MANHATTAN (CN) – Shareholders challenged Warner Music Group’s $3.3 billion sale to Access Industries for $8.25 a share, a mere 4.4 percent premium over the pre-announcement share price, a sale they say will give Warner CEO Edgar Bronfman Jr. an unfair $13.6 million payout. Access is owned by Russian oil tycoon Len Blavatnik.
Warner (WMG) and Access announced the sale on May 6. Warner closed at $7.90 on May 5.
(Some analysts said the price is not a bad one, as the recording industry is being ravaged by piracy, cheap downloads and the unpredictability of prices wrought by new technologies.)
Access will buy Warner through Airplanes Merger Sub, a subsidiary of Airplanes Music, which is a subsidiary of Access. WMG will continue as the surviving corporation, a wholly owned subsidiary of Access.
Bronfman, an heir to the Seagram’s fortune and former vice president of the Vivendi publishing empire, is to continue as CEO of WMG, which handles marketing, distribution and licensing of music produced by approximately 65,000 songwriters and composers, including film soundtracks. Its record labels include Asylum, Atlantic, Bad Boy, East West, Elektra, Nonesuch, Reprise, Rhino, Roadrunner, and Warner Bros.
The transaction is expected to be completed in the third calendar quarter this year.
“Following the closing of the transaction, WMG will become a privately held company and its stock will no longer be traded on the New York Stock Exchange. The company will retain the Warner Music Group name and will continue to operate out of its current facilities,” according to the complaint.
The class claims that Bronfman and other major shareholders, who hold approximately 56 percent of WMG’s outstanding shares, have agreed to vote for the merger. Ten other directors of WMG are named as defendants.
“Because of this stockholder agreement, minority shareholders, such as plaintiffs, will have no meaningful way to stop the proposed transaction through a shareholder vote,” the class claims.
The complaint states: “According to news reports, [Access Industries Chairman Len] Blavatnik, a former board member of WMG from 2004-2008, is a personal friend of Bronfman. Mr. Blavatnik is expected to keep the company’s management intact after the proposed transaction is completed.
“According to news reports, individual defendants agreed to enter into the proposed transaction with Mr. Blavatnik while other bidders were considering a higher offer. Specifically, Tom and Alec Gores, billionaires who run the private equity firms Platinum Equity and the Gores Group, were considering bidding between $8.35 and $8.50 a share when the company entered into the proposed transaction. However, as set forth below, because the merger agreement requires the company to pay a substantial termination fee of $56 million in the event that the company accepts a superior offer from another acquirer, shareholders will not benefit from the Gores’ higher offer. To top Mr. Blavatnik’s offer and cover the termination fee, a potential acquirer would need to pay at least $8.61 per share for WMG.”
The class claims that “the merger agreement contains a number of deal protection devices that will impede a potential acquirer from making a higher offer.”
They say the agreement prohibits the company from soliciting alternative bids and from providing non-public information to other bidders.
The class claims the agreement allows the company to respond to other bids only when the bidder is interested in buying at least 50 percent of the company’s assets or stock.
“This section particularly limits the board’s ability to maximize shareholder value because, according to news reports, other bidders have expressed interest in purchasing parts of the company,” according to the complaint.
“On January 19, 2011, only weeks after beginning the auction to sell WMG, defendants changed the terms of 2,750,000 restricted stock [sic] granted to Mr. Bronfman in 2008 …. Prior to January 19, 2011, the restricted stock would vest if certain time and performance criteria were met.”
The class claims the defendants substantially lowered the performance vesting criteria to allow Bronfman to gain control of the restricted stock.
They add: “Bronfman’s employment contract provides that where there is a change in control of the company, all restricted stock in which the performance vesting criteria are met will vest and all restricted stock where the performance-based criteria has not been met will be canceled.
“Because the company changed the performance vesting criteria in the midst of an auction, Bronfman will receive $13.6 million as a result of the proposed transaction. Had the performance vesting criteria remained the same, Bronfman’s restricted stock would be worthless.”
The class claims that “in facilitating the acquisition of WMG by Access for grossly inadequate consideration and through a flawed process, each of the defendants breached and/or aided the other defendants’ breaches of their fiduciary duties.”
They seek compensatory damages for breach of fiduciary duty and want the defendants enjoined from completing the merger.
The class is represented by David Brower with Brower Piven.