Sirius XM: Meeting Results and Litigation

Sirius XM, the satellite radio company, held its shareholder meeting one week before Christmas.

The stockholders approved all four of the pending measures: re-electing the board of directors, amending the charter to increase the number of authorized shares, authorizing a reverse stock split, and ratifying the appointment of KPMG as the independent auditor.

Shareholder Michael Hartleib had sought to have this meeting postponed. Obviously, he didn't succeed in that. But his lawsuit, in the central federal district of California, continues. How much longer this case will continue may turn on whether the court reads the complaint as an effort to sue Sirius (the pre-merger entity) on behalf of itself.

For those of you interested in looking it up, the caption of the lawsuit is: Hartleib v. Sirius Satellite Radio Inc.et al. The docket number is 08-cv-00790.

On November 17, defendants in that lawsuit filed a motion for its dismissal. I gave the background of that, the last time I wrote on Sirius in this blog. I'll try not to repeat myself too much. But the next two paragraphs are by way of review.

The complaint focuses on the merger as a breach of fiduciary obligation. "The Board and officers of Sirius ... grossly mismanaged its operations by engaging in reckless financing of the merger [ignoring] warning signs that the merger ... would severely damage Sirius Satellite Radio Inc." Plaintiff says that shares of Sirius traded at about $2 a share before the merger, and have since (as of late October) fallen to 29 cents per share.

In the motion to dismiss, defendants say that such charges are "without particularized facts about the individual directors' supposed conflicts. Likewise, Hartleib carelessly accuses the Board of misconduct ... without identifying specific wrongdoing by any particular member."

In a memorandum opposing dismissal, Hartleib's attorneys (led by Bernard C. Jasper of Irvine, Calif.) explain their view that Hartleib is in a position to sue both derivatively (as a representative shareholder) and directly (as someone who suffered harm distinct from that of other shareholders). A derivative lawsuit involves the claim that the object of the fraud is the corporation itself, which for various reasons (here, the capture of the board by the alleged fraudsters) has declined to or cannot sue on its own behalf.

"Hartleib has standing to sue derivatively because Sirius could sue directly," reads one of the subheads.

The complaint alleges that a RICO enterprise was conceived and hatched by XM, Interoperable Technologies, and various individual defendants. The complaint did not name Sirius itself as a participant in the alleged RICO, accordingly he is not in the untenable positionof eeking to sue Sirius (with regard to those particular accusations of the complaint) on behalf of itself.

The caption of the case really isn't much of a help in making this particular point, because as noted above Sirius is the first named defendant.

Anyway, the defendants replied in a brief dated Dec. 8, re-asserting the case as they see it for dismissal. Short summary of the reply memo as respects the derivatives claim, "yes, you did too." Defendants contend that the RICO claims of the complaint in its two incarnations (it was amended once in response to an earlier motion to dismiss) do too in their sweeping language implicate Sirius as part of the Racketeering Influenced Corrupt Organization.

What do I think? I think that consolidation was inevitable. There's only room for one major satellite-radio provider. So I think efforts to characterize this consolidation as racketeering are dubious.

But, hey, I'm watching and learning with the rest of you as this unfolds.

More on Sirius XM

Sirius has scheduled its annual shareholders' meeting for December 18, and has filed an agenda with four items: the re-election of the board of directors; approval of an amendment in the certificate of incorporation to increase the number of authorized shares of stock; approval of a reverse stock split; and ratification of the appointment of KPMG as accountant.

This is the meeting that Hartleib and allies hope to have postponed.

I've done some quick research on the lawsuit mentioned in Mr. Hartleib's recent press release. It appears he actually filed it months ago, in July, when the precursor company defendant was still known as Sirius Satellite Radio Inc.

The original complaint charged, (and I emphasize, I'm only conveying an accusation, one made as a matter of public record, and I don't intend thereby to give it any cerdence): "Upon information and belief, Sirius and XM did develop an interoperable radio, but based on claims that it could not be marketed commercially, never made the radios available to the satellite radio using public."

The plan to merge the two companies developed, the complaint says, as a way of avoiding the competition that interoperability would have made necessary.

At the end of that month, the merger closed.

In September the defendant moved to dismiss the case, arguing as follows: "Basically, Plaintiff, a private citizen, seeks through this action to substitute his own judgment for that of the Federal Communications Commission and the Antitrust Division of the United States Department of Justice, both of which conducted comprehensive reviews of the proposed merger and its competitive effects over many months -- and approved it."

The court granted the motion to dismiss, but in doing so gave the plaintiff leave to amend -- i.e. until October 27 to file an amended complaint that might cure the defects of the first effort.

So the plaintiff filed his amended complaint on time. This one focuses on the merger as a breach of fiduciary obligation. "The Board and officers of Sirius ... grossly mismanaged its operations by engaging in reckless financing of the merger [ignoring] warning signs that the merger ... would severely damage Sirius Satellite Radio Inc." The complaint notes that shares of Sirius traded at about $2 a share before the merger, and have since (as of late October) fallen to 29 cents per share.

The defendant has again, as of yesterday, Nov. 17. moved to dismiss. In its motion, it says thst the sort of charge I just quoted is a conclusory allegation "without particularized facts about the individual directors' supposed conflicts. Likewise, hartleib carelessly accuses the Board of misconduct ... without identifying specific wrongdoing by any particular member."

That's where matters stand as to the lawsuit. My guess (which is only a guiess) is that Hartleib himself is concerned that things aren't going his way, that the defendants may win this one as well. If so, then it makes sense that Hartleib would go public with a press release just as the defense is making its second motion to dismiss -- appealing over the heads of the judge to the public and the shareholders, so to speak.

Sirius XM

Michael Hartleib believes that the management of Sirius XM has been unjustly enriching itself at the expense of its shareholders.

This raises the question: "Who is Michael Hartleib?" Other than the fact that he's the subject in the lead sentence above, I can't find that he "is" anybody whose name most of us should recognize.

Still, he has taken two actions worthy of note in this place. He has created a group called SaveSirius with the idea of waging a proxy fight, and he has filed a derivatives lawsuit in a federal court in California.

SaveSirius has sent formal letters of demand to the SIRIUS XM directors. It demands, specifically:

* postponement of the vote that is seeking shareholder approval to further dilute the common stock by increasing the number of shares in the fully diluted float from 4.5 billion to 8 billion.

* postponement of the proposed reverse split, ranging from 1 for 10 to 1 for 50.

* immediate suspension of all stock compensation plans and other bonuses.