FriendFinder Networks Inc., the owner of Penthouse magazine and thousands of adult-oriented websites, won court approval of its reorganization plan after making changes that satisfied regulators’ objections.
U.S. Bankruptcy Judge Christopher Sontchi in Wilmington, Delaware, accepted the restructuring plan yesterday after FriendFinder eliminated provisions that had caused him to withhold his approval earlier in the day. The releases covered liability from lawsuits and other types of claims.
“We have resolved the objections of the parties,” Dennis A. Meloro, an attorney for FriendFinder, told the judge when the hearing resumed after a break.
Before the modifications were made, the judge had agreed with the U.S. Securities and Exchange Commission that agreements being sought from shareholders to release company officers from liability weren’t consensual and went “too far.”
“I am prepared to, as changed to reflect the court’s earlier ruling, confirm the plan,” Sontchi said.
“We are satisfied with the changes,” said David L. Buchbinder, a lawyer representing the U.S. Trustee, the Justice Department’s bankruptcy watchdog. He said that Susan Sherrill-Beard, a lawyer for the SEC who led the opposition to the releases, was “fine with the changes as well.”
The Boca Raton, Florida-based operator of websites including adultfriendfinder.com sought bankruptcy protection Sept. 17, listing assets of $465.3 million and debt of $661.9 million.
The restructuring will cut about $300 million in debt and reduce annual interest expenses by about $50 million, according to a statement. The reorganized company’s estimated enterprise value was $257.8 million to $285.4 million as of Aug. 31, according to an outline of the plan. The company received unanimous support for the plan from the creditors that were entitled to vote on it.
Under the reorganization plan, second-lien noteholders, who are owed about $330.8 million, will exchange debt for all of reorganized FriendFinder’s equity. First-lien noteholders, owed about $234.3 million, will get cash and new notes. Current shareholders will receive nothing, according to court documents.
The judge earlier ruled that FriendFinder’s method of requiring shareholders to elect to opt out of the releases they would be giving to officers without any consideration rendered the releases non-consensual.
Sherrill-Beard faulted the election notice sent to shareholders as confusing to the everyday investor and said FriendFinder’s request was “taking the law further than it has ever been taken in a Chapter 11 case.”
The judge agreed with the SEC finding that the proposed releases from shareholders to officers went “further than any other case that I’ve seen so far” and that “it does go too far.”
Because there was no consideration being provided “from the release-ees to the release-ors, these are simply gifts to the officers,” the judge said.
Some of the shareholders sued FriendFinder and its officers in federal court in West Palm Beach, Florida, in November 2011, accusing them of misconduct related to the company’s initial public offering. Shareholders weren’t allowed to vote on the plan because they weren’t going to receive any distribution and were deemed to reject the reorganization proposal.
FriendFinder has more than 8,000 websites operating in more than 200 countries with more than 220 million members and more than 750,000 paying subscribers, according to court papers. The websites offer social-networking and adult dating, video-sharing and live interactive video entertainment. In addition to publishing Penthouse magazine, the company licenses the brand for content such as pay-per-view programming.
The lead case is In re PMGI Holdings Inc., 13-bk-12404, U.S. Bankruptcy Court, District of Delaware (Wilmington).