As was reported here on SiriusBuzz, Sirius XM (NASDAQ:SIRI) has scored a victory in the lawsuit filed by Howard Stern in the form of a summary judgment with prejudice issued by Judge Barbara Kapnick. A dismissal with prejudice does not preclude Stern from appealing the decision, and Stern has vowed to do just that. Anything that is potentially worth hundreds of millions of dollars is worth a deeper look.
While the dismissal with prejudice takes away some capability from the Stern camp, it is not the final step that some think it is. Stern will appeal, and in looking at the issues filed with the court (I am not a legal expert), Stern has some decent standing on at least some of the issues brought up in the suit.
Setting aside for a moment the discussion of whether XM subscribers should count in the event of a merger, there is evidence that Sirius XM does still owe Stern some bonuses based on the Sirius subscriber base alone. Consider the following:
- The contract called for Stern to receive bonuses if Sirius XM surpassed internal guidance of subscribers by 2 million, 4, million, 6 million, 8 million, or 10 million in any given year. Those internal estimates were as follows:
- 2005- 2,256,000
- 2006 - 3,707,000
- 2007 - 5,291,000
- 2008 - 7,192,000
- 2009 - 9,284,000
- 2010 - 12,112,000
- In January of 2006 Stern received a bonus payment. The company stated, " We have directed The Bank of New York, the transfer agent for our common stock, to issue on January 9, 2006 an aggregate of 34,375,000 shares of common stock for the benefit of Howard Stern and Don Buchwald, his agent. Pursuant to our October 2004 agreement with Stern, we agreed to deliver these shares in December 2010, or earlier if as of the end of any fiscal year we exceeded agreed upon subscriber targets. Our December 31, 2005 subscriber total exceeded the subscriber target we agreed upon with Stern in October 2004." This bonus was established if Stern beat the 2005 estimate by 1 million subscribers. Sirius finished 2005 with 3,316,560. This entitled Stern to an accelerated payment which the company did deliver.
- In 2006 Sirius finished the year with 6,024,555 subscribers. That total was greater than 3,707,000 by more than 2 million and entitled Stern to the bonus available at 2 million, but not 4 million. Stern was paid his bonus in January of 2007. The company stated, "Based on our subscriber count on December 31, 2006, and pursuant to our October 2004 agreement with Howard Stern, on January 9, 2007 we delivered to affiliates of Stern 22,058,824 shares of common stock, valued at approximately $82.9 million. The number of shares delivered was determined based upon the average closing price of our common stock on the twenty trading days immediately preceding the delivery date. This stock-based payment resulted from our December 31, 2006 subscriber count exceeding a specified target by more than two million subscribers. This target was agreed upon in October 2004 based upon the consensus estimate of securities analysts at that time of approximately 3.5 million Sirius subscribers at December 31, 2006. We ended 2006 with approximately 6,024,000 subscribers. Our agreement with Stern provides for additional stock-based performance bonuses if we exceed an escalating set of specified subscriber targets by increasing amounts substantially greater than two million."
- In 2007 Sirius finished the year with 8,321,755 subscribers. Once again, by the terms of the deal, Stern was entitled to a bonus for exceeding the internal estimate by more than 2 million but would not qualify for the 4 million level bonus. Stern was paid his bonus. Stern received no bonus in January of 2008. According to court documents Stern and Buchwald did not press the issue because Sirius XM was in financial distress. In my opinion Stern did not necessarily forgo the bonus, as it was company discretion to pay in "on or before December 31, 2010".
- In 2008 Sirius XM finished the year with 19,003,846 subscriber including subscribers from XM. If we break out the XM subscribers and look only at Sirius, the company had a total of 9,153,105 subscribers. This number falls short of the 2 million over internal estimates that would constitute a bonus by some 39,000 subscribers. However, if you consider the number of XM subscribers that were participating in the Stern programming due to the "Best Of" package, Stern would again qualify for a bonus at the 2 million level for 2008
- In 2009 Sirius XM finished the year with a combined 18,772,758 subscribers. Of that number 9,023,658 were attributable to Sirius. This number did not meet internal guidance and thus no bonus would be due if we are considering Sirius only subscriber. Even with the addition of "Best Of" subscribers the number would likely fall short. In my opinion, looking only at the Sirius side of the house, Stern did not qualify for bonuses in 2009 or 2010.
As you can see, Stern was only paid two bonuses. One appears to be for beating subscriber estimates in 2005, and the other within the established term of the contract (2006 to 2010) for the 2006 subscriber total. It can be argued that Stern is still due (by contract) a bonus for the year 2007 based solely on Sirius numbers, and for 2008 if the XM subscribers getting the "Best-Of Sirius" package were considered. The court filing from the Stern side did not appear to clearly define the terms of the contract, and the way some dates were written could make it appear that Stern got all he was entitled to when a deeper look shows that, at a minimum, the 2007 bonus was not paid.
These factors could give the Stern side some much needed ammunition in their appeal. Setting aside the bigger picture of the XM subscriber base, I am challenged to find how Sirius XM refused to pay Stern a bonus for 2007 performance. At a minimum the documents filed, while admittedly confusing, demonstrate that Stern is due at least something. Based on these factors alone Stern should and will appeal. However, because of the type of judgement already received (summary with prejudice), the implications may no longer be hundreds of millions, but somewhere under $100 million.
In review of all of this documentation, the appeal may happen, but there is room for a settlement between the parties. Stay tuned.