Last year Michael Shenk filed a shareholder suit against Sirius XM in which he called for the ouster of Mel Karmazin and named several members of the Board of Directors as well as Liberty Media's John Malone as being "Unjustly Enriched" with regard to the Liberty Media rescue of Sirius XM.
Early on the Unjust Enrichment was dropped against all parties except Malone. Since that day, there has existed a distinct possibility that Liberty had their hands somewhat tied with regard to future action with their stake in the satellite radio provider. Essentially Malone had a lawsuit hanging over his head that accused him of being unjustly enriched and could possibly unwind the deal, as well as unwind the merger between Sirius and XM.
On January 31, 2012, Malone was removed from the suit due to a lack of evidence. During the legal process Sirius XM was requested to provide certain documents. What the company did was essentially a "document dump" of 25,000,000 pages, not only providing what was asked for, but millions and millions of pages more. If there were only 90 days to review the documents, it would require scanning an incredible 277,000 pages per day! Within that document pile the plaintiff did not find enough evidence to keep Malone in the lawsuit.
That does not mean the lawsuit is over, it simply means that a component of it is done. However, for Malone and Liberty that component was huge! One must ask how prudent it would be to make a move on Sirius XM when this legality was still hanging out there. With that overhang now removed, it could ease some of the risk associated with Liberty making a move on Sirius XM.
Liberty can currently make an offer for all of Sirius XM at any time. The agreement between Sirius XM and Liberty stipulated that Malone and Liberty could not go over 49.9% ownership for a specified amount of time. Right now, Malone would have to make a tender offer for all shares of the company if he wanted to surpass 49.9% of the company. The offer would have to be high enough to convince enough shareholders to participate and take him over the top, but low enough to satisfy his own valuation of the company.
Most analysts feel that this situation is not likely. What seems more likely is that Liberty can wait until mid-March and do whatever he wants without having to tender an offer for the entire company. By waiting until March, Liberty could garner enough shares to carry a majority position and then enact a Reverse Morris Trust if he so desired.
A Reverse Morris Trust would involve Liberty spinning off their majority stake and then merging that stake into the now smaller Sirius XM. By doing this Malone can gain some substantial tax benefits. If this seems complicated, imagine trying to do it when there is a lawsuit out there stating that you were unjustly enriched! Essentially, by being removed from the suit, Malone now has certain risks mitigated.
There were several lawsuits over the past year and in many ways the Shenk suit may seem very similar to the Blessing which reached a settlement that is now being appealed. Many get the two lawsuits confused. The easiest way to differentiate between the two is to remember that the Blessing (which was settled, but is under appeal) was brought on behalf of consumers. The settlement was that the company would pay $13 million in legal fees and agreed not to raise prices until January of 2012. That suit has about a dozen appeals ongoing.
One mistake that was made was that the details as to how $13 million was arrived at prior to the appeal date. In doing this, those that were appealing were unable to review the terms of the settlement prior to filing their appeal. Essentially they had to appeal that aspect of the case blindly. There is case law that demonstrates why this was a mistake, and that issue is among several points those that are appealing have made. At one point some assumed that plaintiffs in the Blessing matter were getting scared and dropping out of the lawsuit. What was really happening was that those that had held shares of Sirius XM dropped out in order to make the Blessing case a pure consumer case. As you can see, there have been legal maneuverings on both sides.
The Shenk case brings up many of the same issues, but instead of being brought on behalf of consumers, was brought on behalf of shareholders. Shenk has been accused of being a member of the NAB, he is not. He has been accused of being a member of the Pennsylvania Association of Broadcasters, he is not. He has been accused of being tied to a lobby group. Again, this is not true. Shenk was a simple shareholder. He may be familiar to some who have seen the movie Stock Shock. He appeared in it, and at one time was a huge fan of Sirius XM. Even though Malone is not named as unjustly enriched, the Shenk case continues.
At one point Sirius XM argued that the Shenk lawsuit should be dismissed because the issues in it were already settled in the Blessing case (consumer). That argument failed because it was argued that shareholder rights could not be stripped in a consumer lawsuit.
In summary, the legal actions are still happening, but Malone is no longer personally named as a defendant in either case. This could free up Malone and Liberty to move forward with their next plans regarding Sirius XM at any time. There is a distinct possibility that Liberty does nothing but, not many believe this is their ultimate strategy.