This item was co-written by Aaron Bruski and James Ham
The fight over the Sacramento Kings is building to a fever pitch.
In one corner, Seattle-based investors led by hedge fund manager Chris Hansen and Microsoft CEO Steve Ballmer have entered into an agreement to purchase the Kings from the Maloof family with the intention of moving to Seattle.
In the other corner, former NBA All-Star and Sacramento Mayor Kevin Johnson is moving comfortably toward an announcement of his equity partners, which will come at some time this week. Sources close to the situation have said that these owners will more than meet NBA criteria and be able to compete with or beat Seattle’s offer. Additionally, these owners will come to the table willing to pay their portion in an arena deal that was previously approved by the NBA, and sources say will be approved by the Sacramento City Council, as well.
USA Today and the Sacramento Bee reported that big money guys Ron Burkle and Mark Mastrov were in serious talks with the city, and USA Today reported that Burkle met with David Stern in New York on Thursday, January 24th. PBT can confirm each of those reports.
Since the Sacramento Bee’s report on the issue January 24, there has been speculation whether Kings minority owners have the “Right of First Opportunity” to purchase the team from the Maloofs.
Looking at the club’s governing documents, they well may.
NBC ProBasketballTalk has acquired a copy of the Kings’ 1992 ownership agreement and an addendum to the original agreement from May of 2003. While a 1991 version of this document has also made media rounds over the last two weeks, we have verified through sources that the 1992 copy is the definitive agreement governing ownership rights and obligations of the Kings franchise and that the 2003 addendum specifically clarified any confusion regarding the Right of First Refusal, amongst other pending issues.
Article VII of the original agreement, “Transfer of Partnership Interests” starts off in Section 7.1 “Restrictions on Transfer” with the basic tenet that, “…no sale, assignment, transfer, encumbrance or hypothecation (herein referred to as a “Transfer”) shall be made by a Partner of the whole or any part of its or his Partnership interest (including, but not limited to, its or his interest in the capital or profits of the Partnership).” Section 7.2 permits certain specified sales to “Affiliates,” which in theory covers sales to essentially the same ownership (more on “Affiliates” below).
A little further down in Article VII, Section 7.3 spells out the right of first refusal in plain legalese.
Section 7.3. Right of First Opportunity.
Notwithstanding the provisions of Section 7.1 hereof, if a Partner desires to assign all or part of his or its interest in the Partnership and such assignment is not specifically permitted under Sections 7.2A or 7.2B above, then the assignment shall be subject to the right of first opportunity hereinafter described in this Section 7.3. Before a Partner (the “Selling Partner”) actually concludes a sale of its interest in the Partnership subject to this Section 7.3, the Selling Partner shall give notice to (a) the General Partner and each other Limited Partner if the Selling Partner is a Limited Partner, and (b) to each Limited Partner if the Selling Partner is the General Partner (such Partner or Partners other than the Selling Partner being individually and collectively herein called “Non-Selling Partner”) setting forth the purchase price for which it will offer such Partnership interest for sale (which purchase price must be payable entirely in cash or part in cash and the balance pursuant to one or more promissory notes).
Section 7.3 further adds that a “non-selling partner” must step forward with its right to match within 30-days notice of the team’s sale. When that authority is exercised, the minority owner would have a 45-day window to complete a purchase.
The language is clear, but perhaps the Maloof family is counting on an earlier clause:
Section 5.3. Limitations on Authority of the General Partner.
Notwithstanding the provisions of Sections 5.1 and 5.2 hereof:
A. The following decisions shall require the approval of Partners then holding Partnership Percentages aggregating at least 65%:
(1) The moving of the Team from the Sacramento area to another City prior to February 1, 2002;
(2) The sale of all or substantially all of the Partnership Property
Section 5.1 details the “Authority of the General Partner.” It includes language giving the majority owner “exclusive authority to manage the operations and affairs and to make all decisions regarding the Partnership and its business…”
Section 5.2 addresses the “Sale or Financing of Partnership Property.” It includes clear language stating “the General Partner shall have the sole and unrestricted right to and discretion to determine all matters in connection with any sale of the partnership Property or any part thereof…”
In layman’s terms, sections 5.1 through 5.3 establish the potential for a super-majority in the franchise’s decision-making authority. By reaching a 65-percent threshold of controlling interest, the Maloof family and partner Bob Hernreich have accomplished that by purchasing minority shares during the last decade.
While this all seems alarming for the Kings’ minority owners, it is not the end of the story. Nowhere in Sections 7.1 through 7.3 is an exception carved out protecting Section 5.3 and the Maloofs super-majority clause from the right of first opportunity. This means that while the Maloofs’ have the right to sell and/or relocate without minority approval, they don’t have the right to sell any portion of their interest in the club without first giving the limited partners a chance to match.
As attorneys do, how an attorney may interpret the document may depend on who is paying their bills. And a judge may get to make the final call.
The 2003 Addendum goes even a step farther, not only clarifying the situation, but stripping the “Affiliate” language that sources tell PBT may have provided a small loophole for a transfer of the team’s majority share while circumventing the rights of the minority owners. According to a source with intimate knowledge of the situation, the proposed addendum was signed and executed in May of 2003 and included implementation of the following:
2. Partners Right of First Refusal
To clarify the issue of First Right of Refusal on purchase of partnership shares, the following is a proposed amendment to the Partnership Agreements:
A. Partner’s Proposal to Transfer. If a Partner proposes to sell, assign, or otherwise dispose of all or any part of the Partner’s Interest, however it is held, i.e. whether or not the interest is owned directly by it, or through another entity, individual, etc. (Hereafter “Such Interest”), then the Partner (“Selling Partner”) shall first make a written offer to sell such Interest to the remaining Partners, pro rata (as not all of the other Partners are required to participate in the purchase) based on their then ownership positions in the Partnership. The price, terms and conditions shall be as mutually agreed by the parties.
The following section goes on to detail that in the case of a third-party offer, the minority owners retain their right of first refusal for 60 days after receiving the selling Partner’s written notice and it finishes with this definitive statement:
“No Partner shall sell, transfer or otherwise dispose of their Interest, even if owned through a different entity and it is the purported different entity selling all or a portion of itself within the holder of the Interest, except in accordance with the provisions of this Article.”
According to multiple sources, a Notice of Transfer has not been submitted to the minority ownership group.
There is one more note of interest in Section 3 of the 2003 Addendum titled “Sale of an Interest in the General Partner”:
“Any offer received by the General Partners to purchase a portion, or all, of their interest, which was not purchased by the Limited Partners pursuant to their Right of First Refusal, would be considered an offer to purchase that percentage of the total entity.”
Meaning, that if the Maloofs sell their interest to the Hansen-Ballmer group for the reported $525 million and the minority owners do not take up the Right of First Refusal, Hansen and Ballmer would be required to purchase a proportional stake of the minority share as well.
We aren’t looking at $341 million (the Maloof and Hernreich 65-percent share), we would be looking at the entire $525 million. Although whether that sum would make the Seattle group even blink is up for debate.
So the question now becomes, is there a minority owner who is willing to step up and invoke the Right of First Opportunity/Refusal? If so, can that owner come up with the financial backing to match the deal from the Hansen-Ballmer group? And lastly, will the NBA continue to back a Seattle deal that appears to have ignored the rights of minority owners?
After these findings, it would be surprising if the NBA didn’t have some serious questions for the Maloofs and the Seattle group.