Crown Plan Sparks Shareholder Suit

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As the deadline for Hallmark Channel parent Crown Media Holdings to approve a restructuring proposal from its largest stakeholder fast approaches, one minority shareholder is making moves to block the deal, filing a class-action suit in Delaware Chancery Court.

S. Muoio & Co., a New York-based investment firm that owns about 5.8% of Crown stock, filed suit in Delaware Chancery Court on July 13, claiming that the restructuring will unfairly dilute minority shareholders practically into oblivion. Muoio is suing the entire 13-member Crown board of directors, new CEO William Abbott, Crown Media and several Hallmark entities, including Hallmark Entertainment and Hallmark Cards.

On May 28, Crown received a recapitalization proposal from its largest shareholder — Hallmark Cards — that swaps its $1.1 billion in debt for $500 million in loans and $550 million in preferred equity. Hallmark Cards asked Crown to make a decision whether to approve the plan before it files its next 10-Q quarterly statement with the Securities and Exchange Commission. That is expected sometime in late July or early August.

While Hallmark Cards — which also is Crown’s largest debt holder — said the deal would erase more than half of Crown’s debt and put the business on firmer ground, others saw the deal as a way to push other equity holders out of the picture.

Muoio has been a vocal opponent of the deal, claiming that it would give Hallmark 95% of Crown’s equity, leaving 5% to be split among remaining shareholders. Muoio is the second-largest minority shareholder of Crown — it began investing in 2006 — and according to the suit, has sunk $23 million into acquiring its Crown Media stake.

In the suit, a copy of which was filed with the SEC on July 14, Muoio claims that Crown has breached its fiduciary duties to shareholders and that its current financial situation is the result of a series of one-sided transactions that were favorable to Hallmark Cards and its subsidiaries, but detrimental to Crown and its shareholders.

In the suit, Muoio pointed to several questionable Crown deals, including the purchase of RHI Entertainment’s film library for $820 million in 2001 — Crown sold it back to RHI five years later in two separate deals for $300 million.

Muoio also criticized a $400 million note secured by Hallmark Entertainment Holdings in 2003 that basically helped Crown undo a messy preferred stock deal. That $400 million, through accumulated interest, ballooned to about $700 million this year.

But the most recent proposal from Hallmark Cards appeared to be the last straw.

“The crux of Hallmark’s plan is to cause Crown to engage in a facially unfair, self-interested, highly dilutive recapitalization that Hallmark is presenting as Crown’s only alternative to bankruptcy,” the suit states.

Because of the pending litigation, S. Muoio & Co. principal and chief investment officer Salvatore Muoio could not comment directly on the suit. But in the past, he has expressed frustration with Crown and Hallmark Cards concerning the restructuring proposal.

“This was something we had to do,” Muoio said in an interview last Tuesday.

Crown spokeswoman Nancy Carr declined to comment on the suit.

According to the suit, Muoio is asking for a judge to enjoin Hallmark and Crown from consummating the recapitalization deal and for costs and expenses incurred in the class action, including attorneys’ fees.

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