CLASS ACTION GONE BAD? THE PROPOSED SETTLEMENT - Segment 4 Of A 6 Part Series
Segment 1 - Class Action Gone Bad? You Be The Judge
After all of the “hard work”, expedited discovery, depositions, etc. the settlement must be huge, right? Well, to be frank, I do not consider this settlement to be worth the paper it is written on. The plaintiff was not seeking money, he was seeking additional information. In a cursory overview the fact that the plaintiff was not seeking money would seem to make his goals more noble. Seeking additional information to be supplied to shareholders so that they could have a fully informed vote on the merger seems reasonable and just. However, the thought that a case such as this had pure intentions would be much more believable if the parties involved did not demonstrate a history of litigious action.
The settlement boiled down to an 8K being filed with the SEC that provided about eight paragraphs of additional information for investors to consider prior to the shareholder vote. The information below is the proposed remedy for the "concern" that Mr. Brockwell had:
EXCERPTS FROM THE 8K SURROUNDING THE SETTLEMENT: Link To Additional Disclosures
Solely to avoid the costs, risks and uncertainties inherent in litigation and to allow stockholders to vote on the proposals required in connection with the merger at the scheduled meeting, Sirius and the other defendants have entered into a memorandum of understanding with plaintiffs’ counsel in the Brockwell and Johnson lawsuits (the “Memorandum of Understanding”) pursuant to which Sirius, the other named defendants and the plaintiffs have agreed to settle the lawsuits subject to court approval. If the court approves the settlement, the lawsuits will be dismissed with prejudice.
In the Memorandum of Understanding, Sirius agreed to provide certain additional information to stockholders through publicly available filings. Without admitting in any way that the disclosures below are material or otherwise required by law, Sirius makes the following supplemental disclosures:
Supplemental Disclosures Concerning Background of the Merger
On October 24, 2006, Mr. Karmazin briefed the Sirius board of directors on his discussions with XM regarding a possible business combination, summarizing his discussions with Messrs. Parsons and Panero over the past month. Among other things, Mr. Karmazin discussed with the Sirius board of directors regulatory issues involved with a merger, the likely market reaction, and the value creation and synergies that would arise from a business combination. The Sirius board of directors engaged in an extensive discussion of the potential cost savings, including savings in cost centers, research and development and general and other expenses. The board further discussed XM’s assets, its relationships with automakers, whether there were other potential bidders for XM, and XM’s capital structure. Following this discussion, the Sirius board authorized Mr. Karmazin to continue discussions with XM.
In connection with their due diligence reviews, Sirius and XM instituted procedures to ensure that competitive information that was not legally appropriate to disclose was not exchanged by the management of the companies. In certain cases, management of each company reviewed documents provided by the other company that did not include competitive information; and, in other instances, outside counsel to each company reviewed materials but was not permitted to share competitively sensitive information with their clients. Sirius and Sirius’ advisors reviewed, among other things, XM’s agreements with automakers (Toyota, Hyundai, Nissan, General Motors, Honda), sports leagues and conferences (MLB, NHL, ACC, Big East, Pac-10), retailers (Wal-Mart, Circuit City, Best Buy), news providers (CNN, Fox News), entertainment content providers (Oprah, Opie & Anthony, Starbucks, ABC/ESPN), technical service providers (Loral, Sea Launch) and radio manufacturers (Delphi).
Sirius’ advisors also conducted a due diligence review of XM’s litigation and regulatory matters, including but not limited to: (i) the purported stockholder class action captioned In re XM Satellite Radio Sec. Litig., Civ. Act. No. 06-00802 (ESH) (D.C.), which has since been dismissed with prejudice; (ii) an action by members of the recording industry captioned Atlantic Recording Corp., et al., v. XM Satellite Radio, Inc., No. 06-3733 (DAB) (GWG) (S.D.N.Y.); (iii) a purported consumer class action captioned Enderlin v. XM Satellite Radio Holdings, Inc., et al., (E. Dist. Ark.); (iv) proceedings before the Copyright Royalty Board; (v) an arbitration concerning satellite insurance matters; and (vi) various FCC, FTC and SEC inquiries. In connection with these matters, Sirius’ advisors reviewed pleadings and court filings, conducted research and received briefings from XM’s in-house and outside counsel.
