Court rules Loral's $300 million private placement was stealth change-of-control event

By Devika Patel

Knoxville, Tenn., Sept. 23 - Loral Space and Communications Inc. filed an 8-K with the Securities and Exchange Commission Tuesday that details the Delaware Chancery Court's decision regarding the company's planned $300 million private placement of preferred stock.

In essence, the court ruled that MHR Fund Management LLC planned this financing in order to take control of the company, using the placement as a cover for a stealth change-of-control event.

The plaintiffs were certain stockholders of Loral who alleged, among other things, that the sale was not fair to the company and resulted from breach of fiduciary duties by Loral's directors.

According to the judge's ruling, the case centers around the fact that the company emerged from bankruptcy with help from MHR, "whose business model involved taking control of distressed companies and positioning itself to reap the benefits of control for itself and its investors." MHR "used its influence at Loral to place one of its advisors, defendant Michael B. Targoff, as Loral's CEO."

In his decision, the judge wrote, "Although the terms of the 'MHR Financing' capped MHR's common stock voting power at 39.99%, the class voting rights it acquired gave MHR a unilateral veto over any strategic initiative Loral undertook."

As previously reported, the court ruled in favor of the stockholders and held that MHR's investment in Loral did not meet the entire fairness standard under Delaware law and ordered that MHR's preferreds be converted into 9,505,673 non-voting common shares.

The court valued Loral's shares at $30.85 each on the date of the investment and also deducted a $6.75 million placement fee from the $300 million purchase price that was paid by the company to MHR, which it found was not appropriate, thus arriving at the conversion ratio.

The court also dismissed the claims against company directors Dean Olmstead and John P. Stenbit and stated that, because the ordered remedy is one that can be resolved between MHR and Loral, it was not necessary to assign liability to the individual director defendants for breach of fiduciary duty.

As a result of the court's decision, MHR will own 56% of Loral's total equity and 35.4% of its voting power, the same level of voting power it had prior to the transaction.

Loral is a satellite communications company based in New York.

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