Trustee for bankrupt Kings minority owner throws wrench into sale talks

I honestly didn’t know how the Sacramento Kings sale could get any messier than it already was, but then came this story yesterday in the Sacramento Bee:

A bankruptcy trustee who controls 7 percent of the Sacramento Kings says the team’s limited partners are being denied their legal right to match a Seattle investment group’s purchase offer for the team…

[David] Flemmer, the court-appointed trustee overseeing the 7 percent share of the Kings owned by team limited partner Bob Cook, said Cook and other minority owners have “first right of refusal” to buy the club. He said that right is guaranteed in the partnership agreements governing ownership of the team.

That means the limited partners should be allowed to match the deal that the majority owners, the Maloofs, have struck with the group headed by hedge fund manager Chris Hansen.

This is all extremely confusing and gets into contract law which is not my forte, but as I understand it: The minority Kings owners have as part of their purchase agreement a right to be offered a chance to buy more shares of the team before it’s sold off to someone else. One minority owner, Bob Cook, has filed for personal bankruptcy, so the trustee representing his shares is complaining that skipping over this first-refusal bit will make his shares worth less, potentially. And so the trustee is threatening to take this all the bankruptcy court next Thursday, where he’ll demand something, though it’s not exactly clear what yet.

Really, the only thing we know for sure at this point is that involving bankruptcy court in any way is almost certainly going to create a sizable mess, as we saw with the Phoenix Coyotes‘ trip through bankruptcy a couple of years back. This whole thing seems ripe for an out-of-court settlement — it’s not like a guy who’s bankrupt is going to offer to spend $340 million to buy a majority share of the team anyway, though given that Cook is apparently trying to get Oracle CEO Larry Ellison interested in joining the Sacramento effort to keep the team, maybe he’d somehow try to act as a pass-through for Ellison’s money? Add in that the NBA gets to approve or disapprove any sale of the team, and there are all sorts of scenarios involving rocks and hard places, all of which mean that we could be a lot further from resolving the Kings situation than it looked a few days ago.

But anyway, Pearl Jam, Soundgarden, and Death Cab for Cutie want the Seattle arena built, and that’s what’s truly important, right? Because, um, Soundgarden somehow thinks it’s going to be popular enough to play arena shows again, and would like snazzier dressing rooms? Or maybe they just think that it’ll be cool to play at a half-empty Key Arena once there’s nothing else going on there.

39 comments on “Trustee for bankrupt Kings minority owner throws wrench into sale talks

  1. Dangit, I should have waited, and posted what I said in the other thread in this thread.

    The biggest points here:

    1) In order to match the offer, they’d have to MATCH the offer. But the team isn’t worth $525M in Sacramento. Every superwhale in this pod understands that — there’d be no match.

    2) So it would do no real harm if Hansen and the Maloofs got together and agreed to give the current minority owners 10 days to match. Prediction: They absolutely would not (see 1, above).

    3) I think the team of expert lawyers that were brought in to draw up this deal would have noticed this flaw. The trustee in question here is blowing smoke.

    4) During that 10 day period I propose, Hansen would just up his offer to $550M anyway, as insurance.

    This is basically a non-story. I mean, it’s a story; they have to deal with it in some way. But it’s a minor story. By calling it a non-story, I exaggerated. It’s a teensy story.

  2. If any of the junior partners offered to act as a pass-through for Larry Ellison’s (or anyone else’s) money, that would violate many laws. That’s basically impossible. The IRS would see it as a huge gift, and someone would be paying income taxes on that. That would effectively raise the price way over $700M.

    None of the existing junior partners would want to touch an arrangement like that, probably ESPECIALLY Bob Cook.

  3. A sports writer/attorney has seen the bylaws regarding the sale of minority shares within this team’s bylaws. He hasn’t posted the bylaws themselves, but he has offered some comments on them.

    He’s on twitter @McCannSportsLaw.

  4. Mike;

    It’s a matter of contract between the partners (existing partners) and, as discussed the other day on the Seattle Kingersonics thread, it is not a surprise that the Kings partnership has this provision in their agreement. Most multipartner ownership groups do precisely to avoid increasing fragmentation, and to give the partners the option (though not necessarily the ability) to control who they admit to the group.

