In yet another suit filed against Sirius XM, allegations surrounding the merger and the company’s pricing plans seems to be the center of attention. The latest is a lawsuit brought by Michael Shenk against the Board of Directors and Sirius XM Satellite Radio as a nominal defendant.
The first thing to understand here is that Shenk is suing on behalf of himself, the company, and the shareholders. In theory this means that Sirius XM stands to benefit from this case if it were to be decided in favor of the Plaintiff (Shenk). The reality is that Sirius XM most likely does not want to be a participant in the suit, as it attacks the company’s Board of Directors as well as their CEO,Mel Karmazin, and calls into question the actions by the management of the company. Lawsuits such as this can have exhaustive periods of discovery, depositions, etc. All of this takes manpower, time, and legal efforts to defend. Another key element is that most companies agree to defend their Board of Directors in legal matters pertaining to their actions on behalf of the company. Thus in theory, by being named as a nominal defendant, the company is working against itself. The reality is that Shenk and his attorneys claim to be acting on behalf of the company when the company may not want at all to be represented by them.
The second item of note is not really part of the suit, but part of the Sirius XM 3 year price cap, set to expire at the end of July, and right now being considered by the FCC. Sirius XM is seeking to have the price cap restriction removed allowing them to price their service however they see fit. It has already been reported that the company was seeking to raise prices in August of this year, but agreed in a proposed settlement in another suit to stave off any increases until after December 31, 2011. With so much public discussion about pricing, and law these suits, the FCC will likely be well aware of the debate, and this could potentially impact their decision. Should the FCC decide to continue the price cap, the company could well find themselves with yet another lawsuit…this time as a plaintiff vs. the FCC.
The Shenk suit deals with matters from February 19, 2007 to the present time. Interestingly the suit, in its introduction and overview (point 2), incorrectly states that Sirius was the surviving entity in the merger between Sirius and XM. The real facts are that XM was the surviving entity.In the filing it was stated, “ Under the proposed transaction and pursuant to an Agreement and Plan of Merger dated February 19, 2007, a wholly owned subsidiary of Sirius, Vernon Merger Corporation, will be merged with and into XM, with XM being the surviving entity of this subsidiary merger. The surviving entity will be controlled by a new Board of Directors, selected by both Sirius and XM, and its equity ownership will be represented equally by former shareholders of XM and Sirius prior to the merger. Getting this fact wrong right off the bat calls into question the level of reseach and accuracy of Shenk and his attorneys.
The suit does bring some salient points though. It speaks to Karmazin testifying that the company before the House Judiciary committee and the FCC about price of satellite radio being lower, not higher. Here is where we get into a dance of words. Sirius XM was very specific in their language when testifying. They typically indicated that they would not raise the price of the base subscription. Shenk argues that the “family plan” increase in 2009 was a violation. The reality is that the company never promised not to raise family plan prices, nor did they address a fee for Internet streaming. While a duel of words is oft the crux of disputes, I think that the record will show that technically Sirius XM was within their rights.
The suit charges that Karmazin, acting on his own, and without board consent, entered into merger negotiations with XM. The question here is whether Karmazin, as CEO of the company, can have discussion with other companies. I would contend that Karmazin was well within his rights to “discuss” a possible merger, and that will likely be the defense. When those discussions got to a certain point, Karmazin, as his duty dictated, brought the matter to the Board of Directors. Shenk claims that Karmazin was “negotiating” with XM. This stance is fools play. Of course Karmazin can discuss and even negotiate, to a certain point, without having to convene a Board meeting.
Another aspect of this case centers on the 1997 mandate of the development of an “interoperable receiver” capable of receiving both Sirius and XM. Again, we get into the semantics of language. To the letter the FCC mandate dictated that Sirius and XM “develop” an interoperable receiver. The companies did just that. They submitted their interoperable receiver to the FCC and the agency accepted the submission without comment. While the intent of the FCC may have been to see such a receiver get to market, the language used in the mandate allowed the company to never market such a receiver (today they fo have the Merge on the market). This case goes on to deal with the process of the merger, and the approval of same by shareholders. Most language throughout this section of the suit is subjective and full of opinion rather than fact.
This suit also attacks the royalty fee, but fails to point out that the royalty fee was known by the FCC and DOJ prior to these agencies approving the merger. Also attacked is the Liberty Media bail-out of Sirius XM. These allegations have been debated time and time again, and in previous suits. This latest is simply a rehash of various actions we have seen in the last 4 years.
It would appear that much of the basis of this suit can be found in a Fialkov Summons and Compliant filed in the New York Supreme Court last year. Sirius XM has likely been dealing with and already has answers for many of these allegations for over a year now. The Fialkov matter was stayed pending a decision on the Blessing case.
The bottom line is that, in my opinion, this suit will cost money to defend, and in the end will either be dismissed or settled for a small sum. The Board of Directors will remain, as will Mel Karmazin. If I had to describe this suit in one word it would be “LAUGHABLE”.
Position – Long Sirius XM Radio