(CN) – Clear Channel shareholders brought a derivative class action over the $1 billion that the broadcast giant loaned to iHeartMedia, saying the aid was given at “far-below-market interest rates” despite Clear Channel’s own $20 billion debts.
Filed on Dec. 29 in Delaware Chancery Court, the complaint from the Norfolk County Retirement System notes that iHeartMedia owns approximately 90 percent of Clear Channel’s stock after taking the company public in 2005.
For years, the complaint alleges, iHeart’s financial troubles have “bedeviled” Clear Channel.
“Rumors of impending bankruptcy made it increasingly difficult, if not impossible, for iHeart to issue debt in the public market or through arms-length negotiations,” the complaint says.
“As a result, iHeart depended more heavily than ever upon the cash management sweep arrangement and the Revolving Note with Clear Channel, which provided iHeart desperately needed cash flow,” the retirement system continues. “Indeed, the Revolving Note became iHeart’s principal source of liquidity.”
This is a “perilous situation” for Clear Channel, according to the complaint, because iHeart faces a debt crisis from a 2006 buyout organized by defendants Bain Capital Partners and Thomas H. Lee Partners.
“If iHeart were to become insolvent or file for bankruptcy protection, then Clear Channel would become just another unsecured creditor of iHeart unlikely to ever be repaid in full, if at all,” the complaint says.
On Nov. 29, 2017, Clear Channel announced that it amended a revolving note of what iHeart owed to Clear Channel.
Clear Channel said it would extend the notes maturity date from Dec. 15, 2017, to May 15, 2019. It also said it would lend money to iHeart under the revolving note at rates fat below the market interest rates.
The class action says this terms are “commercially unreasonably” and “commercially unconscionable.”
“Plaintiff brings this action to remedy the harm incurred by Clear Channel as a result of the Clear Channel Board and the Control Group Defendants’ faithless conduct in connection with the Third Amendment, which causes Clear Channel to lend to iHeart on patently unfair terms,” the complaint states.
The suit also names Clear Channel board members Douglas Jacobs, Blair E. Hendrix, Daniel G. Jones, Vincente Piedrahita, Olivia Sabine, Dale W. Tremblay, and Clear Channel Chairman and Chief Executive Officer Robert W. Pittman.
IHeart, Bain Capital, and Thomas H. Lee Partners did not return Courthouse News’s request for comment in a timely manner.
The class action suit seeks declaration that defendants breached their fiduciary duties to the company and to change to rate of interest to a rate that’s reasonable. The plaintiff also seeks damages that the court deems reasonable.