumni Association, says [sic] that she was removed from one of the working committees for 'asking too many questions' and encouraging 'due diligence,'” the report states. "These two facts coupled with the resignation of Trustee Herman Viets... lead to the conclusion that those on the Board in favor of the affiliation were attempting to marginalize the participation of those individuals who opposed the affiliation."

3) An updated appraisal of Polytech’s real property was never obtained by the Board. The Alumni Association stated that the board has in part promoted the affiliation by claiming Poly is not solvent enough to operate independently for long. "While Polytech has claims [sic] that they are in debt by approximately $33 million dollars, by their own admission, they relied upon a 2005 appraisal of their real estate," the report states. (A January 2005 appraisal valued Poly property at $213 million; surely the value of Brooklyn real estate has skyrocketed, a point not made in the report.)

"Their failure to obtain an updated appraisal, regardless of the cost involved, is inconsistent with the duty of care that the Board owed to Polytech," the report states. "Given the fact that the Polytech Board is comprised of individuals who are, inter alia, attorneys and leaders of large corporations, it is inconceivable that they would not have thought it prudent to obtain an updated appraisal of Polytech’s real property."

What next?

The section of the report labeled Conclusion does not make any recommendation regarding the fate of the consolidation but instead raises general questions about affiliations and consolidations, including:

• Whether procedures should be put in place requiring institutions to inform students, faculty, administration and alumni about their plans and allow a "reasonable period of time" for input.
• When and to what extent an institution’s Board of Trustees and other members of the institution should be involved in negotiations.
• Whether procedures should be put in place to ensure that faculty, administration, students and alumni are aware of potential conflicts of interest regarding such mergers and the steps taken to resolve those conflicts.
• Whether procedures should be put in place, before a final vote is held to approve an affiliation/consolidation, to inform interested parties of the terms of the transaction and to obtain their input.

The Department of Education and Board of Regents are expected to examine the issues by the end of June.

LaValle report on Polytechnic University and NYU