    The only item of interest to me is that neither the Maloofs or Hansen/Ballmer (or their many and various attorneys) appear to have looked at the existing partnership agreement to determine that the “internal” offer was a necessary step. That is troubling, frankly. But not surprising considering who the vendor of shares is here…

    Still, in the end it is overwhelmingly unlikely that any of the partners will match the Hansen offer for the Maloofs shares… the interesting thing would be whether or not the partnership agreement allows the other owners to preferentially select an outsider (like Ellison, just as an example) as their new partner over the option the Maloofs have put forward. Put simply, if the Maloofs can still sell their share for the same price, they can’t claim to be harmed by having to sell to someone who might keep the team in Sacramento.

    That would be an unusual provision, IMO (most are straight “right of first refusal” on share sales). But it isn’t impossible that the Maloof’s existing partners do have say in who their new partner is.

  5. From the discussion on @McCannSportsLaw (thanks for that link, MikeM), it looks like the existing minority owners can’t front for an Ellison, say, as if they tried to re-sell shares to anyone else they’d run into the *Maloofs’* right of first refusal, at which point the Maloofs could just buy the shares right back.

    In other words, this is only a useful tactic if some current minority owner actually has $340m burning a hole in their pocket. Though I still expect that the involvement of bankruptcy court will gum things up for a while, if nothing else.

  6. Franklin Mieuli used this tactic to delay the sale of the 49ers in the mid-70’s. The Morabito sisters had a deal to sell to a group led by Wayne Valley, who had been forced out of Raiders ownership by Al Davis a couple years before. Mieuli, then the owner of the Golden State Warriors and a friend of Davis, got a year or so to try to match the Valley offer but was unable to do so (with the implication that he was just being obstructionist on the behalf of Davis). Valley had given up by this point, so the team was eventually sold to the DeBartolos instead.

  7. I still think it’s kinda funny that the trustee for Cook’s shares is the one bringing this up. His goal is to get as much money as possible for those shares.

    Well, with Hansen being willing to spend $5.25M for each one percent of the team, that brings Cook’s share to $36.75M. And because those shares are sort of a “license to do more”, they’ll probably go for more than that.

    If the trustee thinks he can get more than $36.75M for those shares by forcing this issue, I think he has it completely backwards. Those shares won’t be worth $36.75M if the team stays in Sac. They’d be worth less than $25M, I’d bet.

    Mission: Screwed up.

  8. John, I guess the wording on the existing partnership bylaws is pretty weird. It almost looks like a sort-of one-way first right of refusal. Read some of the tweets from McCann to see what I mean.

    There may not have been any circumvention at all. When they drew up the sales agreement to Hansen, I think the lawyers were fully aware of the wording here. This delay could actually be… Zero.

    I think this issue will be settled very quickly. As luck would have it, the auction for Cook’s old shares is April 19 — which is day two of the BOG’s meeting.

  9. Ooooh, so now the “Burkle Bomb” has been dropped.

    Burkle met with Stern yesterday in New York to talk about assembling their own offer.

    sacbee dot com again.

    The trouble is, the timing. That $30M becomes non-refundable on Feb 1. If they try to scuttle the deal on or after that date, you can bet the lawsuits will cost a lot more than $30M to settle.

    It’s a race to Feb 1 now. That’s next Friday. They’ll have to have a competitive offer and an arena plan as solid as Seattle’s by next Friday. Tell me again how that happens.

  10. Is there a way that Hansen could get out of paying the $30M deposit? Any wiggle room? Newest hashtag coming out of Sacramento: #hereweburkle. I’m waiting for #herewestop or #herewegetonwithourlives.

  11. Can somebody explain to me how exactly the nonrefundable deposit is supposed to make this sale impossible to undo? The NBA has the right to reject any sale for any reason (or claims it does, anyway, and no court has yet ruled otherwise), so it seems like if Hansen agreed to a nonrefundable deposit of his own volition, that would be his problem. Is it just that having a dollar figure on what he’d be out makes it easier for Hansen to show damages in some hypothetical court case?

