As the deadline for Crown Media Holdings, parent of the Hallmark Channel, to approve a restructuring proposal from its largest shareholder fast approaches, one minority shareholder who opposes the deal has filed a class action lawsuit in Delaware Chancery Court to block the transaction.
S. Muoio & Associates, a New York based investment firm that owns about 5% of Crown stock, filed suit in Delaware Chancery Court on July 13, claiming that the restructuring will unfairly dilute minority shareholders practically into oblivion.
On May 28, Crown received a recapitalization proposal from its largest shareholder -- Hallmark Cards -- to swap $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 decision is expected sometime in late July or early August.
Hallmark Cards -- also 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.
In the suit, a copy of which was filed with the SEC on July 14, Muoio claims 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.
"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.
Nancy Carr, a Crown spokesperson, declined to comment on the suit.
Because of the pending litigation, S. Muoio & Associates 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 Tuesday.
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.