Spanish Broadcasting System (SBS) has announced that “certain transfers of the company’s outstanding 10 ¾% Series B Cumulative Exchangeable Redeemable Preferred Stock (its “Series B Preferred Stock”) may, when attempted, have had no effect as a legal matter and were void and remain void today.”
As a result, the company says, “there are genuine questions regarding valid ownership, or good title, to these shares.”
As a result, SBS on Monday requested that The Depository Trust Company suspend trading in the Series B Preferred Stock “pending the resolution of who validly owns these shares” and is considering possible additional steps “to protect the lawful owners of its Series B Preferred Stock and innocent parties from ineffective and possibly fraudulent transfers of such shares, among other things.”
Here’s some background on the matter: On November 2, 2017, certain purported holders of the Series B Preferred Stock filed a lawsuit against SBS in the Delaware Court of Chancery, claiming to represent approximately 94% of the outstanding shares of the Series B Preferred Stock and alleging violations by the company of the Certificate of Designations under which the Series B Preferred Stock was issued, among other things, which SBS has vigorously denied.
If the facts alleged in the complaint are correct, which SBS has not conceded, then the collective ownership of the outstanding Series B Preferred Stock by non-U.S. entities would, without giving effect to provisions contained in the company’s charter, exceed 63% of the outstanding Series B Preferred Stock.
That’s not good: This ownership would result in a violation of Section 310(b)(4) of the Communications Act of 1934, as amended, which limits to 25% (as calculated according to applicable regulations promulgated under the Act) the indirect foreign ownership of FCC broadcast licensees.
This would also violate Article X of the Charter, which restricts foreign ownership in SBS to not more than 25% of the aggregate number of shares of its capital stock outstanding in any class or series entitled to vote on any matter.
“In addition,” SBS reported Monday afternoon, “it appears that certain of these transactions, if given effect, would have required the prior approval of the FCC of foreign ownership in excess of the 25% limit set forth in the Act.”
On November 28, 2017, SBS requested by letter to these “purported holders and their counsel” the information required from them on an urgent basis so SBS could comply with its statutory obligations under the Act and advise the FCC regarding the extent of its indirect foreign ownership holdings, and so SBS could definitively determine the ownership of the Company’s Series B Preferred Stock.
On that date, SBS also filed with the SEC an 8-K filing containing a current report, including the potential consequences of having excessive foreign ownership of the Series B Preferred Stock.
In addition, SBS filed a petition for a declaratory ruling with the FCC on December 4, 2017 seeking Commission approval to exceed temporarily the 25% indirect foreign ownership limit while it takes steps to comply with the Act.
The FCC responded, in part, by directing that additional information must be disclosed to the Commission regarding the identities of the purported holders of the Series B Preferred Stock.
“To date, these purported holders of the Series B Preferred Stock have not provided all of the information requested by the company,” SBS says.
What does the Commission have to say? It granted SBS an extension until April 27, 2018 to provide the FCC with the required information.
“Because the company has not received the necessary information from the purported holders, it cannot at present identify the extent of its foreign ownership or determine which investors have valid title to the company’s Series B Preferred Stock and which do not,” SBS admits.
While certain of its Series B Preferred Stock may have been transferred to non-U.S. entities, it has not yet issued foreign share certificates evidencing such stock.