Supplemental Disclosure Concerning Reasons for the Merger
Sirius believes that the merger will result in significant cost synergies. Wall Street equity analysts have published estimates of the present value of cost synergies ranging from $3 billion to $9 billion. Sirius expects operating cost savings to be achievable in almost every cost item on the companies’ income statement, including:
• sales and marketing (through, among other things, lower brand advertising expense, cost reductions in retail relationship management, sales training, retail placement monitoring, and ad sales);
• subscriber acquisition (through areas such as lower radio production costs driven by enhanced scale);
• research and development (including through the possible elimination of duplicative R&D efforts with the adoption of technological developments across platforms, and the elimination of overlapping R&D resources);
• general and administrative expenses (through the elimination of redundant staff);
• product development;
• content (through potential improvement in margins given broader audience reach and lower internal programming costs by elimination of certain channel overlap); and
• programming operating infrastructure (as a result of the potential to rationalize maintenance and administrative capital expenditures, and avoid the duplication of disaster recovery expenses).
Moreover, over the long-term, Sirius believes the combined company will derive significant additional value by procuring its future generation satellites and terrestrial repeaters as a single entity and by potentially reducing satellite, engineering and support requirements.
Supplemental Disclosure Concerning the Sirius Board of Directors’ Recommendation
The factors and risks considered by the Sirius board of directors in connection with its determination that the merger and entering into the merger agreement with XM are advisable and in the best interest of Sirius and its stockholders, and its approval thereof, also include the probability that other strategic alternatives would fail to provide Sirius’ stockholders with the same value, synergies and cost savings as would a business combination with XM.
Supplemental Disclosure Concerning Opinion of Financial Advisor to the Sirius Board of Directors
The table below lists premiums for the transactions reviewed in connection with this analysis:
Sirius paid Morgan Stanley $4,576,000 in connection with Morgan Stanley’s services rendered as the administrative and collateral agent under its $250 million senior secured term credit facility. In addition, in the five years preceding the execution of the merger agreement, Sirius paid Morgan Stanley an aggregate of approximately $28,000,000 in connection with the underwriting and placement of various issuances of convertible debt securities and debt securities.
Supplemental Disclosure Concerning Regulatory Approvals Required for the Merger
In response to a “Second Request” for information relating to the merger from the U.S. Department of Justice, Sirius has produced millions of pages of documents from the files of many of its executives. These documents include business planning documents, documents discussing competition in the audio entertainment industry, pricing documents, as well as documents covering numerous other categories. In response to the Second Request, Sirius has also produced data regarding its business operations, including information on revenues, sales, and prices which was requested by the Department of Justice. As part of its investigation and as is typical in Second Request investigations, the Department of Justice has taken deposition testimony and, Sirius understands, has requested information from some third parties, including from Sirius’ competitors in audio entertainment. On September 4, 2007, Sirius and XM each certified to the Department of Justice that they were in substantial compliance with the Second Request.
This communication contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the benefits of the business combination involving Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc., including potential synergies and cost savings and the timing thereof, future financial and operating results, the combined company’s plans, objectives, expectations and intentions with respect to future operations, products and services; and other statements identified by words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “will,” “should,” “may,” or words of similar meaning. Such forward-looking statements are based upon the current beliefs and expectations of Sirius’ and XM’s management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and generally beyond the control of Sirius and XM. Actual results may differ materially from the results anticipated in these forward-looking statements.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statement: general business and economic conditions; the performance of financial markets and interest rates; the ability to obtain governmental approvals of the transaction on a timely basis; the failure of Sirius and XM to obtain the required stockholder approvals; the failure to realize synergies and cost-savings from the transaction or delay in realization thereof; the businesses of Sirius and XM may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected; and operating costs and business disruption following the merger, including adverse effects on employee retention and on our business relationships with third parties, including manufacturers of radios, retailers, automakers and programming providers. Additional factors that could cause Sirius’ and XM’s results to differ materially from those described in the forward-looking statements can be found in Sirius’ and XM’s Annual Reports on Form 10-K for the year ended December 31, 2006, and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007, June 30, 2007 and September 30, 2007 which are filed with the Securities and Exchange Commission (the "SEC") and available at the SEC’s Internet site (http://www.sec.gov). The information set forth herein speaks only as of the date hereof, and Sirius and XM disclaim any intention or obligation to update any forward looking statements as a result of developments occurring after the date of this communication.