  12. Actually, that non-refundable part will never be active. The only way it would come into effect would be if Hansen backed out. If the NBA said “no dice” (which I don’t expect at all, given the $525M amount), or if the Maloofs backed out (again, I don’t expect that; again, $525M), that would be different — Hansen would get a refund.

    This deal just looks rock-solid to me.

    I don’t even think the FROR has legs. It was dumb that the trustee even raised the point.

    Even Burkle flying to NYC doesn’t help.

  13. Oooh, musicians want to support building a new arena so they can use the old arena for shows in Seattle Center or so they can use the new arena… or so they can use whichever arena will charge the band less ?

    I loved these guys during the 90s and, the fact that they’re mostly still alive while pushing 50 is good (for musicians), but I’m really unsure if their letter is meant to support saving the Seattle Center Arena (which Hansen wants re purposed into a smaller music venue, despite the acoustics being a huge complaint) or if they’re looking 20k seat shows at playing in a new arena.

  14. The key piece of the article is this:

    “Flemmer is holding an auction for Cook’s 7 percent share of the team to pay off his creditors. If the limited partners are denied the right to match Hansen’s offer, that diminishes the value of the Cook share, he said.”

    Mr. Flemmer is just performing this fiduciary responsibility to maximize the value of the assets in his trust. Of course, if it’s generally accepted that matching the Seattle bid isn’t feasible for Sacramento, the value of the option is essentially nothing. But he’s gotta do what he can.

  15. I think you need to look a step beyond the auction. The court-ordered Trustee auction results in new owner of the minor shares… court law trumps whatever the rest of the partners say (since they didn’t try to buy the share of the team from Cook before it went into receivership). If minor shares have right to buy the whole thing then whomever acquires those minor shares at auction get’s priority 1 in buying the whole team (unless a current owner is interested). Shootout occurs between how badly someone like Ellison wants a team (located 120 miles from his preferred San Jose location) vs Hansen (located 90 miles from Sacra.mento… well, where he lives is) if the right of first refusal is honored

  16. Well, why don’t Vedder, and the rest use their own damn millions to pay Hansen. So, some millionaires support welfare for some billionaires, big suprise. No wonder none of those bands have soul.

  17. I am not seeing how it would not be possible for a minority owner to front for an investment group, or individual. Why specifically not? What really prevents it? I think a smart investment group, or investor, could rigamarole around any obstacles if there are any.

    Here is one: The minority owner starts a new business MInorityHoldCo Development. The large investor invests in MinorityHoldCo. MinorityHoldCo invests in the Kings. I am sure there are better more rigamoroley ways to get around any obstacles, if any; but that gives an idea of how simple it would be.

    Anyway, the ROFR would seem to allow anyone into the game. Columbus, Ohio wants a team.

    Then it would seem that only the Maloofs 53% would need to be purchased to gain control of the team. So, with the team valued at 525 million that would be 278.25 million for the Maloofs’ 53%, and control of the team. I would think any billionaire interested in owning an NBA team would not find the 278.25 undoable.

  18. As regards Michael McCann of McCann Sports Law: McCann will be the first Director of the University of New Hamphire Law School’s, Sports and Entertainment Law Institute beginning this Fall, and seems to know of what he speaks.

    Now, What would happen if Carlos Slim showed up in Sacramento? I am still waiting for the Sultan of Brunei’s offer for the Kings. That Sultan is loves the idea of owning Kings.

  19. Jhande, a change in ownership structure would require a vote of all current partners. So how do you think the Maloofs would vote on that?

  20. As a Seattle taxpayer who is already contributing to taxpayer subsidies totaling a billion dollars for new stadiums for the “Seattle” Mariners and the “Seattle Seahawks” and also to pay off the $70 million dollar roof for the no longer existing Kingdome, and the continuing financial losses of Key Arena, the former home of the “Seattle” Sonics, I am rooting for the good citizens of Sacramento to keep “their” team. May their community’s wealthy parasites on the public purse prevail over our wealthy community parasites in being host to an NBA team.

