Harbinger Group is exchanging 120 million shares of its common stock for 27.8 million shares of pet-food maker Spectrum. Harbinger Group is majority-owned by hedge-fund firm Harbinger Capital Partners LLC, which also has a majority interest in Spectrum. The exchange is the result of a “flawed process” and is “financially unfair” to Harbinger Group shareholders, investor Alan R. Kahn said in the complaint.
If the exchange is consummated, Harbinger Capital will increase its majority share of Harbinger Group to 93 percent but will have “suffered no loss of control over Spectrum,” lawyers for Kahn said in the complaint filed today on behalf of the company in Delaware Chancery Court.
“Thus HCP has diluted the minority shares; acquired a virtually 100 percent interest in HGI; and at the same time managed to main control over the very consideration that it has ‘paid’ as consideration of the deal,” lawyers for Kahn said. “Such blatant self-dealing is unconscionable.”
Jeff Zelkowitz, an outside spokesman for Harbinger Group, said company officials declined to comment on the lawsuit.
Harbinger Capital’s billionaire founder Philip A. Falcone, who was also named in the complaint, has been selling stock and bonds through Harbinger Group to finance controlling investments. Harbinger Group, a onetime oil driller, raised $350 million in November by selling five-year debt in its first bond offering. The funds will be held in an escrow account until Harbinger Group completes the Spectrum exchange, the company said last month.
Avoid Further Injury
Kahn is asking a judge to force Harbinger Group to rescind the terms of the exchange to avoid further injury to the company, according to the complaint.
“The SB exchange has been approved by the board and by HCP as a majority shareholder by written consent, without any input from HGI public shareholders,” lawyers for Kahn said.
Once complete, the deal allows Falcone to become “the overwhelming majority owner of a publicly traded company where he answers to no one,” Kahn’s lawyers said in the complaint.
“Indeed, he will no longer need to appease dissatisfied investors that have fled his fund in the wake of his personal cash crunch,” Kahn said in the complaint.
In addition to rescinding the exchange, Kahn is seeking unspecified damages.
The case is Kahn v. Philip A. Falcone, CA6088, Delaware Chancery Court (Wilmington).
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