Ergen, who privately bought $1 billion in LightSquared debt, has a conflict of interest, and Dish’s $2.22 billion bid for LightSquared’s wireless spectrum should be overseen by an independent committee, lawyers for the shareholders argued at a hearing today in state court in Las Vegas.
“The board has completely abdicated its fiduciary duties to Ergen and his lawyers,” Mark Lebovitch, an attorney for the shareholders, said at the hearing. “The plaintiff is fighting to reempower the board through the independent committee.”
The Jacksonville Police and Fire Pension Fund said in a complaint brought on behalf of the satellite-television provider against the board of directors that Ergen’s private purchase of LightSquared’s debt conflicts with Dish’s strategic interests in the company’s assets, and that a “corporate governance breakdown” at the company had ensued.
The pension fund said Dish had created a two-person special committee to protect it from a “blatant conflict of interest” between the company, which seeks to buy spectrum as part of its business strategy, and Ergen, who “secretly made himself LightSquared’s largest creditor” by buying its debt from around the time of its bankruptcy filing in May 2012.
Ergen, who should have let the special committee protect the board and the company’s shareholders from the conflict of interest, instead “clashed with and disbanded” the committee, leading to the resignation of one of its two members, the pension fund said.
The shareholders seek a court order preventing Ergen and directors under his control from interfering in the LightSquared bid as well as disgorgement of any profit Ergen might make on his investment in LightSquared debt.
The shareholders’ request “is based on nothing more than sheer conjecture,” Dish’s board said in a Nov. 20 filing. “Plaintiff has provided no evidence that the LightSquared transaction is not fair to Dish or its stockholders.”
Stephen Peek, a lawyer for the Dish special litigation committee, told the judge today that the shareholders were focusing on the process only and not on the price Dish has offered for LightSquared, which he said was fair.
‘Future of Dish’
“Buying spectrum is important to the future of Dish,” Peek said. “The purchase price of the stalking-horse bid, $2.22 billion, is fair to Dish.”
LightSquared, based in Reston, Virginia, filed for bankruptcy in May 2012, listing assets of $4.48 billion and debt of $2.29 billion. U.S. regulators blocked the service after makers and users of GPS devices, including the U.S. military and commercial airlines, said LightSquared’s signals would confound navigation equipment.
U.S. Bankruptcy Judge Shelley Chapman in Manhattan last month dismissed claims by Philip A. Falcone’s Harbinger Capital Partners LLC, LightSquared’s owner, accusing Ergen and Dish of fraudulently trying to take control of LightSquared by secretly buying the company’s debt.
LightSquared filed a new complaint Nov. 15 in bankruptcy court alleging Ergen violated a credit agreement provision barring the company’s direct competitors from owning its debt by his purchases through SP Special Opportunities LLC.
Paul Basta, a lawyer representing an independent committee at LightSquared that is evaluating the auction process, gave an update today at a hearing before Chapman. He told her that today is the deadline for the company to receive competing bids.
Ergen first made a $2 billion bid for the LightSquared assets in May through a company he controlled, according to the shareholders’ complaint. In July, Dish was included as the lead bidder, with a $2.22 billion offer, under a reorganization plan proposed by LightSquared creditors including Ergen, according to the complaint.
In their complaint, the Dish shareholders compare Ergen’s actions to Conrad Black’s undermining of Hollinger International Inc., and also seek unspecified damages from Ergen. Black’s prosecution and conviction in the U.S. for fraud followed a shareholder revolt.
Dish, a direct broadcast satellite company based in Englewood, Colorado, was founded by Ergen. He owns more than 52 percent of Dish’s stock and 88 percent of its voting power, according to the complaint.
Any profit Ergen makes from his investment in LightSquared debt would enrich him unjustly at Dish’s expense, lawyers for the fund said. Also, if Dish were independent, it would be more likely to consider cutting a deal with LightSquared and Harbinger that let Dish buy its spectrum even if it meant Ergen would “take a haircut” on his position.
The case is Jacksonville Police and Fire Pension Fund v. Ergen, A-13-686775-B, Clark County, Nevada, District Court (Las Vegas).
The bankruptcy case is In re LightSquared Inc., 12-bk-12080, U.S. Bankruptcy Court, Southern District of New York (Manhattan).