A police pension fund is suing Sirius XM’s board for letting John Malone’s Liberty Media take over the company without a fight and without paying a premium. The lawsuit, filed in the Court of Chancery in Delaware by the City of Miami (Florida) Police Relief and Pension Fund, comes just days after Liberty filed with the FCC that it plans to take full control of Sirius and its board by increasing its stake in the satellite radio operator to more than 50%–it is currently at 48%. Sirius’ 13-person board includes five members who are representatives of Liberty.
Liberty acquired its initial stake in Sirius in 2009 as part of a deal in which it loaned the satellite radio provider $530 million to help it stave off bankruptcy.
As part of the loan, Sirius’ board agreed not to adopt a poison pill or any defense measures against a Liberty takeover after a three-year standstill. Since the standstill expired in March, Liberty has been buying Sirius shares in the open market.
Liberty’s effort to take control of Sirius XM will eventually lead to a spinoff. The goal is to spin off Sirius, in keeping with Liberty’s history of making its properties, including DirecTV, Liberty Global and now Starz LLC into their own publicly held companies.
The pension fund alleges that the provisions that prohibit SiriusXM’s board from fighting off a Liberty takeover are a breach of its fiduciary duties. The provisions prevent the directors from taking any action to hurt Liberty’s ability to continue acquiring Sirius stock, “regardless of whether Liberty’s acquisition poses a threat to Sirius’ non-Liberty shareholders,” according to the lawsuit reported on by Reuters/CNBC.
“Put simply, a board cannot tie its own hands, or the hands of successor boards, in ways that constitute an abdication of their fiduciary duties,” it said.
The police fund is seeking compensatory damages and asks Liberty to stop buying Sirius shares on the open market. The pension fund is also seeking class action status in the case against Sirius’ board.
SiriusXM CEO Mel Karmazin previously said Liberty could not take over the company without paying a premium, but he downplayed the fray with Liberty on a recent conference call.
One legal expert in Delaware specializing on corporate governance told Reuters cases brought against a company’s board are tough to win: “Ultimately, unless you have some serious conflicts of interest on the part of the directors, the Delaware courts are typically protective of the decisions the directors make,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
And indeed, Delaware Judge Leo Strine refused a request for an injunction to prevent Malone from buying more shares. Strine called the request a bit of a stretch.
RBR-TVBR observation: The real question is whether or not a Liberty takeover will help increase the value of the company and benefit SiriusXM shareholders. If Mel Karmazin really thought it would hurt the company, he’d be fighting it—he values his reputation and would not go down as the guy who left SiriusXM in a lurch. Liberty certainly plans to increase the company’s value—and perhaps offering—before spinning it off, so buckle up and enjoy the ride if you own the stock.