Icahn Sued by Hedge Fund

Bill Sjostrom —  3 February 2006

Carl Icahn has been all over the news lately. I’m beginning to think it’s to garner publicty for the launch of a new reality show called something like “The Activist.� I would watch it.

Anyway, today the W$J reports (click here) that Icahn is being sued by a hedge fund in connection with proposed transactions between XO Communications (Icahn is XO’s chairman, owns 8% of its common stock, 90% of its long term debt, and 95% of its preferred stock) and Elk Associates, an entity controlled by Ichan.

According to the article:

The arrangement calls for XO to sell its business and key assets to Elk Associates . . . for $700 million. Most of the proceeds — $556 million — would go to Mr. Icahn to redeem preferred stock and make an early repayment of $392 million in debt XO owes to Mr. Icahn. XO’s minority shareholders would be left with the roughly $300 million XO has in cash and a group of wireless licenses that aren’t generating meaningful revenue, the suit says. XO’s attorney, Bruce Kraus of Willkie Farr & Gallagher, said a board committee went to great lengths to attract other bidders and approached 89 potential buyers.

XO is incorporated in Delaware, so Delaware corporate law controls. The suit looks like a classic duty of loyalty case, but its hard to say without all the facts. I assume the committee referenced above attempted to comply with DGCL section 144(a)(1) (safe harbor for conflict of interest transaction disclosed to board committee and approved in good faith by a majority of disinterested directors on the committee). If so, then the plaintiff may be alleging that there was not adequate disclosure to the committee, the committee was not disinterested, or the committee did not act in good faith. If true, Icahn would then have the burden of proving that the transactions are intrinsically fair to XO.