Sirius XM shareholder suit nixed…for now


For the second time, a federal judge has dismissed the racketeering lawsuit that shareholder Michael Hartleib filed against Sirius XM management. But, once again, the judge left the door open for the lawsuit to be amended, so CEO Mel Karmazin shouldn’t expect Hartleib to go away. Meanwhile, shareholders will vote next week on authorizing a massive reverse-split so Karmazin can move forward on a financial restructuring before $210 million of debt comes due in February.

The first time around the federal court ruled that Hartleib, a long-time Sirius investor, had not established standing for his lawsuit accusing company management of not operating in the interest of the shareholders, but of conspiring with XM management to steal the business from shareholders in a future move to go private. But he was allowed to file an amended suit.

This time US District Judge Cormac Carney ruled that Hartleib had not exhausted his options to get the board of directors to enact the actions he wants – primarily unwinding the Sirius XM merger and making interoperable receivers widely available. He had failed to prove futility in dealing with the board of directors because Sirius XM got a new board of directors in August after the merger was consummated. But once again Hartleib has been given 20 days to amend his lawsuit – and that’s likely to be extended because of the holidays.

Hartleib tells RBR/TVBR he will, indeed, be back. “No consideration has been given to the shareholders whatsoever,” he said of his claims against the satellite radio company He now plans to propose multiple resolutions to the board of directors, including one giving shareholders a say on the compensation of top management. Not that he expects any of his suggestions to be adopted. But after they’re rejected, he can re-file his lawsuit.

In the meantime, shareholders vote next Thursday (December 18) on authorizing a massive reverse split. “They’ll get the vote,” Hartleib said, although he plans to show up in opposition.

What happens then? Stockholders will be diluted as management uses the stabilized stock price – moved back out of penny-stock territory – to swap for debt. Then the dissident shareholder expects company managers to issue lots of new stock options to themselves. “That’s when I would argue that the company will be taken private,” Hartleib said. The offer might look attractive compared to where the stock has been, but Hartleib and other long-time investors would get only a fraction of what they paid for their shares.

RBR/TVBR observation: The one thing that Michael Hartleib and Mel Karmazin agree on is that Sirius XM stock has value. We’re not so sure. But then, we never thought subscription satellite radio was a viable business. To date, no one has proven us wrong.