Malone Got the Gravy, Public Shareholders|Got Liberty Media’s Crumbs, Class Claims

WILMINGTON, Del. (CN) - Liberty Media let directors trade in their shares for a more valuable consideration in the company after it merged with DirectTV, shareholders say in a class action in Chancery Court. Liberty Media Chairman John Malone and his wife transferred their shares for more than $160 million of the new "super-voting stock" that carries 15 votes per share, according to the complaint.

Lead plaintiff Blackthorn Partners is the largest public shareholder of Liberty Media, with 110,816 of the company's 1.8 million shares. Blackthorn says it and other public shareholders represent 2.6 percent of the eligible aggregate vote.

The class represents "a diverse and disaggregated group of small stakeholders unlikely to mount a concerted opposition or, for that matter, to understand fully the complicated deal structure" that gave directors an unfair advantage, according to the complaint.

In the first phase of the Liberty Media "split-off," the company converted 90 percent of each share into a corresponding share of stock in newly formed Liberty Entertainment, which had a 57 percent interest in DirectTV Group, according to the complaint. Blackthorn says Liberty Entertainment and DTV became wholly owned subsidiaries of a new parent company called DirectTV in the second phase of the transaction.

Malone and his wife then transferred their shares in Liberty "for new DTV series B super-voting stock carrying 15 votes per share and numerous express and implied consent rights," according to the complaint.

The new stock allegedly gave the Malones $160 million in considerations not shared with public shareholders.

Blackthorn says public shareholders received new DTV series A common stock, which carry only one vote per share and lack the valuable consent rights.

"The disparate allocation of consideration within Series B class occurred with no procedural safeguards whatsoever, leaving the LMDIB [public shareholders] without voice, powerless to vote down the transaction and with no recourse other than to seek redress from this court," according to the complaint.

By contrast, Blackthorn says, Malone had obtained effective control over DTV and was freed from a premium cap.

"Malone has been paid handsomely to augment his control over valuable assets and to position himself to capitalize on a future transaction, free from a premium cap and any concern over other, super-voting shareholders," according to the complaint.

"None of this valuable consideration, negotiated by Malone for Malone with the passive (if not active) assistance of directors whose future and fortunes are inextricably intertwined with Malone's, was shared with the LMDIB public shareholders who had no one representing their interests at the deal table," according to the complaint. (Parentheses and italics in complaint.)

Blackthorn says other Liberty Media directors were allowed to convert their stock to avoid certain tax consequences. One director, Robert Bennett, took in more than $4 million worth of shares, and all of the other Liberty Media directors received "accelerated vesting of options through which they collectively realized over $38 million."

Liberty Media's financial adviser, Goldman Sachs & Co., did not advise on whether the transaction was fair, according to the complaint.

"Goldman Sachs' objectivity was compromised by the fact that the flat fee paid for its work was conditioned on the transaction closing," the complaint states. "Above all, Goldman Sachs explicitly did not consider or offer an opinion on the fairness of the consideration ultimately received [by all of the shareholders]."

The class seeks compensatory and recessionary damages, disgorgement, and equitable redistribution, alleging breach of fiduciary duty and self-dealing. It is represented by Montgomery Donaldson with Montgomery, McCracken, Walker & Rhoads.

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