    Microsoft’s Steve Ballmer is just one of the several investors in this affair. Forbes reports his personal wealth at $15,000,000,000. He could finance this new Seattle arena and team purchase with his pocket change but chooses instead to buy politicians instead and have them help him to feed at the public trough.

  21. Mike I am not saying a change in ownership structure of the team, or any change in the ownership of the minority owner.
    What I am saying is the minority owner could have a different business entity separate from the team, which receives the investor’s, or investment group’s, money; then the minority owner’s separate business entity pays the minority owner ; then it would still be only the minority owner involved in ownership of the team, and the minority owner has the money to match Hansen’s offer.

  22. Jhande, that would be a way for parties to control teams with no approval from the NBA. It’ll never happen. The fror issue has been greatly overdone, especially by the fan blogs. Read McCann’s tweets.

  23. If Death Cab for Cutie wants this to happen, there is really no reason to discuss it anymore. Done!!!

  24. Folks,

    I’m better than you all. Sacramento will not lose the Kings. They will annouce they are staying this Monday on radio. The sperm Whales are in place. Orca is here.

    I’m smarter than you all. I’m the greatest.

  25. This entire thing with the FROR story has just been one giant waste of time.

    I’m glad you didn’t comment on the Bee’s speculative article yesterday, about how Hansen might decide to just walk away from the arena debt in Sacramento. What a stupid theory that is.

    In short, I think they’ll pay off the loan for $77M (which means they’ll then own the arena), and then sell it off for whatever they can get ($20M? $30M? Who knows?), and consider that to be part of the purchase price for the team. Sleep Train is not a very valuable asset, but it’s not worthless, either. At $30M, I’m sure AEG or someone can run arena shows at a profit for a decade or so there.

    If they run away from that debt, it means Sacramento would own a $25M piece of the Kings. I just can’t see how Hansen would accept that. The NBA would probably require a written promise that Hansen pays off the loan before they’ll approve this sale — but I don’t think they’ll need to do that.

  26. Not finding that one on the Bee site, MikeM. Can you post a link? I promise I’ll approve it promptly.


    (This comment will await moderation, curse you, Neil deMause.)

  28. The largest problem with that Bee article: The NBA will just about certainly force the new buyers to sign a legal document that they will pay off the existing debt to Sacramento, in full. If Hansen and the rest from Seattle don’t do that, the NBA will reject the sale.

    I think Hansen will willingly sign such a document, and then make his payment when he’s asked to do so. This is another non-issue the Bee dreamed up to make it look as though this sale will never happen. To which I say: Dear Bee, the sale has already happened.

  29. Yeah, I agree. It’s over for Sacramento, regardless of personal opinion. The reality is that we are about a month away from it being official. The fake action by Sacramento is good for business; keep a few hopeful butts in the seats. It’s over, it’s finished. Time to watch the Sac State Hornets.

  30. As if all this wasn’t enough, apparently the VB arena proposal has lived to see another day:

    That’s pretty astonishing, really. Oh well, it’s always better when you have options.

  31. Keep in mind the whole Jordan/Bobcats situation that got brought up as comparison with this whole facet of the ordeal. Jordan exercised his right of first refusal as a minority owner when Bob Johnson tried selling his majority to another group. Jordan didn’t have the funds on his own but was able to assemble an investment group to make the matching bid for the majority ownership. They ended up winning. It’s conceivable that any of the four minority owners of the Kings, including Bob Cook for the time being (though I’m not sure how someone whose property has been secured in a court trust per bankruptcy proceedings can still make demands and speak for his ownership), could rope someone in as an investment partner to fund their match.

    The main thing with this, though, is that the Hansen-Ballmer group has been silent about the development, which supposes that they were fully aware of the situation with the minor ownership and have already addressed it. In fact, there have been words floated about that the HB offer and the ROFR clause were already vetted by the NBA’s lawyers, meaning that they feel they’ve worked past the issue already.

  32. The 49ers are on this weekend. That’s what I bow down to. They are supreme and will beat the Ravens 45-7.

    We shall worship San Francisco after this win. The Ravens have no chance, Lewis is old.