In Re Loral Space and Communications, Inc. (Del. Ch., Sept. 19, 2008)
"In this decision, I conclude that the MHR Financing was unfair to Loral. Using its effective control, MHR set in motion a process in which the only option that the Special Committee considered was a deal with MHR itself. Rather than acting as an effective agent for the public stockholders by aggressively demanding a market check or seeking out better-than-market terms from MHR in exchange for no market check, the Special Committee gave MHR terms that were highly favorable to MHR, in comparison to the convertible preferred transactions its own advisor deemed comparable. These terms gave MHR a chokehold on Loral’s future and 63% of its equity. Regrettably, the negotiation process was also marred by the conduct of its chairman and financial advisor, who undercut Loral’s own negotiation position. Even more egregiously, during the special committee process, its chairman was seeking to have MHR invest in his own business."
"The lack of a market check and the unusual nature of the MHR Financing make it a challenging task to determine the correct remedy. But the behavior of MHR itself suggests that Loral had positive growth prospects that MHR wanted to capture solely for itself; growth prospects that MHR was uniquely positioned to know about and that were not known by the public markets. Given MHR’s burden to demonstrate fairness, its own positive view of Loral’s prospects, and the unduly favorable terms it extracted from an ineffective Special Committee, I enter a remedy reforming the MHR Financing to convert MHR’s convertible preferred into non-voting common stock. I use a price that takes into account MHR’s access to inside information, its insulation of itself from market pressures, and its attainment of a $6.75 million fee for placing securities with itself, but that also gives substantial weight to Loral’s actual stock trading price. This remedy also addresses the unfair control benefits attained by MHR."
Opinion here.