Important Additional Information Has Been Filed with the SEC
This communication is being made in respect of the proposed business combination involving Sirius and XM. In connection with the proposed transaction, Sirius has filed with the SEC a Registration
Statement on Form S-4 containing a Joint Proxy Statement/Prospectus and each of Sirius and XM have filed with the SEC other documents regarding the proposed transaction. The definitive Joint Proxy Statement/Prospectus was mailed to stockholders of Sirius and XM on or about October 9, 2007. INVESTORS AND SECURITY HOLDERS OF SIRIUS AND XM ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER DOCUMENTS FILED WITH THE SEC CAREFULLY IN THEIR ENTIRETY BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.
Investors and security holders may obtain free copies of the Registration Statement and the Joint Proxy Statement/Prospectus and other documents filed with the SEC by Sirius and XM through the web site maintained by the SEC at www.sec.gov. Free copies of the Registration Statement and the Joint Proxy Statement/Prospectus and other documents filed with the SEC can also be obtained by directing a request to Sirius Satellite Radio Inc., 1221 Avenue of the Americas, 36 th Floor, New York, NY 10020, Attention: Investor Relations or by directing a request to XM Satellite Radio Holdings Inc., 1500 Eckington Place, N.E., Washington, DC 20002, Attention: Investor Relations.
Sirius, XM and their respective directors and executive officers and other persons may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction. Information regarding Sirius’ directors and executive officers is available in its Annual Report on Form 10-K for the year ended December 31, 2006, which was filed with the SEC on March 1, 2007, and its proxy statement for its 2007 annual meeting of stockholders, which was filed with the SEC on April 23, 2007, and information regarding XM’s directors and executive officers is available in XM’s Annual Report on Form 10-K, for the year ended December 31, 2006, which was filed with the SEC on March 1, 2007 and its proxy statement for its 2007 annual meeting of stockholders, which was filed with the SEC on April 17, 2007. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, is contained in the Joint Proxy Statement/Prospectus and other relevant materials filed with the SEC.
The above is the settlement. At least the portion of the settlement that shareholders are made aware of, also included in the settlement are attorney's fees for the law firm of Robbin's Umeda and Fink LLP, as well as indemnification for Sirius Satellite Radio. Pretty simple stuff with, what is in my opinion, very little meaningful information.
Did the information above actually satisfy Mr. Brockwell’s “concerns”? It must have, otherwise he would not have settled.
Did the additional information change the way shareholders voted? In my opinion it did not. I would be shocked if 1/1,000th of 1% of shares voted were impacted by the additional information provided.
Did it change the ultimate result of the vote? In my opinion it did not. The votes to approve this merger were virtually a foregone conclusion. Investors, the street, and analysts wanted this merger.
Do you as an investor see value in the settlement disclosure? What value would you place on it?
Did Brockwell’s Council have enough time to look through the documents? Did they even prepare interrogatory questions? Did they have any follow-ups to depositions? Who did they depose aside from Mel Karmazin?
Those who read through the suit will see a picture of a process that was expedited and fast. They will see that there was limited time to request and review documents, limited time to develop interrogatories, and limited time to conduct depositions. In fact, in the settlement filing Mr. Fink, the attorney for Brockwell, actually pats himself on the back with self aggrandizing compliments as to his expertise and the speed at which he was able to handle this matter. Does this seem right? After all, we are dealing with a “concerned” shareholder who felt that there was additional information that needed to be considered. Then again, maybe I am just expecting something unrealistic. It seems that 24 days to decide to file a suit file the suit, and an expedited process to review everything is perfectly acceptable. Perhaps it is just me.
Eight paragraphs of information in exchange for legal fees and indemnifications for the company. Will the court even accept this settlement? I find this whole situation to be a sad commentary on business in America as well as the legal system. What exactly was the goal here? Does the proposed settlement at least equate in value to the costs of attorney fees? Readers will need to come to their own conclusion. What is being presented here is a very broad brushed picture of this process. Those that want more detail can find it with relative ease.
Position - Long Sirius, Long XM